-----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, NnMRaSvzv4v1GZ0T+X95oS+uQXOsGYBXcZnkEcg86n8Sivw53ZmoXm/oN8pUVngh z/flUGuifPAfXSwPe4xUZA== 0000950129-00-001350.txt : 20000324 0000950129-00-001350.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950129-00-001350 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OI CORP CENTRAL INDEX KEY: 0000073773 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 730728053 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-06511 FILM NUMBER: 576701 BUSINESS ADDRESS: STREET 1: P O BOX 9010 STREET 2: 151 GRAHAM RD CITY: COLLEGE STATION STATE: TX ZIP: 778429010 BUSINESS PHONE: 4096901711 MAIL ADDRESS: STREET 1: 151 GRAHAM RD STREET 2: P O BOX 9010 CITY: COLLEGE STATION STATE: TX ZIP: 77842-9010 FORMER COMPANY: FORMER CONFORMED NAME: OCEANOGRAPHY INTERNATIONAL CORP DATE OF NAME CHANGE: 19801205 10-K405 1 O.I. CORPORATION - DATED DECEMBER 31, 1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 0-6511. O.I. CORPORATION (Exact name of registrant as specified in its charter) OKLAHOMA 73-0728053 (State of Incorporation) (IRS Employer Identification No.) 151 GRAHAM ROAD, BOX 9010 COLLEGE STATION, TEXAS 77842-9010 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code: (979) 690-1711 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH ELECTRONIC SYSTEM ON WHICH QUOTED Common Stock, par value $0.10 per share National Association of Securities Dealers Automated Quotation System (NASDAQ)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10K. X --- The aggregate market value, as of March 13, 2000, of the common stock (based on the average of the high and low trade prices of these shares on NASDAQ) of O. I. Corporation held by non-affiliates was approximately $9,559,444. The number of shares outstanding of the common stock as of March 13, 2000 was 3,003,846. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 2000 Annual Meeting of Shareholders Part III information is incorporated by reference to the Proxy Statement 2 PART I ITEM 1. BUSINESS GENERAL O.I. Corporation (the "Company") is a corporation organized in 1963, in accordance with the Business Corporation Act of the State of Oklahoma, as Clinical Development Corporation, a builder of medical and research laboratories. In 1969, the Company moved from Oklahoma City, Oklahoma to College Station, Texas, and the Company's name was changed to Oceanography International Corporation. The Company's name was changed to O.I. Corporation in July 1980; and in January 1989, the Company filed to do business as OI Analytical to better align the company name with the products offered and market served. The Company designs, manufactures, markets, and services products primarily for specialized applications in the analytical instruments markets, including sample preparation, detection, measurement, and monitoring instruments used to analyze chemical compounds. The Company's principal business strategy is to direct its product development capabilities, manufacturing processes, and marketing skills toward market niches, which it believes it can successfully penetrate and quickly assume a leading position. Management continually emphasizes product innovation, improvement in quality and product performance, on-time delivery, cost reductions, and other value added activities. The Company seeks growth opportunities through technological and product improvement, the development of new applications for existing products, and by acquiring and developing new products, new markets, and new competencies. DEVELOPMENT OF THE COMPANY The Company historically has expanded both through internal development of new products and technologies and through the acquisition of technologies, product lines, market positions, competencies, and businesses. During the past several years, the Company has completed a number of acquisitions that have provided additional technologies, specialized manufacturing or product development expertise, and broader capabilities in marketing and distribution. A summary of each of the Company's strategic acquisitions is set forth below: o On February 1, 1999, the Company acquired certain assets of General Analysis Corporation (GAC), headquartered in South Norwalk, Connecticut. GAC designs, manufactures, and markets infrared gas and liquid analytical instruments and accessories used in laboratories, in-line and on-line liquid analysis and gas analysis in field monitoring applications. o On May 1, 1996, the Company acquired certain assets of ALPKEM Corporation headquartered in Wilsonville, Oregon, formerly a division of Perstorp Analytical, Inc. ALPKEM designs, manufactures, and markets flow analyzers for ion analysis using Segmented Flow Analyzers (SFA) and Flow Injection Analysis (FIA), Cyanide analyzers, and field portable instruments. o On February 9, 1995, the Company acquired Laboratory Automation, Inc., (LAI) d.b.a. ABC Instruments, headquartered in Columbia, Missouri. LAI was incorporated on May 17, 1993 in the State of Missouri. LAI's products include gel permeation chromatography (GPC) systems, Soxtherm (an automated Soxhlet extractor), Integrity 2000 (a solvent purification system), and other solvent recovery systems. GPC is a method of preparing a wide range of samples for analysis and is a common procedure for sample preparation for various industrial and governmental laboratories, including the U.S. Food and Drug Administration (USFDA), U.S. Department of Agriculture (USDA), and U.S. Environmental Protection Agency (EPA). o On June 24, 1994, the Company acquired the assets of Floyd Associates, Inc. headquartered in Lake Wylie, South Carolina. Floyd Associates Inc., founded in 1986 by Terry S. Floyd, develops, 2 3 manufactures, and markets microwave products used to prepare chemical compounds for analyses. Markets for the microwave digestion equipment include environmental, biological, metallurgical, geological, and industrial. Applications include acid digestion of aqueous inorganic samples in accordance with proposed EPA and other defined methods. Organic sample matrices such as oil, sludge, solvents, and hazardous wastes are also handled by these microwave products. o On January 4, 1994, the Company acquired CMS Research Corporation, headquartered in Birmingham, Alabama. CMS, founded in 1986 by Gary D. Sides, is engaged in research, development, manufacturing, and marketing of instrumentation for continuous monitoring systems used for monitoring chemical warfare agents and volatile organic compounds (VOCs). PRODUCTS The Company develops, manufactures, markets, and services analytical, monitoring, and sample preparation products, components, and systems used to detect, measure, and analyze chemical compounds. GAS CHROMATOGRAPHY (GC) INSTRUMENTS The Company designs, manufactures, markets, and services components with gas chromatographs, including detectors and sample introduction instruments. Gas chromatography is an analytical technique that separates organic compounds based on their unique physical and chemical properties. The use of gas chromatography in a number of diverse applications has led to the continuous development of a broad range of sample introduction and detector devices. Advances in the field are based on technology improvements that provide improved sample introduction, faster analysis, lower level and selective detection, and ease-of-use. GC instruments currently manufactured by the Company include the following: Electrolytic Conductivity Detector (ELCD); Photoionization Detector (PID); Flame-Ionization Detector (FID); Tandem PID/ELCD; Tandem PID/FID; Halogen Specific Detector (XSD)(TM); Flame Photometric Detector (FPD); Pulsed Flame Photometric Detector (PFPD); Injectors and Inlets; Purge-and-Trap Sample Concentrator (P&T); P&T Autosamplers; Headspace Sampler; Liquid Autosampler; Preconcentration and Thermo Desorption Device; Air Tube Concentrators, Volatile Organic Sample Train (VOST); and Multi-Point Sampling Inlet Module. GC ANALYZER SYSTEMS The Company integrates GC components with GCs and GC mass spectrometers (GC/MS) to form customized GC analyzer systems including: VOC Analyzers, BTEX (Benzene, Toluene, Ethylbenzene, and Xylenes) Analyzers, Pesticide Analyzers, FBA (Fluorinated By-Products Analyzers), Continuous Emissions Monitoring (CEM), continuous air monitoring analyzers for air toxins and VOCs, Permeating Testing, and Ethyleneoxide Analyzers. The Company configures GC systems in standard and custom configurations to meet market needs in the laboratory, in the field, and on line. Configured systems can analyze chemical compounds in gas, liquids, or solids matrixes using the appropriate components. The Company manufactures GCs, and purchases GCs and GC/MSs manufactured by others. The Company procures GC components, GCs, and GC/MSs pursuant to a number of different arrangements, including a Value Added Reseller (VAR) Agreement and Original Equipment Manufacturer (OEM) Agreement with Agilent Technologies, Inc. ORGANIC CARBON ANALYZER SYSTEMS The Company designs, manufactures, markets, and services Total Organic Carbon (TOC) Analyzers and related accessories that are used to measure organic and inorganic carbon levels in ultrapure water, drinking water, groundwater, wastewater, soils, and solids. The Company's TOC Analyzers are used in testing required by the EPA and testing ultrapure water used in U.S. pharmaceutical methods; the manufacturing of semiconductors; power generation; and oceanographic research. TOC products 3 4 produced by the Company include: High Temperature Persulfate TOC Analyzer; Combustion TOC Analyzer; and TOC Solids Module. WATER ANALYZERS On-site water measurements of water quality may be performed with the Company's portable Aqua-Check Water Analyzer, which simultaneously measures the pH, conductivity, dissolved oxygen, and temperature of water and aqueous solutions. FLOW ANALYSIS SYSTEM The Company designs, manufactures, markets, and services Segmented Flow Analyzers (SFA), Flow Injection Analyzers (FIA), and field portable instruments such as The Flow Solution(TM) IV; Flow Solution(TM) 3000; and Cyanide (CN) Analyzer. These instruments perform a wide range of analyses, including the measurement of nitrate, nitrite, phosphate, ammonia, chloride, alkaline, and sulfate in liquids. The Company's CN Analyzer can perform total cyanide analysis in a number of industrial applications including cyanide testing in gold and silver mining, electroplating, metal finishing, and semiconductor operations. The SFA, FIA, and CN Analyzer products may be equipped with autosamplers to enhance productivity. SAMPLE PREPARATION PRODUCTS AND SYSTEMS The Company designs, manufactures, markets, and services sample preparation instrumentation used to prepare sample matrices for analysis. The most time-consuming part of chemical analysis is sample preparation. Procedures, techniques, and instruments that can reduce total sample preparation time are highly desirable for analysis of chemical compounds. The Company's sample preparation products and systems include Microwave Digestion Systems; Automated Gel Permeation Chromatography (GPC); and Soxtherm Soxhlet Extraction Systems. FILTOMETERS The Company designs, manufactures, markets, and services selective wavelength instruments (non-dispersive infrared instruments) that are sometimes called Filtometers. The Filtometer employs an interference filter that defines the band of radiation falling on the detector. The signal is the result of radiation produced by the source, the energy throughput, and the quality of the option. Filtometers are quantitative and designed to make repeated measurements on individual samples or continuously on a process stream or air. The Company provides two products employing filtometer technology as follows: CONTINUOUS REFRIGERANT MONITORS, which are used by the chiller/refrigerant industry for the rapid detection of low-level refrigerant leaks. These instruments can monitor for all refrigerants including CFCs (Chlorofluorocarbons), HFCs (Hydrofluorocarbons), HCFCs (Hydrochlorofluorocarbons) and ammonia and meet ASHRAE (American Society of Heating, Refrigerating and Air-conditioning Engineers) 15-1994 Safety Code Requirements. BEVERAGE ANALYZERS, which are used on-line and in the laboratory to measure dissolved Brix (sugar), diet syrup and carbon dioxide in beverages. This equipment is currently used in soft-drink bottling plants, breweries, and wineries. VALUE ADDED RESELLER The Company is a value-added reseller (VAR) for analytical instruments manufactured by Agilent Technologies, Inc. (Agilent). Under the terms of the agreement with Agilent, the Company purchases Agilent analytical instruments, including GCs and gas chromatography/mass spectrometers (GC/MSs), integrates them with Company-manufactured components, and markets these analytical systems for environmental analysis to comply with EPA 500, 600, and 8000 Series Methods, and for other chemical analyses. The Company conducts its own marketing to generate sales leads, obtains customer orders, configures systems, ships, installs, and provides after-sale support. The VAR agreement is subject to renewal annually. Should the VAR not be renewed, the Company believes substitute arrangements for access to GC and GC/MS instruments can be made with little or no adverse economic consequence. 4 5 SALES BY LOCATION All of the Company's assets are located in the United States and all sales are conducted in U.S. dollars. There have been no sales or transfers between geographic areas during the last five fiscal years. Estimated net revenue attributable to the United States, export revenue as a group, and the number of countries in which export revenue was generated are as follows:
$ in thousands 1999 1998 1997 1996 1995 - -------------- ------- ------- ------- ------- ------- Net Revenue: United States $21,193 $18,732 $16,941 $15,568 $15,110 Export 4,541 4,952 4,689 4,588 2,832 ------- ------- ------- ------- ------- Total $25,734 $23,684 $21,630 $20,156 $17,942 ======= ======= ======= ======= ======= % Revenue: United States 82% 79% 78% 77% 84% Export 18% 21% 22% 23% 16% ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% ======= ======= ======= ======= ======= Number of countries-export 59 54 39 35 31
Sales to any particular international geographic area did not exceed 10% of revenue for any of the years 1995 to 1999. MANUFACTURING The Company manufactures products, using similar techniques and methods, at three locations in the U.S. The Company's manufacturing capabilities include electro-mechanical assembly, testing, integration of components and systems, and calibration and validation of configured systems. The Company believes that its manufacturing processes are documented in accordance with applicable domestic and international regulations and standards. The Company's policy is to have its products certified pursuant to safety standards by one or more of the following agencies: Underwriters Laboratories (UL), Canadian Standards Association (CSA) and/or the European Committee for Electrotechnical Standardization (CE). These agencies and others also certify that instruments meet certain performance standards and that advertised specifications are accurate. During 1999, the Company obtained ISO 9001 certification for its College Station, Texas manufacturing operations and is in the process of obtaining ISO 9001 certification for its Birmingham, Alabama manufacturing operations. MARKETING The Company markets and sells analytical components and systems that it manufactures and that are purchased for resale, provides on-site installation and support services, and distributes expendables and accessories required to support the operation of products sold. The Company sells its products domestically to end users through a direct sales channel and manufacturers' representatives, and internationally through independent manufacturers' representatives and distributors. The Company's marketing program includes advertising, direct mail, seminars, trade shows, telemarketing, and promotion on the Company's Internet web site. TECHNICAL SUPPORT The Company employs a technical support staff that provides on-site installation service and after-sale support to ensure customer satisfaction. The Company offers training courses, publishes technical information, and provides 5 6 application support for customers. Products sold by the Company generally include a 90-day to one-year warranty. Customers may also purchase extended warranty contracts that provide coverage after the expiration of the initial warranty. The Company installs and services its products through its field service personnel in the United States and Canada and through distributors and manufacturers' representatives internationally. RESEARCH AND DEVELOPMENT The analytical instrumentation industry is subject to rapid changes in technology. The Company's success is heavily dependent on its ability to continually improve its existing products and to introduce new products. Research and development costs, relating to both present and future products, are expensed as incurred, and such expenses were $1,881,000 in 1999, $1,458,000 in 1998, and $1,697,000 in 1997. The Company actively pursues development of potential new products, including custom configured GC systems and components, instrument control and data reporting software systems, dedicated analyzers, microwave systems and other sample preparation products, on-line beverage monitors, and continuous air monitoring systems to measure refrigerants. PATENTS The Company holds both United States and international patents and has both U.S. and international patent applications pending. The Company currently holds 32 patents, which expire between the years 2002 and 2015. As a matter of policy, the Company vigorously pursues and protects its proprietary technology positions and seeks patent coverage on technology developments that it regards as material and patentable. While the Company believes that all of its patents and applications have value, its future success is not dependent on any single patent or application. COMPETITION The Company encounters aggressive competition in all aspects of its business activity. The Company competes with many firms in the design, manufacture, and sale of analytical instruments, principally on the basis of product technology and performance, quality and reliability, sales and marketing ability, product support, delivery, and price. Most of the Company's competitors have significantly greater financial and other resources, broader market coverage on a global basis, and greater breadth of product line in each market segment served than the Company. EMPLOYEES As of December 31, 1999, the Company had a total of 190 full-time employees. The Company employs scientists and engineers who research and develop potential new products. To protect the Company's proprietary information, the Company has confidentiality agreements with its employees who come in contact with such information. None of the Company's employees are covered by a collective bargaining agreement. Management believes that relations between the Company and its employees are good. 6 7 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages, positions, and offices, as of March 13, 2000, are as follows:
Name Age Position Date Elected to Position - ----------------- --- -------- ------------------------ William W. Botts 57 President and Chief Executive Officer 1985 Chairman of the Board 1986 Mark G. Whiteman 46 Vice President/General Manager 1997 Jane A. Smith 51 Vice President/Corporate Secretary 1990 Julie A. Wright 33 Corporate Controller 1999
William W. Botts joined the Company as President and Chief Operating Officer on February 1, 1985, was named Chief Executive Officer of the Company on July 19, 1985, and Chairman of the Board of Directors of the Company on May 26, 1986. Prior to joining the Company, he was Vice President and General Manager of the Brandt Division of TRW Inc. Mark G. Whiteman was employed by the Company in March 1997 as Vice President/General Manager. He was employed by Scott Specialty Gases as Eastern Region Vice President/General Manager from 1994 to 1997. Prior to that, he was employed with E.I. DuPont for 19 years where he held a variety of management positions. Jane A. Smith has been employed with the Company since 1973. She was named Assistant Corporate Secretary in 1976 and Corporate Secretary in 1986. On May 22, 1990, Mrs. Smith was named Vice President/Corporate Secretary. Julie A. Wright has been employed with the Company since 1990. She was named Controller in 1993. On May 10, 1999, she was named Corporate Controller. ENVIRONMENTAL REGULATIONS The Company believes it is in compliance with federal, state, and local laws and regulations involving the protection of the environment. The Company routinely handles small amounts of materials that may be deemed hazardous. Hazardous materials are primarily introduced into the Company's products by end users rather than by the Company. The Company believes there will be no material effect upon its capital expenditures, earnings, and competitive position caused by its compliance with federal, state, or local provisions regulating the discharge of materials into the environment or relating to the protection of the environment. However, to the extent that analytical instruments designed and manufactured by the Company for environmental analysis are purchased by its customers to assist them in complying with environmental regulations, changes to these regulations could reduce demand for some of the Company's products. SOURCES OF RAW MATERIALS The Company produces its products from raw materials, component parts, and other supplies that are generally available from a number of different sources. The Company has few long-term contracts with suppliers. For certain purchased materials, the Company has developed preferred sources on the basis of quality and service. There are several purchased components that are supplied by single source suppliers. There can be no assurance that these preferred or single sources will continue to make materials available in sufficient quantities, at prices, and on other terms and conditions that are adequate for the Company's needs. However, there is no indication that any of these preferred or single sources will cease to do business with the Company. The Company believes that in 7 8 the event of any such cessation, adequate alternate sources would be available, although perhaps at increased costs to the Company. In addition, substitute components may require reconfiguration of certain products and may cause delays in filling customer orders. Although the Company occasionally uses subcontractors, such arrangements are not material to its business. BACKLOG - OPEN ORDERS The Company's backlog of orders on December 31, 1999 was approximately $2,986,000, compared to $2,383,000 as of December 31, 1998, and $3,575,000 as of December 31, 1997. The Company's policy is to include in its backlog only purchase orders or production releases that have firm delivery dates within one year. Recorded backlog may not result in sales because of purchase order changes, cancellations, or other factors. The Company anticipates that substantially all of its present backlog of orders will be shipped or completed during 2000. CUSTOMERS The Company's customers include various military agencies of the U.S. government, industrial businesses, semiconductor manufacturers, engineering and consulting firms, municipalities, environmental testing laboratories, beverage bottlers, and chiller-refrigerant companies. No single customer accounted for more than 10% of revenue in 1999, 1998, or 1997. However, federal, state, and municipal governments and public and private research institutions accounted for 29% of revenue in 1999, 31% of revenue in 1998, and 35% in 1997. A decrease in sales to these governmental groups could have a material adverse impact on the Company's results of operations. Export sales accounted for 18% of revenue in 1999, compared to 21% in 1998, and 22% in 1997. - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES The Company owns approximately 68,650 sq. ft. of office, engineering, laboratory, and production space in College Station, Texas and leases approximately 17,700 sq. ft. of office, engineering, laboratory, production, and warehouse space in Alabama, Missouri, Oregon, Connecticut, and Texas. The facility in Oregon is subleased and is not occupied by the Company. The Company believes that its facilities are in good condition and are suitable and adequate for its present operations and that suitable space is readily available if any of its leases are not extended. The Company's headquarters, research, and manufacturing operations occupy approximately 68,650 sq. ft. of space located on 11.29 acres of land in College Station, Texas. The Company rents and uses for storage a 4,500 sq. ft. facility on a separate tract of land approximately eight miles from the Company's headquarters. The Company leases approximately 10,000 sq. ft., in Pelham, a subdivision of Birmingham, Alabama under a lease expiring October 2004, approximately 3,200 sq. ft. in Columbia, Missouri on a month-to-month basis, and approximately 2,000 sq. ft. in South Norwalk, Connecticut under a lease expiring in May 2000. The Company also leases approximately 2,500 sq. ft. in Beaverton, Oregon under a lease expiring in May 2001. This facility is subleased to a third party. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS From time to time, the Company has received, and in the future may receive, notice of claims against it, which in some instances have developed, or may develop, into lawsuits. Management does not expect any pending claim to have a material adverse effect on the consolidated financial position and results of operations of the Company. 8 9 - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Company, through solicitation of proxies or otherwise, during the fourth quarter of 1999. PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK MARKET INFORMATION The Company's Common Stock trades on the NASDAQ Stock Market under the symbol: OICO. Information below is contained in a statistical report obtained from the National Association of Securities Dealers, Inc. (NASD). The ranges of high and low trade prices for the Company's Common Stock for 1999 and 1998 were as follows:
1999 1998 ------------- ------------- HIGH LOW High Low ---- --- ---- --- First Quarter 7 4-3/8 4-5/8 4 Second Quarter 5-1/2 3-5/8 5-1/2 4-1/8 Third Quarter 4-11/16 4-1/4 5-1/4 4-9/32 Fourth Quarter 4-5/8 3-7/8 6-7/16 4
NOTE: The above quotations represent prices between dealers, do not include retail markup, markdown, or commission, and may not necessarily represent actual transactions. DIVIDENDS The Company has never paid dividends on the Common Stock, and management does not anticipate paying any dividends in the near future. APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 13, 2000, there were approximately 943 holders of record of the Company's Common Stock. 9 10 - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA
($ in thousands except per share amounts) 1999 1998 1997 1996 1995 - ---------------------------------------------- ---------- ---------- ---------- ---------- ---------- Income statement data: Net revenue $ 25,734 $ 23,684 $ 21,630 $ 20,156 $ 17,942 Income before income taxes 1,587 2,859 2,035 1,469 1,507 Net income 1,051 1,822 1,393 1,003 1,023 Diluted earnings per share $ 0.32 $ 0.50 $ 0.35 $ 0.24 $ 0.24 Balance sheet data: Total assets $ 19,490 $ 18,828 $ 19,100 $ 19,186 $ 17,700 Working capital 7,964 10,028 12,300 12,391 11,855 Shareholders' equity 14,533 14,744 15,284 14,961 14,212 Common size income statement data: Net revenue 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue 58.0 53.9 53.4 50.0 51.5 ---------- ---------- ---------- ---------- ---------- Gross profit 42.0 46.1 46.6 50.0 48.5 Selling, general, and administrative 29.9 30.0 31.8 31.7 30.7 Research and development 7.3 6.1 7.9 9.0 10.8 Patent litigation expense 0.0 0.0 0.2 4.5 1.6 ---------- ---------- ---------- ---------- ---------- Operating income 4.8 10.0 6.7 4.8 5.4 Other income (expense), net 1.4 2.1 2.7 2.5 3.0 ---------- ---------- ---------- ---------- ---------- Income before income taxes 6.2 12.1 9.4 7.3 8.4 Provision for income taxes 2.1 4.4 3.0 2.3 2.7 ---------- ---------- ---------- ---------- ---------- Net income 4.1% 7.7% 6.4% 5.0% 5.7% ========== ========== ========== ========== ==========
The 1999 results include the acquisition of GAC, which was completed on February 1, 1999. See Note 2 to the financial statements. - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K includes certain statements that are deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-K that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future, are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks, and uncertainties, many of which are beyond the control of the Company. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. SUMMARY Net revenue increased 9% in 1999, compared to 1998, while net income was down 42% for the same period. The Company's financial position as of December 31, 1999 reflects a decrease in working capital to $7,964,000, compared to $10,028,000 at December 31, 1998. Diluted earnings per share were $0.32 in 1999, $0.50 in 1998, and $0.35 in 1997. 10 11 REVENUE Net revenue was $25,734,000 in 1999, compared to $23,684,000 in 1998, and $21,630,000 in 1997. Export revenue decreased 8% to $4,541,000 in 1999, while domestic revenue increased 13% to $21,193,000. In 1998, export revenue increased 6% to $4,952,000 and domestic revenue increased 11% to $18,732,000. Sales of TOC analyzers decreased in 1999 compared to 1998 due to a decline in demand in the U.S. pharmaceutical industry. This decline was due to most pharmaceutical companies having purchased during 1998 TOC analyzers to comply with the U.S. Pharmacopoeia (USP) guidelines. These guidelines required that cleaning validation using TOC be implemented during 1998. Sales of TOC analyzers had increased in 1998 compared to 1997 due to improved demand in the pharmaceutical market and the enhancement of the Company's Combustion TOC Analyzer to serve the wastewater market. During 1998, U.S. pharmaceutical companies increased their purchases of TOC analyzers to comply with USP guidelines for cleaning validation. Microwave product sales decreased in 1999 due to lower demand in international markets. The Company believes it has continued to improve the performance, reliability, and value to the customer of its closed-vessel microwave system. Microwave product sales increased from 1997 to 1998 due to a few large international sales. Sales of GC components and systems increased in 1999 primarily due to increases in the sale and lease of GC/MS systems configured with the Company's sample inlet systems. Previously, the GC/MS system sold by certain of the Company's competitors displaced GC systems offered by the Company that included selective detectors manufactured by the Company. By offering GC/MS systems, the Company believes it has recognized and addressed the trend in environmental testing of performing tests using MS detectors, rather than selective detectors. GC/MS systems sales have less value added by the Company than GC systems configured with the Company's selective detector. Accordingly, gross profit margins are reduced to the extent that GC/MS systems sales increase and sales of GC systems with Company-manufactured, selective detectors decrease. Sales of GC components and systems increased from 1997 to 1998 for the reasons stated above and an increase in the sale of continuous emissions monitoring (CEM) systems due primarily to U.S. government purchases of chemical warfare agent monitoring systems. The Company believes that ratification of the Chemical Weapons Convention Treaty by the U.S. in mid-1997 provided the impetus for a number of government agencies to commence programs requiring chemical warfare agent monitoring systems. Sales of flow analyzer products decreased in 1999 and 1998 as compared to 1997 due to a decline in sales of aftermarket parts, offset in part by an increase in equipment sales. During 1999, overall sales increased due to sales of beverage and refrigerant monitoring products resulting from the acquisition of GAC on February 1, 1999. There were no beverage and refrigerant monitoring sales in 1998 or 1997. Sales of the beverage monitors have been hurt by delays in the introduction of a new product, competitive actions, and lower market demand due to restructuring in the soft drink industry. Capital leasing revenues decreased in 1999 compared to 1998, which decreased slightly from 1997. Capital leases are generally three to four years and allow customers to manage their cash outflow against the income generated by their instruments. The Company files public notice documents under the Uniform Commercial Code in conjunction with each lease to protect its interest in the equipment. The Company maintained a portfolio of investments in such sales-type leases amounting to $908,000 as of December 31, 1999, $1,035,000 as of December 31, 1998, and $890,000 as of December 31, 1997. The average effective interest rate of the leases was 9.7% for the portfolio as of December 31, 1999. International revenues decreased 8% to $4,541,000 in 1999 compared to $4,952,000 in 1998, and $4,688,000 in 1997. International revenues as a percent of total revenue were 18% for 1999, compared to 21% in 1998 and 22% in 1997. International revenues decreased from 1998 to 1999 due to the general economic conditions in Asia and aggressive competitor actions in certain product lines in Europe. Additionally, the 1998 international revenues included a few large, nonrecurring sales of the microwave product line. The Company had 94 distributors and representatives in 48 countries at December 31, 1999, compared to 66 distributors and representatives in 39 11 12 countries at December 31, 1998, and 77 distributors and representatives in 39 countries at December 31, 1997. The increase in the number of distributors is the result of adding representatives due to the acquisition of new product lines and initiatives to enter new markets. Neither inflation nor changing prices have had a material impact on the Company's net revenues over the past three fiscal years. GROSS PROFIT Gross profit was 42% in 1999, compared to 46% in 1998, and 47% in 1997. During 1999 gross profit decreased due to an increase in sales of GC/MS systems, which are lower margin products, an increase in the cost of service revenue, and increased manufacturing variance. The increased manufacturing variance was primarily due to lower sales volume and accordingly lower production of beverage and refrigerant monitoring products obtained in the acquisition of GAC. To reduce costs, the manufacturing of the beverage and refrigerant monitoring products was relocated to the Company's headquarters in College Station, Texas during November 1999. During 1998 gross profit decreased due to an increase in sales of GC/MS systems and an increase in the cost of service revenue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative (SG&A) expenses were $7,692,000 in 1999, or 30% of revenue, compared to $7,093,000, or 30% of revenue in 1998, and $6,929,000, or 32% of revenue in 1997. The increase in SG&A expenses from 1998 to 1999 resulted from higher commissions due to the increase in sales, increased staffing in the domestic and international sales and service organizations, cost related to sales of the beverage and refrigerant monitoring products obtained in the acquisition of GAC, and the settlement during 1998 of certain post-closing matters associated with an asset acquisition completed in 1997. These increases were offset in part by a decrease in the accrual for certain discretionary employee benefits. The terms of the asset acquisition settlement agreement in 1998 resulted in the Company purchasing 100,000 shares of the Company's common stock for $2.20 per share from the seller of the assets. At the time of the settlement, the market value of the Company's common stock was $5.00 per share. The $280,000 difference between the market value and the purchase price of the Company's common stock received by the Company in the settlement was accounted for as a recovery of legal fees and other excess operating costs incurred in connection with the acquisitions, reducing SG&A expense during 1998. Such settlement has not resulted in and is not expected to result in a reduction of SG&A cost in any future periods. The increase in SG&A expenses from 1997 to 1998 resulted from higher commissions and royalties due to the increase in sales, increased costs of recruitment of new employees, an increase in the accrual for certain discretionary employee benefits and expenses associated with the consolidation of certain operations. The increases were offset in part by the settlement of the aforementioned post-closing matters associated with a prior year asset acquisition. RESEARCH AND DEVELOPMENT EXPENSES Research and development (R&D) expenditures amounted to $1,881,000, or 7% of revenue in 1999, compared to $1,458,000, or 6% of revenue in 1998, and $1,697,000, or 8% of revenue in 1997. R&D expenses increased from 1998 to 1999 due to product development costs at GAC and an increased number of personnel, offset in part by a decrease in consulting expense and a decrease in the purchase of supplies for R&D projects. R&D expenses decreased from 1997 to 1998 due to fewer personnel and a decrease in the purchase of supplies used in the design of products. INTEREST INCOME Interest income decreased 31% to $302,000 in 1999 from $436,000 in 1998, which decreased 7% from $468,000 in 1997. The decrease in interest income from 1998 to 1999 was due to a decrease in cash, cash equivalents, and investments during 1999. This decrease in cash was due to the purchase of treasury stock, the acquisition of GAC, and the purchase of manufacturing rights for a headspace product. The decrease in interest income from 1997 to 1998 was due to a decrease in cash and cash equivalents and investments during 1998 due to the purchase of treasury stock and payment for a facility expansion of the College Station location. INCOME BEFORE INCOME TAXES Income before income taxes decreased 45% to $1,587,000, or 6% of revenue in 1999 from $2,859,000, or 12% of revenue in 1998, which increased 40% from $2,035,000, or 9% of revenue in 1997. Income before tax decreased in 1999 compared to 1998 due to the increase in SG&A and R&D expense and the decrease in interest income, offset in part by the increase in sales. Income before tax increased in 1998 12 13 compared to 1997 due to the increase in sales and a decrease in R&D expense, offset in part by an increase in SG&A expense and a decrease in interest income. PROVISION FOR INCOME TAXES The Company's effective income tax rate was 34% in 1999 and 36% in 1998 and 32% in 1997. The income tax rate decreased from 1998 to 1999 due to increased tax benefit from the Company's Foreign Sales Corporation. The income tax rate increased from 1997 to 1998 due to the mix of sales by state. NET INCOME Net income decreased 42% to $1,051,000, or 4% of revenue for 1999, compared to $1,822,000, or 8% of revenue for 1998, which increased 31% from $1,393,000, or 6% of revenue for 1997. Several factors contributed to the decline in net income during 1999, including lower sales in most products, delays in completing development and introduction of a potential new product, expenses relating to relocation and integration of the beverage and refrigerant air monitoring products, field service expenses to rebuild customer relations with soft drink bottlers, and staffing and travel expenses relating to international marketing. BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share were $0.33 for 1999, compared to $0.51 for 1998 and $0.36 for 1997 computed based on 3,223,601 shares outstanding for 1999, 3,560,818 for 1998, and 3,924,128 for 1997. Diluted earnings per share were $0.32 for 1999, compared to $0.50 for 1998 and $0.35 for 1997 computed based on 3,278,816 shares outstanding for 1999, 3,641,434, in 1998, and 3,991,911 in 1997. The declining number of shares outstanding is attributable to the Company's stock repurchase program, on which it expended $1,364,000, $2,446,000, and $950,000, for 1999, 1998, and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company considers a number of liquidity measures that aid in measuring the Company's ability to meet its financial obligations. Such ratios, working capital, and changes in cash and cash equivalents as of the end of the Company's last three years are as follows:
($ in thousands) 1999 1998 1997 - ---------------- -------- -------- -------- LIQUIDITY MEASURES Ratio of current assets to current liabilities 2.7 3.6 4.5 Total liabilities to equity 34% 28% 25% Days sales in accounts receivable 56 52 60 Average annual inventory turnover 3.0 2.9 3.1 Working capital $ 7,964 $ 10,028 $ 12,300 CHANGES IN CASH AND CASH EQUIVALENTS Net cash provided by (used in) Operating activities $ 1,339 $ 1,551 $ 1,721 Investing activities (726) 918 (1,343) Financing activities (1,263) (2,362) (911) Net increase (decrease) in: Cash and cash equivalents $ (650) $ 107 $ (533) Cash and cash equivalents: Beginning of year 1,537 1,430 1,963 End of year 887 1,537 1,430
Working capital decreased 21%, or $2,064,000, to $7,964,000 in 1999, compared to $10,028,000 in 1998 and $12,300,000 in 1997. The current ratio of 2.7 for 1999 was down from 3.6 for 1998, primarily due to an increase 13 14 in accounts payable and a decrease in cash and investments caused by the acquisition of GAC, the purchase of the manufacturing rights for a headspace product, and the repurchase of 317,685 shares of the Company's Common Stock now held in treasury. Since 1995, the Company has repurchased an aggregate 1,311,315 shares at an average purchase price of $4.12 per share. As of December 31, 1999, the Company held 1,046,736 shares in treasury. The 1998 current ratio of 3.6 was down from 4.5 in 1997 primarily due to an increase in accrued liabilities and a decrease in cash and investments caused by payments for a facility expansion in College Station and the repurchase of common stock. The Company's cash position decreased to $887,000 in 1999 from $1,537,000 in 1998, primarily due to the acquisition of GAC, payment for the above-mentioned manufacturing rights, and the repurchase of common stock. Average annual inventory turnover was slightly higher at 3.0 in 1999, compared to 2.9 in 1998 and 3.1 in 1996. The number of days of sales in accounts receivable increased to 56 days in 1999, from 52 days in 1998, which decreased from 60 days in 1997. Current liabilities increased to $4,755,000 in 1999 from $3,857,000 in 1998 due primarily to an increase in accounts payable and unearned revenue, offset in part by a decrease in accrued compensation related to certain discretionary employee benefits. Total liabilities represented 34% of equity in 1999, compared to 28% in 1998 and 25% in 1997. Net cash flow provided by operating activities for 1999 was $1,339,000, compared to $1,551,000 in 1998 and $1,721,000 in 1997. The decrease in cash flow from operations in 1999 was primarily due to the decrease in net income, an increase in accounts receivable, and a decrease in accrued liabilities, offset in part by a decrease in inventory and an increase in accounts payable. All working capital account changes for 1999 are net of the effect of the purchase of GAC. The decrease in cash flow from operations in 1998 compared to 1997 was primarily due to an increase in inventory, offset in part by a decrease in accounts receivable, an increase in accrued liabilities, and an increase in net income. Net cash flow provided by (used in) investing activities for 1999 was ($726,000), compared to $918,000 in 1998, and ($1,343,000) in 1997. The decrease in cash flow provided by investing activities during 1999 was primarily due to the acquisition of GAC, the purchase of the manufacturing rights to a headspace product, and the decrease in the maturity of investments, offset in part by the decrease in payment for the facility expansion in College Station due to the project's completion. The increase in cash flow provided by investing activities during 1998 was due to the maturity of investments, offset in part by the purchase of fixed assets and payment for the facility expansion in College Station. Net cash flow used in financing activities was $1,262,000 in 1999, compared to $2,362,000 in 1998, and $911,000 in 1997. The decrease in cash flow used in financing activities in 1999 was due to decreased purchases of treasury stock. The increase in cash flow used in financing activities from 1997 to 1998 was due to increased purchases of treasury stock. The Company has historically been able to fund working capital and capital expenditures from operations, and expects to be able to finance its 2000 working capital requirements from cash on hand and funds generated from operations. SEGMENT INFORMATION The Company manages its businesses primarily on a product and services basis. The Company's reportable segments are analytical instruments and beverage monitors. See Note 14 for additional segment data. YEAR 2000 To coordinate the phases of the Company's Year 2000 project, the Company established an executive steering committee and a project team. The phases of the project were: (i) awareness; (ii) assessment; (iii) remediation; (iv) testing; (v) implementation of the necessary modifications and (vi) contingency planning. The goal of the Year 2000 project was to ensure that all of the critical systems and processes under the Company's direct control remained functional. As of December 31, 1999, the Company had substantially completed the above phases for all critical domestic and international systems. While the Year 2000 rollover date has passed with no apparent disruptions experienced by the Company's systems and processes, it remains possible that third parties may have experienced disruptions which have not yet manifested any impact on the Company, but could in the future. Accordingly, the Company is prepared to implement its contingency plans should a disruption occur. While the total cost of the Company's Year 2000 project has yet to be determined, the Company does not expect to incur any remaining material costs in 2000. 14 15 Other than the items discussed above, management is not aware of other commitments or contingent liabilities, which would have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause its actual results in 2000 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. CHANGING PRICES AND THE EFFECT OF INFLATION The Company believes that competition based on price is the most significant factor affecting its customers' buying decisions. There is no assurance that the Company can pass along cost increases in the form of price increases or sustain profit margins that have been achieved in prior years. Although inflation has not had a material impact on the Company's operations, there is no assurance that inflation will not adversely affect its operations in the future. The prices of some components purchased by the Company have increased in the past several years due in part to decreased volume. Certain other material and labor costs have also increased, but the Company believes that these increases are approximately consistent with overall inflation rates. UNCERTAINTY OF BUSINESS GROWTH The environmental instrument markets in which the Company competes have been flat or declining over the past several years. The Company has identified a number of strategies it believes will allow it to grow its business despite this decline, including acquiring complementary businesses, developing new applications for its technologies, and strengthening its presence in selected geographic markets. No assurance can be given that the Company will be able to successfully implement these strategies, or that these strategies will result in the growth of the Company's business. RISKS ASSOCIATED WITH ACQUISITION STRATEGY One of the Company's growth strategies is to supplement internal growth with the acquisition of complementary businesses and technologies that augment its existing product lines. Certain businesses acquired by the Company within the past five years have produced net operating losses or low levels of profitability. Businesses the Company may seek to acquire in the future may also be marginally profitable or unprofitable. In order for any acquired business to achieve the level of profitability desired by the Company, the Company must successfully change the acquired companies' operations and improve their market penetration. No assurance can be given that the Company will be successful in this regard. In addition, promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory approvals, including antitrust approvals. There can be no assurance that the Company will be able to complete pending or future acquisitions. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds either through public or private financing. Debt financing, if available, may be on terms that are unfavorable to the Company and equity financing may result in significant dilution to the Company's shareholders. RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE, OBSOLESCENCE, AND THE DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS The market for the Company's products and services is characterized by rapid and significant technological change and evolving industry standards. New product introductions responsive to these factors require significant planning, design, development and testing at the technological, product, and manufacturing process levels, and may render existing products and technologies uncompetitive or obsolete. There can be no assurance that the Company's products will not become uncompetitive or obsolete. In addition, industry acceptance of new technologies developed by the Company may be slow to develop due to, among other things, existing regulations applying specifically to older technologies and the general unfamiliarity of users with new technologies. 15 16 POSSIBLE ADVERSE EFFECT FROM CONSOLIDATION IN THE ENVIRONMENTAL INSTRUMENT MARKET AND CHANGES IN ENVIRONMENTAL REGULATIONS One of the important markets for the Company's products is environmental analysis. During the past four years, there has been a contraction in the market for analytical instruments used for environmental analysis. This contraction has caused consolidation in the businesses serving this market. Such consolidation may have an adverse impact on certain businesses of the Company. In addition, most air, water, and soil analyses are conducted to comply with federal, state, local, and foreign environmental regulations. These regulations are frequently specific as to the type of technology required for a particular analysis and the level of detection required for that analysis. The Company develops, configures, and markets its products to meet customer needs created by existing and anticipated environmental regulations. These regulations may be amended or eliminated in response to new scientific evidence or political or economic considerations. Any significant change in environmental regulations could result in a reduction in demand for the Company's products. POSSIBLE ADVERSE EFFECT FROM DEPENDENCE ON SALES TO THE U.S. GOVERNMENT The Company's customers include various government agencies and public and private research institutions, which accounted for 29% of the Company's sales in 2000. The capital spending of these entities can have a significant effect on the demand for the Company's products. Such spending is based on a wide variety of factors, including the resources available to make purchases, the spending priorities among various types of equipment, public policy, political trends, and the effects of different economic cycles. Any decrease in capital spending by any of the customer groups that account for a significant portion of the Company's sales could have a material adverse effect on the Company's business and results of operations. DEPENDENCE ON CAPITAL SPENDING PATTERNS OF CUSTOMERS AND GOVERNMENT FUNDING The Company's customers include pharmaceutical and chemical companies, laboratories, government agencies, and public and private research institutions. The capital spending patterns of these entities, and fluctuation in the funding of government agencies who are major customers, can have a significant effect on the demand for the Company's products. Any decrease in capital spending by any of the customer groups that account for a significant portion of the Company's sales, or a decline in the funding of government customers, could have a material adverse effect on the Company's business and results of operations. POSSIBLE ADVERSE IMPACT OF SIGNIFICANT INTERNATIONAL SALES Sales outside the United States accounted for approximately 18% of the Company's revenues in 1999. The Company expects that international sales will continue to account for a significant portion of the Company's revenues in the future. Sales to customers in foreign countries are subject to a number of risks, including the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries could impose withholding taxes or otherwise tax the Company's foreign income, impose tariffs, or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand; export licenses, if required, may be difficult to obtain and the protection of intellectual property in foreign countries may be more difficult to enforce. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business and results of operations. COMPETITION The Company encounters and expects to continue to encounter intense competition in the sale of its products. The Company believes that the principal competitive factors affecting the market for its products include product performance, price, reliability, and customer service. The Company's competitors include large multinational corporations and their operating units. Most of the Company's competitors have substantially greater financial, marketing, and other resources than those of the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than the Company. In addition, competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. There can be no assurance that the Company's current products, products under development or ability to discover new technologies will be sufficient to enable it to compete effectively with its competitors. 16 17 PROTECTION, DEFENSE, AND USE OF INTELLECTUAL PROPERTY The Company holds patents relating to various aspects of its products and believes that proprietary technical know-how is critical to many of its products. Proprietary rights relating to the Company's products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. There can be no assurance that patents will issue from any pending or future patent applications owned by or licensed to the Company or that the claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In the absence of patent protection, the Company may be vulnerable to competitors who attempt to copy the Company's products or gain access to its trade secrets and technical know-how. Proceedings initiated by the Company to protect its proprietary rights could result in substantial costs to the Company. There can be no assurance that competitors of the Company will not initiate litigation to challenge the validity of the Company's patents, or that they will not use their resources to design comparable products that do not infringe upon the Company's patents. There may also be pending or issued patents held by parties not affiliated with the Company that relate to the Company's products or technologies. The Company may need to acquire licenses to, or contest the validity of, any such patents. There can be no assurance that any license required under any such patent would be made available on acceptable terms or that the Company would prevail in any such contest. The Company could incur substantial costs in defending itself in suits brought against it or in suits in which the Company may assert its patent rights against others. If the outcome of any such litigation is unfavorable to the Company, the Company's business and results of operations could be materially adversely affected. In addition, the Company relies on trade secrets and proprietary technical know-how that it seeks to protect, in part, by confidentiality agreements with its collaborators, employees, and consultants. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. MARKET RISK The Company is exposed to a variety of market risks, including changes in interest rates and the market value of its investments. In the normal course of business, the Company employs established policies and procedures to manage its exposure to changes in the market value of its investments. To date, the Company has not experienced any material effects to its financial position or results of operations due to market risks or its efforts to manage market risks. The fair value of the Company's investments in debt securities at December 31, 1999 and 1998 was $2,299,645 and $2,776,814, respectively. See Note 3 for further information regarding these instruments. The Company's investment policy is to manage its investment portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio by investing in multiple types of investment grade securities. The Company's investment portfolio is primarily invested in short-term securities with at least an investment grade rating to minimize interest rate and credit risk. Although changes in interest rates may affect the fair value of the investment portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold prior to maturity. The Company intends to hold all investments to maturity. - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT RESPONSIBILITY FOR FINANCIAL REPORTING Management is responsible for the integrity and objectivity of the data included in this report. We believe we have provided financial information (both audited and unaudited) that is representative of the Company's operations, reliable on a consistent basis throughout the periods presented, and relevant for a meaningful appraisal of the Company. The financial statements have been prepared in accordance with generally accepted accounting principles. Where necessary, they reflect estimates based on management's judgment. Established accounting procedures and related systems of internal control provide reasonable assurance that assets are safeguarded, that the books and records properly reflect all transactions, and that policies and procedures are implemented by qualified personnel. Management periodically reviews the Company's accounting and control systems. 17 18 The Company's Audit Committee, composed of at least three members of the Board of Directors who are not employees of the Company, meets regularly with representatives of management and the independent accountants to monitor the functioning of the accounting and control systems and to review the results of the audit performed by the independent accountants. The independent accountants and Company employees have full and free access to the Audit Committee without the presence of management. The Audit Committee recommends independent accountants for appointment by the Board. The independent accountants conduct an objective, independent examination of the financial statements. Their report appears as a part of the Company's Annual Report on Form 10-K. /s/ Julie A. Wright - ---------------------------------------- Julie A. Wright, Corporate Controller /s/ William W. Botts - ---------------------------------------- William W. Botts, President/CEO Date: March 15, 2000 ----------------------------------- 18 19 REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDERS OF O. I. CORPORATION In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of O. I. Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas January 21, 2000 19 20 O. I. CORPORATION CONSOLIDATED BALANCE SHEET
December 31 ---------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 887,043 $ 1,536,548 Investments 1,760,299 2,771,565 Accounts receivable-trade, net of allowance for doubtful accounts of $254,038 and $215,917, respectively 3,927,999 3,361,305 Investment in sales-type leases 485,699 459,184 Inventories 4,922,748 4,917,268 Deferred income tax assets 601,958 537,401 Other current assets 133,857 302,333 ------------ ------------ Total current assets 12,719,603 13,885,604 Property, plant and equipment, net 3,895,235 3,620,389 Investment in sales-type leases, net of current 422,002 575,600 Long-term investments 553,155 0 Other assets, net 1,899,886 747,154 ------------ ------------ Total assets $ 19,489,881 $ 18,828,747 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 2,299,055 $ 1,198,271 Accrued liabilities 2,456,122 2,659,023 ------------ ------------ Total current liabilities 4,755,177 3,857,294 ------------ ------------ Deferred income taxes 201,785 227,612 ------------ ------------ Commitments and contingencies ------------ ------------ Shareholders' equity: Preferred stock, $0.10 par value, 3,000,000 shares authorized, no shares issued and outstanding Common stock, $0.10 par value, 10,000,000 shares authorized, 4,103,377 shares issued 410,338 410,338 Additional paid-in capital 4,381,089 4,373,896 Treasury stock, 1,046,736 and 754,334 shares, respectively, at cost (4,597,732) (3,328,173) Retained earnings 14,339,224 13,287,780 ------------ ------------ 14,532,919 14,743,841 ------------ ------------ Total liabilities and stockholders' equity $ 19,489,881 $ 18,828,747 ============ ============
The accompanying notes are an integral part of these financial statements. 20 21 O. I. CORPORATION CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net revenue $ 25,734,267 $ 23,683,685 $ 21,630,245 Cost of revenue 14,933,362 12,764,748 11,554,442 ------------ ------------ ------------ Gross profit 10,800,905 10,918,937 10,075,803 Selling, general and administrative expenses 7,692,379 7,093,192 6,928,679 Research and development expenses 1,880,976 1,458,326 1,696,688 ------------ ------------ ------------ Operating income 1,227,550 2,367,419 1,450,436 Other income (expense): Interest income, net 302,483 436,147 467,782 Other income 56,705 55,505 116,626 ------------ ------------ ------------ Income before income taxes 1,586,738 2,859,071 2,034,844 Provision for income taxes (535,294) (1,036,637) (642,252) ------------ ------------ ------------ Net income $ 1,051,444 $ 1,822,434 $ 1,392,592 ============ ------------ ------------ Basic earnings per share $ 0.33 $ 0.51 $ 0.36 ============ ============ ============ Diluted earnings per share $ 0.32 $ 0.50 $ 0.35 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 21 22 O. I. CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 1,051,444 $ 1,822,434 $ 1,392,592 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 626,418 410,617 570,010 Deferred income taxes (90,384) 65,711 48,086 Gain on disposition of property (19,410) (10,219) (45,589) Changes in assets and liabilities, net of the effect of the purchase of General Analysis Corporation (GAC)(1999): Accounts receivable (292,648) 209,185 357,660 Inventories 313,243 (1,139,491) 2,175 Other assets 221,277 (135,526) (289,674) Accounts payable 540,837 (31,809) (83,395) Accrued liabilities (1,012,002) 359,855 (230,943) ------------ ------------ ------------ Net cash provided by operating activities 1,338,775 1,550,757 1,720,922 ------------ ------------ ------------ Cash flows from investing activities: Purchase of property plant, and equipment (634,542) (504,148) (320,986) Construction in progress (119,808) (2,023,006) (83,998) Proceeds from sale of assets 48,983 43,882 124,076 Purchase of GAC, net of cash acquired (259,459) 0 0 Purchase of manufacturing rights (213,405) 0 0 Purchase of investments (2,322,257) (2,355,129) (7,757,298) Maturity of investments 2,762,000 5,703,000 6,682,000 Change in other assets 12,574 53,787 12,776 ------------ ------------ ------------ Net cash provided by (used in) investing activities (725,914) 918,386 (1,343,430) ------------ ------------ ------------ Cash flows from financing activities: Purchase of treasury stock (1,364,042) (2,446,240) (949,713) Proceeds from issuance of common stock 101,676 83,865 38,827 ------------ ------------ ------------ Net cash used in financing activities (1,262,366) (2,362,375) (910,886) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (649,505) 106,768 (533,394) Cash and cash equivalents: Beginning of year 1,536,548 1,429,780 1,963,174 ------------ ------------ ------------ End of year $ 887,043 $ 1,536,548 $ 1,429,780 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during year for: Interest $ 836 $ 307 $ 12,241 Income taxes 615,830 832,200 883,519 Business acquisition, net of cash acquired: Working capital, other than cash acquired (855,560) 0 0 Property, plant and equipment 25,006 0 0 Purchase price in excess of net assets acquired 1,077,645 0 0 Other assets 12,368 0 0 ------------ ------------ ------------ Net cash used to acquire GAC 259,459 0 0
The accompanying notes are an integral part of these financial statements. 22 23 O. I. CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional -------------------------- Paid-In Treasury Retained Shares Amount Capital Stock Earnings ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1996 4,143,046 $ 414,305 $ 4,586,661 $ (112,968) $10,072,754 Purchase of 243,233 shares of treasury stock (949,713) Shares cancelled (39,669) (3,967) (154,709) Issuance of 2,256,shares from treasury for directors' compensation 245 7,755 Issuance of 21,001 shares from treasury for exercise of stock options (54,218) 72,972 Issuance of 2,965 shares from treasury to Employee Stock Purchase Plan 1,883 10,191 Net Income 1,392,592 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 4,103,377 410,338 4,379,862 (971,763) 11,465,346 Purchase of 529,768 shares of treasury stock (2,446,240) Issuance of 21,034 shares from treasury for exercise of stock options (11,040) 75,718 Issuance of 3,893 shares from treasury to Employee Stock Purchase Plan 3,353 14,112 Tax benefit associated with exercised options 1,721 Net income 1,822,434 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1998 4,103,377 410,338 4,373,896 (3,328,173) 13,287,780 Purchase of 317,685 shares of treasury stock (1,364,042) Issuance of 20,666 shares from treasury for exercise of stock options 2,235 77,373 Issuance of 4,617 shares from treasury to Employee Stock Purchase Plan 4,958 17,110 Net income 1,051,444 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1999 4,103,377 $ 410,338 $ 4,381,089 $(4,597,732) $14,339,224 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 23 24 O. I. CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES O. I. Corporation (the Company) was organized in 1969. The Company designs, manufactures, markets, and services analytical, monitoring, and sample preparation products, components, and systems used to detect, measure, and analyze chemical compounds. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue and the related cost of sales are generally recognized upon shipment of goods or provision of service with no substantial right of return. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. INVESTMENTS The Company's investments in debt securities are classified as held to maturity as the Company has the positive intent and ability to hold the investments until maturity. These investments are reported at amortized cost. LEASES The Company's leasing operations consist of the leasing of analytical instruments. The majority of the Company's leases are classified as sales-type leases. These leases expire over the next four years. INVENTORIES Inventories consist of electronic equipment and various components and are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company maintains a reserve for inventory obsolescence and regularly evaluates its inventory. Items with no movement in six months or more are reserved or written off. The Company also provides an obsolescence reserve for items that have impairments in their realizable value below cost as a result of new product introductions. DEMONSTRATION EQUIPMENT The demonstration of the Company's products is often required prior to a customer's purchase. The Company makes available certain equipment for use in demonstration, believing that a successful demonstration will promote the customer's purchase of the equipment. Equipment used in demonstration is classified as inventory and is depreciated to a zero value in a six-month period from the date of being used in a customer demonstration. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is recorded at cost and depreciated over the estimated useful lives using the straight-line method. OTHER ASSETS Other assets primarily include acquired patents, licenses, customer lists, non-compete agreements, goodwill, and trademarks that are amortized on a straight-line basis over 5 to 17 years. Amortization charged to operations amounted to $166,000, $56,000, and $86,000 for the years ended December 31, 1999, 1998, and 1997, respectively. The Company has classified as goodwill the cost in excess of fair value of the net assets of companies acquired in purchase transactions. At each balance sheet date, the Company evaluates the realizability of goodwill based on expectations of non-discounted cash flows and operating income for each product line having a material goodwill balance. Based on its most recent analysis, the Company believes that no material impairment of goodwill exists at December 31, 1999. 24 25 LONG-LIVED ASSETS The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. No such impairment losses have been identified by the Company. PRODUCT WARRANTIES Products are sold with warranties ranging from 90 days to one year. Estimated expenses associated with these warranties are accrued in the accompanying financial statements. The Company also sells extended product warranties typically covering an additional period of one year. Revenue from extended warranties is recorded ratably over the period. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. INCOME TAXES The Company uses the asset and liability approach to account for income taxes. This approach requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. The Company places its available cash in money market funds and investment grade domestic corporate bonds. The Company's investments are subject to fluctuations based on interest rates prevailing in the market place. The Company sells its products primarily to large corporations, environmental testing laboratories, and governmental agencies. The majority of its customers are located in the United States and all sales are denominated in U.S. dollars. Concentrations of credit risk with respect to trade receivables are limited due to the financial stability of the customers comprising the Company's customer base. The Company performs ongoing credit evaluations of its customers to minimize credit risk. As of December 31, 1999 and 1998, the Company had no significant concentrations of credit risk related to accounts receivable. However, agencies of the U.S. government constitute a significant percent of the Company's revenue (Note 14). Any federal budget cuts or changes in regulations affecting the U.S. chemical warfare programs or the EPA may have a negative impact on the Company's future revenue. EARNINGS PER SHARE The Company reports both basic earnings per share, which is based on the weighted average number of common shares outstanding and diluted earnings per share, which is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Stock options are the only dilutive potential shares the Company has outstanding. The weighted average of shares used in the basic earnings per share calculation was 3,223,601 in 1999, 3,560,818 in 1998, and 3,924,128 in 1997. The weighted average number of shares used in the diluted earnings per share computation was 3,278,816 in 1999, 3,641,434 in 1998, and 3,991,911 in 1997. At December 31, 1999, 1998, and 1997 options to acquire 102,800, 31,000, and 152,200 shares at weighted average exercise prices of $7.37, $11.68, and $5.98 respectively, were not included in the computations of dilutive earnings per share as the options' exercise price was greater than the average market price of the common shares. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (FAS 130), Reporting Comprehensive Income. This statement established standards for reporting and display of comprehensive income and its components. Net income is the Company's only component of comprehensive income. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131 (FAS 131), Disclosures about Segments of an Enterprise and Related Information. FAS 131 supersedes FAS 14, Financial Reporting for Segments of a Business Enterprise; replacing the "industry segment" approach with the "management approach." The management approach designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. 25 26 FAS 131 also requires disclosure about products and sources, geographic areas and major customers. The Company believes it operated in one reportable segment as defined by FAS 131 for the year ended December 31, 1998. As a result of the acquisition of GAC (see Note 2), the Company believes it operates in two reportable segments as defined by FAS 131 for the year ended December 31, 1999. The adoption of FAS 131 did not affect results of operations or financial position, but did affect the disclosure of segment information for the year ended December 31, 1999 (Note 14). USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the use of management estimates and judgments. Actual results may differ from these estimates. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (FAS 133) Accounting for Derivative Instruments and Hedging Activities. The pronouncement establishes accounting and reporting standards for derivative instruments. The pronouncement was to become effective for fiscal years beginning after June 15, 1999. During June 1999, the Financial Accounting Standards Board issued Financial Accounting Standards No. 137 (FAS 137) Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement 133 which delayed the effective date of FAS 133 to fiscal years beginning after June 15, 2000. The Company has historically not engaged in significant derivative instrument activity. Adoption of FAS 133 is not expected to have a material effect on the Company's financial position or operational results. - -------------------------------------------------------------------------------- NOTE 2: ACQUISITIONS On February 1, 1999, the Company acquired substantially all of the assets of General Analysis Corporation (GAC). GAC is a supplier of beverage monitors used to measure dissolved Brix (sugar), diet syrup and carbon dioxide in beverage streams. GAC also sells air and gas monitors that are used by the chiller/refrigerant industry for the rapid detection of low-level refrigerant leaks. The Company acquired GAC for $259,459 in cash and the assumption of approximately $1,100,000 in liabilities. In addition, the Company may be obligated to make earn-out payments to the former owner of GAC based upon the achievement of potential future revenue targets. The earn-out provision is based upon a percentage of equipment sales, as defined in the purchase agreement, in excess of certain thresholds through 2003. The sales thresholds approximate $1,000,000 for 1999 and increase ratably each year to total a sales threshold of at least $5,000,000 in 2003. No earn-out payments were earned for the year ended December 31, 1999. Any earn-out payments will be recorded as an adjustment to the purchase price of the acquisition because the earn-out payments are based upon the future performance of the Company and not upon continued employment of the former owners. As of December 31, 1999, the maximum aggregate amount of the potential earn-out payments is approximately $3,500,000. The excess of the purchase price over fair market value of the underlying assets acquired of $1,078,000 was allocated to intangibles, including patents, non-compete agreements, trademarks, and goodwill based upon estimates of relative fair values. The intangible assets are being amortized over a 5-15 year period, dependent upon the nature of the assets and are included within the other assets caption of the balance sheet. The acquisition was accounted for using the purchase method of accounting, with the results of the acquired operations being included from the date of acquisition. The unaudited pro forma results of operations, as if GAC had been acquired by the Company from January 1, 1998, have been prepared for illustrative purposes only and include certain adjustments, such as additional amortization expense as a result of goodwill and other intangible assets and decreased interest expense on retired debt. The pro forma results are not necessarily indicative of the combined results of operations of future periods or the results that would have actually occurred had the companies been combined during the specified periods and are as follows: 26 27
(unaudited) December 31, ----------------------- 1999 1998 ---------- ---------- Total revenues $ 25,875 $ 27,312 Income before income tax 1,329 2,267 Pro forma net income 811 1,233 Earnings per common share: Basic $ 0.25 $ 0.35 Diluted 0.25 0.35 Shares used in computing earnings per share Basis $ 3,224 $ 3,561 Diluted 3,279 3,641
- -------------------------------------------------------------------------------- NOTE 3: INVESTMENTS Investments considered held to maturity at December 31, 1999, consisted of the following:
Gross Gross Amortized Market Unrealized Unrealized Cost Value Holding Gains Holding Losses ------------ ------------ ------------- -------------- Short-term corporate bonds $ 1,760,299 $ 1,752,053 $ 0 $ (8,246) Long-term corporate bonds 553,155 547,592 0 (5,563) ------------ ------------ ------------- ------------ Total corporate bonds $ 2,313,454 $ 2,299,645 $ 0 $ (13,809)
All of the investments at December 31, 1999 are scheduled to mature in 2000 and 2001. Market value is based upon quoted market prices for the investments. Investments considered held to maturity at December 31, 1998, consisted of the following:
Gross Gross Amortized Market Unrealized Unrealized Cost Value Holding Gains Holding Losses ------------ ------------ ------------- -------------- Short-term corporate bonds $ 2,771,565 $ 2,776,814 $ 5,249 $ 0
- -------------------------------------------------------------------------------- NOTE 4: NET INVESTMENT IN SALES-TYPE LEASES The following sets forth the components of the net investment in sales-type leases as of December 31, 1999: Future minimum lease payments to be received are: 2000 $ 485,699 2001 292,933 2002 99,028 2003 30,041 ------------ 907,701 Less: amount relating to interest 94,927 ------------ Present value of minimum lease payments to be received $ 812,774 ============
27 28 - -------------------------------------------------------------------------------- NOTE 5: INVENTORIES Inventories, which include material, labor, and overhead, on December 31, 1999 and 1998, consisted of the following:
1999 1998 -------------- ------------- Raw materials $ 2,341,596 $ 2,041,218 Work-in-process 472,297 809,917 Finished goods 2,108,855 2,066,133 -------------- ------------- $ 4,922,748 $ 4,917,268 ============== =============
- -------------------------------------------------------------------------------- NOTE 6: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment on December 31, 1999 and 1998, consisted of the following:
Estimated useful lives 1999 1998 ------------ -------------- ------------- Land $ 41,221 $ 41,221 Buildings 33 to 40 years 3,635,051 1,476,046 Construction in progress 119,808 2,107,004 Furniture and equipment 3 to 10 years 2,289,861 2,111,469 -------------- ------------- 6,085,941 5,735,740 Less accumulated depreciation (2,190,706) (2,115,351) -------------- ------------- $ 3,895,235 $ 3,620,389 ============== =============
- -------------------------------------------------------------------------------- NOTE 7: ACCRUED LIABILITIES Accrued liabilities on December 31, 1999 and 1998, consisted of the following:
1999 1998 --------------- --------------- Accrued compensation $ 642,825 $ 751,666 Accrued warranties 582,818 502,818 Unearned revenue-service contracts 400,260 251,912 Unearned interest-investment in sales-type leases 265,063 223,865 Other liabilities and accrued expenses 565,156 928,762 --------------- --------------- $ 2,456,122 $ 2,659,023 =============== ===============
28 29 - -------------------------------------------------------------------------------- NOTE 8: LINE OF CREDIT The Company has a line of credit agreement expiring March 25, 2000, which provides for secured borrowings up to $1,300,000 at an interest rate of the bank's base rate plus 1%, which was 9.50% at December 31, 1999. The Company did not draw on the line during 1999. The terms of the line of credit agreement contain, among other provisions, requirements for maintaining defined levels of working capital and net worth. The agreement also requires an annual fee of one point at the maturity of the line on the total funds advanced against the line. - -------------------------------------------------------------------------------- NOTE 9: STOCK OPTION AND STOCK PURCHASE PLAN In 1987, the Company established a stock option and stock appreciation rights plan (1987 Plan) qualified under Section 422 of the Internal Revenue Code of 1986. The 1987 Plan provided for the granting of options for the purchase of up to 500,000 shares of common stock of the Company with the options having an exercise price of not less than the par value of such stock. The options generally expire 10 years from the date of grant and generally vest over three years from the date of grant. During 1991, the stockholders approved an amendment to the 1987 Plan allowing restricted stock grants. As a result of such amendment, the 1987 Plan allows for stock grants subject to vesting requirements that may be determined at the time of such grant. The 1987 Plan expired in accordance with its terms on December 31, 1997. At such time, options to purchase 483,837 of the 500,000 shares reserved for issuance had been granted. The Company does not currently intend to adopt a plan to replace the 1987 Plan. During 1992, the Company's Board of Directors, and during 1993, the Company's stockholders, approved the O. I. Corporation 1993 Incentive Compensation Plan (1993 Plan). The 1993 Plan provides for the granting of options to purchase up to 500,000 shares of the Company's common stock with the options having an exercise price of not less than the par value of such stock. Employees and nonemployee directors of the Company are eligible for such grants. The options generally expire ten years from the date of grant and generally vest over three or four years. During 1999, the Company granted 72,800 share options under the 1993 Plan, with a weighted average exercise price based on the stock price of $5.46 at the date of grant. As of December 31, 1999, 266,166 options were available for grant under the 1993 Plan. The 1993 Plan also allows for the granting of stock appreciation rights (SARs) and stock awards, although none have been granted. Options outstanding under the 1987 Plan and the 1993 Plan have exercise prices equal to the market value on the date of grant. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting for Awards of Stock-Based Compensation (FAS 123), the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 --------- --------- -------- Net income As reported $ 1,051 $ 1,822 $ 1,393 Pro forma 989 1,749 1,347 Basic earnings per share As reported $ 0.33 $ 0.51 $ 0.36 Pro forma 0.31 0.49 0.34 Diluted earnings per share As reported $ 0.32 $ 0.50 $ 0.35 Pro forma 0.30 0.48 0.34
29 30 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998, and 1997 respectively: dividend yield of zero for each year; expected volatility of 32, 33, and 34 percent; risk-free interest rates of 4.79, 5.56, and 6.04 percent; and expected lives of seven years. The weighted average fair value at the date of grant for options granted during 1999, 1998, and 1997 was $2.68, $2.06, and $1.90, respectively. Activity under the 1987 Plan and the 1993 Plan for each of the three years in the period ended December 31, 1999 was as follows:
Weighted Average Shares Price per Share Price per Share ------------ ---------------- --------------- Options outstanding, December 31, 1996 348,000 $0.8125 - $14.00 $ 4.12 Options granted 93,700 3.50 - 4.25 3.92 Options exercised (21,001) 0.8125 - 2.50 0.89 Options forfeited or cancelled (21,466) 2.50 - 3.94 3.25 ----------- Options outstanding, December 31, 1997 399,233 2.50 - 14.00 4.29 Options granted 16,000 4.25 - 4.75 4.38 Options exercised (21,034) 2.50 - 4.12 3.08 Options forfeited or cancelled (42,733) 2.50 - 6.06 4.29 ----------- Options outstanding, December 31, 1998 351,466 2.50 - 14.00 4.37 Options granted 72,800 4.28 - 5.625 5.46 Options exercised (20,666) 2.50 - 4.00 3.85 Options forfeited or cancelled (15,900) 3.50 - 5.625 4.42 ----------- Options outstanding, December 31, 1999 387,700 2.50 - 14.00 4.60
There were 263,800, 248,568, and 223,477, share options exercisable at December 31, 1999, 1998, and 1997, respectively. The following table summarizes significant ranges of outstanding and exercisable options at December 31, 1999.
Options Outstanding Options Exercisable ------------------------------------------ --------------------- Weighted Weighted Weighted average average average Ranges of remaining exercise exercise Exercise prices Shares life in years price Shares price --------------- ----------- --------------- ----------- --------- --------- $2.50 - 3.74 169,700 6.0 $ 3.15 133,500 $ 3.05 3.75 - 5.62 188,000 7.5 4.75 100,300 4.36 5.63 - 8.45 8,000 3.1 6.01 8,000 6.01 14.00 22,000 3.0 14.00 22,000 14.00
In 1989, the Company established an Employee Stock Purchase Plan. Under the plan provisions, employees may purchase shares of the Company's common stock on a regular basis through payroll deductions. Any person who is a full-time employee of the Company is eligible to participate in the plan, with each participant's purchases limited to 10% of annual gross compensation. The plan is administered by the Compensation Committee of the Board of Directors. Shares of common stock are purchased in the open market or issued from shares held in treasury. The Company pays all commissions and contributes an additional 15% for the purchase of shares that are distributed to eligible participating employees. The Company's contribution to the plan was not significant in any of the years reported. The aggregate number of shares of common stock available for purchase under this plan is 200,000. As of December 31, 1999, 41,146 shares had been purchased under the plan. 30 31 - -------------------------------------------------------------------------------- NOTE 10. STOCKHOLDERS' EQUITY The Company's Articles of Incorporation authorize the issuance of up to 3,000,000 shares of preferred stock with $0.10 par value per share. The voting rights, dividend rate, redemption price, rights of conversion, rights upon liquidation, and other preferences are subject to determination by the Board of Directors. As of December 31, 1999, no preferred stock had been issued. The Company's Board of Directors has authorized the Company to repurchase shares of its common stock through open market purchases or privately negotiated transactions. Since 1995, the Company has repurchased an aggregate 1,311,315 shares related to these authorizations. The shares are held by the Company and accounted for using the cost method. The Company is authorized to purchase up to 163,685 additional shares. - -------------------------------------------------------------------------------- NOTE 11. INCOME TAXES The Company's operations are only taxed under domestic jurisdictions. The provision for income taxes is summarized as follows:
Years Ended December 31 ---------------------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Current provision: Federal $ 570,386 $ 816,552 $ 480,653 State 55,291 154,375 113,513 Deferred provision (90,383) 65,710 48,086 ------------ ----------- ----------- $ 535,294 $ 1,036,637 $ 642,252 ============ =========== ===========
The provision for income taxes differs from the amount computed by applying the federal statutory rates for the following reasons:
Years Ended December 31 ---------------------------------- 1999 1998 1997 ------ ------- ------ Tax at statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 5.8 5.8 5.4 Other, net (6.1) (3.5) (7.9) ------ ------- ------ 33.7% 36.3% 31.5% ====== ======= ======
31 32 Deferred tax assets (liabilities) are comprised of the following at December 31, 1999 and 1998:
December 31, ------------------------ 1999 1998 ---------- ---------- Current: Warranty reserve $ 201,127 $ 201,127 Bad debt allowance 83,843 84,596 Inventory reserve 37,692 35,662 Uniform capitalization 211,165 160,541 Accrued vacation 50,992 38,336 Other 17,139 17,139 ---------- ---------- Total current $ 601,958 $ 537,401 ---------- ---------- Noncurrent: Depreciation $ 21,459 $ (30,643) Deferred compensation 17,975 20,000 Intangibles (114,493) (112,871) Other (75,209) (52,581) ---------- ---------- Total noncurrent $ (150,268) $ (176,095) ========== ========== Net tax asset before valuation allowance 451,690 361,306 Valuation allowance (51,517) (51,517) ---------- ---------- Net deferred tax asset $ 400,173 $ 309,789 ========== ==========
- -------------------------------------------------------------------------------- NOTE 12: EMPLOYEE BENEFIT PLANS The Company maintains a Retirement Savings Plan (the Plan) for its employees that allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company's contributions to the Plan are discretionary. Employees vest immediately in their contributions and vest in the Company's contributions ratably over five years. The Company accrued contributions of $100,000, $150,000 and $120,000 to the Plan for the years ended December 31, 1999, 1998, and 1997, respectively. - -------------------------------------------------------------------------------- NOTE 13: COMMITMENTS AND CONTINGENCIES The Company has agreed to pay the former owner of Floyd Associates, Inc. a royalty equal to 5% of the net revenue earned from certain microwave-based products up to a maximum amount of $1,182,500. The contingent liability arose as a result of the acquisition of Floyd. No minimum payments are required in the agreement. The Company recognized royalty expense related to this agreement of $34,503, $62,551, and $50,954, in 1999, 1998, and 1997, respectively. The Company has entered operating leases for certain facilities. These operating leases expire in the years 2000 and 2004. Rental expense recognized in 1999, 1998, and 1997 was $262,000, $260,000, and $324,000, respectively. Future minimum rental payments under these leases for 2000, 2001, 2002, 2003, and 2004 are $118,250, $105,000, $105,000, $105,000 and $87,500, respectively. 32 33 - -------------------------------------------------------------------------------- NOTE 14: SEGMENT DATA In 1998, the Company adopted FAS 131. The Company manages its businesses primarily on a product and services basis. The Company's reportable segments are analytical instruments and beverage monitors. The reportable segments provide products as described in Note 1. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on segment profit. The Company does not segregate assets by reportable segment. There is no prior year segment information as the beverage monitor segment was acquired in the GAC acquisition, which was completed during the year ended December 31, 1999. The table below presents information about revenue from unaffiliated customers, income from continuing operations before tax as of and for the year ended December 31, 1999:
Analytical Beverage Reconciling Instruments Monitors Items Total ----------- ----------- ----------- ----------- Revenue from unaffiliated customers $24,733,000 $ 1,001,000 $ 0 $25,734,000 Interest Income 0 0 302,000 (1) 302,000 Depreciation and amortization 556,000 44,000 26,000 (2) 626,000 Income (loss) from continuing operations before tax 2,745,000 (272,000) (886,000)(3) 1,587,000 Income tax expense (benefit) 925,000 (92,000) (298,000)(4) 535,000
Reconciling items for 1999: (1) Corporate interest income. (2) Corporate depreciation and amortization. (3) Corporate interest income plus corporate general and administrative expenses. (4) Corporate income tax expense. Analytical instruments was the only reportable segment for the years ended December 31, 1998 and December 31, 1997. Revenue related to operations in the United States and foreign countries for the years ended December 31, 1999, 1998, and 1997 are presented below. The basis for attributing revenues from external customers to individual countries is based upon locations to which the product is shipped. Long-lived assets related to continuing operations in the United States and foreign countries as of the years ended December 31, 1999, 1998, and 1997 are as follows:
Years Ended 1999 1998 1997 ----------- ----------- ----------- Revenue from unaffiliated customers: United States $21,193,604 $18,731,459 $16,941,229 Foreign 4,540,663 4,952,226 4,689,016 Long-lived assets at end of year: United States $ 3,895,235 $ 3,620,389 $ 1,459,049
No single customer accounted for more than 10% of revenue in 1999, 1998, or 1997. Sales to federal, state and municipal governments occur in the analytical instrument segment accounted for 29% of total revenue in 1999, 31% of total revenue in 1998, and 35% of total revenue in 1997. 33 34 - -------------------------------------------------------------------------------- NOTE 15: QUARTERLY INFORMATION (UNAUDITED) Quarterly financial information for 1999 and 1998 is summarized as follows:
($ in thousands, except per share amounts) First Second Third Fourth 1999 Qtr. Qtr. Qtr. Qtr. ---------- ---------- ---------- ---------- Net revenue $ 6,105 $ 6,798 $ 6,922 $ 5,909 Gross profit 2,625 2,963 2,894 2,319 Net income 323 384 286 58 Basic earnings per share $ 0.10 $ 0.12 $ 0.09 $ 0.02 Diluted earnings per share $ 0.09 $ 0.12 $ 0.09 $ 0.02
($ in thousands, except per share amounts) First Second Third Fourth 1998 Qtr. Qtr. Qtr. Qtr. ---------- ---------- ---------- ---------- Net revenue $ 5,825 $ 5,752 $ 6,077 $ 6,030 Gross profit 3,104 2,460 2,756 2,599 Net income 433 460 462 467 Basic earnings per share $ 0.11 $ 0.13 $ 0.13 $ 0.14 Diluted earnings per share $ 0.11 $ 0.12 $ 0.13 $ 0.14
- -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to the identification, business experience, and directorships of each director and nominee for director of the Company, required by Item 401 of Regulation S-K and presented in the section entitled "Election of Directors-Nominees for Board of Directors" of the Company's Proxy Statement for the annual meeting of shareholders on May 10, 2000 (the "Proxy Statement"), is hereby incorporated by reference. See Item 1 for information relating to the identification and business experience of the Company's executive officers. The information relating to persons subject to Section 16 of the Securities Exchange Act of 1934 and the timeliness with which they have filed Forms 3, 4, and 5, required by Item 405 of Regulation S-K and presented in the section titled "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement, is incorporated herein by reference. - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION The information relating to the cash compensation of directors and officers, required by Item 402 of Regulation S-K and presented in the section entitled "Election of Directors-Compensation of Directors" and "Election of Directors-Compensation of Executive Officers" of the Company's Proxy Statement for the annual meeting of shareholders on May 10, 2000, is incorporated herein by reference. 34 35 - -------------------------------------------------------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information relating to security ownership required by Item 403 of Regulation S-K, which is presented in the section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Company's Proxy Statement for the annual meeting of shareholders on May 10, 2000, is incorporated herein by reference. - -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information relating to relationships and transactions required by Item 404 of Regulation S-K, which is presented in the section, "Election of Directors - Executive Compensation - Certain Transactions, Employment Contracts, Termination of Employment and Change-in-Control Arrangements" of the Company's Proxy Statement for the annual meeting of shareholders on May 10, 2000, is incorporated herein by reference. 35 36 PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements of O. I. Corporation and its subsidiary that are included in Part II, Item 8: Page Report of Independent Accountants......................................................................19 Consolidated Balance Sheet at December 31, 1999 and 1998...............................................20 Consolidated Statement of Income for the years ended December 31, 1999, 1998, and 1997.................21 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998, and 1997.............22 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997............................................................................................23 Notes to Consolidated Financial Statements.............................................................24
(a) 2. Financial Statement Schedules required to be filed by Item 8 of this Form: All schedules are omitted as they are not required, or are not applicable, or the required information is included in the financial statements or notes thereto. (a) 3. Exhibits 3.1 Articles of Incorporation of the Company, as amended (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 33-24505) and incorporated herein by reference). 3.2 Bylaws of the Company (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No. 33-24505) and incorporated herein by reference). *10.1 Amended and Restated 1987 Stock Option and SAR Plan (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 33-24505) and incorporated herein by reference). *10.2 Employee Stock Purchase Plan (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 33-62209) and incorporated herein by reference). *10.3 Employment Agreement between the Company and William W. Botts (filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 Value-Added Reseller Agreement between the Company and Hewlett-Packard Company (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). *10.5 1993 Incentive Compensation Plan (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). 36 37 10.6 Registration Rights Agreement among O. I. Corporation and the former shareholders of CMS Research Corporation dated January 4, 1994 (filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). *10.7 Employment Agreement between the Company and Mark G. Whiteman (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 23.1 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule (for SEC purposes only). 99.1 The O. I. Corporation definitive Proxy Statement, dated April 10, 2000, is incorporated by reference as an Exhibit hereto for the information required by the Securities and Exchange Commission, and, except for those portions of such definitive proxy statement specifically incorporated by reference elsewhere herein, such definitive proxy statement is deemed not to be filed as a part of this report. (b) Reports on Form 8-K. No Form 8-K was filed for the quarter ended December 31, 1999. - ---- * Management contract or compensatory plan or arrangement. 37 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. O. I. CORPORATION /s/ William W. Botts -------------------------------------- Date: February 28, 2000 By: William W. Botts ---------------------------- President and Chief Executive Officer 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 Title Date --------- ----- ---- /s/ William W. Botts President, Chief Executive Officer, February 28, 2000 - -------------------------------- Director and Principal Financial Officer ----------------- William W. Botts /s/ Julie A. Wright Corporate Controller, February 28, 2000 - --------------------------------- Principal Accounting Officer ----------------- Julie A. Wright /s/ Jack S. Anderson Director February 28, 2000 - -------------------------------- ----------------- Jack S. Anderson /s/ Edwin B. King Director February 28, 2000 - -------------------------------- ----------------- Edwin B. King /s/ Craig R. Whited Director February 28, 2000 - -------------------------------- ----------------- Craig R. Whited
38 39 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Articles of Incorporation of the Company, as amended (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 33-24505) and incorporated herein by reference). 3.2 Bylaws of the Company (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No. 33-24505) and incorporated herein by reference). *10.1 Amended and Restated 1987 Stock Option and SAR Plan (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 33-24505) and incorporated herein by reference). *10.2 Employee Stock Purchase Plan (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 33-62209) and incorporated herein by reference). *10.3 Employment Agreement between the Company and William W. Botts (filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 Value-Added Reseller Agreement between the Company and Hewlett-Packard Company (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference). *10.5 1993 Incentive Compensation Plan (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). 10.6 Registration Rights Agreement among O. I. Corporation and the former shareholders of CMS Research Corporation dated January 4, 1994 (filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). *10.7 Employment Agreement between the Company and Mark G. Whiteman (filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 23.1 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule (for SEC purposes only). 99.1 The O. I. Corporation definitive Proxy Statement, dated April 10, 2000, is incorporated by reference as an Exhibit hereto for the information required by the Securities and Exchange Commission, and, except for those portions of such definitive proxy statement specifically incorporated by reference elsewhere herein, such definitive proxy statement is deemed not to be filed as a part of this report.
- ---- * Management contract or compensatory plan or arrangement. EX-23.1 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 33-24505, 33-62209 and 33-66822) of O.I. Corporation our report dated January 21, 2000 relating to the financial statements, which appears in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 22, 2000 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 DEC-31-1999 887 2,313 4,182 254 4,923 12,720 6,086 2,191 19,490 4,755 0 0 0 410 14,123 19,490 25,734 25,734 14,933 5,791 3,782 0 0 1,586 535 1,051 0 0 0 1,051 0.33 0.32
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