-----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, H+oOPGN4Z0a181OPT6o9fo9ndHCPiIwrhNVo7VyY2h3TbVizVaMVOAgFsJUylLlL z0qD4ihSzdEd/HShBxXDQQ== 0000950129-99-001253.txt : 19990331 0000950129-99-001253.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950129-99-001253 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578886 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: 778429010 FORMER COMPANY: FORMER CONFORMED NAME: OCEANOGRAPHY INTERNATIONAL CORP DATE OF NAME CHANGE: 19801205 10-K405 1 O.I. CORPORATION - DATED 12/31/98 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, 1998 [ ] 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: (409) 690-1711 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of class) 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 of the voting stock (based upon the March 15, 1999 average of the high and low trade prices of these shares from the National Association of Securities Dealers) of O. I. Corporation held by non-affiliates was approximately $14,552,239. The number of shares outstanding of each of the issuer's classes of common stock as of March 15, 1999 was 3,353,285. Item 9 and Part III information is incorporated by reference to the proxy statement for the annual meeting of shareholders to be held May 10, 1999. 2 PART I ITEM 1.BUSINESS GENERAL O. I. Corporation (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 employ its product development capabilities, manufacturing processes, and marketing skills to market niches, which it believes it can successfully penetrate and quickly assume a leading position. Management continually emphasizes product innovation, improvement in quality, product performance, on-time delivery, cost reductions, and other value added activities. The Company seeks growth opportunities through technological and product improvement 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 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). 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, 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 U.S. Environmental Protection Agency (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 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 USEPA. 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. 2 3 RECENT DEVELOPMENTS o On February 1, 1999, the Company acquired certain assets and assumed certain liabilities 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. 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, developed in 1952, 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; and 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 (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 MSs pursuant to a number of different arrangements, including a Value Added Reseller (VAR) Agreement and Original Equipment Manufacturer (OEM) Agreement with Hewlett-Packard Company. 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 USEPA and testing ultrapure water used in U.S. pharmaceutical methods; the manufacturing of semiconductors; power generation; and oceanographic research. TOC products produced by the Company include: High Temperature Persulfate TOC Analyzer; Combustion TOC Analyzer; and TOC Solids Module. 3 4 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. VALUE ADDED RESELLER The Company is a value-added reseller (VAR) for analytical instruments manufactured by Hewlett-Packard Company (HP). Under the terms of the agreement with HP, the Company purchases HP 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 USEPA 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 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 1998 1997 1996 1995 1994 - -------------------------- ------- ------- ------- ------- ------- Net Revenue: United States $18,732 $16,941 $15,568 $15,110 $16,794 Export 4,952 4,689 4,588 2,832 1,562 ------- ------- ------- ------- ------- Total 23,684 21,630 20,156 17,942 18,356 ======= ======= ======= ======= ======= %Revenue: Export 21% 22% 23% 16% 9% United States 79% 78% 77% 84% 91% ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% ======= ======= ======= ======= ======= Number of countries-export 54 39 35 31 26
Sales to any particular international geographic area did not exceed 10% of revenue for any of the years 1994 to 1998. 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. The Company is in the process of obtaining ISO 9001 certification for its College Station, Texas and Birmingham, Alabama manufacturing operations. As of January 1, 1996, instruments sold in Europe are required to have a CE mark. During 1995, 1996, 1997, and 1998, the Company incurred expenses relating to product modification and certification testing to ensure that certain of its products typically sold in Europe comply with CE requirements. MARKETING The Company markets and sells analytical components and systems that it produces and purchases for resale, provides on-site 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. 5 6 TECHNICAL SUPPORT The Company's technical support staff provides after-sale support to ensure customer satisfaction. The Company offers training courses, publishes technical information, and provides 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 $1,458,000 in 1998, $1,697,000 in 1997, and $1,811,000 in 1996. 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. PATENTS The Company holds both United States and international patents and has both U.S. and international patent applications pending. The Company currently holds 29 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, it 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 resources, broader market coverage on a global basis, and greater breadth of product line and other resources than the Company. EMPLOYEES As of December 31, 1998, the Company had a total of 165 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 satisfactory. 6 7 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages, positions, and offices, as of February 28, 1999, are as follows:
NAME AGE POSITION DATE ELECTED TO POSITION ---- --- -------- ------------------------ William W. Botts 56 President and Chief Executive Officer 1985 Chairman of the Board 1986 Mark G. Whiteman 45 Vice President/General Manager 1997 Jane A. Smith 50 Vice President/Corporate Secretary 1990
Prior to joining the Company, William W. Botts was Executive Vice President and Chief Operating Officer of The Brandt Company, a privately owned oil field service company headquartered in Houston, Texas, which was sold to TRW, Inc. in August 1982. At that time, he was named Vice President and General Manager of the Brandt Division of TRW Inc., a position he held until he joined the Company as President and Chief Operating Officer on February 1, 1985. Mr. Botts 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. 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. 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. 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 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. 7 8 BACKLOG - OPEN ORDERS The Company's backlog of orders on December 31, 1998 was approximately $2,383,000, compared to $3,575,000 as of December 31, 1997, and $3,366,000 as of December 31, 1996. The decrease in the backlog at December 31, 1998 as compared to December 31, 1997 was due to a shipment during 1998 of a large order that was in the backlog 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 1999. CUSTOMERS The Company's customers include various military agencies of the U.S. government, industrial businesses, semiconductor manufacturers, engineering and consulting firms, municipalities and environmental testing laboratories, and beverage bottlers and chiller-refrigerant companies. No single customer accounted for more than 10% of revenue in 1998, 1997, or 1996. Federal, state, and municipal governments accounted for 31% of revenue in 1998, 35% in 1997, and 27% in 1996. Export sales accounted for 21% of revenue in 1998, compared to 22% in 1997, and 23% in 1996. - -------------------------------------------------------------------------------- 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 19,715 sq. ft. of office, engineering, laboratory, production, and warehouse space in Alabama, Missouri, Oregon, and Texas. 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 within eight miles of the Company's headquarters. The Company leases approximately 9,490 sq. ft., in Hoover, a subdivision of Birmingham, Alabama on a month-to-month basis; approximately 3,200 sq. ft. in Columbia, Missouri under a lease expiring in July 1999; and approximately 2,500 sq. ft. in Beaverton, Oregon, under a lease expiring in May 2001. - -------------------------------------------------------------------------------- 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 claim pending to have a material adverse effect on the consolidated financial position and results of operations of the Company. - -------------------------------------------------------------------------------- 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 1998. 8 9 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 1998 and 1997 were as follows:
1998 1997 ---------------------------------------------------------------- High Low High Low First Quarter 4-5/8 4 4-1/8 3-3/8 Second Quarter 5-1/2 4-1/8 4-3/4 3-5/8 Third Quarter 5-1/4 4-9/32 4-5/8 3-7/8 Fourth Quarter 6-7/16 4 5-3/16 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, and management does not anticipate paying any dividends in the near future. APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 15, 1999, there were approximately 972 holders of record of the Company's common stock. 9 10 - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA
($ in thousands except per share amounts) 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Income statement data: Net revenue $ 23,684 $ 21,630 $ 20,156 $ 17,942 $ 18,356 Income before income taxes 2,859 2,035 1,469 1,507 2,131 Net income 1,822 1,393 1,003 1,023 1,545 Diluted earnings per share $ 0.50 $ 0.35 $ 0.24 $ 0.24 $ 0.37 Balance sheet data: Total assets $ 18,828 $ 19,100 $ 19,186 $ 17,700 $ 15,979 Working capital 10,028 12,300 12,391 11,855 11,156 Shareholders' equity 14,744 15,284 14,961 14,212 12,882 Common size income statement data: Net revenue 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue 53.9 53.4 50.0 51.5 55.2 ---------- ---------- ---------- ---------- ---------- Gross profit 46.1 46.6 50.0 48.5 44.8 Selling, general, and administrative 30.0 31.8 31.7 30.7 25.5 Research and development 6.1 7.9 9.0 10.8 9.9 Patent litigation expense 0.0 0.2 4.5 1.6 0.0 ---------- ---------- ---------- ---------- ---------- Operating income 10.0 6.7 4.8 5.4 9.4 Other income (expense), net 2.1 2.7 2.5 3.0 2.2 ---------- ---------- ---------- ---------- ---------- Income before income taxes 12.1 9.4 7.3 8.4 11.6 Provision for income taxes 4.4 3.0 2.3 2.7 3.2 ---------- ---------- ---------- ---------- ---------- Net income 7.7% 6.4% 5.0% 5.7% 8.4% ========== ========== ========== ========== ==========
- -------------------------------------------------------------------------------- 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 1998, compared to 1997, while net income was up 31% for the same period. The Company's financial position as of December 31, 1998 reflects a decrease in working capital to $10,028,000, compared to $12,300,000 at December 31, 1997. Diluted earnings per share were $0.50 in 1998, $0.35 in 1997, and $0.24 in 1996. 10 11 REVENUE Net revenue was $23,684,000 in 1998, compared to $21,630,000 in 1997, and $20,156,000 in 1996. Export revenue increased 6% to $4,952,000 in 1998, while domestic revenue increased 11% to $18,732,000. In 1997, export revenue increased 2% to $4,689,000 and domestic revenue increased 9% to $16,941,000. Sales of TOC analyzers increased in 1998 compared to 1997 due to improving demand in the pharmaceutical market and the enhancement of the Company's Combustion TOC Analyzer to serve the wastewater market. Sales of TOC analyzers were flat in 1997 compared to 1996 due to slower sales in certain markets and delays in the shipment of the Company's newly-introduced Combustion TOC analyzer. Microwave product sales increased in 1998 due to increasing 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 were flat from 1996 to 1997 due to a delay in product redesign of the closed-vessel microwave system and price competition for the Company's private label, open-vessel microwave system. During 1998, the Company stopped marketing the private label, open-vessel microwave system and terminated the agreement with the supplier. Sales of GC components and systems increased in 1998 primarily due to an increase in the sale of continuous emissions monitoring (CEMs) systems and 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 to perform 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 1996 to 1997 for the reasons stated above. CEM system sales increased in 1998 compared to 1997 due primarily to U.S. government purchases of chemical warfare agent monitoring systems. The ratification of the Chemical Weapons Convention Treaty by the U.S. in mid-1997 appears to have provided momentum for a number of government agencies to commence programs requiring chemical warfare agent monitoring systems. Sales of CEM systems also increased from 1996 to 1997 due to U.S. government purchases of chemical warfare agent monitoring systems. Sales of flow analyzer products decreased in 1998 due to a decline in sales of aftermarket parts, offset in part by an increase in equipment sales. Sales of flow analyzer products increased in 1997 due to only eight months of sales of such products being included in 1996. On an annualized basis, flow analyzer revenues decreased in 1997 compared to 1996 due to the effect of lower sales in environmental testing and loss of sales momentum resulting from the change in ownership and management in the ALPKEM acquisition. Leasing sales decreased slightly in 1998 compared to 1997, which increased from 1996. 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 Uniform Commercial Code documents in conjunction with each lease to protect its interest in the equipment. As of December 31, 1998, the Company had $1,035,000 in its investment in sales-type lease portfolios compared to $890,000 as of December 31, 1997, and $613,000 as of December 31, 1996. The average effective interest rate of the leases is 9.5%. International revenues increased 6% to $4,952,000 in 1998 compared to $4,689,000 in 1997, and $4,588,000 in 1996. International revenues as a percent of total revenue was 21% for 1998, compared to 22% in 1997 and 23% in 1996. The Company had 66 distributors and representatives in 39 countries at December 31, 1998, compared to 77 distributors and representatives in 39 countries at December 31, 1997 and 77 distributors and representatives in 37 countries at December 31, 1996. GROSS PROFIT Gross profit was 46% in 1998, compared to 47% in 1997, and 50% in 1996. During 1998 gross profit decreased due to an increase in sales of GC/MS systems, which are lower margin products and an increase in the cost of service revenue. During 1997 gross profit decreased due to an increase in warranty expense and an increase in sales of GC/MS systems. 11 12 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and administrative (SG&A) expenses were $7,093,000 in 1998, or 30% of revenue, compared to $6,880,000, or 32% of revenue in 1997, and $6,404,000, or 32% of revenue in 1996. 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 certain post-closing matters associated with a prior year asset acquisition and a decrease in rent due to the consolidation of certain operations. The terms of the asset acquisition settlement agreement 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 has been 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. The increase in SG&A expenses from 1996 to 1997 resulted from higher commissions due to the increase in sales, the addition of a vice president/general manager, and an increase in travel expenses. Other expenses such as salaries, rent, utilities, and telephone increased due to the acquisition of ALPKEM. ALPKEM expenses were included for eight months of 1996 and for the full year of 1997. RESEARCH AND DEVELOPMENT EXPENSES Research and development (R&D) expenditures amounted to $1,458,000, or 6% of revenue in 1998, compared to $1,697,000, or 8% of revenue in 1997, and $1,811,000, or 9% of revenue in 1996. R&D expenses decreased from 1997 to 1998 due to fewer personnel and a decrease in the purchase of supplies. R&D and engineering for some of the businesses acquired by the Company have been consolidated to achieve cost reduction and improved productivity. R&D expenses decreased from 1996 to 1997 due to fewer personnel, offset in part by an increase in the purchase of supplies used in the design of products. PATENT LITIGATION EXPENSES No patent litigation expense was incurred in 1998, compared to $49,000, or less than 1% of revenue, in 1997 and $901,000, or 5% of revenue, in 1996. The decrease in expense from 1997 to 1998 and from 1996 to 1997 was due to the conclusion of a patent infringement claim by the Company against The Tekmar Company during 1997. INTEREST INCOME Interest income decreased 7% to $436,000 in 1998 from $468,000 in 1997, which increased 18% from $398,000 in 1996. The decrease in interest income from 1997 to 1998 was due to a decrease in cash, cash equivalents, and investments during 1998. This decrease in cash was due to the purchase of treasury stock and payment for a facility expansion at the College Station location. The increase in interest income from 1996 to 1997 was due to an increase in cash and cash equivalents during 1997. INCOME BEFORE INCOME TAXES Income before income taxes increased 40% to $2,859,000, or 12% of revenue in 1998 from $2,035,000, or 9% of revenue in 1997, which increased 39% from $1,469,000, or 7% of revenue in 1996. Income before tax increased in 1998 compared to 1997 due to the increase in sales and decrease in R&D expense, offset in part by an increase in SG&A expense and a decrease in interest income. Income before tax increased in 1997 compared to 1996 due to the decrease in patent litigation and the increase in interest income. PROVISION FOR INCOME TAXES The Company's effective income tax rate was 36% in 1998 and 32% in 1997 and 1996. The income tax rate increased due to the mix of sales by state. NET INCOME Net income increased 31% to $1,822,000, or 8% of revenue for 1998, compared to $1,393,000, or 6% of revenue for 1997, which increased 39% from $1,003,000, or 5% of revenue for 1996. BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share were $0.51 for 1998, compared to $0.36 for 1997 and $0.24 for 1996 computed based on 3,560,818 shares outstanding for 1998, 3,924,128 in 1997, and 4,097,463 in 1996. Diluted earnings per share were $0.50 for 1998, compared to $0.35 for 1997 and $0.24 for 12 13 1996 computed based on 3,641,434 shares outstanding for 1998, 3,991,911 in 1997, and 4,146,777 in 1996. The declining number of shares outstanding is attributable to the Company's stock repurchase program, on which it expended $2,446,000, $950,000, and $640,000 for 1998, 1997, and 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company considers a number of liquidity measures that aid in measuring the Company's ability to meet its financial obligations. Such ratios, working capital, and changes in cash and cash equivalents as of the end of the Company's last three years are as follows:
($ in thousands) 1998 1997 1996 ------------------------------------------------------------------------------- LIQUIDITY MEASURES Ratio of current assets to current liabilities 3.6 4.5 4.2 Total liabilities to equity 28% 25% 28% Days sales in accounts receivable 52 60 71 Average annual inventory turnover 2.9 3.1 3.2 Working capital $ 10,028 $ 12,300 $ 12,391 CHANGES IN CASH AND CASH EQUIVALENTS Net cash provided by (used in): Operating activities $ 1,551 $ 1,721 $ 511 Investing activities 918 (1,343) (3,447) Financing activities (2,362) (911) (604) Net increase (decrease) in: Cash and cash equivalents $ 107 $ (533) $ (3,540) Cash and cash equivalents: Beginning of year 1,430 1,963 5,503 End of year 1,537 1,430 1,963
Working capital decreased 18%, or $2,272,000, to $10,028,000 in 1998, compared to $12,300,000 in 1997 and $12,391,000 in 1996. The current ratio of 3.6 for 1998 was down from 4.5 for 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 purchase of treasury stock. The 1997 current ratio of 4.5 was up from 4.2 in 1996 primarily due to a decrease in accrued legal expenses and other accrued liabilities. The Company's cash position increased to $1,537,000 in 1998 from $1,430,000 in 1997, primarily due to the maturity of investments, offset in part by the purchase of treasury stock and payments for the construction of a new facility in College Station. Average annual inventory turnover was lower at 2.9 in 1998, compared to 3.1 in 1997 and 3.2 in 1996 due primarily to an increase in finished goods inventory over the three years in order to provide faster delivery to customers. The number of days of sales in accounts receivable decreased to 52 days in 1998, from 60 days in 1997, and 71 days in 1996, due to continued focus on collections. Current liabilities increased to $3,857,000 in 1998 from $3,524,000 in 1997 due primarily to an increase in unearned revenue and an increase in for CE testing activity near year-end. Total liabilities represented 28% of equity in 1998, compared to 25% in 1997 and 28% in 1996. Net cash flow provided by operating activities for 1998 was $1,551,000, compared to $1,721,000 in 1997 and $511,000 in 1996. The decrease in cash flow from operations in 1998 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. The increase in cash flow from operations in 1997 compared to 1996 was primarily due to a decrease in accounts receivable and an increase in net income, offset in part by a decrease in accounts payable. All working capital account changes for 1996 are net of the effect of the purchase of ALPKEM. Net cash flow provided by 13 14 (used in) investing activities for 1998 was $918,000, compared to ($1,343,000) in 1997, and ($3,447,000) in 1996. 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. The decrease in cash flow used in investing activities from 1996 to 1997 was due to the acquisition of ALPKEM in 1996 and no acquisitions in 1997. Net cash flow used in financing activities was $2,362,000 in 1998, compared to $911,000 in 1997, and $604,000 in 1996. The increase in cash flow used in financing activities in 1998 and 1997 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 1999 working capital requirements from cash on hand and funds generated from operations. YEAR 2000 Year 2000 Issue. Many software applications, hardware and equipment and embedded chip systems identify dates using only the last two digits of the year. These products may be unable to distinguish between dates in the year 2000 and the dates in the year 1900. That inability (referred to as the "Year 2000" issue), if not addressed, could cause applications, equipment or systems to fail or provide incorrect information after December 31, 1999, or when using dates after December 31, 1999. This in turn could have an adverse effect on the Company due to the Company's direct dependence on its own applications, equipment, and systems and indirect dependence on those of other entities with which the Company must interact. Compliance Program. In order to address the Year 2000 issue, the Company established during 1998 a project team to assure that key automated systems and related processes will remain functional through year 2000. The team will address the project in the following stages: (i) awareness, (ii) assessment, (iii) remediation, (iv) testing and (v) implementation of the necessary modifications. The key automated systems consist of (a) project estimating, management and financial systems applications, (b) hardware and equipment, (c) embedded chip systems and (d) third-party developed software. The evaluation of the Year 2000 issue includes the evaluation of the Year 2000 exposure of third parties material to the operations of the Company. Company State of Readiness. The awareness phase of the Year 2000 project has begun with a corporate-wide awareness program , which will continue to be updated throughout the life of the project. The assessment phase of the project involves, among other things, efforts to obtain representations and assurances from third parties, including third party vendors, that their hardware and equipment, embedded chip systems and software being used by or impacting the Company or any of its business units are or will be modified to be Year 2000 compliant. To date, the Company does not expect that responses from such third parties will be conclusive. As a result, management cannot predict the potential consequences if these or other third parties are not Year 2000 compliant. The exposure associated with the Company's interaction with third parties is also currently being evaluated. Through the awareness program, the Company has determined that some internal applications are not Year 2000 compliant. The Company plans to replace or upgrade these systems by mid-1999. The Company has evaluated its products and believes that most of the products it is currently shipping are Year 2000 compliant. The Company has plans to upgrade the products that are not Year 2000 compliant and anticipates completion of this process during 1999. The Company believes it has no legal obligation to upgrade previously shipped products that are not Year 2000 compliant. It may make available for sale compliance fixes for certain products. Management expects that the remediation, testing, and implementation phases will be completed prior to the Year 2000. Costs to Address Year 2000 Compliance Issues. While the total cost to the Company of the Year 2000 project is still being evaluated, management currently estimates that the costs to be incurred by the Company in 1999 and 2000 associated with assessing and testing applications, hardware and equipment, embedded chip systems, and third party developed software will be less than $150,000. To date, the Company has not expended significant funds related to its Year 2000 compliance assessment. 14 15 Risk of Non-Compliance and Contingency Plans. The major applications which pose the greatest Year 2000 risks for the Company if implementation of the Year 2000 compliance program is not successful are the Company's systems, financial systems applications and related third-party software. Potential problems if the Year 2000 compliance program is not successful include disruptions of the Company's revenue gathering from and distribution to its customers and vendors and the inability to perform its other financial and accounting functions. The goal of the Year 2000 project is to ensure that all of the critical systems and processes, which are under the direct control of the Company, remain functional. However, because certain systems and processes may be interrelated with systems outside of the control of the Company, there can be no assurance that all implementations will be successful. Accordingly, as part of the Year 2000 project, contingency and business plans will be developed to respond to any failures as they may occur. Such contingency and business plans are scheduled to be completed during 1999. Because the Company's internal systems are PC-based, management does not expect the costs to the Company of the Year 2000 project to have a material adverse effect on the Company's financial position, results of operations or cash flows. However, based on information available at this time, the Company cannot conclude that any failure of the Company or third parties to achieve Year 2000 compliance will not adversely affect the Company. 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 1999 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. CHANGING PRICES/EFFECT OF INFLATION The Company believes that competition based on price is the 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. Inflation has not had a material impact on the Company's operations. 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 increased, but the Company believes that such increases are approximately consistent with overall inflation rates. UNCERTAINTY OF 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, 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 growth of the Company's business. RISKS ASSOCIATED WITH ACQUISITION STRATEGY One of the Company's growth strategies is to supplement its internal growth with the acquisition of businesses and technologies that complement or augment the Company's existing product lines. Certain businesses acquired by the Company within the past three years have produced net operating losses and low levels of profitability. In addition, businesses that 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 operations of the acquired companies 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 any such acquisitions, it may be necessary for the Company to raise additional funds either through public or private financing. Any equity or debt financing, if available at all, may be on terms that are not favorable to the Company and may result in dilution to the Company's shareholders. 15 16 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 written specifically for older technologies and general unfamiliarity of users with new technologies. POSSIBLE ADVERSE EFFECT FROM CONSOLIDATION IN THE ENVIRONMENTAL MARKET AND CHANGES IN ENVIRONMENTAL REGULATIONS One of the important markets for the Company's products is environmental analysis. During the past three 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 31% of the Company's sales in 1998. 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. RISKS ASSOCIATED WITH DEPENDENCE ON CAPITAL SPENDING POLICIES AND GOVERNMENT FUNDING The Company's customers include pharmaceutical and chemical companies, laboratories, government agencies, and public and private research institutions. The capital spending of these entities 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 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 21% of the Company's revenues in 1998. 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 16 17 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. RISKS ASSOCIATED WITH 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, and 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 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 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 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. POTENTIAL FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE YEAR 2000 The Company is dependent on its computer software programs and operating systems in operating its business. The Company also depends on the proper functioning of computer systems of third parties, such as vendors and clients. The failure of any of these systems to appropriately interpret the upcoming calendar year 2000 could have a material adverse effect on the Company's financial condition, results of operations, cash flows and business prospects. The Company is currently identifying its own applications that will not be Year 2000 compliant and taking steps to determine whether third parties are doing the same. In addition, the Company is implementing a plan to prepare its computer systems to be Year 2000 compliant by December 31, 1999. The inability to remedy the Company's Year 2000 problems or the failure of third parties to do so may cause business interruptions or shutdown, financial loss, regulatory actions, reputational harm and/or legal liability. There can be no assurance that the Company's Year 2000 program will be effective or that the Company's estimates about the timing and cost of completing its program will be accurate. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Year 2000." MARKET RISK The Company is exposed to a variety of 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. The fair value of the Company's investments in debt securities at December 31, 1998 was $2,776,814. See Note 3 for further information regarding these instruments. The Company's investment policy is to manage its investment 17 18 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 until the investments are sold. - -------------------------------------------------------------------------------- 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, 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 accounting and control systems. The Company's Audit Committee, composed of at least two 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, Controller /s/ William W. Botts - -------------------------------- William W. Botts, President/CEO Date: March 24, 1999 - -------------------------------- 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 of cash flows present fairly, in all material respects, the financial position of O. I. Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 22, 1999, except as to note 14, which is as of February 1, 1999 19 20 O. I. CORPORATION CONSOLIDATED BALANCE SHEET
December 31, ---------------------------- 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,536,548 $ 1,429,780 Investments 2,771,565 5,709,517 Accounts receivable-trade, net of allowance for doubtful accounts of $215,917 and $255,637, respectively 3,361,305 3,570,489 Investment in sales-type leases 459,184 358,115 Inventories 4,917,268 3,777,778 Deferred income tax assets 537,401 667,069 Other current assets 302,333 311,987 ------------ ------------ Total current assets 13,885,604 15,824,735 Property, plant and equipment, net 3,620,389 1,459,049 Investment in sales-type leases, net of current 575,600 531,489 Long-term investments 0 434,818 Other assets 747,154 849,510 ------------ ------------ Total assets $ 18,828,747 $ 19,099,601 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, trade $ 1,198,271 $ 1,225,080 Accrued liabilities 2,659,023 2,299,169 ------------ ------------ Total current liabilities 3,857,294 3,524,249 ------------ ------------ Deferred income taxes 227,612 291,569 ------------ ------------ Commitments and contingencies (Note 12) ------------ ------------ Stockholders' 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 4,373,896 4,379,862 Treasury stock, 754,334 and 249,493 shares, respectively, at cost (3,328,173) (971,763) Retained earnings 13,287,780 11,465,346 ------------ ------------ 14,743,841 15,283,783 ------------ ------------ Total liabilities and stockholders' equity $ 18,828,747 $ 19,099,601 ============ ============
The accompanying notes are an integral part of these financial statements. 20 21 O. I. CORPORATION CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Net revenue $ 23,683,685 $ 21,630,245 $ 20,156,448 Cost of revenue 12,764,748 11,554,442 10,076,740 ------------ ------------ ------------ Gross profit 10,918,937 10,075,803 10,079,708 Selling, general and administrative expenses 7,093,192 6,880,026 6,403,810 Research and development expenses 1,458,326 1,696,688 1,811,403 Patent litigation expense 0 48,653 900,951 ------------ ------------ ------------ Operating income 2,367,419 1,450,436 963,544 Other income (expense): Interest income 436,147 467,782 398,095 Other income 55,505 116,626 106,930 ------------ ------------ ------------ Income before income taxes 2,859,071 2,034,844 1,468,569 Provision for income taxes (1,036,637) (642,252) (465,147) ------------ ------------ ------------ Net income $ 1,822,434 $ 1,392,592 $ 1,003,422 ============ ============ ============ Basic earnings per share $ 0.51 $ 0.36 $ 0.24 ============ ============ ============ Diluted earnings per share $ 0.50 $ 0.35 $ 0.24 ============ ============ ============
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, -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 1,822,434 $ 1,392,592 $ 1,003,422 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 410,617 570,010 576,589 Deferred income taxes 65,711 48,086 (39,586) Gain on disposition of property (10,219) (45,589) (6,639) Changes in assets and liabilities, net of the effect of the purchase of ALPKEM (1996): Accounts receivable 209,185 357,660 (654,979) Inventories (1,139,491) 2,175 (757,104) Other assets (135,526) (289,674) (111,863) Accounts payable (31,809) (83,395) 458,778 Accrued liabilities 359,855 (230,943) 42,850 ------------ ------------ ------------ Net cash provided by operating activities 1,550,757 1,720,922 511,468 ------------ ------------ ------------ Cash flows from investing activities: Purchase of property, plant, and equipment (504,148) (320,986) (299,540) Construction in progress (2,023,006) (83,998) 0 Proceeds from sale of assets 43,882 124,076 18,900 Purchase of ALPKEM 0 0 (526,743) Purchase of investments (2,355,129) (7,757,298) (8,710,000) Maturity of investments 5,703,000 6,682,000 6,124,000 Change in other assets 53,787 12,776 (53,949) ------------ ------------ ------------ Net cash provided by (used in) investing activities 918,386 (1,343,430) (3,447,332) ------------ ------------ ------------ Cash flows from financing activities: Purchase of treasury stock (2,446,240) (949,713) (640,182) Proceeds from issuance of common stock 83,865 38,827 35,898 ------------ ------------ ------------ Net cash provided by (used in) financing activities (2,362,375) (910,886) (604,284) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 106,768 (533,394) (3,540,148) Cash and cash equivalents: Beginning of year 1,429,780 1,963,174 5,503,322 ------------ ------------ ------------ End of year $ 1,536,548 $ 1,429,780 $ 1,963,174 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during year for: Interest $ 307 $ 12,241 $ 594 Income taxes 832,200 883,519 567,039
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, 1995 4,116,129 $ 411,613 $ 4,730,669 $ 0 $ 9,069,332 Purchase of 220,629 shares of treasury stock (640,182) Issuance of common and 73,083 treasury shares in conjunction with the acquisition of ALPKEM 26,917 2,692 144,955 202,353 Issuance of 110,000 shares from treasury for exercise of stock options (290,625) 309,375 Issuance of 5,064 shares from treasury to Employee Stock Purchase Plan 1,662 15,486 Net income 1,003,422 --------- ----------- ----------- ----------- ----------- 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 ========= =========== =========== =========== ===========
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 products primarily for specialized applications in the analytical instruments markets, including sample preparation, detection, measurement, and monitoring instruments used to 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 for 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, and trademarks that are amortized on a straight-line basis over 10 to 17 years. LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards No. 121 (FAS 121) Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, 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. Under FAS 121, 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. 24 25 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 nine months. 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 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 the U.S. dollar. 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, 1998 and 1997, 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 sales. Any federal budget cuts affecting the chemical warfare programs or the USEPA may have a negative impact on the Company's future sales. 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 3,560,818 in 1998, 3,924,128 in 1997, and 4,097,463 in 1996. The weighted average number of shares used in the diluted earnings per share computation was 3,641,434 in 1998, 3,991,911 in 1997, and 4,146,777 in 1996. At December 31, 1998, 1997, and 1996 options to acquire 31,000, 152,200, and 148,500 shares at weighted average exercise prices of $11.68, $5.98, and $5.90 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 DATA During 1998, 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. The Company believes it operates in one reportable segment as defined by FAS 131. The adoption of FAS 131 did not affect results of operations or the financial position of the Company. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the use of management estimates and judgments. 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. FAS 133 is effective for fiscal years beginning after June 15, 1999 and establishes accounting and reporting standards for derivative instruments. 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. 25 26 - -------------------------------------------------------------------------------- NOTE 2: ACQUISITIONS On May 1, 1996, the Company purchased certain assets of ALPKEM Corporation, a division of Perstorp Analytical. ALPKEM designs, manufactures, and markets segmented flow analyzers, flow injection analyzers and portable field instruments. As consideration for the acquisition, Perstorp Analytical received $505,000 in cash and 100,000 shares of the Company's common stock valued at $350,000 at the date of acquisition. The transaction was accounted for as a purchase, with results of the acquired operations being included from the date of acquisition. - -------------------------------------------------------------------------------- NOTE 3: INVESTMENTS Investments considered held to maturity at December 31, 1998, consist 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
All of the investments at December 31, 1998 are scheduled to mature in 1999. Market value is based upon quoted market prices for the investments. Short-term investments at December 31, 1997, consisted of the following:
Gross Gross Amortized Market Unrealized Unrealized Cost Value Holding Gains Holding Losses ------------ ------------ -------------- ------------- Short-term corporate bonds $ 5,709,517 $ 5,712,909 $ 4,815 $ (1,423) Long-term corporate bonds 434,818 435,179 417 (56) ------------ ------------ -------------- ------------- Total corporate bonds $ 6,144,335 $ 6,148,088 $ 5,232 $ (1,479)
- -------------------------------------------------------------------------------- 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, 1998: Future minimum lease payments to be received are: 1999 $ 459,184 2000 364,086 2001 197,936 2002 13,578 ----------- 1,034,784 Less: amount relating to interest 111,768 ---------- Present value of minimum lease payments to be received $ 923,016 ==========
26 27 - -------------------------------------------------------------------------------- NOTE 5: INVENTORIES Inventories, which include material, labor, and overhead, on December 31, 1998 and 1997, consist of the following:
1998 1997 ------------ ------------ Raw materials $ 2,041,218 $ 2,137,979 Work-in-process 809,917 624,650 Finished goods 2,066,133 1,015,149 ------------ ------------ $ 4,917,268 $ 3,777,778 ============ ============
- -------------------------------------------------------------------------------- NOTE 6: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment on December 31, 1998 and 1997, consists of the following:
Estimated useful lives 1998 1997 ------------------------------------------------------------------------------ Land $ 41,221 $ 41,221 Buildings 33 to 40 years 1,476,046 1,474,391 Construction in progress 2,107,004 83,998 Furniture and equipment 3 to 10 years 2,111,469 2,219,716 ------------ ------------ 5,735,740 3,819,326 Less accumulated depreciation and amortization (2,115,351) (2,360,277) ------------ ------------ $ 3,620,389 $ 1,459,049 ============ ============
- -------------------------------------------------------------------------------- NOTE 7: ACCRUED LIABILITIES Accrued liabilities on December 31, 1998 and 1997, consist of the following:
1998 1997 ---------- ---------- Accrued compensation $ 751,666 $ 769,911 Accrued warranties 502,818 524,706 Unearned revenue-service contracts 251,912 186,322 Unearned interest-investment in sales-type leases 223,865 166,126 Other liabilities and accrued expenses 928,762 652,104 ---------- ---------- $2,659,023 $2,299,169 ========== ==========
- -------------------------------------------------------------------------------- NOTE 8: LINE OF CREDIT The Company has a line of credit agreement expiring March 25, 1999, which provides for secured borrowings up to $1,300,000 at an interest rate of 8.75%. The Company did not draw on the line during 1998. The terms of 27 28 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 10 years from the date of grant. During 1998, the Company granted 16,000 options under the 1993 Plan, with a weighted average exercise price based on the stock price of $4.38 at the date of grant. 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:
1998 1997 1996 -------- ------- -------- Net income As reported $ 1,822 $ 1,393 $ 1,003 Pro forma 1,749 1,347 981 Basic earnings per share As reported $ 0.51 $ 0.36 $ 0.24 Pro forma 0.49 0.343 0.239 Diluted earnings per share As reported $ 0.50 $ 0.35 $ 0.24 Pro forma 0.48 0.337 0.237
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 1998, 1997, and 1996 respectively: dividend yield of zero for each year; expected volatility of 33, 34, and 33 percent; risk-free interest rates of 5.56, 6.04, and 6.13 percent; and expected lives of seven years. The weighted average fair value at the date of grant for options granted during 1998, 1997, and 1996 was $2.06, $1.90, and $1.73, respectively. 28 29 Activity under the 1987 Plan and the 1993 Plan for each of the three years in the period ended December 31, 1998 was as follows:
Weighted Average Shares Price per Share Price per Share ------ --------------- --------------- Options outstanding, December 31, 1995 458,900 $ 0.10 - $14.00 $ 3.86 Options granted 85,500 3.375 - 3.81 3.48 Options exercised (110,000) 0.10 - 0.875 0.17 Options forfeited or cancelled (86,400) 2.50 - 14.00 7.09 -------- 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
There were 248,568, 223,477, and 194,510 share options exercisable at December 31, 1998, 1997, and 1996, respectively. The following table summarizes significant ranges of outstanding and exercisable options at December 31, 1998.
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 - 3.74 177,966 7.1 $ 3.15 116,067 $ 2.98 3.75 - 5.62 142,500 6.3 4.30 101,501 4.32 5.63 - 8.45 9,000 4.1 6.01 9,000 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, 1998, 36,529 shares had been purchased under the plan. - -------------------------------------------------------------------------------- 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, 1998, no preferred stock had been issued. 29 30 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 993,630 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 156,370 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 ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Current provision: Federal $ 816,552 $ 480,653 $ 384,583 State 154,375 113,513 120,150 Deferred provision 65,710 48,086 (39,586) ------------ ------------ ------------ $ 1,036,637 $ 642,252 $ 465,147 ============ ============ ============
The provision for income taxes differs from the amount computed by applying the federal statutory rates for the following reasons:
Years Ended December 31 ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Tax at statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 5.8 5.4 4.0 Permanent differences 0 (6.3) Other, net (3.5) (7.9) 0 ---------- ---------- ---------- 36.3% 31.5% 31.7% ========== ========== ==========
Deferred tax assets (liabilities) are comprised of the following at December 31, 1998 and 1997:
December 31, --------------------------- 1998 1997 ------------ ------------ Current: Warranty reserve $ 201,127 $ 209,883 Bad debt allowance 84,596 93,584 Inventory reserve 35,662 92,845 Uniform capitalization 160,541 177,949 Accrued vacation 38,336 72,469 Other 17,139 20,339 ------------ ------------ Total current $ 537,401 $ 667,069 ------------ ------------
30 31 Noncurrent: Depreciation $ (30,643) $ (122,898) Deferred compensation 20,000 20,000 Intangibles (112,871) (103,083) Other (52,581) (34,071) ------------ ------------ Total noncurrent $ (176,095) $ (240,052) ============ ============ Net tax asset before valuation allowance 361,306 427,017 Valuation allowance (51,517) (51,517) ------------ ------------ Net deferred tax asset (liability) $ 309,789 $ 375,500 ============ ============
- -------------------------------------------------------------------------------- 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 contributed $150,000, $120,000 and $100,000 to the Plan for the years ended December 31, 1998, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- NOTE 13: COMMITMENTS AND CONTINGENCIES The Company has agreed to pay the former owner of Floyd a royalty equal to 5% of the net revenue earned from certain microwave-based products up to a maximum amount of $1,182,500 (Note 2). No minimum payments are required in the agreement. The Company recognized royalty expense related to this agreement of $62,551, $50,954, and $51,683 in 1998, 1997, and 1996, respectively. The Company has entered operating leases for certain facilities. These operating leases expire in 1998. Rental expense recognized in 1998, 1997, and 1996 was $260,000, $324,000, and $229,000, respectively. Future minimum rental payments under these leases for 1999, 2000, and 2001 are $54,823, $23,435, and $9,975, respectively. - -------------------------------------------------------------------------------- NOTE 14: SUBSEQUENT EVENT On February 1, 1999, the Company acquired substantially all of the assets of General Analysis Corporation (GAC) for $260,634 and the assumption of certain liabilities expected to approximate $1,000,000. The assets acquired include inventory, property and equipment used in the development, manufacture, marketing and sales of instruments that detect and measure certain compounds in liquids and air. The Company intends to use such assets for the same purpose. The acquisition will be accounted for as an asset purchase. - -------------------------------------------------------------------------------- NOTE 15: SEGMENT DATA The Company manages its business primarily on a product and services basis; the Company has one reportable segment. The reportable segment provides products and services as described in Note 1. The accounting policies of the segment are those described in the "Summary of Significant Accounting Policies' in Note 1. The Company evaluates the performance of its segment based on segment profit. Revenues related to operations in the United States totaled $18,731,459, $16,941,229, and $15,568,286 for the years ended December 31, 1998, 1997, and 1996, respectively. Revenues to customers located in other foreign 31 32 countries totaled $4,952,226, $4,689,016, and $4,588,162 for the years ended December 31, 1998, 1997, and 1996, respectively. No single customer accounted for more than 10% of revenue in 1998, 1997, or 1996. Federal, state and municipal governments accounted for 31% of revenue in 1998, 35% in 1997, and 27% in 1996. - -------------------------------------------------------------------------------- NOTE 16: QUARTERLY INFORMATION (UNAUDITED) Quarterly financial information for 1998 and 1997 is summarized as follows:
($ 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
($ in thousands, except per share amounts) First Second Third Fourth 1997 Qtr. Qtr. Qtr. Qtr. ------------------------------------------------------------------------------------ Net revenue $ 5,321 $ 5,735 $ 5,210 $ 5,364 Gross profit 2,584 2,788 2,306 2,398 Net income 322 364 319 388 Basic earnings per share $ 0.08 $ 0.10 $ 0.08 $ 0.10 Diluted earnings per share $ 0.08 $ 0.09 $ 0.08 $ 0.10
- -------------------------------------------------------------------------------- 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, 1999 (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 hereby incorporated 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, 1999, is hereby incorporated by reference. 32 33 - -------------------------------------------------------------------------------- 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, 1999, is hereby incorporated 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, 1999, is hereby incorporated by reference. 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, 1998 and 1997...............................................20 Consolidated Statement of Income for the years ended December 31, 1998, 1997, and 1996.................21 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996.............22 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996.......................................................................................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). 33 34 *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, 1999 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, 1998. * Management contract or compensatory plan or arrangement. 34 35 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: March 24, 1999 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, March 24, 1999 - -------------------------------- Director and Principal Financial Officer ------------------------------ William W. Botts /s/ Julie A. Wright Controller, Principal Accounting Officer March 24, 1999 - --------------------------------- ------------------------------ Julie A. Wright /s/ Jack S. Anderson Director March 24, 1999 - -------------------------------- ---------------------------- Jack S. Anderson /s/ Edwin B. King Director March 24, 1999 - -------------------------------- --------------------------- Edwin B. King /s/ Craig R. Whited Director March 24, 1999 - -------------------------------- --------------------------- Craig R. Whited
35 36 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, 1999 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 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-14683) of our report dated January 22, 1999 (except as to Note 14, which is as of February 1, 1999,) appearing in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Houston, Texas March 29, 1999 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 1,536,548 2,771,565 3,577,222 215,917 4,917,268 13,885,604 5,735,740 2,115,351 18,828,747 3,857,294 0 0 0 410,338 14,333,503 18,828,747 23,683,685 23,683,685 12,764,748 4,818,834 3,732,684 0 0 2,859,071 1,036,637 1,822,434 0 0 0 1,822,434 0.51 0.50
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