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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________to_________
Commission File Number: 0-6511
O. I. CORPORATION
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(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
- ---------------------------------- ------------------
State of Incorporation I.R.S. Employer
Identification No.
P.O. Box 9010
151 Graham Road
College Station, Texas 77842-9010
- ---------------------------------- ------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
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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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The number of shares outstanding of the common stock as of May 1, 2004 was
2,782,211.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
O.I. CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
March 31, December 31,
2004 2003
-------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 3,151 $ 2,869
Accounts receivable-trade, net of allowance for
doubtful accounts of $201 and $217, respectively 4,573 4,359
Investment in sales-type leases 272 235
Investments 6,748 6,136
Inventories 3,489 3,075
Current deferred income tax assets 762 727
Other current assets 187 172
-------------- --------------
Total current assets $ 19,182 $ 17,573
Investment in unconsolidated investee 901 976
Property, plant and equipment, net 3,425 3,434
Investment in sales-type leases, net of current 268 222
Long-term deferred income tax assets 156 296
Intangible assets, net 105 107
Other assets 60 99
-------------- --------------
Total assets $ 24,097 $ 22,707
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,674 $ 1,306
Accrued liabilities 3,545 3,162
-------------- --------------
Total current liabilities $ 5,219 $ 4,468
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value, 3,000 shares
authorized, no shares issued and outstanding
Common stock, $0.10 par value, 10,000 shares
authorized 4,103 shares issued and
outstanding 410 410
Additional paid-in capital 4,329 4,338
Treasury stock, 1,323 and 1,355 shares,
respectively, at cost (5,777) (5,930)
Retained earnings 19,680 19,254
Accumulated other comprehensive income, net 236 167
-------------- --------------
Total stockholders' equity 18,878 18,239
-------------- --------------
Total liabilities and stockholders' equity $ 24,097 $ 22,707
============== ==============
See notes to unaudited condensed consolidated financial statements.
2
O.I. CORPORATION
Condensed Consolidated Statements of Income
and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2004 2003
-------------- --------------
Net revenues:
Products $ 5,546 $ 5,553
Service 848 869
-------------- --------------
6,394 6,422
Cost of revenues:
Products 2,666 2,885
Service 348 301
-------------- --------------
3,014 3,186
Gross profit 3,380 3,236
Selling, general and administrative expenses 2,053 2,056
Research and development expenses 734 680
-------------- --------------
Operating income 593 500
Other income, net 126 72
Loss from unconsolidated investee (74) --
-------------- --------------
Income before income taxes 645 572
Provision for income taxes 219 214
-------------- --------------
Net income $ 426 $ 358
============== ==============
Other comprehensive income, net of tax:
Unrealized gains on investments 69 143
-------------- --------------
Comprehensive income $ 495 $ 501
============== ==============
Earnings per share:
Basic $ 0.15 $ 0.13
Diluted $ 0.15 $ 0.13
Shares used in computing earnings per share:
Basic 2,764 2,759
Diluted 2,847 2,768
See notes to unaudited condensed consolidated financial statements.
3
O.I. CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 426 $ 358
Depreciation & amortization 127 111
Deferred income taxes 67 26
Loss on disposition of property -- 4
Loss from unconsolidated investee 74 --
Change in working capital 10 (648)
-------------- --------------
Net cash flows provided by (used in) operating activities $ 704 $ (149)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,372) --
Maturity of investments 866 --
Proceeds from insurance policy 55 --
Purchase of property, plant & equipment (115) (94)
Proceeds from sales of assets -- 4
-------------- --------------
Net cash flows (used in) investing activities $ (566) $ (90)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to
exercise of employee stock options and employee
stock purchase plan
144 5
-------------- --------------
Net cash flows provided by financing activities $ 144 $ 5
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 282 (234)
Cash and cash equivalents, at beginning of quarter 2,869 3,915
-------------- --------------
Cash and cash equivalents, at end of quarter $ 3,151 $ 3,681
============== ==============
See notes to unaudited condensed consolidated financial statements.
4
O.I. CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company"), an Oklahoma corporation, was organized in
1963. The Company designs, manufactures, markets, and services analytical,
monitoring and sample preparation products, components, and systems used to
detect, measure, and analyze chemical compounds.
The accompanying unaudited condensed consolidated financial statements have been
prepared by O.I. Corporation and include all adjustments that are, in the
opinion of management, necessary for a fair presentation of financial results
pursuant to the rules and regulations of the Securities and Exchange Commission.
All adjustments and provisions included in these statements are of a normal
recurring nature. All intercompany transactions and balances have been
eliminated in the financial statements. Certain prior period amounts in the
condensed consolidated financial statements have been reclassified for
comparative purposes. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2003.
2. INVENTORIES.
Inventories are stated at the lower of first-in, first-out cost or market:
Mar. 31, 2004 Dec. 31, 2003
-------------- --------------
Raw Materials $ 2,550 $ 2,261
Work in Process 200 207
Finished Goods 739 607
-------------- --------------
$ 3,489 $ 3,075
============== ==============
3. COMPREHENSIVE INCOME.
Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are recorded as an element of
stockholders' equity and are excluded from net income. The Company's components
of comprehensive income are net income and unrealized gains and losses on
investments.
4. 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 common shares the Company has outstanding. For
the three months ended March 31, 2004 and 2003, options to acquire 46 shares and
208 shares of common stock, respectively, at a weighted average exercise price
of $8.36 and $5.11 per share, respectively, were not included in the computation
of dilutive earnings per share as their effect would be antidilutive.
5
5. STOCK-BASED COMPENSATION.
At March 31, 2004, the Company had three stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock - based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FAS Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
Three Months Ended
March 31
2004 2003
---------- ----------
Net income, as reported $ 426 $ 358
Deduct: Total stock-based compensation expense
determined under fair value based method
for awards granted, modified, or settled,
net of related tax effects 46 31
---------- ----------
Pro forma net income $ 380 $ 327
Earnings per share:
Basic -- as reported $ 0.15 $ 0.13
Basic -- pro forma $ 0.14 $ 0.12
Diluted -- as reported $ 0.15 $ 0.13
Diluted -- pro forma $ 0.13 $ 0.12
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents relating to technology used in the
Company's products. Intangible assets, net, as of March 31, 2004 and December
31, 2003 were approximately $105 and $107, net of accumulated amortization of
$131 and $129, respectively. Total amortization expense on intangible assets for
the three months ended March 31, 2004 and 2003 was approximately $2 and $4,
respectively. The estimated aggregate amortization expense for the remaining
nine months of 2004 is $8, and approximately $10, $9, $9 and $8 for each of the
four succeeding fiscal years 2005 to 2008, respectively.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability on March 31, 2004 were
as follows:
Liabilities, beginning of year $ 707
Expense for new warranties issued 18
Warranty claims (3)
------------
Liabilities, March 31, 2004 $ 722
============
8. RECENT PRONOUNCEMENTS.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. The Company's adoption of EITF 02-16 did not have an effect on its
financial statements.
6
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
the Company issues or modifies subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending after
December 15, 2002. The Company has historically issued guarantees only in the
form of product warranties, and the adoption of FIN 45 did not have a material
effect on its 2003 financial statements. Disclosures required by FIN 45 are
included in the accompanying financial statements.
In December, the FASB issued Interpretation No. 46 (revised December 2003) ("FIN
46R"), "Consolidation of Variable Interest Entities, an interpretation of ARB
51". The primary objectives of FIN 46R are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine if a business enterprise should consolidate the VIEs. This new model
for consolidation applies to an entity for which either: the equity investors
(if any) do not have a controlling financial interest; or the equity investment
at risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46R requires that all enterprises with a significant variable interest in a VIE
make additional disclosures regarding their relationship with the VIE. The
interpretation requires public entities to apply FIN 46R to all entities that
are considered SPEs in practice and under the FASB literature that was applied
before the issuance of FIN 46R by the end of the first reporting period that
ends after December 15, 2003. Application of the accounting requirements of the
interpretation to all other entities is required by the end of the first
reporting period that ends after March 15, 2004. The adoption of FIN 46R had no
effect on the Company's financial statements.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, concerning, among other things, (i) possible or assumed
future results of operations, contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," (ii) prospects for the
Company's business or products; (iii) other matters that are not historical
facts. These forward-looking statements are identified by their use of terms and
phrases such as "believes," "expects," "anticipates," "intends," "estimates,"
"plans" and similar terms and phrases.
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. The Company's business and results of
operations are subject to a number of assumptions, risks and uncertainties, many
of which are beyond the Company's ability to control or predict. Because of
these risks and uncertainties, actual results may differ materially from those
expressed or implied by forward-looking statements, and investors are cautioned
not to place undue reliance on such statements, which are not guarantees of
future performance and which speak only as of the date thereof.
Factors that could cause actual results to differ materially include, but are
not limited to,
o The Company's ability to retain existing customers and to attract and
retain new customers.
o The financial condition and spending practices of its customers.
o The Company's ability to provide products that meet the needs of the
Company's customers.
o Advancements or changes in technology that may render the Company's
products less valuable or obsolete.
o Conditions in the environmental instrument market.
o The Company's ability to obtain financing in the event it is needed.
o The Company's ability to maintain products that meet customer expectations
in a rapidly changing competitive market.
o The Company's retention of an arrangement with Agilent or a suitable
similar supplier for the supply of gas chromatographs and mass
spectrometers to configure systems for the analysis of various air and
water matrices to determine the presence of volatile organic compounds.
o Acts of war, terrorism, natural disasters and outbreaks of disease or
potentially fatal sicknesses.
o Underutilization of the Company's existing facilities possibly resulting in
inefficiencies.
o Delays in new product research, development, and engineering products
resulting in delays in the market introduction of such products.
o The increased cost of health insurance and subsequent increased cost to the
Company and employees.
o Economic slowdowns, or unforeseen price reductions in the Company's
global market segments, with adverse effects on profit margins.
o The unanticipated expenses of assimilating newly acquired businesses into
the Company's business structure, as well as the impact of unusual expenses
from business strategies, asset valuations, acquisitions, divestitures and
organizational structures.
o Unpredictable delays or difficulties in the development of key new product
programs, and the risk of not recovering major research and development
expenses, and/or the risks of major technological shifts away from the
Company's technologies and core competencies.
8
o Unexpected delays or failure to realize success in developing a previously
announced new product for homeland defense and security.
The cautionary statements contained or referred to herein should be considered
in connection with any written or oral forward-looking statements that may be
issued by the Company or persons acting on the Company's behalf. The Company
does not undertake any obligation to release any revisions to or to update
publicly any forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. When
considering forward-looking statements, you should also keep in mind the risk
factors described in our Annual Report on Form 10-K for the year ended December
31, 2003.
The following discussion should be read in conjunction with the unaudited
codensed consolidated financial statements and the notes thereto.
OPERATING RESULTS
Total net revenues for the three months ended March 31, 2004 decreased $28,000
or 0.4% to $6,394,000 compared to $6,422,000 for the same period of the prior
year. Product revenues decreased $7,000, or 0.1% to $5,546,000 compared to
$5,553,000 for the same period of the prior year. Sales across virtually all of
the product lines were essentially flat or decreased with the exception of the
new Eclipse Purge-and-Trap Sample Concentrator and MINICAMS air-monitoring
systems. Sales of MINICAMS helped to offset decreases in sales of other
products, including continuous flow analyzers and gel permeation chromatography
products. Additionally, the Eclipse purge-and-trap concentrator, released in the
third quarter of 2003, has been well received and sales of this product
partially offset decreases in sales of other GC systems and components.
Revenues from services decreased $21,000 or 2% to $848,000 compared to $869,000
for the same period of the prior year. Revenues from services decreased compared
to the three months ended March 31, 2003, primarily due to a lower demand for
in-house, factory repair and field repair services.
Domestic revenues from sales of products and services increased, while
international revenues decreased for the three months ended March 31, 2004,
compared to the same period of the prior year.
The environmental instrument market in which we compete has been flat or
declining over the past several years and we have not seen a fundamental
improvement in these markets. We remain cautiously optimistic about future sales
and have identified a number of products and strategies we believe will allow us
to grow our business despite this decline, including the acquisition of
complementary businesses, developing new products, developing new applications
for its technologies, and strengthening our presence in selected geographic
markets. No assurance can be given that we will be able to successfully
implement these strategies, or if successfully implemented, that these
strategies will result in growth of the our business.
Despite the decrease in total net revenues, gross profit for the three months
ended March 31, 2004 increased to $3,380,000 or 53% of revenues, compared to
$3,236,000, or 50% of revenues, for the same period of the prior year. The
increase in gross profit was primarily due to improved product mix relating to
sales of MINICAMS and the Eclipse.
Selling, general, and administrative ("SG&A") expenses for the three months
ended March 31, 2004 remained relatively unchanged at $2,053,000 or 32% of
revenues, compared to $2,056,000, or 32% of revenues, for the same period of the
prior year. SG&A expenses for the three months ended March 31, 2004 decreased
due to lower direct selling expenses.
9
Research and development ("R&D") expenses for the three months ended March 31,
2004 increased $54,000 to $734,000, compared to $680,000 for the same period of
the prior year. R&D expenses expressed as a percentage of revenues, however,
remained unchanged at 11%. The increase in R&D expenses for the three months
ended March 31, 2004 was due to increased expenses related to the development of
potential new products. In the second quarter of 2003, we announced our plan to
intensify our R&D efforts to refresh existing products and develop new products,
and cautioned that R&D spending may increase over historical levels as a dollar
amount, and as a percentage of revenues. We still believe that this may be the
case, and that such increases in R&D expenditures may create operating losses in
future periods.
Other income, net, which comprises of interest and dividend income from
investments, interest income from customer leases and gain/loss from
dispositions of Company property, increased to $126,000 for the three months
ended March 31, 2004, compared to $72,000 for the same period of the prior year.
We incurred a loss from an unconsolidated investee, which amounted to $74,000
for the three months ended March 31, 2004. The loss from this unconsolidated
investment represents our share of the results of operations from our 13.8%
investment in December 2003 in the preferred shares of Intelligent Ion, Inc.
Intelligent Ion, Inc. is a development stage company whose operations have
primarily consisted of research and development. We expect to continue to incur
quarterly losses from our investment in Intelligent Ion, Inc. At this time, we
cannot predict when or if Intelligent Ion, Inc. will begin to generate income
from its operations.
Income before income taxes increased $73,000 or 13% to $645,000 compared to
$572,000 for the same period of the prior year primarily due to improved gross
profit from product mix partially offset by an increase in R&D expenses and the
loss from our investment in an unconsolidated investee.
Provision for income taxes increased $5,000 for the three months ended March 31,
2004 to a provision of $219,000 compared to $214,000 for the same period of the
prior year. The effective tax rate was 34% for the quarter ended March 31, 2004
compared to 37% for the same period of the prior year.
Net income for the quarter ended March 31, 2004 increased $68,000 or 19% to
$426,000 compared to $358,000 for the same period of the prior year, primarily
due to improved gross profit from product mix, partially offset by increases in
costs for R&D and loss from our investment in an unconsolidated investee. Basic
and diluted earnings per share for the quarter ended March 31, 2004 were $0.15
per share computed based on basic and diluted weighted average shares
outstanding of 2,764,000 and 2,847,000, respectively, compared to basic and
diluted earnings per share of $0.13 per share for the same period of the prior
year computed based on basic and diluted weighted average shares outstanding of
2,759,000 and 2,768,000, respectively. Earnings per share increased due to the
increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,151,000 as of March 31, 2004, compared to
$2,869,000 as of December 31, 2003. Working capital as of March 31, 2004
increased to $13,963,000, compared to $13,105,000 as of December 31, 2003
primarily due to increases in inventory, short-term investments, and accounts
receivable offset by an increase in accounts payable and accrued liabilities.
Working capital, as a percentage of total assets, was 58% as of March 31, 2004
and 58% at December 31, 2003. The current ratio was 3.7 at March 31, 2004 and
3.9 at December 31, 2003. Total liabilities-to-equity ratio increased to 28% as
of March 31, 2004, compared to 24% as of December 31, 2003.
10
Net cash flow provided by (used in) operating activities for the quarter ended
March 31, 2004, was $704,000, compared to $(149,000) for the same period of the
prior year. The increase in cash flow from operating activities in the three
months ended March 31, 2004 was primarily due to an increase in net income. In
addition, changes to working capital resulted from increases in liabilities. Net
cash flow (used in) investing activities was $(566,000) for the three months
ended March 31, 2004, compared to $(90,000) for the same period of the prior
year. The increase in cash used in investing activities was primarily due to an
increase in the purchases of investments with excess cash. Net cash flow
provided by financing activities for the three months ended March 31, 2004 was
$144,000 compared to $5,000 for the same period of the prior year. The increase
in cash provided by financing activities was primarily due to the issuance of
stock to employees pursuant to an increase in the exercise of stock option
awards.
We have historically been able to fund working capital and capital expenditures
from operations, and expect to be able to finance our 2004 working capital
requirements from cash on hand and funds generated from operations. However,
demand for our products is influenced by the overall condition of the economy in
which we sell our products, by the capital spending budgets of our customers and
by our ability to successfully meet our customers' expectations. The
environmental instrument market in which we compete has been flat or declining
over the past several years, and uncertainty about the economy has prolonged our
customers' decisions to spend capital for our products. Any further decline in
our customers' markets or in general economic conditions would likely result in
a further reduction in demand for our products and services and could harm our
results of operations and, therefore, harm the primary source of our cash flows.
Other matters that could affect the extent of funds required within the
short-term and long-term include future acquisitions of other businesses,
extensive investment in product R&D activities, or spending to develop markets
for the our products. We may engage in discussions with third parties to acquire
new products or businesses or to form strategic alliances and joint ventures.
These types of transactions may require additional funds from sources other than
current operations to complete. We believe that such funds would come from
traditional institutional debt financing or other third party financing.
In the second quarter of 2003, we announced a plan to undertake a more extensive
research, development, and engineering effort with the intent of developing
products with innovative technologies, which we believe will stimulate demand in
a market demonstrating slow or no growth. The major goals in our efforts are
(i)to position the Company to serve new markets, including homeland defense,
(ii)to increase our position in the beverage market, and (iii)to broaden our
product offering in the process analytical instruments market. Our plan to
increase research and development will increase R&D expenses in dollar terms and
as a percentage of revenues during the next 24 months. Such expenses will
include hiring additional personnel, purchasing supplies and component products
for experimental use, outsourcing certain work, and using consulting services.
We expect that such expenses will fluctuate quarterly based on the specific
activity during the quarter. Increases in R&D efforts may also result in
investments in the external development by other third parties in which funding
the Company may participate. Such fluctuating expenditures, together with
fluctuating revenues, may result in a quarterly or annual operating loss. We
believe we have sufficient cash on hand and funds from operations to maintain
our commitment to this plan.
Since 1995, we have repurchased an aggregate of 1,755,978 shares at an average
purchase price of $4.13 per share, pursuant to the Company's stock repurchase
program. Repurchases in the amount of 28,600 shares were made during 2003, but
none were made in the three months ended March 31, 2004. We may purchase up to
an additional 19,022 shares under the current stock repurchase program. We may
seek approval from the Company's Board of Directors to expand this program in
the future if it believes repurchases continue to be in the best interests
11
of the Company. Expansion of this program would also be funded from cash from
operations. We do not expect to declare a dividend in the foreseeable future.
Other than the items discussed above, we are not aware of other commitments or
contingent liabilities that would have a materially adverse effect on the
Company's financial condition, results of operations, or cash flows.
SEGMENT INFORMATION
The Company manages its businesses primarily on a product and services basis.
The Company aggregates its segments as one reportable segment based on the
similar characterisitics of their operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to implement critical accounting
policies and to make estimates that could significantly influence the results of
operations and financial position. The accounting policies and estimates, which
significantly influence the results of the Company's operations and its
financial position, include revenue recognition policies, the valuation
allowance for inventories and accounts receivable, estimates for future losses
on product warranties, and policies on accounting for stock-based compensation.
REVENUE RECOGNITION. The Company derives revenues from three sources: system
sales, part sales, and services. For system sales and parts sales, revenue is
generally recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the contract price is fixed or determinable, title and risk of
loss have passed to the customer, and collection is reasonably assured. The
Company's sales are typically not subject to rights of return, and historically,
sales returns have not been significant. System sales that do not involve unique
customer acceptance terms or new specifications or technology with customer
acceptance provisions, and that involve installation services are accounted for
as multiple-element arrangements, where the larger of the contractual billing
holdback or the fair value of the installation service is deferred when the
product is delivered and recognized when the installation is complete. In all
cases, the fair value of undelivered elements, such as accessories ordered by
customers, is deferred until the related items are delivered to the customer.
For certain other system sales that do involve unique customer acceptance terms
or new specifications or technology with customer acceptance provisions, all
revenue is generally deferred until customer acceptance. Revenue related to part
sales is recognized when the parts have been shipped and title and risk of loss
have passed to the customer. Deferred revenue is included in unearned revenues
in accrued liabilities in the accompanying unaudited condensed consolidated
balance sheets.
Products generally carry one year of warranty. Once the warranty period has
expired, the customer may purchase an extended product warranty typically
covering an additional period of one year. Extended warranty billings are
generally invoiced to the customer at the beginning of the contract term.
Revenue from extended warranties is deferred and recognized ratably over the
duration of the contracts. Unearned maintenance and extended warranty revenue is
included in deferred revenues in accrued liabilities in the accompanying
unaudited condensed consolidated balance sheets.
ACCOUNTS RECEIVABLE. The Company maintains allowances for doubtful accounts for
estimated losses resulting from the failure of its customers to make required
payments and for estimated sales returns. Customers may not make payments or
return products due to a variety of reasons including deterioration of their
financial condition or dissatisfaction with the Company's products. Management
makes regular assessments of doubtful accounts
12
and uses the best information available including correspondence with customers
and credit reports. If the Company determines that there is impairment in the
ability to collect payments from customers, additional allowances may be
required. However, the Company does not believe that there is significant
likelihood of this risk from a single customer, since the Company does not have
a significant credit concentration risk with any one single customer.
Historically, the Company has not experienced significant bad debt losses, but
the Company could experience increased losses if general economic conditions
were to deteriorate, resulting in the impairment of a number of its customers'
ability to meet their obligations, or if management made different judgments or
utilized different estimates for sales returns and allowances for doubtful
accounts.
INVENTORIES. Inventories consist of electronic equipment and various components.
The Company operates in an industry where technological advances or new product
introductions are a frequent occurrence. Either one of these occurrences can
make obsolete or significantly impair customer demand for a portion of the
Company's inventory on hand. The Company regularly evaluates its inventory and
maintains a reserve for inventory obsolescence and excess inventory. As a
policy, the Company provides a reserve for products with no movement in six
months or more and which management determines, based on available market
information, are no longer saleable. The Company also applies subjective
judgment in the evaluation of the recoverability of the rest of its inventory
based upon known and expected market conditions and company plans. If the
Company's competitors were to introduce a new technology or product that renders
a product sold by the Company obsolete or unnecessary, it could have a
significant adverse effect on the Company's future operating results and
financial position.
The Company had changes in required reserves in recent periods due to
discontinuation of certain product lines and obsolescence related to new product
introductions, as well as declining market conditions. As a result, the Company
incurred net inventory charges of approximately $151,000 during fiscal 2003.
PRODUCT WARRANTIES. Products are sold with warranties ranging from 90 days to
one year, and extended warranties may be purchased for some products. Estimated
expenses associated with these warranties are provided for in the accompanying
financial statements at the time of revenue recognition. The Company makes
estimates of these costs based on historical experience and on various other
assumptions including historical and expected product failure rates, material
usage, and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage, or service delivery costs
differ from estimates, revisions to the estimated warranty liability would be
required.
STOCK-BASED COMPENSATION. The Company elected to account for fixed award stock
options and non-employee directors' options under the provisions of APB Opinion
No. 25 "Accounting for Stock Issued to Employees." As such, no compensation cost
has been recorded in the financial statements relative to these options. The
Company utilizes the Black-Scholes option-pricing model to estimate the fair
value of these options for disclosure purposes.
Stock granted to non-employee directors are accounted for in accordance with FAS
No. 123 "Accounting for Stock-Based Compensation." Accordingly, directors' stock
is recorded as compensation expense at estimated fair value on the date the
stock is earned by the director.
13
RECENT PRONOUNCEMENTS-SEE NOTE 8 OF ITEM 1
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 polices 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 on its financial position or results of
operations due to market risks. The fair value of the Company's investments at
March 31, 2004 was $6,748,000.
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. As of March 31, 2004, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the chief executive officer and chief
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the chief executive and financial officers
have concluded that the Company's disclosure controls and procedures are
effective. Subsequent to the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls.
The Company's management, including the chief executive officer and chief
financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.
14
PART II- OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
31.1 Principal Executive Officer certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer certification pursuant to
18. U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2004.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O. I. CORPORATION
---------------------------------
(Registrant)
Date: May 7, 2004 BY: /s/ William W. Botts
-------------- ------------------------------------
William W. Botts
President and
Chief Executive Officer
Date: May 7, 2004 BY: /s/ Juan M. Diaz
-------------- ------------------------------------
Juan M. Diaz
Vice President-Corporate Controller
Principal Accounting Officer
16
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
31.1 Principal Executive Officer certification pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer certification pursuant to 18. U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Principal Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002