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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, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-6511
O. I. CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
(State of Incorporation) (IRS Employer Identification No.)
151 GRAHAM ROAD, BOX 9010
COLLEGE STATION, TEXAS 77842-9010
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (979) 690-1711
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF CLASS
Common Stock, par value $0.10 per share
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 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value, as of June 30, 2004, of the common stock (based on
the average of bid and asked prices of these shares on NASDAQ) of O. I.
Corporation held by non-affiliates was approximately $21,798,973.
The number of shares outstanding of the common stock as of March 14, 2005 was
2,823,137.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2005 Annual Meeting of Shareholders
Part III information is incorporated byreference from the Proxy Statement
PART I
ITEM 1. BUSINESS
GENERAL
O. I. Corporation (referred to as "the Company," "we," "our" or "us") was
organized in 1963, in accordance with the Business Corporation Act of the State
of Oklahoma, as Clinical Development Corporation, a builder of medical and
research laboratories. In 1969, the Company moved from Oklahoma City, Oklahoma
to College Station, Texas, and the Company's name was changed to Oceanography
International Corporation. The Company's name was changed to O.I. Corporation in
July 1980; and in January 1989, the Company began doing business as OI
Analytical to better align the company name with the products offered and
markets served.
O. I. Corporation provides innovative products for chemical analysis. The
Company's products perform sample preparation, detection, analysis, measurement,
and monitoring applications in food, beverage, pharmaceutical, semiconductor,
power generation, chemical, petrochemical, and defense industries. Headquartered
in College Station, Texas, the Company's products are sold worldwide by a direct
sales force, independent sales representatives, and distributors. The Company's
principal business strategy is to direct its product development capabilities,
manufacturing processes, and marketing skills toward market niches, which it
believes it can successfully penetrate and then assume a leading position.
Management continually emphasizes product innovation, improvement in quality and
product performance, on-time delivery, cost reductions, and other value-added
activities. The Company seeks growth opportunities through technological and
product improvement, the development of new applications for existing products,
and by acquiring and developing new products, new markets, and new competencies.
The Company's web site is located at www.oico.com. The Company makes available,
free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is filed with the Securities and
Exchange Commission ("SEC"). These filings are also available through the SEC's
website at www.sec.gov.
RECENT DEVELOPMENTS
The Company has historically expanded through internal development of new
products and technologies, through the acquisition of technologies, product
lines, market positions, competencies, businesses, and through entering into
alliances, distributorships, original equipment manufacturer supply agreements
(OEMs), and value added reseller agreements (VARs). Such developments,
acquisitions, and agreements have provided the Company additional technologies,
specialized manufacturing or product development expertise, and broader
capabilities in marketing and distribution.
On December 23, 2004, we completed the purchase of certain assets of Intelligent
Ion, Inc. (III), including intellectual property owned or licensed by III,
prototype products, software, and research assets. The completion of the
purchase terminated the strategic alliance between the Company and III, that
included a Product Purchase Agreement to fund III's product development efforts
and an investment of $1,000,000 in a Series A Preferred Stock offering by III in
December 2003, which was a condition precedent to entering into the Product
Purchase Agreement. The purchase marks the Company's entry into the field of
mass spectrometry and is consistent with our strategy, announced in 2003, to
increase research and development in an effort to bring new and innovative
products to market.
Products
GAS CHROMATOGRAPHY INSTRUMENTS AND SYSTEMS The Company designs, manufactures,
markets, and services components for gas chromatographs (GCs), including
detectors and sample introduction instruments. Gas chromatography is an
analytical technique that separates organic compounds based on their unique
physical and chemical properties. The use of gas chromatography in a number of
diverse applications has led to the continuous development of a broad range of
sample introduction and detector devices. Advances in the field are based on
technology improvements that provide improved sample introduction, faster
analysis, lower level and selective
2
detection, ease-of-use, and increased reliability. 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; Eclipse
Purge-and-Trap Sample Concentrator (P&T); P&T Autosamplers;
Preconcentration and Thermo Desorption Device; Air Tube Concentrators;
Volatile Organic Sample Train (VOST); and Multi-Point Sampling Inlet
Module.
The Company purchases analytical instruments including GCs and GC mass
spectrometers (GC/MS) manufactured by GC companies, including purchases under an
OEM agreement with Agilent Technologies, Inc. The Company integrates GC
components with GCs and GC/MS to form customized GC analyzer systems including:
VOC (volatile organic carbon) analyzers, BTEX (Benzene, Toluene, Ethylbenzene,
and Xylenes) analyzers, pesticide analyzers, fluorinated by-products (FBA)
analyzers, continuous emissions monitoring (CEM), continuous air monitoring
analyzers for air toxins and VOCs, permeation testing analyzers, 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, liquid, or solid matrices using the
appropriate components. One such configured continuous air monitoring analyzer
is the MINICAM. The MINICAMS product, which is used to monitor, detect, and
measure toxic airborne chemical compounds and is used to monitor for the
presence of chemical warfare agents such as Mustard (HD), Sarin (GB), Soman
(GD), Tabun (GA), and Lewisite (L). In 2004, the U.S. Government continued
acceptance testing of our new automated Continuous Sampling System coupled with
the MINICAMS to address new air monitoring levels as promulgated by the Centers
for Disease Control and Prevention. The new requirements will significantly
lower airborne exposure limits to protect the health and safety of workers and
the general population during the disposal and transport of these agents.
TOTAL 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 U.S. Environmental
Protection Agency 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
Analyzer.
AUTOMATED CHEMISTRY ANALYZERS The Company designs, manufactures, markets, and
services Segmented Flow Analyzers (SFA), Flow Injection Analyzers (FIA), and
field portable instruments such as the Flow Solution(R) IV, Flow Solution 3000,
and CNSolution(TM) 3000 (cyanide analyzer). These instruments perform a wide
range of ion analyses, including the measurement of nitrate, nitrite, phosphate,
ammonia, chloride, alkalinity, 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 and Gel Permeation Chromatography (GPC) Systems.
FILTOMETERS The Company designs, manufactures, markets, and services
non-dispersive infrared instruments (NDIR) that are sometimes called
filtometers. The filtometer uses a light source and an interference filter to
send light of a specific wavelength through a sample. The sample's absorbance of
the light, as measured by a suitable detector, is a direct measure of the
sample's concentration. This makes the filtometer well suited to making repeated
measurements on individual samples or continuously on a process stream or air.
The Company provides two products employing filtometer technology including:
3
CONTINUOUS REFRIGERANT MONITORS are used by the chiller/refrigerant
industry for the rapid detection of low-level refrigerant leaks and for
monitoring carbon monoxide gas in parking garage applications. These
instruments can monitor for all refrigerants including CFCs
(chlorofluorocarbons), HFCs (hydrofluorocarbons), HCFCs
(hydrochloro-fluorocarbons), and ammonia and meet ASHRAE (American Society
of Heating, Refrigerating, and Air-conditioning Engineers) 15-2001 Safety
Code Requirements.
BEVERAGE ANALYZERS are used on-line and in the laboratory to measure
dissolved Brix (sugar), diet syrup, and carbon dioxide in beverages. This
equipment is currently used in soft-drink bottling plants, breweries, and
wineries.
SALES BY LOCATION
All of the Company's assets are located in the United States, and all sales are
conducted in U.S. dollars. Estimated net revenues attributable to the United
States, export revenues as a group, and the number of countries in which export
revenues were generated, are as follows:
$ in thousands 2004 2003 2002 2001 2000
- ---------------- -------- -------- -------- -------- --------
Net Revenues:
United States $ 20,075 $ 18,442 $ 17,699 $ 21,231 $ 19,402
Export 8,405 6,764 5,984 4,638 4,999
-------- -------- -------- -------- --------
Total $ 28,480 $ 25,206 $ 23,683 $ 25,869 $ 24,401
======== ======== ======== ======== ========
% Net Revenues:
United States 70% 73% 75% 82% 80%
Export 30% 27% 25% 18% 20%
-------- -------- -------- -------- --------
Total 100% 100% 100% 100% 100%
======== ======== ======== ======== ========
Number of countries-export 64 62 70 58 61
Sales to the Asia-Pacific region were approximately 16% of net revenues for 2004
and 13% of net revenues for 2003; and sales to the European-African region were
approximately 10% of net revenues for 2004 and 13% of net revenues for 2002;
however, sales did not exceed 10% of revenues to any particular international
geographic area for any of the years 2001 or 2000.
For additional financial information, including financial information for the
last three years on total assets, please see "Item 8. Financial Statements and
Supplementary Data" and the notes to the consolidated financial statements
included in this annual report.
MANUFACTURING
The Company manufactures products by using similar techniques and methods at two
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's products have
been 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 has
obtained and maintains ISO 9001 certification for its College Station, Texas and
its Birmingham, Alabama, manufacturing operations.
MARKETING
The Company markets and sells analytical components and systems that it
manufactures and that are purchased for resale, provides on-site installation
and support services, and distributes expendables and accessories required to
support the operation of products sold. The Company sells its products
domestically to end users through a direct sales channel, manufacturers'
representatives, distributors and resellers, and internationally through
independent manufacturers' representatives and distributors. The Company's
marketing program for its products and services,
4
both domestically and internationally, includes advertising, direct mail,
seminars, trade shows, telemarketing, and promotion on the Company's Internet
web site at www.oico.com.
TECHNICAL SUPPORT
The Company employs a technical support staff that provides on-site
installation, service, and after-sale support of its products in an attempt to
ensure customer satisfaction. The Company offers training courses, publishes
technical bulletins containing product repair information, parts lists, and
application support information for customers. Products sold by the Company
generally include a 90-day to one-year warranty. Customers may also purchase
extended warranty contracts or service contracts that provide coverage after the
expiration of the initial warranty. The Company installs and services its
products through its field service personnel and through third party contractors
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, advance and broaden employed
technologies, increase product reliability, improve product performance, improve
handling of data produced from analysis, reduce the physical size of the
product, reduce cycle time of analysis, and maintain or reduce product cost.
Research and development costs, relating to both present and potential future
products, are expensed as incurred, and such expenses were $2,998,000 in 2004,
plus $483,000 of acquired in-process research and development, $2,698,000 in
2003, and $2,246,000 in 2002. 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,
including TOC and ion analyzers, on-line beverage monitors, and continuous air
monitoring systems.
PATENTS
The Company holds both U.S. and international patents and has both U.S. and
international patent applications pending. The Company currently holds 29
patents as of year-end 2004, which expire between the years 2005 and 2023,
compared to 30 patents in the prior year. As a matter of policy, the Company
vigorously pursues and protects its proprietary technology positions and seeks
patent coverage on technology developments that it regards as material and
patentable. While the Company believes that all of its patents and applications
have value, its future success is not dependent on any single patent or
application.
COMPETITION
The Company encounters aggressive competition in all aspects of its business
activity. The Company competes with many firms in the design, manufacture, and
sale of analytical instruments, principally on the basis of product technology
and performance, product quality and reliability, sales and marketing
capability, access to channels of distribution and product support, delivery,
and price. Most of the Company's competitors have significantly greater
resources than the Company in virtually all aspects of competition, including
financial and related resources, market coverage on a global basis, breadth of
product(s) in each market segment(s) served, access to human and technical
resources, buying power, and marketing strength, including brand recognition,
market share, and bundled product sales.
EMPLOYEES
As of December 31, 2004, the Company had 151 full-time employees. The Company
employs scientists and engineers who research and develop potential new
products. To protect the Company's proprietary information, the Company has
confidentiality agreements with its employees who come in contact with such
information. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that relations between the Company and
its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 of Part III of this annual report on Form 10-K.
5
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 might be deemed hazardous. Hazardous
materials are primarily introduced into the Company's products by end users
rather than by the Company. The Company believes there will be no material
effect upon its capital expenditures, earnings, and competitive position caused
by its compliance with federal, state, or local provisions regulating the
discharge of materials into the environment or relating to the protection of the
environment. However, to the extent that analytical instruments designed and
manufactured by the Company for environmental analysis are purchased by its
customers to assist them in complying with environmental regulations, changes to
these regulations could affect demand for some of the Company's products.
SOURCES OF RAW MATERIALS
The Company produces its products from raw materials, component parts, and other
supplies that are generally available from a number of different sources. The
Company has few long-term contracts with suppliers. For certain purchased
materials, the Company has developed preferred sources on the basis of quality
and service. Several purchased components 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, or that the risk of cessation is only
significant to the Company's older products for which the Company plans to
discontinue manufacturing and support and that have been or will be replaced by
newer versions. The Company uses sub-contractors to manufacture certain
components of its products. Subcontractors often are small businesses that can
be affected by economics and other factors that would impact their ability to be
a reliable supplier. Substitute suppliers and/or components may require
reconfiguration of products, which might result in significant product changes
in the view of customers, ultimately resulting in the Company having
discontinued such products.
BACKLOG OF OPEN ORDERS
The Company's backlog of orders on December 31, 2004 was approximately
$4,402,000, compared to $3,172,000 on December 31, 2003 and $5,327,000 on
December 31, 2002. The Company's policy is to include in its backlog only
purchase orders or production releases that have firm delivery dates in the
twelve-month period following December 31, 2004. 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 2005.
SEASONALITY
The Company believes that the demand for its products is not subject to
significant seasonal variations, except that historically environmental markets
are slower in the first and fourth quarters and governmental markets are
stronger in the third quarter.
CUSTOMERS
The Company's customers include various military agencies of the U.S.
Government, industrial businesses, semiconductor manufacturers, engineering and
consulting firms, municipalities, environmental testing laboratories, beverage
bottlers, and chiller-refrigerant companies. Sales to the U.S. Government
accounted for approximately 11% of revenues in 2004, no single customer
accounted for more than 10% of revenues in 2003, and sales to Parsons
Infrastructure & Technology Group, Inc. accounted for approximately 10% of
revenues in 2002. Federal, state, and municipal governments and public and
private research institutions in the aggregate accounted for 24% of revenues in
2004, 20% of revenues in 2003, and 17% of revenues in 2002. A decrease in sales
to these groups could have a material adverse impact on the Company's results of
operations. Export sales accounted for 30% of revenues in 2004, compared to 27%
of revenues in 2003, and 25% of revenues in 2002.
6
ITEM 2. PROPERTIES
The Company owns a facility with space of approximately 68,650 sq.ft. located on
11.29 acres of land in College Station, Texas, and has good title, free of any
encumbrances. The Company leases approximately 20,000 sq.ft. of office,
engineering, laboratory, production, and warehouse space in Pelham, Alabama, a
suburb of Birmingham, under a lease expiring in December 2006. The Company also
leases 500 sq.ft. of office space in Edgewood, Maryland, under a lease, which
can be renewed annually, and 5,144 sq. ft. of office space in Seattle,
Washington under a six-month lease. The Company believes that its facilities are
in good condition and are suitable for its present operations and that suitable
space is readily available for expansion or if any of its leases are not
extended.
ITEM 3. LEGAL PROCEEDINGS
From time to time, in the ordinary course of business, the Company has received,
and in the future may receive, notice of claims against it, which in some
instances have developed, or may develop, into lawsuits. Management does not
expect any pending claim to have a material adverse effect on the consolidated
financial position and results of operations of the Company.
Certain claims are pending against the Company with respect to matters arising
out of the ordinary conduct of its business. For all claims, in the opinion of
management, based upon presently available information, either adequate
provision for anticipated costs has been made by insurance, accruals or
otherwise, or the ultimate anticipated costs resulting will not materially
affect the Company's consolidated financial position or results of operations.
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 2004.
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 per share of the Company's
common stock for each quarterly period during fiscal 2004 and 2003 were as
follows:
2004 2003
------------------- ------------------
High Low High Low
-------- -------- -------- ------
First Quarter $ 8.89 $ 7.45 $ 4.45 $ 3.50
Second Quarter 9.03 7.85 5.50 3.20
Third Quarter 9.25 7.99 6.12 4.86
Fourth Quarter 11.55 8.54 8.90 5.61
NOTE: The above quotations represent prices between dealers, do not include
retail markup, markdown, or commission, and may not necessarily represent
actual transactions.
DIVIDENDS The Company has never paid dividends on the Common Stock, and
management does not anticipate paying any dividends in the foreseeable future.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 14, 2005, there were
approximately 809 holders of record of the Company's Common Stock.
7
EQUITY COMPENSATION PLAN INFORMATION
All existing equity compensation plans have been approved by security holders.
Number of securities Weighted average Number of
to be issued upon exercise price of securities
exercise of outstanding remaining
outstanding options, options, warrants, available for
Plan Category warrants and rights and rights future issuance
(a) (b) (c)
- -------------------------------------- -------------------- ------------------ ----------------
Employee Stock Purchase Plan --(1) --(1) 136,825
2003 Incentive Compensation Plan 68,800 $ 7.29 279,000
1993 Incentive Compensation Plan 188,605 $ 4.56 --(2)
1987 Amended and Restated Stock
Option and SAR Plan 15,300 $ 3.46 --(2)
------- ----------- -------
272,705 $ 5.20 415,825
======= =========== =======
1) Employees eligible to participate in the Employee Stock Purchase
Plan may purchase shares of the Company's stock on a regular basis
through payroll deductions. The price of the shares to the employees
equals the average of the bid and ask price of the last five days of
each fiscal quarter.
2) Both the 1987 and 1993 Incentive Compensation Plans have expired and
no new securities may be issued.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical financial data
for each of the five years in the period ended December 31, 2004. The selected
historical financial data set forth below has been derived from our audited
consolidated financial statements included elsewhere in this annual report on
Form 10-K. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited consolidated financial statements and related notes included
elsewhere in this annual report on Form 10-K.
($ in thousands except per share amounts) 2004 2003 2002 2001 2000
- ------------------------------------------- ---------- ---------- --------- ---------- --------
Income statement data:
- ----------------------
Net revenues $ 28,480 $ 25,206 $ 23,683 $ 25,869 $ 24,401
Impairment of intangible assets -- -- 346 -- 960
Acquired in-process research and
development 483 -- -- -- --
Loss from unconsolidated investee 208 24 -- -- --
Impairment of investment in
unconsolidated investee 768 -- -- -- --
Income before income taxes 2,218 2,385 871 2,963 978
Net income 1,762 1,635 658 2,006 616
Diluted earnings per share $ 0.61 $ 0.58 $ 0.24 $ 0.74 $ 0.21
Balance sheet data:
- -------------------
Total assets $ 25,387 $ 22,707 $ 20,982 $ 19,391 $ 17,905
Working capital 15,989 13,105 12,355 11,478 8,983
Stockholders' equity 20,187 18,239 16,551 15,849 13,796
Common size income statement data:
- ----------------------------------
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 49.2 52.7 56.1 52.6 55.0
---------- ---------- --------- ---------- --------
Gross profit 50.8 47.3 43.9 47.4 45.0
Selling, general, and administrative
expenses 28.9 28.7 30.7 28.9 30.4
Research and development expenses 10.5 10.7 9.5 8.3 8.0
Acquired in-process research and
development 1.7 0.0 0.0 0.0 0.0
Impairment of intangible assets 0.0 0.0 1.4 0.0 4.0
---------- ---------- --------- ---------- --------
Operating income 9.7 7.9 2.3 10.2 2.6
Interest and other income, net 1.5 1.6 1.3 1.3 1.4
Loss from unconsolidated investee 0.7 0.1 0.0 0.0 0.0
Impairment of investment in
unconsolidated investee 2.7 0.0 0.0 0.0 0.0
---------- ---------- --------- ---------- --------
Income before income taxes 7.8 9.4 3.6 11.5 4.0
Provision for income taxes 1.6 2.9 0.9 3.7 1.5
---------- ---------- --------- ---------- --------
Net income 6.2% 6.5% 2.7% 7.8% 2.5%
========== ========== ========= ========== ========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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,
evaluation of the impairment of and estimated useful lives of intangible assets,
and estimates for future losses on product warranties.
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 has 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 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. Deferred revenue from such system sales is presented as
unearned revenues in accrued liabilities in the accompanying consolidated
balance sheets.
Our 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 contract. Unearned extended warranty revenue is included in
unearned revenues in accrued liabilities in the accompanying 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 may
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 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. Certain distributors or
manufacturer's representatives in growing geographic areas, on management
approval, may exceed credit limits to accommodate financial growth.
Historically, the Company has not experienced significant bad debt losses, but
the Company could experience increased losses if general economic conditions of
its significant customers or any of the markets in which it sells its products
were to deteriorate. This could result 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
significantly impair customer demand for a portion of the Company's inventory on
hand, making it obsolete. 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.
10
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 $200,000 during fiscal 2002,
approximately $151,000 during fiscal 2003 and approximately $42,000 in fiscal
2004.
INTANGIBLE ASSETS The Company's intangible assets primarily include product
patents. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142 on January 1, 2002, as required. Accordingly, the Company reviews the
recoverability and estimated useful lives of other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. During the quarter
ended September 30, 2002, the Company completed an evaluation of the future
prospects of certain products and determined that certain related intangible
assets amounting to approximately $346,000 were impaired and written off by a
charge to expense for the period ended December 31, 2002.
The intangible assets acquired from III in December 2004 consisted of patents
and licenses. The majority of the purchase price was allocated to acquired
in-process research & development as the technological feasibility of the
in-process technology had not been established and the technology had no
alternative future use.
PRODUCT WARRANTIES Products are sold with warranties ranging from 90 days to one
year, and extended warranties may be purchased for some products. The Company
establishes a reserve for warranty expenditures and then adjusts the amount of
reserve, annually, if actual warranty experience is different than accrued. 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.
RESULTS OF OPERATIONS
The following table summarizes the results of the Company's operations for each
of the past three years. All percentage amounts were calculated using the
underlying data in thousands.
For the Years Ended December 31,
-------------------------------------------------------------
Percentage Percentage
Increase Increase
2004 (Decrease) 2003 (Decrease) 2002
-------- ---------- -------- ---------- --------
Total net revenues $ 28,480 13% $ 25,206 6% $ 23,683
Total cost of revenues 14,012 5% 13,286 0% 13,279
-------- -------- --------
Gross profit 14,468 21% 11,920 15% 10,404
Selling, general, and administrative expenses 8,219 14% 7,225 (1%) 7,258
Research and development expenses 2,998 11% 2,698 20% 2,246
Acquired in-process research and development 483 100% -- -- --
Impairment of intangible assets -- -- -- (100%) 346
-------- -------- --------
Operating income 2,768 39% 1,998 261% 554
Interest and other income 426 3% 412 30% 317
Loss from unconsolidated investee (208) 766% (24) 100% --
Impairment of investment in unconsolidated
investee (768) 100% -- -- --
-------- -------- --------
Income before income taxes 2,218 (7%) 2,385 174% 871
Provision for income taxes 456 (39%) 750 252% 213
-------- -------- --------
Net income 1,762 8% 1,635 148% 658
======== ======== ========
Diluted earnings per share $0.61 5% $ 0.58 142% $0.24
11
2004 Compared to 2003
- ---------------------
NET REVENUES
Total net revenues for the year ended December 31, 2004 increased $3,274,000, or
13%, to $28,480,000, compared to $25,206,000 for the same period of the prior
year. Net revenues increased due to strong sales of the Company's new Eclipse
Purge-and-Trap Sample Concentrator, MINICAMS air-monitoring systems, continuous
flow analyzers, the LAN 9000 beverage analyzer, and Total Organic Carbon
analyzers (TOC). In 2004 our LAN 9000 On-Line Beverage Monitor sales increased,
and were highlighted by a sales win to install new monitors at a major soft
drink producer's premier bottling plant located near its headquarters. The LAN
9000 measures Brix, diet, and carbon dioxide in beverage process streams. The
Eclipse, our new generation P&T sample concentrator, was well accepted by
customers in 2004, including the China Environmental Protection Agency. We
continued to add accessories to the product line, including two autosamplers,
one for water and one for a combination of water and soil, an Automated
Multipoint Process Sampler (AMPS) module for 24-hour automated monitoring of
municipal or process water supplies, and a productivity-enhancing device, the pH
Express(TM).
Both domestic revenues and international revenues increased for the year ended
December 31, 2004, compared to the same period of the prior year. International
revenues increased as a percentage of total revenues, as sales into Europe and
Asia increased for the year ended December 31, 2004, compared to the same period
of the prior year. During the second quarter of 2004, the Company increased its
presence in Asia by opening a representative office in China. We believe that
China is a growing market and opening this office will better position the
Company to compete for business in China.
Increases in revenues from products were partially offset by decreases in
revenues from services. Revenues from services decreased $78,000, or 3% to
$2,918,000, compared to $2,996,000 for the same period of the prior year.
Revenues from services decreased, compared to the same period of the prior year,
primarily due to lower revenues from field repair and installation services.
Although net revenues may have increased for the year ended December 31, 2004,
compared to the same period of the prior year, the environmental instrument
market has been flat or declining over the past several years. Furthermore,
improvement in the performance of some products is still offset by the
below-expectations performance of certain other products. The Company continues
to encounter strong competition and continues to seek improved distribution
strategies for certain products in some channels and 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, the
development of new products, development of new applications for our
technologies, and the strengthening of 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 Company's business.
Neither inflation nor changing prices have had a material impact on the
Company's net revenues over the past three fiscal years.
GROSS PROFIT Gross profit for the year ended December 31, 2004 increased
$2,548,000, or 21% to $14,468,000, compared to $11,920,000 for the same period
of the prior year. Gross profit represented 50.8% of revenues for the year ended
December 31, 2004, and 47.3% for the same period of the prior year. The increase
in gross profit for the year ended December 31, 2004, compared to the same
period of the prior year, was primarily due to an increase in revenues and
improved product mix with more sales of higher margin, newer products
manufactured by the Company, and less sales of gas chromatography equipment
purchased under an original equipment manufacturers supply agreement.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES R&D expenses for the year ended December
31, 2004 increased $300,000, or 11% to $2,998,000, compared to expenses of
$2,698,000 for the same period of the prior year. R&D expenses represented 10.5%
of revenues for the year ended December 31, 2004 and 10.7% of revenues for the
same period of the prior year. The increase in R&D expenses for the year ended
December 31, 2004 was due to a plan to focus on product development, which was
announced in the second quarter of 2003. The plan stated our intention to
intensify our R&D efforts on updating existing products and to develop new
products to serve markets with growth potential greater than the environmental
testing market. As stated previously, R&D spending will likely increase over
12
historical levels as a dollar amount, and as a percentage of revenues. At this
time, we plan to remain committed to this plan even at the risk of incurring an
operating loss on a quarterly or annual basis.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES SG&A expenses for the year
ended December 31, 2004 increased $994,000, or 14% to $8,219,000, compared to
$7,225,000 for the same period of the prior year, primarily due to increases in
compensation and other related expenses, bad debt expense, accounting and other
professional fees. SG&A expense increased in dollars, as well as a percentage of
revenues for the years ended December 31, 2004 to 28.9% compared to 28.7% in
2003.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT On December 23, 2004, we completed
the acquisition of certain assets of III, including intellectual property owned
and licensed by III, and prototype products. See Note 2 to the Consolidated
Financial Statements for more detail of the transaction. The purchase price was
assigned to the fair value of the assets acquired, including the in-process
research and development. As of the acquisition date, technological feasibility
of the in-process technology had not been established and the technology had no
alternative future use. Accordingly, we expensed the entire amount of the
in-process research and development of $483,000 at the date of the acquisition.
The key assumptions underlying the valuation of acquired in-process research and
development are as follows:
Project Name: Portable GC Mass spectrometer
Percent completed as of acquisition date: 20%-30%
Estimated costs to complete technology at acquisition date: $1,500,000
Risk-adjusted discount rate: 20%
First period expected revenue: Calendar Year 2006
The development of the acquired technology into a commercial product or products
remains highly dependent on the remaining efforts to achieve technical
viability, rapidly changing customer markets, uncertain standards for a new
product, and significant competitive threats from several companies. The nature
of the efforts to develop this technology into a commercially viable product
consists primarily of research planning, designing, experimenting, and testing
activities necessary to determine that the technology can meet market
expectations, including functionality and technical requirements. Failure of our
research efforts to prove that the technology will function for the intended
purpose or to bring a product to market in a timely manner could result in a
loss of market share or a lost opportunity to capitalize on emerging markets,
and could have a material adverse impact on the future prospects of these R&D
efforts. First period of expected revenues should not be relied on as a
commitment or indication of product introduction date.
Subsequent to the acquisition of these assets, there have been no significant
developments related to the current status of the acquired in-process research
and development that would result in material changes to the assumptions.
Failure to achieve the expected levels of revenue and net income from a product
or products based on this technology will negatively impact the return on
investment expected at the time that the purchase was completed and may result
in impairment charges to the $105,000 of other intangible assets acquired.
OPERATING INCOME Operating income for the year ended December 31, 2004 increased
$770,000, or 39% to $2,768,000, compared to $1,998,000 for the same period of
the prior year. The increase in operating income for the year ended December 31,
2004 is primarily due to the increase in revenues from product sales partially
offset by an increase in R&D activity, SG&A expenditures, and from III
in-process research and development expense acquired.
INTEREST AND OTHER INCOME Other income, net, which is comprised of interest and
dividend income from investments, interest income from customer leases, and
gain/loss from dispositions of Company property, increased by $14,000, or 3% to
$426,000, compared to $412,000 for the same period of the prior year, primarily
due to more interest income from investments.
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN UNCONSOLIDATED INVESTEE We incurred a
loss of $208,000 relating to the write off of the losses from our investment in
III, an unconsolidated investee, an investment which was a condition precedent
to entering into the Product Purchase Agreement. The Company recognized a
$768,000 impairment charge relating to its investment in the unconsolidated
investee during the quarter ended September 30, 2004, due to an other than
temporary decline in its fair value. (See Note 2 to the Consolidated Financial
Statements).
13
INCOME BEFORE INCOME TAXES Income before income taxes for the year ended
December 31, 2004 decreased $167,000, or 7% to $2,218,000, compared to income of
$2,385,000 for the same period of the prior year. The decrease in income before
income taxes for the year ended December 31, 2004, was primarily due to losses
relating to the Company's investment in III amounting to approximately
$1,459,000 offsetting the increase in operating income.
PROVISION FOR INCOME TAXES Provision for income taxes decreased $294,000 for the
year ended December 31, 2004 to a provision of $456,000, compared to $750,000
for the same period of the prior year. The effective tax rate was 20.5% for the
year ended December 31, 2004, compared to 31.5% for the same period of the prior
year, primarily due to a decrease in taxable income resulting from an increase
in income tax due to deductions for R&D expenditures, foreign sales, dividends
received from investments, employee incentive stock option exercises and effects
of state tax true ups.
NET INCOME Net income for the year ended December 31, 2004, increased $127,000,
or 8% to $1,762,000, compared to net income of $1,635,000 in the same period of
the prior year, primarily due to increase in revenues from product sales and
decrease in provision for income taxes partially offset by losses from our
investment in and acquisition of assets from III.
BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share was $0.63, and
diluted earnings per share was $0.61 for the year ended December 31, 2004,
compared to basic and diluted earnings of $0.59 and $0.58 per share,
respectively, for the same period of the prior year.
2003 Compared to 2002
- ---------------------
NET REVENUES
Total net revenues for the year ended December 31, 2003 increased 6%, or
$1,523,000, to $25,206,000, compared to $23,683,000 for the same period of the
prior year, primarily due to increases in revenues from GC components and
systems, MINICAMS air-monitoring systems, and the introduction of new products
partially offset by decreases in sales or flat sales of other products.
Net revenues from customer services, including rentals of the Company's
products, decreased in 2003, compared to the prior year, due to a decrease in
new product installations and factory repair services performed, partially
offset by an increase in customer training and on-site repair services
performed.
Export revenues increased 13% in 2003 to $6,764,000, compared to $5,984,000 in
the prior year. Sales of air-monitoring systems, GC systems and components, TOC
analyzers and beverage analyzers all increased, primarily due to increased
demand for organic volatile and inorganic nutrient monitoring solutions within
the environmental and industrial client base.
GROSS PROFIT Gross profit, as a percentage of net revenues, increased to 47.3%
in 2003, compared to 43.9% in the prior year. Gross profit in dollars increased
15%, or $1,516,000, to $11,920,000 in 2003, compared to $10,404,000 in the prior
year. The increase in gross profit dollars and gross profit margin for 2003,
compared to the prior year, was primarily due to increases in revenues combined
with an improvement in sales mix for the period, and a decrease in manufacturing
and warranty costs.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES SG&A expenses were
$7,225,000 in 2003, or 28.7% of revenues, compared to $7,258,000 in the prior
year, or 30.7% of revenues. SG&A expenses decreased in 2003 compared to the
prior year primarily due to improvements in efficiency in selling and product
support, partially offset by increases in administrative expenses. The Company
continued to incur increased administrative expense for professional goods and
services to assess and react to the changes in securities laws, including the
Sarbanes-Oxley Act and the corporate governance rules of the NASDAQ.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES R&D expenditures increased 20% to
$2,698,000, or 10.7% of revenues in 2003, compared to $2,246,000, or 9.5% of
revenues in the prior year. The increase in R&D expenses is due to a plan to
increase focus and spending on product development.
IMPAIRMENT OF INTANGIBLE ASSETS There were no charges for impairments of
intangible assets in 2003 compared to
14
$346,000 in the prior year. During the quarter ended September 30, 2002, the
Company completed an evaluation of the future prospects of certain products, and
as a result of these decisions, the Company determined that certain intangible
assets amounting to approximately $346,000 were impaired. The impaired
intangible assets were from prior acquisitions and consisted primarily of
acquired trade names and patents that were no longer used.
INTEREST AND OTHER INCOME Interest and other income increased 30% in 2003 from
the prior year. The increase in other income in 2003 was primarily due to an
increase in dividends on preferred stock investments due to a higher average
invested balance, partially offset by the Company's share of losses from its
investment in III.
INCOME BEFORE INCOME TAXES Income before income taxes increased 174%, or
$1,514,000, to $2,385,000 in 2003 from $871,000 in the prior year primarily due
to an increase in revenues from sales of products, an improvement in sales mix,
a decrease in manufacturing and warranty costs and decreases in impairment
charges and other operating costs, partially offset by an increase in R&D
expenses.
PROVISION FOR INCOME TAXES The Company's effective income tax rate was 31.5% in
2003 and 24.4% in the prior year. The effective income tax rate increased from
the prior year to 2003 due to an increase in taxable income from operations.
NET INCOME The increase in net income for the year ended December 31, 2003 was
primarily due to an increase in revenues from sales of products, a decrease in
impairment charges, a decrease in manufacturing and warranty costs, and an
increase in dividends from preferred stock investments, partially offset by an
increase in R&D expenses.
BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share was $0.59 for 2003
and $0.24 for the prior year, computed based on 2,756,430 shares outstanding for
2003 and 2,755,634 shares outstanding for the prior year. Diluted earnings per
share were $0.58 for 2003, and $0.24 for the prior year, computed based on
2,797,421 shares outstanding for 2003 and 2,778,478 shares outstanding for the
prior year.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company considers a number of liquidity measures that aid in measuring the
Company's ability to meet its financial obligations. Such ratios, working
capital, and changes in cash and cash equivalents as of the end of the Company's
last three years are as follows:
($ in thousands) 2004 2003 2002
- ------------------------------------------------ ------- ------- --------
LIQUIDITY MEASURES
Ratio of current assets to current liabilities 4.1 3.9 3.8
Total liabilities to equity 26% 25% 27%
Days sales in accounts receivable 63 59 63
Average annual inventory turnover 2.7 3.1 3.0
Working capital $15,989 $13,105 $ 12,355
CHANGES IN CASH AND CASH EQUIVALENTS
Net cash provided by (used in)
Operating activities $ 2,024 $ 2,684 $ 2,979
Investing activities (3,610) (3,673) (2,234)
Financing activities 258 (58) 29
Net (decrease)/increase in:
Cash and cash equivalents $(1,328) $(1,046) $ 775
Cash and cash equivalents:
Beginning of year 2,869 3,915 3,140
End of year 1,541 2,869 3,915
Working capital increased 22%, or $2,884,000, to $15,989,000 in 2004, compared
to $13,105,000 in 2003, and $12,355,000 in 2002 primarily due to an increase in
investments of excess cash combined with an increase in inventories and accounts
receivable due to an increase in sales volume.
Days in accounts receivable increased to 63 days in 2004, compared to 59 days in
2003, and 63 days in 2002 primarily due to extension of payment terms to
customers and manufacturer's representatives in growing geographic areas to
accommodate financial growth.
Net cash flows provided by operating activities for the year ended December 31,
2004 were $2,024,000, compared to $2,684,000 for the same period of the prior
year. The decrease in cash flows provided by operating activities in 2004 was
primarily due to an increase in accounts receivable and inventory, resulting
from an increase in sales volume. During 2003, the Company generated $2,684,000
in cash from operating activities, which represents the Company's principal
source of cash, a decrease of $295,000, compared to $2,979,000 in 2002. The
decrease in operating cash flows in 2003 was primarily due to an increase in
accounts receivable resulting from an increase in sales.
Net cash flows (used in) investing activities for the year ended December 31,
2004 were $(3,610,000), compared to $(3,673,000) for the same period of the
prior year. The decrease in cash flows (used in) investing activities resulted
from an increase in purchase of investments and property and equipment. Cash
flow (used in) investing activities in 2003 of $(3,673,000), an increase of
$1,439,000 compared to $(2,234,000) in 2002, was primarily due to the purchase
of other investments. The Company considers investment alternatives and invests
surplus cash in low-risk, short-term investments of varying maturities or
investment grade preferred stock to maximize return while maintaining investment
risk at a minimum. The Company invested a portion of its available cash in such
investments during 2004, 2003 and 2002 to maintain its liquidity, however, the
investment in III was part of an arrangement to develop and gain access to
technology for use in potential new products and not as an income-earning asset,
such as the Company's other investment grade preferred stocks.
Net cash flows provided by (used in) financing activities for the year ended
December 31, 2004 were $258,000, compared to $(58,000) for the same period of
the prior year. The increase in cash provided by financing activities was
16
primarily due to the issuance of stock to employees pursuant to an increase in
the number of employees exercising stock option awards. Cash flows (used in)
financing activities were $(58,000) in 2003, compared to cash provided of
$29,000 in 2002. Cash was used in financing activities during 2003 primarily to
repurchase Company stock.
AGGREGATE CONTRACTUAL OBLIGATIONS
Payments Due by Period
---------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 years 3-5 years 5 years
- ------------------------ ------------- ------------ ----------- --------- ---------
Operating Leases (1) $ 359,835 $ 188,785 $ 171,050 -0- -0-
Purchase Obligations (2) 2,711,829 2,711,829 -0- -0- -0-
------------- ------------ ----------- --- ---
Total $ 3,071,664 $ 2,900,614 $ 171,050 -0- -0-
============= ============ =========== === ===
(1) Future minimum rental payments under an operating lease for some leased
facilities expiring December 2006. These amounts do not include a
six-month prepaid operating lease for office space in Seattle, Washington.
(2) Open purchase orders primarily for raw materials, component parts, and
other supplies that the Company uses to manufacture its products.
We have historically been able to fund working capital and capital expenditures
from operations, and expect to be able to finance our 2005 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. 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 or
product lines, extensive investment in product R&D activities, or spending to
develop markets for 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. Should the need arise, we would attempt
to obtain such funds from traditional institutional debt financing or other
third party financing.
The Company's initiative in 2003 to obtain a mass-selective detector for use in
a new product led to the strategic alliance with III and our investment in and
funding of III's development. With the purchase of the assets of III, the
Company anticipates spending at least $1,500,000 to complete the development of
a commercial product or products based on the technology and incorporate that
technology into our products. The Company anticipates using its own employees
and certain key contractors to attempt to complete the product development. Such
research efforts are experimental and may cost more than planned. Nevertheless,
we believe that we have the working capital to maintain our commitment to this
development effort.
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. The major goals in our efforts are (i) to
position the Company to serve new markets, (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. 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. 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.
The Company invests excess funds generated from operations in money market
funds, treasury bills and investment grade securities rated by Moody's or
Standard & Poor's. The Company's investment portfolio is primarily invested in
short-term securities and preferred stocks with at least an investment grade
rating to minimize credit risk. These investments are exposed to a variety of
market risks, including changes in interest rates. The fair value of the
Company's investments in debt and equity securities at December 31, 2003 was
$6,135,000, and the fair value at
17
December 31, 2004 was $8,586,000. Year-to-date unrealized losses in the fair
value of some of those investments are primarily due to recent increases in
interest rates. The Company's investment policy is to manage its investment
portfolio to preserve principal and liquidity while maximizing the return on the
investment portfolio by investing in multiple types of investment grade
securities. Although changes in interest rates may affect the fair value of the
investment portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments were sold. Approximately $18,000
was realized as a loss on the sales of such investments during 2004.
Since 1995, the Company has repurchased an aggregate of 1,755,978 shares of
treasury stock at an average purchase price of $4.13 per share, pursuant to the
Company's stock repurchase program. No repurchases were made in 2004, but the
Company may purchase up to an additional 19,022 shares under the current stock
repurchase program. The Company may seek an expansion of this program in the
future if it believes repurchases continue to be in the best interests of the
Company. Expansion of this program would also be funded from cash from
operations.
The Company conducts some operations in leased facilities under an operating
lease expiring on November 30, 2006, and a six-month, prepaid lease for office
space in Seattle, Washington. Future minimum rental payments under this lease
are $189,000 for 2005 and $171,000 for 2006.
SEGMENT INFORMATION The Company manages its businesses primarily on a product
and services basis. The Company reports its operations as a single segment. See
Note 15 of the Company's financial statements for additional segment data.
Other than the items discussed above, management is not aware of other
commitments or contingent liabilities, which would have a materially adverse
effect on the Company's financial condition, results of operations, or cash
flows.
RISK FACTORS AND CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
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, concerning, among other things, (i) possible or assumed future
results of operation, contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," (ii) prospects for the Company's
business products; and (iii) other matters that are not historical facts. These
forward-looking statements are identified by their use of terms and a phrase
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. 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.
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 2004 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
OUR FAILURE TO IMPLEMENT AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN OUR
BUSINESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND STOCK PRICE. We believe that we currently
have adequate internal controls over financial reporting but we are still
exposed to potential risks resulting from new requirements that we evaluate the
effectiveness of such internal controls under Section 404 of the Sarbanes-Oxley
Act of 2002. As a non-accelerated filer, Section 404 of the Sarbanes-Oxley Act
of 2002 requires that we include in our annual report on Form 10-K for December
31, 2006 our assessment of the effectiveness of our internal controls over
financial reporting. In addition, our independent auditors will be required to
attest to whether our assessment is free of material misstatement and documented
in an acceptable form and separately report on whether they believe we maintain,
in all material respects, effective control over financial reporting as of
December 31, 2006. We are currently documenting our internal control systems and
procedures and implementing improvements in order to comply with the assessment
and attestation requirements of Section 404. The evaluation and attestation
processes required by Section 404 are new and neither companies nor independent
auditors have significant experience in testing or complying with
18
these requirements. Accordingly, we may encounter problems or delays in
completing the review and evaluation, the implementation of improvements, the
receipt of a report of our independent auditors indicating that management's
assessment of the effectiveness of internal controls over financial reporting is
free of material misstatement and is adequately documented, and the receipt of a
separate report of our independent auditors that we maintain effective internal
controls. While we currently anticipate being able to fully implement the
requirements of Section 404, we cannot be certain as to the timing of completion
of our evaluation, testing and remediation actions or our independent auditors'
audit thereof. If we are not able to implement the requirements of Section 404
in a timely manner or with adequate compliance, we may be unable to conclude on
an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404. The impact thereof on our future
financial performance and the market price of our stock is uncertain, and we
might be subject to sanctions or investigation by regulatory authorities, such
as the Securities and Exchange Commission or the NASDAQ.
FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS OR TAXATION RULES MAY ADVERSELY
AFFECT OUR REPORTED RESULTS OF OPERATIONS. A change in accounting standards or a
change in existing taxation rules can have a significant effect on our reported
results. New accounting pronouncements and taxation rules and varying
interpretations of accounting pronouncements have occurred and may occur in the
future. These new accounting pronouncements and taxation rules may adversely
affect our reported financial results or the way we conduct our business.
Under the newly-issued Statement of Financial Accounting Standards (SFAS) No.
123R, we will be required to account for equity under our stock plans as a
compensation expense, and our net income and net income per share will be
reduced. Currently, we record compensation expense only in connection with
option grants that have an exercise price below fair market value. For option
grants that have an exercise price at fair market value, we calculate
compensation expense and disclose their impact on net income (loss) and net
income (loss) per share, as well as the impact of all stock-based compensation
expense in a footnote to the consolidated financial statements. SFAS No. 123R
requires the Company to adopt the new accounting provisions beginning in our
fourth quarter of 2005, and will require the Company to expense shares issued
under employee stock purchase plans, stock options, restricted stock and stock
appreciation rights, as compensation cost.
THE COMPANY'S PURCHASE OF SUBSTANTIALLY ALL OF THE ASSETS OF III MAY NOT RESULT
IN A SUCCESSFUL PRODUCT. In December 2004, the Company completed the purchase of
certain assets of III, including intellectual property owned and licensed by
III, prototype products, software, and research assets for use in the
development of a portable GC/MS product. As of the acquisition date,
technological feasibility of the in-process technology had not been established,
and the technology had no alternative future use. The development of the
technology into a commercial product or products remains highly dependent on the
remaining efforts to achieve technical viability, rapidly changing customer
markets, uncertain standards for a new product, and significant competitive
threats from several companies. The nature of the efforts to develop this
technology into a commercially viable product consists primarily of planning,
designing, experimenting, and testing activities necessary to determine that the
technology can meet market expectations, including functionality and technical
requirements. Failure to bring the product to market in a timely manner could
result in a loss of market share or a lost opportunity to capitalize on emerging
markets, and could have a material adverse impact on the future prospects of
these R&D efforts. Subsequent to the acquisition, there have been no significant
developments related to the current status of the acquired in-process research
and development projects that would result in material changes to the
assumptions. Failure to achieve the expected levels of revenue and net income
from a product or products based on the acquired III technology will negatively
impact the return on investment expected at the time that the purchase was
completed and may result in impairment charges. Additionally, the value of other
intangible assets acquired may become impaired.
THE COMPANY'S INCREASED R&D EFFORTS MAY NOT RESULT IN PRODUCTS THAT ARE
SUCCESSFUL IN THE MARKETPLACE. During 2003, the Company announced its plan to
increase spending on R&D for potential new products. The Company feels that to
maintain its market share for existing products and to gain market share in new
markets such as homeland security, that it must increase its R&D spending. The
Company expects its R&D expense to be higher than its historical average. Such
R&D spending may involve new technology or updates of existing technology. There
is no assurance that such R&D efforts to develop new technology will be
successful, or that if R&D efforts do yield new products, that such products
will be successful in the marketplace once introduced.
19
THE COMPANY'S OPERATING RESULTS AND FINANCIAL CONDITION COULD BE HARMED IF THE
INDUSTRIES, INTO WHICH IT SELLS ITS PRODUCTS, DEMAND FEWER PRODUCTS SIMILAR TO
PRODUCTS SOLD BY THE COMPANY. Visibility into our markets is limited. Any
decline in our customers' markets or in general economic conditions would likely
result in a reduction in demand for our products and services. The environmental
instrument markets, in which the Company competes, have been flat or declining
over the past several years. 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 consolidated financial
position, results of operations, cash flows, and stock price. The Company has
identified a number of strategies it believes will allow it to grow its business
despite this decline, including acquiring complementary businesses, developing
new applications for its technologies, and strengthening its presence in
selected geographic markets. No assurance can be given that the Company will be
able to successfully implement these strategies, or if successfully implemented,
that these strategies will result in growth of the Company's business.
OUR ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY
RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED. The Company's
success is highly dependent upon implementation of its acquisition strategy.
Certain businesses acquired and strategic alliances by the Company in the past
years have produced net operating losses or low levels of profitability,
including the strategic alliance with Intelligent Ion, Inc. and the acquisition
of General Analysis Corporation. Businesses the Company may seek to acquire in
the future may also be marginally profitable or unprofitable. For any acquired
business to achieve the level of profitability desired by the Company, the
Company must successfully change the acquired companies' operations and improve
their market penetration. No assurance can be given that the Company will be
successful in this regard. In addition, promising acquisitions are difficult to
identify and complete for a number of reasons, including competition among
prospective buyers and the need for regulatory approvals, including antitrust
approvals. There can be no assurance that the Company will be able to complete
pending or future acquisitions. In order to finance such acquisitions, it may be
necessary for the Company to raise additional funds either through public or
private financing. Debt financing, if available, may be on terms that are
unfavorable to the Company, and equity financing may result in significant
dilution to the Company's shareholders.
As a result of such transactions, the Company's financial results may differ
from the investment community's expectations in a given quarter. In addition,
acquisitions and strategic alliances may require the Company to integrate a
different company culture, management team, and business infrastructure. The
Company may have difficulty developing, manufacturing, and marketing the
products of a newly acquired company in a way that enhances the performance of
its combined businesses or product lines to realize the value from expected
synergies. Depending on the size and complexity of an acquisition, the Company's
successful integration of the entity depends on a variety of factors including;
the retention of key employees, the management of facilities and employees in
separate geographic areas, the retention of key customers, and the integration
or coordination of different research and development, product manufacturing and
sales programs, and facilities. All of these efforts require varying levels of
management resources that may divert the Company's attention from other business
operations. If the Company does not realize the expected benefits or synergies
of such transactions, its consolidated financial position, results of
operations, and stock price could be negatively impacted.
TECHNOLOGICAL CHANGE COULD CAUSE THE COMPANY'S PRODUCTS TO BECOME
NON-COMPETITIVE OR OBSOLETE. 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 noncompetitive or obsolete. There can be no
assurance that the Company's products will not become noncompetitive 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
that apply specifically to older technologies and the general unfamiliarity of
users with new technologies.
CONSOLIDATION IN THE ENVIRONMENTAL INSTRUMENT MARKET AND CHANGES IN
ENVIRONMENTAL REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS. One of
the important markets for the Company's products is environmental analysis.
During the past five years, there has been a contraction in the market for
analytical instruments used for environmental analysis. This contraction has
caused consolidation in the companies 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
20
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.
REDUCED CAPITAL SPENDING BY THE COMPANY'S CUSTOMERS COULD HARM ITS BUSINESS. The
Company's customers include various government agencies and public and private
research institutions, which accounted for 24% of the Company's sales in 2004,
as well as pharmaceutical and chemical companies and laboratories. 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, which 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.
THE COMPANY'S RESULTS OF OPERATIONS ARE DEPENDENT ON ITS RELATIONSHIP WITH
AGILENT TECHNOLOGIES, INC. (AGILENT). Prior to December 1, 2000, the Company had
a Value Added Reseller (VAR) Agreement with Agilent that was not renewed by
Agilent. Agilent cited the increasing competitive nature of the Company's
products with their products as the reason for not renewing the VAR agreement.
On December 1, 2000, the Company entered into an OEM agreement with Agilent,
subsequently renewed in December 2001, 2002, 2003 and 2004. The original
equipment manufacturers (OEM) agreement does not provide for marketing
cooperation, and therefore, the Company and Agilent compete for the same
business. No assurances can be made that Agilent will renew the OEM agreement,
nor that the Company will sustain sales levels in the future under the Agilent
OEM agreement. As the Company continues to evaluate its alternatives, it may be
determined that continuing the OEM agreement is not its best strategy. The OEM
agreement is renewable on an annual basis, and there is no assurance that it
will be renewed in future years. Failure to renew the agreement would place at
risk a substantial part of the Company's sales of GC systems and would have a
material adverse effect on its financial condition and results of operations.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD SUBJECT THE COMPANY TO
SIGNIFICANT EXPENSE. The Company has agreements relating to the sale of products
to government entities and is subject to various statutes and regulations that
apply to companies doing business with the government. The Company is also
subject to investigation for compliance with the terms of government contracts.
Non-compliance, although inadvertent, may result in legal proceedings or
liability, which may be significant. Several of the Company's product lines are
subject to significant international, federal, state, local, health, safety,
packaging, product content, and labor regulations. In addition, many of the
Company's products are regulated or sold into regulated industries, requiring
compliance with additional regulations in marketing these products. Significant
expenses may be incurred to comply with these regulations or remedy past
violations of these regulations. Any failure to comply with applicable
government regulations could also result in cessation of portions or all of the
Company's operations, impositions of fines, and restrictions on the ability to
carry on or expand operations.
ENVIRONMENTAL CONTAMINATION CAUSED BY ONGOING OPERATIONS COULD SUBJECT THE
COMPANY TO SUBSTANTIAL LIABILITIES IN THE FUTURE. Some of the Company's
manufacturing processes involve the use of substances regulated under various
international, federal, state, and local laws governing the environment. The
Company could be subject to liabilities for environmental contamination, and
these liabilities may be substantial. Although the Company's policy is to apply
strict standards for environmental protection at its sites inside and outside
the United States, even if not subject to regulations imposed by foreign
governments, the Company may not be aware of all conditions that could subject
it to liability.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS MAY CAUSE THE COMPANY TO INCUR
SIGNIFICANT EXPENSES, AND FAILURE TO MAINTAIN COMPLIANCE WITH CERTAIN
GOVERNMENTAL REGULATIONS MAY HAVE A NEGATIVE IMPACT ON THE COMPANY'S BUSINESS
AND RESULTS OF OPERATIONS. The Company's business is subject to various
significant international, federal, state, and local, health and safety,
packaging, product content, and labor regulations. These regulations are
complex, change frequently and have tended to become more stringent over time.
For example, the Company's chemical analysis products are used in the drug
design and production processes to test compliance with the Toxic Substances
Control Act, the Food, Drug, and Cosmetic Act, and similar regulations.
Therefore, the Company must continually adapt its chemical analysis products to
changing regulations. The Company may be required to incur significant expenses
to comply with these regulations or to remedy violations of these regulations.
Any failure by the Company to comply with applicable government regulations
could also result in cessation of its operations or portions of its operations,
product recalls or impositions of fines and restrictions on its ability to carry
on or expand its operations. In
21
addition, because many of the Company's products are regulated or sold into
regulated industries, it must comply with additional regulations in marketing
its products.
The Company's products and operations are also often subject to the rules of
industrial standards bodies, like the International Standards Organization, as
well as regulation of other agencies such as the U. S. Federal Communications
Commission. The Company also must comply with work safety rules. If the Company
fails to adequately address any of these regulations, its business will be
harmed.
ECONOMIC, POLITICAL, AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES COULD
ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS. Sales outside the U. S.
accounted for approximately 30% of the Company's revenues in 2004. The Company
expects that international sales will continue to account for a significant
portion of the Company's revenues in the future. Sales to the Company's
international customers are subject to a number of risks including interruption
to transportation flows for delivery of finished goods to its customers; changes
in foreign currency exchange rates; changes in political or economic conditions
in a specific country or region; trade protection measures and import or export
licensing requirements; negative consequences from changes in tax laws;
differing protection of intellectual property; and unexpected changes in
regulatory requirements. 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.
THE COMPANY FACES COMPETITION FROM THIRD PARTIES IN THE SALE OF ITS PRODUCTS.
The Company encounters and expects to continue to encounter intense competition
in the sale of its products. The Company believes that the principal competitive
factors affecting the market for its products include product performance,
price, reliability, and customer service. The Company's competitors include
large multinational corporations and operating units of such corporations. Most
of the Company's competitors have substantially greater financial, marketing,
and other resources than those of the Company. Therefore, 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.
THE COMPANY COULD INCUR SUBSTANTIAL COSTS IN PROTECTING AND DEFENDING ITS
INTELLECTUAL PROPERTY, AND LOSS OF PATENT RIGHTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS. The Company holds patents relating to various
aspects of its products and believes that proprietary technical know-how is
critical to many of its products. Proprietary rights relating to the Company's
products are protected from unauthorized use by third parties only to the extent
that they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. There can be no assurance that patents will issue
from any pending or future patent applications owned by or licensed to the
Company or that the claims allowed under any issued patents will be sufficiently
broad to protect the Company's technology. In the absence of patent protection,
the Company may be vulnerable to competitors who attempt to copy the Company's
products or gain access to its trade secrets and technical know-how. Proceedings
initiated by the Company to protect its proprietary rights could result in
substantial costs to the Company. There can be no assurance that competitors of
the Company will not initiate litigation to challenge the validity of the
Company's patents, or that they will not use their resources to design
comparable products that do not infringe upon the Company's patents. There may
also be pending or issued patents held by parties not affiliated with the
Company that relate to the Company's products or technologies. The Company may
need to acquire licenses to, or contest the validity of, any such patents. There
can be no assurance that any license required under any such patent would be
made available on acceptable terms or that the Company would prevail in any such
contest. The Company could incur substantial costs in defending itself in suits
brought against it or in suits in which the Company may assert its patent rights
against others. If the outcome of any such litigation is unfavorable to the
Company, the Company's business and results of operations could be materially
and adversely affected. In addition, the Company relies on trade secrets and
proprietary technical know-how that it seeks to protect, in part, by
confidentiality agreements with its collaborators, employees, and consultants.
There can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors.
THE COMPANY'S FLUCTUATING QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT
STOCK PRICE. The Company cannot reliably predict future revenue and
profitability, and unexpected changes may cause adjustments to the Company's
operations. Since a high proportion of the Company's costs are fixed, due in
part to significant cost to
22
maintain customer support, research and development and manufacturing costs,
relatively small declines in revenues could disproportionately affect the
Company's quarterly operating results, and in turn, cause declines in the
Company's stock price. Other factors that could affect quarterly operating
results include lower demand for and market acceptance of products due to
adverse changes in economic activity or conditions in the Company's major
markets; lower selling prices due to competitive pressures; unanticipated
delays, problems, or increased costs in the introduction of new products or
manufacture of existing products; changes in the relative portion of revenue
represented by the Company's various products and customers; and competitors'
announcements of new products, services or technological innovations. Any one of
these factors, individually or in combination, could cause the stock price of
the Company to fluctuate greatly.
ALTHOUGH INFLATION HAS NOT HAD A MATERIAL IMPACT ON THE COMPANY'S OPERATIONS,
THERE IS NO ASSURANCE THAT INFLATION WILL NOT ADVERSELY AFFECT ITS OPERATIONS IN
THE FUTURE. The Company believes that competition based on price is a
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. The
prices of some components purchased by the Company have increased in the past
several years due in part to decreased volume. Certain other material and labor
costs have also increased, but the Company believes that these increases are
approximately consistent with overall inflation rates. Competing companies are
larger, better trained, and they cover larger areas geographically.
FAILURE OF SUPPLIERS TO DELIVER SUFFICIENT QUANTITIES OF PARTS IN A TIMELY
MANNER COULD CAUSE THE COMPANY TO LOSE SALES AND, IN TURN, ADVERSELY AFFECT THE
COMPANY'S RESULTS OF OPERATIONS. The Company may be materially and adversely
impacted if sufficient parts are not received in time to meet manufacturing
requirements. Factors that may result in manufacturing delays include certain
parts that may be available only from a single supplier or a limited number of
suppliers; key components may become unavailable and may be difficult to replace
without significant reengineering of the Company's products; suppliers may
extend lead times, limit supplies, or increase prices due to capacity
constraints or other factors. Should the Company reduce purchase orders to its
suppliers and its sales increase rapidly, its suppliers may not react quickly
enough or may refuse to expedite shipments of parts to use because of the
Company's previous reduction in requirements. If sufficient parts are not
received in time to meet manufacturing requirements, then the Company will not
be able to meet its obligations to deliver goods to its customers and may cause
the Company to lose sales.
THE COMPANY'S INABILITY TO ADJUST ITS ORDERS FOR PARTS OR ADAPT ITS
MANUFACTURING CAPACITY IN RESPONSE TO CHANGING MARKET CONDITIONS COULD ADVERSELY
AFFECT THE COMPANY'S EARNINGS. The Company's earnings could be harmed if it is
unable to adjust its orders for parts to respond to market fluctuations. In
order to secure components for the production of products, the Company may enter
into non-cancelable purchase commitments with vendors, or at times make advance
payments to suppliers, which could impact its ability to adjust its inventory to
declining market demands. Prior commitments of this type have resulted in an
excess of parts as demand for certain of the Company's products has decreased.
If the demand for the Company's products continues to decrease, it may
experience an excess of parts and be forced to incur additional charges. Certain
parts may be available only from a single supplier or a limited number of
suppliers. In addition, suppliers may cease manufacturing certain components
that are difficult to substitute without significant reengineering of the
Company's products. Suppliers may also extend lead times, limit supplies, or
increase prices due to capacity constraints or other factors.
Additionally, because the Company cannot immediately adapt its production
capacity and related cost structures to rapidly changing market conditions, when
demand does not meet the Company's expectations, its manufacturing capacity will
likely exceed its production requirements.
IF THE COMPANY SUFFERS LOSS TO OUR FACILITIES OR DISTRIBUTION SYSTEM DUE TO
CATASTROPHE, OUR OPERATIONS COULD BE SERIOUSLY HARMED. Our facilities and
distribution system are subject to catastrophic loss due to fire, flood,
terrorism, or other natural or man-made disasters. Our production facilities and
corporate headquarters are located in College Station, Texas, and we also have
production facilities in Alabama. If any of these facilities were to experience
a catastrophic loss, it could disrupt our operations, delay production,
shipments, and revenue and result in large expenses to repair or replace the
facilities. Although we carry insurance for property damage and business
interruption, we do not carry insurance or financial reserves for interruptions
or potential losses arising from earthquakes or terrorism.
23
THE INTRODUCTION OF NEW PRODUCTS RESULTS IN RISKS RELATING TO START UP OF SUCH
PRODUCTS, CUSTOMER ACCEPTANCE, EMPLOYEE TRAINING, DISTRIBUTOR TRAINING, AND
PHASE OUT OF OLD PRODUCTS. The development and introduction of new products
requires the execution of a number of steps, any one of which if not executed
properly can result in lost sales, market share, and damage to our reputation
all of which might result in operating losses and, accordingly, our stock price
could decline.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company is exposed to a variety of market risks, including
changes in interest rates and the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to changes in the market value of its investments.
The fair value of the Company's investments in debt and equity securities at
December 31, 2004 and December 31, 2003 was $8,586,000 and $6,135,000,
respectively. Year-to-date unrealized losses in the fair value of some of those
investments are primarily due to recent increases in interest rates. The
Company's investment policy is to manage its investment portfolio to preserve
principal and liquidity while maximizing the return on the investment portfolio
by investing in multiple types of investment grade securities. The Company's
investment portfolio is primarily invested in short-term securities, with at
least an investment grade rating to minimize credit risk, and preferred stocks.
Although changes in interest rates may affect the fair value of the investment
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments were sold. Approximately $18,000 was realized
as a loss on the sales of such investments during the second quarter.
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. Management
believes it has provided financial information (both audited and unaudited) that
is representative of the Company's operations, reliable on a consistent basis
throughout the periods presented, and relevant for a meaningful appraisal of the
Company. The financial statements have been prepared in accordance with
generally accepted accounting principles. Where necessary, they reflect
estimates based on management's judgment.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are safeguarded, that the books and
records properly reflect all transactions, and that qualified personnel
implement policies and procedures. Management periodically reviews the Company's
accounting and control systems.
The Company's Audit Committee, composed of at least three members of the Board
of Directors who are not employees of the Company, meets regularly with
representatives of management and the independent accountants to monitor the
functioning of the accounting and control systems and to review the results of
the audit performed by the independent accountants. The independent accountants
and Company employees have full and free access to the Audit Committee without
the presence of management.
The Audit Committee has full authority and responsibility to oversee the
appointment, termination, funding, evaluation, and independence of the
independent auditors engaged by the Company.
The independent accountants conduct an objective, independent examination of the
financial statements. Their report appears as a part of this Annual Report on
Form 10-K.
24
Report of Independent Registered Public Accounting Firm
Board of Directors
O. I. Corporation:
We have audited the accompanying consolidated balance sheets of O. I.
Corporation (an Oklahoma corporation) and subsidiary as of December 31, 2004 and
2003, and the related consolidated statements of income, stockholders' equity,
and cash flow for each of the three years in the period ended December 31, 2004.
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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O. I. Corporation
and subsidiary as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
GRANT THORNTON LLP
Houston, Texas
February 22, 2005
25
O.I. CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
-------------------------------
2004 2003
ASSETS ------------- -------------
Current assets:
Cash and cash equivalents $ 1,541,000 $ 2,869,246
Accounts receivable-trade, net of allowance for doubtful accounts of
$271,344 and $217,361, respectively 4,898,290 4,359,555
Investment in sales-type leases-current portion 272,965 234,680
Investments 8,585,532 6,135,565
Inventories 5,011,794 3,074,649
Current deferred income tax assets 697,812 727,416
Other current assets 181,551 172,081
------------- -------------
Total current assets 21,188,944 17,573,192
Investment in unconsolidated investee -- 975,814
Property, plant and equipment, net 3,404,240 3,434,333
Investment in sales-type leases, net of current 275,016 222,098
Long-term deferred income tax assets 286,597 295,818
Intangible assets, net 208,263 107,003
Other assets 23,641 99,132
------------- -------------
Total assets $ 25,386,701 $ 22,707,390
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,896,793 $ 1,306,075
Accrued liabilities 3,302,812 3,162,466
------------- -------------
Total current liabilities 5,199,605 4,468,541
------------- -------------
Commitments and contingencies
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 4,326,097 4,338,100
Treasury stock, 1,295,967 and 1,354,752 shares, respectively, at cost (5,660,918) (5,930,742)
Retained earnings 21,016,173 19,254,036
Accumulated other comprehensive income, net 95,406 167,117
------------- -------------
20,187,096 18,238,849
------------- -------------
Total liabilities and stockholders' equity $ 25,386,701 $ 22,707,390
============= =============
The accompanying notes are an integral part of these financial statements.
26
O.I. CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net Revenues:
Products $ 25,562,048 $ 22,210,242 $ 20,329,919
Services 2,917,566 2,995,807 3,353,075
------------ ------------ ------------
Total net revenues 28,479,614 25,206,049 23,682,994
Cost of revenues:
Products 12,563,276 11,824,320 11,635,711
Services 1,448,772 1,461,350 1,643,659
------------ ------------ ------------
Total cost of revenues 14,012,048 13,285,670 13,279,370
------------ ------------ ------------
Gross profit 14,467,566 11,920,379 10,403,624
Selling, general and administrative expenses 8,218,685 7,224,661 7,257,742
Research and development expenses 2,998,044 2,697,851 2,246,189
Acquired in-process research and development 483,140 -- --
Impairment of intangible assets -- -- 346,000
------------ ------------ ------------
Operating income 2,767,697 1,997,864 553,693
Other income:
Interest income, net 102,990 43,860 59,208
Other income 322,810 367,849 258,348
Loss from unconsolidated investee (207,914) (24,186) --
Impairment of investment in unconsolidated investee (767,900) -- --
------------ ------------ ------------
Income before income taxes 2,217,683 2,385,387 871,249
Provision for income taxes (455,546) (750,664) (213,186)
------------ ------------ ------------
Net income $ 1,762,137 $ 1,634,723 $ 658,063
============ ============ ============
Basic earnings per share $ 0.63 $ 0.59 $ 0.24
============ ============ ============
Diluted earnings per share $ 0.61 $ 0.58 $ 0.24
============ ============ ============
Weighted average number of shares outstanding:
Basic shares 2,793,619 2,756,430 2,755,634
Diluted shares 2,874,194 2,797,421 2,778,478
The accompanying notes are an integral part of these financial statements.
27
O.I. CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 1,762,137 $ 1,634,723 $ 658,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 540,825 461,340 487,317
Acquired in-process research & development 483,140 -- --
Impairment of intangible assets -- -- 346,000
Loss on obsolete inventory 42,461 151,639 200,000
Deferred income taxes 78,157 87,865 (311,653)
Gain on disposition of property (7,805) (12,820) (26,941)
Loss from unconsolidated investee 207,914 24,186 --
Impairment of investment in Intelligent Ion, Inc. 767,900 -- --
Changes in assets and liabilities
Accounts receivable (538,734) (585,125) 480,303
Inventories (1,979,607) 911,835 235,235
Other current assets and investments in sales-type
leases (63,396) (26,598) 36,375
Accounts payable 590,717 (6,493) (17,434)
Accrued liabilities 140,346 43,909 892,113
------------ ------------ ------------
Net cash provided by operating activities 2,024,055 2,684,461 2,979,378
------------ ------------ ------------
Cash flows from investing activities:
Purchase of Intelligent Ion, Inc. assets (588,140) -- --
Purchase of property plant, and equipment (504,090) (483,904) (480,148)
Proceeds from sale of assets 10,422 25,403 36,949
Purchase of investments (4,018,650) (3,055,750) (2,683,843)
Maturity/Proceeds from sales of investments 1,442,281 840,000 900,000
Investment in unconsolidated investee -- (1,000,000) --
Cash Value of Life Insurance 53,573 -- --
Change in other assets (5,520) 1,491 (6,609)
------------ ------------ ------------
Net cash (used in) investing activities (3,610,124) (3,672,760) (2,233,651)
------------ ------------ ------------
Cash flows from financing activities:
Purchase of treasury stock -- (143,105) --
Proceeds from issuance of common stock 257,823 85,410 29,435
------------ ------------ ------------
Net cash (used in) provided by financing activities 257,823 (57,695) 29,435
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,328,246) (1,045,994) 775,162
Beginning of year 2,869,246 3,915,240 3,140,078
------------ ------------ ------------
End of year $ 1,541,000 $ 2,869,246 $ 3,915,240
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during year for:
Income taxes 635,021 790,466 110,000
Non-cash investing and financing activities:
Offset of notes 420,809 -- --
The accompanying notes are an integral part of these financial statements.
28
O. I. CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Com- Total
-------------------- Paid-In Treasury Retained prehensive Stockholders'
Shares Amount Capital Stock Earnings Income/(Loss) Equity
--------- --------- ----------- ----------- ------------ ------------- -------------
Balance, December 31, 2001 4,103,377 $ 410,338 $ 4,329,379 $(5,893,761) $ 16,961,250 $ 41,689 $ 15,848,895
Issuance of 3,100 shares from treasury
for exercise of stock options (941) 13,073 12,132
Issuance of 3,562 shares from treasury to
Employee Stock Purchase Plan 2,438 14,865 17,303
Comprehensive income (loss):
Unrealized gain on investments, net of
deferred tax benefit of $7,675 14,898
Net income 658,063
Total comprehensive income (loss) 672,961
--------- --------- ----------- ----------- ------------ ------------- ------------
Balance, December 31, 2002 4,103,377 410,338 4,330,876 (5,865,823) 17,619,313 56,587 16,551,291
Purchase of 28,600 shares of treasury
stock (143,105) (143,105)
Issuance of 16,300 shares from treasury
for exercise of stock options 5,495 66,194 71,689
Issuance of 2,760 shares from treasury to
Employee Stock Purchase Plan 1,729 11,992 13,721
Comprehensive income (loss):
Unrealized gain (loss) on investments,
net of deferred tax benefit of $59,635 110,530
Net income 1,634,723
Total comprehensive income (loss) 1,745,253
--------- --------- ----------- ----------- ------------ ------------- ------------
Balance, December 31, 2003 4,103,377 410,338 4,338,100 (5,930,742) 19,254,036 167,117 18,238,849
Issuance of 57,301 shares from treasury
for exercise of stock options (16,001) 252,022 236,021
Issuance of 2,584 shares from treasury to
Employee Stock Purchase Plan 3,998 17,802 21,800
Comprehensive income (loss):
Unrealized gain (loss) on investments,
net of deferred tax expense of $30,499 (71,711)
Net income 1,762,137
Total comprehensive income (loss) 1,690,426
--------- --------- ----------- ----------- ------------ ------------- ------------
Balance, December 31, 2004 4,103,377 $ 410,338 $ 4,326,097 $(5,660,918) $ 21,016,173 $ 95,406 $ 20,187,096
========= ========= =========== =========== ============ ============= ============
The accompanying notes are an integral part of these financial statements.
29
O. I. CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
O. I. Corporation, an Oklahoma corporation, was organized in 1963. O.I.
Corporation designs, manufactures, markets, and services analytical, monitoring,
and sample preparation products, components, and systems used to detect,
measure, and analyze chemical compounds.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America, and include the accounts of O. I. Corporation and its
wholly owned subsidiary (collectively, the "Company"). All significant
intercompany transactions and balances have been eliminated in the consolidated
financial statements. The Company used the equity method to account for its
unconsolidated investee (see further discussion below).
REVENUE RECOGNITION The Company derives revenues from three sources -- system
sales, parts 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 has 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 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. Deferred revenue from such system sales is presented as unearned
revenues in accrued liabilities in the accompanying consolidated balance sheets.
Our 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 contract. Unearned extended warranty revenue is included in
unearned revenues in accrued liabilities in the accompanying consolidated
balance sheets.
SHIPPING AND HANDLING COSTS Shipping and handling costs are included in products
cost of revenues.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid cash
investment instruments with an original maturity of three months or less to be
cash equivalents. Included in cash and cash equivalents at December 31, 2004 and
2003 are uninsured temporary cash investments in money market funds of $93,000
and $702,000. Additionally, the Company had at December 31, 2004 and 2003,
$52,000 and $1,309,000, respectively of cash balances in excess of the Federal
Deposit Insurance Corporation limits.
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 may
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 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.
INVESTMENTS The Company accounts for its investments using Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This standard requires that certain
debt and equity securities be adjusted to market value at the end of each
accounting period. The Company invests in debt securities and preferred stocks.
The Company's investments as of December 31, 2004 and 2003 consisted of
preferred
30
stock investments, and medium-term commercial notes. These investments were
classified as available-for-sale and are stated at fair value at December 31,
2004 and 2003. The Company also had six-month Treasury bills at December 31,
2004 that were classified as available-for-sale. The unrealized gain (loss) on
investments is reported net of tax as accumulated other comprehensive income
(loss) in the accompanying consolidated statements of stockholders' equity.
Realized gains and losses on sales of investments are determined on a specific
identification basis and included in the consolidated statements of income.
INVESTMENT IN SALES-TYPE 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 typically expire over a four-year
period. The Company recognizes as revenues the principal portion of sales-type
leases upon initiation of the lease. Interest is deferred and recognized as
revenues over the initial term of the lease. Security deposits are deferred
until the lease expires and either recognized as revenues or returned to the
customer, as appropriate.
INVENTORIES Inventories consist of electronic equipment and various components
and are stated at the lower of cost or market. Cost is determined on a first-in,
first-out basis. The Company maintains a reserve for inventory obsolescence and
regularly evaluates its inventory. Items with no movement in six months or more
are reserved or written off. The Company also provides impairments for items
that have realizable value below cost.
INVESTMENT IN UNCONSOLIDATED INVESTEE The Company's investment in Intelligent
Ion, Inc. ("III") represented approximately 10% ownership on a fully diluted
basis. However, the Company had the right to appoint two of the five total
directors to serve on III's Board of Directors. Therefore, the Company accounted
for its investment in III preferred shares using the equity method of
accounting.
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is recorded at
cost and depreciated over the estimated useful lives of 3 to 40 years using the
straight-line method. Repairs and maintenance are expensed as incurred.
INTANGIBLE ASSETS Intangible assets primarily include patents that are amortized
on a straight-line basis over their estimated useful lives, seventeen years.
U.S. GAAP requires that long-lived assets to be held and used, including
intangible assets, be reviewed for impairment whenever changes in circumstances
indicate that the carrying value may not be recoverable. The carrying value is
considered impaired when the anticipated separately identifiable undiscounted
cash flows from such an asset are less than the carrying value of the asset. In
that event, a loss is recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset.
PRODUCT WARRANTIES Products are sold with warranties ranging from 90 days to one
year, and extended warranties may be purchased for some products. The Company
establishes a reserve for warranty expenditures and then adjusts the amount of
reserve, annually, if actual warranty experience is different than accrued. 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.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as
incurred.
ADVERTISING COSTS All advertising costs are expensed as incurred and included in
selling and administrative expenses in the consolidated statements of income.
Advertising expenses for 2004, 2003 and 2002 were $201,560, $183,392 and
$220,921, respectively.
INCOME TAXES The Company provides for deferred taxes in accordance with SFAS No.
109, Accounting for Income Taxes, which requires the Company to use 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. The provision for income taxes is
based on income before income taxes as reported in the accompanying consolidated
statements of income.
FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments" defines the fair value of financial instruments as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. Due to their near-term maturities, the carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable are considered
equivalent to fair value. The Company does not have any off-balance sheet
financial instruments.
CONCENTRATIONS 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, investment grade domestic corporate bonds, and highly rated corporate
preferred stocks. The Company's investments are subject to fluctuations based on
interest rates and trading conditions prevailing in the marketplace. The Company
sells its products primarily to large corporations, environmental testing
laboratories, and governmental agencies. The majority of its customers are
located in the U. S. and all sales are denominated in U.S.
31
dollars. The Company performs ongoing credit evaluations of its customers to
minimize credit risk. However, agencies of the U.S. government constitute a
significant percentage of the Company's revenues (See Note 15). Any federal
budget cuts or changes in regulations affecting the U.S. chemical warfare
programs or the U.S. Environmental Protection Agency may have a negative impact
on the Company's future revenues.
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
2,793,619 in 2004, 2,756,430 in 2003, and 2,755,634 in 2002. The weighted
average number of shares used in the diluted earnings per share computation was
2,874,194 in 2004, 2,797,421 in 2003, and 2,778,478 in 2002. At December 31,
2003, and 2002, options to acquire 84,400, and 133,700 shares at weighted
average exercise prices of $6.24, and $5.88, respectively, were not included in
the computations of dilutive earnings per share as their effect would be
anti-dilutive. There were no anti-dilutive options outstanding for the year
ended December 31, 2004.
COMPREHENSIVE INCOME (LOSS) Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income. This Statement established standards
for reporting and display of comprehensive income and its components. Net income
and unrealized gains and losses on available-for-sale investments are the
Company's only components of comprehensive income (loss).
STOCK BASED COMPENSATION At December 31, 2004, the Company has three stock-based
employee compensation plans, which are described more fully in Note 10. 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 SFAS No.
123, Accounting for Stock-Based Compensation.
Year ended December 31
----------------------------------------------
(in thousands)
2004 2003 2002
------- ------- ------
Net income, as reported $ 1,762 $ 1,635 $ 658
Deduct: Total stock-based compensation expense
determined under fair value based method for awards
granted, modified, or settled, net of related tax
effects 72 49 88
------- ------- ------
Pro forma net income $ 1,690 $ 1,586 $ 570
======= ======= ======
Earnings per share:
Basic - as reported $ 0.63 $ 0.59 $ 0.24
Basic - pro forma $ 0.61 $ 0.58 $ 0.21
Diluted - as reported $ 0.61 $ 0.58 $ 0.24
Diluted - pro forma $ 0.59 $ 0.57 $ 0.21
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 2004, 2003, and 2002, respectively: dividend yield of zero for each
year; expected volatility of 27, 37, and 37 percent; risk-free interest rates of
3.10, 3.91, and 1.30 percent; and expected lives of seven years. The weighted
average fair value at the date of grant for options granted during 2004, 2003,
and 2002 was $2.93, $2.25, and $2.09, respectively.
USE OF ESTIMATES The preparation of the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America requires the use of management's estimates. These estimates are
subjective in nature and involve judgments that affect the reported amounts of
assets and liabilities, the disclosure of
32
contingent assets and liabilities at year-end, and the reported amounts of
revenues and expenses during the year. Actual results could differ from those
estimates.
RECLASSIFICATIONS Certain prior period amounts in the consolidated financial
statements have been reclassified for comparative purposes. Such
reclassification had no effect on net revenues or the net income (loss) or the
overall financial condition of the company.
RECENT PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board
(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 Special Purpose Entities in practice and under the FASB
literature that was applied before the issuance of FIN 46R. The adoption of FIN
46R had no effect on the Company's financial statements.
In March 2004, the FASB issued EITF No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments,"
which provides new guidance for assessing impairment losses on debt and equity
investments. The new impairment model applies to investments accounted for under
the cost or equity method and investments accounted for under SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." EITF No.
03-01 also includes new disclosure requirements for cost method investments and
for all investments that are in an unrealized loss position. In September 2004,
the FASB delayed the accounting provisions of EITF No. 03-01; however the
disclosure requirements remain effective and the applicable ones have been
adopted for the year-end 2004. The Company will evaluate the effect, if any, of
EITF 03-01 when final guidance is issued.
In March 2004, the EITF reached a consensus on EITF No. 03-16, "Accounting for
Investments in Limited Liability Companies" ("EITF 03-16"). The EITF concluded
that if investors in a limited liability company have specific ownership
accounts, they should follow the guidance prescribed in Statement of Position
78-9, "Accounting for Investments in Real Estate Ventures", and EITF Topic No.
D-46, "Accounting for Limited Partnership Investments." Otherwise, investors
should follow the significant influence model prescribed in Accounting
Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The adoption of this Issue did not have a material
impact on the Company's financial condition, results of operations or cash
flows.
In December 2004, the FASB issued Statement 123 (revised 2004), Share-Based
Payment (Statement 123(R)). This Statement requires that the costs of employee
share-based payments be measured at fair value on the awards' grant date using
an option-pricing model and recognized in the financial statements over the
requisite service period. This Statement does not change the accounting for
stock ownership plans, which are subject to American Institute of Certified
Public Accountants SOP 93-6, "Employer's Accounting for Employee Stock Ownership
Plans." Statement 123(R) supersedes Opinion 25, Accounting for Stock Issued to
Employees and its related interpretations, and eliminates the alternative to use
Opinion 25's intrinsic value method of accounting, which the Company is
currently using.
Statement 123(R) allows for two alternative transition methods. The first method
is the modified prospective application whereby compensation cost for the
portion of awards for which the requisite service has not yet been rendered that
are outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards
that are modified, repurchased, or cancelled after the adoption date will be
accounted for under the provisions of Statement 123(R). The second method is the
modified retrospective application, which requires that the Company restates
prior period financial statements. The modified retrospective application may be
applied either to all prior periods or only to prior interim periods in the year
of adoption of this statement. The Company is currently determining which
transition method it will adopt and is evaluating the impact Statement 123(R)
will have on its financial position, results of operations, EPS and cash flows
when the Statement is adopted.
33
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43" ("FAS 151"), which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted
material (spoilage) costs to be recognized as current-period charges. It also
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. FAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company is evaluating the impact of this standard on
the consolidated financial statements.
NOTE 2. INVESTMENT IN UNCONSOLIDATED INVESTEE
On December 11, 2003, the Company made a $1,000,000 investment in Intelligent
Ion, Inc. ("III") Series A Preferred Stock, which was a condition precedent to
entering into the Product Purchase Agreement. During the year ended December 31,
2004, the Company recorded approximately $208,000 in losses from its share of
the results of operations of III. The Company decided to write off the remaining
book value of its investment in III, totaling $768,000 as of September 30, 2004
in recognition of an other than temporary decline in its fair value. The Company
based its conclusion primarily on III's inability to meet development milestones
in a timely manner, and its inability to raise funds necessary for working
capital. The write-off was a non-cash charge.
In December 2004, the Company completed the purchase of certain assets of III,
including assignment of license agreements and intellectual property owned by
III, prototype products, software, and research assets. The completion of the
purchase terminated the strategic alliance between the Company and III. The
purchase price was approximately $600,000, which included offset of indebtedness
by the Company of approximately $421,000. The purchase price of certain assets
of III was assigned to the fair value of the assets acquired, including the
in-process research and development. As of the acquisition date, technological
feasibility of the in-process technology had not been established and the
technology had no alternative future use. Accordingly, the in-process research
and development of $483,000 at the date of the acquisition was expensed.
The amount of the purchase price allocated to in-process research and
development was based on widely established valuation techniques. The fair value
assigned to the acquired in-process research and development was determined
using the income approach, which discounts expected future cash flows to present
value. The key assumptions used in the valuation include, among others, expected
completion date of the in-process projects identified as of the acquisition
date, estimated costs to complete the projects, revenue contributions and
expense projections assuming the resulting product has entered the market, and
discount rate based on the risks associated with the development life cycle of
the in-process technology acquired. The discount rate used in the present value
calculations, 20%, is normally obtained from a weighted-average cost of capital
analysis, adjusted upward to account for the inherent uncertainties surrounding
the successful development of the in-process research and development, the
expected profitability levels of such technology, and the uncertainty of
technological advances that could potentially impact the estimates. The
valuation assumptions do not include significant cost savings.
Other than the $105,000 of value assigned to the purchased intangible assets, no
other amounts remain on the Company's consolidated balance sheet related to III
as of December 31, 2004.
NOTE 3. NET INVESTMENT IN SALES-TYPE LEASES
The following lists the components of the net investment in sales-type leases as
of December 31:
2004 2003
------------- -----------
Total minimum lease payments to be received $ 547,981 $ 456,778
Less: Unearned income (68,090) (51,248)
------------- -----------
Net investment in sales-type leases $ 479,891 $ 405,530
============= ===========
34
At December 31, 2004, minimum lease payments for each of the five succeeding
fiscal years are as follows: $272,965 in 2005, $160,804 in 2006, $80,229 in
2007, $33,650 in 2008, and $333 in 2009.
NOTE 4. INVENTORIES
Inventories, which include material, labor, and manufacturing overhead, on
December 31, 2004 and 2003, consisted of the following:
2004 2003
----------- -----------
Raw materials $ 3,055,911 $ 2,261,343
Work-in-process 1,071,486 206,611
Finished goods 884,397 606,695
----------- -----------
$ 5,011,794 $ 3,074,649
=========== ===========
A loss for obsolete inventory was determined in 2003 and 2004 by taking the
total of the inventory related to discontinued products and consistent with the
Company's policy relating to obsolete inventory, the total of other inventory
with no movement in six months including excess, which the Company determined is
no longer saleable based on available market information. The loss for obsolete
inventory totaled approximately $151,000 in 2003 and approximately $42,000 in
2004, and is included in cost of revenues in the consolidated statements of
income.
NOTE 5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at cost on December 31, 2004 and 2003, consisted
of the following:
Estimated Useful Lives 2004 2003
---------------------- ------------ -----------
Land $ 40,462 $ 40,462
Buildings 33 to 40 years 3,845,499 3,845,499
Leasehold improvements 5 years 117,522 80,004
Furniture and equipment 3 to 10 years 3,316,298 2,903,831
------------ -----------
7,319,781 6,869,796
Less accumulated depreciation (3,915,541) (3,435,463)
------------ -----------
$ 3,404,240 $ 3,434,333
============ ===========
Depreciation expenses totaled $531,565 and $451,727 for the years ended December
31, 2004 and 2003, respectively.
NOTE 6. INVESTMENTS
Investments considered available for sale at December 31, 2004 and 2003,
consisted of the following:
2004 2003
----------- -----------
Marketable equity securities $ 4,436,755 $ 4,642,965
Corporate 1,465,855 992,600
Other 500,000 500,000
U.S. Government and federal agency 2,182,922 -
----------- -----------
$ 8,585,532 $ 6,135,565
=========== ===========
35
December 31, 2004
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
Securities Available-for-Sale
Debt securities:
U.S. Government and federal agency $ 2,182,922 $ 0 $ 0 $ 2,182,922
Corporate 1,500,000 0 (34,145) 1,465,855
Other 500,000 0 0 500,000
----------- ---------- ---------- ------------
Total debt securities 4,182,922 0 (34,145) 4,148,777
Marketable equity securities 4,258,055 278,647 (99,947) 4,436,755
----------- ---------- ---------- ------------
Total securities available-for-sale $ 8,440,977 $ 278,647 $ (134,092) $ 8,585,532
=========== ========== ========== ============
December 31, 2003
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
Securities Available-for-Sale
Debt securities:
U.S. Government and federal agency $ 0 $ 0 $ 0 $ 0
Corporate 1,000,000 0 (7,400) 992,600
Other 500,000 0 0 500,000
----------- ---------- ---------- ------------
Total debt securities 1,500,000 0 (7,400) 1,492,600
Marketable equity securities 4,382,358 394,907 (134,300) 4,642,965
----------- ---------- ---------- ------------
Total securities available-for-sale $ 5,882,358 $ 394,907 $ (141,700) $ 6,135,565
=========== ========== ========== ============
The amortized cost and fair value of debt securities by contractual maturity at
December 31,2004 follows:
Available for Sale
---------------------------
Amortized Fair
Cost Value
----------- -----------
Within 1 year $ 2,682,922 $ 2,682,922
Over 1 year through 5 years 1,500,000 1,465,855
----------- -----------
$ 4,182,922 $ 4,148,777
=========== ===========
For the years ended December 31, 2004, 2003 and 2002, proceeds from sales of
securities available for sale amounted to $978,113, $840,000 and $1,085,499,
respectively. Gross realized gains amounted to $70,282, $12,739 and $376 in
2004, 2003 and 2002, respectively. Gross realized losses amounted to $88,802,
$573, and $1,046, respectively.
36
Information pertaining to securities with gross unrealized losses at December
31, 2004, aggregated by investment category and length of time that individual
securities have been in a continuous loss position follows:
Less Than Twelve Months Over Twelve Months
------------------------- -------------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ---------- ---------- ----------
Securities Available for Sale
Debt securities:
U.S. Government and federal agency $ 0 $ 0 $ 0 $ 0
Corporate 26,595 473,405 7,550 992,450
Other 0 0 0 0
---------- ---------- ---------- ----------
Total debt securities 26,595 473,405 7,550 992,450
Marketable equity securities 76,947 887,050 23,000 506,500
---------- ---------- ---------- ----------
Total securities available-for-sale $ 103,542 $1,360,455 $ 30,550 $1,498,950
========== ========== ========== ==========
All investments are at market values based upon quoted market prices as of
December 31.
NOTE 7. INTANGIBLE ASSETS
Intangible assets on December 31, 2004 and 2003, consisted of the following:
2004 2003
-------------------------- --------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Patents $ 254,451 $ (151,188) $ 236,281 $ (129,278)
Rights to Licenses 105,000 -0- -0- -0-
---------- ------------ ---------- ------------
$ 359,451 $ (151,188) $ 236,281 $ (129,278)
========== ============ ========== ============
Amortization expense charged to operations amounted to approximately $23,104,
$9,613, and $38,209, for the years ended December 31, 2004, 2003, and 2002,
respectively, including $12,000 expense during 2004 due to the abandonment of a
patent.
Estimated future amortization expense:
For year ended 12/31/05 $ 14,801
For year ended 12/31/06 $ 14,705
For year ended 12/31/07 $ 14,123
For year ended 12/31/08 $ 13,420
For year ended 12/31/09 $ 13,420
Each year, the Company performs an annual evaluation of the future prospects of
certain products and their related inventory and intangible assets. During 2002,
as a result of this evaluation, the Company recognized an impairment loss
totaling approximately $346,000, which is included in SG&A expense in the
consolidated statements of income. The Company evaluated its remaining
intangible assets in 2003 and in 2004 and determined that no impairment charge
was necessary.
37
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities on December 31, 2004 and 2003, consisted of the following:
2004 2003
----------- ----------
Accrued compensation and other related expenses $ 1,356,481 $ 911,864
Accrued warranties 650,861 707,225
Unearned revenues 301,457 420,617
Unearned revenues - service contracts 413,995 397,230
Unearned revenues/deposits - sales-type leases 168,780 129,514
Other liabilities and accrued expenses 411,238 596,016
----------- ----------
$ 3,302,812 $3,162,466
=========== ==========
NOTE 9. PRODUCT WARRANTY LIABILITIES
The changes in the Company's product warranty liability on December 31, 2004 and
2003 are as follows:
2004 2003
----------- ----------
Liabilities, beginning of year $ 707,225 $ 734,637
Expense for new warranties issued 18,000 55,274
Warranty claims (74,365) (82,686)
----------- ----------
Liabilities, end of year $ 650,860 $ 707,225
=========== ==========
NOTE 10. 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 expired in accordance with its terms on December 31, 1997.
Options granted to purchase 15,300 shares remain outstanding under the 1987 Plan
at December 31, 2004.
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 expired in accordance with its terms in December
2002. Options granted to purchase 188,605 shares remain outstanding under the
1993 plan at December 31, 2004.
The 2003 Incentive Compensation Plan (the "Incentive Plan") was adopted by the
Board of Directors on February 25, 2002, and approved by the Company's
shareholders at the annual meeting of shareholders on May 6, 2002. The Incentive
Plan became effective on January 1, 2003. Key personnel and non-employee
directors of the Company are eligible to participate in the Incentive Plan. The
purpose of the Incentive Plan is to attract, retain, and motivate key employees
and non-employee directors of the Company by providing additional benefits to
such employee and non-employee directors by way of granting stock options, stock
appreciation rights ("SARs"), stock awards and performance awards. The Incentive
Plan is administered by the Compensation Committee. Members of the Compensation
Committee are not eligible to participate under the Incentive Plan, other than
to receive stock option grants and awards of stock on a formula basis as set
forth in the Plan. The 2003 Plan also provides that each non-employee director
will be awarded 3,000 shares of restricted stock upon his initial election to
the Board of Directors.
The aggregate number of shares of the Company's common stock as to which awards
may be granted under the Incentive Plan is 350,000, subject to adjustments as
described in the Incentive Plan; provided, however, that 150,000 shares of
Common Stock shall be reserved for the grant of incentive stock options under
the Incentive Plan. The Incentive Plan terminates on December 31, 2012.
38
The option price for each stock option is determined by the Compensation
Committee, but in no event may the exercise price per share be less than the
market value per share (as defined in the Plan) on the date of the grant;
provided, however, that in the case of an employee who, at the time an incentive
stock option is granted, owns (within the meaning of Section 424(d) of Code)
more than 10% of the total combined voting power of all classes of stock of the
Company or any subsidiary corporation, then the exercise price for the incentive
stock option shall be at least 110% of the market value per share of Common
Stock at the time of grant.
The Company registered the shares of Common Stock issuable pursuant to the
Incentive Plan under the Securities Act of 1933, as amended, on Form S-8 on June
18, 2003.
Activity under the 1987 Plan, the 1993 Plan and the 2003 Plan for each of the
three years in the period ended December 31 was as follows:
WEIGHTED AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
-------- --------------- ----------------
Options outstanding, December 31, 2001 213,306 $ 2.50 - 6.06 $ 4.18
Options granted 135,000 3.82 - 6.52 5.20
Options exercised (3,100) 3.125 - 3.94 3.91
Options forfeited or cancelled (20,900) 2.50 - 6.52 5.14
--------
Options outstanding, December 31, 2002 324,306 2.50 - 6.52 4.35
Options granted 18,500 4.00 - 4.15 4.09
Options exercised (16,300) 3.125 - 6.52 4.64
Options forfeited or cancelled (37,500) 3.875 - 6.52 5.43
--------
Options outstanding, December 31, 2003 289,006 2.50 - 6.52 4.41
Options granted 53,600 7.87 - 8.36 8.29
Options exercised (56,201) 2.50 - 6.52 4.13
Options forfeited or cancelled (13,900) 3.125 - 8.36 4.91
--------
Options outstanding, December 31, 2004 272,705 $ 2.50 - 8.36 $ 5.20
There were 165,476, 175,452, and 114,852, share options exercisable at December
31, 2004, 2003, and 2002, respectively.
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------- -------------------
Weighted Weighted
Weighted Average Average Average
Ranges of Remaining Life in Exercise Exercise
Exercise Prices Shares Years Price Shares Price
- --------------- ------- ----------------- --------- ------- ---------
$2.50 - $4.03 133,172 6.0 $ 3.81 92,944 $ 3.79
$4.12 - $6.52 86,433 5.6 $ 5.47 64,132 $ 5.40
$7.87 - $8.36 53,100 9.1 $ 8.19 8,400 $ 7.50
In 1989, the Company established an Employee Stock Purchase Plan, which the
Board of Directors, in 1998, re-authorized to continue in its same format. 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
Compensation Committee of the Board of Directors administers the plan. 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, 2004, 63,175 shares had been
purchased under the plan.
39
NOTE 11. 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, 2004, no preferred stock had been issued.
The Company's Board of Directors has authorized the Company to repurchase shares
of its common stock through open market purchases or privately negotiated
transactions. Since 1995, the Company has repurchased an aggregate 1,755,978
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
19,022 additional shares as of December 31, 2004.
NOTE 12. 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
------------------------------------------
2004 2003 2002
----------- ----------- ------------
Current provision:
Federal $ 335,194 $ 481,393 $ 454,931
State 130,338 120,861 69,908
Deferred provision (benefit) (9,986) 148,410 (311,653)
----------- ----------- ------------
$ 455,546 $ 750,664 $ 213,186
=========== =========== ============
The provision for income taxes differs from the amount computed by applying the
federal statutory rates for the following reasons:
Years Ended December 31
-----------------------
2004 2003 2002
---- ---- ----
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 6.0 6.0 5.6
Future research and development credits (7.7) (5.5) (5.2)
Dividends received deduction (2.8) (2.8) (5.7)
Disqualifying incentive stock option
dispositions (2.5) -- --
Extraterritorial Income Exclusion (1.5)
Other, net (5.0) (0.2) (4.3)
---- ---- ----
20.5% 31.5% 24.4%
==== ==== ====
Deferred tax assets (liabilities) are comprised of the following at December 31,
2004 and 2003:
2004 2003
--------- ----------
Current:
Warranty reserve $ 293,765 $ 312,311
Bad debt allowance 102,772 70,920
Inventory reserve 97,135 166,830
Uniform capitalization 161,448 107,486
Accrued vacation 78,460 61,027
Other (35,768) 8,842
--------- ----------
Total current $ 697,812 $ 727,416
========= ==========
40
Noncurrent:
Depreciation $ 80,578 $ 35,655
Deferred compensation 47,447 47,447
Intangibles 91,265 145,407
Other 67,307 67,309
--------- ----------
Total noncurrent 286,597 295,818
Net tax asset before valuation allowance 984,409 1,023,234
Valuation allowance -- --
--------- ----------
Net deferred tax asset $ 984,409 $1,023,234
========= ==========
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company maintains a Retirement Savings Plan (the 401(k) Plan) for its
employees, which allows participants to make contributions by salary reduction
pursuant to Section 401(k) of the Internal Revenue Code. The Company's
contributions to the 401(k) Plan are discretionary. Employees vest immediately
in their contributions and vest in the Company's contributions ratably over five
years. The Company made contributions of $176,000, $125,000, and $55,000 to the
401(k) Plan for the years ended December 31, 2004, 2003, and 2002, respectively.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company has an agreement with the former owner of Floyd Associates, Inc. to
pay a royalty equal to 5% of the net revenue earned from certain microwave-based
products up to a maximum amount of $1,182,500. The contingent liability arose as
a result of the acquisition of Floyd in 1994. No minimum payments are required
in the agreement. The Company recognized royalty expense related to this
agreement of $22,589, $23,874, and $24,249 in 2004, 2003, and 2002,
respectively.
The Company leases approximately 20,000 sq. ft. of office, engineering,
laboratory, production, and warehouse space in Pelham, Alabama, a suburb of
Birmingham, under a lease expiring in November 2006. The Company also leases 500
sq. ft of office space in Edgewood, Maryland, which can be renewed annually.
Rental expense recognized in 2004, 2003, and 2002, was $195,535, $191,904, and
$201,220, respectively. Future minimum rental payments under these leases for
each year of the next five successive years are $188,785, $171,050, $-0-, $-0-,
and $-0-.
NOTE 15. SEGMENT DATA
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. FAS 131 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. FAS 131 also requires disclosure
about products and sources, geographic areas and major customers. The Company
aggregates its segments as one reportable segment based on the similar
characteristics of their operations.
Revenues related to operations in the U.S. and foreign countries for the years
ended December 31, 2004, 2003, and 2002, are presented below. Revenues from
external customers are attributed to individual countries based upon locations
to which the product is shipped. Long-lived assets related to continuing
operations in the U.S. and foreign countries as of the years ended December 31,
2004, 2003, and 2002, are as follows:
Years Ended December 31
2004 2003 2002
------------- ------------ ------------
Net revenues from unaffiliated customers:
United States $ 20,074,606 $ 18,441,929 $ 17,699,135
Foreign $ 8,405,008 $ 6,764,120 5,983,859
Long-lived assets at end of year:
United States $ 3,404,240 $ 3,434,333 $ 3,414,739
41
One customer accounted for approximately 11% of revenues in 2004. No single
customer accounted for more than 10% of revenues in or 2003. One customer
accounted for approximately 10% of revenues in 2002. Sales to federal, state,
and municipal governments accounted for 24% of total revenues in 2004, 20% of
total revenues in 2003, and 17% of total revenues in 2002.
NOTE 16. QUARTERLY INFORMATION (UNAUDITED)
Quarterly financial information for 2004 and 2003 is summarized as follows:
($ in thousands, except per share amounts) First Second Third Fourth
2004 Qtr. Qtr. Qtr. Qtr.
- ----------------------------------------- --------- --------- --------- --------
Net revenues $ 6,394 $ 7,329 $ 7,756 $ 7,001
Gross profit 3,336 3,629 4,017 3,486
Net income 426 515 351 470
Basic earnings per share $ 0.15 $ 0.19 $ 0.13 $ 0.16
Diluted earnings per share $ 0.15 $ 0.18 $ 0.12 $ 0.16
($ in thousands, except per share amounts) First Second Third Fourth
2003 Qtr. Qtr. Qtr. Qtr.
- ----------------------------------------- --------- --------- --------- --------
Net revenues $ 6,422 $ 5,774 $ 6,711 $ 6,299
Gross profit 3,206 2,779 3,192 2,743
Net income 358 270 535 472
Basic earnings per share $ 0.13 $ 0.10 $ 0.19 $ 0.17
Diluted earnings per share $ 0.13 $ 0.10 $ 0.19 $ 0.16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with our independent public
accountants.
ITEM 9A. 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 December 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 principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the chief executive officer and principal
financial officer 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 CEO and principal 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.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning officers, directors and nominees for director of the
Company is presented in the sections entitled "Nominees for Board of Directors"
and "Executive Officers of the Registrant" of the Company's Proxy Statement for
the 2005 Annual Meeting of Shareholders to be held on May 9, 2005, which
sections are incorporated in this annual report on Form 10-K by reference. The
information concerning compliance with 16(a) of the Securities Exchange Act of
1934, as amended, is presented in the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement for the 2005 Annual
Meeting of Shareholders, which section is incorporated in this annual report on
Form 10-K by reference.
Information concerning our audit committee and our audit committee financial
expert is set forth in the section entitled "The Board of Directors and its
Committees," in our Proxy Statement for the 2005 Annual Meeting of Shareholders,
which section is incorporated in this annual report on Form 10-K by reference.
Information concerning our Code of Ethics is set forth in the section entitled
"Code of Ethics" in our Proxy Statement for the 2005 Annual Meeting of
Shareholders, which section is incorporated in this annual report on Form 10-K
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth in the section
entitled "Executive Compensation" in our Proxy Statement for the 2005 Annual
Meeting of Shareholders, which section is incorporated in this annual report on
Form 10-K by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information for this item is set forth in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in our Proxy Statement
for the 2005 Annual Meeting of Shareholders, which section is incorporated in
this annual report on Form 10-K by reference.
Information concerning securities authorized for issuance under our equity
compensation plans is set forth in Part II of Item 5 of this Form 10-K and is
incorporated in Item 12 of this annual report on Form 10-K by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information for this item is set forth in the section entitled, "Certain
Transactions, Employment Contracts, Termination of Employment and
Change-in-Control Arrangements" in our Proxy Statement for the 2005 Annual
Meeting of Shareholders, which section is incorporated in this annual report on
Form 10-K by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information for this item is set forth in the section entitled "Principal
Accounting Fees and Services" in our Proxy Statement for the 2005 Annual Meeting
of Shareholders, which section is incorporated in this annual report on Form
10-K by reference.
43
PART IV
ITEM 15. 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 Registered Public Accounting Firm............................................. 25
Consolidated Balance Sheets at December 31, 2004 and 2003........................................... 26
Consolidated Statements of Income for the years ended December 31, 2004, 2003, and
2002................................................................................................ 27
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003,
and 2002............................................................................................ 28
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2004, 2003, and 2002................................................................................ 29
Notes to Consolidated Financial Statements.......................................................... 30-42
(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 (filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for the
year-ended December 31, 2001 and incorporated herein by
reference).
3.2 Amended and restated Bylaws of the Company (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year-ended December 31, 2002 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).
44
*10.7 2003 Incentive Compensation Plan (filed as Exhibit A to the
Company's Proxy Statement on Schedule 14-A dated April 5,
2002, and incorporated herein by reference).
*10.8 O.I. Corporation 2003 Incentive Compensation Plan (filed as
Exhibit 99.1 the registration statement on Form S-8 (No.
333-106254) and incorporated herein by reference).
*10.9 Form of Nonqualified Stock Option Agreement between O.I.
Corporation and its Directors.
*10.10 Form of Nonqualified Stock Option Agreement between O.I.
Corporation and its Employees.
*10.11 Form of Qualified Stock Option Agreement between O.I.
Corporation and it Employees.
23.1 Consent of Grant Thornton LLP.
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.
99.1 The O. I. Corporation definitive Proxy Statement, dated
April 14, 2005, 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.
(b) Reports on Form 8-K.
Form 8-K dated October 26, 2004, regarding material impairment
of Intelligent Ion, Inc. Series A Preferred Stock and press
release regarding its signing a non-binding Letter of Intent
to acquire substantially all the assets of Intelligent Ion,
Inc.
Form 8-K dated December 29, 2004, regarding O.I. Corporation
press release regarding its completion of the purchase of
certain assets of Intelligent Ion, Inc.
45
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 23, 2005 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 23, 2005
- -------------------- Director
William W. Botts (Principal Executive Officer)
/s/ Juan M. Diaz Vice President- Corporate Controller, March 23, 2005
- ---------------- (Principal Financial Officer and
Juan M. Diaz Principal Accounting Officer)
/s/ Jack S. Anderson Director March 23, 2005
- --------------------
Jack S. Anderson
/s/ Richard W. K. Chapman Director March 23, 2005
- -------------------------
Richard W. K. Chapman
/s/ Edwin B. King Director March 23, 2005
- -----------------
Edwin B. King
/s/ Craig R. Whited Director March 23, 2005
- -------------------
Craig R. Whited
46
EXHIBIT INDEX
Exhibits
3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year-ended December 31,
2001 and incorporated herein by reference).
3.2 Amended and restated Bylaws of the Company (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year-ended December 31,
2002 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 2003 Incentive Compensation Plan (filed as Exhibit A to the Company's
Proxy Statement on Schedule 14-A dated April 5, 2002, and incorporated
herein by reference).
*10.8 O.I. Corporation 2003 Incentive Compensation Plan (filed as Exhibit
99.1 the registration statement on Form S-8 (No. 333-106254) and
incorporated herein by reference).
*10.9 Form of Nonqualified Stock Option Agreement between O.I. Corporation
and its Directors.
*10.10 Form of Nonqualified Stock Option Agreement between O.I. Corporation
and its Employees.
*10.11 Form of Qualified Stock Option Agreement between O.I. Corporation and
it Employees.
23.1 Consent of Grant Thornton LLP.
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.
99.1 The O.I. Corporation definitive Proxy Statement, dated April 14, 2005,
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.