UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________to_________
Commission File Number: 0-6511
O. I. CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
- ---------------------------------- --------------------
State of Incorporation I.R.S. Employer
Identification No.
P.O. Box 9010
151 Graham Road
College Station, Texas 77842-9010
- ---------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes[ ] No [X]
The number of shares outstanding of the common stock as of May 5, 2003 was
2,759,273.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O.I. CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
March 31, December 31,
2003 2002
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,681 $ 3,915
Short-term investments, available-for-sale 3,950 3,733
Accounts receivable-trade, net of allowance for 4,384 3,775
doubtful accounts of $298 and $282, respectively
Investment in sales-type leases 264 278
Inventories 4,205 4,138
Current deferred tax asset 801 801
Other current assets 125 146
-------- --------
Total current assets 17,410 16,786
Property, plant and equipment, net 3,394 3,415
Investment in sales-type leases, net of current 289 271
Long-term deferred income tax assets 210 310
Intangible assets, net 114 116
Other assets 100 84
-------- --------
Total assets $ 21,517 $ 20,982
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,472 $ 1,312
Accrued compensation and other related expenses 791 770
Unearned revenues 780 959
Accrued warranties 722 735
Other liabilities and accrued expenses 695 655
-------- --------
Total current liabilities 4,460 4,431
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value, 3,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.10 par value, 10,000 shares
authorized 4,103 shares issued and
outstanding, respectively 410 410
Additional paid in capital 4,331 4,331
Treasury stock, 1,344 and 1,345 shares,
respectively, at cost (5,861) (5,866)
Retained earnings 17,977 17,619
Accumulated other comprehensive income, net 200 57
-------- --------
Total stockholders' equity 17,057 16,551
-------- --------
Total liabilities and stockholders' equity $ 21,517 $ 20,982
======== ========
</Table>
See notes to unaudited condensed consolidated financial statements.
2
O.I. CORPORATION
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss)
(In thousands, except per share data)
(Unaudited)
<Table>
<Caption>
Three Months Ended
March 31,
--------------------
2003 2002
------- -------
Net revenues:
Products $ 5,553 $ 4,059
Service 869 1,000
------- -------
6,422 5,059
Cost of revenues:
Products 2,793 2,364
Service 393 525
------- -------
3,186 2,889
Gross profit 3,236 2,170
Selling, general and administrative expenses 2,056 1,922
Research and development expenses 680 581
------- -------
Operating income (loss) 500 (333)
Other income, net 72 69
------- -------
Income (Loss) before income taxes 572 (264)
Provision (Benefit) for income taxes 214 (90)
------- -------
Net income (loss) $ 358 $ (174)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments
available-for-sale 143 (24)
------- -------
Comprehensive income (loss) $ 501 $ (198)
======= =======
Earnings (Loss) per share:
Basic $ 0.13 $ (0.06)
Diluted $ 0.13 $ (0.06)
Shares used in computing earnings (loss) per share:
Basic 2,759 2,752
Diluted 2,768 2,752
</Table>
See notes to unaudited condensed consolidated financial statements.
3
O.I. CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<Table>
<Caption>
Three Months Ended
March 31,
----------------------
2003 2002
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 358 $ (174)
Depreciation & amortization 111 137
Deferred income taxes 26 (15)
Loss on disposition of property 4 10
Change in working capital (648) (122)
------- -------
Net cash flows (used in) operating activities (149) (164)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment (94) (148)
Proceeds from sale of assets 4 4
------- -------
Net cash flows (used in) investing activities (90) (144)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5 5
------- -------
Net cash flows provided by financing activities 5 5
------- -------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (234) (303)
Cash and cash equivalents, at beginning of quarter 3,915 3,140
------- -------
Cash and cash equivalents, at end of quarter $ 3,681 $ 2,837
======= =======
</Table>
See notes to unaudited condensed consolidated financial statements.
4
O.I. CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company"), an Oklahoma corporation, was organized in
1969. The Company designs, manufactures, markets, and services analytical,
monitoring and sample preparation products, components, and systems used to
detect, measure, and analyze chemical compounds.
The accompanying unaudited condensed consolidated financial statements have been
prepared by O.I. Corporation and include all adjustments that are, in the
opinion of management, necessary for a fair presentation of financial results
pursuant to the rules and regulations of the Securities and Exchange Commission.
All adjustments and provisions included in these statements are of a normal
recurring nature. All intercompany transactions and balances have been
eliminated in the financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
2. INVENTORIES.
Inventories are stated at the lower of first-in, first-out cost or market:
<Table>
<Caption>
Mar. 31, 2003 Dec. 31, 2002
------------- -------------
Raw Materials $3,145 $3,216
Work in Process 198 220
Finished Goods 862 702
------ ------
$4,205 $4,138
====== ======
</Table>
3. COMPREHENSIVE INCOME (LOSS).
Comprehensive income (loss) refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are recorded as an element of
stockholders' equity and are excluded from net income (loss). The Company's
components of comprehensive income (loss) are net income (loss) and unrealized
gains and losses on available-for-sale investments.
4. EARNINGS (LOSS) PER SHARE.
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common shares outstanding. Stock options
are the only dilutive potential common shares the Company has outstanding. For
the three months ended March 31, 2003 and 2002, options to acquire 208 shares
and 275 shares of common stock, respectively, at a weighted average exercise
price of $5.11 and $6.52 per share, respectively, were not included in the
computation of dilutive earnings per share as their effect would be
antidilutive.
5. STOCK-BASED COMPENSATION.
At March 31, 2003, the Company has three stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
5
the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FAS Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
<Table>
<Caption>
Three Months Ended
March 31
---------------------------
2003 2002
---- ----
Net income (loss), as reported $ 358 $ (174)
Deduct: Total stock-based compensation expense
determined under fair value based method
for awards granted, modified, or settled,
net of related tax effects 31 67
-------- --------
Pro forma net income (loss) 327 (241)
Earnings (loss) per share:
Basic--as reported $ 0.13 $ (0.06)
Basic--pro forma $ 0.12 $ (0.09)
Diluted--as reported $ 0.13 $ (0.06)
Diluted--pro forma $ 0.12 $ (0.09)
</Table>
6. INTANGIBLE ASSETS, NET.
Intangible assets, net consisted of patents relating to technology used in the
Company's products. Intangible assets, net, as of March 31, 2003 and December
31, 2002 were approximately $114 and $116, net of accumulated amortization of
$344 and $342, respectively. Total amortization expense on intangible assets for
the three months ended March 31, 2003 and 2002 was approximately $4 and $14,
respectively. The estimated aggregate amortization expense for each of the five
succeeding fiscal years 2003 to 2007 is approximately $9.
7. PRODUCT WARRANTY LIABILITIES.
The charges in the Company's product warranty liability on March 31, 2003 were
as follows:
<Table>
Liability, beginning of year $ 735
Warranty claims (13)
-----
Liability, March 31, 2003 $ 722
=====
</Table>
8. RECENT PRONOUNCEMENTS.
In April 2002, the FASB issued FAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which is effective for transactions occurring after May 15, 2002. FAS 145
rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses
from extinguishment of debt. FAS 44 set forth industry-specific transitional
guidance that did not apply to the Company. FAS 145 amends FAS 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. FAS 145 also makes technical corrections to certain
existing pronouncements that are not substantive in nature. The adoption of FAS
145 in the third quarter of fiscal year 2002 did not have a significant impact
on the Company's financial condition or results of operations.
In July 2002, the FASB issued FAS 146, "Accounting for Exit or Disposal
Activities." FAS 146 addresses the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities that are currently accounted for pursuant to the guidance set forth
in Emerging Issues Task Force issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in Restructuring)." The Scope of FAS 146 includes costs
related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees, and certain termination benefits
provided to employees who are involuntarily terminated. FAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The Company does
not expect the adoption of FAS 146 to have a significant impact on its financial
condition or results of operations.
6
In 2003, the FASB issued FAS 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure," an amendment of FAS 123. The disclosure requirements
of FAS 123, "Accounting for Stock-Based Compensation," which apply to stock
compensation plans of all companies, are amended to require certain disclosures
about stock-based employee compensation plans in an entity's accounting policy
note. Those disclosures include a tabular format of pro forma net income and, if
applicable, earnings per share under the fair value method if the intrinsic
value method is used in any period presented. Pro forma information in a tabular
format is also required in the notes to interim financial information if the
intrinsic value method is used in any period presented. The amendments to the
disclosure and transition provisions of FAS 123 are effective for fiscal years
ending after December 15, 2002. The Company does not plan a change to the fair
value based method of accounting for stock-based employee compensation and has
included the disclosure requirements of FAS 148 in the accompanying financial
statements.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, "Accounting
Changes." The Company has not determined the effect of adoption of EITF 00-21 on
its financial statements or the method of adoption it will use.
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. The Company's adoption of EITF 02-16 did not have an effect on its
financial statements.
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measure provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
the Company issues or modifies subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending after
December 15, 2002. The Company has historically issued guarantees only in the
form of product warranties and does not anticipate FIN 45 will have a material
effect on its 2003 financial statements. Disclosures required by FIN 45 are
included in these condensed consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), "Consolidation
of Variable Interest Entities," FIN 46 clarifies the application of Accounting
Research Bulletin 51, 'Consolidated Financial Statements," for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties,
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest
7
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company is in the process of determining
what impact, if any, the adoption of the provisions of FIN 46 will have upon its
financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, concerning, among other things, (i) possible or assumed
future results of operations, contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," (ii) prospects for the
Company's business or products; (iii) other matters that are not historical
facts. These forward-looking statements are identified by their use of terms and
phrases such as "believes," "expects," "anticipates," "intends," "estimates,"
"plans" and similar terms and phrases.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. The Company's business and results of
operations are subject to a number of assumptions, risks and uncertainties, many
of which are beyond the Company's ability to control or predict. Because of
these risks and uncertainties, actual results may differ materially from those
expressed or implied by forward-looking statements, and investors are cautioned
not to place undue reliance on such statements, which are not guarantees of
future performance and which speak only as of the date thereof.
Factors that could cause actual results to differ materially include, but are
not limited to,
o the Company's ability to attract and retain new customers,
o the financial condition and spending practices of its customers,
o the Company's ability to provide products that meet the needs of its
customers,
o advancements or changes in technology that may render the Company's
products less valuable or obsolete,
o conditions in the environmental instrument market, and
o the Company's ability to obtain financing in the event it is needed.
The cautionary statements contained or referred to herein should be considered
in connection with any written or oral forward-looking statements that may be
issued by the Company or persons acting on the Company's behalf. The Company
does not undertake any obligation to release any revisions to or to update
publicly any forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. When
considering forward-looking statements, you should also keep in mind the risk
factors described in our Annual Report on Form 10-K for the year ended December
31, 2002.
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto.
8
RECENT DEVELOPMENTS
Cancellation of Future Deliveries under Contract With Parsons Infrastructure &
Technology Group, Inc. Parsons Infrastructure & Technology Group, Inc.
("Parsons"), granted to the Company a series of purchase orders totaling
approximately $3,200,000 for MINICAMS. Due to changes in the scope of the
equipment needed by the customers, approximately $820,000 of this purchase order
was cancelled subsequent to March 31, 2003. Parsons and the Company negotiated a
cancellation fee of approximately $68,000, which will be invoiced upon
completion of the order, which is expected to be by June 30, 2003. Total
revenues recognized since the beginning of this order were approximately
$2,373,000, including approximately $32,000 recognized in the quarter ended
March 31, 2003.
OPERATING RESULTS
Net revenues for the quarter ended March 31, 2003 were $6,422,000 compared to
$5,059,000 for the same period of the prior year. Net revenues increased due to
higher product sales partially offset by lower revenues from services. Product
revenues increased due to higher sales of MINICAMS, GC systems and components,
Total Organic Carbon (TOC) analyzers, flow analyzers, microwave digestion
systems, and refrigerant monitoring systems, which more than offset lower sales
of gel permeation chromatography products (GPC) and beverage monitors compared
to the quarter ended March 31, 2002.
Increases in revenues from products were partially offset by decreases in
revenues from services. Revenues from services decreased compared to the quarter
ended March 31, 2002, primarily due to a lower demand for in-house, factory
repair services and lower revenues from rentals due to a customer choosing to
make early payment on a significant amount of operating leases in the second
quarter of 2002.
International and domestic revenues increased for the quarter ended March 31,
2003 compared to the same period of the prior year. Revenues from sales of
products and services in Europe, Asia, and Latin America increased for the
quarter ended March 31, 2003 compared to the same period of the prior year.
While competition and unpredictable local economic conditions continue to affect
international sales, the Company continues to invest in further developing
distribution channels to establish market positions in international markets.
Despite the increase in net revenues for the quarter ended March 31, 2003
compared to the same period of the prior year, the sustained economic downturn
and the war in Iraq have resulted in prolonged purchasing decisions, and has
reduced purchasing and capital spending in many of the markets that the Company
serves, in particular, industrial and government customers. In addition, the
environmental instrument market in which the Company competes has been flat or
declining over the past several years. The Company remains cautiously optimistic
about future sales and has identified a number of strategies it believes will
allow it to grow its business despite this decline, including the acquisition of
complementary businesses, developing new products, 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.
Gross profit for the quarter ended March 31, 2003 increased to $3,236,000 or 50%
of revenues, compared to $2,170,000, or 43% of revenues, for the same quarter of
2002. The increase in gross profit was primarily due to higher sales with
improved sales mix, lower warranty costs, and improved operational efficiencies.
Selling, general, and administrative ("SG&A") expenses for the quarter ended
March 31, 2003 increased to $2,056,000 or 32% of revenues, compared to
$1,922,000, or 38% of revenues, for the same quarter of 2002. SG&A expenses for
the first
9
quarter of 2003 increased due to higher direct selling expenses, equipment
depreciation, benefit-related costs, audit fees, and expenses for legal fees for
routine corporate-related matters. The Company continues to incur increased
administrative expense, both for accounting and legal professional services to
assess and react to the changes in securities laws, i.e. Sarbanes-Oxley and
NASDAQ.
Research and development ("R&D") expenses for the quarter ended March 31, 2003
increased to $680,000 or 11% of revenues, compared to the first quarter of 2002
R&D expenses of $581,000, or 11% of revenues. The increase in R&D expenses for
the first quarter of 2003 was due to increased expenses related to the
development of potential new products.
Other income, net, which is comprised of interest and dividend income from
investments and sales-type leases, income from customer lease buyouts and
dispositions of Company property, increased due to higher income from
investments which was partially offset by decreases in income from customer
lease buyouts and dispositions of Company property.
Provision (benefit) for income taxes increased for the quarter ended March 31,
2003 to a provision of $214,000, compared to a benefit of $(90,000), for the
same quarter of 2002. The effective tax rates were 38% for the quarter ended
March 31, 2003 and 34% for 2002.
Net income for the quarter ended March 31, 2003 was $358,000 compared to a net
loss of ($174,000) in the same period of 2002 primarily due to higher net
revenues and cost reductions resulting in improved gross profit, partially
offset by increases in operating costs for R&D and SG&A. Basic and diluted
earnings per share for the quarter ended March 31, 2003 were $0.13 per share
compared to basic and diluted net loss per share of $(0.06) per share for the
same period of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3,681,000 as of March 31, 2003, compared to
$3,915,000 as of December 31, 2002. Working capital as of March 31, 2003,
increased to $12,950,000, compared to $12,355,000 as of December 31, 2002
primarily due to increases in inventory, short-term investments, and accounts
receivable. Working capital, as a percentage of total assets, was 60% as of
March 31, 2003 and 59% at December 31, 2002. The current ratio was 3.9 at March
31, 2003 and 3.8 at December 31, 2002. Total liabilities-to-equity ratio
decreased to 26% as of March 31, 2003, compared to 27% as of December 31, 2002.
Net cash flow (used in) operating activities for the quarter ended March 31,
2003, was $(149,000), as compared to $(164,000) for the same period of 2002. The
decrease in cash flow used in operating activities in the quarter ended March
31, 2003 was primarily due to an increase in net income offset by increases to
working capital resulting from increases in accounts receivable, short-term
investments, and inventory. Net cash flow (used in) investing activities was
$(90,000) for the quarter ended March 31, 2003, compared to $(144,000) for the
first quarter 2002. The decrease in cash used in investing activities was due to
a decrease in the purchases of property, plant and equipment. Net cash flow
provided by financing activities for the quarter ended March 31, 2003 and for
the quarter ended March 31, 2002 was $5,000. Cash provided by financing
activities for both periods relates to the quarterly sale of common stock to the
Employee Stock Purchase Plan from the Company's treasury stock.
The Company has historically been able to fund working capital and capital
expenditures from operations, and expects to be able to finance its 2003 working
capital requirements from cash on hand and funds generated from operations.
However, demand for the Company's products is influenced by the overall
condition of the economy in which the Company sells its products, by
10
the capital spending budgets of its customers and by the Company's ability to
successfully meet its customers' expectations, through its product offerings,
the needs of its customers. The environmental instrument markets in which the
Company competes have been flat or declining over the past several years, and
the sustained economic downturn, military conflicts and threatened military
conflicts by the U.S. have resulted in prolonged, reduced purchasing and capital
spending in many of the markets that the Company serves worldwide. In
particular, industrial and government customers are currently in a downward
cycle characterized by diminished product demand, excess manufacturing capacity
and the erosion of average selling prices. We are uncertain how long the current
downturn will last. Any further decline in our customers' markets or in general
economic conditions would likely result in a further reduction in demand for our
products and services and could harm our results of operations and, therefore,
harm the primary source of our cash flows.
Other matters that could affect the extent of funds required within the
short-term and long-term include future acquisitions of other businesses,
extensive investments in product R&D activities, or spending to develop markets
for the Company's products. The Company may engage in discussions with third
parties to acquire new products or businesses or to form strategic alliances and
joint ventures. This type of transaction may create a need for increased cash
flow from sources other than the Company's current operating activities to
complete these transactions. The Company believes that the sources of such funds
would come from traditional institutional debt financing or other types of debt.
In addition, the Company may engage in significant R&D spending or market
developing activities above current operating levels in order to respond to
perceived market opportunities. These activities may require the Company to seek
additional funds from sources other than its current operating activities. The
Company believes that if the need arises in the future for funding of
acquisitions, R&D or marketing activities, it would attempt to attain such
funding on terms that are favorable to the Company.
Since 1995, the Company has repurchased an aggregate of 1,727,378 shares at an
average purchase price of $3.95 per share. Although no such repurchases were
made in the quarter ended March 31, 2003, the Company may purchase up to an
additional 47,622 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.
AGGREGATE CONTRACTUAL OBLIGATIONS
The Company conducts some of its operations in leased facilities under an
operating lease expiring on November 30, 2006. Future minimum rental payments
under this lease for the remainder of 2003 are summarized in the table below.
<Table>
<Caption>
Payments Due by Period
(In thousands)
---------------------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total Year 1-2 Years 3-5 Years years
----- ---- --------- --------- -----
Operating leases $698 $145 $382 $171 $-0-
</Table>
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.
SEGMENT INFORMATION
The Company manages its businesses primarily on a product and services basis.
The Company operates its business as a single segment.
11
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to implement critical accounting
policies and to make estimates that could significantly influence the results of
operations and financial position. The accounting policies and estimates that
significantly influence the results of the Company's operations and its
financial position include revenue recognition policies, the valuation of
inventories and accounts receivable, evaluation of the impairment of and
estimated useful lives of intangible assets, estimates for future losses on
product warranties, stock-based compensation, and the necessity for a deferred
income tax asset valuation reserve.
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 larger of the contractual billing
hold back or the fair value of the installation service is deferred when the
product is delivered and recognized when the installation is complete. In all
cases, the fair value of undelivered elements, such as accessories ordered by
customers, is deferred until the related items are delivered to the customer.
For certain other system sales that do involve unique customer acceptance terms
or new specifications or technology with customer acceptance provisions, all
revenue is generally deferred until customer acceptance. Revenue related to part
sales is recognized when the parts have been shipped and title and risk of loss
have passed to the customer. Deferred revenue, net of related deferred cost of
sales, is presented as unearned revenues in the accompanying condensed
consolidated balance sheets.
Products generally carry one year of warranty. Once the warranty period has
expired, the customer may purchase an extended product warranty typically
covering an additional period of one year. Extended warranty billings are
generally invoiced to the customer at the beginning of the contract term.
Revenue from extended warranties is deferred and recognized ratably over the
duration of the contracts. Unearned maintenance and extended warranty revenue is
included in unearned revenues in the accompanying condensed consolidated balance
sheets.
Revenues from bill and hold sales are recognized in accordance with the criteria
specified in SAB 101. In addition to the criteria above, the customer must
request that the transaction be on a bill and hold basis and have a substantial
business purpose for ordering the goods on that basis; there must be a
reasonable, fixed schedule for delivery consistent with the business purpose;
the Company must no longer retain any performance obligations; the earnings
process must be substantially complete; the items sold must be segregated from
the rest of the Company's inventory and must be ready for final shipment to the
customer.
Inventories. Inventories consist of electronic equipment, sensors, pumps, valves
and various components. The Company operates in an industry where technological
advances or new product introductions are a frequent occurrence. Either one of
these occurrences can make obsolete or significantly impair customer demand for
a portion of the Company's inventory on hand. The Company regularly evaluates
its inventory and maintains a reserve for inventory obsolescence and excess
inventory. As a policy, the Company provides a reserve for products with no
movement in six months or more and which management determines, based on
available market information, are no longer
12
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.
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 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. However, the Company does not
believe that there is significant likelihood of this risk from a single
customer, since the Company does not have a significant credit concentration
risk with any one single customer. Historically, the Company has not experienced
significant bad debt losses, but the Company could experience increased losses
if general economic conditions were to deteriorate, resulting in the impairment
of a number of its customers' ability to meet their obligations, or if
management made different judgments or utilized different estimates for sales
returns and allowances for doubtful accounts.
Intangible Assets. The Company's intangible assets primarily include product
patents. The Company adopted FAS 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. The determination of related estimated useful lives and whether
these assets are impaired involves significant judgments based upon short and
long-term projections of future performance. Certain of these forecasts reflect
assumptions regarding our ability to successfully develop and ultimately
commercialize technology. Changes in strategy and/or market conditions may
result in adjustments to recorded asset balances. Due to uncertain market
conditions and potential changes in our strategy and product portfolio, it is
possible that forecasts used to support our intangible assets may change in the
future, which could result in additional non-cash charges that would adversely
affect our results of operations and financial condition.
Product Warranties. Products are sold with warranties ranging from 90 days to
one year, and extended warranties may be purchased for some products. Estimated
expenses associated with these warranties are provided for in the accompanying
condensed, consolidated financial statements at the time of revenue recognition.
The Company makes estimates of these costs based on historical experience and on
various other assumptions including historical and expected product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from estimates, revisions to the estimated warranty
liability would be required.
Stock-based Compensation. The Company elected to account for fixed award stock
options and non-employee directors' options under the provisions of APB Opinion
No. 25 "Accounting for Stock Issued to Employees." As such, no compensation cost
has been recorded in the financial statements relative to these options. The
Company utilizes the Black-Scholes option pricing model to estimate the fair
value of these options for disclosure purposes.
Stock granted to non-employee directors are accounted for in accordance with FAS
No. 123 Accounting for Stock-Based Compensation. Accordingly, directors' stock
is recoded as compensation expense at estimated fair value on the date the stock
is earned by the director.
13
Income Taxes. The Company provides for deferred taxes in accordance with FAS No.
109 (FAS 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 primary sources of the
Company's income tax differences are deferred tax assets created by differences
between the depreciable and amortizable lives for book and tax purposes of the
Company's fixed and intangible assets and other deductions that must be deferred
into the future in accordance with the Code. Pursuant to FAS 109, the Company
may record a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. To make such a determination, the
Company considers historical and future taxable income. In the event the
Company's financial position deteriorates, the Company may determine that it
would not be able to realize its deferred tax assets in the future. Likewise,
the Company may determine that it would be able to realize its entire net
deferred tax asset in the future. Such determinations may significantly affect
the Company's results of operations and financial position in the period such
determination is made.
RECENT PRONOUNCEMENTS-SEE NOTE 7 OF ITEM 1
ITEM 3. QUANTITATIVE AND INITIATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including changes in interest
rates and the market value of its investments. In the normal course of business,
the Company employs established polices and procedures to manage its exposure to
changes in the market value of its investments. To date, the Company has not
experienced any material effects to its financial position or results of
operations due to market risks. The fair value of the Company's investments at
March 31, 2003 was $3,950,000.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the chief executive officer and chief financial officer, of the effectiveness of
the Company's disclosure controls and procedures. Based on that evaluation, the
chief executive and financial officers have concluded that the Company's
disclosure controls and procedures are effective. Subsequent to the date of
their evaluation, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls.
The Company's management, including the CEO and CFO, 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.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: None
14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS: None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5. OTHER INFORMATION: None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
99.1 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.
99.2 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.
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).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O.I. CORPORATION
(Registrant)
Date: May 9, 2003 BY: /s/ William W. Botts
-----------------------------
William W. Botts
President/CEO
Authorized Officer
Date: May 9, 2003 BY: /s/ Juan M. Diaz
-----------------------------
Juan M. Diaz
Corporate Controller
Principal Accounting Officer
15
CERTIFICATIONS
I, William W. Botts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O.I. Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 9, 2003 /s/ William W. Botts
-----------------------------------
William W. Botts, Chairman of the
Board of Directors, President, and
Chief Executive Officer
(Principal Executive Officer)
16
CERTIFICATIONS
I, Juan M. Diaz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O.I. Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 9, 2003 /s/ Juan M. Diaz
-----------------------------
Juan M. Diaz
Corporate Controller
(Principal Financial Officer)
17
EXHIBIT INDEX
Exhibit
Number Exhibit Title
- ------ -------------
99.1 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.
99.2 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.