UNITED STATES
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, 2005
[ ] 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 3 or Section 15(d) of the Act. Yes [ ] No [ ]
The aggregate market value, as of June 30, 2005, 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 $29,675,650.
The number of shares outstanding of the common stock as of March 13, 2006 was
2,866,220.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2006 Annual Meeting of Shareholders
Part III information is incorporated by reference from the Proxy Statement
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART 1
Item 1 Business 3
Item 1A Risk Factors 7
Item 1B Unresolved Staff Comments 14
Item 2 Properties 14
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters 15
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and 18
Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk 25
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants on Accounting and 45
Financial Disclosure
Item 9A Controls and Procedures 45
PART III
Item 10 Directors and Executive Officers of the Registrant 45
Item 11 Executive Compensation 45
Item 12 Security Ownership of Certain Beneficial Owners and Management 46
Item 13 Certain Relationships and Related Transactions 46
Item 14 Principal Accounting Fees and Services 46
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 47
2
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 detection, analysis, measurement, and monitoring
applications in food, beverage, pharmaceutical, semiconductor, power generation,
chemical, petrochemical, and chemical treatment and security 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 that it believes it can successfully penetrate and then assume a
leading position in such markets. 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 for 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.
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 techniques for sample
introduction, faster analysis, lower levels of 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 of such
products under an OEM agreement with Agilent Technologies, Inc. The Company
integrates GC components with GCs and GC/MS to configure 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
customer's needs in the laboratory, in the field, and on-line. Configured
systems can analyze chemical compounds in gas, liquid, or solid
3
matrices using the appropriate components. One such configured continuous air
monitoring analyzer is the MINICAMS. The MINICAMS product, which is used to
monitor toxic airborne chemical compounds for the presence of chemical warfare
agents such as Mustard (HD), Sarin (GB), Soman (GD), Tabun (GA), and Lewisite
(L). The Company offers an automated Continuous Sampling System which may be
coupled with the MINICAMS to address new air monitoring levels as promulgated by
the Centers for Disease Control and Prevention. The new requirements
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 to comply with methods and testing required by
the U.S. Environmental Protection Agency, compliance with US Pharmacopoeia
testing standards for ultrapure water used in manufacturing pharmaceuticals, and
pure water used in semiconductor manufacturing; power generation; and
oceanographic research. Customers often select TOC products based on the method
of oxidation of a sample. The Company as well as other suppliers produce
products which oxidize samples by High Temperature Persulfate and Combustion
which are the two most widely recognized methods. The Company also provides a
TOC Solids Analyzer which is designed to analyze samples with very high
particulates and solids.
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 3100,
and Model 3500 Discrete 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:
REFRIGERANT MONITORS, which are used by the chiller/refrigerant industry to
continuously monitor and detect 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, which are used in the manufacturing process 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 with the exception
of some equipment provided on certain occasions for temporary demonstration in
customer locations and for exhibits. 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:
4
$ in thousands 2005 2004 2003 2002 2001
------- ------- ------- ------- -------
Net Revenues:
United States $21,322 $20,075 $18,442 $17,699 $21,231
Export 8,531 8,405 6,764 5,984 4,638
------- ------- ------- ------- -------
Total $29,853 $28,480 $25,206 $23,683 $25,869
======= ======= ======= ======= =======
% Net Revenues:
United States 71% 70% 73% 75% 82%
Export 29% 30% 27% 25% 18%
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
======= ======= ======= ======= =======
Number of countries-export 60 64 62 70 58
Sales to the Asia-Pacific region were approximately 13% of net revenues for
2005, 16% of net revenues for 2004 and 13% of net revenues for 2003; and sales
to the European-African region were approximately 12% of net revenues for 2005,
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 2001.
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 manufacturing
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, 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 with the goal of
achieving a high level of 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
5
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
$3,670,000 in 2005. Research and development costs in 2004 were $2,998,000 plus
$483,000 of acquired in-process research and development, and in 2003 were
$2,698,000. The Company actively pursues development of potential new products,
including custom-configured GC systems and components, instrument control and
data reporting software systems, and 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. We have a growing portfolio of
Intellectual Property which includes technology in the field of Gas
Chromatography, TOC, and MS. As of December 31, 2005 we own or have rights under
license to 43 issued patents and 27 pending patent applications which expire
between the years 2006 and 2024, compared to 29 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. The Company also actively seeks to
license technology in fields of interest from third parties, provided such
licenses are available on reasonable terms. 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 with suppliers, and marketing strength including brand
recognition, market share, bundled product sales, and resources to work in
Methods and Applications development and to maintain contacts with standards
setting bodies such as ASTM and USEPA and to liaison with research scientist in
universities and research institutes.
EMPLOYEES
As of December 31, 2005, the Company had 157 full-time employees. The Company
employs scientists and engineers who conduct 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.
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.
6
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, 2005 was approximately
$2,897,000, compared to $4,402,000 on December 31, 2004 and $3,172,000 on
December 31, 2003. 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, 2005. 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 2006.
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 of the calendar year and
governmental markets are stronger in the third quarter of the calendar year.
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 16% of revenues in 2005 and 11% of revenues in 2004,
and no single customer accounted for more than 10% of revenues in 2003. Federal,
state, and municipal governments and public and private research institutions in
the aggregate accounted for 25% of revenues in 2005, 24% of revenues in 2004,
and 20% of revenues in 2003. A decrease in sales to these groups could have a
material adverse impact on the Company's results of operations. Export sales
accounted for 29% of revenues in 2005, compared to 30% of revenues in 2004, and
27% of revenues in 2003.
ITEM 1A. RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 2006 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
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
7
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.
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, 2007 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, 2007. 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 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.
123(R), we will be required to account for equity under our stock option 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
8
well as the impact of all stock-based compensation expense in a footnote to the
consolidated financial statements. The Company plans to adopt SFAS 123(R) as of
the beginning of the first quarter of 2006.
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 or efforts to
acquire new technology from third parties will be successful, or that if R&D
efforts do yield new products, that such products will be successful in the
marketplace once introduced.
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
9
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.
After contracting for several years, the market for analytical instruments used
for environmental analysis could continue contracting and consolidation. 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 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 25% of the Company's sales in 2005,
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). On December 1, 2000, the Company entered
into an OEM agreement with Agilent, and it has been renewed in December 2001,
2002, 2003 2004 and 2005. The original equipment manufacturers (OEM) agreement
does not provide for marketing cooperation between the Company and Agilent, 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 against
the Company or liability, either of which may be a significant expense or
disruption to the Company's business. 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.
10
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 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 29% of the Company's revenues in 2005. 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'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 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
11
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 or inflation on certain commodities that would effect all
industry participants in a reasonably similar way.
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.
The Company's provision for such circumstances may not be adequate. 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.
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 loss and accordingly our stock price
could decline.
THE INFORMATION SYSTEMS THE COMPANY UTILIZES COULD FAIL OR LOSE COMPATABILITY OR
VENDORS COULD STOP SUPPORTING THEM. Our automated computerized systems are used
to perform virtually all business processes including maintaining our general
ledger for accounting, engineering records, customer data, supplier data, and
provides records retention for much of the Company's general business records.
The software systems from different vendors are used to accommodate these
business processes and maintaining compatability among these systems is becoming
increasingly costly and difficult to maintain. No assurance can be made that
the Company
12
will avoid system failures or that vendors will not discontinue their support of
each such system, any of which would result in a costly and significant
disruption to the Company's business.
SOME OF OUR PRODUCTS MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS WHICH COULD BE
COSTLY TO RESOLVE AND AFFECT OUR RESULTS OF OPERATIONS. There can be no
assurance that we will not be subject to third-party claims in connection with
our products or that any indemnification or insurance available to us will be
adequate to protect us from liability. A product liability claim, product recall
or other claim, as well as any claims for uninsured liabilities or in excess of
insured liabilities, could have a material adverse effect on our business and
results of operations.
ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS HAVE AND ARE LIKELY TO
CONTINUE TO INCREASE OUR COSTS. The Sarbanes-Oxley Act of 2002 has required
changes in some of our corporate governance, securities disclosure and
compliance practices. In response to the requirements of that Act, the
Securities Exchange Commission ("SEC") and NASDAQ Exchange have promulgated new
rules. Compliance with these new rules has increased our legal and financial and
accounting costs, and we expect these increased costs to continue indefinitely.
We also expect these developments to make it more difficult and more expensive
for us to obtain director and officer liability insurance, and these
developments may make it more difficult for us to attract and retain qualified
members of our board of directors or qualified executive officers.
OUR SALES IN INTERNATIONAL MARKETS ARE SUBJECT TO A VARIETY OF LAWS AND
POLITICAL AND ECONOMIC RISKS THAT MAY ADVERSELY IMPACT OUR SALES AND RESULTS OF
OPERATIONS IN CERTAIN REGIONS. Our ability to capitalize on growth in new
international markets and to maintain the current level of operations in our
existing international markets is subject to risks associated with international
sales operations. These include:
- changes in currency exchange rates which impact the price to
international consumers;
- the burdens of complying with a variety of foreign laws and
regulations;
- unexpected changes in regulatory requirements; and
- the difficulties associated with promoting products in unfamiliar
cultures.
We are also subject to general, political, economic and regulatory risks in
connection with our international sales operations, including:
- political instability;
- changes in diplomatic and trade relationships;
- general economic fluctuations in specific countries or markets; and
- changes in regulatory schemes.
Any of the above mentioned factors could adversely affect our sales and results
of operations in international markets.
WE MUST RECRUIT AND RETAIN KEY EMPLOYEES IN ORDER TO BE SUCCESSFUL. Our
continued success depends on the services of our key executive, sales and
marketing and technical employees. The loss of the services of these personnel,
or our inability to attract and retain other qualified management, sales and
marketing, and technical employees, could have a material adverse effect on our
business and results of operations. The Company does not have Agreements with
key personnel wherein such personnel agree not to compete with the Company and
ancillary consideration. Our success also depends in part on our ability to
attract, hire, train, retain, and motivate qualified personnel, with appropriate
levels of managerial and technical capabilities. Our business generally requires
a significant level of expertise to effectively develop and market our products
and services. We have at times experienced, and continue to experience,
difficulty in
13
recruiting qualified personnel. We believe that the pool of potential applicants
with such requisite expertise is limited. Recruiting qualified personnel is an
intensely competitive and time-consuming process. Such competition has resulted
in demands for increased compensation from qualified applicants. Due to such
competition, we have experienced, and expect to continue to experience, turnover
in personnel. We cannot ensure that we will be successful in attracting and
retaining the personnel required to conduct and expand our operations
successfully. Our business, financial condition and results of operations could
be materially and adversely affected if we were unable to attract, hire, train,
retain, and motivate qualified personnel.
IF WE DO NOT INTRODUCE SUCCESSFUL NEW PRODUCTS AND SERVICES IN A TIMELY MANNER,
OUR PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL
SUFFER. We generally sell our products in industries that are characterized by
rapid technological changes, frequent new product and service introductions and
changing industry standards. In addition, many of the markets in which we
operate are seasonal and cyclical. Without the timely introduction of new
products, services and enhancements, our products and services will become
technologically obsolete over time, in which case our revenue and operating
results would suffer. The success of our new products and services will depend
on several factors, including our ability to:
- properly identify customer needs;
- innovate and develop new technologies, services and applications;
- successfully commercialize new technologies in a timely manner;
- manufacture and deliver our products in sufficient volumes on time;
- differentiate our offerings from our competitors' offerings;
- price our products competitively;
- anticipate our competitors' development of new products, services or
technological innovations; and
- control product quality in our manufacturing process.
WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND
FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT
CONTRACTS COULD HARM OUR BUSINESS BY LEADING TO A REDUCTION IN REVENUE
ASSOCIATED WITH THESE CUSTOMERS. We have agreements relating to the sale of our
products to government entities and, as a result, we are subject to various
statutes and regulations that apply to companies doing business with the
government. The laws governing government contracts differ from the laws
governing private contracts. For example, many government contracts contain
pricing terms and conditions that are not applicable to private contracts. We
are also subject to investigation for compliance with the regulations governing
government contracts. A failure to comply with these regulations might result in
suspension of these contracts, or administrative penalties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 at the end of November 2006 with an
option to extend for five one-year renewal periods. The Company also leases 500
sq.ft. of office space in Edgewood, Maryland, under a lease, which can be
renewed annually with an option to extend for two one-year renewal periods. The
Company believes that the facilities it currently occupies are in good condition
and are suitable for its present operations and that suitable space is readily
available for expansion or to accommodate its operations should any of its
leases not be extended.
14
ITEM 3. LEGAL PROCEEDINGS
PENDING MATTERS
From time to time, the Company has disputes that arise in the ordinary course of
its business. One such incident is the following: The Company and its
wholly-owned subsidiary CMS Research Corp. ("CMS Research") have been sued by
Aviv Amirav ("Amirav") in a Complaint filed in the United States District Court
for the Southern District of New York on January 26, 2006 styled Amirav v. CMS
Research Corp. and O.I. Corporation, Case No. 06-Civ-00659. The Complaint
alleges (i) infringement and contributory infringement of United States patent
no. 5,153,673, issued to Amirav, and (ii) breach of a license agreement between
Amirav and CMS Research. Amirav's Complaint seeks (i) preliminary and permanent
injunctive relief, (ii) actual damages in an unspecified amount, treble damages,
and punitive damages, and (iii) attorneys' fees, interest, and other relief. The
Company is currently preparing its answer to the complaint, and plans to
vigorously oppose the plaintiff's. It is not possible at this stage of the case
to determine what liability exposure, if any, is faced by the Company; however,
an unfavorable outcome, including a determination that the Company is not
entitled to the license and/or a determination that the Company's sales under
the license are infringing transactions, would have a material adverse impact on
the Company's results of operations.
OTHER MATTERS
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. 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 2005.
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 2005 and 2004 were as
follows:
2005 2004
--------------- --------------
High Low High Low
------ ------ ------ -----
First Quarter $11.45 $ 8.78 $ 8.89 $7.45
Second Quarter 12.99 8.20 9.03 7.85
Third Quarter 12.90 10.10 9.25 7.99
Fourth Quarter 13.63 10.28 11.55 8.54
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, however, we
continually consider and review the merits of paying a dividend.
15
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 13, 2006, there were
approximately 802 holders of record of the Company's Common Stock.
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
warrants and rights and rights future issuance
Plan Category (a) (b) (c)
- -------------------------------------- -------------------- ------------------ ---------------
Employee Stock Purchase Plan --(1) --(1) 134,647
2003 Incentive Compensation Plan 74,566 $7.77 271,300
1993 Incentive Compensation Plan 157,522 $4.60 --(2)
1987 Amended and Restated Stock Option
and SAR Plan 3,100 $3.50 --(2)
------- ----- -------
235,188 $5.59 405,947
======= ===== =======
1) Employees eligible to participate in the Employee Stock Purchase Plan may
purchase shares of the Company's stock on a regular basis through payroll
deductions. The price of the shares to the employees equals the lowest of
the average of the bid and ask price of the last five days of each fiscal
quarter, or the average closing price of the last five days of each fiscal
quarter, or the last trade price on the day of purchase by the Company.
2) Both the 1987 and 1993 Incentive Compensation Plans have expired and no new
securities may be issued.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical financial data
for each of the five years in the period ended December 31, 2005. The selected
historical financial data set forth below has been derived from our audited
consolidated financial statements included elsewhere in this annual report on
Form 10-K. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited consolidated financial statements and related notes included
elsewhere in this annual report on Form 10-K.
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
($ in thousands, except per share
amounts)
Income statement data:
Net revenues $29,853 $28,480 $25,206 $23,683 $25,869
Impairment of intangible assets -- -- -- 346 --
Acquired in-process research and
development -- 483 -- -- --
Loss from unconsolidated investee -- 208 24 -- --
Impairment of investment in
unconsolidated investee -- 768 -- -- --
Income before income taxes 3,225 2,218 2,385 871 2,963
Net income 2,486 1,762 1,635 658 2,006
Diluted earnings per share $ 0.85 $ 0.61 $ 0.58 $ 0.24 $ 0.74
Balance sheet data:
Total assets $28,159 $25,387 $22,707 $20,982 $19,391
Working capital 18,508 15,989 13,105 12,355 11,478
Stockholders' equity 22,768 20,187 18,239 16,551 15,849
Common size income statement data:
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 49.2 49.2 52.7 56.1 52.6
------- ------- ------- ------- -------
Gross profit 50.8 50.8 47.3 43.9 47.4
Selling, general, and administrative
expenses 29.4 28.9 28.7 30.7 28.9
Research and development expenses 12.3 10.5 10.7 9.5 8.3
Acquired in-process research and
development -- 1.7 -- -- --
Impairment of intangible assets -- -- -- 1.4 --
------- ------- ------- ------- -------
Operating income 9.1 9.7 7.9 2.3 10.2
Interest and other income, net 1.7 1.5 1.6 1.3 1.3
Loss from unconsolidated investee -- 0.7 0.1 -- --
Impairment of investment in
unconsolidated investee -- 2.7 -- -- --
------- ------- ------- ------- -------
Income before income taxes 10.8 7.8 9.4 3.6 11.5
Provision for income taxes 2.5 1.6 2.9 0.9 3.7
------- ------- ------- ------- -------
Net income 8.3% 6.2% 6.5% 2.7% 7.8%
======= ======= ======= ======= =======
17
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 be allowed to temporarily exceed credit limits to accommodate
their growth until new credit limits are considered and established, otherwise
representatives are told they must comply with existing credit limits within a
specified period of time. 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
18
new technology or product that renders a product sold by the Company obsolete or
unnecessary, it could have a significant adverse effect on the Company's future
operating results and financial position.
The Company had changes in required reserves in recent periods due to
discontinuation of certain product lines and obsolescence related to new product
introductions, as well as declining market conditions. As a result, the Company
incurred net inventory charges of approximately $151,000 during fiscal 2003,
approximately $42,000 in fiscal 2004, and approximately $67,000 in fiscal 2005.
INTANGIBLE ASSETS The Company's intangible assets consist primarily of
intellectual property. 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.
The intangible assets acquired from Intelligent Ion, Inc. (III) in December 2004
consisted of patents and licenses. The majority of the purchase price was
allocated to acquired in-process research & development and was expensed because
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.
RECENT PRONOUNCEMENTS SEE NOTE 1 OF ITEM 8
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
2005 (Decrease) 2004 (Decrease) 2003
------- ---------- -------- ---------- -------
Total net revenues $29,853 5% $ 28,480 13% $25,206
Total cost of revenues 14,675 5% 14,012 5% 13,286
------- -------- -------
Gross profit 15,178 5% 14,468 21% 11,920
Selling, general, and administrative expenses 8,798 7% 8,219 14% 7,225
Research and development expenses 3,670 22% 2,998 11% 2,698
Acquired in-process research and
development -- (100%) 483 100% --
Impairment of intangible assets -- -- -- -- --
------- -------- -------
Operating income 2,710 (2%) 2,768 39% 1,998
Interest and other income 515 21% 426 3% 412
Loss from unconsolidated investee -- (100%) (208) 766% (24)
Impairment of investment in unconsolidated
investee -- (100%) (768) 100% --
------- -------- -------
Income before income taxes 3,225 45% 2,218 (7%) 2,385
Provision for income taxes 739 62% 456 (39%) 750
------- -------- -------
Net income 2,486 41% 1,762 8% 1,635
======= ======== =======
Diluted earnings per share $ 0.85 39% $ 0.61 5% $ 0.58
19
2005 Compared to 2004
NET REVENUES Total net revenues for the year ended December 31, 2005 increased
$1,373,000, or 5%, to $29,853,000, compared to $28,480,000 for the same period
of the prior year. Net revenue growth was driven by higher sales of the
MINICAMS(R) air monitoring system, gas chromatography (GC) components and
systems, Total Organic Carbon (TOC) analyzers, and Automated Chemistry
Analyzers.
Both domestic revenues and international revenues increased for the year ended
December 31, 2005, compared to the same period of the prior year. International
revenues decreased, however, as a percentage of total revenues, as sales into
Asia slowed, offsetting increases in Europe for the year ended December 31,
2005, 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, and in 2005, additional personnel were added to increase the
level of customer support. We believe that China is a growing market and that
committing resources to that market will better position the Company to compete
for business in China.
Revenues from both products and services increased for the year ended December
31,2005, compared to the same period of the prior year. Revenues from services
increased $413,000, or 14% to $3,331,000, compared to $2,918,000 for the same
period of the prior year. Revenues from services increased, compared to the same
period of the prior year, primarily due to approximately $253,000 in service
revenue recognized in the second quarter resulting from payment received for
services the Company performed at risk in the fourth quarter of 2004.
Although the Company's net revenues increased for the year ended December 31,
2005, 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 sale of products to that market is uneven in
product mix and may result in lower overall sales to that market segment. 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 a
potential market 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.
Historically, inflation nor changing prices have had a material impact on the
Company's net revenues, however, inflation in certain commodity components
included in the Company's products has resulted in increased manufacturing cost
in some of the Company's products which have not been fully recovered in product
pricing to customers.
GROSS PROFIT Gross profit for the year ended December 31, 2005 increased
$710,000, or 5% to $15,178,000, compared to $14,468,000 for the same period of
the prior year. Gross profit represented 50.8% of revenues for the year ended
December 31, 2005 and 50.8% for the same period of the prior year. The increase
in gross profit for the year ended December 31, 2005, compared to the same
period of the prior year, was due to an increase in revenues and improved
product mix with more sales of higher margin, newer products manufactured by the
Company, partially offset by an increase in cost of certain purchased component
parts from vendors that we were unable to pass on to customers, and increases in
other costs of sales, such as consumable supplies and expenses related to
demonstration models of new products (primarily TOC 1030 and Discrete Analyzer),
and increased warranty costs related to the resolution of new product issues.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES SG&A expenses for the year
ended December 31, 2005 increased $579,000, or 7% to $8,798,000, compared to
$8,219,000 for the same period of the prior year, primarily due to increases in
service, marketing and applications costs. In the prior year, efforts in these
areas went more towards fulfilling customer orders. SG&A expense increased as a
percentage of revenues for the year ended December 31, 2005 to 29.5%, compared
to 28.9% in 2004.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES R&D expenses for the year ended December
31, 2005 increased $672,000, or 22% to $3,670,000, compared to $2,998,000 for
the same period of the prior year. R&D expenses represented 12.3% of revenues
for the year ended December 31, 2005 and 10.5% of revenues for the same period
of
20
the prior year. The increase in R&D expenses for the year ended December 31,
2005 was primarily due to increased expense related to development of a
potential new GC Mass Spectrometer (MS) product. The purchase of III resulted in
the Company bringing in house development work for a major component of this
potential new product and accordingly, we incurred the associated cost. We
anticipate R&D expenses to remain at these levels and perhaps increase,
depending on the outcome of our efforts and expenses related to any actions we
may need to take in attempts to solve technical challenges encountered in our
efforts to create a commercial GC MS product. As stated previously, R&D spending
will likely increase over historical levels in 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.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT For the year ended December 31,
2005, we incurred no expense relating to acquired in-process research and
development, whereas such expenses amounted to $483,000 for the same period of
the prior year.
OPERATING INCOME Operating income for the year ended December 31, 2005 decreased
$57,000, or 2% to $2,711,000, compared to $2,768,000 for the same period of the
prior year. The decrease in operating income for the year ended December 31,
2005 is primarily due to the increase in R&D activity and SG&A expenditures,
partially offset by an increase in gross profit and a decrease in acquired
in-process R&D expenditures.
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 $89,000, or 21% to
$515,000, compared to $426,000 for the same period of the prior year, primarily
due to interest income from higher levels of invested funds and increasing
interest rates.
LOSS FROM AND IMPAIRMENT OF INVESTMENT IN UNCONSOLIDATED INVESTEE For the year
ended December 31, 2005, we had no expense relating to an unconsolidated
investee, whereas such expenses amounted to $976,000 for the same period of the
prior year.
INCOME BEFORE INCOME TAXES Income before income taxes for the year ended
December 31, 2005 increased $1,007,000, or 45% to $3,225,000, compared to income
of $2,218,000 for the same period of the prior year. The increase in income
before income taxes for the year ended December 31, 2005 was primarily due to
the prior period having approximately $1,459,000 in expenses relating to an
investment in an unconsolidated investee.
PROVISION FOR INCOME TAXES Provision for income taxes increased $283,000 for the
year ended December 31, 2005 to a provision of $739,000, compared to $456,000
for the same period of the prior year. The effective tax rate was 22.9% for the
year ended December 31, 2005. This is primarily due to certain permanent
differences between our book income and taxable income that lowers our tax
liability, such as dividends received deduction, extraterritorial income
exclusion, and past and future R&D credits. The past R&D credits amounted to
approximately $237,000 and relate to the fiscal years 2001 to 2004. This amends
all eligible past tax years, and we expect the future effective tax rates to
increase. The effective tax rate for the same period of the prior year was
20.5%. The increase over the prior year was primarily due to a decrease in
deductions for foreign sales, and a reduction in 2004 tax due to correcting the
previous year's tax accrual which did not recur in 2005.
NET INCOME Net income for the year ended December 31, 2005 increased $724,000,
or 41% to $2,486,000, compared to net income of $1,762,000 in the same period of
the prior year, primarily due to an increase in net revenues and gross margin,
and a decrease in acquired in-process R&D expense and losses on unconsolidated
investee, partially offset by an increase in provision for income taxes, R&D and
SG&A expenditures.
BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share were $0.88, and
diluted earnings per share were $0.85 for the year ended December 31, 2005,
compared to basic and diluted earnings of $0.63 and $0.61 per share,
respectively, for the prior year.
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
21
$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(R) 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 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.
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.
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.
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.
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.
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 at the acquisition date were 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 at acquisition date: Calendar Year 2006
22
Subsequent to the acquisition of these assets and during the whole of 2005,
technical progress on the development of a commercial product was slower than
predicted at the time of the acquisition because the core patented technology
required additional basic research before incorporation into a final product.
The status of the research and development at the end of 2005 can be estimated
as follows:
Percent completed at the end of 2005: 40%-50%
Estimated costs to complete technology at the end of 2005: $1,000,000
Risk-adjusted discount rate: 20%
First period expected revenue at the end of 2005: Calendar Year 2007
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 revenue above should not be relied upon as a
commitment or indication of product introduction date.
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 and
related intangible assets amounting to approximately $53,000 capitalized
subsequent to the acquisition.
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).
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
23
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 $0.58 per share,
respectively, for the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company considers a number of liquidity measures that aid in measuring the
Company's ability to meet its financial obligations. Such ratios, working
capital, and changes in cash and cash equivalents as of the end of the Company's
last three years are as follows:
($ in thousands) 2005 2004 2003
------- ------- -------
LIQUIDITY MEASURES
Ratio of current assets to current liabilities 4.4 4.1 3.9
Total liabilities to equity 24% 26% 25%
Days sales in accounts receivable 69 59 59
Average annual inventory turnover 2.7 3.1 3.3
Working capital $18,508 $15,989 $13,105
CHANGES IN CASH AND CASH EQUIVALENTS
Net cash provided by (used in)
Operating activities $ 1,930 $ 2,024 $ 2,684
Investing activities (1,958) (3,610) (3,673)
Financing activities 214 258 (58)
Net increase/(decrease) in:
Cash and cash equivalents 186 (1,328) (1,046)
Cash and cash equivalents:
Beginning of year 1,541 2,869 3,915
End of year 1,727 1,541 2,869
We have historically been able to fund working capital and capital expenditures
from operations, and expect to be able to finance our 2006 working capital
requirements from cash on hand and funds generated from operations. Although the
Company invests a portion of its excess funds generated from operations in
short-term securities, including money market funds, treasury bills, and a
portion in preferred stocks, the Company's primary plan for the use of cash is
continuing significant research and development efforts to introduce new
products.
Other matters which could affect the extent of funds required within the
short-term and long-term include future acquisitions of other businesses or
product lines. We may engage in discussions with third parties to acquire new
products or businesses or to form joint ventures. These types of transactions
may require additional funds from sources other than current operations. We
believe that such funds would come from traditional institutional debt financing
or other third party financing. We may also use our capital resources to enhance
the Company's competitiveness in the marketplace by providing favorable credit
terms to more customers, and increase stock levels of certain products to take
advantage of market opportunities.
AGGREGATE CONTRACTUAL OBLIGATIONS
24
Payments Due by Period
-----------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 years 3-5 years 5 years
- ----------------------- ---------- ---------- --------- --------- ---------
Operating Leases (1) $ 173,301 $ 173,301 -0- -0- -0-
Purchase Obligations (2) 2,407,116 2,407,116 -0- -0- -0-
---------- ---------- --- --- ---
Total $2,580,417 $2,580,417 -0- -0- -0-
========== ========== === === ===
(1) Future minimum rental payments under an operating lease for some leased
facilities expiring November 30, 2006.
(2) Open purchase orders primarily for raw materials, component parts, and
other supplies that the Company uses to manufacture its products.
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 2005, 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. Future minimum rental payments under this
lease are $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 consolidated financial statements for additional
segment data.
On or about January 27, 2006, Aviv Amirav filed a complaint against the Company
in the U.S. District Court of Southern New York, captioned Aviv Amirav v. CMS
Research Corporation, a wholly owned subsidiary of the Company, and O. I.
Corporation. The plaintiff seeks injunctive relief, unspecified damages,
including treble damages, attorneys' fees and costs for patent infringement,
inducement to patent infringement and breach of contract relating to a patent
licensed by Mr. Amirav to the Company. The Company is currently preparing its
answer to the complaint, and plans to vigorously oppose the plaintiff's
infringement and breach of contract claims. It is not possible at this stage of
the case to determine what liability exposure, if any, is faced by the Company;
however, an unfavorable outcome, including a determination that the Company is
not entitled to the license and/or a determination that the Company's sales
under the license are infringing transactions, could have a material adverse
impact on the Company's results of operations.
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.
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. Factors that could cause these differences include, but are not
limited to, those set forth under Item 1A -- Risk Factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
25
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, 2005 and December 31, 2004 was $9,841,000 and $8,586,000,
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 $1,000 was realized
as a gain on the sales of such investments during the fourth 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 registered public accountants
to monitor the functioning of the accounting and control systems and to review
the results of the audit performed by the independent registered public
accountants. The independent registered public 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 registered public accountants engaged by the Company.
The independent registered public accountants conduct an objective, independent
examination of the financial statements. Their report appears as a part of this
Annual Report on Form 10-K.
26
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, 2005 and
2004, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audit 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
GRANT THORNTON LLP
Houston, Texas
March 3, 2006
27
O. I. CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
-------------------------
2005 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,726,645 $ 1,541,000
Accounts receivable-trade, net of allowance
for doubtful accounts of $325,940 and
$271,344, respectively 6,324,499 4,898,290
Investment in sales-type leases-current portion 307,526 272,965
Investments, at market 9,840,704 8,585,532
Inventories 4,616,778 5,011,794
Current deferred income tax assets 904,400 697,812
Other current assets 178,774 181,551
----------- -----------
Total current assets 23,899,326 21,188,944
Property, plant and equipment, net 3,229,386 3,404,240
Investment in sales-type leases, net of current 189,782 275,016
Long-term deferred income tax assets 538,654 286,597
Intangible assets, net 275,755 208,263
Other assets 26,319 23,641
----------- -----------
Total assets $28,159,222 $25,386,701
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,427,626 $ 1,896,793
Accrued liabilities 3,963,703 3,302,812
----------- -----------
Total current liabilities 5,391,329 5,199,605
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 4,374,270 4,326,097
Treasury stock, 1,249,572 and 1,295,967
shares, respectively, at cost (5,456,134) (5,660,918)
Retained earnings 23,501,937 21,016,173
Accumulated other comprehensive (loss)
income, net (62,518) 95,406
----------- -----------
22,767,893 20,187,096
----------- -----------
Total liabilities and stockholders' equity $28,159,222 $25,386,701
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
28
O. I. CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Net revenues:
Products $26,521,944 $25,562,048 $22,210,242
Services 3,330,859 2,917,566 2,995,807
----------- ----------- -----------
Total net revenues 29,852,803 28,479,614 25,206,049
Cost of revenues:
Products 13,214,920 12,563,276 11,824,320
Services 1,459,805 1,448,772 1,461,350
----------- ----------- -----------
Total cost of revenues 14,674,725 14,012,048 13,285,670
----------- ----------- -----------
Gross profit 15,178,078 14,467,566 11,920,379
Selling, general and administrative expenses 8,797,890 8,218,685 7,224,661
Research and development expenses 3,669,670 2,998,044 2,697,851
Acquired in-process research and development -- 483,140 --
----------- ----------- -----------
Operating income 2,710,518 2,767,697 1,997,864
Other income:
Interest income, net 223,322 102,990 43,860
Other income 291,325 322,810 367,849
Loss from unconsolidated investee -- (207,914) (24,186)
Impairment of investment in unconsolidated
investee -- (767,900) --
----------- ----------- -----------
Income before income taxes 3,225,165 2,217,683 2,385,387
Provision for income taxes (739,401) (455,546) (750,664)
----------- ----------- -----------
Net income $ 2,485,764 $ 1,762,137 $ 1,634,723
=========== =========== ===========
Basic earnings per share $ 0.88 $ 0.63 $ 0.59
=========== =========== ===========
Diluted earnings per share $ 0.85 $ 0.61 $ 0.58
=========== =========== ===========
Weighted average number of shares outstanding:
Basic shares 2,836,506 2,793,619 2,756,430
Diluted shares 2,917,715 2,874,194 2,797,421
The accompanying notes are an integral part of
these consolidated financial statements.
29
O. I. CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------
2005 2004 2003
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 2,485,764 $ 1,762,137 $ 1,634,723
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 556,058 540,825 461,340
Acquired in-process research & development -- 483,140 --
Loss on obsolete inventory 66,897 42,461 151,639
Deferred income taxes (377,285) 78,157 87,865
Gain on disposition of property (5,002) (7,805) (12,820)
Loss from unconsolidated investee -- 207,914 24,186
Impairment of investment in Intelligent Ion, Inc. (III) -- 767,900 --
Changes in assets and liabilities
Accounts receivable (1,426,209) (538,734) (585,125)
Inventories 328,119 (1,979,607) 911,835
Other current assets and investments in sales-type leases 70,923 (63,396) (26,598)
Accounts payable (469,167) 590,717 (6,493)
Accrued liabilities 700,226 140,346 43,909
----------- ----------- -----------
Net cash provided by operating activities 1,930,324 2,024,055 2,684,461
----------- ----------- -----------
Cash flows from investing activities:
Purchase of Intelligent Ion, Inc. assets -- (588,140) --
Purchase of property plant, and equipment (367,180) (504,090) (483,904)
Proceeds from sale of property plant, and equipment 5,893 10,422 25,403
Purchase of investments (7,481,696) (4,018,650) (3,055,750)
Maturity/proceeds from sales of investments 5,935,592 1,442,281 840,000
Investment in unconsolidated investee -- -- (1,000,000)
Cash value of life insurance -- 53,573 --
Change in other assets (50,911) (5,520) 1,491
----------- ----------- -----------
Net cash used in investing activities (1,958,302) (3,610,124) (3,672,760)
----------- ----------- -----------
Cash flows from financing activities:
Purchase of treasury stock -- -- (143,105)
Proceeds from issuance of treasury stock 213,623 257,823 85,410
----------- ----------- -----------
Net cash provided by (used in) financing activities 213,623 257,823 (57,695)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 185,645 (1,328,246) (1,045,994)
Beginning of year 1,541,000 2,869,246 3,915,240
----------- ----------- -----------
End of year $ 1,726,645 $ 1,541,000 $ 2,869,246
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Income taxes 738,717 635,021 790,466
Non-cash investing and financing activities:
Offset of notes for advances to III in exchange for III assets -- 420,809 --
The accompanying notes are an integral part of these consolidated
financial statements.
30
O. I. CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
------------------- Paid-In Treasury Retained Comprehensive Stockholders'
Shares Amount Capital Stock Earnings Income/(Loss) Equity
--------- -------- ---------- ----------- ----------- ------------- -------------
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
Comprehensive income: 1,729 11,992 13,721
Unrealized gain on
investments, net of
deferred tax expense of
$59,635 110,530
Net income 1,634,723
Total comprehensive income 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:
Unrealized loss on
investments, net of
deferred tax benefit of
$30,499 (71,711)
Net income 1,762,137
Total comprehensive income 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
Issuance of 44,067 shares from
treasury for exercise of
stock options (5,023) 195,200 190,177
Issuance of 2,178 shares from
treasury to Employee
Stock Purchase Plan 13,862 9,584 23,446
Excess tax benefit for
disqualifying employee
incentive stock option
dispositions 39,334 39,334
Comprehensive income:
Unrealized loss on
investments, net of
deferred tax benefit of
$81,360 (157,924)
Net income 2,485,764
Total comprehensive income 2,327,840
--------- -------- ---------- ----------- ----------- --------- -----------
Balance, December 31, 2005 4,103,377 $410,338 $4,374,270 $(5,456,134) $23,501,937 $ (62,518) $22,767,893
========= ======== ========== =========== =========== ========= ===========
The accompanying notes are an integral part of these
financial statements.
31
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, 2005 and
2004 are uninsured temporary cash investments in money market funds of $313,000
and $93,000, respectively. Additionally, the Company had at December 31, 2005
and 2004, $215,000 and $52,000, 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, 2005 and 2004 consisted of
preferred
32
stock investments, medium-term commercial notes, short-term commercial paper,
and Treasury bills. These investments were classified as available-for-sale and
are stated at fair value at December 31, 2005 and 2004. The Company also had
six-month Treasury bills at December 31, 2005 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 statement 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. Declines in the fair value of
individual available-for-sale securities below their carrying value that are
other than temporary, result in write-downs of the individual securities to
their fair value. The related write-downs are included in earnings as realized
losses.
INVESTMENT IN SALES-TYPE LEASES The Company's leasing operations consist of
leasing analytical instruments. All 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.
LOSS FROM UNCONSOLIDATED INVESTEE. The Company's losses from its investment in
Intelligent Ion, Inc. (III) represented its proportionate share of III's losses
under the equity method of accounting. The Investment in III was written off in
2004.
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. Improvements of leased properties are amortized over the
shorter of the life of the applicable lease term on the estimated useful life.
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 2005, 2004 and 2003 were $147,341, $201,560 and
$183,392, 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.
33
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. 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
2,836,506 in 2005, 2,793,619 in 2004, and 2,756,430 in 2003. The weighted
average number of shares used in the diluted earnings per share computation was
2,917,715 in 2005, 2,874,194 in 2004, and 2,797,421 in 2003. At December 31,
2005, options to acquire 8,000 shares at the weighted average exercise price of
$11.65 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. At December 31, 2003 options
to acquire 84,400 shares at the weighted average exercise price of $6.24 were
not included in the computations of dilutive earnings per share as their effect
would be anti-dilutive.
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, 2005, 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)
------------------------
2005 2004 2003
------ ------ ------
Net income, as reported $2,486 $1,762 $1,635
Deduct: Total stock-based compensation
expense determined under fair value based
method for awards granted, modified, or
settled, net of related tax effects 96 72 49
------ ------ ------
Pro forma net income $2,390 $1,690 $1,586
====== ====== ======
Earnings per share:
Basic--as reported $ 0.88 $ 0.63 $ 0.59
Basic--pro forma $ 0.84 $ 0.61 $ 0.58
Diluted--as reported $ 0.85 $ 0.61 $ 0.58
Diluted--pro forma $ 0.82 $ 0.59 $ 0.57
34
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 2005, 2004, and 2003, respectively: dividend yield of zero for each
year; expected volatility of 27, 27, and 37 percent; risk-free interest rates of
3.48, 3.10, and 3.91 percent; and expected lives of three, seven and seven
years. The weighted average fair value at the date of grant for options granted
during 2005, 2004, and 2003 was $2.61, $2.93, and $2.25, 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 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.
RECENT PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board
issued Statement 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS
123(R) 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. SFAS
123(R) 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." SFAS 123(R)
supersedes APB Opinion 25, "Accounting for Stock Issued to Employees" and its
related interpretations and eliminates the alternative to use APB Opinion 25's
intrinsic value method of accounting, which the Company used through December
31, 2005.
The Company will adopt Statement 123(R) on January 1, 2006, using the modified
prospective method, whereby we will apply Statement 123(R) to new and modified
awards beginning January 1, 2006. Additionally, we will be required to recognize
compensation cost as expense for the portion of outstanding unvested awards,
based on the grant-date fair value of those awards calculated using the
Black-Scholes option pricing model under Statement 123 for pro forma
disclosures. The effect of adopting Statement 123(R) for current outstanding
options, not including future grants in 2006, will decrease the Company's net
income by approximately $51,000 during 2006.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43", which is the result of its efforts to converge U.S. accounting
standards for inventories with International Accounting Standards. SFAS 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. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005
The FASB has issued SFAS No. 154, "Accounting Changes and Error Corrections".
This new standard replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements".
Among other changes, SFAS 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is impracticable to do so.
SFAS 154 also provides that (1) a change in method of depreciating or amortizing
a long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." SFAS 154 is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005. Early adoption of
SFAS 154 is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005.
On June 8, 2005, the FASB issued a FASB Staff Position (FSP) interpreting FASB
Statement No. 143, "Accounting for Asset Retirement Obligations." Specifically,
the FASB issued FSP FAS 143-1, "Accounting for Electronic Equipment Waste
Obligations." This standard addresses the accounting for obligations associated
with Directive 2002/96/EC, Waste Electrical and Electronic Equipment, which was
adopted by the European Union. The FSP provides guidance on how to account for
the effects of the Directive but only with respect to historical waste (i.e.,
waste associated with products placed on the market on or before August 13,
2005). The guidance in the FSP is required to be applied the later of (1) the
first reporting period ending after June 8, 2005, or (2) the date of the
adoption of the law by the applicable EU-member country. As of December 31,
2005, many EU-member countries
35
had not yet adopted the Directive, and the Company is still evaluating the
impact, if any, of FSP FAS 143-1 on its financial position, cash flow, or
results of operations.
In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS
124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." This FSP provides guidance on determining if an investment
is considered to be impaired, if the impairment is other-than-temporary and the
measurement of an impairment loss. It also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The guidance in this FSP amends Statement 115,
Accounting for Certain Investments in Debt and Equity Securities, and is
effective for reporting periods beginning after December 15, 2005. The Company
is currently accounting for investments in accordance with this guidance, and
therefore, the adoption of this FSP will not have a material impact on the
Company's results of operations or financial position.
In February 2006, the FASB issued Statement No. 155, Accounting for Certain
Hybrid Financial Instruments (" FAS 155"), which amends FASB Statement No. 133
and FASB Statement 140, and improves the financial reporting of certain hybrid
financial instruments by requiring more consistent accounting that eliminates
exemptions and provides a means to simplify the accounting for these
instruments. Specifically, FASB Statement No. 155 allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. FAS 155 is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company does not
intend to issue or acquire the hybrid instruments included in the scope of FAS
155 and does not expect the adoption of FAS 155 to affect future reporting or
disclosures.
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.
36
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, 2005 or 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:
2005 2004
-------- --------
Total minimum lease payments to be received $497,308 $547,981
Less: Unearned income (45,409) (68,090)
-------- --------
Net investment in sales-type leases $451,899 $479,891
======== ========
At December 31, 2005, minimum lease payments for each of the five succeeding
fiscal years are as follows: $307,526 in 2006, $131,338 in 2007, $57,464 in
2008, $980 in 2009, and $0 in 2010.
NOTE 4. INVENTORIES
Inventories, which include material, labor, and manufacturing overhead, on
December 31, 2005 and 2004, consisted of the following:
2005 2004
---------- ----------
Raw materials $3,296,685 $3,055,911
Work-in-process 650,668 1,071,486
Finished goods 669,425 884,397
---------- ----------
$4,616,778 $5,011,794
========== ==========
An expense for obsolete inventory was determined in 2005 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 expense for
obsolete inventory totaled approximately $67,000 in 2005, approximately $42,000
in 2004, and approximately $151,00 in 2003. These expenses are 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, 2005 and 2004, consisted
of the following:
Estimated
Useful Lives 2005 2004
-------------- ----------- -----------
Land $ 40,462 $ 40,462
Buildings 33 to 40 years 3,847,835 3,845,499
Leasehold improvements 5 years 121,132 117,522
Furniture and equipment 3 to 10 years 3,640,322 3,316,298
----------- -----------
7,649,751 7,319,781
Less accumulated depreciation (4,420,365) (3,915,541)
----------- -----------
$ 3,229,386 $ 3,404,240
=========== ===========
Depreciation expenses totaled $541,148 and $531,565 for the years ended December
31, 2005 and 2004, respectively.
NOTE 6. INVESTMENTS
Investments considered available-for-sale at December 31, 2005 and 2004,
consisted of the following:
37
2005 2004
---------- ----------
Marketable equity securities $3,742,675 $4,436,755
Corporate securities 4,604,445 1,465,855
Other securities 500,000 500,000
U.S. Government and federal agency securities 993,584 2,182,922
---------- ----------
$9,840,704 $8,585,532
========== ==========
December 31, 2005
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities Available-for-Sale
Debt securities:
U.S. Government and federal agency $ 993,584 $ 0 $ 0 $ 993,584
Corporate 4,716,540 0 (112,095) 4,604,445
Other 500,000 0 0 500,000
---------- -------- --------- ----------
Total debt securities 6,210,124 0 (112,095) 6,098,029
Marketable equity securities 3,725,305 147,238 (129,868) 3,742,675
---------- -------- --------- ----------
Total securities available-for-sale $9,935,429 $147,238 $(241,963) $9,840,704
========== ======== ========= ==========
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
========== ======== ========= ==========
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 2005 follows:
Available for Sale
---------------------------
Fair
Amortized Cost Value
-------------- ----------
Within 1 year $4,710,124 $4,710,124
Over 1 year through 5 years 1,500,000 1,387,905
---------- ----------
$6,210,124 $6,098,029
========== ==========
For the years ended December 31, 2005, 2004 and 2003, proceeds from sales of
securities available for sale amounted to $533,513, $978,113 and $840,000,
respectively. Gross realized gains amounted to $38,949, $70,282 and $12,739 in
2005, 2004 and 2003, respectively. Gross realized losses amounted to $38,193,
$88,802, and $573 in 2005, 2004, and 2003, respectively. For the years ended
December 31, 2005, 2004 and 2003, dividend income amounted to $262,126,
$263,479, and $277,103, respectively.
Information pertaining to securities with gross unrealized losses at December
31, 2005, aggregated by investment category and length of time that individual
securities have been in a continuous loss position follows:
38
2005
-------------------------------------------------
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 0 0 112,095 1,387,905
Other 0 0 0 0
------- ---------- -------- ----------
Total debt securities 0 0 112,095 1,387,905
Marketable equity securities 49,892 1,040,655 79,975 836,000
------- ---------- -------- ----------
Total securities available-for-sale $49,892 $1,040,655 $192,070 $2,223,905
======= ========== ======== ==========
2004
-------------------------------------------------
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. The Company does not believe these unrealized losses are "other
than temporary" as (1) the Company has the ability and intent to hold the
investments to maturity, or a period of time sufficient to allow for a recovery
in market value; (2)it is not probable that the Company will be unable to
collect the amounts contractually due; and (3) no decision to dispose of the
investments was make prior to the balance sheet date.
NOTE 7. INTANGIBLE ASSETS
Intangible assets on December 31, 2005 and 2004, consisted of the following:
2005 2004
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Patents $336,853 $(159,922) $254,451 $(151,188)
Rights to Licenses 105,000 (6,176) 105,000 -0-
-------- --------- -------- ---------
$441,853 $(166,098) $359,451 $(151,188)
======== ========= ======== =========
Amortization expense charged to operations amounted to approximately $14,910,
$23,104, and $9,613, for the years ended December 31, 2005, 2004, and 2003,
respectively, including $12,000 expense during 2004 due to the abandonment of a
patent.
39
Estimated future amortization expense:
For year ended 12/31/06 $15,991
For year ended 12/31/07 $15,408
For year ended 12/31/08 $14,705
For year ended 12/31/09 $14,705
For year ended 12/31/10 $13,932
Each year, the Company performs an annual evaluation of the future prospects of
certain products and their related inventory and intangible assets. The Company
evaluated its remaining intangible assets in 2005 and in 2004 and determined
that no impairment charge was necessary.
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities on December 31, 2005 and 2004, consisted of the following:
2005 2004
---------- ----------
Accrued compensation and other related expenses $1,506,029 $1,356,481
Accrued warranties 635,669 650,861
Unearned revenues 431,989 301,457
Unearned revenues - service contracts 428,375 413,995
Unearned revenues/deposits - sales-type leases 165,316 168,780
Other liabilities and accrued expenses 796,325 411,238
---------- ----------
$3,963,703 $3,302,812
========== ==========
NOTE 9. PRODUCT WARRANTY LIABILITIES
The changes in the Company's product warranty liability on December 31, 2005 and
2004 are as follows:
2005 2004
--------- ---------
Liabilities, beginning of year $ 650,861 $ 707,225
Expense for new warranties issued 485,932 341,766
Warranty claims (501,124) (398,130)
--------- ---------
Liabilities, end of year $ 635,669 $ 650,861
========= =========
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 3,100 shares remain outstanding under the 1987 Plan
at December 31, 2005.
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 157,522 shares remain outstanding under the
1993 plan at December 31, 2005.
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
40
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.
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, 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
Options granted 8,000 11.65 11.65
Options exercised (44,217) 2.50 - 8.36 4.31
Options forfeited or cancelled (1,300) 3.50 - 8.36 4.62
-------
Options outstanding, December 31, 2005 235,188 $2.90 - 11.65 $ 5.60
There were 187,888, 165,476, and 175,452, share options exercisable at December
31, 2005, 2004, and 2003, respectively.
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 2005:
Options
Options Outstanding Exercisable
---------------------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Ranges of Remaining Life Exercise Exercise
Exercise Prices Shares in Years Price Shares Price
- --------------- ------ -------------- -------- ------ --------
$2.90 - $ 4.03 98,539 5.2 $3.85 82,339 $3.84
$4.12 - $ 6.52 77,383 4.3 $5.42 72,283 $5.51
$7.87 - $11.65 59,266 8.4 $8.74 33,267 $9.03
In 1989, the Company established an Employee Stock Purchase Plan, which the
Board of Directors, in 1998,
41
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, 2005, 65,353 shares had been
purchased under the plan.
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, 2005, no preferred stock had been issued and none
is outstanding.
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, 2005.
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
-------------------------------
2005 2004 2003
--------- -------- --------
Current provision:
Federal $ 883,835 $335,194 $481,393
State 232,856 130,338 120,861
Deferred provision (benefit) (377,290) (9,986) 148,410
--------- -------- --------
$ 739,401 $455,546 $750,664
========= ======== ========
The provision for income taxes differs from the amount computed by applying the
federal statutory rates for the following reasons:
Years Ended December 31
-----------------------
2005 2004 2003
---- ---- ----
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 4.8 6.0 6.0
Future research and development credits (5.6) (7.7) (5.5)
Past research and development credits (7.3) -- --
Dividends received deduction (1.9) (2.8) (2.8)
Disqualifying incentive stock option
dispositions -- (2.5) --
Extraterritorial Income Exclusion (1.4) (1.5) --
Other, net 0.3 (5.0) (0.2)
---- ---- ----
22.9% 20.5% 31.5%
==== ==== ====
Deferred tax assets (liabilities) are comprised of the following at December 31,
2005 and 2004:
42
2005 2004
---------- --------
Current:
Warranty reserve $ 254,268 $293,765
Bad debt allowance 115,840 102,772
Inventory reserve 236,825 97,135
Uniform capitalization 184,963 161,448
Accrued vacation 76,735 78,460
Other 35,769 (35,768)
---------- --------
Total current $ 904,400 $697,812
========== ========
Noncurrent:
Depreciation $ 348,343 $ 80,578
Deferred compensation 47,447 47,447
Intangibles 29,856 91,265
Other 113,008 67,307
---------- --------
Total noncurrent 538,654 286,597
Net tax asset before valuation
allowance 1,443,054 984,409
Valuation allowance -- --
---------- --------
Net deferred tax asset $1,443,054 $984,409
========== ========
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 $225,000, $176,000, and $125,000 to the
401(k) Plan for the years ended December 31, 2005, 2004, and 2003, 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 $19,231, $22,589, and $23,874 in 2005, 2004, and 2003,
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 2005, 2004, and 2003, was $196,664, $195,535, and
$191,904, respectively. Future minimum rental payments under these leases for
each year of the next five successive years are $171,050, $-0-, $-0-, $-0-, and
$-0-.
Other than as described below, there are no material pending legal proceedings
other than ordinary, routine litigation incidental to the business to which the
Company is a party or of which any of its property is subject.
The Company and its wholly-owned subsidiary CMS Research Corp. ("CMS Research")
have been sued by Aviv Amirav ("Amirav") in a Complaint filed in the United
States District Court for the Southern District of New York on January 26, 2006
styled Amirav v. CMS Research Corp. and O.I. Corporation, Case No. 06-Civ-00659.
The Complaint alleges (i) infringement and contributory infringement of United
States patent no. 5,153,673, issued to Amirav, and (ii) breach of a license
agreement between Amirav and CMS Research. Amirav's Complaint seeks (i)
preliminary and permanent injunctive relief, (ii) actual damages in an
unspecified amount, treble damages, and punitive damages, and (iii) attorneys'
fees, interest, and other relief. The Company is currently preparing its answer
to the complaint, and plans to vigorously oppose the plaintiff's. It is not
possible at this stage of the case to
43
determine what liability exposure, if any, is faced by the Company; however, an
unfavorable outcome, including a determination that the Company is not entitled
to the license and/or a determination that the Company's sales under the license
are infringing transactions, would have a material adverse impact on the
Company's results of operations.
The ultimate resolution of these matters could have a material, adverse effect
on the Company's financial position and results of operations.
NOTE 15. SEGMENT DATA
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. SFAS 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. SFAS 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, 2005, 2004, and 2003, 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,
2005, 2004, and 2003, are as follows:
Years Ended December 31
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Net revenues from unaffiliated customers:
United States $21,321,535 $20,074,606 $18,441,929
Foreign $ 8,531,268 $ 8,405,008 $ 6,764,120
Long-lived assets at end of year:
United States $ 3,229,386 $ 3,404,240 $ 3,434,333
One customer accounted for approximately 16% of revenues in 2005 and 11% of
revenues in 2004. No single customer accounted for more than 10% of revenues in
2003. Sales to federal, state, and municipal governments accounted for 25% of
total revenues in 2005, 24% of total revenues in 2004, and 20% of total revenues
in 2003.
Sales to the Asia-Pacific region were approximately 13% of net revenues for
2005, 16% of net revenues for 2004 and 13% of net revenues for 2003; and sales
to the European-African region were approximately 12% of net revenues for 2005
and 10% of net revenues for 2004.
NOTE 16. QUARTERLY INFORMATION (UNAUDITED)
Quarterly financial information for 2005 and 2004 is summarized as follows:
($ in thousands, except per share amounts) First Second Third Fourth
2005 Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------ ------ ------ ------ ------
Net revenues $7,700 $7,024 $7,239 $7,889
Gross profit 4,055 3,559 3,550 4,014
Net income 620 442 463 961
Basic earnings per share 0.22 0.16 0.16 0.34
Diluted earnings per share 0.21 0.15 0.16 0.33
44
($ 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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with our independent registered
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, 2005, 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.
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 2006 Annual Meeting of Shareholders to be held on May 8, 2006, 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 2006 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 2006 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 2006 Annual Meeting of
Shareholders, which section is incorporated in this annual report on Form 10-K
by reference.
ITEM 11. EXECUTIVE COMPENSATION
45
Information concerning executive compensation is set forth in the section
entitled "Executive Compensation" in our Proxy Statement for the 2006 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 2006 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 2006 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 2006 Annual Meeting
of Shareholders, which section is incorporated in this annual report on Form
10-K by reference.
46
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............ 27
Consolidated Balance Sheets at December 31, 2005 and 2004 ......... 28
Consolidated Statements of Income for the years ended December 31,
2005, 2004, and 2003............................................ 29
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003............................... 30
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2005, 2004, and 2003......................... 31
Notes to Consolidated Financial Statements......................... 32-44
(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).
47
*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. (filed as exhibit 10.9 to the
Company's Annual Report on form 10-K for the year-ended
December 31, 2004 and incorporated herein by reference).
*10.10 Form of Nonqualified Stock Option Agreement between O.I.
Corporation and its Employees. (filed as exhibit 10.10 to the
Company's Annual Report on form 10-K for the year-ended
December 31, 2004 and incorporated herein by reference).
*10.11 Form of Qualified Stock Option Agreement between O.I. Corporation
and it Employees. (filed as exhibit 10.11 to the
Company's Annual Report on form 10-K for the year-ended
December 31, 2004 and incorporated herein by reference).
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 18,
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.
48
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, 2006 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, 2006
- ------------------------------ Director
William W. Botts (Principal Executive Officer)
/s/ Juan M. Diaz Vice President- Corporate Controller, March 23, 2006
- ------------------------------ (Principal Financial Officer and
Juan M. Diaz Principal Accounting Officer)
/s/ Jack S. Anderson Director March 23, 2006
- ------------------------------
Jack S. Anderson
/s/ Richard W. K. Chapman Director March 23, 2006
- ------------------------------
Richard W. K. Chapman
/s/ Edwin B. King Director March 23, 2006
- ------------------------------
Edwin B. King
/s/ Craig R. Whited Director March 23, 2006
- ------------------------------
Craig R. Whited
49
EXHIBIT INDEX
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.