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, 2006
[ ] 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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value Nasdaq Global Market
$0.10 per share
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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]
The aggregate market value, as of June 30, 2006, 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 (assuming, for this purpose, that all
directors, officers and owners of 5% or more of the registrant's common stock
are deemed affiliates) was approximately $20,678,697.
The number of outstanding shares of common stock as of March 15, 2007 was
2,861,711.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2007 Annual Meeting of Shareholders
Part III information is incorporated by reference from the Proxy Statement
CAUTIONARY STATEMENT
Except for the historical financial information contained herein, the
matters discussed in this report on Form 10-K (as well as documents incorporated
herein by reference) may be considered "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. Such forward-looking
statements include declarations regarding the intent, belief or current
expectations of O.I. Corporation and its management and may be signified by the
words "expects," "anticipates," "intends," "believes" or similar language. You
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties. Actual
results could differ materially from those indicated by such forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed under "Risk Factors" and elsewhere in this report. O.I.
Corporation disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
O. I. Corporation, referred to as the Company, OI, 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, we moved from Oklahoma City, Oklahoma to College Station,
Texas, and changed our name to Oceanography International Corporation. To better
reflect current business operations, we again changed our name to O.I.
Corporation in July 1980, and in January 1989 we began doing business as OI
Analytical.
At OI, we provide innovative products for chemical monitoring and analysis. Our
products perform detection, analysis, measurement, and monitoring applications
in a wide variety of industries including food, beverage, pharmaceutical,
semiconductor, power generation, chemical, petrochemical and security.
Headquartered in College Station, Texas, we sell our products throughout the
world utilizing a direct sales force as well as a network of independent sales
representatives and distributors. Our primary strategy is to identify market
niches we can penetrate using our product development capabilities,
manufacturing processes and marketing skills with the goal of assuming a market
leadership position. Management continually emphasizes product innovation,
quality improvement, performance enhancement, and on-time delivery while
striving for product cost improvements to promote added value for our products.
We seek growth opportunities through 1) the development of new applications for
existing products, 2) technological and product improvement to develop new
products for both new and existing markets and 3) the acquisition and
development of new products and competencies.
STOCK OPTION INVESTIGATION
During the first quarter of 2007, we conducted a voluntary internal review of
our historical stock option grants, stock option exercises and related option
and compensation procedures in addition to certain accounting matters at the
request of our Board of Directors and then-current President and Chief Executive
Officer William W. Botts. This review was performed at the direction of a
Special Committee of our Board comprised of three independent directors, each of
whom joined the Board in 2006. The Special Committee was given complete
authority and all powers necessary to conduct this review. The Special Committee
also engaged outside legal counsel and other outside consultants to assist it in
performing its duties.
During the investigation, the Special Committee reviewed all stock option grants
from 1985 through 2006, encompassing approximately 469 stock option grants
granting 1,329,700 stock options to employees and non-employee directors on 48
different grant dates. The Special Committee also investigated all stock option
exercises from 1997 to 2001 in which the exercise price was paid through the
tender of Company common stock. The Special Committee's legal and accounting
advisors identified, preserved, collected and reviewed over 17,000 documents and
conducted 14 interviews of current and former employees and members of the Board
of Directors.
Based on the evidence reviewed by its legal and accounting advisors, the Special
Committee came to the following principal findings regarding the Company's
historical stock option practices:
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- Between 1985 and 2006, administrative deficiencies led to a number of
misdated option grants and errors in the selection of exercise prices
for certain grants.
- In 1997, the issuance of 81,500 options pursuant to the Company's 1987
Stock Option Plan was approved on a date after which the plan had
expired and resolutions approving these grants were inserted into the
minutes of a Board meeting that occurred prior to the expiration of
the plan.
- In 1998, the Compensation Committee of the Board approved the cashless
exercise by Mr. Botts of a stock option to purchase 15,000 shares of
O. I. common stock on a date following the expiration of that stock
option, resulting in a benefit to Mr. Botts not permissible under the
Company's stock option plan. The approval was reflected in resolutions
approved for inclusion in minutes of a meeting that occurred prior to
the expiration of the option.
- From 2003 to 2006, administrative errors were made in the
determination of exercise prices relating to automatic option grants
made to Board members at the Company's Annual Meeting of Shareholders.
Pursuant to the Company's 2003 option plan, at each annual meeting
each of the Company's non-employee directors receive a grant to
purchase 2,000 shares of the Company's common stock. The exercise
price for these grants should have been based on the closing price on
the last trading day prior to the annual meeting but were instead
mistakenly based on the closing price on the day of the annual
meeting. In 2004 and 2006, this resulted in a benefit to these Board
members of a reduced exercise price of $0.191 per share in 2004 and
$1.35 per share in 2006. In 2003 and 2005, the exercise price of the
stock option exceeded the closing price of the Company's common stock
on the last trading day prior to the annual meeting and therefore
there was no benefit to these Board members. The impact of these
errors is insignificant to the consolidated financial statements
contained in this Form 10-K.
- The limited controls and the lack of definitive processes for stock
option granting and approval allowed for abuse, including on three
separate occasions the apparent use of hindsight in the establishment
of more favorable grant dates and exercise prices for options.
- Non-cash stock-based compensation expense associated with
discrepancies found in the measurement dates and the determination of
exercise prices for certain stock options granted between 1985 and
2006 totaled approximately $371,000. Essentially all of this expense
occurred in connection with stock option grants issued during the time
period from 1985 through 2001.
In addition, the Special Committee came to the following principal findings
regarding the exercise of stock options by William W. Botts and Jane Smith:
As permitted by our stock option plans, Mr. Botts tendered shares of OI
common stock held by him to pay the exercise price of stock options held by
him on six occasions from December 1997 to November 2001. As required by
the option plan under which these grants were made, Mr. Botts obtained the
approval of the Board or Compensation Committee to conduct such exercises.
In some cases this approval was obtained after the option exercise and in
some cases this approval was obtained before such exercise. However, such
exercises were apparently approved without Mr. Botts making full disclosure
to the Board or Compensation Committee that, for each such exercise, he
used the high sale price of the day on which he represented that he
exercised his stock options to value the shares of common stock he tendered
to pay the exercise price for his stock options. In addition, on five of
these six occasions, the market price of OI common stock on the date Mr.
Botts represented that he exercised his stock options using shares of
common stock to pay the exercise price corresponded with the high trading
price for OI common stock during the period around the date Mr. Botts
represented that he exercised these options. In some cases the price used
by Mr. Botts was the high price for several weeks surrounding the exercise
and in one case the price was the high trading price for the year in which
the option was exercised. On five of these occasions, the investigation
uncovered no evidence of backdating in the selection by Mr. Botts of his
exercise dates. However, on one occasion, the Special Committee found
evidence of the use of hindsight in selecting the exercise price which
resulted in Mr. Botts retaining up to 7,004 additional shares of common
stock that he would not have been entitled to retain had he used the
closing price of OI common stock on the date the investigation indicated
was the most likely date that Mr. Botts actually exercised this option. The
Special Committee also found that Jane Smith, our former Corporate
Secretary, assisted Mr. Botts in processing and documenting these stock
option exercises. In addition, Ms. Smith also exercised stock options and
tendered OI common stock as payment of the exercise prices held by her on
some of the same dates as Mr. Botts, including the date on which the
Special Committee found evidence of backdating.
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RESTATEMENT OF FINANCIAL STATEMENTS
We have restated the accompanying financial statements by reducing retained
earnings and increasing additional paid in capital in the amount of $371,000 as
of January 1, 2004, reflecting the additional compensation expense for prior
years. The restatement had no material impact on our consolidated statements of
income or cash flows during any of the periods presented.
RESIGNATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER AND FORMER CORPORATE
SECRETARY
In light of the findings of the Special Committee, William W. Botts resigned his
positions as President, Chief Executive Officer and as a director of OI and Jane
Smith, our former Corporate Secretary, also resigned her employment with OI.
EXPENSE OF THE INVESTIGATION
We anticipate the total cost of the investigation to total approximately $1.25
million, consisting primarily of legal and consulting expenses. All such costs
will be reflected in our first quarter 2007 financial results.
REMEDIAL ACTIONS AND RECOMMENDATIONS
In 2003, the Board authorized changes to the 2003 Incentive Compensation Plan in
order to clarify and revise the provisions for granting and exercising of stock
options. These changes were enacted to remediate deficiencies in internal
control that existed at that time. We believe internal controls surrounding the
granting and exercising of stock options have been functioning adequately since
the remediation occurred. Based on the results of its investigation, the Special
Committee has recommended further changes to improve the process. We are
currently reviewing these recommendations and developing and implementing a
remediation plan addressing historical option grants and the granting of future
equity-based awards. In addition, we have delivered a full presentation
regarding the results of the Special Committee's investigation to the staff of
the Division of Enforcement of the Securities and Exchange Commission and will
continue to cooperate fully in the event of any further inquiry.
OPERATIONS
We design, manufacture, market and service products in the following primary
areas: 1) Gas Chromatograph, or GC, Instruments and Systems, 2) Total Organic
Carbon Analyzer Systems, 3) Automated Chemistry Analyzers, 4) Sample Preparation
Products and Systems and 5) Filtometers, also called Infra-Red (IR) Based
Analyzers. Our products in each of these areas are further described below.
GAS CHROMATOGRAPHY INSTRUMENTS AND SYSTEMS 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 or ELCD; Photoionization Detector or
PID; Flame-Ionization Detector or FID; Tandem PID/ELCD; Tandem PID/FID;
Halogen Specific Detector or XSD(TM); Pulsed Flame Photometric Detector or
PFPD; Injectors and Inlets; Eclipse Purge-and-Trap Sample Concentrator or
P&T; P&T Autosampler; Preconcentration and Thermal Desorption Device; Air
Tube Desorber; Automated PH Measurement Device; and Multi-Point Automated
Samplers.
We purchase analytical instruments including GCs and GC mass spectrometers, or
GC/MS, manufactured by GC companies. Many of these purchases occur under our OEM
agreement with Agilent Technologies, Inc, or Agilent. We typically integrate GC
components with GCs and GC/MS to configure customized GC analyzer systems
including: VOC, or volatile organic carbon, analyzers; BTEX, or Benzene,
Toluene, Ethylbenzene, and Xylenes, analyzers; pesticide analyzers; fluorinated
by-products, or FBA, analyzers; continuous emissions monitoring, or CEM;
continuous air monitoring analyzers for air toxins and VOCs; permeation testing
analyzers; and ethylene oxide analyzers.
At our factories, we produce GC systems in standard and custom configurations to
meet customers' needs in the laboratory, in the field and on-line. Configured
systems analyze chemical compounds in gas, liquid, or solid environments by
incorporating the appropriate components. One such configured continuous air
monitoring analyzer is our MINICAMS(R) product line. Our customers use MINICAMS
to monitor toxic airborne chemical compounds for the presence of gaseous
chemical warfare agents such as Mustard, or HD; Sarin, or GB; Soman, or GD;
Tabun, or GA;
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and Lewisite, or L. In addition, we offer an automated Continuous Sampling
System that 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, OR TOC, ANALYZER SYSTEMS TOC analyzers and related
accessories are used to measure organic and inorganic carbon levels in ultrapure
water, drinking water, groundwater, wastewater, process waters, soils, and
solids. Our TOC analyzers can be employed to comply with methods and testing
required by the United States Environmental Protection Agency, or EPA, and other
world-wide regulatory agency requirements; to ensure compliance with United
States Pharmacopoeia testing standards for ultrapure water used in manufacturing
pharmaceuticals; to monitor pure water used in semiconductor manufacturing and
power generation; and to provide data for oceanographic research. Customers
often select TOC products based on the method of oxidation of a sample. Our TOC
analyzers oxidize samples by High Temperature Persulfate and combustion; the two
most widely recognized methods in the industry. We also produce a TOC Solids
Analyzer designed to analyze samples with very high particulates and solids.
AUTOMATED CHEMISTRY ANALYZERS Our products in this area include Segmented Flow
Analyzers, or SFA, and Flow Injection Analyzers, or FIA, such as the Flow
Solution(R) IV, Flow Solution 3100, and Model DA-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. Our CN Analyzer can perform total cyanide analysis in a number of
industrial and environmental 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 Our sample preparation instrumentation
products are used to prepare sample matrices for analysis. Sample preparation
typically represents the most time-consuming aspect of chemical analysis. We
strive to provide procedures, techniques, and instruments to reduce total sample
preparation time, a highly desired goal for our customers in the analysis of
chemical compounds. Our sample preparation products and systems consist
primarily of Gel Permeation Chromatography, or GPC, Systems.
IR BASED ANALYZERS Our IR Based Analyzers use 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. Our IR Based Analyzers are particularly well
suited to making repeated measurements on individual samples or continuously on
a process stream or air. We incorporate IR Based Analyzers in the following two
products:
REFRIGERANT MONITORS, which are used by the chiller/refrigerant industry to
continuously monitor and detect low-level refrigerant leaks. These
instruments can monitor all refrigerants including CFCs
(chlorofluorocarbons), HFCs (hydrofluorocarbons), and HCFCs
(hydrochloro-fluorocarbons) in accordance with ASHRAE (American Society of
Heating, Refrigerating, and Air-conditioning Engineers) 15-2004 Safety Code
Requirements. In addition, these monitors can be utilized to detect carbon
monoxide gas in parking garage applications and ammonia.
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.
5
SALES BY LOCATION
We generally transact all sales in U.S. dollars. Estimated net revenues
attributable to the United States, export revenues as a group, and the number of
countries in which export revenues were generated, are as follows:
$ in thousands 2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Net Revenues:
United States $21,121 $21,322 $20,075 $18,442 $17,699
Export 9,143 8,531 8,405 6,764 5,984
------- ------- ------- ------- -------
Total $30,264 $29,853 $28,480 $25,206 $23,683
======= ======= ======= ======= =======
% Net Revenues:
United States 70% 71% 70% 73% 75%
Export 30% 29% 30% 27% 25%
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
======= ======= ======= ======= =======
Number of countries-export 64 60 64 62 70
Sales to the Asia-Pacific region were approximately 13% of net revenues for both
2006 and 2005, 16% of net revenues for 2004 and 13% of net revenues for 2003;
and sales to the European-African region were approximately 14% for 2006, 12% of
net revenues for 2005, 10% of net revenues for 2004 and 13% of net revenues for
2002.
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
We manufacture products in ISO 9001 certified facilities located in College
Station, Texas and Pelham, Alabama, a suburb of Birmingham, using similar
techniques and methods at both locations. Our manufacturing capabilities include
electro-mechanical assembly, testing and integration of components and systems
in addition to calibration and validation of configured systems. Our products
are generally certified pursuant to safety standards established by one or more
of the following agencies: Underwriters Laboratories, or UL; Canadian Standards
Association, or CSA; and/or the European Committee for Electrotechnical
Standardization, or CE. These agencies and others also certify the accuracy of
advertised product specifications and compliance with certain manufacturing
standards.
MARKETING
We market, sell and support analytical components and systems. In addition, we
provide on-site installation and support services, distribute expendables and
provide accessories required to support the operation of our products in the
field. Domestically, we sell our products to end users through a direct sales
channel, manufacturers' representatives, distributors and resellers, while
internationally we sell through independent manufacturers' representatives and
distributors. Our marketing initiatives include advertising, direct mail,
seminars, trade shows, telemarketing and promotion on the Company's internet web
site at www.oico.com.
TECHNICAL SUPPORT
We employ a technical support staff that provides on-site installation, service,
and after-sale support of our products with a goal of maximizing customer
satisfaction. We also offer training courses and publish technical bulletins
that contain product repair information, parts lists, and application support
information for customers. Our products generally include a warranty ranging
from 90 days to one year. Customers may also purchase extended warranties or
service contracts that provide coverage after the expiration of the initial
warranty. We install and service products using our field service personnel or
third party contractors in North America while utilizing distributors and
manufacturers' representatives in other international locations.
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RESEARCH AND DEVELOPMENT
The analytical instrumentation industry is subject to rapid changes in
technology. Our future success relies heavily on continued product enhancement.
To accomplish this objective, we seek to advance and broaden employed
technologies, improve product reliability, boost product performance, augment
analytical data handling, reduce product size and cut analytical cycle time
while maintaining or reducing product cost. In addition, we actively pursue
development of potential new products. Our efforts to enhance existing products
and develop new products require an extensive investment in research and
development. We expense research and development costs relating to both present
and potential future products as incurred. These expenses totaled $3,117,000
during 2006 and $3,670,000 in 2005. Research and development costs in 2004
amounted to $2,998,000 plus $483,000 of acquired in-process research and
development.
PATENTS
We have a growing portfolio of intellectual property, including both domestic
and international patents and patent applications pending, primarily in the
fields of Gas Chromatography, TOC, and MS. As of December 31, 2006, we own or
have rights under license to 44 issued patents and 25 pending patent
applications which expire between the years 2007 and 2025, compared to 43
patents in the prior year. As a matter of policy, we vigorously pursue and
protect our proprietary technology positions and seek patent coverage on
technology developments where appropriate. We also actively seek to license
technology in fields of interest from third parties, provided such licenses are
available on reasonable terms. While we believe that all of our patents and
applications have value, our future success is not dependent on any single
patent, application or group of patents soon to expire.
COMPETITION
We encounter aggressive competition in all aspects of our business activity. OI
competes with many firms in the design, manufacture, and sale of analytical
instruments, principally on the basis of product technology, performance,
quality and reliability as well as product support, delivery, and price.
Additional competitive factors include sales and marketing capability and access
to channels of distribution. Many of our competitors have significantly greater
resources than OI offering greater global market coverage, more extensive
product offerings, broader access to human and technical resources, more
expansive buying power with suppliers, superior brand recognition, larger market
share and greater financial resources. Our past success in niche market
penetration is not necessarily an indication of future results to be expected.
EMPLOYEES
As of December 31, 2006, our workforce consisted of 155 full-time employees. We
employ scientists and engineers who conduct research and develop potential new
products. To protect our proprietary information, we have confidentiality
agreements in place with certain employees, as we deem appropriate. None of our
employees are covered by a collective bargaining agreement. We believe that
relations between management and our employees are satisfactory.
ENVIRONMENTAL REGULATIONS
We are in compliance with federal, state, and local laws and regulations
involving the protection of the environment, to the best of our knowledge. In
the normal course of business, we often handle small quantities of materials
that could be deemed hazardous. However, hazardous materials are primarily
introduced into our products by end users rather than by OI employees. Our
compliance with federal, state, or local provisions regulating the discharge of
materials into the environment or relating to the protection of the environment
should have no material effect upon planned capital expenditures, future
earnings or competitive position. However, to the extent that customers purchase
our analytical instruments for environmental analysis to assist in their
compliance with environmental regulations, changes to these regulations could
affect demand for certain of our products.
SOURCES OF RAW MATERIALS
We manufacture our products from raw materials, component parts and other
supplies generally available from a number of different sources with few
long-term supplier contracts. For certain purchased materials, we utilize
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preferred sources established on the basis of quality and service. Single source
suppliers provide several purchased components. We can provide no assurance that
these preferred or single source suppliers will continue to make materials
available in sufficient quantities, at prices, and on other terms and conditions
that are adequate for our needs. However, we have no indication that any of
these preferred or single source suppliers will cease to do business with us.
Should we experience a cessation in our relationship with a preferred or single
source supplier, we believe adequate alternate sources can be located, though at
potentially increased cost. We use sub-contractors to manufacture certain
product components. In some cases, these sub-contractors are small businesses
that can be affected by local economic conditions and other business factors
that could impact their ability to be reliable suppliers. Substitute suppliers
and/or components may require reconfiguration of products, which might result in
significant product changes in the view of customers and could ultimately result
in our discontinuing such products.
BACKLOG OF OPEN ORDERS
Our backlog of orders on December 31, 2006 was approximately $3,856,000,
compared to $2,897,000 in 2005 and $4,402,000 on December 31, 2004. The backlog
at the end of 2006 was due in large part to orders for MINICAMS under
governmental contracts. We generally include in the backlog only purchase orders
or production releases that have firm delivery dates in the twelve-month period
following our fiscal year-end. However, recorded backlog may not result in sales
because of purchase order changes, cancellations, or other factors. We
anticipate that substantially all of our present backlog of orders will be
shipped or completed during 2007.
SEASONALITY
Demand for our products has not historically exhibited significant seasonal
variation with regard to our consolidated net revenues. However, environmental
markets tend to be weaker in the first and fourth quarters of the calendar year
while U.S. Federal governmental markets are often slightly stronger in the third
quarter of the calendar year.
CUSTOMERS
Our 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 17% of revenues in 2006, 16% of revenues in 2005, and 11% of
revenues in 2004. Federal, state, and municipal governments and public and
private research institutions in the aggregate accounted for 24% of revenues in
2006, 25% of revenues in 2005, and 24% of revenues in 2004. A decrease in sales
to these groups could have a material adverse impact on our results of
operations. Export sales accounted for approximately 30% of revenues over each
of the past three years.
AVAILABLE INFORMATION
Our internet website address is http://www.oico.com. Our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available through the investor
relations page of our internet website free of charge as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission (SEC). Our internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
TECHNOLOGICAL CHANGE COULD CAUSE OUR PRODUCTS TO BECOME NON-COMPETITIVE OR
OBSOLETE. The market for our products and services is characterized by rapid and
significant technological change and quickly evolving industry standards. New
product introductions responsive to these factors require significant planning,
design, development, and testing. We can provide no assurance that our products
will remain competitive in this fast changing environment. In addition, industry
acceptance of new technologies we seek to develop may be slow to develop due to
existing regulations that apply specifically to older technologies, the general
unfamiliarity of users with new technologies and other factors.
WE COULD INCUR SUBSTANTIAL COSTS IN PROTECTING AND DEFENDING OUR INTELLECTUAL
PROPERTY AND LOSS OF PATENT RIGHTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS. We hold patents relating to various aspects of our products and
believe that proprietary technical know-how is critical to many of our products.
Proprietary rights relating to our products are protected from unauthorized use
by third parties only to the extent that they are covered by valid and
enforceable patents or are maintained in confidence as trade secrets. There can
be no assurance that patents will issue from any pending or future patent
applications owned by or licensed to us or that the claims allowed under any
issued patents will be sufficiently broad to protect our technology. In the
absence of patent protection, we may be vulnerable to competitors who attempt to
copy our products or gain access to our trade secrets and technical know-how.
Our competitors could also initiate litigation to challenge the validity of our
patents, or may use their resources to design comparable products that do not
infringe upon our patents. We could incur substantial costs in defending OI in
suits brought against us or in suits in which we may assert our patent rights
against others. If the outcome of any such litigation is unfavorable to us, our
business and results of operations could be materially and adversely affected.
In addition, we rely on trade secrets and proprietary technical know-how that we
seek to protect, in part, by confidentiality agreements with our collaborators,
employees, and consultants. We can provide no assurance that these agreements
will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known or be independently
developed by competitors.
OUR EXTENSIVE R&D EFFORTS MAY NOT RESULT IN PRODUCTS THAT ARE SUCCESSFUL IN THE
MARKETPLACE. To maintain our market share for existing products and to gain
market share in new markets such as homeland security, we must invest heavily
each year in R&D spending. This R&D spending often involves new technologies or
updates of existing technology. We can provide no assurance that our R&D efforts
to develop new technology or efforts to acquire new technology from third
parties will be successful, or that new products we may develop through such
efforts will be successful in the marketplace.
CONSOLIDATION IN THE ENVIRONMENTAL INSTRUMENT MARKET AND CHANGES IN
ENVIRONMENTAL REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS. Environmental
analysis, which represents a significant market for our products, has exhibited
a trend of contraction and consolidation in recent years. Continuation of this
trend could have an adverse impact on our business. 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. We develop, configure and market our
products to meet customer needs created by existing and expected 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
our products.
OUR RESULTS OF OPERATIONS ARE DEPENDENT ON OUR RELATIONSHIP WITH AGILENT. We
operate under an original equipment manufacturer, or OEM, agreement with
Agilent, which has been in place for several years. Our OEM agreement provides
for no marketing cooperation between the two companies. As a result, we compete
with Agilent for the same business in some cases. We can provide no assurance
that Agilent will renew our OEM agreement, which is renewable annually, or that
we will sustain current sales levels in the future under the Agilent OEM
agreement. As we continue to evaluate alternatives, we may decide that
continuing the OEM agreement is not our best strategy. A decision on our part to
discontinue the agreement would place at risk a substantial part of our GC
systems sales and could have a material adverse effect on our financial
condition and results of operations.
ECONOMIC, POLITICAL, AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Sales outside the U. S. accounted
for approximately 30% of our revenues in 2006. We expect international sales to
account for a significant portion of our future revenues. Sales to international
customers are
9
subject to a number of risks including interruption to transportation flows for
delivery of finished goods to 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.
Unfavorable developments in these areas could have a material adverse effect on
our business and results of operations.
PARTS SHORTAGES OR EXCESS PARTS INVENTORY COULD ADVERSELY AFFECT OUR EARNINGS.
We rely on various component parts to meet production demands. Should we
encounter a shortage due to loss of a single source supplier or group of
suppliers, for example, we may suffer a loss in sales, which could detrimentally
impact our earnings. In certain cases, we enter into non-cancelable purchase
commitments with vendors to secure components at the best available price.
Should market demand for our products decline unexpectedly, we may develop
excess parts inventory, which could result in inventory write-downs that would
negatively impact our financial position.
AS A SMALL ORGANIZATION, WE FACE MANY RISKS INHERENT IN OPERATING A MICROCAP
PUBLIC COMPANY. Because we are a relatively small organization, we have limited
resources both in terms of our physical facilities and human resources. Should
we suffer a catastrophic loss in either of our primary facilities, we could face
a significant disruption in our business. To be successful, we rely on the
performance of our employees including key executives, sales and marketing
professionals, technical staff, managers and production personnel. Our ability
to meet customer demand could be negatively impacted if we are unable to
attract, hire, train, retain and motivate qualified employees.
In addition, as a small company, the cost of compliance with governmental
regulations, including recently enacted securities laws such as the
Sarbanes-Oxley Act of 2002, or SOX, continues to escalate and represents a
significant expenditure of funds. We are currently documenting and further
evaluating our internal control systems to comply with the assessment and
attestation requirements of SOX Section 404. Our financial position and results
of operation could be negatively impacted if we encounter unexpected
difficulties in SOX or other regulatory compliance.
As a microcap company we have a relatively small number of shares of common
stock outstanding, with insiders and holders of 5% or more shares owning a
significant portion of our stock. Because of this concentration of ownership,
our common stock is thinly traded and experiences some periods with no
transactions. This lack of public float adversely affects the liquidity of an
investment in our shares.
OUR UPCOMING IMPLEMENTATION OF A NEW COMPUTER SYSTEM COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR OPERATIONS. During 2006, we began the implementation of an
enterprise resource planning, or ERP, system. Our plans are to begin using the
new ERP system during the second quarter of 2007. Implementation of this new ERP
system is a major undertaking for us, touching on all facets of our business and
impacting virtually every employee. We have conducted and continue to perform
pre-implementation testing and training. In addition, we plan to conduct
post-implementation reviews to ensure that internal controls surrounding the
system implementation process, application programs and the closing process are
properly designed to capture all transactions while preventing material
financial statement errors. Operating effectiveness of related controls will be
evaluated during the implementation. Despite our rigorous planning and
exhaustive efforts to ensure a smooth implementation while maintaining
appropriate internal controls, we could potentially experience business
disruptions and/or internal control deficiencies. A business disruption could
result in a material adverse impact on our sales and results of operation while
an internal control deficiency could put at risk our ability to accurately
report operating results, financial position and cash flows.
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. In recent periods we have increased our
emphasis on governmental sales and have obtained agreements relating to the sale
of our products and services to government entities. 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.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS MAY CAUSE US TO INCUR SIGNIFICANT
EXPENSES, AND FAILURE TO MAINTAIN COMPLIANCE WITH CERTAIN GOVERNMENTAL
REGULATIONS COULD NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS. Our
products and operations are subject to various international, federal, state,
local, health and safety,
10
packaging, product content, and labor regulations as well as rules of industrial
standards bodies such as the International Standards Organization. These
regulations are complex, change frequently and have tended to become more
stringent over time. For example, our 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. As a result, we must continually adapt our chemical analysis
products to changing regulations. We could incur significant expenses to comply
with these regulations or to remedy violations of these regulations. The failure
to comply with applicable government regulations could also result in a
cessation of operations or portions of our operations, product recalls or
impositions of fines and restrictions on our ability to carry on or expand
operations. In addition, because many of our products are regulated or sold into
regulated industries, we must comply with additional regulations in marketing
these products.
POTENTIAL ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES
COULD RESULT IN FINANCIAL RESULTS THAT DO NOT MEET EXPECTATIONS. We are well
positioned to pursue acquisitions and plan to consider a growth strategy that
could potentially include acquisitions, strategic alliances or joint ventures.
Certain businesses acquisitions and strategic alliances in past years, including
the strategic alliance with Intelligent Ion, Inc. and the acquisition of General
Analysis Corporation, have produced losses or profitability well below our
expectation. Businesses we may seek to acquire in the future may also fall short
of our profit objectives. For an acquired business to achieve our desired level
of profitability, we need to successfully assimilate the acquired company's
operations and improve their market penetration. We can provide no assurance of
future success in this regard. To finance potential acquisitions, we may need to
raise additional funds either through public or private financing. We may have
difficulty in obtaining debt financing on terms we find attractive, while equity
financing can result in significant dilution to our shareholders.
Should we complete such a transaction, our financial results may differ from the
investment community's expectations. In addition, acquisitions and strategic
alliances often require the integration of a different company culture,
management team and business infrastructure. We could potentially experience
difficulty developing, manufacturing, and marketing the products of a newly
acquired company in a way that enhances performance of the combined businesses
or product lines to realize the value from expected synergies. Depending on the
size and complexity of an acquisition, our successful integration of the entity
depends on a variety of factors including: retention of key employees;
management of facilities and employees in separate geographic areas; 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 our
attention from other business operations. If we do not realize the expected
benefits or synergies of such transactions, our consolidated financial position,
results of operations and stock price could be negatively impacted.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
OI 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. We lease 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 2007 with an option to
extend for four additional one-year renewal periods. We also lease 500 sq.ft. of
office space in Edgewood, Maryland, renewable annually with an option to extend
for one more one-year renewal period. We believe that the facilities we occupy
are in good condition and are suitable for our present operations and that
suitable space is readily available for expansion or to accommodate our
operations should any of our leases not be extended.
ITEM 3. LEGAL PROCEEDINGS
On January 27, 2006, Aviv Amirav filed a lawsuit in U.S. District Court for the
Southern District of New York against us and our wholly-owned subsidiary, CMS
Research Corporation for (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. On November 15, 2006, the
lawsuit was settled and the case was dismissed with prejudice. We agreed to pay
Amirav $175,000, $100,000 of which was paid on November 30, 2006 and $75,000 of
which must be paid on or before April 4, 2007. The settlement clarifies OI's
future royalty payment obligations to Amirav by confirming that OI will continue
to pay royalties on the same basis as its past practice and by clarifying
11
that OI can sell under the license to any manufacturer of gas chromatographs.
The settlement also clarifies OI's royalty reporting obligations and requires a
mandatory audit of royalty payments by an independent accountant before any
future lawsuit by Amirav. There is no admission of fault or liability in the
settlement.
From time to time, in the ordinary course of business, we have received, and in
the future may receive, notice of claims against us, which in some instances
have developed, or may develop, into lawsuits. For all claims, in the opinion of
our 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 our 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 2006.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITES
COMMON STOCK MARKET INFORMATION Our common stock trades on the NASDAQ Global
Market under the symbol: OICO. The ranges of high and low trade prices per share
of our common stock for each quarterly period during fiscal 2006 and 2005 were
as follows:
2006 2005
--------------- ---------------
High Low High Low
------ ------ ------ ------
First Quarter $14.49 $11.29 $11.45 $ 8.78
Second Quarter 15.00 11.09 12.99 8.20
Third Quarter 13.35 9.53 12.90 10.10
Fourth Quarter 12.13 9.59 13.63 10.28
NOTE: The above quotations represent prices between dealers, do not include
retail markup, markdown, or commission, and may not necessarily represent
actual transactions.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 15, 2007, there were
approximately 786 holders of record of OI common stock.
DIVIDENDS Prior to 2006, we paid no dividends on our common stock. On March 20,
2006, our Board of Directors established an annual cash dividend of $0.20 per
share, payable $0.05 per quarter. The payment of future cash dividends under the
policy is subject to the continuing determination by the Board of Directors that
this policy remains in the best interest of shareholders, complies with the law
and does not violate any applicable agreements into which we may enter.
We declared cash dividends on all our common stock, in the amount of:
Quarters Ended (per share)
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2007 $0.05 -- -- --
2006 N/A 0.05 0.10 0.05
2005 N/A N/A N/A N/A
12
PERFORMANCE GRAPH
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG O.I. CORPORATION,
NASDAQ MARKET INDEX AND SIC CODE INDEX
(PERFORMANCE GRAPH)
<Table>
<Caption>
2001 2002 2003 2004 2005 2006
------ ----- ------ ------ ------ -------
O.I. CORPORATION 100.00 62.46 134.60 153.09 190.77 178.48
SIC CODE INDEX 100.00 65.91 105.47 107.84 114.34 132.77
NASDAQ MARKET INDEX 100.00 69.75 104.88 113.70 116.19 128.12
</Table>
ASSUMES $100 INVESTED ON JAN. 01, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2006
ISSUER REPURCHASES OF EQUITY SECURITIES
The following table provides information about our purchases of equity
securities that are registered by us pursuant to section 12 of the Exchange Act
during the quarter ended December 31, 2006.
Total Average
Number of Price Total Number of Shares Maximum Number of Shares
Shares Paid per Purchased as Part of a that May Yet Be Purchased
2006 Purchased Share Publicly Announced Program Under the Program (1)
---- --------- -------- -------------------------- -------------------------
2000 Plan (1)
October 1-October 31 1,361 $10.00 1,361 7,544
November 1-November 30 7,544 $10.05 7,544 0
December 1-December 31 0 $ 0.00 0 0
------ ------ ------ -------
Total 8,905 8,905
====== ======
2006 Plan(2)
October 1-October 31 0 $ 0.00 0 100,000
November 1-November 30 5,322 $ 9.99 5,322 94,678
December 1-December 31 16,987 $10.59 16,987 77,691
------ ------ ------ -------
Total 22,309 22,309
====== ======
(1) In February 2000, a plan was approved to repurchase up to 300,000 shares of
OI common stock with no specified expiration date.
(2) In August 2006, a plan was approved to repurchase up to 100,000 shares of
OI common stock with no specified expiration date. Purchases under this
plan were suspended in January 2007.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical financial data
for each of the five years in the period ended December 31, 2006. The selected
historical financial data set forth below has been derived from our audited
consolidated financial statements included elsewhere in this annual report on
Form 10-K. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited consolidated financial statements and related notes included
elsewhere in this annual report on Form 10-K.
($ in thousands, except per
share amounts) 2006 2005 2004 2003 2002
------- ------- ------- ------- -------
Income statement data:
Net revenues $30,264 $29,853 $28,480 $25,206 $23,683
Cost of revenues 14,904 14,675 14,012 13,286 13,279
Gross profit 15,360 15,178 14,468 11,920 10,404
Selling, general, and administrative
Expenses 9,374 8,798 8,219 7,225 7,258
Research and development expenses 3,117 3,670 2,998 2,698 2,246
Impairment of intangible assets -- -- -- -- 346
Acquired in-process research and
Development -- -- 483 -- --
Operating income 2,869 2,710 2,768 1,997 554
Interest and other income, net 615 515 426 412 317
Loss/impairment of investment in
unconsolidated investee -- -- 976 24 --
Income before income taxes 3,484 3,225 2,218 2,385 871
Provision for income taxes 1,075 739 456 750 213
Net income 2,409 2,486 1,762 1,635 658
Basic earnings per share $ 0.84 $ 0.88 $ 0.63 $ 0.59 $ 0.24
Diluted earnings per share $ 0.81 $ 0.85 $ 0.61 $ 0.58 $ 0.24
Balance sheet data:
Total assets $30,512 $28,159 $25,387 $22,707 $20,982
Working capital 20,218 18,508 15,989 13,105 12,355
Stockholders' equity 24,613 22,768 20,187 18,239 16,551
Cash dividends declared per share $ 0.20 -- -- -- --
Common size income statement data:
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 49.3 49.2 49.2 52.7 56.1
------- ------- ------- ------- -------
Gross profit 50.7 50.8 50.8 47.3 43.9
Selling, general, and administrative
Expenses 30.9 29.4 28.9 28.7 30.7
Research and development expenses 10.3 12.3 10.5 10.7 9.5
Impairment of intangible assets -- -- -- -- 1.4
Acquired in-process research and
Development -- -- 1.7 -- --
------- ------- ------- ------- -------
Operating income 9.5 9.1 9.7 7.9 2.3
Interest and other income, net 2.0 1.7 1.5 1.6 1.3
Loss/impairment of investment in
unconsolidated investee -- -- 3.4 0.1 --
------- ------- ------- ------- -------
Income before income taxes 11.5 10.8 7.8 9.4 3.6
Provision for income taxes 3.5 2.5 1.6 2.9 0.9
------- ------- ------- ------- -------
Net income 8.0% 8.3% 6.2% 6.5% 2.7%
======= ======= ======= ======= =======
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONTENTS
This item of the annual report on Form 10K is divided into the following
sections:
- Executive Summary - Provides a brief overview of the year's results
and known uncertainties expected to have an effect on future results.
- Critical Accounting Estimates - Discusses the most significant
accounting estimates that we believe are essential to aid in
understanding our reported financial results.
- Results of Operations - Analyzes our financial results comparing
sales, operating margins and expenses to prior periods including our
expectation of trends and uncertainties on future results.
- Liquidity and Capital Resources - Analyzes our cash flow from
operating, investing and financing activities and further discusses
current and projected liquidity.
- Inflation - Reviews the impact of inflation on reported results.
- Market Risk - Discusses our exposure to market risk sensitive
instruments commonly referred to as derivatives.
EXECUTIVE SUMMARY
During 2006, we continued our positive financial performance increasing our
stockholders' equity by 8.1% and generating strong positive cash flow from
operations. This enabled us to increase our cash and investments by $2,159,000
while offering a $0.20 annual dividend to shareholders for the first time in our
history. Our overall net revenues increased slightly despite a weak domestic
market on the strength of higher service revenues largely attributable to the
Wyle contract under which we developed for NASA a prototype TOC analyzer for
potential use on the International Space Station, and growth in international
product sales. We feel that there will continue to be growth opportunities in
both governmental and international sales.
Our margins held steady during the year, but our Selling, general and
administrative, or SG&A, expenses increased significantly due largely to legal
expenses in the Aviv Amirav lawsuit settled during the fourth quarter of 2006.
Research and development, or R&D, expenses declined in 2006 because of the
reclassification of certain expenses to cost of goods sold in connection with
the Wyle contract. We feel this contract has been very beneficial, allowing us
to pursue and develop new technology we can exploit commercially while providing
funding for the research and development required.
Our higher sales, coupled with lower R&D expense, more than offset increased
SG&A costs enabling us to generate a 5.8% increase in operating income for the
year. Despite our increase in operating income and sharply higher interest
income in 2006, net income declined due to an increase in our effective tax
rate.
Looking ahead, we anticipate continued high SG&A expenses for 2007. A special
investigation related to certain past stock option activity was initiated during
the first quarter of 2007 and resulted in legal expenses of approximately
$1,250,000 in the first quarter of 2007. We expect overall sales growth to be
minimal during the coming year due to the continued weak domestic environmental
instrument market. Our recent investment in updating our current product lines
has been critical in maintaining domestic market share and we are working
diligently to develop new products and technologies for future growth. However,
we do not expect new product sales to significantly increase our 2007 revenues.
To promote sales growth, we have implemented certain international sales
initiatives that should continue expansion in this area. Further, we feel there
are additional opportunities to increase governmental sales in certain areas.
Our goal is to pursue these opportunities to fund research and development that
can be later utilized for commercial applications.
15
We are currently well positioned to pursue acquisitions with $13,700,000 in cash
and investments on hand as of December 31, 2006 and with no outstanding bank
debt. We continue to pursue a two-pronged, long-term growth strategy of organic
expansion through development of new products and applications in addition to
acquisition of new companies or product lines. While there is significant risk
inherent in a growth by acquisition strategy, we continue to evaluate potential
acquisition candidates. We believe our efforts will provide longer-term growth,
but feel it is unlikely that 2007 sales results will be significantly impacted
by our current growth plans. As a result, for 2007 we anticipate minimal sales
growth and may experience a decline in overall profitability due to the
significant expenses incurred in connection with the stock option investigation.
CRITICAL ACCOUNTING ESTIMATES
Our preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires that we utilize key
accounting policies and make certain estimates that could significantly
influence the results of operations and financial position. The most critical of
these accounting policies and estimates include revenue recognition policies and
related warranty reserves, the valuation allowance for inventories and
uncollectible accounts receivable and intangible asset valuation.
REVENUE RECOGNITION AND WARRANTY RESERVES We derive revenue from three sources:
system sales, part sales and services. For system sales and parts sales, we
generally recognize revenue 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.
Our sales are typically not subject to rights of return, and historically we
have not experienced significant sales returns. We generally record system sales
that include installation services as multiple-element arrangements. In these
situations, we recognize product revenue upon shipment but defer the
installation service revenue until the installation is complete. We defer
revenue recognition for the fair value of any undelivered elements, such as
accessories ordered by customers, until the completion of delivery to the
customer. For certain system sales that involve unique customer acceptance terms
or new specifications or technology with customer acceptance provisions, we do
not recognize revenue until we receive customer acceptance. We record any
deferred revenue from such system sales as an accrued liability.
Our products generally have a warranty ranging from 90 days to one year. Upon
expiration of the warranty period, the customer may purchase an extended product
warranty typically covering an additional period of one year. We generally
invoice extended warranty billings to the customer at the beginning of the
contract term and recognize the related revenue ratably over the duration of the
contract. Unearned extended warranty revenue is treated as an accrued liability.
We record a reserve for warranty expenditures and periodically adjust the amount
of the reserve as required to reflect actual warranty experience. In determining
the warranty reserve, we consider our historical experience and various
additional factors including 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 our
estimates, the estimated warranty liability could prove to be significantly
over- or understated. As of December 31, 2006 and 2005, our warranty liability
totaled $662,000 and $636,000 respectively.
ACCOUNTS RECEIVABLE We maintain an allowance for doubtful accounts representing
our estimate of that portion of accounts receivable which we may be unable to
collect from customers. Customer receivables may prove uncollectible for a
variety of reasons including deterioration of customer financial condition,
damage during shipment, or dissatisfaction with product performance. We
regularly assess potential doubtful accounts and use the best information
available, including customer correspondence and credit reports. Though our bad
debts have not historically been significant, we could experience increased bad
debt expense should a major customer or market segment experience a financial
downturn or our estimate of uncollectible accounts, which is based on our
historical experience, prove to be inaccurate.
INVENTORIES Our inventories consist primarily of electronic equipment and
various components. We operate in a fast-paced industry with frequent
technological advances and new product introductions. Such occurrences can
significantly impair customer demand for our products and the related inventory
we have on hand. We regularly evaluate our inventory and maintain a reserve for
excess or obsolete inventory. Generally, we record an impairment allowance for
products with no movement in over six months that we believe to be either
unsalable, or salable only at a reduced selling price. We further use our
judgment in evaluating the recoverability of all inventory based upon
16
known and expected market conditions as well as future product plans. Should our
competitors introduce a new technology or product that renders our current
products obsolete, our allowance for inventory impairment may be inadequate.
Our inventory obsolescence charges totaled approximately $42,000 in fiscal 2004,
approximately $67,000 in fiscal 2005 and approximately $109,000 in fiscal 2006.
The inventory impairment allowance account totaled approximately $999,000 and
$906,000 at December 31, 2006 and 2005, respectively.
INTANGIBLE ASSETS Our intangible assets consist primarily of intellectual
property, including patents and patent applications. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, we review the
recoverability and estimated useful lives of our intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. As a result of our reviews, we
have not recorded any material charges during 2006, 2005 or 2004.
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
2006 (DECREASE) 2005 (DECREASE) 2004
------- ---------- ------- ---------- -------
Total net revenues $30,264 1% $29,853 5% $28,480
Total cost of revenues 14,904 2% 14,675 5% 14,012
------- ------- -------
Gross profit 15,360 1% 15,178 5% 14,468
Selling, general, and administrative expenses 9,374 7% 8,798 7% 8,219
Research and development expenses 3,117 (15%) 3,670 22% 2,998
Acquired in-process research and
development -- -- -- (100%) 483
Impairment of intangible assets -- -- -- -- --
------- ------- -------
Operating income 2,869 6% 2,710 (2%) 2,768
Interest and other income 615 19% 515 21% 426
Loss from unconsolidated investee -- -- -- (100%) (208)
Impairment of investment in unconsolidated
Investee -- -- -- (100%) (768)
------- ------- -------
Income before income taxes 3,484 8% 3,225 45% 2,218
Provision for income taxes 1,075 45% 739 62% 456
------- ------- -------
Net income 2,409 (3%) 2,486 41% 1,762
======= ======= =======
Basic earnings per share $ 0.84 (5%) $ 0.88 40% $ 0.63
Diluted earnings per share $ 0.81 (5%) $ 0.85 39% $ 0.61
2006 Compared to 2005
NET REVENUES. Total net revenues for the year ended December 31, 2006 increased
$411,000, or 1%, to $30,264,000, compared to $29,853,000 for the same period of
the prior year due primarily to higher service revenues. Sales from services
increased $1,481,000, or 44%, to $4,812,000, compared to $3,331,000 for the same
period of the prior year. Our strong growth in service revenues was largely
attributable to billings in connection with the Wyle contract of $1,435,000.
Under this agreement, we developed a prototype TOC analyzer, in conjunction with
Wyle, for potential use on the International Space Station. In addition to the
short-term benefit of higher 2006 service revenues, we believe the technology
developed under this program will provide future new product opportunities in
our commercial markets.
During 2006, our product revenues decreased $1,071,000, or 4%, to $25,451,000
compared to $26,522,000 for the same period last year. This decline was
attributable to the weak domestic environmental instrument market with domestic
products revenue down slightly for the year. Two of the industry's largest
companies, Severn Trent and
17
Test America, announced a merger, providing a further indication of the
continuing consolidation in the environmental instrument market. Both of these
companies have been our customers, but their purchases were postponed during the
latter part of 2006. At this time we cannot estimate the impact on future sales
from this merger. Despite the decline in overall product sales, we feel our
efforts in recent years to enhance our primary product lines have allowed us to
maintain, or in some cases grow, our market share in the GC and TOC product
areas. For example, sales of Automated Chemistry Analyzers, GPC products, and
refrigerant monitoring products increased in 2006 compared to last year, due in
part to our product development efforts.
Although domestic product sales declined, our international product revenues
continued to grow and increased as a percentage of total revenues. International
sales were particularly strong in Europe with sales also up in Asia on an
overall basis. However, sales were weaker in China and Taiwan and sales declined
slightly in Latin America. We remain optimistic about international sales growth
opportunities, particularly in the China market, and plan to increase our
international sales efforts.
GROSS PROFIT. As a percentage of net revenues, our gross profit for the year
ended December 31, 2006 was unchanged from the prior year. Although the overall
gross profit percentage was unchanged, margins on our sales of products improved
0.8% on lower discounting during the year, while our margins on services
declined by 6.7% due to the impact of the Wyle contract. Because of our higher
net revenues in 2006, gross profit increased $182,000, or 1%, to $15,360,000,
compared to $15,178,000 in 2005.
SELLING, GENERAL AND ADMINISTRATIVE, OR SG&A EXPENSES. SG&A expenses for the
year ended December 31, 2006 increased $576,000, or 7%, to $9,374,000, compared
to $8,798,000 for the prior year. Several factors contributed to this increase,
including: legal fees associated with the Aviv Amirav lawsuit settled during the
fourth quarter; higher audit and tax preparation fees, expenses related to our
board of directors, which increased in size during 2006; and the implementation
of SFAS 123(R) in 2006 which requires the expensing of stock options upon
issuance. SG&A expense increased as a percentage of revenues for the year ended
December 31, 2006 to 30.9%, compared to 29.4% in the same period of the prior
year.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses for the year ended December 31,
2006 decreased $553,000, or 15%, to $3,117,000 compared to $3,670,000 for the
same period of the prior year. R&D expenses represented 10.3% of revenues for
the year ended December 31, 2006 and 12.3% of revenues for the same period of
the prior year. The decrease in R&D expenses for the year ended December 31,
2006 was primarily due to certain R&D personnel resources being assigned to
perform work under the agreement with Wyle. Expenses relating to such work are
accounted for as service cost of sales. Certain R&D resources assigned to this
project during 2006 have returned to internal R&D projects. However, these
resources could again be assigned to contract work if we are successful in
obtaining additional research contracts. We expect future R&D expenses to
increase, though government funding for such research could minimize the growth
in our reported R&D expenditures. We remain committed to our previously
announced plan to increase research and development in an effort to bring new
and innovative products to market, including a mass spectrometer product.
Execution of this strategy has taken longer than expected because we are
conducting research in an attempt to develop an entirely new detector for use in
the field of MS. We continue to believe the technology we are developing will be
successful, though significant challenges and risks remain. This technology
represents a significant revenue opportunity for us if it performs as we
anticipate.
OPERATING INCOME. Operating income for the year ended December 31, 2006
increased $159,000, or 6%, to $2,869,000, compared to $2,711,000 for the same
period of the prior year. This increase in operating income for the year ended
December 31, 2006 is primarily attributable to increased revenues and gross
profit and lower R&D expenses, partially offset by higher SG&A expenses.
INTEREST AND OTHER INCOME. Interest income increased to $381,000 for the year
ended December 31, 2006, up $158,000 from 2005 due primarily to higher interest
rates on invested funds and increased funds invested during the year. Other
income, which consists primarily of preferred stock dividends, declined to
$234,000 during 2006 compared to $291,000 in the prior year due to reduced
investments in preferred stock.
PROVISION FOR INCOME TAXES. Our provision for income taxes increased $336,000
for the year ended December 31, 2006 totaling $1,075,000, compared to $739,000
for the prior year. During 2006, the effective tax rate was 30.8%. This is
primarily due to certain permanent differences between our book income and
taxable income that lower our tax liability. These permanent differences include
the dividends received deduction and extraterritorial income exclusion,
18
Domestic Production Activities Deduction, or DPAD, as well as R&D credits. The
effective tax rate for 2005 was 22.9%. The increase over the prior year was
primarily due to a decrease in deductions. In 2005 we realized additional R&D
credits relating to tax years 2001 through 2004. The R&D credits resulted in
$237,000 of additional reductions to the tax liability.
NET INCOME. Net income for the year ended December 31, 2006 decreased $77,000,
or 3%, to $2,409,000, compared to net income of $2,486,000 in the same period of
the prior year, primarily due to an increase in the provision for income taxes
and higher SG&A expense, partially offset by an increase in net revenues and
gross margin, lower R&D expense and higher interest income.
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, because 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, we increased our presence in Asia by opening a representative office in
China, with additional staff added in 2005 to further improve customer support.
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. Service revenues increased 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.
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, unchanged from the prior year. The increase in gross profit
during 2005, resulted primarily from increased revenues.
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 in 2004 due primarily to increases in service, marketing and
applications costs. 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 totaled $3,670,000, an increase of $672,000, or 22%, compared
to 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 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. As a result of our purchase of Intelligent Ion, Inc.,
or III, we increased our in-house development efforts related to this potential
new product.
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 was primarily due to increased R&D and SG&A expenditures,
partially offset by higher revenues and reduced 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.
19
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 $237,000 and relate to the fiscal years 2001 to 2004. This amended
all eligible past tax years. The effective tax rate for the same period of the
prior year was 20.5%. The increase over the prior year was primarily due to a
decrease in deductions for foreign sales, and a reduction in 2004 tax due to
correcting the previous year's tax accrual that did not recur in 2005.
LIQUIDITY AND CAPITAL RESOURCES
We consider a number of liquidity and working capital performance ratios in
evaluating our financial condition. The following table includes certain ratios,
working capital information and summarized cash flows for use in understanding
our current liquidity and recent trends in this area:
($ in thousands) 2006 2005 2004
------- ------- -------
LIQUIDITY AND WORKING CAPITAL PERFORMANCE MEASURES
Ratio of current assets to current liabilities 4.4 4.4 4.1
Total liabilities to equity 24% 24% 26%
Working capital $20,218 $18,508 $15,989
Cash, cash equivalents & investments $13,726 $11,567 $10,127
CHANGES IN CASH AND CASH EQUIVALENTS
Net cash provided by (used in)
Operating activities $ 3,479 $ 1,930 $ 2,024
Investing activities (1,740) (1,958) (3,610)
Financing activities (801) 214 258
Net increase/(decrease) in:
Cash and cash equivalents 938 186 (1,328)
Cash and cash equivalents:
Beginning of year 1,727 1,541 2,869
End of year 2,665 1,727 1,541
Cash provided by operating activities during 2006 increased $1,549,000 from the
prior year, due primarily to improved accounts receivable collections partially
offset by increased inventory. We further benefited from a higher accounts
payable balance, which was attributable to certain inventory purchases as well
as some consulting work performed near year end. Our strong earnings continued
to drive our positive cash flow from operations in 2006.
Cash used by investing activities totaled $1,740,000 in 2006, a decline of
$218,000 from 2005 despite a $262,000 increase in purchases of property plant
and equipment. Our reduced purchases of investments were the primary cause of
the decrease in cash used by investing activities as we kept more assets in cash
at the end of 2006 compared to the previous year.
Our strong cash flow from operations enabled us to initiate a cash dividend and
resume purchase of treasury stock, the two primary factors in the use of funds
by financing activities. We repurchased 41,331 shares in 2006 at an average
price of $10.62 per share. While our Stock repurchase plan was suspended in
January 2007 in connection with the commencement of our stock option
investigation, if our Board reauthorizes our repurchase plan we may purchase up
to an additional 77,691 shares under our current stock repurchase program. In
the future, we may seek an expansion of this program if repurchases continue to
be attractive.
We continued to improve our liquidity in 2006 as evidenced by our $2,159,000
increase in cash, cash equivalents and marketable securities. Our liquidity and
financial strength are further demonstrated by our continued high current ratio,
consistent liability to equity ratio and growth in working capital. Our liquid
assets should be more than adequate to fund working capital, R&D and capital
expenditures for the near term. As previously discussed, we are considering
20
acquisition opportunities involving new products or businesses as well as joint
ventures and strategic alliances. Such transactions may require additional
funding. We believe that such funding should be available through traditional
institutional debt financing, other third party financing or through issuance of
additional stock. However, we can provide no assurance required funding would be
available on favorable terms within the time frame that may be required. We may
also use our capital resources to enhance our competitive position in the
marketplace by providing favorable credit terms to customers or through other
sales and marketing initiatives.
AGGREGATE CONTRACTUAL OBLIGATIONS
Payments Due by Period
-----------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 years 3-5 years 5 years
- ----------------------- ---------- ---------- --------- --------- ---------
Operating Leases $ 225,520 $ 201,933 $23,587 -0- -0-
Purchase Obligations (1) 2,182,956 2,182,956 -0- -0- -0-
---------- ---------- ------ --- ---
Total $2,408,476 $2,384,889 23,587 -0- -0-
========== ========== ====== === ===
(1) Open purchase orders primarily for raw materials, component parts, and
other supplies that the Company uses to manufacture its products.
We conduct certain operations in leased facilities under an operating lease
expiring on November 30, 2007. Future minimum rental payments under this lease
are $177,000 for 2007.
SEGMENT INFORMATION. We manage our businesses primarily on a product and
services basis. We report our operations as a single segment. See Note 15 of our
consolidated financial statements for additional segment data.
Management is not aware of any commitments or contingent liabilities that would
have a materially adverse effect on the Company's financial condition, results
of operations, or cash flows.
INFLATION
Historically, neither inflation nor changing prices have had a material impact
on our net revenues or results of operations. However, future inflationary
trends could potentially impact our sales and earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company is exposed to a variety of market risks, including
changes in interest rates and the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to changes in the market value of its investments.
The fair value of the Company's investments in debt and equity securities at
December 31, 2006 and December 31, 2005 was $11,062,000 and $9,841,000,
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 $23,000 was realized
as a loss on the sales of such investments for the year ended December 31, 2006.
21
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 independent 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.
22
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
O. I. Corporation:
We have audited the accompanying consolidated balance sheets of O. I.
Corporation (an Oklahoma corporation) and subsidiary as of December 31, 2006 and
2005, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2006. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment", on a modified prospective basis as of January 1, 2006.
As discussed in Note 2 to the consolidated financial statements, an adjustment
has been made to retained earnings as of January 1, 2004 to correct certain
errors resulting in understatement of previously reported stock-based
compensation expense.
/s/ GRANT THORNTON LLP
Houston, Texas
March 28, 2007
23
O. I. CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
-------------------------
2006 2005
----------- -----------
Restated
ASSETS
Current assets:
Cash and cash equivalents $ 2,664,736 $ 1,726,645
Accounts receivable-trade, net of allowance for doubtful accounts of
$298,804 and $325,940, respectively 5,959,971 6,324,499
Investment in sales-type leases-current portion 213,194 307,526
Investments, at market 11,061,650 9,840,704
Inventories, net 5,013,824 4,616,778
Current deferred income tax assets 1,011,785 904,400
Other current assets 191,591 178,774
----------- -----------
Total current assets 26,116,751 23,899,326
Property, plant and equipment, net 3,279,001 3,229,386
Investment in sales-type leases, net of current 142,824 189,782
Long-term deferred income tax assets 605,027 538,654
Intangible assets, net 340,679 275,755
Other assets 27,700 26,319
----------- -----------
Total assets $30,511,982 $28,159,222
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,858,699 $ 1,427,626
Accrued liabilities 4,040,111 3,963,703
----------- -----------
Total current liabilities 5,898,810 5,391,329
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 4,964,766 4,745,270
Treasury stock, 1,235,807 and 1,249,572 shares, respectively, at cost (5,707,386) (5,456,134)
Retained earnings 24,963,333 23,130,937
Accumulated other comprehensive (loss) income, net (17,879) (62,518)
----------- -----------
24,613,172 22,767,893
----------- -----------
Total liabilities and stockholders' equity $30,511,982 $28,159,222
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
24
O. I. CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
---------------------------------------
2006 2005 2004
----------- ----------- -----------
Net revenues:
Products $25,451,487 $26,521,944 $25,562,048
Services 4,812,302 3,330,859 2,917,566
----------- ----------- -----------
Total net revenues 30,263,789 29,852,803 28,479,614
Cost of revenues:
Products 12,474,529 13,214,920 12,563,276
Services 2,429,712 1,459,805 1,448,772
----------- ----------- -----------
Total cost of revenues 14,904,241 14,674,725 14,012,048
----------- ----------- -----------
Gross profit 15,359,548 15,178,078 14,467,566
Selling, general and administrative expenses 9,373,688 8,797,890 8,218,685
Research and development expenses 3,117,240 3,669,670 2,998,044
Acquired in-process research and development -- -- 483,140
----------- ----------- -----------
Operating income 2,868,620 2,710,518 2,767,697
Other income:
Interest income, net 381,134 223,322 102,990
Other income 233,992 291,325 322,810
Loss from unconsolidated investee -- -- (207,914)
Impairment of investment in unconsolidated investee -- -- (767,900)
----------- ----------- -----------
Income before income taxes 3,483,746 3,225,165 2,217,683
Provision for income taxes (1,074,575) (739,401) (455,546)
----------- ----------- -----------
Net income $ 2,409,171 $ 2,485,764 $ 1,762,137
=========== =========== ===========
Basic earnings per share $ 0.84 $ 0.88 $ 0.63
=========== =========== ===========
Diluted earnings per share $ 0.81 $ 0.85 $ 0.61
=========== =========== ===========
Weighted average number of shares outstanding:
Basic shares 2,876,456 2,836,506 2,793,619
Diluted shares 2,983,406 2,917,715 2,874,194
The accompanying notes are an integral part of
these consolidated financial statements.
25
O. I. CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------
2006 2005 2004
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 2,409,171 $ 2,485,764 $ 1,762,137
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 578,653 556,058 540,825
Stock based compensation 129,189 -- --
Acquired in-process research & development -- -- 483,140
Provision for obsolete inventory 109,301 66,897 42,461
Deferred income tax expense/(benefit) (196,752) (377,285) 78,157
Tax benefit from stock options exercised (63,229) -- --
Loss/(gain) on disposition of property 10,103 (5,002) (7,805)
Loss/(gain) on sale of securities 22,863 (756) 18,520
Loss from unconsolidated investee -- -- 207,914
Impairment of investment in Intelligent Ion, Inc. (III) -- -- 767,900
Changes in assets and liabilities
Accounts receivable 364,528 (1,426,209) (538,734)
Inventories (506,347) 328,119 (1,979,607)
Other current assets and investments in
sales-type leases (11,990) 71,679 (81,916)
Accounts payable 431,073 (469,167) 590,717
Accrued liabilities 139,637 700,226 140,346
------------ ----------- -----------
Net cash provided by operating activities 3,416,200 1,930,324 2,024,055
------------ ----------- -----------
Cash flows from investing activities:
Purchase of Intelligent Ion, Inc. assets -- -- (588,140)
Purchase of property plant, and equipment (629,028) (367,180) (504,088)
Proceeds from sale of property plant, and equipment 6,976 5,893 10,422
Purchase of investments (11,996,046) (7,481,696) (4,018,650)
Maturity/proceeds from sales of investments 10,958,952 5,935,592 1,442,281
Cash value of life insurance -- -- 53,573
Change in other assets (81,243) (50,911) (5,520)
------------ ----------- -----------
Net cash used in investing activities (1,740,389) (1,958,302) (3,610,122)
------------ ----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (438,870) -- --
Proceeds from issuance of treasury stock 214,696 213,623 257,821
Tax benefit from stock options exercised 63,229 -- --
Payment of cash dividends on common stock (576,775) -- --
------------ ----------- -----------
Net cash (used in) provided by financing activities (737,720) 213,623 257,821
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 938,091 185,645 (1,328,246)
Beginning of year 1,726,645 1,541,000 2,869,246
------------ ----------- -----------
End of year $ 2,664,736 $ 1,726,645 $ 1,541,000
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Income taxes 891,154 738,717 635,021
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.
26
O. I. CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Com- Total
------------------- Paid-In Treasury Retained prehensive Stockholders'
Shares Amount Capital Stock Earnings Income/(Loss) Equity
--------- -------- ----------- ------------ ----------- ------------- -------------
Balance, January 1, 2004 4,103,377 $410,338 $4,338,100 $(5,930,742) $19,254,036 $ 167,117 $18,238,849
Restatement 371,000 (371,000)
Balance, January 1, 2004-Restated 4,103,377 410,338 4,709,100 (5,930,742) 18,883,036 167,117 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 3,998 17,802 21,800
Purchase Plan
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-Restated 4,103,377 410,338 4,697,097 (5,660,918) 20,645,173 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 13,862 9,584 23,446
Purchase Plan
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-Restated 4,103,377 410,338 4,745,270 (5,456,134) 23,130,937 (62,518) 22,767,893
--------- -------- ---------- ----------- ----------- --------- -----------
Purchase of 42,994 shares of treasury
stock (438,870) (438,870)
Issuance of 42,665 shares from
treasury for exercise of stock
options 12,255 177,511 189,766
Issuance of 2,094 shares from treasury
to Employee Stock 14,823 10,107 24,930
Purchase Plan
Stock-based compensation expense 129,189 129,189
Dividends paid (576,775) (576,775)
Excess tax benefit for disqualifying
employee incentive
stock option dispositions 63,229 63,229
Comprehensive income:
Unrealized gain on investments, net of
deferred tax expense of $22,994 44,639
Net income 2,409,171
Total comprehensive income 2,453,810
--------- -------- ---------- ----------- ----------- --------- -----------
Balance, December 31, 2006 4,103,377 $410,338 $4,964,766 $(5,707,386) $24,963,333 $ (17,879) $24,613,172
========= ======== ========== =========== =========== ========= ===========
The accompanying notes are an integral part of
these consolidated financial statements.
27
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 in air and water.
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" or "OI"). 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.
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 a warranty ranging from 90 days to one year. 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, 2006 and
2005 are temporary cash investments in money market funds of $850,000 and
792,000 of which $704,000 and $313,000, respectively was uninsured.
Additionally, the Company had at December 31, 2006 and 2005, $99,000 and
$215,000, 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 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. The Company
periodically accrues for bad debt and management regularly compares
uncollectible accounts with period end accounts receivable balances to determine
its adequacy.
INVESTMENTS The Company accounts for its investments (including auction-rate
securities) 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's investments as of December 31,
2006 and 2005 consisted of preferred stock investments,
28
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, 2006 and 2005. The Company also had six-month Treasury
bills at December 31, 2006 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 or 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 2006, 2005 and 2004 were $151,205, $147,341 and
$201,560, 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.
29
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. Certain short-term investments, including preferred
stock and corporate notes, are considered available-for-sale, and are adjusted
at the end of each accounting period to their current market 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. At
December 31, 2006 and 2005, options to acquire 8,000 and 8,000 shares at the
weighted average exercise prices of $11.90 and $11.65, respectively, were not
included in the computations of dilutive earnings per share as their effect
would be anti-dilutive. There were no anti-dilutive options outstanding for the
year ended December 31, 2004. The following table sets forth the computation of
basic and diluted earnings per share:
Year Ended
------------------------------------------
December 31, December 31, December 31,
2006 2005 2004
------------ ------------ ------------
Numerator, earnings attributable to common stockholders $2,409,171 $2,485,764 $1,762,137
Denominator:
Basic-weighted average common shares outstanding 2,876,456 2,836,506 2,793,619
Dilutive effect of employee stock options 106,950 81,209 80,575
---------- ---------- ----------
Diluted outstanding shares 2,983,406 2,917,715 2,874,194
========== ========== ==========
Basic earnings per common share $ 0.84 $ 0.88 $ 0.63
========== ========== ==========
Diluted earnings per common share $ 0.81 $ 0.85 $ 0.61
========== ========== ==========
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 On January 1, 2006, we adopted the provisions of
Statement 123 (revised 2004) (Statement 123(R)), Share-Based Payment, which
revises Statement 123, Accounting for Stock-Based Compensation, and supersedes
APB Opinion 25, Accounting for Stock Issued to Employees. Statement 123(R)
requires us to recognize expense related to the fair value of our stock-based
compensation awards, including employee stock options.
Prior to the adoption of Statement 123(R), we accounted for stock-based
compensation awards using the intrinsic value method of Opinion 25. Accordingly,
we did not recognize compensation expense in our consolidated statements of
income for options we granted that had an exercise price equal to the market
value of the underlying common stock on the date of grant. As required by
Statement 123, we also provided certain pro forma disclosures for stock-based
awards as if the fair-value-based approach of Statement 123 had been applied.
30
We elected to use the modified prospective transition method as permitted by
Statement 123(R) and therefore have not restated our financial results for prior
periods. Under this transition method, we apply the provisions of Statement
123(R) to new awards and to awards modified, repurchased, or cancelled after
January 1, 2006. Additionally, we recognize compensation cost for the portion of
awards for which the requisite service has not been rendered (unvested awards)
that were outstanding as of January 1, 2006, as the remaining service is
rendered. The compensation cost we record for these awards is based on their
grant-date fair value as calculated for the pro forma disclosures required by
Statement 123. See Note 10 for additional information regarding stock-based
compensation.
The following table illustrates the effect on net income after tax and net
income per common share as if we had applied the fair value recognition
provisions of Statement 123 to stock-based compensation for the twelve months
ended December 31, 2005 and 2004:
Year ended
December 31
---------------
(in thousands)
2005 2004
------ ------
Net income, as reported $2,486 $1,762
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
------ ------
Pro forma net income $2,390 $1,690
====== ======
Earnings per share:
Basic--as reported $ 0.88 $0.63
Basic--pro forma $ 0.84 $0.61
Diluted--as reported $ 0.85 $0.61
Diluted--pro forma $ 0.82 $0.59
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.
We record a reserve for warranty expenditures and periodically adjust the amount
of the reserve as required to reflect actual warranty experience. In determining
the warranty reserve, we consider our historical experience and various
additional factors including expected product failure rates, material usage and
service delivery costs incurred in correcting a product failure.
We maintain an allowance for doubtful accounts representing our estimate of that
portion of accounts receivable which we may be unable to collect from customers.
Customer receivables may prove uncollectible for a variety of reasons including
deterioration of customer financial condition, damage during shipment, or
dissatisfaction with product performance. We regularly assess potential doubtful
accounts and use the best information available, including customer
correspondence and credit reports.
We regularly evaluate our inventory and maintain a reserve for excess or
obsolete inventory. Generally, we record an impairment allowance for products
with no movement in over six months that we believe to be either unsalable, or
salable only at a reduced selling price. We further use our judgment in
evaluating the recoverability of all inventory based upon known and expected
market conditions as well as future product plans.
RECENT PRONOUNCEMENTS In July 2006, the FASB issued FASB Interpretation 48,
"Accounting for Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the
threshold for recognizing the benefits of tax return positions in the financial
statements as "more-likely-than-not" to be sustained by the taxing authority.
The recently issued literature also provides guidance on the recognition,
measurement and classification of income tax uncertainties, along with any
related interest and penalties. FIN 48 also includes guidance concerning
accounting for income tax uncertainties in interim periods and increases the
level of disclosures associated with any recorded income tax uncertainties.
31
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
will be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. We will adopt the provisions of this
interpretation in the first quarter of 2007, as required. We are still
evaluating the impact this new pronouncement will have on our consolidated
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108). SAB 108 provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. Under this bulletin, registrants should
quantify errors using both a balance sheet and an income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 is effective for fiscal years ending on or after November 15,
2006. Adoption of SAB 108 did not have a material impact on the Company's
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements" which is effective for fiscal years
beginning after November 15, 2007 and for interim periods within those years.
This statement defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements. We are currently
evaluating the potential impact of this statement, if any, on our financial
position, cash flow, or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Valve Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No. 115" which permits an entity to choose to measure certain
financial assets and liabilities at fair value. SFAS No. 159 also revises
provisions of SFAS No. 115 that apply to available-for-sale and trading
securities. This statement is effective for fiscal years beginning after
November 15, 2007. We have not yet evaluated the potential impact of this
standard.
NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On January 22, 2007, the Company announced that a committee of independent
directors of the Board of Directors (the "Special Committee") assisted by
independent legal counsel and outside accounting experts was conducting an
independent investigation to review the Company's historical stock option grant
and related accounting practices. The Special Committee and its advisors
conducted an extensive review of the Company's historical stock option grants
from 1985 through 2006 and related accounting, including an assessment and
review of the Company's accounting policies, internal records, supporting
documentation and e-mail communications, as well as interviews with current and
former employees and current and former members of the Company's executive
management and Board of Directors.
On March 23, 2007, the Company announced the following principal findings from
the Special Committee's investigation:
- Between 1985 and 2006, administrative deficiencies led to a number of
misdated option grants and errors in the selection of exercise prices
for certain grants.
- In 1997, the issuance of 81,500 options pursuant to the Company's 1987
Stock Option Plan was approved on a date after which the plan had
expired and resolutions approving these grants were inserted into the
minutes of a Board meeting that occurred prior to the expiration of
the plan.
- In 1998, the Compensation Committee of the Board approved the cashless
exercise by William W. Botts, the Company's Chairman and CEO, of a
stock option to purchase 15,000 shares of O. I. common stock on a date
following the expiration of that stock option, resulting in a benefit
to Mr. Botts not permissible under the Company's stock option plan.
The approval was reflected in resolutions approved for inclusion in
minutes of a meeting that occurred prior to the expiration of the
option.
- From 2003 to 2006, administrative errors were made in the
determination of exercise prices relating to automatic option grants
of 2,000 shares per year made to Board members at the Company's Annual
Meeting of
32
Shareholders. The exercise price for these grants should been based on
the closing price of the last trading day prior to the annual meeting
but were instead mistakenly based on the closing price on the day of
the annual meeting.
- From 2003 to 2006, administrative errors were made in the
determination of exercise prices relating to automatic option grants
made to Board members at the Company's Annual Meeting of Shareholders.
Pursuant to the Company's 2003 option plan, at each annual meeting
each of the Company's non-employee directors receive a grant to
purchase 2,000 shares of the Company's common stock. The exercise
price for these grants should have been based on the closing price on
the last trading day prior to the annual meeting but were instead
mistakenly based on the closing price on the day of the annual
meeting. In 2004 and 2006, this resulted in a benefit to these Board
members of a reduced exercise price of $0.191 per share in 2004 and
$1.35 per share in 2006. In 2003 and 2005, the exercise price of the
stock option exceeded the closing price of the Company's common stock
on the last trading day prior to the annual meeting and therefore
there was no benefit to these Board members. The impact of these
errors is insignificant to the consolidated financial statements
contained in this Form 10-K.
- The limited controls and the lack of definitive processes for stock
option granting and approval allowed for abuse, including on three
separate occasions the apparent use of hindsight in the establishment
of more favorable grant dates and exercise prices for options.
- From 1997 through 2001, Mr. Botts exercised stock options on six
occasions by tendering shares of OI common stock held by him to pay
the exercise price required, as permitted by the stock option plans.
However, evidence indicates that these option exercises occurred
without full disclosure to the Board or Compensation Committee that
the price used to value the shares of OI stock tendered by Mr. Botts
represented the high sale price of the day. Further, on one occasion,
the Special Committee found evidence of the use of hindsight by Mr.
Botts in selecting the exercise date, which resulted in his retention
of 7,004 additional shares of OI common stock to which he would not
otherwise have been entitled.
The Special Committee concluded that compensation expense totaling $371,000
should be recorded as a result of discrepancies found in the measurement dates
and the determination of exercise prices associated with certain stock options
granted primarily between 1985 and 2001. Accordingly, the Company restated its
accompanying consolidated financial statements by reducing retained earnings and
increasing additional paid in capital as of January 1, 2004. The adjustment for
stock compensation expense had no material impact on the consolidated statements
of income or cash flows during any of the periods presented.
In 2003, the Board authorized changes to the 2003 Incentive Compensation Plan in
order to clarify and revise the provisions for granting and exercising of stock
options. These changes were enacted to remediate deficiencies in internal
control that existed at that time. We believe internal controls surrounding the
granting and exercising of stock options have been functioning adequately since
the remediation occurred. Based on the results of its investigation, the Special
Committee has recommended further changes to improve the process. We are
currently reviewing these recommendations and developing and implementing a
remediation plan addressing historical option grants and the granting of future
equity-based awards. In addition, we have delivered a full presentation
regarding the results of the Special Committee's investigation to the staff of
the Division of Enforcement of the Securities and Exchange Commission and will
continue to cooperate fully in the event of any further inquiry.
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:
2006 2005
-------- --------
Total minimum lease payments to be received $356,018 $497,308
Less: Unearned income (34,436) (45,409)
-------- --------
Net investment in sales-type leases $321,582 $451,899
======== ========
At December 31, 2006, minimum lease payments for each of the five succeeding
fiscal years are as follows: $213,194 in 2007, $103,833 in 2008, $28,587 in
2009, $10,404 in 2010, and $0 in 2011.
NOTE 4. INVENTORIES
Inventories, which include material, labor, and manufacturing overhead, on
December 31, 2006 and 2005, consisted of the following:
2006 2005
---------- ----------
Raw materials $4,612,378 $4,202,827
Work-in-process 807,136 650,668
Finished goods 593,583 669,425
Reserves (999,273) (906,142)
---------- ----------
$5,013,824 $4,616,778
========== ==========
A provision for obsolete inventory was determined in 2006 and 2005 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 provision for
obsolete inventory totaled approximately $109,000 in 2006, approximately $67,000
in 2005, and approximately $42,000 in 2004. These provisions are included in
cost of revenues in the consolidated statements of income.
33
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost on December 31, 2006 and 2005, consisted
of the following:
Estimated
Useful Lives 2006 2005
-------------- ----------- -----------
Land $ 40,462 $ 40,462
Buildings 33 to 40 years 3,850,344 3,847,835
Leasehold improvements 5 years 136,977 121,132
Furniture and equipment 3 to 10 years 4,171,325 3,640,322
----------- -----------
8,199,108 7,649,751
Less accumulated depreciation (4,920,107) (4,420,365)
----------- -----------
$ 3,279,001 $ 3,229,386
=========== ===========
Depreciation expense totaled $562,334 and $541,148 for the years ended December
31, 2006 and 2005, respectively.
NOTE 6. INVESTMENTS
Investments considered available-for-sale at December 31, 2006 and 2005,
consisted of the following:
2006 2005
----------- ----------
Marketable equity securities $ 2,827,995 $3,742,675
Corporate securities 1,459,420 4,604,445
Other securities 700,296 500,000
U.S. Government and federal agency securities 6,073,939 993,584
----------- ----------
$11,061,650 $9,840,704
=========== ==========
December 31, 2006
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
Securities Available-for-Sale
Debt securities:
U.S. Government and federal agency $ 6,073,939 $ 0 $ 0 $ 6,073,939
Corporate 1,500,000 0 (40,580) 1,459,420
Other 700,296 0 0 700,296
----------- -------- --------- -----------
Total debt securities 8,274,235 0 (40,580) 8,233,655
Marketable equity securities 2,814,504 118,488 (104,997) 2,827,995
----------- -------- --------- -----------
Total securities available-for-sale $11,088,739 $118,488 $(145,577) $11,061,650
=========== ======== ========= ===========
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
========== ======== ========= ==========
34
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 2006 follows:
Available for Sale
-----------------------
Amortized Fair
Cost Value
---------- ----------
Within 1 year $6,774,235 $6,774,235
Over 1 year through 5 years 1,500,000 1,459,420
---------- ----------
$8,274,235 $8,233,655
========== ==========
For the years ended December 31, 2006, 2005 and 2004, proceeds from sales of
securities available for sale amounted to $1,157,296, $533,513, and $978,113,
respectively. Gross realized gains amounted to $0, $38,949, and $70,282 in 2006,
2005 and 2004, respectively. Gross realized losses amounted to $22,863, $38,193,
and $88,802, in 2006, 2005, and 2004, respectively. For the years ended December
31, 2006, 2005 and 2004, dividend income amounted to $229,163, $262,126, and
$263,479, respectively.
Information pertaining to securities with gross unrealized losses at December
31, 2006, aggregated by investment category and length of time that individual
securities have been in a continuous loss position follows:
2006
-----------------------------------------------------------------
Less Than Twelve Months Over Twelve Months
------------------------------ --------------------------------
No. of Gross No. of Gross
Invest Unrealized Fair Invest Unrealized Fair
-ments Losses Value -ments Losses Value
------ ---------- -------- ------ ---------- ----------
Securities Available for Sale
Debt securities:
U.S. Government and federal agency 0 $ 0 $ 0 0 $ 0 $ 0
Corporate 0 0 0 2 40,580 1,459,420
Other 0 0 0 0 0 0
--- ------- -------- --- -------- ----------
Total debt securities 0 0 0 2 40,580 1,459,420
Marketable equity securities 2 31,100 345,300 4 73,897 951,500
--- ------- -------- --- -------- ----------
Total securities available-for-sale 2 $31,000 $345,300 6 $114,477 $2,410,920
=== ======= ======== === ======== ==========
2005
-------------------------------------------------------------------
Less Than Twelve Months Over Twelve Months
-------------------------------- --------------------------------
No. of Gross No. of Gross
Invest Unrealized Fair Invest Unrealized Fair
-ments Losses Value -ments Losses Value
------ ---------- ---------- ------ ---------- ----------
Securities Available for Sale
Debt securities:
U.S. Government and federal agency 0 $ 0 $ 0 0 $ 0 $ 0
Corporate 0 0 0 2 112,095 1,387,905
Other 0 0 0 0 0 0
--- ------- ---------- --- -------- ----------
Total debt securities 0 0 0 2 112,095 1,387,905
Marketable equity securities 4 49,892 1,040,655 4 79,975 836,000
--- ------- ---------- --- -------- ----------
Total securities available-for-sale 4 $49,892 $1,040,655 6 $192,070 $2,223,905
=== ======= ========== === ======== ==========
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 made prior to the balance sheet date.
35
NOTE 7. INTANGIBLE ASSETS
Intangible assets on December 31, 2006 and 2005, consisted of the following:
2006 2005
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Patents $418,095 $(170,063) $336,853 $(159,922)
Rights to licenses 105,000 (12,353) 105,000 (6,176)
-------- --------- -------- ---------
$523,095 $(182,416) $441,853 $(166,098)
======== ========= ======== =========
Amortization expense charged to operations amounted to approximately $16,319,
$14,910, and $23,104, for the years ended December 31, 2006, 2005, and 2004,
respectively, including $12,000 expense during 2004 due to the abandonment of a
patent.
Estimated future amortization expense:
For year ended 12/31/07 $14,922
For year ended 12/31/08 $14,219
For year ended 12/31/09 $14,219
For year ended 12/31/10 $13,446
For year ended 12/31/11 $12,340
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 2006 and in 2005 and determined
that no impairment charge was necessary.
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities on December 31, 2006 and 2005, consisted of the following:
2006 2005
---------- ----------
Accrued compensation and other related expenses $1,407,938 $1,506,029
Accrued warranties 662,169 635,669
Unearned revenues 261,213 431,989
Unearned revenues - service contracts 333,146 428,375
Unearned revenues/deposits - sales-type leases 150,654 165,316
Other liabilities and accrued expenses 1,224,991 796,325
---------- ----------
$4,040,111 $3,963,703
========== ==========
NOTE 9. PRODUCT WARRANTY LIABILITIES
The changes in the Company's product warranty liability on December 31, 2006 and
2005 are as follows:
2006 2005
--------- ---------
Liabilities, beginning of year $ 635,669 $ 650,861
Expense for new warranties issued 703,019 485,932
Warranty claims (676,519) (501,124)
--------- ---------
Liabilities, end of year $ 662,169 $ 635,669
========= =========
36
NOTE 10. STOCK OPTION AND STOCK PURCHASE PLAN
On January 1, 2006, we adopted the provisions of Statement 123 (revised 2004)
(Statement 123(R)), Share-Based Payment, which revises Statement 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion 25, Accounting for
Stock Issued to Employees. Statement 123(R) requires us to recognize expense
related to the fair value of our stock-based compensation awards, including
employee stock options.
Prior to the adoption of Statement 123(R), we accounted for stock-based
compensation awards using the intrinsic value method of Opinion 25. Accordingly,
we did not recognize compensation expense in our statements of income for
options we granted that had an exercise price equal to the market value of the
underlying common stock on the date of grant. As required by Statement 123, we
also provided certain pro forma disclosures for stock-based awards as if the
fair-value-based approach of Statement 123 had been applied.
We have elected to use the modified prospective transition method as permitted
by Statement 123(R) and therefore have not restated our financial results for
prior periods. Under this transition method, we will apply the provisions of
Statement 123(R) to new awards and to awards modified, repurchased, or cancelled
after January 1, 2006. Additionally, we will recognize compensation cost for the
portion of awards for which the requisite service has not been rendered
(unvested awards) that were outstanding as of January 1, 2006, as the remaining
service is rendered. The compensation cost we record for these awards will be
based on their grant-date fair value as calculated for the pro forma disclosures
required by Statement 123.
Our pre-tax compensation cost for stock-based compensation was $129,000 ($77,000
after tax effects) for the year ended December 31, 2006. As a result of the
adoption of Statement 123(R), our financial results were lower than under our
previous accounting method for share-based compensation by the following
amounts:
Twelve months ended
December 31, 2006
-------------------
(in 000s, except
per share amounts)
Income before income taxes $ 129
Net income $ 77
Basic earnings per share $0.03
Diluted earnings per share $0.03
Statement 123(R) requires that cash flows from the exercise of stock options
resulting from tax benefits in excess of recognized cumulative compensation cost
(excess tax benefits) be classified as financing cash flows. For the twelve
months ended December 31, 2006 the excess tax benefit was $63,229.
In 2005 and 2004, our pre-tax compensation cost for stock-based compensation
would have been $160,000 ($96,000 after tax effects) and $120,000 ($72,000 after
tax effects), respectively. Had we adopted Statement 123 in those years our
financial results would have been lower by the following amounts:
Year ended December 31
----------------------
(in 000s, except per
share amounts)
2005 2004
----- -----
Income before income taxes $ 160 $ 120
----- -----
Net income $ 96 $ 72
Basic earnings per share $0.04 $0.02
Diluted earnings per share $0.03 $0.02
37
8,000 non-qualified stock options were granted to members of the board of
directors under the 2003 Incentive Compensation Plan during the second quarter
of 2006. The weighted average fair values of options were calculated using the
following assumptions:
2006 2005 2004
---------- ---------- ----------
Risk free interest rate 5.00% 3.48% 3.10%
Expected dividend 0.05 -- --
Expected life 3.00 years 3.00 years 7.00 years
Expected volatility 37.00% 27.00% 27.00%
The risk-free interest rate is based upon interest rates that match the
contractual terms of the stock option grants. The expected volatility is based
on historical observation and recent price fluctuations. The expected life is
based on evaluations of historical and expected future employee exercise
behavior, which is not less than the vesting period of the options. In 2006 and
2005, the only options granted were to non-employee directors that have a
three-year contractual life. In 2004, options were granted to both non-employee
directors and employees. The Company began paying dividends in 2006 and had not
paid any prior to that time. The weighted average fair value of stock options
granted in 2006, 2005 and 2004 was $3.30, $2.61 and $2.93, respectively.
INCENTIVE COMPENSATION PLANS
We have two stock option plans, one of which has expired and one with shares
available for grant at December 31, 2006 as follows:
2003 Incentive
Plan Compensation Plan
---- -----------------
Minimum exercise price as a percentage of fair
market value at date of grant 100%
Plan termination date December 31, 2012
Shares available for grant at December 31, 2006 269,000
Option grants under both plans have a contractual life of ten years, except
grants to non-employee directors, which have a contractual life of three years.
Option grants vest equally on each anniversary of the grant date, commencing
with the first anniversary, except grants to non-employee directors that vest
100% after six months. We recognize compensation cost for these awards on a
straight-line basis over the service period.
On May 8, 2006, upon their election to the board of directors, four new members
of the board were granted 3,000 restricted shares of common stock that will vest
two years from the date of grant. The fair value of the stock was calculated
using the closing market price on the date of grant and not the Black-Scholes
option-pricing model. The closing market price was $11.90 per share.
The following is a summary of the changes in outstanding options for the twelve
months ended December 31, 2004, 2005 and 2006:
38
WEIGHTED AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
------- --------------- ----------------
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
Options granted 8,000 11.90 11.90
Options exercised (42,665) 2.90 - 8.36 5.00
Options forfeited or cancelled (8,100) 4.03 - 8.36 5.83
-------
Options outstanding, December 31, 2006 192,423 $3.13 - 11.90 $ 5.98
There were 175,488, 187,888, and 165,476 share options exercisable at December
31, 2006, 2005, and 2004, respectively.
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 2006:
Options
Options Outstanding Exercisable
------------------------------------- -----------------
Weighted Weighted
Weighted Average Average Average
Ranges of Remaining Life in Exercise Exercise
Exercise Prices Shares Years Price Shares Price
- --------------- ------ ----------------- -------- ------ --------
$3.13 - $4.03 71,440 4.3 $3.84 65,440 $3.83
$4.12 - $6.52 64,050 3.1 $5.44 64,050 $5.44
$7.87 - $11.90 57,233 4.9 $9.26 45,999 $9.48
Intrinsic
As of December 31, 2006 Shares Value
- ----------------------- ------ ---------
Total outstanding in-the-money options 176,423 1,049,681
Total vested in-the-money options 159,489 971,305
Total options exercised in 2006 42,665 273,014
During the twelve months ended December 31, 2006 and 2005, 8,000 non-qualified
stock options, respectively, were granted to members of the board of directors
under the 2003 Incentive Compensation Plan. The total intrinsic value of share
options exercised for the twelve months ended December 31, 2006 was $273,000.
The weighted average grant date fair value of options granted during the twelve
months ended December 31, 2006 was $3.30 per share.
During the twelve months ended December 31, 2006, proceeds received by the
Company from the exercise of options were $190,000. At December 31, 2006, total
unrecognized stock-based compensation expense related to unvested stock options
was approximately $230,000, which is expected to be recognized over a weighted
average period of approximately 2.1 years.
39
NOTE 11. STOCKHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of up to
3,000,000 shares of preferred stock with $0.10 par value per share. The voting
rights, dividend rate, redemption price, rights of conversion, rights upon
liquidation, and other preferences are subject to determination by the Board of
Directors. As of December 31, 2006, 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 of 1,797,309
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
77,691 additional shares as of December 31, 2006.
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
---------------------------------
2006 2005 2004
---------- --------- --------
Current provision:
Federal $1,032,790 $ 883,835 $335,194
State 238,537 232,856 130,338
Deferred provision (benefit) (196,752) (377,290) (9,986)
---------- --------- --------
$1,074,575 $ 739,401 $455,546
========== ========= ========
The provision for income taxes differs from the amount computed by applying the
federal statutory rates for the following reasons:
Years Ended December 31
-----------------------
2006 2005 2004
----- ----- -----
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 4.5 4.8 6.0
Current research and development credits (4.7) (5.6) (7.7)
Past research and development credits -- (7.3) --
Dividends received deduction (1.6) (1.9) (2.8)
Disqualifying incentive stock option dispositions -- -- (2.5)
Extraterritorial Income Exclusion (0.8) (1.4) (1.5)
Other, net (0.6) 0.3 (5.0)
---- ---- ----
30.8% 22.9% 20.5%
==== ==== ====
40
Deferred tax assets (liabilities) are comprised of the following at December 31,
2006 and 2005:
2006 2005
---------- ----------
Current:
Warranty reserve $ 264,868 $ 254,268
Bad debt allowance 116,592 115,840
Inventory reserve 248,921 236,825
Uniform capitalization 243,388 184,963
Accrued vacation 93,140 76,735
Other 44,876 35,769
---------- ----------
Total current $1,011,785 $ 904,400
---------- ----------
Noncurrent:
Depreciation $ 503,182 $ 348,343
Deferred compensation 47,447 47,447
Intangibles (32,052) 29,856
Other 86,450 113,008
---------- ----------
Total noncurrent 605,027 538,654
---------- ----------
Net tax asset before valuation allowance 1,616,812 1,443,054
Valuation allowance -- --
---------- ----------
Net deferred tax asset $1,616,812 $1,443,054
========== ==========
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 $254,000, $225,000, and $176,000 to the
401(k) Plan for the years ended December 31, 2006, 2005, and 2004, 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 $9,995, $19,231, and $22,589 in 2006, 2005, and 2004, 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 2007. The Company also leases 500
sq. ft of office space in Edgewood, Maryland, which can be renewed annually.
Rental expense recognized in 2006, 2005, and 2004, was $198,118, $196,664, and
$195,535, respectively. Future minimum rental payments under these leases for
each year of the next five successive years are $201,933, $22,880, $707, $-0-,
and $-0-.
The Company places purchase orders with vendors primarily for raw materials,
component parts, and other supplies that the Company uses to manufacture its
products. As of December 31, 2006, the Company had approximately $2,183,000 of
open purchase orders.
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.
41
The Company and its wholly-owned subsidiary CMS Research Corp. ("CMS Research")
were 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 alleged (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.
On November 15, 2006, the lawsuit was settled and the case was dismissed with
prejudice. We agreed to pay Amirav $175,000, $100,000 of which was paid on
November 30, 2006 and $75,000 of which must be paid on or before April 4, 2007.
The settlement clarifies O.I.'s future royalty payment obligations to Arimav by
confirming that O.I. will continue to pay royalties on the same basis as its
past practice and by clarifying that O.I. can sell under the license to any
manufacturer of gas chromatographs. The settlement also clarifies O.I.'s royalty
reporting obligations and requires a mandatory audit of royalty payments by an
independent accountant before any future lawsuit by Amirav. There is no
admission of fault or liability in the settlement.
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, 2006, 2005, and 2004 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,
2006, 2005, and 2004 are as follows:
Years Ended December 31
---------------------------------------
2006 2005 2004
----------- ----------- -----------
Net revenues from unaffiliated customers:
United States $21,121,179 $21,321,535 $20,074,606
Foreign $ 9,142,610 $ 8,531,268 $ 8,405,008
Long-lived assets at end of year:
United States $ 3,279,001 $ 3,229,386 $ 3,404,240
One customer accounted for approximately 17% of revenues in 2006, approximately
16% of revenues in 2005 and 11% of revenues in 2004. Sales to federal, state,
and municipal governments accounted for 24% of total revenues in 2006, 25% of
total revenues in 2005, and 24% of total revenues in 2004.
Sales to the Asia-Pacific region were approximately 13% of net revenues for
2006, 13% of net revenues for 2005, and 16% of net revenues for 2004; and sales
to the European-African region were approximately 14% of net revenues for 2006,
12% of net revenues for 2005 and 10% of net revenues for 2004.
42
NOTE 16. QUARTERLY INFORMATION (UNAUDITED)
Quarterly financial information for 2006 and 2005 is summarized as follows:
($ in thousands, except per share amounts)
First Second Third Fourth
2006 Qtr. Qtr. Qtr. Qtr.
---- ------ ------ ------ ------
Net revenues $7,809 $6,615 $7,556 $8,284
Gross profit 3,963 3,159 3,806 4,432
Net income 622 198 581 1,008
Basic earnings per share 0.22 0.07 0.20 0.35
Diluted earnings per share 0.21 0.07 0.20 0.33
($ 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
NOTE 17. 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 short-term
investments, accounts receivable and accounts payable are considered equivalent
to fair value. The Company does not have any off-balance sheet financial
instruments. Short-term investments are adjusted to market value at the end of
each accounting period as discussed in Note 1.
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, 2006, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the principal executive officer and
principal financial officer, of the effectiveness of the Company's disclosure
controls and procedures. Based on that evaluation, the principal 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.
Changes in internal control over financial reporting. Effective January 8, 2007,
the Company hired J. Bruce Lancaster as CFO. The position had been vacant since
June 8, 2006. Effective January 22, 2007 our President and CEO, William W.
Botts, voluntarily agreed to be placed on paid administrative leave from his
position as President and CEO, and as a member of the Board of Directors, of O.
I. Corporation. He later resigned these positions on March 21, 2007. Effective
January 22, 2007 the Company's Board of Directors appointed Dr. Richard W.K.
Chapman, a member of the Board of Directors, as Acting Chief Executive Officer
and appointed Dr. Donald P. Segers, the Vice President/General Manager of the
company's CMS subsidiary, as Acting President. Dr. Chapman is the former
President and CEO of ThermoQuest Corporation and has served and is currently
serving on several boards of both public and private companies. The Acting CEO
and Acting President continue to perform the duties of the former CEO &
President with respect to internal controls over financial reporting since their
appointments began on January 22, 2007.
Other than the aforementioned, there was no change in our internal control over
financial reporting that occurred during the year ending December 31, 2006 that
has materially affected, or that we believe is reasonably likely to materially
affect our internal control over financial reporting. 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.
ITEM 9B. OTHER INFORMATION
Nasdaq Deficiency Letter; Deficiency Resolved
On March 30, 2007, we received a Nasdaq Staff Deficiency Letter notifying us
that, as of January 21, 2007, we were not in compliance with Nasdaq's
compensation and nomination committee requirements for continued listing as set
forth in Marketplace Rules 4350(c)(3) and 4350(c)(4), respectively. Our
compliance failure arose when Dr. Richard W.K. Chapman, a member of both our
Compensation Committee and Nominating and Corporate Governance Committee, was
appointed as our Acting Chief Executive Officer, thereby disqualifying him from
meeting the compensation and nomination committee member independence standards
required by Nasdaq for continued listing.
Dr. Chapman resigned from the Compensation and Nominating and Corporation
Governance Committees effective March 8 and March 19, 2007, respectively. The
Nasdaq Staff Deficiency Letter further states that as a result of Dr. Chapman's
resignations, our Compensation and Nominating and Corporate Governance
Committees are now composed solely of independent directors, and the Nasdaq
staff has determined that we have regained compliance with Nasdaq rules as of
the dates of Dr. Chapman's resignations from those committees.
Dr. Chapman continues to serve as our Acting Chief Executive Officer and is
doing so in an unpaid capacity. We did not hold any meetings of the Compensation
Committee or the Nominating and Corporate Governance Committee, nor did either
of those committees take any actions, during the period in which Dr. Chapman
remained on those committees while serving as our Acting Chief Executive
Officer.
Retirement of Directors
On April 1, 2007, Edwin B. King and Craig R. Whited retired from their positions
as members of the Board of Directors of O.I. Corporation. As set forth in OI's
Current Reports on Form 8-K dated March 8, 2006 and December 29, 2006, Mr. King
had previously announced his intention to retire as a Director effective on or
before the date of OI's 2007 annual meeting of shareholders and Mr. Whited had
announced his intention to retire effective on the date of the 2007 annual
meeting of shareholders. In connection with their retirement from the Board,
O.I. Corporation entered into mutual releases with each of Messrs. King and
Whited.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Proxy Statement under the sections captioned "Proposal One: Election of
Director", "Executive Compensation", "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" and "Code of Ethics," which sections are
incorporated in this annual report on Form 10-K by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth in the section
entitled "Executive Compensation" in our Proxy Statement for the 2007 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 2007 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 2007 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 2007 Annual Meeting
of Shareholders, which section is incorporated in this annual report on Form
10-K by reference.
44
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....... 23
Consolidated Balance Sheets at December 31, 2006 and 2005..... 24
Consolidated Statements of Income for the years ended
December 31, 2006, 2005, and 2004.......................... 25
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005, and 2004.......................... 26
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2006, 2005, and 2004.............. 27
Notes to Consolidated Financial Statements.................... 28-43
2. Financial Statement Schedules required to be filed by Item 8 of this
Form:
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............... F-1
(b) 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 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).
*10.2 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).
*10.3 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).
*10.4 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).
45
*10.5 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).
*10.6 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).
*10.7 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).
*10.8 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).
*10.9 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).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Power of Attorney (included on signature page to this Form 10-K).
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.
* Management contract or compensatory plan or arrangement.
46
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/ J. Bruce Lancaster
----------------------------------------
Date: April 2, 2007 By: J. Bruce Lancaster
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard W.K. Chapman and J. Bruce
Lancaster, and each of them, acting individually, as his or her
attorney-in-fact, each with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this annual report on Form 10-K and other
documents in connection herewith and therewith, and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection herewith and therewith and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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/ Richard W.K. Chapman Acting Chief Executive Officer, April 2, 2007
- ------------------------------ and Director
Richard W.K. Chapman (Principal Executive Officer)
/s/ J. Bruce Lancaster Chief Financial Officer April 2, 2007
- ------------------------------
J. Bruce Lancaster
/s/ Raymond E. Cabillot Chairman of the Board April 2, 2007
- ------------------------------
Raymond E. Cabillot
/s/ Kenneth M. Dodd Director April 2, 2007
- ------------------------------
Kenneth M. Dodd
/s/ Robert L. Moore Director April 2, 2007
- ------------------------------
Robert L. Moore
/s/ Leo Barton Womack Director April 2, 2007
- ------------------------------
Leo Barton Womack
47
O.I. CORPORATION AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND CHARGED TO END OF
PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
------------ ---------- -------------- ---------- ----------
Allowance for doubtful accounts deducted
from trade accounts receivable
Years ended:
December 31, 2006 $326 $ 30 $ (57)(1) $ -- $299
December 31, 2005 271 131 (76)(1) -- 326
December 31, 2004 290 177 (196)(1) -- 271
Reserve for inventory obsolescence
deducted from inventories
Years ended:
December 31, 2006 $906 $ 52 $ 41 (2) $ -- $999
December 31, 2005 756 67 83 (2) -- 906
December 31, 2004 762 42 (48)(2) -- 756
- --------------------
(1) Amounts were deemed uncollectible.
(2) Amounts were deemed obsolete.
F-1
Index to 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 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).
*10.2 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).
*10.3 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).
*10.4 Registration Rights Agreement among O. I. Corporation and the former
shareholders of CMS Research Corporation dated January 4, 1994 (filed as
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference).
*10.5 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).
*10.6 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).
*10.7 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).
*10.8 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).
*10.9 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).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Power of Attorney (included on signature page to this Form 10-K).
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.
* Management contract or compensatory plan or arrangement.