UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2007
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-6511
O. I. CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-0728053
State of Incorporation I.R.S. Employer
Identification No.
P.O. Box 9010
151 Graham Road
College Station, Texas 77842-9010
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (979) 690-1711
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is 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]
As of May 1, 2007, there were 2,891,123 shares of the issuer's common stock,
$.10 par value, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
O.I. CORPORATION and SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
March 31, December 31,
2007 2006
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,220 $ 2,665
Accounts receivable-trade, net of allowance for
doubtful accounts of $280 and $299, respectively 5,927 5,960
Investment in sales-type leases-current portion 215 213
Investments, at market 9,487 11,062
Inventories, net 4,823 5,014
Current deferred income tax assets 1,012 1,012
Other current assets 134 191
------- -------
Total current assets 24,818 26,117
Property, plant and equipment, net 3,381 3,279
Investment in sales-type leases, net of current 137 143
Long-term deferred income tax assets 592 605
Intangible assets, net 390 341
Other assets 28 27
------- -------
Total assets $29,346 $30,512
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,287 $ 1,859
Accrued liabilities 4,043 4,040
------- -------
Total current liabilities 5,330 5,899
Long-term liabilities 365 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value, 3,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.10 par value, 10,000 shares
authorized 4,103 shares issued, 2,862 shares
and 2,868 shares outstanding, respectively 410 410
Additional paid-in capital 4,994 4,965
Treasury stock, 1,242 and 1,236 shares,
respectively, at cost (5,787) (5,707)
Retained earnings 24,027 24,963
Accumulated other comprehensive income/(loss),
net of taxes 7 (18)
------- -------
Total stockholders' equity 23,651 24,613
------- -------
Total liabilities and stockholders' equity $29,346 $30,512
======= =======
See notes to unaudited condensed consolidated financial statements.
2
O.I. CORPORATION and SUBSIDIARY
Condensed Consolidated Statements of Operations
and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------
2007 2006
------ ------
Net revenues:
Products $6,493 $6,476
Services 849 1,333
------ ------
7,342 7,809
Cost of revenues:
Products 3,223 3,184
Services 389 662
------ ------
3,612 3,846
Gross profit 3,730 3,963
Selling, general and administrative expenses 3,661 2,455
Research and development expenses 932 742
------ ------
Operating (loss)/income (863) 766
Other income, net 399 122
------ ------
(Loss)/income before income taxes (464) 888
(Benefit)/provision for income taxes (102) 266
------ ------
Net (loss)/income $ (362) $ 622
====== ======
Other comprehensive income, net of tax:
Unrealized gains on investments 25 12
------ ------
Comprehensive (loss)/income $ (337) $ 634
====== ======
(Loss)/earnings per share:
Basic $(0.13) $ 0.22
Diluted $(0.13) $ 0.21
Shares used in computing (loss)/earnings per share:
Basic 2,862 2,859
Diluted 2,862 2,940
Cash dividends declared per share of common stock $ 0.05 --
See notes to unaudited condensed consolidated financial statements.
3
O.I. CORPORATION and SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months
Ended March 31,
-----------------
2007 2006
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $ (362) $ 622
Depreciation & amortization 148 144
Deferred income taxes -- (70)
Stock based compensation 26 17
(Gain)/loss on disposition of property, plant & equipment (214) 12
Tax benefit from stock option exercise (--) (8)
Change in working capital (408) (144)
------- -------
Net cash flows (used in)/provided by operating activities $ (810) $ 581
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (1,225) (2,433)
Maturity of investments 2,895 3,034
Purchase of property, plant & equipment (269) (113)
Proceeds from sale of property, plant & equipment 237 4
Change in other assets (53) (33)
------- -------
Net cash flows provided by investing activities $ 1,585 $ 459
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock pursuant to
exercise of employee stock options and employee
stock purchase plan 13 87
Purchase of treasury stock (90) --
Payment of cash dividends on common stock (143) --
Tax benefit from stock option exercise -- 8
------- -------
Net cash flows (used in)/provided by financing activities $ (220) $ 87
NET INCREASE IN CASH AND CASH EQUIVALENTS 555 1,127
Cash and cash equivalents, at beginning of quarter 2,665 1,727
------- -------
Cash and cash equivalents, at end of quarter $ 3,220 $ 2,854
======= =======
See notes to unaudited condensed consolidated financial statements.
4
O.I. CORPORATION and SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
O.I. Corporation (the "Company", "we" or "our"), an Oklahoma corporation, was
organized in 1963. The Company designs, manufactures, markets, and services
analytical, monitoring and sample preparation products, components, and systems
used to detect, measure, and analyze chemical compounds.
The accompanying unaudited condensed consolidated financial statements have been
prepared by O.I. Corporation and include all adjustments that are, in the
opinion of management, necessary for a fair presentation of financial results
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). All adjustments and provisions included in these statements are of
a normal recurring nature. All intercompany transactions and balances have been
eliminated in the financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2006.
CRITICAL ACCOUNTING POLICIES
In June 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109," which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN No. 48
requires recognition of tax benefits that satisfy a greater than 50% probability
threshold. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. As required, we adopted the provisions of FIN No. 48 as of January
1, 2007.
2. INVENTORIES, NET.
Inventories, net, which include material, labor, and manufacturing overhead, are
stated at the lower of first-in, first-out cost or market (in thousands):
Mar. 31, 2007 Dec. 31, 2006
------------- -------------
Raw materials $4,598 $4,612
Work-in-process 537 807
Finished goods 543 594
Reserves (855) (999)
------ ------
$4,823 $5,014
====== ======
3. COMPREHENSIVE (LOSS)/INCOME.
Other comprehensive (loss)/income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are recorded as an element
of stockholders' equity. The Company's components of comprehensive (loss)/income
are net income and unrealized gains and losses on available-for-sale
investments.
4. (LOSS)/EARNINGS PER SHARE.
Basic EPS is computed by dividing net income (loss) by the weighted-average
number of common shares outstanding for the period. Diluted EPS is based on the
weighted-average number of shares outstanding during each period and the assumed
exercise of dilutive stock options less the number of treasury shares assumed to
be purchased from the exercise proceeds using the average market price of the
Company's common stock for each of the periods presented.
For the three months ended March 31, 2007, the Company's potentially dilutive
options of 64,638 were not used in the calculation of diluted earnings since the
effect of potentially dilutive securities in computing a loss per share was
antidilutive.
5. 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. In accordance with Statement 123(R),
our financial statements recognize expense related to the fair value of our
stock-based compensation awards for all periods presented.
5
In addition, the accompanying financial statements include compensation cost for
the portion of awards for which the requisite service had not been rendered
(unvested awards) that were outstanding as of January 1, 2006. The compensation
cost recorded for these awards was based on their grant-date fair value.
Our pre-tax compensation cost for stock-based compensation was $26,000 and
$17,000 ($16,000 and $10,000 after tax effects) for the three months ended March
31, 2007 and 2006, respectively.
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 three
months ended March 31, 2007 there was no excess tax benefit. In the same period
of the prior year the excess tax benefit was $8,000.
During the three months ended March 31, 2007, our CFO, who we hired in January,
was granted 20,000 incentive stock options under the 2003 Incentive Compensation
Plan. No options were granted in the same period of the prior year. The weighted
average fair value of these options was calculated using the following
assumptions:
Employee incentive stock options
- --------------------------------
Risk free interest rate 4.75%
Expected dividend yield 1.75%
Expected life 3.00 years
Expected volatility 37.00%
STOCK OPTION PLANS
We have two stock option plans, one of which has expired and one with shares
available for grant at March 31, 2007 as follows:
2003 Incentive 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 March 31, 2007 249,000
Option grants under both plans have a contractual life of ten years, except
grants to non-employee directors that 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 which vest
100% after six months. We recognize compensation costs for these awards on a
straight-line basis over the service period.
The following is a summary of the changes in outstanding options for the three
months ended March 31, 2007:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Shares Exercise Contractual Value
(000) Price Life (000)
------ -------- ----------- ---------
Outstanding at beginning of period 192 $ 5.98 4.1 years
Granted 20 $11.42 9.8 years
Exercised (1) $ 4.97 --
Forfeited (0) -- --
Expired (0) -- --
Outstanding at end of period 211 $ 6.51 4.4 years $1,065
Vested or expected to vest at end of
period 211 $ 6.51 4.4 years $1,065
Exercisable at end of period 182 $ 6.01 3.7 years $1,006
6
The total intrinsic value of share options exercised during the first three
months of fiscal 2007 and 2006 was $10,000 and $152,000, respectively. The
weighted average grant date fair value of options granted during the three
months ended March 31, 2007 was $5.22 per share.
OTHER INFORMATION
As of March 31, 2007, we had $217,000 of total unrecognized compensation cost
related to non-vested awards granted under our various share-based plans, which
we expect to recognize over a weighted-average period of 3.3 years.
We received cash from options exercised during the first three months of fiscal
years 2007 and 2006 of $8,000 and $82,000, respectively. The impact of these
cash receipts is included in financing activities in the accompanying
consolidated statements of cash flows.
The Company's practice has been to issue shares for option exercises out of
treasury stock as provided under the terms of the 2003 Incentive Compensation
Plan. We believe our treasury stock holdings are sufficient to satisfy any
exercises in 2007.
6. INTANGIBLE ASSETS, NET.
Intangible assets, net, consisted of patents relating to technology used in the
Company's products and ongoing legal expenses incurred in connection with the
prosecution of pending patent applications which are capitalized as incurred.
Intangible assets, net, as of March 31, 2007 and December 31, 2006, were
approximately $390,000 and $341,000, net of accumulated amortization of $186,000
and $182,000, respectively. The increase was primarily due to legal expenses
incurred to prosecute certain international patent applications on existing
domestic patents. Total amortization expense on intangible assets for the three
months ended March 31, 2007 and 2006 was approximately $4,000 and 5,000,
respectively. The estimated aggregate amortization expense for the remainder of
2007 and each of the four succeeding fiscal years 2008 to 2011 is approximately
$12,000, $15,000, $15,000, $15,000 and $13,000, respectively.
7. PRODUCT WARRANTY LIABILITIES.
The changes in the Company's product warranty liability for the three months
ended March 31, 2007 were as follows (in thousands):
Liabilities, beginning of year $ 662
Expense for new warranties issued 273
Warranty claims (282)
-----
Liabilities, March 31, 2007 $ 653
=====
8. INCOME TAXES.
The effective tax rate for the first quarter of 2007 and 2006 were 22.0 percent
and 30.0 percent, respectively. The lower tax rate in 2007 was due to favorable
deductions and credits received, such as the Domestic Production Activity
Deduction, stock option exercises and research and development credits.
The Company and its subsidiary file income tax returns in the U.S. federal
jurisdiction, and various state jurisdictions. Effective January 1, 2007, the
Company adopted FIN No. 48, "Accounting for Uncertainty in Income Taxes." In
accordance with FIN No. 48, the Company recognized a cumulative-effect
adjustment of $431,000 as of January 1, 2007, increasing its current and
long-term liabilities for unrecognized tax benefits, interest, and penalties and
reducing the balance of Retained earnings.
At January 1, 2007, the Company had $431,000 in unrecognized tax benefits, the
recognition of which would have an affect of $373,000 on the effective tax rate.
Included in the balance of unrecognized tax benefits at January 1, 2007, is
$8,000 related to tax positions for which it is reasonably possible that the
total amounts could significantly change during the next twelve months. This
amount represents a decrease in unrecognized tax benefits comprised of items
related to expiring statutes in state jurisdictions.
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits in SG&A expenses. At January 1, 2007, the Company had accrued
$57,000 and $1,000 for the potential payment of interest and penalties,
respectively.
As of January 1, 2007, the Company is subject to U.S. Federal income tax
examinations for the tax years 2001 through 2006. In addition, the Company is
subject to state and local income tax examinations for the tax years 2001
through 2006, with certain exceptions.
There were no significant changes to any of these amounts during the first
quarter of 2007
9. COMMITMENTS AND CONTINGENCIES.
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.
7
10. RECENT PRONOUNCEMENTS.
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 Value 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 are currently evaluating the potential impact of this
statement, if any, on our financial position, cash flow, or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of 1934, as amended, concerning, among other things, (i) possible or assumed
future results of operations, contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," (ii) prospects for our
business or products; (iii) other matters that are not historical facts. These
forward-looking statements are identified by their use of terms and phrases such
as "believes," "expects," "anticipates," "intends," "estimates", "plans" and
similar terms and phrases.
These statements are based on certain assumptions and analyses made by us in
light of our experience and perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. Our business and results of operations are subject to a
number of assumptions, risks and uncertainties, many of which are beyond our
ability to control or predict. Because of these risks and uncertainties, actual
results may differ materially from those expressed or implied by forward-looking
statements, and investors are cautioned not to place undue reliance on such
statements, which are not guarantees of future performance and which speak only
as of the date thereof.
The cautionary statements contained or referred to herein should be considered
in connection with any written or oral forward-looking statements that may be
issued by us or persons acting on the Company's behalf. The Company does not
undertake any obligation to release any revisions to or to update publicly any
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. When considering
forward-looking statements, you should also keep in mind the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2006.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto.
RECENT DEVELOPMENTS
STOCK OPTION INVESTIGATION
During the first quarter of 2007, we conducted a voluntary review of our
historical stock option grants, stock option exercises and related option and
compensation procedures, and certain accounting matters at the request of our
Board of Directors and then-current President and Chief Executive Officer. This
review was performed at the direction of a Special Committee of our Board
composed of independent directors, assisted by legal counsel and other outside
consultants.
As a result of the investigation, the Special Committee noted various
administrative deficiencies which led to misdated options, the issuance of
certain options after plan expiration, administrative errors in determining
certain exercise prices, limited instances of the use of hindsight in selecting
beneficial exercise prices and a lack of definitive processes and controls in
our historical stock option granting process. Upon the conclusion of the
investigation, our then-current President and CEO resigned his positions with
OI.
The cost of the investigation totaled approximately $1,250,000, consisting
primarily of legal and consulting expenses. All investigation costs are included
in our first quarter 2007 results in SG&A expenses.
U.S. ARMY CONTRACT
On March 19, 2007, we announced that we entered into a contract with the U.S.
Army to develop an "Online Inexpensive Total Organic Carbon Detector". Under
this contract, we will design, assemble, and deliver a prototype Online Total
Organic Carbon Detector for water analysis. The estimated Phase 1 value for the
contract is approximately $403,000 with a potential total contract value of
approximately $1,252,000. Our work on this project will begin during the second
quarter.
8
RESULTS OF OPERATIONS
Consolidated net revenues for the three months ended March 31, 2007 decreased
$467,000 or 6.0%, to $7,342,000, compared to $7,809,000 for the same period of
the prior year. Our sales decrease in the first quarter was primarily
attributable to lower service revenue, which declined as a result of last year's
billings under our agreement with Wyle. We completed the contract with Wyle
during 2006 and our 2007 revenues under the Wyle contract have been minimal,
consisting of service and support. However, we anticipate billings under our
U.S. Army contract to increase second quarter service revenues.
First quarter product revenues were essentially unchanged from 2006, up 0.3% to
$6,493,000 for 2007. Product revenues increased primarily due to sales of
MINICAMS air-monitoring systems. We delivered a significant shipment of MINICAMS
to the U.S. Army during the first quarter, and have now completed the bulk of
our contract announced on May 17, 2006. Higher sales of MINICAMS products more
than offset decreased sales of TOC Analyzers. We continued to experience an
overall decline in the domestic environmental testing commercial market, and
continue our R&D efforts to develop new products that will provide future
revenue growth.
International product revenues also decreased slightly, primarily due to lower
European sales. Increased Asian sales partially offset the decline in sales to
Europe. We continue to benefit from increased emerging market demand in
Singapore and Taiwan, and we are working to strengthen our international
distributor network.
Gross profit for the three months ended March 31, 2007 decreased to $3,730,000,
compared to $3,963,000 for the same period of the prior year due to lower
revenues. On a percentage of sales basis, our margins held steady at 50.8%.
Selling, general, and administrative ("SG&A") expenses for the three months
ended March 31, 2007 increased to $3,661,000, or 49.9% of revenues, compared to
$2,455,000, or 31.4% of revenues, for the same period of the prior year. This
increase of $1,206,000, or 49.1%, was primarily attributable to legal and
consulting costs incurred in connection with the stock option investigation
concluded during the first quarter. We believe SG&A expenses should return to a
level more consistent with historical experience in the coming quarters.
Research and development ("R&D") expenses for the three months ended March 31,
2007 increased to $932,000, or 12.7% of sales, compared to $742,000, or 9.5% of
sales, for the same period of the prior year. R&D expenses increased $190,000,
or 25.6%, compared to the same period of the prior year primarily due to the
reclassification of certain R&D expenses in 2007. During 2006, we utilized a
portion of our R&D resources to perform work under the agreement with Wyle, with
related expenses classified as service cost of sales. In connection with our
U.S. Army contract previously noted, we anticipate our upcoming R&D expenses to
decline as we reassign certain R&D resources to this project.
Operating (loss)/income for the three months ended March 31, 2007 decreased
$1,629,000, or 213.7% to a loss of ($863,000), compared to income of $766,000
for the same period of the prior year. The decrease in operating income for the
three months ended March 31, 2007 was primarily attributable to increased SG&A
expenses and lower revenues.
Other income increased $277,000 or 227.0% to $399,000 for the three months ended
March 31, 2007, compared to $122,000 for the same period of the prior year. This
increase was primarily due to a gain on the condemnation of .40 acres of our
College Station, Texas property for the widening of the adjacent highway and
right of way. In addition, our investment interest income increased as a result
of higher interest rates on a larger invested balance.
Our provision for income taxes decreased $368,000 for the three months ended
March 31, 2007 compared to the same period of the prior year. The effective tax
rate was 22% for the quarter ended March 31, 2007, compared to 30% in 2006. Our
effective tax rate differs from the statutory rate primarily due to the Domestic
Production Activity Deduction and the R&D tax credit.
Net (loss)/income for the quarter ended March 31, 2007 decreased $984,000 or
158.2% to ($362,000) compared to $622,000 for the same period of the prior year,
primarily due to a decrease in operating income partially offset by an increase
in other income and a decrease in our provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow used in operating activities for the quarter ended March 31, 2007
totaled $810,000, a decline of $1,391,000 compared to the same period of 2006.
The decrease in cash flow from operating activities in the three months ended
March 31, 2007 was primarily due to lower net income and use of funds for
working capital requirements.
Net cash flow provided by investing activities totaled $1,585,000 for the three
months ended March 31, 2007, compared to $459,000 for the same period of the
prior year. The increase in cash provided by investing activities was primarily
due to the conversion of certain investments to cash to fund our working capital
needs and an increase in proceeds from the sale of property.
Net cash flow used in financing activities for the three months ended March 31,
2007 totaled
9
$220,000, compared to cash flow provided by financing activities of $87,000 for
the same period of the prior year. The decrease in cash provided by financing
activities was primarily due to payment of a cash dividend and the repurchase of
our common stock. In the same period of the prior year, we did not pay a cash
dividend nor did we repurchase any OI stock. Cash received in connection with
the exercise of stock options also declined during 2007.
Cash, cash equivalents and short-term investments totaled $12,707,000 as of
March 31, 2007, compared to $13,727,000 as of December 31, 2006. Though down
from year-end, we believe our liquidity and expected cash flows from operations
are more than sufficient to meet expected working capital, capital expenditure
and R&D requirements for both the short-term and long-term. We invest a portion
of our excess funds generated from operations in short-term securities,
including money market funds, treasury bills, and a portion in preferred stocks.
Our primary plan for the use of cash is continuing significant research and
development efforts to introduce new products. Other possible uses of cash could
include future acquisitions of businesses or product lines that fit with our
strategy for growth. We may engage in discussions with third parties to acquire
new products or businesses or to form joint ventures. We may also use our
capital resources to enhance the Company's competitiveness in the marketplace by
providing favorable credit terms to more customers, to finance equipment for
leasing and or renting to our customers, and increase inventory stock levels of
certain products to take advantage of market opportunities. Further, we may
utilize a portion of our cash for additional dividends or certain
recapitalization strategies including more aggressive stock repurchases.
The Company's Board of Directors declared a cash dividend on January 21, 2007 of
$0.05 per common share payable on February 23, 2007 to shareholders of record at
the close of business on February 9, 2007. The dividend was declared in
connection with the Board of Directors' decision to establish an annual cash
dividend of $0.20 per share, payable at $0.05 per quarter. The payment of future
cash dividends under the policy is subject to the approval by our Board of
Directors.
Stock Repurchases
For the three months ended March 31, 2007, we repurchased a total of 7,864
shares at an average price of $11.38 per share under our stock repurchase
program. We may repurchase an additional 69,827 shares as of March 31, 2007, and
may seek future Board approval to expand this program. We anticipate any
expansion of this program would be funded from cash on hand and cash from
operations.
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 $ 170,000 $ 146,000 $ 24,000 -0- -0-
Other Obligations (2) 431,000 8,000 423,000 -0- -0-
Purchase Obligations (1) 1,846,000 1,846,000 -0- -0- -0-
---------- ---------- -------- ---- ----
Total $2,447,000 $2,000,000 $447,000 $-0- $-0-
========== ========== ======== ==== ====
(1) Open purchase orders primarily for raw materials, component parts, and
other supplies that the Company uses to manufacture its products.
(2) Other Obligations includes uncertain tax liabilities recorded under FIN No.
48, "Accounting for Uncertainty in Income Taxes."
We conduct certain operations in leased facilities under an operating lease
expiring on November 30, 2007. Future minimum rental payments under this lease
are $129,000 for 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Please reference Part I-Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a variety of market risks, including changes in interest rates
and the market value of our investments (including auction-rate securities). In
the normal course of business, we employ established policies and procedures to
manage our exposure to changes in the market value of our investments.
The fair value of our investments in debt and equity securities at March 31,
2007 and December 31, 2006 was approximately $9,487,000 and $11,062,000,
respectively. The year-to-date unrealized gain in the fair value of those
investments is approximately $25,000, primarily due to recent increases in the
value of various preferred stock holdings. Our investment policy is to manage
our investment portfolio to preserve principal and liquidity while maximizing
the return on the investment portfolio by investing in multiple types of
investment grade securities. Our investment portfolio is primarily invested in
short-term securities, with at least an investment grade rating to minimize
credit risk, preferred stocks, and six-month treasury bills. We believe that our
investment policy is conservative, both in terms of the average maturity of
investments that we allow and in terms of the credit quality of the investments
we hold. Although changes in interest
10
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. There were no realized gains or losses on sales of such
investments during the three months ended March 31, 2007. In the same period of
the prior year there were realized losses of approximately $13,000.
ITEM 4. CONTROLS AND PROCEDURES.
We maintain a set of disclosure controls and procedures designed to ensure that
the information we are required to disclose in reports filed or submitted 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. During the period of January 1, 2007 to March 31, 2007, an
evaluation was carried out under the supervision and with the participation of
management, including the acting chief executive officer and principal financial
officer, of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the acting chief executive and principal financial officer
have concluded that, as of March 31, 2007, our disclosure controls and
procedures are effective. Subsequent to the date of their evaluation, there have
been no significant changes in our internal controls or in other factors that
could significantly affect these controls.
Our management, including the acting Chief Executive Officer and principal
financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.
PART II- OTHER INFORMATION
Item 1. Legal Proceedings:
In the normal course of our business, we are subject to legal proceedings
brought against us. There have been no material developments to the legal
proceedings described in Part I, Item 3. "Legal Proceedings" in our Annual
Report on Form 10-K for the year-ended December 31, 2006 and there are no new
reportable legal proceedings for the quarter ended March 31, 2007.
Item 1A. Risk Factors:
In addition to the risk factors in our Annual Report on Form 10-K for the year
ended December 31, 2006, we have determined that the following additional risk
factor is applicable:
During the first quarter of 2007, William W. Botts, our President and CEO for
the past twenty-one years, resigned. In addition, three Directors resigned from
our Board. We believe our remaining Directors and management team are
experienced and well-qualified to build on OI's past success. However, we can
provide no assurance that this transition in management and governance will not
have a negative impact on our future performance.
THE MATTERS RELATING TO THE INVESTIGATION BY THE SPECIAL COMMITTEE OF OUR BOARD
OF DIRECTORS INTO OUR STOCK OPTION GRANTING AND EXERCISE PRACTICES MAY RESULT IN
FUTURE LITIGATION OR REGULATORY INQUIRIES WHICH COULD HARM OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
On January 22, 2007, we announced that, at the request of our Board of Directors
and William W. Botts, our then President and Chief Executive Officer, we were
conducting a voluntary internal review of our historical stock option grants,
stock option exercises and related option and compensation procedures and
certain accounting matters. This review was performed at the direction of a
Special Committee of our Board of Directors that was 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 our 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 our Board
of Directors.
On March 23, 2007 we announced the principal findings of the Special Committee
of its Board of Directors relating to this investigation, a summary of which can
be found in our Current Report on Form 8-K filed March 23, 2007.
This review of our historical stock option granting practices required us to
incur substantial expenses for legal, accounting and other professional
services, and served as a distraction to management. Our historical stock option
granting, stock option exercise and related option and compensation procedures
practices have exposed us to greater risks associated with litigation and
regulatory proceedings. There can be no guarantee that any such litigation or
regulatory reviews will reach the same conclusions as that of the Special
Committee. The conduct and resolution of these matters could be time consuming,
expensive and distracting from the conduct of our business.
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We voluntarily contacted the United States Securities and Exchange Commission,
or the SEC, regarding the Special Committee's investigation and have shared the
results of the Special Committee investigation with the SEC. We have cooperated
and intend to continue to cooperate with the SEC regarding this matter.
While we believe that we have made appropriate judgments and taken appropriate
remedial action regarding the results of the investigation, the SEC may disagree
with our actions and conclusions and there is a risk that any SEC inquiry could
lead to circumstances in which we may have to further restate our prior
financial statements, or otherwise take actions not currently contemplated. Any
such circumstances could also lead to delays in filing our subsequent SEC
reports and possible delisting of our stock from The Nasdaq Global Market.
Furthermore, the results of the investigation and the actions taken by us in
connection with the investigation may make us the target of litigation by our
shareholders. If we are subject to adverse findings in any of these other
matters, we could be required to pay damages or penalties or have other remedies
imposed upon us which could harm our business, financial condition, results of
operations and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
10.1 Employment offer letter dated January 4, 2007 by and between
Registrant and J. Bruce Lancaster (filed as Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated January 8, 2007 and
incorporated herein by reference).
10.2 Separation and Release Agreement between William W. Botts and
O.I. Corporation dated March 21, 2007, attached as Exhibit 10.1 to the
current report on Form 8-K filed by O.I. Corporation on March 21, 2007
and incorporated herein by reference.
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 and 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O. I. CORPORATION
(Registrant)
Date: May 15, 2007 BY: /s/ J. Bruce Lancaster
------------------------------------
J. Bruce Lancaster
Vice President-Chief Financial
Officer
(Principal Accounting Officer)
12
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.1 Employment offer letter dated January 4, 2007 by and between
Registrant and J. Bruce Lancaster (filed as Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated January 8, 2007 and
incorporated herein by reference).
10.2 Separation and Release Agreement between William W. Botts and O.I.
Corporation dated March 21, 2007, attached as Exhibit 10.1 to the
current report on Form 8-K filed by O.I. Corporation on March 21, 2007
and incorporated herein by reference.
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 and 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
13