<PAGE> 1
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, 1998
[ ] 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: (409) 690-1711
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of class)
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 10K. [X]
The aggregate market value of the voting stock (based upon the March 15, 1999
average of the high and low trade prices of these shares from the National
Association of Securities Dealers) of O. I. Corporation held by non-affiliates
was approximately $14,552,239.
The number of shares outstanding of each of the issuer's classes of common stock
as of March 15, 1999 was 3,353,285.
Item 9 and Part III information is incorporated by reference to the proxy
statement for the annual meeting of shareholders to be held May 10, 1999.
<PAGE> 2
PART I
ITEM 1.BUSINESS
GENERAL
O. I. Corporation (the "Company") designs, manufactures, markets, and services
products primarily for specialized applications in the analytical instruments
markets, including sample preparation, detection, measurement, and monitoring
instruments used to analyze chemical compounds. The Company's principal business
strategy is to employ its product development capabilities, manufacturing
processes, and marketing skills to market niches, which it believes it can
successfully penetrate and quickly assume a leading position. Management
continually emphasizes product innovation, improvement in quality, product
performance, on-time delivery, cost reductions, and other value added
activities. The Company seeks growth opportunities through technological and
product improvement and by acquiring and developing new products, new markets,
and new competencies.
DEVELOPMENT OF THE COMPANY
The Company historically has expanded both through internal development of new
products and technologies and through the acquisition of technologies, product
lines, market positions, competencies, and businesses. During the past several
years, the Company has completed a number of acquisitions that have provided
additional technologies, specialized manufacturing or product development
expertise, and broader capabilities in marketing and distribution. A summary of
each of the Company's strategic acquisitions is set forth below:
o On January 4, 1994, the Company acquired CMS Research Corporation,
headquartered in Birmingham, Alabama. CMS, founded in 1986 by Gary
D. Sides, is engaged in research, development, manufacturing, and
marketing of instrumentation for continuous monitoring systems
used for monitoring chemical warfare agents and volatile organic
compounds (VOCs).
o On June 24, 1994, the Company acquired the assets of Floyd
Associates, Inc. headquartered in Lake Wylie, South Carolina.
Floyd Associates Inc., founded in 1986 by Terry S. Floyd,
develops, manufactures, and markets microwave products used to
prepare chemical compounds for analyses. Markets for the microwave
digestion equipment include environmental, biological,
metallurgical, geological, and industrial. Applications include
acid digestion of aqueous inorganic samples in accordance with
proposed U.S. Environmental Protection Agency (EPA) and other
defined methods. Organic sample matrices such as oil, sludge,
solvents, and hazardous wastes are also handled by these microwave
products.
o On February 9, 1995, the Company acquired Laboratory Automation,
Inc., (LAI) d.b.a. ABC Instruments, headquartered in Columbia,
Missouri. LAI was incorporated on May 17, 1993 in the State of
Missouri. LAI's products include gel permeation chromatography
(GPC) systems, Soxtherm (an automated Soxhlet extractor),
Integrity 2000 (a solvent purification system), and other solvent
recovery systems. GPC is a method of preparing a wide range of
samples for analysis and is a common procedure for sample
preparation for various industrial and governmental laboratories,
including the U.S. Food and Drug Administration (USFDA), U.S.
Department of Agriculture (USDA), and USEPA.
o On May 1, 1996, the Company acquired certain assets of ALPKEM
Corporation headquartered in Wilsonville, Oregon, formerly a
division of Perstorp Analytical, Inc. ALPKEM designs,
manufactures, and markets flow analyzers for ion analysis using
Segmented Flow Analyzers (SFA) and Flow Injection Analysis (FIA),
Cyanide analyzers, and field portable instruments.
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RECENT DEVELOPMENTS
o On February 1, 1999, the Company acquired certain assets and
assumed certain liabilities of General Analysis Corporation (GAC),
headquartered in South Norwalk, Connecticut. GAC designs,
manufactures, and markets infrared gas and liquid analytical
instruments and accessories used in laboratories, in-line and
on-line liquid analysis and gas analysis in field monitoring
applications.
PRODUCTS
The Company develops, manufactures, markets, and services analytical,
monitoring, and sample preparation products, components, and systems used to
detect, measure, and analyze chemical compounds.
GAS CHROMATOGRAPHY (GC) INSTRUMENTS The Company designs, manufactures, markets,
and services components with gas chromatographs, including detectors and sample
introduction instruments. Gas chromatography, developed in 1952, is an
analytical technique that separates organic compounds based on their unique
physical and chemical properties. The use of gas chromatography in a number of
diverse applications has led to the continuous development of a broad range of
sample introduction and detector devices. Advances in the field are based on
technology improvements that provide improved sample introduction, faster
analysis, lower level and selective detection, and ease-of-use. GC instruments
currently manufactured by the Company include the following:
Electrolytic Conductivity Detector (ELCD); Photoionization Detector (PID);
Flame-Ionization Detector (FID); Tandem PID/ELCD; Tandem PID/FID; Halogen
Specific Detector (XSD)TM; Flame Photometric Detector (FPD); Pulsed Flame
Photometric Detector (PFPD); Injectors and Inlets; Purge-and-Trap Sample
Concentrator (P&T); P&T Autosamplers; and Headspace Sampler; Liquid
Autosampler Preconcentration and Thermo Desorption Device; Air Tube
Concentrators, Volatile Organic Sample Train (VOST); and Multi-Point
Sampling Inlet Module.
GC ANALYZER SYSTEMS The Company integrates GC components with GCs and GC mass
spectrometers (MS) to form customized GC analyzer systems including: VOC
Analyzers, BTEX (Benzene, Toluene, Ethylbenzene, and Xylenes) Analyzers,
Pesticide Analyzers, FBA (Fluorinated By-Products Analyzers), Continuous
Emissions Monitoring (CEM), continuous air monitoring analyzers for air toxins
and VOCs, Permeating Testing, and Ethyleneoxide Analyzers.
The Company configures GC systems in standard and custom configurations to meet
market needs in the laboratory, in the field, and on line. Configured systems
can analyze chemical compounds in gas, liquids, or solids matrixes using the
appropriate components.
The Company manufactures GCs, and purchases GCs and GC/MSs manufactured by
others. The Company procures GC components, GCs, and MSs pursuant to a number of
different arrangements, including a Value Added Reseller (VAR) Agreement and
Original Equipment Manufacturer (OEM) Agreement with Hewlett-Packard Company.
ORGANIC CARBON ANALYZER SYSTEMS The Company designs, manufactures, markets, and
services Total Organic Carbon (TOC) Analyzers and related accessories that are
used to measure organic and inorganic carbon levels in ultrapure water, drinking
water, groundwater, wastewater, soils, and solids. The Company's TOC Analyzers
are used in testing required by the USEPA and testing ultrapure water used in
U.S. pharmaceutical methods; the manufacturing of semiconductors; power
generation; and oceanographic research. TOC products produced by the Company
include: High Temperature Persulfate TOC Analyzer; Combustion TOC Analyzer; and
TOC Solids Module.
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WATER ANALYZERS On-site water measurements of water quality may be performed
with the Company's portable Aqua-Check Water Analyzer, which simultaneously
measures the pH, conductivity, dissolved oxygen, and temperature of water and
aqueous solutions.
FLOW ANALYSIS SYSTEM The Company designs, manufactures, markets, and services
Segmented Flow Analyzers (SFA), Flow Injection Analyzers (FIA), and field
portable instruments such as The Flow Solution(TM) IV; Flow Solution(TM) 3000;
and Cyanide (CN) Analyzer. These instruments perform a wide range of analyses,
including the measurement of nitrate, nitrite, phosphate, ammonia, chloride,
alkaline, and sulfate in liquids. The Company's CN Analyzer can perform total
cyanide analysis in a number of industrial applications including cyanide
testing in gold and silver mining, electroplating, metal finishing, and
semiconductor operations. The SFA, FIA, and CN Analyzer products may be equipped
with autosamplers to enhance productivity.
SAMPLE PREPARATION PRODUCTS AND SYSTEMS The Company designs, manufactures,
markets, and services sample preparation instrumentation used to prepare sample
matrices for analysis. The most time-consuming part of chemical analysis is
sample preparation. Procedures, techniques, and instruments that can reduce
total sample preparation time are highly desirable for analysis of chemical
compounds. The Company's sample preparation products and systems include
Microwave Digestion Systems; Automated Gel Permeation Chromatography (GPC); and
Soxtherm Soxhlet Extraction Systems.
VALUE ADDED RESELLER
The Company is a value-added reseller (VAR) for analytical instruments
manufactured by Hewlett-Packard Company (HP). Under the terms of the agreement
with HP, the Company purchases HP analytical instruments, including GCs and gas
chromatography/mass spectrometers (GC/MSs), integrates them with
Company-manufactured components, and markets these analytical systems for
environmental analysis to comply with USEPA 500, 600, and 8000 Series Methods,
and for other chemical analyses. The Company conducts its own marketing to
generate sales leads, obtains customer orders, configures systems, ships,
installs, and provides after-sale support. The VAR agreement is subject to
renewal annually. Should the VAR not be renewed, the Company believes substitute
arrangements for access to GC and GC/MS instruments can be with little or no
adverse economic consequence.
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SALES BY LOCATION
All of the Company's assets are located in the United States and all sales are
conducted in U.S. dollars. There have been no sales or transfers between
geographic areas during the last five fiscal years. Estimated net revenue
attributable to the United States, export revenue as a group, and the number of
countries in which export revenue was generated are as follows:
<TABLE>
<CAPTION>
$ in thousands 1998 1997 1996 1995 1994
- -------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Revenue:
United States $18,732 $16,941 $15,568 $15,110 $16,794
Export 4,952 4,689 4,588 2,832 1,562
------- ------- ------- ------- -------
Total 23,684 21,630 20,156 17,942 18,356
======= ======= ======= ======= =======
%Revenue:
Export 21% 22% 23% 16% 9%
United States 79% 78% 77% 84% 91%
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
======= ======= ======= ======= =======
Number of countries-export 54 39 35 31 26
</TABLE>
Sales to any particular international geographic area did not exceed 10% of
revenue for any of the years 1994 to 1998.
MANUFACTURING
The Company manufactures products, using similar techniques and methods, at
three locations in the U.S. The Company's manufacturing capabilities include
electro-mechanical assembly, testing, integration of components and systems, and
calibration and validation of configured systems. The Company believes that its
manufacturing processes are documented in accordance with applicable domestic
and international regulations and standards.
The Company's policy is to have its products certified pursuant to safety
standards by one or more of the following agencies: Underwriters Laboratories
(UL), Canadian Standards Association (CSA) and/or the European Committee for
Electrotechnical Standardization (CE). These agencies and others also certify
that instruments meet certain performance standards and that advertised
specifications are accurate. The Company is in the process of obtaining ISO 9001
certification for its College Station, Texas and Birmingham, Alabama
manufacturing operations.
As of January 1, 1996, instruments sold in Europe are required to have a CE
mark. During 1995, 1996, 1997, and 1998, the Company incurred expenses relating
to product modification and certification testing to ensure that certain of its
products typically sold in Europe comply with CE requirements.
MARKETING
The Company markets and sells analytical components and systems that it produces
and purchases for resale, provides on-site support services, and distributes
expendables and accessories required to support the operation of products sold.
The Company sells its products domestically to end users through a direct sales
channel and manufacturers representatives, and internationally through
independent manufacturers' representatives and distributors. The Company's
marketing program includes advertising, direct mail, seminars, trade shows,
telemarketing, and promotion on the Company's Internet web site.
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TECHNICAL SUPPORT
The Company's technical support staff provides after-sale support to ensure
customer satisfaction. The Company offers training courses, publishes technical
information, and provides application support for customers. Products sold by
the Company generally include a 90-day to one-year warranty. Customers may also
purchase extended warranty contracts that provide coverage after the expiration
of the initial warranty. The Company installs and services its products through
its field service personnel in the United States and Canada and through
distributors and manufacturers' representatives internationally.
RESEARCH AND DEVELOPMENT
The analytical instrumentation industry is subject to rapid changes in
technology. The Company's success is heavily dependent on its ability to
continually improve its existing products and to introduce new products.
Research and development costs, relating to both present and future products,
are expensed as incurred, and such expenses were $1,458,000 in 1998, $1,697,000
in 1997, and $1,811,000 in 1996. The Company actively pursues development of
potential new products, including custom configured GC systems and components,
instrument control and data reporting software systems, dedicated analyzers,
microwave systems and other sample preparation products.
PATENTS
The Company holds both United States and international patents and has both U.S.
and international patent applications pending. The Company currently holds 29
patents, which expire between the years 2002 and 2015. As a matter of policy,
the Company vigorously pursues and protects its proprietary technology positions
and seeks patent coverage on technology developments that it regards as material
and patentable. While the Company believes that all of its patents and
applications have value, it is not dependent on any single patent or
application.
COMPETITION
The Company encounters aggressive competition in all aspects of its business
activity. The Company competes with many firms in the design, manufacture, and
sale of analytical instruments, principally on the basis of product technology
and performance, quality and reliability, sales and marketing ability, product
support, delivery, and price. Most of the Company's competitors have
significantly greater financial resources, broader market coverage on a global
basis, and greater breadth of product line and other resources than the Company.
EMPLOYEES
As of December 31, 1998, the Company had a total of 165 full-time employees. The
Company employs scientists and engineers who research and develop potential new
products. To protect the Company's proprietary information, the Company has
confidentiality agreements with its employees who come in contact with such
information. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that relations between the Company and
its employees are satisfactory.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, positions, and offices, as of
February 28, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION DATE ELECTED TO POSITION
---- --- -------- ------------------------
<S> <C> <C> <C>
William W. Botts 56 President and Chief Executive Officer 1985
Chairman of the Board 1986
Mark G. Whiteman 45 Vice President/General Manager 1997
Jane A. Smith 50 Vice President/Corporate Secretary 1990
</TABLE>
Prior to joining the Company, William W. Botts was Executive Vice President and
Chief Operating Officer of The Brandt Company, a privately owned oil field
service company headquartered in Houston, Texas, which was sold to TRW, Inc. in
August 1982. At that time, he was named Vice President and General Manager of
the Brandt Division of TRW Inc., a position he held until he joined the Company
as President and Chief Operating Officer on February 1, 1985. Mr. Botts was
named Chief Executive Officer of the Company on July 19, 1985, and Chairman of
the Board of Directors of the Company on May 26, 1986.
Mark G. Whiteman was employed by the Company in March 1997 as Vice
President/General Manager. He was employed by Scott Specialty Gases as Eastern
Region Vice President/General Manager from 1994 to 1997. Prior to that, he was
employed with E.I. DuPont for 19 years where he held a variety of management
positions.
Jane A. Smith has been employed with the Company since 1973. She was named
Assistant Corporate Secretary in 1976 and Corporate Secretary in 1986. On May
22, 1990, Mrs. Smith was named Vice President/Corporate Secretary.
ENVIRONMENTAL REGULATIONS
The Company believes it is in compliance with federal, state, and local laws and
regulations involving the protection of the environment. The Company routinely
handles small amounts of materials that may be deemed hazardous. Hazardous
materials are primarily introduced into the Company's products by end users
rather than by the Company. The Company believes there will be no material
effect upon its capital expenditures, earnings, and competitive position caused
by its compliance with federal, state, or local provisions regulating the
discharge of materials into the environment or relating to the protection of the
environment.
SOURCES OF RAW MATERIALS
The Company produces its products from raw materials, component parts, and other
supplies that are generally available from a number of different sources. The
Company has few long-term contracts with suppliers. For certain purchased
materials, the Company has developed preferred sources on the basis of quality
and service. There are several purchased components that are supplied by single
source suppliers. There can be no assurance that these preferred or single
sources will continue to make materials available in sufficient quantities, at
prices, and on other terms and conditions that are adequate for the Company's
needs. However, there is no indication that any of these preferred or single
sources will cease to do business with the Company. The Company believes that in
the event of any such cessation, adequate alternate sources would be available,
although perhaps at increased costs to the Company. In addition, substitute
components may require reconfiguration of certain products and may cause delays
in filling customer orders. Although the Company occasionally uses
subcontractors, such arrangements are not material to its business.
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BACKLOG - OPEN ORDERS
The Company's backlog of orders on December 31, 1998 was approximately
$2,383,000, compared to $3,575,000 as of December 31, 1997, and $3,366,000 as of
December 31, 1996. The decrease in the backlog at December 31, 1998 as compared
to December 31, 1997 was due to a shipment during 1998 of a large order that was
in the backlog as of December 31, 1997. The Company's policy is to include in
its backlog only purchase orders or production releases that have firm delivery
dates within one year. Recorded backlog may not result in sales because of
purchase order changes, cancellations, or other factors. The Company anticipates
that substantially all of its present backlog of orders will be shipped or
completed during 1999.
CUSTOMERS
The Company's customers include various military agencies of the U.S.
government, industrial businesses, semiconductor manufacturers, engineering and
consulting firms, municipalities and environmental testing laboratories, and
beverage bottlers and chiller-refrigerant companies. No single customer
accounted for more than 10% of revenue in 1998, 1997, or 1996. Federal, state,
and municipal governments accounted for 31% of revenue in 1998, 35% in 1997, and
27% in 1996. Export sales accounted for 21% of revenue in 1998, compared to 22%
in 1997, and 23% in 1996.
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ITEM 2. PROPERTIES
The Company owns approximately 68,650 sq. ft. of office, engineering,
laboratory, and production space in College Station, Texas and
leases approximately 19,715 sq. ft. of office, engineering,
laboratory, production, and warehouse space in Alabama, Missouri,
Oregon, and Texas. The Company believes that its facilities are in
good condition and are suitable and adequate for its present
operations and that suitable space is readily available if any of
its leases are not extended.
The Company's headquarters, research, and manufacturing operations
occupy approximately 68,650 sq. ft. of space located on 11.29
acres of land in College Station, Texas. The Company rents and
uses for storage a 4,500 sq. ft. facility on a separate tract of
land within eight miles of the Company's headquarters.
The Company leases approximately 9,490 sq. ft., in Hoover, a
subdivision of Birmingham, Alabama on a month-to-month basis;
approximately 3,200 sq. ft. in Columbia, Missouri under a lease
expiring in July 1999; and approximately 2,500 sq. ft. in
Beaverton, Oregon, under a lease expiring in May 2001.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has received, and in the future may receive,
notice of claims against it, which in some instances have developed, or may
develop, into lawsuits. Management does not expect any claim pending to have a
material adverse effect on the consolidated financial position and results of
operations of the Company.
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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 1998.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK MARKET INFORMATION The Company's common stock trades on the NASDAQ
Stock Market under the symbol: OICO. Information below is contained in a
statistical report obtained from the National Association of Securities Dealers,
Inc. (NASD). The ranges of high and low trade prices for the Company's common
stock for 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter 4-5/8 4 4-1/8 3-3/8
Second Quarter 5-1/2 4-1/8 4-3/4 3-5/8
Third Quarter 5-1/4 4-9/32 4-5/8 3-7/8
Fourth Quarter 6-7/16 4 5-3/16 4
</TABLE>
NOTE: The above quotations represent prices between dealers, do not
include retail markup, markdown, or commission, and may not
necessarily represent actual transactions.
DIVIDENDS The Company has never paid dividends, and management does not
anticipate paying any dividends in the near future.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 15, 1999,
there were approximately 972 holders of record of the Company's
common stock.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
($ in thousands except per share amounts) 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income statement data:
Net revenue $ 23,684 $ 21,630 $ 20,156 $ 17,942 $ 18,356
Income before income taxes 2,859 2,035 1,469 1,507 2,131
Net income 1,822 1,393 1,003 1,023 1,545
Diluted earnings per share $ 0.50 $ 0.35 $ 0.24 $ 0.24 $ 0.37
Balance sheet data:
Total assets $ 18,828 $ 19,100 $ 19,186 $ 17,700 $ 15,979
Working capital 10,028 12,300 12,391 11,855 11,156
Shareholders' equity 14,744 15,284 14,961 14,212 12,882
Common size income statement data:
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 53.9 53.4 50.0 51.5 55.2
---------- ---------- ---------- ---------- ----------
Gross profit 46.1 46.6 50.0 48.5 44.8
Selling, general, and administrative 30.0 31.8 31.7 30.7 25.5
Research and development 6.1 7.9 9.0 10.8 9.9
Patent litigation expense 0.0 0.2 4.5 1.6 0.0
---------- ---------- ---------- ---------- ----------
Operating income 10.0 6.7 4.8 5.4 9.4
Other income (expense), net 2.1 2.7 2.5 3.0 2.2
---------- ---------- ---------- ---------- ----------
Income before income taxes 12.1 9.4 7.3 8.4 11.6
Provision for income taxes 4.4 3.0 2.3 2.7 3.2
---------- ---------- ---------- ---------- ----------
Net income 7.7% 6.4% 5.0% 5.7% 8.4%
========== ========== ========== ========== ==========
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K includes certain statements that are deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Form 10-K that address activities, events, or developments that the
Company expects, believes, or anticipates will or may occur in the future, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments, and
other factors it believes are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks, and uncertainties, many of which
are beyond the control of the Company. Investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in the forward-looking
statements.
SUMMARY Net revenue increased 9% in 1998, compared to 1997, while net income was
up 31% for the same period. The Company's financial position as of December 31,
1998 reflects a decrease in working capital to $10,028,000, compared to
$12,300,000 at December 31, 1997. Diluted earnings per share were $0.50 in 1998,
$0.35 in 1997, and $0.24 in 1996.
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REVENUE Net revenue was $23,684,000 in 1998, compared to $21,630,000 in 1997,
and $20,156,000 in 1996. Export revenue increased 6% to $4,952,000 in 1998,
while domestic revenue increased 11% to $18,732,000. In 1997, export revenue
increased 2% to $4,689,000 and domestic revenue increased 9% to $16,941,000.
Sales of TOC analyzers increased in 1998 compared to 1997 due to improving
demand in the pharmaceutical market and the enhancement of the Company's
Combustion TOC Analyzer to serve the wastewater market. Sales of TOC analyzers
were flat in 1997 compared to 1996 due to slower sales in certain markets and
delays in the shipment of the Company's newly-introduced Combustion TOC
analyzer.
Microwave product sales increased in 1998 due to increasing demand in
international markets. The Company believes it has continued to improve the
performance, reliability, and value to the customer of its closed-vessel
microwave system. Microwave product sales were flat from 1996 to 1997 due to a
delay in product redesign of the closed-vessel microwave system and price
competition for the Company's private label, open-vessel microwave system.
During 1998, the Company stopped marketing the private label, open-vessel
microwave system and terminated the agreement with the supplier.
Sales of GC components and systems increased in 1998 primarily due to an
increase in the sale of continuous emissions monitoring (CEMs) systems and
increases in the sale and lease of GC/MS systems configured with the Company's
sample inlet systems. Previously, the GC/MS system sold by certain of the
Company's competitors displaced GC systems offered by the Company that included
selective detectors manufactured by the Company. By offering GC/MS systems, the
Company believes it has recognized and addressed the trend in environmental
testing to perform tests using MS detectors, rather than selective detectors.
GC/MS systems sales have less value added by the Company than GC systems
configured with the Company's selective detector; accordingly, gross profit
margins are reduced to the extent that GC/MS systems sales increase and sales of
GC systems with Company-manufactured, selective detectors decrease. Sales of GC
components and systems increased from 1996 to 1997 for the reasons stated above.
CEM system sales increased in 1998 compared to 1997 due primarily to U.S.
government purchases of chemical warfare agent monitoring systems. The
ratification of the Chemical Weapons Convention Treaty by the U.S. in mid-1997
appears to have provided momentum for a number of government agencies to
commence programs requiring chemical warfare agent monitoring systems. Sales of
CEM systems also increased from 1996 to 1997 due to U.S. government purchases of
chemical warfare agent monitoring systems.
Sales of flow analyzer products decreased in 1998 due to a decline in sales of
aftermarket parts, offset in part by an increase in equipment sales. Sales of
flow analyzer products increased in 1997 due to only eight months of sales of
such products being included in 1996. On an annualized basis, flow analyzer
revenues decreased in 1997 compared to 1996 due to the effect of lower sales in
environmental testing and loss of sales momentum resulting from the change in
ownership and management in the ALPKEM acquisition.
Leasing sales decreased slightly in 1998 compared to 1997, which increased from
1996. Leases are generally three to four years and allow customers to manage
their cash outflow against the income generated by their instruments. The
Company files Uniform Commercial Code documents in conjunction with each lease
to protect its interest in the equipment. As of December 31, 1998, the Company
had $1,035,000 in its investment in sales-type lease portfolios compared to
$890,000 as of December 31, 1997, and $613,000 as of December 31, 1996. The
average effective interest rate of the leases is 9.5%.
International revenues increased 6% to $4,952,000 in 1998 compared to $4,689,000
in 1997, and $4,588,000 in 1996. International revenues as a percent of total
revenue was 21% for 1998, compared to 22% in 1997 and 23% in 1996. The Company
had 66 distributors and representatives in 39 countries at December 31, 1998,
compared to 77 distributors and representatives in 39 countries at December 31,
1997 and 77 distributors and representatives in 37 countries at December 31,
1996.
GROSS PROFIT Gross profit was 46% in 1998, compared to 47% in 1997, and 50% in
1996. During 1998 gross profit decreased due to an increase in sales of GC/MS
systems, which are lower margin products and an increase in the cost of service
revenue. During 1997 gross profit decreased due to an increase in warranty
expense and an increase in sales of GC/MS systems.
11
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general, and
administrative (SG&A) expenses were $7,093,000 in 1998, or 30% of revenue,
compared to $6,880,000, or 32% of revenue in 1997, and $6,404,000, or 32% of
revenue in 1996. The increase in SG&A expenses from 1997 to 1998 resulted from
higher commissions and royalties due to the increase in sales, increased costs
of recruitment of new employees, an increase in the accrual for certain
discretionary employee benefits and expenses associated with the consolidation
of certain operations. The increases were offset in part by the settlement of
certain post-closing matters associated with a prior year asset acquisition and
a decrease in rent due to the consolidation of certain operations. The terms of
the asset acquisition settlement agreement resulted in the Company purchasing
100,000 shares of the Company's common stock for $2.20 per share from the seller
of the assets. At the time of the settlement, the market value of the Company's
common stock was $5.00 per share. The $280,000 difference between the market
value and the purchase price of the Company's common stock received by the
Company in the settlement has been accounted for as a recovery of legal fees and
other excess operating costs incurred in connection with the acquisitions,
reducing SG&A expense during 1998. The increase in SG&A expenses from 1996 to
1997 resulted from higher commissions due to the increase in sales, the addition
of a vice president/general manager, and an increase in travel expenses. Other
expenses such as salaries, rent, utilities, and telephone increased due to the
acquisition of ALPKEM. ALPKEM expenses were included for eight months of 1996
and for the full year of 1997.
RESEARCH AND DEVELOPMENT EXPENSES Research and development (R&D) expenditures
amounted to $1,458,000, or 6% of revenue in 1998, compared to $1,697,000, or 8%
of revenue in 1997, and $1,811,000, or 9% of revenue in 1996. R&D expenses
decreased from 1997 to 1998 due to fewer personnel and a decrease in the
purchase of supplies. R&D and engineering for some of the businesses acquired by
the Company have been consolidated to achieve cost reduction and improved
productivity. R&D expenses decreased from 1996 to 1997 due to fewer personnel,
offset in part by an increase in the purchase of supplies used in the design of
products.
PATENT LITIGATION EXPENSES No patent litigation expense was incurred in 1998,
compared to $49,000, or less than 1% of revenue, in 1997 and $901,000, or 5% of
revenue, in 1996. The decrease in expense from 1997 to 1998 and from 1996 to
1997 was due to the conclusion of a patent infringement claim by the Company
against The Tekmar Company during 1997.
INTEREST INCOME Interest income decreased 7% to $436,000 in 1998 from $468,000
in 1997, which increased 18% from $398,000 in 1996. The decrease in interest
income from 1997 to 1998 was due to a decrease in cash, cash equivalents, and
investments during 1998. This decrease in cash was due to the purchase of
treasury stock and payment for a facility expansion at the College Station
location. The increase in interest income from 1996 to 1997 was due to an
increase in cash and cash equivalents during 1997.
INCOME BEFORE INCOME TAXES Income before income taxes increased 40% to
$2,859,000, or 12% of revenue in 1998 from $2,035,000, or 9% of revenue in 1997,
which increased 39% from $1,469,000, or 7% of revenue in 1996. Income before tax
increased in 1998 compared to 1997 due to the increase in sales and decrease in
R&D expense, offset in part by an increase in SG&A expense and a decrease in
interest income. Income before tax increased in 1997 compared to 1996 due to the
decrease in patent litigation and the increase in interest income.
PROVISION FOR INCOME TAXES The Company's effective income tax rate was 36% in
1998 and 32% in 1997 and 1996. The income tax rate increased due to the mix of
sales by state.
NET INCOME Net income increased 31% to $1,822,000, or 8% of revenue for 1998,
compared to $1,393,000, or 6% of revenue for 1997, which increased 39% from
$1,003,000, or 5% of revenue for 1996.
BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share were $0.51 for
1998, compared to $0.36 for 1997 and $0.24 for 1996 computed based on 3,560,818
shares outstanding for 1998, 3,924,128 in 1997, and 4,097,463 in 1996. Diluted
earnings per share were $0.50 for 1998, compared to $0.35 for 1997 and $0.24 for
12
<PAGE> 13
1996 computed based on 3,641,434 shares outstanding for 1998, 3,991,911 in 1997,
and 4,146,777 in 1996. The declining number of shares outstanding is
attributable to the Company's stock repurchase program, on which it expended
$2,446,000, $950,000, and $640,000 for 1998, 1997, and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES The Company considers a number of liquidity
measures that aid in measuring the Company's ability to meet its financial
obligations. Such ratios, working capital, and changes in cash and cash
equivalents as of the end of the Company's last three years are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
LIQUIDITY MEASURES
Ratio of current assets to current liabilities 3.6 4.5 4.2
Total liabilities to equity 28% 25% 28%
Days sales in accounts receivable 52 60 71
Average annual inventory turnover 2.9 3.1 3.2
Working capital $ 10,028 $ 12,300 $ 12,391
CHANGES IN CASH AND CASH EQUIVALENTS
Net cash provided by (used in):
Operating activities $ 1,551 $ 1,721 $ 511
Investing activities 918 (1,343) (3,447)
Financing activities (2,362) (911) (604)
Net increase (decrease) in:
Cash and cash equivalents $ 107 $ (533) $ (3,540)
Cash and cash equivalents:
Beginning of year 1,430 1,963 5,503
End of year 1,537 1,430 1,963
</TABLE>
Working capital decreased 18%, or $2,272,000, to $10,028,000 in 1998, compared
to $12,300,000 in 1997 and $12,391,000 in 1996. The current ratio of 3.6 for
1998 was down from 4.5 for 1997, primarily due to an increase in accrued
liabilities and a decrease in cash and investments caused by payments for a
facility expansion in College Station and the purchase of treasury stock. The
1997 current ratio of 4.5 was up from 4.2 in 1996 primarily due to a decrease in
accrued legal expenses and other accrued liabilities. The Company's cash
position increased to $1,537,000 in 1998 from $1,430,000 in 1997, primarily due
to the maturity of investments, offset in part by the purchase of treasury stock
and payments for the construction of a new facility in College Station. Average
annual inventory turnover was lower at 2.9 in 1998, compared to 3.1 in 1997 and
3.2 in 1996 due primarily to an increase in finished goods inventory over the
three years in order to provide faster delivery to customers. The number of days
of sales in accounts receivable decreased to 52 days in 1998, from 60 days in
1997, and 71 days in 1996, due to continued focus on collections. Current
liabilities increased to $3,857,000 in 1998 from $3,524,000 in 1997 due
primarily to an increase in unearned revenue and an increase in for CE testing
activity near year-end. Total liabilities represented 28% of equity in 1998,
compared to 25% in 1997 and 28% in 1996.
Net cash flow provided by operating activities for 1998 was $1,551,000, compared
to $1,721,000 in 1997 and $511,000 in 1996. The decrease in cash flow from
operations in 1998 was primarily due to an increase in inventory, offset in part
by a decrease in accounts receivable, an increase in accrued liabilities and an
increase in net income. The increase in cash flow from operations in 1997
compared to 1996 was primarily due to a decrease in accounts receivable and an
increase in net income, offset in part by a decrease in accounts payable. All
working capital account changes for 1996 are net of the effect of the purchase
of ALPKEM. Net cash flow provided by
13
<PAGE> 14
(used in) investing activities for 1998 was $918,000, compared to ($1,343,000)
in 1997, and ($3,447,000) in 1996. The increase in cash flow provided by
investing activities during 1998 was due to the maturity of investments, offset
in part by the purchase of fixed assets and payment for the facility expansion
in College Station. The decrease in cash flow used in investing activities from
1996 to 1997 was due to the acquisition of ALPKEM in 1996 and no acquisitions in
1997. Net cash flow used in financing activities was $2,362,000 in 1998,
compared to $911,000 in 1997, and $604,000 in 1996. The increase in cash flow
used in financing activities in 1998 and 1997 was due to increased purchases of
treasury stock.
The Company has historically been able to fund working capital and capital
expenditures from operations, and expects to be able to finance its 1999 working
capital requirements from cash on hand and funds generated from operations.
YEAR 2000
Year 2000 Issue. Many software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the year. These
products may be unable to distinguish between dates in the year 2000 and the
dates in the year 1900. That inability (referred to as the "Year 2000" issue),
if not addressed, could cause applications, equipment or systems to fail or
provide incorrect information after December 31, 1999, or when using dates after
December 31, 1999. This in turn could have an adverse effect on the Company due
to the Company's direct dependence on its own applications, equipment, and
systems and indirect dependence on those of other entities with which the
Company must interact.
Compliance Program. In order to address the Year 2000 issue, the Company
established during 1998 a project team to assure that key automated systems and
related processes will remain functional through year 2000. The team will
address the project in the following stages: (i) awareness, (ii) assessment,
(iii) remediation, (iv) testing and (v) implementation of the necessary
modifications. The key automated systems consist of (a) project estimating,
management and financial systems applications, (b) hardware and equipment, (c)
embedded chip systems and (d) third-party developed software. The evaluation of
the Year 2000 issue includes the evaluation of the Year 2000 exposure of third
parties material to the operations of the Company.
Company State of Readiness. The awareness phase of the Year 2000 project has
begun with a corporate-wide awareness program , which will continue to be
updated throughout the life of the project. The assessment phase of the project
involves, among other things, efforts to obtain representations and assurances
from third parties, including third party vendors, that their hardware and
equipment, embedded chip systems and software being used by or impacting the
Company or any of its business units are or will be modified to be Year 2000
compliant. To date, the Company does not expect that responses from such third
parties will be conclusive. As a result, management cannot predict the potential
consequences if these or other third parties are not Year 2000 compliant. The
exposure associated with the Company's interaction with third parties is also
currently being evaluated. Through the awareness program, the Company has
determined that some internal applications are not Year 2000 compliant. The
Company plans to replace or upgrade these systems by mid-1999. The Company has
evaluated its products and believes that most of the products it is currently
shipping are Year 2000 compliant. The Company has plans to upgrade the products
that are not Year 2000 compliant and anticipates completion of this process
during 1999. The Company believes it has no legal obligation to upgrade
previously shipped products that are not Year 2000 compliant. It may make
available for sale compliance fixes for certain products.
Management expects that the remediation, testing, and implementation phases will
be completed prior to the Year 2000.
Costs to Address Year 2000 Compliance Issues. While the total cost to the
Company of the Year 2000 project is still being evaluated, management currently
estimates that the costs to be incurred by the Company in 1999 and 2000
associated with assessing and testing applications, hardware and equipment,
embedded chip systems, and third party developed software will be less than
$150,000. To date, the Company has not expended significant funds related to its
Year 2000 compliance assessment.
14
<PAGE> 15
Risk of Non-Compliance and Contingency Plans. The major applications which pose
the greatest Year 2000 risks for the Company if implementation of the Year 2000
compliance program is not successful are the Company's systems, financial
systems applications and related third-party software. Potential problems if the
Year 2000 compliance program is not successful include disruptions of the
Company's revenue gathering from and distribution to its customers and vendors
and the inability to perform its other financial and accounting functions.
The goal of the Year 2000 project is to ensure that all of the critical systems
and processes, which are under the direct control of the Company, remain
functional. However, because certain systems and processes may be interrelated
with systems outside of the control of the Company, there can be no assurance
that all implementations will be successful. Accordingly, as part of the Year
2000 project, contingency and business plans will be developed to respond to any
failures as they may occur. Such contingency and business plans are scheduled to
be completed during 1999. Because the Company's internal systems are PC-based,
management does not expect the costs to the Company of the Year 2000 project to
have a material adverse effect on the Company's financial position, results of
operations or cash flows. However, based on information available at this time,
the Company cannot conclude that any failure of the Company or third parties to
achieve Year 2000 compliance will not adversely affect the Company.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
CHANGING PRICES/EFFECT OF INFLATION The Company believes that competition based
on price is the significant factor affecting its customers' buying decisions.
There is no assurance that the Company can pass along cost increases in the form
of price increases or sustain profit margins that have been achieved in prior
years. Inflation has not had a material impact on the Company's operations. The
prices of some components purchased by the Company have increased in the past
several years due in part to decreased volume. Certain other material and labor
costs have increased, but the Company believes that such increases are
approximately consistent with overall inflation rates.
UNCERTAINTY OF GROWTH The environmental instrument markets in which the Company
competes have been flat or declining over the past several years. The Company
has identified a number of strategies it believes will allow it to grow its
business, including acquiring complementary businesses, developing new
applications for its technologies, and strengthening its presence in selected
geographic markets. No assurance can be given that the Company will be able to
successfully implement these strategies, or that these strategies will result in
growth of the Company's business.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY One of the Company's growth
strategies is to supplement its internal growth with the acquisition of
businesses and technologies that complement or augment the Company's existing
product lines. Certain businesses acquired by the Company within the past three
years have produced net operating losses and low levels of profitability. In
addition, businesses that the Company may seek to acquire in the future may also
be marginally profitable or unprofitable. In order for any acquired business to
achieve the level of profitability desired by the Company, the Company must
successfully change operations of the acquired companies and improve their
market penetration. No assurance can be given that the Company will be
successful in this regard. In addition, promising acquisitions are difficult to
identify and complete for a number of reasons, including competition among
prospective buyers and the need for regulatory approvals, including antitrust
approvals. There can be no assurance that the Company will be able to complete
pending or future acquisitions. In order to finance any such acquisitions, it
may be necessary for the Company to raise additional funds either through public
or private financing. Any equity or debt financing, if available at all, may be
on terms that are not favorable to the Company and may result in dilution to the
Company's shareholders.
15
<PAGE> 16
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE, OBSOLESCENCE, AND THE DEVELOPMENT
AND ACCEPTANCE OF NEW PRODUCTS The market for the Company's products and
services is characterized by rapid and significant technological change and
evolving industry standards. New product introductions responsive to these
factors require significant planning, design, development and testing at the
technological, product, and manufacturing process levels, and may render
existing products and technologies uncompetitive or obsolete. There can be no
assurance that the Company's products will not become uncompetitive or obsolete.
In addition, industry acceptance of new technologies developed by the Company
may be slow to develop due to, among other things, existing regulations written
specifically for older technologies and general unfamiliarity of users with new
technologies.
POSSIBLE ADVERSE EFFECT FROM CONSOLIDATION IN THE ENVIRONMENTAL MARKET AND
CHANGES IN ENVIRONMENTAL REGULATIONS One of the important markets for the
Company's products is environmental analysis. During the past three years, there
has been a contraction in the market for analytical instruments used for
environmental analysis. This contraction has caused consolidation in the
businesses serving this market. Such consolidation may have an adverse impact on
certain businesses of the Company. In addition, most air, water, and soil
analyses are conducted to comply with federal, state, local, and foreign
environmental regulations. These regulations are frequently specific as to the
type of technology required for a particular analysis and the level of detection
required for that analysis. The Company develops, configures, and markets its
products to meet customer needs created by existing and anticipated
environmental regulations. These regulations may be amended or eliminated in
response to new scientific evidence or political or economic considerations. Any
significant change in environmental regulations could result in a reduction in
demand for the Company's products.
POSSIBLE ADVERSE EFFECT FROM DEPENDENCE ON SALES TO THE U.S. GOVERNMENT The
Company's customers include various government agencies and public and private
research institutions, which accounted for 31% of the Company's sales in 1998.
The capital spending of these entities can have a significant effect on the
demand for the Company's products. Such spending is based on a wide variety of
factors, including the resources available to make purchases, the spending
priorities among various types of equipment, public policy, political trends,
and the effects of different economic cycles. Any decrease in capital spending
by any of the customer groups that account for a significant portion of the
Company's sales could have a material adverse effect on the Company's business
and results of operations.
RISKS ASSOCIATED WITH DEPENDENCE ON CAPITAL SPENDING POLICIES AND GOVERNMENT
FUNDING The Company's customers include pharmaceutical and chemical companies,
laboratories, government agencies, and public and private research institutions.
The capital spending of these entities can have a significant effect on the
demand for the Company's products. Any decrease in capital spending by any of
the customer groups that account for a significant portion of the Company's
sales could have a material adverse effect on the Company's business and results
of operations.
POSSIBLE ADVERSE IMPACT OF SIGNIFICANT INTERNATIONAL SALES Sales outside the
United States accounted for approximately 21% of the Company's revenues in 1998.
The Company expects that international sales will continue to account for a
significant portion of the Company's revenues in the future. Sales to customers
in foreign countries are subject to a number of risks, including the following:
agreements may be difficult to enforce and receivables difficult to collect
through a foreign country's legal system; foreign customers may have longer
payment cycles; foreign countries could impose withholding taxes or otherwise
tax the Company's foreign income, impose tariffs, or adopt other restrictions on
foreign trade; fluctuations in exchange rates may affect product demand; export
licenses, if required, may be difficult to obtain and the protection of
intellectual property in foreign countries may be more difficult to enforce.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company's business and results of operations.
COMPETITION The Company encounters and expects to continue to encounter intense
competition in the sale of its products. The Company believes that the principal
competitive factors affecting the market for its products include product
performance, price, reliability, and customer service. The Company's competitors
include large
16
<PAGE> 17
multinational corporations and their operating units. Most of the Company's
competitors have substantially greater financial, marketing, and other resources
than those of the Company. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their products than the
Company. In addition, competition could increase if new companies enter the
market or if existing competitors expand their product lines or intensify
efforts within existing product lines. There can be no assurance that the
Company's current products, products under development or ability to discover
new technologies will be sufficient to enable it to compete effectively with its
competitors.
RISKS ASSOCIATED WITH PROTECTION, DEFENSE, AND USE OF INTELLECTUAL PROPERTY The
Company holds patents relating to various aspects of its products and believes
that proprietary technical know-how is critical to many of its products.
Proprietary rights relating to the Company's products are protected from
unauthorized use by third parties only to the extent that they are covered by
valid and enforceable patents or are maintained in confidence as trade secrets.
There can be no assurance that patents will issue from any pending or future
patent applications owned by or licensed to the Company or that the claims
allowed under any issued patents will be sufficiently broad to protect the
Company's technology, and in the absence of patent protection, the Company may
be vulnerable to competitors who attempt to copy the Company's products or gain
access to its trade secrets and know-how. Proceedings initiated by the Company
to protect its proprietary rights could result in substantial costs to the
Company. There can be no assurance that competitors of the Company will not
initiate litigation to challenge the validity of the Company's patents, or that
they will not use their resources to design comparable products that do not
infringe the Company's patents. There may also be pending or issued patents held
by parties not affiliated with the Company that relate to the Company's products
or technologies. The Company may need to acquire licenses to, or contest the
validity of, any such patents. There can be no assurance that any license
required under any such patent would be made available on acceptable terms or
that the Company would prevail in any such contest. The Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which the Company may assert its patent rights against others. If the outcome of
any such litigation is unfavorable to the Company, the Company's business and
results of operations could be materially adversely affected. In addition, the
Company relies on trade secrets and proprietary know-how that it seeks to
protect, in part, by confidentiality agreements with its collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors.
POTENTIAL FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE YEAR 2000 The Company is
dependent on its computer software programs and operating systems in operating
its business. The Company also depends on the proper functioning of computer
systems of third parties, such as vendors and clients. The failure of any of
these systems to appropriately interpret the upcoming calendar year 2000 could
have a material adverse effect on the Company's financial condition, results of
operations, cash flows and business prospects. The Company is currently
identifying its own applications that will not be Year 2000 compliant and taking
steps to determine whether third parties are doing the same. In addition, the
Company is implementing a plan to prepare its computer systems to be Year 2000
compliant by December 31, 1999.
The inability to remedy the Company's Year 2000 problems or the failure of third
parties to do so may cause business interruptions or shutdown, financial loss,
regulatory actions, reputational harm and/or legal liability. There can be no
assurance that the Company's Year 2000 program will be effective or that the
Company's estimates about the timing and cost of completing its program will be
accurate. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Year 2000."
MARKET RISK The Company is exposed to a variety of risks, including changes in
interest rates and the market value of its investments. In the normal course of
business, the Company employs established policies and procedures to manage its
exposure to changes in the market value of its investments. To date, the Company
has not experienced any material effects to its financial position or results of
operations due to market risks.
The fair value of the Company's investments in debt securities at December 31,
1998 was $2,776,814. See Note 3 for further information regarding these
instruments. The Company's investment policy is to manage its investment
17
<PAGE> 18
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
interest rate and credit risk. 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 until the investments are sold.
- --------------------------------------------------------------------------------
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. We believe we
have provided financial information (both audited and unaudited) that is
representative of the Company's operations, reliable on a consistent basis, 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 policies and procedures are
implemented by qualified personnel. Management periodically reviews the
accounting and control systems.
The Company's Audit Committee, composed of at least two members of the Board of
Directors who are not employees of the Company, meets regularly with
representatives of management and the independent accountants to monitor the
functioning of the accounting and control systems and to review the results of
the audit performed by the independent accountants. The independent accountants
and Company employees have full and free access to the Audit Committee without
the presence of management.
The Audit Committee recommends independent accountants for appointment by the
Board.
The independent accountants conduct an objective, independent examination of the
financial statements. Their report appears as a part of the Company's Annual
Report on Form 10-K.
/s/ Julie A. Wright
- --------------------------------
Julie A. Wright, Controller
/s/ William W. Botts
- --------------------------------
William W. Botts, President/CEO
Date: March 24, 1999
- --------------------------------
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<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF O. I. CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of O. I.
Corporation and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
January 22, 1999, except as to note 14,
which is as of February 1, 1999
19
<PAGE> 20
O. I. CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,536,548 $ 1,429,780
Investments 2,771,565 5,709,517
Accounts receivable-trade, net of allowance for doubtful
accounts of $215,917 and $255,637, respectively 3,361,305 3,570,489
Investment in sales-type leases 459,184 358,115
Inventories 4,917,268 3,777,778
Deferred income tax assets 537,401 667,069
Other current assets 302,333 311,987
------------ ------------
Total current assets 13,885,604 15,824,735
Property, plant and equipment, net 3,620,389 1,459,049
Investment in sales-type leases, net of current 575,600 531,489
Long-term investments 0 434,818
Other assets 747,154 849,510
------------ ------------
Total assets $ 18,828,747 $ 19,099,601
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,198,271 $ 1,225,080
Accrued liabilities 2,659,023 2,299,169
------------ ------------
Total current liabilities 3,857,294 3,524,249
------------ ------------
Deferred income taxes 227,612 291,569
------------ ------------
Commitments and contingencies (Note 12)
------------ ------------
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 4,373,896 4,379,862
Treasury stock, 754,334 and 249,493 shares, respectively, at cost (3,328,173) (971,763)
Retained earnings 13,287,780 11,465,346
------------ ------------
14,743,841 15,283,783
------------ ------------
Total liabilities and stockholders' equity $ 18,828,747 $ 19,099,601
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
O. I. CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenue $ 23,683,685 $ 21,630,245 $ 20,156,448
Cost of revenue 12,764,748 11,554,442 10,076,740
------------ ------------ ------------
Gross profit 10,918,937 10,075,803 10,079,708
Selling, general and administrative expenses 7,093,192 6,880,026 6,403,810
Research and development expenses 1,458,326 1,696,688 1,811,403
Patent litigation expense 0 48,653 900,951
------------ ------------ ------------
Operating income 2,367,419 1,450,436 963,544
Other income (expense):
Interest income 436,147 467,782 398,095
Other income 55,505 116,626 106,930
------------ ------------ ------------
Income before income taxes 2,859,071 2,034,844 1,468,569
Provision for income taxes (1,036,637) (642,252) (465,147)
------------ ------------ ------------
Net income $ 1,822,434 $ 1,392,592 $ 1,003,422
============ ============ ============
Basic earnings per share $ 0.51 $ 0.36 $ 0.24
============ ============ ============
Diluted earnings per share $ 0.50 $ 0.35 $ 0.24
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
O. I. CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,822,434 $ 1,392,592 $ 1,003,422
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 410,617 570,010 576,589
Deferred income taxes 65,711 48,086 (39,586)
Gain on disposition of property (10,219) (45,589) (6,639)
Changes in assets and liabilities,
net of the effect of the purchase of
ALPKEM (1996):
Accounts receivable 209,185 357,660 (654,979)
Inventories (1,139,491) 2,175 (757,104)
Other assets (135,526) (289,674) (111,863)
Accounts payable (31,809) (83,395) 458,778
Accrued liabilities 359,855 (230,943) 42,850
------------ ------------ ------------
Net cash provided by operating activities 1,550,757 1,720,922 511,468
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (504,148) (320,986) (299,540)
Construction in progress (2,023,006) (83,998) 0
Proceeds from sale of assets 43,882 124,076 18,900
Purchase of ALPKEM 0 0 (526,743)
Purchase of investments (2,355,129) (7,757,298) (8,710,000)
Maturity of investments 5,703,000 6,682,000 6,124,000
Change in other assets 53,787 12,776 (53,949)
------------ ------------ ------------
Net cash provided by (used in) investing activities 918,386 (1,343,430) (3,447,332)
------------ ------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (2,446,240) (949,713) (640,182)
Proceeds from issuance of common stock 83,865 38,827 35,898
------------ ------------ ------------
Net cash provided by (used in) financing activities (2,362,375) (910,886) (604,284)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 106,768 (533,394) (3,540,148)
Cash and cash equivalents:
Beginning of year 1,429,780 1,963,174 5,503,322
------------ ------------ ------------
End of year $ 1,536,548 $ 1,429,780 $ 1,963,174
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 307 $ 12,241 $ 594
Income taxes 832,200 883,519 567,039
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
O. I. CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Treasury Retained
Shares Amount Capital Stock Earnings
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 4,116,129 $ 411,613 $ 4,730,669 $ 0 $ 9,069,332
Purchase of 220,629 shares of treasury stock (640,182)
Issuance of common and 73,083
treasury shares in conjunction
with the acquisition of ALPKEM 26,917 2,692 144,955 202,353
Issuance of 110,000 shares from
treasury for exercise of stock options (290,625) 309,375
Issuance of 5,064 shares from treasury
to Employee Stock Purchase Plan 1,662 15,486
Net income
1,003,422
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 4,143,046 414,305 4,586,661 (112,968) 10,072,754
Purchase of 243,233 shares
of treasury stock (949,713)
Shares cancelled (39,669) (3,967) (154,709)
Issuance of 2,256 shares from treasury
for directors' compensation 245 7,755
Issuance of 21,001 shares from treasury
for exercise of stock options (54,218) 72,972
Issuance of 2,965 shares from treasury
to Employee Stock Purchase Plan 1,883 10,191
Net income 1,392,592
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 4,103,377 410,338 4,379,862 (971,763) 11,465,346
Purchase of 529,768 shares
of treasury stock (2,446,240)
Issuance of 21,034 shares from treasury
for exercise of stock options (11,040) 75,718
Issuance of 3,893 shares from treasury
to Employee Stock Purchase Plan 3,353 14,112
Tax benefit associated with exercised options 1,721
Net income 1,822,434
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 4,103,377 $ 410,338 $ 4,373,896 $(3,328,173) $13,287,780
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
O. I. CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
O. I. Corporation (the Company) was organized in 1969. The Company designs,
manufactures, markets, and services products primarily for specialized
applications in the analytical instruments markets, including sample
preparation, detection, measurement, and monitoring instruments used to analyze
chemical compounds.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
REVENUE RECOGNITION Revenue and the related cost of sales are generally
recognized upon shipment of goods or provision of service with no substantial
right of return.
CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments with an original maturity
of three months or less to be cash equivalents.
INVESTMENTS The Company's investments in debt securities are classified as held
to maturity as the Company has the positive intent and ability to hold the
investments until maturity. These investments are reported at amortized cost.
LEASES The Company's leasing operations consist of the leasing of analytical
instruments. The majority of the Company's leases are classified as sales-type
leases. These leases expire over the next four years.
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 for or written off. The Company also provides an obsolescence
reserve for items that have impairments in their realizable value below cost as
a result of new product introductions.
DEMONSTRATION EQUIPMENT The demonstration of the Company's products is often
required prior to a customer's purchase. The Company makes available certain
equipment for use in demonstration, believing that a successful demonstration
will promote the customer's purchase of the equipment. Equipment used in
demonstration is classified as inventory and is depreciated to a zero value in a
six-month period from the date of being used in a customer demonstration.
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is recorded at
cost and depreciated over the estimated useful lives using the straight-line
method.
OTHER ASSETS Other assets primarily include acquired patents, licenses, customer
lists, and trademarks that are amortized on a straight-line basis over 10 to 17
years.
LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards
No. 121 (FAS 121) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, the Company reviews for the impairment of
long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Under FAS 121, an impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. No such impairment losses
have been identified by the Company.
24
<PAGE> 25
PRODUCT WARRANTIES Products are sold with warranties ranging from 90 days to one
year. Estimated expenses associated with these warranties are accrued in the
accompanying financial statements. The Company also sells extended product
warranties typically covering an additional period of nine months. Revenue from
extended warranties is recorded ratably over the period.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as
incurred.
INCOME TAXES The Company uses 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.
CONCENTRATION 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
and investment grade domestic corporate bonds. The Company's investments are
subject to fluctuations based on interest rates prevailing in the market place.
The Company sells its products to large corporations, environmental testing
laboratories, and governmental agencies. The majority of its customers are
located in the United States and all sales are denominated in the U.S. dollar.
Concentrations of credit risk with respect to trade receivables are limited due
to the financial stability of the customers comprising the Company's customer
base. The Company performs ongoing credit evaluations of its customers to
minimize credit risk. As of December 31, 1998 and 1997, the Company had no
significant concentrations of credit risk related to accounts receivable.
However, agencies of the U.S. government constitute a significant percent of the
Company's sales. Any federal budget cuts affecting the chemical warfare programs
or the USEPA may have a negative impact on the Company's future sales.
EARNINGS PER SHARE The Company reports both basic earnings per share, which is
based on the weighted average number of common shares outstanding and diluted
earnings per share, which is based on the weighted average number of common
shares outstanding and all dilutive potential common shares outstanding. Stock
options are the only dilutive potential shares the Company has outstanding. The
weighted average of shares used in the basic earnings per share calculation was
3,560,818 in 1998, 3,924,128 in 1997, and 4,097,463 in 1996. The weighted
average number of shares used in the diluted earnings per share computation was
3,641,434 in 1998, 3,991,911 in 1997, and 4,146,777 in 1996. At December 31,
1998, 1997, and 1996 options to acquire 31,000, 152,200, and 148,500 shares at
weighted average exercise prices of $11.68, $5.98, and $5.90 respectively, were
not included in the computations of dilutive earnings per share as the options'
exercise price was greater than the average market price of the common shares.
COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 (FAS 130), Reporting Comprehensive
Income. This statement established standards for reporting and display of
comprehensive income and its components. Net income is the Company's only
component of comprehensive income.
SEGMENT DATA During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (FAS 131), Disclosures about Segments of an Enterprise and
Related Information. FAS 131 supersedes FAS 14, Financial Reporting for Segments
of a Business Enterprise; replacing the "industry segment" approach with the
"management approach." The management approach 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. The Company
believes it operates in one reportable segment as defined by FAS 131. The
adoption of FAS 131 did not affect results of operations or the financial
position of the Company.
USE OF ESTIMATES The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of management
estimates and judgments.
RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133 ("FAS 133")
Accounting for Derivative Instruments and Hedging Activities. FAS 133 is
effective for fiscal years beginning after June 15, 1999 and establishes
accounting and reporting standards for derivative instruments. The Company has
historically not engaged in significant derivative instrument activity.
Adoption of FAS 133 is not expected to have a material effect on the Company's
financial position or operational results.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform
to current year presentation.
25
<PAGE> 26
- --------------------------------------------------------------------------------
NOTE 2: ACQUISITIONS
On May 1, 1996, the Company purchased certain assets of ALPKEM Corporation, a
division of Perstorp Analytical. ALPKEM designs, manufactures, and markets
segmented flow analyzers, flow injection analyzers and portable field
instruments. As consideration for the acquisition, Perstorp Analytical received
$505,000 in cash and 100,000 shares of the Company's common stock valued at
$350,000 at the date of acquisition. The transaction was accounted for as a
purchase, with results of the acquired operations being included from the date
of acquisition.
- --------------------------------------------------------------------------------
NOTE 3: INVESTMENTS
Investments considered held to maturity at December 31, 1998, consist of the
following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Holding Gains Holding Losses
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Short-term corporate bonds $ 2,771,565 $ 2,776,814 $ 5,249 $ 0
</TABLE>
All of the investments at December 31, 1998 are scheduled to mature in 1999.
Market value is based upon quoted market prices for the investments.
Short-term investments at December 31, 1997, consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Holding Gains Holding Losses
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Short-term corporate bonds $ 5,709,517 $ 5,712,909 $ 4,815 $ (1,423)
Long-term corporate bonds 434,818 435,179 417 (56)
------------ ------------ -------------- -------------
Total corporate bonds $ 6,144,335 $ 6,148,088 $ 5,232 $ (1,479)
</TABLE>
- --------------------------------------------------------------------------------
NOTE 4: NET INVESTMENT IN SALES-TYPE LEASES
The following sets forth the components of the net investment in sales-type
leases as of December 31, 1998:
Future minimum lease payments to be received are:
<TABLE>
<S> <C>
1999 $ 459,184
2000 364,086
2001 197,936
2002 13,578
-----------
1,034,784
Less: amount relating to interest 111,768
----------
Present value of minimum lease
payments to be received $ 923,016
==========
</TABLE>
26
<PAGE> 27
- --------------------------------------------------------------------------------
NOTE 5: INVENTORIES
Inventories, which include material, labor, and overhead, on December 31, 1998
and 1997, consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 2,041,218 $ 2,137,979
Work-in-process 809,917 624,650
Finished goods 2,066,133 1,015,149
------------ ------------
$ 4,917,268 $ 3,777,778
============ ============
</TABLE>
- --------------------------------------------------------------------------------
NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment on December 31, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
Estimated
useful lives 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 41,221 $ 41,221
Buildings 33 to 40 years 1,476,046 1,474,391
Construction in progress 2,107,004 83,998
Furniture and equipment 3 to 10 years 2,111,469 2,219,716
------------ ------------
5,735,740 3,819,326
Less accumulated depreciation
and amortization (2,115,351) (2,360,277)
------------ ------------
$ 3,620,389 $ 1,459,049
============ ============
</TABLE>
- --------------------------------------------------------------------------------
NOTE 7: ACCRUED LIABILITIES
Accrued liabilities on December 31, 1998 and 1997, consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accrued compensation $ 751,666 $ 769,911
Accrued warranties 502,818 524,706
Unearned revenue-service contracts 251,912 186,322
Unearned interest-investment in
sales-type leases 223,865 166,126
Other liabilities and accrued expenses 928,762 652,104
---------- ----------
$2,659,023 $2,299,169
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
NOTE 8: LINE OF CREDIT
The Company has a line of credit agreement expiring March 25, 1999, which
provides for secured borrowings up to $1,300,000 at an interest rate of 8.75%.
The Company did not draw on the line during 1998. The terms of
27
<PAGE> 28
the line of credit agreement contain, among other provisions, requirements for
maintaining defined levels of working capital and net worth. The agreement also
requires an annual fee of one point at the maturity of the line on the total
funds advanced against the line.
- --------------------------------------------------------------------------------
NOTE 9: STOCK OPTION AND STOCK PURCHASE PLAN
In 1987, the Company established a stock option and stock appreciation rights
plan (1987 Plan) qualified under Section 422 of the Internal Revenue Code of
1986. The 1987 Plan provided for the granting of options for the purchase of up
to 500,000 shares of common stock of the Company with the options having an
exercise price of not less than the par value of such stock. The options
generally expire 10 years from the date of grant and generally vest over three
years from the date of grant. During 1991, the stockholders approved an
amendment to the 1987 Plan allowing restricted stock grants. As a result of such
amendment, the 1987 Plan allows for stock grants subject to vesting requirements
that may be determined at the time of such grant. The 1987 Plan expired in
accordance with its terms on December 31, 1997. At such time, options to
purchase 483,837 of the 500,000 shares reserved for issuance had been granted.
The Company does not currently intend to adopt a plan to replace the 1987 Plan.
During 1992, the Company's Board of Directors, and during 1993, the Company's
stockholders, approved the O. I. Corporation 1993 Incentive Compensation Plan
(1993 Plan). The 1993 Plan provides for the granting of options to purchase up
to 500,000 shares of the Company's common stock with the options having an
exercise price of not less than the par value of such stock. Employees and
nonemployee directors of the Company are eligible for such grants. The options
generally expire 10 years from the date of grant. During 1998, the Company
granted 16,000 options under the 1993 Plan, with a weighted average exercise
price based on the stock price of $4.38 at the date of grant. The 1993 Plan also
allows for the granting of stock appreciation rights (SARs) and stock awards,
although none have been granted.
Options outstanding under the 1987 Plan and the 1993 Plan have exercise prices
equal to the market value on the date of grant.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of Statement of
Financial Accounting Standards No. 123, Accounting for Awards of Stock-Based
Compensation (FAS 123), the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C> <C>
Net income As reported $ 1,822 $ 1,393 $ 1,003
Pro forma 1,749 1,347 981
Basic earnings per share As reported $ 0.51 $ 0.36 $ 0.24
Pro forma 0.49 0.343 0.239
Diluted earnings per share As reported $ 0.50 $ 0.35 $ 0.24
Pro forma 0.48 0.337 0.237
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997, and 1996 respectively: dividend yield
of zero for each year; expected volatility of 33, 34, and 33 percent; risk-free
interest rates of 5.56, 6.04, and 6.13 percent; and expected lives of seven
years. The weighted average fair value at the date of grant for options granted
during 1998, 1997, and 1996 was $2.06, $1.90, and $1.73, respectively.
28
<PAGE> 29
Activity under the 1987 Plan and the 1993 Plan for each of the three years in
the period ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price per Share Price per Share
------ --------------- ---------------
<S> <C> <C> <C>
Options outstanding, December 31, 1995 458,900 $ 0.10 - $14.00 $ 3.86
Options granted 85,500 3.375 - 3.81 3.48
Options exercised (110,000) 0.10 - 0.875 0.17
Options forfeited or cancelled (86,400) 2.50 - 14.00 7.09
--------
Options outstanding, December 31, 1996 348,000 0.8125 - 14.00 4.12
Options granted 93,700 3.50 - 4.25 3.92
Options exercised (21,001) 0.8125 - 2.50 0.89
Options forfeited or cancelled (21,466) 2.50 - 3.94 3.25
--------
Options outstanding, December 31, 1997 399,233 2.50 - 14.00 4.29
Options granted 16,000 4.25 - 4.75 4.38
Options exercised (21,034) 2.50 - 4.12 3.08
Options forfeited or cancelled (42,733) 2.50 - 6.06 4.29
--------
Options outstanding, December 31, 1998 351,466 2.50 - 14.00 4.37
</TABLE>
There were 248,568, 223,477, and 194,510 share options exercisable at December
31, 1998, 1997, and 1996, respectively.
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
Ranges of remaining exercise exercise
Exercise prices Shares life in years price Shares price
--------------- ------ ------------- -------- ------ ---------
<S> <C> <C> <C> <C> <C>
$2.50 - 3.74 177,966 7.1 $ 3.15 116,067 $ 2.98
3.75 - 5.62 142,500 6.3 4.30 101,501 4.32
5.63 - 8.45 9,000 4.1 6.01 9,000 6.01
14.00 22,000 3.0 14.00 22,000 14.00
</TABLE>
In 1989, the Company established an Employee Stock Purchase Plan. Under the plan
provisions, employees may purchase shares of the Company's common stock on a
regular basis through payroll deductions. Any person who is a full-time employee
of the Company is eligible to participate in the plan, with each participant's
purchases limited to 10% of annual gross compensation. The plan is administered
by the Compensation Committee of the Board of Directors. Shares of common stock
are purchased in the open market or issued from shares held in treasury. The
Company pays all commissions and contributes an additional 15% for the purchase
of shares that are distributed to eligible participating employees. The
Company's contribution to the plan was not significant in any of the years
reported. The aggregate number of shares of common stock available for purchase
under this plan is 200,000. As of December 31, 1998, 36,529 shares had been
purchased under the plan.
- --------------------------------------------------------------------------------
NOTE 10. 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, 1998, no preferred stock had been issued.
29
<PAGE> 30
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 993,630
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
156,370 additional shares.
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES
The Company's operations are only taxed under domestic jurisdictions.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current provision:
Federal $ 816,552 $ 480,653 $ 384,583
State 154,375 113,513 120,150
Deferred provision 65,710 48,086 (39,586)
------------ ------------ ------------
$ 1,036,637 $ 642,252 $ 465,147
============ ============ ============
</TABLE>
The provision for income taxes differs from the amount computed by applying the
federal statutory rates for the following reasons:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 5.8 5.4 4.0
Permanent differences 0 (6.3)
Other, net (3.5) (7.9) 0
---------- ---------- ----------
36.3% 31.5% 31.7%
========== ========== ==========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current:
Warranty reserve $ 201,127 $ 209,883
Bad debt allowance 84,596 93,584
Inventory reserve 35,662 92,845
Uniform capitalization 160,541 177,949
Accrued vacation 38,336 72,469
Other 17,139 20,339
------------ ------------
Total current $ 537,401 $ 667,069
------------ ------------
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C>
Noncurrent:
Depreciation $ (30,643) $ (122,898)
Deferred compensation 20,000 20,000
Intangibles (112,871) (103,083)
Other (52,581) (34,071)
------------ ------------
Total noncurrent $ (176,095) $ (240,052)
============ ============
Net tax asset before valuation allowance 361,306 427,017
Valuation allowance (51,517) (51,517)
------------ ------------
Net deferred tax asset (liability) $ 309,789 $ 375,500
============ ============
</TABLE>
- --------------------------------------------------------------------------------
NOTE 12: EMPLOYEE BENEFIT PLANS
The Company maintains a Retirement Savings Plan (the Plan) for its employees
that allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. The Company's contributions to the
Plan are discretionary. Employees vest immediately in their contributions and
vest in the Company's contributions ratably over five years. The Company
contributed $150,000, $120,000 and $100,000 to the Plan for the years ended
December 31, 1998, 1997, and 1996, respectively.
- --------------------------------------------------------------------------------
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company has agreed to pay the former owner of Floyd a royalty equal to 5% of
the net revenue earned from certain microwave-based products up to a maximum
amount of $1,182,500 (Note 2). No minimum payments are required in the
agreement. The Company recognized royalty expense related to this agreement of
$62,551, $50,954, and $51,683 in 1998, 1997, and 1996, respectively.
The Company has entered operating leases for certain facilities. These operating
leases expire in 1998. Rental expense recognized in 1998, 1997, and 1996 was
$260,000, $324,000, and $229,000, respectively. Future minimum rental payments
under these leases for 1999, 2000, and 2001 are $54,823, $23,435, and $9,975,
respectively.
- --------------------------------------------------------------------------------
NOTE 14: SUBSEQUENT EVENT
On February 1, 1999, the Company acquired substantially all of the assets of
General Analysis Corporation (GAC) for $260,634 and the assumption of certain
liabilities expected to approximate $1,000,000. The assets acquired include
inventory, property and equipment used in the development, manufacture,
marketing and sales of instruments that detect and measure certain compounds in
liquids and air. The Company intends to use such assets for the same purpose.
The acquisition will be accounted for as an asset purchase.
- --------------------------------------------------------------------------------
NOTE 15: SEGMENT DATA
The Company manages its business primarily on a product and services basis; the
Company has one reportable segment. The reportable segment provides products and
services as described in Note 1. The accounting policies of the segment are
those described in the "Summary of Significant Accounting Policies' in Note 1.
The Company evaluates the performance of its segment based on segment profit.
Revenues related to operations in the United States totaled $18,731,459,
$16,941,229, and $15,568,286 for the years ended December 31, 1998, 1997, and
1996, respectively. Revenues to customers located in other foreign
31
<PAGE> 32
countries totaled $4,952,226, $4,689,016, and $4,588,162 for the years ended
December 31, 1998, 1997, and 1996, respectively. No single customer accounted
for more than 10% of revenue in 1998, 1997, or 1996. Federal, state and
municipal governments accounted for 31% of revenue in 1998, 35% in 1997, and 27%
in 1996.
- --------------------------------------------------------------------------------
NOTE 16: QUARTERLY INFORMATION (UNAUDITED)
Quarterly financial information for 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
1998 QTR. QTR. QTR. QTR.
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUE $ 5,825 $ 5,752 $ 6,077 $ 6,030
GROSS PROFIT 3,104 2,460 2,756 2,599
NET INCOME 433 460 462 467
BASIC EARNINGS PER SHARE $ 0.11 $ 0.13 $ 0.13 $ 0.14
DILUTED EARNINGS PER SHARE $ 0.11 $ 0.12 $ 0.13 $ 0.14
</TABLE>
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) First Second Third Fourth
1997 Qtr. Qtr. Qtr. Qtr.
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 5,321 $ 5,735 $ 5,210 $ 5,364
Gross profit 2,584 2,788 2,306 2,398
Net income 322 364 319 388
Basic earnings per share $ 0.08 $ 0.10 $ 0.08 $ 0.10
Diluted earnings per share $ 0.08 $ 0.09 $ 0.08 $ 0.10
</TABLE>
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the identification, business experience, and
directorships of each director and nominee for director of the Company, required
by Item 401 of Regulation S-K and presented in the section entitled "Election of
Directors-Nominees for Board of Directors" of the Company's Proxy Statement for
the annual meeting of shareholders on May 10, 1999 (the "Proxy Statement"), is
hereby incorporated by reference. See Item 1 for information relating to the
identification and business experience of the Company's executive officers. The
information relating to persons subject to Section 16 of the Securities Exchange
Act of 1934 and the timeliness with which they have filed Forms 3, 4, and 5,
required by Item 405 of Regulation S-K and presented in the section titled
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy
Statement, is hereby incorporated by reference.
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
The information relating to the cash compensation of directors and officers,
required by Item 402 of Regulation S-K and presented in the section entitled
"Election of Directors-Compensation of Directors" and "Election of
Directors-Compensation of Executive Officers" of the Company's Proxy Statement
for the annual meeting of shareholders on May 10, 1999, is hereby incorporated
by reference.
32
<PAGE> 33
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership required by Item 403 of
Regulation S-K, which is presented in the section entitled "Security Ownership
of Certain Beneficial Owners and Management" of the Company's Proxy Statement
for the annual meeting of shareholders on May 10, 1999, is hereby incorporated
by reference.
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to relationships and transactions required by Item 404
of Regulation S-K, which is presented in the section, "Election of Directors -
Executive Compensation - Certain Transactions, Employment Contracts, Termination
of Employment and Change-in-Control Arrangements" of the Company's Proxy
Statement for the annual meeting of shareholders on May 10, 1999, is hereby
incorporated by reference.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. 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:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants......................................................................19
Consolidated Balance Sheet at December 31, 1998 and 1997...............................................20
Consolidated Statement of Income for the years ended December 31, 1998, 1997, and 1996.................21
Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996.............22
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997,
and 1996.......................................................................................23
Notes to Consolidated Financial Statements.............................................................24
</TABLE>
(a) 2. Financial Statement Schedules required to be filed by Item 8 of this
Form:
All schedules are omitted as they are not required, or are not
applicable, or the required information is included in the financial
statements or notes thereto.
(a) 3. Exhibits
3.1 Articles of Incorporation of the Company, as amended (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (No. 33-24505) and incorporated herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (No. 33-24505) and
incorporated herein by reference).
*10.1 Amended and Restated 1987 Stock Option and SAR Plan (filed as
Exhibit 4.3 to the Company's Registration Statement on Form
S-8 (No. 33-24505) and incorporated herein by reference).
33
<PAGE> 34
*10.2 Employee Stock Purchase Plan (filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (No. 33-62209)
and incorporated herein by reference).
*10.3 Employment Agreement between the Company and William W. Botts
(filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated
herein by reference).
10.4 Value-Added Reseller Agreement between the Company and
Hewlett-Packard Company (filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference).
*10.5 1993 Incentive Compensation Plan (filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.6 Registration Rights Agreement among O. I. Corporation and the
former shareholders of CMS Research Corporation dated January
4, 1994 (filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
*10.7 Employment Agreement between the Company and Mark G. Whiteman
(filed as Exhibit 10.7 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated
herein by reference).
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (For SEC Purposes Only)
99.1 The O.I. Corporation definitive Proxy Statement, dated April
10, 1999 is incorporated by reference as an Exhibit hereto
for the information required by the Securities and Exchange
Commission, and, except for those portions of such definitive
proxy statement specifically incorporated by reference
elsewhere herein, such definitive proxy statement is deemed
not to be filed as a part of this report.
(b) Reports on Form 8-K.
No Form 8-K was filed for the quarter ended December 31, 1998.
* Management contract or compensatory plan or arrangement.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
O. I. CORPORATION
/s/ William W. Botts
----------------------------
Date: March 24, 1999 By: William W. Botts
------------------------- President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William W. Botts President, Chief Executive Officer, March 24, 1999
- -------------------------------- Director and Principal Financial Officer ------------------------------
William W. Botts
/s/ Julie A. Wright Controller, Principal Accounting Officer March 24, 1999
- --------------------------------- ------------------------------
Julie A. Wright
/s/ Jack S. Anderson Director March 24, 1999
- -------------------------------- ----------------------------
Jack S. Anderson
/s/ Edwin B. King Director March 24, 1999
- -------------------------------- ---------------------------
Edwin B. King
/s/ Craig R. Whited Director March 24, 1999
- -------------------------------- ---------------------------
Craig R. Whited
</TABLE>
35
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company, as amended (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (No. 33-24505) and incorporated herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (No. 33-24505) and
incorporated herein by reference).
*10.1 Amended and Restated 1987 Stock Option and SAR Plan (filed as
Exhibit 4.3 to the Company's Registration Statement on Form
S-8 (No. 33-24505) and incorporated herein by reference).
*10.2 Employee Stock Purchase Plan (filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (No. 33-62209)
and incorporated herein by reference).
*10.3 Employment Agreement between the Company and William W. Botts
(filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated
herein by reference).
10.4 Value-Added Reseller Agreement between the Company and
Hewlett-Packard Company (filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference).
*10.5 1993 Incentive Compensation Plan (filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.6 Registration Rights Agreement among O. I. Corporation and the
former shareholders of CMS Research Corporation dated January
4, 1994 (filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
*10.7 Employment Agreement between the Company and Mark G. Whiteman
(filed as Exhibit 10.7 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated
herein by reference).
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (For SEC Purposes Only)
99.1 The O.I. Corporation definitive Proxy Statement, dated April
10, 1999 is incorporated by reference as an Exhibit hereto
for the information required by the Securities and Exchange
Commission, and, except for those portions of such definitive
proxy statement specifically incorporated by reference
elsewhere herein, such definitive proxy statement is deemed
not to be filed as a part of this report.
</TABLE>
- ---------
* Management contract or compensatory plan or arrangement.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-14683) of our report dated January 22, 1999
(except as to Note 14, which is as of February 1, 1999,) appearing in this
Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,536,548
<SECURITIES> 2,771,565
<RECEIVABLES> 3,577,222
<ALLOWANCES> 215,917
<INVENTORY> 4,917,268
<CURRENT-ASSETS> 13,885,604
<PP&E> 5,735,740
<DEPRECIATION> 2,115,351
<TOTAL-ASSETS> 18,828,747
<CURRENT-LIABILITIES> 3,857,294
<BONDS> 0
0
0
<COMMON> 410,338
<OTHER-SE> 14,333,503
<TOTAL-LIABILITY-AND-EQUITY> 18,828,747
<SALES> 23,683,685
<TOTAL-REVENUES> 23,683,685
<CGS> 12,764,748
<TOTAL-COSTS> 4,818,834
<OTHER-EXPENSES> 3,732,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,859,071
<INCOME-TAX> 1,036,637
<INCOME-CONTINUING> 1,822,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,822,434
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
</TABLE>
