UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 28, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14429
ISCO, INC.
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(Exact name of registrant as specified in its charter)
NEBRASKA 47-0461807
- -------------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No)
4700 SUPERIOR STREET, LINCOLN, NEBRASKA 68504-1398
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(Address of principal executive offices) (Zip Code)
(402) 464-0231
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes of
common stock as of February 25, 2000:
COMMON STOCK, $0.10 PAR VALUE 5,643,992
- ----------------------------- -----------------------
Class Number of Shares
ISCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K 10
Exhibit 27 is not included as a part of this document. However, it is available
from the Investor Relations Department.
2
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
-------------------- --------------------
Jan 28 Jan 29 Jan 28 Jan 29
2000 1999 2000 1999
-------- -------- --------- -------
Net sales $13,508 $11,756 $26,691 $25,242
Cost of sales 6,063 5,756 12,095 11,709
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7,445 6,000 14,596 13,533
------- ------- ------- -------
Expenses:
Selling, general, and administrative 5,257 5,416 10,391 10,903
Research and engineering 1,291 1,540 2,694 3,053
------- ------- ------- -------
6,548 6,956 13,085 13,956
------- ------- ------- -------
Operating income (loss) 897 (956) 1,511 (423)
Net non-operating income:
Investment income 76 82 141 159
Interest expense (105) (78) (203) (102)
Other 124 272 248 357
------- ------- ------- -------
95 276 186 414
------- ------- ------- -------
Earnings (loss) before income taxes 992 (680) 1,697 (9)
Income taxes (tax benefit) 339 (202) 623 (97)
------- ------- ------- -------
Net earnings (loss) $ 653 $ (478) $ 1,074 $ 88
======= ======= ======= =======
Basic earnings (loss) per share $.12 $(.08) $.19 $.02
======= ======= ======= =======
Diluted earnings (loss) per share $.12 $(.08) $.19 $.02
======= ======= ======= =======
Weighted average number of shares outstanding 5,644 5,644 5,644 5,646
Additional shares assuming exercise of common stock equivalents and
dilutive stock options 25 -- 22 10
------- ------- ------- -------
Total 5,669 5,644 5,666 5,656
======= ====== ======= =======
Cash dividend per share $.00 $.05 $.00 $.10
======= ====== ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
Jan 28 Jul 30
2000 1999
---------- --------
Unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 4,809 $ 3,423
Accounts receivable - trade, net of allowance for doubtful accounts
of $187,000 and $198,000 9,056 9,501
Inventories (Note 3) 9,397 9,016
Refundable income taxes 97 383
Deferred income taxes 1,142 1,134
Other current assets 469 449
------- -------
Total current assets 24,970 23,906
Property, plant, and equipment, net of accumulated depreciation
of $16,540,000 and $15,681,000 19,452 20,019
Property held for sale (Note 6) 2,257 2,257
Deferred income taxes 39 318
Other assets (Note 4) 6,489 6,825
------- -------
Total assets $53,207 $53,325
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,181 $ 1,832
Short-term borrowing 1,466 1,560
Current portion of long-term debt 1,191 1,180
Accrued expenses 3,342 3,311
------- -------
Total current liabilities 7,180 7,883
Long-term debt 3,488 3,996
Shareholders' equity (Note 5):
Preferred stock, $.10 par value, authorized 5,000,000 shares; issued none -- --
Common stock, $.10 par value, authorized 15,000,000 shares; issued and
outstanding 5,643,992 564 564
Additional paid-in capital 37,740 37,740
Retained earnings 4,226 3,152
Accumulated other comprehensive income (loss) 9 (10)
------- -------
Total shareholders' equity 42,539 41,446
------- -------
Total liabilities and shareholers' equity $53,207 $53,325
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Columnar amounts in thousands)
Six Months Ended
--------------------------
Jan 28 Jan 29
2000 1999
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $1,074 $ 88
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 1,351 1,119
Change in operating assets and liabilities (666) (1,237)
Other 618 (1)
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Total adjustments 1,303 (119)
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Cash flows from operating activities 2,377 (31)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities -- 1,699
Proceeds from sale of property, plant, and equipment 136 384
Purchase of property, plant, and equipment (709) (4,469)
Other -- 8
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Cash flows from investing activities (573) (2,378)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid -- (564)
Net change in short-term borrowings 27 205
Proceeds from long-term debt -- 5,000
Repayment of debt (445) (75)
Purchase of common stock -- (165)
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Cash flows from financing activities (418) 4,401
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CASH AND CASH EQUIVALENTS:
Net increase 1,386 1,992
Balance at beginning of year 3,423 3,837
------ ------
$4,809 $5,829
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SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
The Company made income tax payments (received refunds) of $85,000 and
($289,000) during the six month periods ended January 28, 2000 and January
29, 1999, respectively. The Company made interest payments of $203,000 and
$102,000 during the six month periods ended January 28, 2000 and January 29,
1999, respectively.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in thousands, except per share data)
January 28, 2000
NOTE 1: In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments necessary for a
fair presentation of the financial position of the Company and the results of
operations for the interim periods presented herein. All such adjustments are of
a normal recurring nature. Results of operations for the current unaudited
interim period are not necessarily indicative of the results that may be
expected for the entire fiscal year. All significant inter-company transactions
and accounts have been eliminated.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements included
in the Annual Report on Form 10K for the year ended July 30, 1999.
NOTE 2: Certain reclassifications have been made to the prior periods' financial
statements to conform to the current periods' presentation.
NOTE 3: Inventories are valued at the lower of cost or market, principally on
the last-in, first-out (LIFO) basis. The composition of inventories was as
follows:
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Jan 28, 2000 Jul 30, 1999
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Raw materials $4,291 $3,893
Work-in-process 3,785 3,422
Finished goods 1,321 1,701
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$9,397 $9,016
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Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,372,000 and $1,214,000 higher than reported on the
LIFO basis at January 28, 2000 and July 30, 1999, respectively.
NOTE 4: Other Assets
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Jan 28, 2000 Jul 30, 1999
------------ ------------
Intangibles, net of accumulated amortization
of $928,000 and $728,000 $2,851 $3,051
Investment in AFTCO, net of accumulated
amortization of $138,000 and $100,000 903 1,058
Cash value of life insurance 1,380 1,358
Note receivable - related party 1,000 1,000
Other 355 358
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$6,489 $6,825
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6
NOTE 5: Comprehensive income (loss), for the three and six month periods ended
January 28, 2000 and January 29, 1999, was as follows:
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Three Months Ended Six Months Ended
------------ ----------- ------------ ------------
Jan 28, 2000 Jan 29,2000 Jan 28, 2000 Jan 29, 1999
------------ ----------- ------------ ------------
Net earnings (loss) $653 $(478) $1,074 $88
Other comprehensive income, net of income tax:
Foreign currency translation adjustment 18 (2) 19 (6)
Unrealized holding gains (losses) on
available-for-sale securities -- (6) -- (4)
----- ----- ------ ---
Comprehensive income (loss) $671 $(486) $1,093 $78
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NOTE 6: In February 2000, the Company disposed of the property held for sale.
The sale resulted in a pre-tax loss on disposal of approximately $50,000 and
will be recorded in the third quarter of fiscal year 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAIN TREND ANALYSIS AND OTHER 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.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS WITHIN THIS DOCUMENT.
SALES ANALYSIS AND REVIEW
Our sales for the three-month and six-month periods, ended January 28, 2000,
were $13,508,000 and $26,691,000, respectively. For the periods under review,
our sales were 15 percent and 6 percent higher than for the same periods last
year. Sales of our core products (wastewater samplers, flow meters, and liquid
chromatography products) were up 21 percent for the three months. For the same
period, sales of our other products (process monitoring, supercritical fluid
extraction (SFE), syringe pumps, Geomation, and STIP products) were up 4
percent. For the six months, sales of our core products were up 11 percent. For
the same period, sales of our other products were down 2 percent.
Domestic sales for the three months and six months were up 26 percent and 13
percent, respectively. Domestic sales of our core products for the same periods
were up 26 percent and 13 percent, respectively. All of our core products
contributed to the increase in the three-month period sales over last year.
Sales of chromatography and flow meter products accounted for the increase in
the six-month period sales over last year. Domestic sales of our other products
for the same periods were up 58 percent and 27 percent, respectively. Sales of
process monitoring, SFE, and syringe pumps products accounted for the increase
in the three-month period. The six-month period increase was due to increased
sales of SFE and process monitoring products offset by decreases in sales of
syringe pumps and Geomation products.
International sales for the three months and six months were down 7 percent and
10 percent, respectively. International sales of our core products for the same
periods were both up 4 percent. The increases were due to increased sales of
chromatography products over last year. International sales of our other
products for the same periods were down 17 percent and 25 percent, respectively.
The decrease for the three-month period was the result of decreases in sales of
Geomation and STIP products offset by an increase in sales of SFE products. The
decrease in the six-month period was due to lower sales of all other products
with the exception of syringe pumps over the prior year.
During the three months and six months, we received net orders of $13.4 million
and $26.0, respectively. The net orders we received were 9 percent and 2 percent
higher than the same periods last year. At mid-year, our order backlog was $5
million, 13 percent lower than at the beginning of the fiscal year.
7
OPERATING INCOME ANALYSIS AND REVIEW
RESULTS OF OPERATIONS
The following table sets forth, for the three-month and six-month periods
indicated, the percentages which certain components of the Condensed
Consolidated Statements of Operations bear to net sales and the percentage
change of such components (based on actual dollars) compared with the same
periods of the prior year.
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
---------------------------------- --------------------------------
1/28/00 1/29/99 Change 1/28/00 1/29/99 Change
------- ------- -------- ------- ------- -------
Net sales 100.0 100.0 14.9 100.0 100.0 5.7
Cost of sales 44.9 48.9 5.3 45.3 46.4 3.3
------- ------- ------- -------
55.1 51.1 24.1 54.7 53.6 7.8
------- ------- ------- -------
Expenses:
Selling, general, & administrative 38.9 46.1 (2.9) 38.9 43.2 (4.7)
Research & engineering 9.6 13.1 (16.2) 10.1 12.1 (11.8)
------- ------- ------- -------
48.5 59.2 (5.9) 49.0 55.3 ( 6.2)
------- ------- ------- -------
Operating income (loss) 6.6 (8.1) -- 5.7 (1.7) --
Non-operating income:
Investment income .6 .7 (7.0) .5 .6 (11.3)
Interest expense (.8) (.7) 34.6 (.8) (.4) 99.0
Other .9 2.3 (54.5) .9 1.4 (30.6)
------- ------- ------- -------
.7 2.3 (65.5) .6 1.6 (55.1)
------- ------- ------- -------
Earnings (loss) before income taxes 7.3 (5.8) -- 6.3 (.1) --
Income taxes 2.5 (1.7) -- 2.3 (.4) --
------- ------- ------- -------
Net earnings (loss) 4.8 (4.1) -- 4.0 .3 1,119.1
======= ======= ======= =======
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We had operating income of $897,000 and $1,511,000, respectively, for the three
months and six months ended January 28, 2000. For the same periods last year, we
had operating losses of $956,000 and $423,000, respectively. The change was a
result of performance improvements at Isco-Lincoln offset by operating losses
incurred by Geomation and STIP.
Gross margin percentages improved to 55.1 percent and 54.7 percent,
respectively, for the three months and six months ended January 28, 2000. This
compares to gross margin percentages of 51.1 percent and 53.6 percent for the
same periods last year. The prior year's gross margin was adversely impacted by
costs associated with the consolidation and relocation of the manufacturing
operations at Isco-Lincoln.
Our selling, general and administrative expenses declined by $159,000 and
$512,000, respectively, for the three months and six months ended January 28,
2000 as compared to the same periods of the previous year. The decreases were
primarily a result of decreased selling expenses at STIP and costs associated
with the settlement of litigation in the second quarter of 1999.
Research and engineering expenses declined by $249,000 and $359,000,
respectively, for the three months and six months ended January 28, 2000 as
compared to the same periods of the previous year. This decline was a result of
reduced costs associated with a reduction in staff at Isco-Lincoln that occurred
in fiscal 1999 and the timing of expenditures for product development projects.
8
Non-operating income decreased by 65.5 percent and 55.1 percent, respectively,
for the three months and six months ended January 28, 2000 as compared to the
same periods of the previous year. The decrease in the three-month period is due
to gains realized on the sale of assets associated with the consolidation of the
Isco-Lincoln facility in the second quarter of fiscal 1999. The decrease in the
six-month period was due to increased interest expense and expenses associated
with the property held for sale.
Our effective income tax rate for the three months and six months ended January
28, 2000 was 34.2 percent and 36.7 percent, respectively. This represents tax
expenses of approximately $339,000 and $623,000. This compares with income tax
benefits of approximately $202,000 and $97,000 in the same periods last year.
The prior year benefits resulted from losses incurred, reductions in the tax
rate for our subsidiary in Switzerland, and research and development tax credits
generated.
FINANCIAL CONDITION AND LIQUIDITY
Our cash position increased by $1,386,000 for the six months ended January 28,
2000, resulting in a cash balance of $4,809,000. This increase was generated
from positive cash flows from operations. Cash generated from operations was
driven by net earnings, depreciation and amortization and other non-cash items
totaling $3,043,000 offset by changes in operating assets and liabilities of
$666,000. At January 28, 2000, our working capital was $17.8 million and our
current ratio was 3.5:1. Both of these items represented a slight improvement
over our position at July 30, 1999 and over the end of the previous fiscal
quarter. In February 2000, we completed the sale of the Westgate facility. This
sale provided us with $2.1 million in cash. The financial reporting of this sale
is discussed in greater detail in Note 7 of the financial statements.
YEAR 2000
In 1995, management acknowledged that the change in the century (Y2K) could have
a significant effect upon our operations. We evaluated our situation in the
light of the following questions.
- Will the computer systems that we use to manage our business function
properly after December 31, 1999?
- Will our products continue to function properly after December 31, 1999?
- Will our key vendors be able to continue to deliver materials and
services after December 31, 1999?
- Will our key customers be able to submit orders for our products after
December 31, 1999?
As of July 31, 1999, the start of our fiscal year 2000, all Isco entities
were operating on Y2K compliant systems. This was accomplished by either the
upgrading of existing systems and software applications or the installation
of new operating systems.
Our current products, with few exceptions, are compliant with Isco's Year
2000 Product Compliance Policy. The majority of our discontinued products
that still may be in service are compliant with our Y2K policies and those
that are not have reasonable Y2K step-around procedures. Therefore, we
believe our liabilities are limited with respect to our products being Y2K
compliant.
We contacted key vendors and obtained assurance that the products and
services provided by these vendors would not be affected after December 31,
1999.
At this time, we have not experienced any significant Y2K related problems
from our operating systems, products, or the ability to receive products and
services from our vendors.
In our 1999 fiscal year-end report we stated that the Baan ERP operating
system that was originally purchased to bring future operational efficiencies
and address our Y2K compliance issue at the Isco-Lincoln facility was put on
hold due to instability problems. Management is actively evaluating our
options. At this time, we have approximately $2.3 million invested in Baan
related software and hardware.
9
MARKET RISK
We do not use derivative financial or commodity instruments. Our other financial
instruments include cash and cash equivalents, accounts and notes receivable,
accounts and notes payable, and long-term debt. Our cash and cash equivalents,
accounts and notes receivable, and accounts and notes payable balances are
generally short-term in nature and do not expose our company to material market
risk. At January 28, 2000, we had $4.7 million of fixed rate long-term debt and
$6.5 million of variable rate credit facilities. At January 28, 2000,
approximately $1.5 million was outstanding under these credit facilities. We do
not believe that changes in interest rates on the long-term debt and credit
facilities would have a material effect on our company's results of operations
given our current obligations under those long-term debt and credit facilities.
INFLATION
The effect of inflation on the costs of our company and its ability to pass
on cost increases in the form of increased prices is dependent upon market
conditions and the competitive environment. The general level of inflation in
the U.S. economy has been relatively low for the past several years and has
not, to date, had a significant effect on our company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference to the
section entitled "Market Risk" in Part I, Item 2, Management's Discussion and
Analysis of Results of Operations and Financial Condition.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our company's annual meeting of shareholders was held on December 9, 1999.
A. The following persons were elected to serve a two-year term on our Board of
Directors:
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Nominee Votes
---------------------------- -----------------------------------
In Favor Withheld
------------ -----------
Robert W. Allington 4,910,148 127,869
James L. Linderholm 4,910,964 127,869
Dale L. Young 4,916,529 127,869
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B. Amendment No. 1 to the Isco, Inc. 1996 Stock Option Plan:
-------------------------------------------------------------------------
Votes
--------------------------------------
In Favor Against Abstaining
--------- ------- ----------
Approval of Amendment No. 1 4,824,213 210,284 5,919
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISCO, INC.
Date: March 9, 2000 BY /S/ ROBERT W. ALLINGTON
----------------------------------
Robert W. Allington, Chairman and
Chief Executive Officer
Date: March 9, 2000 BY /S/ VICKI L. BENNE
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Vicki L. Benne, Treasurer and
Chief Financial Officer
11