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 April 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
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ISCO, INC.
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(Exact name of registrant as specified in its charter)
NEBRASKA 47-0461807
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(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 May 26, 2000:
COMMON STOCK, $0.10 PAR VALUE 5,643,992
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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 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 - Financial Data Schedule 11
(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 Nine months ended
--------------------- ---------------------
Apr 28 Apr 30 Apr 28 Apr 30
2000 1999 2000 1999
------- ------- ------- -------
Net sales $13,950 $12,889 $40,641 $38,131
Cost of sales 6,487 6,088 18,582 17,797
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7,463 6,801 22,059 20,334
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Expenses:
Selling, general, and administrative 5,345 5,417 15,736 16,320
Research and engineering 1,429 1,464 4,123 4,517
Write-off of ERP operating system (Note 7) 2,448 -- 2,448 --
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9,222 6,881 22,307 20,837
------- ------- ------- -------
Operating income (loss) (1,759) (80) (248) (503)
Non-operating income (loss):
Investment income 201 97 342 256
Interest expense (89) (64) (292) (166)
Other 58 (149) 306 208
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170 (116) 356 298
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Earnings (loss) before income taxes (1,589) (196) 108 (205)
Income taxes (tax benefit) (579) (71) 44 (168)
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Net earnings (loss) $(1,010) $ (125) $ 64 $ (37)
======= ======= ======= =======
Basic earnings (loss) per share $ (.18) $ (.02) $ .01 $ (.01)
======= ======= ======= =======
Diluted earnings (loss) per share $ (.18) $ (.02) $ .01 $ (.01)
======= ======= ======= =======
Weighted average number of shares outstanding 5,644 5,644 5,644 5,646
Additional shares assuming exercise of dilutive common stock
equivalents -- -- 27 --
------- ------- ------- -------
Total 5,644 5,644 5,671 5,646
======= ======= ======= =======
Cash dividend per share $ .00 $ .00 $ .00 $ .10
======= ======= ======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Columnar amounts in thousands)
Apr 28 Jul 30
2000 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 4,649 $ 3,423
Short-term investments 1,498 --
Accounts receivable - trade, net of allowance for doubtful accounts
of $161,000 and $198,000 9,160 9,501
Inventories (Note 3) 9,885 9,016
Refundable income taxes 716 383
Deferred income taxes 1,447 1,134
Other current assets 435 449
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Total current assets 27,790 23,906
Property, plant, and equipment, net of accumulated depreciation 16,977 20,019
of $16,510,000 and $ 15,681,000
Property held for sale (Note 6) -- 2,257
Long-term investments 997 --
Deferred income taxes 46 318
Other assets (Note 4) 6,205 6,825
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Total assets $52,015 $53,325
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,246 1,832
Short-term borrowing 1,781 1,560
Current portion of long-term debt 977 1,180
Accrued expenses 3,015 3,311
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Total current liabilities 7,019 7,883
Long-term debt 3,399 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 3,216 3,152
Accumulated other comprehensive income (loss) 77 (10)
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Total shareholders' equity 41,597 41,446
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Total liabilities and shareholders' equity $52,015 $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)
Nine months ended
----------------------
Apr 28 Apr 30
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 64 $ (37)
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities:
Depreciation and amortization 1,957 1,775
Write-off of ERP operating system 2,448 --
Change in operating assets and liabilities (2,218) (1,536)
Other 293 (82)
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Total adjustments 2,480 157
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Cash flows from operating activities 2,544 120
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities -- 1,963
Proceeds from sale of held-to-maturity securities -- 250
Proceeds from sale of property, plant, and equipment 2,403 521
Purchase of held-to-maturity securities (2,495) --
Purchase of property, plant, and equipment (1,035) (6,994)
Other -- 8
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Cash flows from investing activities (1,127) (4,252)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid -- (564)
Net change in short-term borrowings 509 161
Proceeds from long-term debt -- 5,000
Repayment of debt (700) (290)
Purchase of common stock -- (165)
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Cash flows from financing activities (191) 4,142
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CASH AND CASH EQUIVALENTS:
Net increase 1,226 10
Balance at beginning of year 3,423 3,837
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Balance at end of period $ 4,649 $ 3,847
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SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
The Company made income tax payments (received refunds) of $418,000 and
($264,000) during the nine month periods ended April 28, 2000 and April 30,
1999, respectively.
The Company made interest payments of $292,000 and $166,000 during the nine
month periods ended April 28, 2000 and April 30, 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)
April 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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Apr 28, 2000 Jul 30, 1999
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Raw materials $4,357 $3,893
Work-in-process 4,078 3,422
Finished goods 1,450 1,701
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$9,885 $9,016
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Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,498,000 and $1,214,000 higher than reported on the
LIFO basis at April 28, 2000 and July 30, 1999, respectively.
NOTE 4: Other Assets
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Apr 28, 2000 Jul 30, 1999
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Intangibles, net of accumulated amortization $2,750 $3,051
of $1,029,000 and $728,000
Investment in AFTCO, net of accumulated 832 1,058
amortization of $156,000 and $100,000
Cash value of life insurance 1,397 1,358
Note receivable - related party 1,000 1,000
Other 226 358
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$6,205 $6,825
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6
NOTE 5: Comprehensive income (loss), for the three and nine month periods ended
April 28, 2000 and April 30, 1999, was as follows:
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Three months ended Nine months ended
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Apr 28, 2000 Apr 30, 1999 Apr 28, 2000 Apr 30, 1999
------------ ------------ ------------ ------------
Net income (loss) $(1,010) $ (125) $ 64 $ (37)
Other comprehensive income, net of income tax:
Foreign currency translation adjustment 68 -- 87 (6)
Unrealized holding gains (losses) on
available-for-sale securities -- -- -- (4)
------- ------- ------- -------
Comprehensive income $ (942) $ (125) $ 151 $ (47)
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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.
NOTE 7: In April 2000, management of the Company determined that the
previously suspended implementation of the ERP operating software system for
the Isco-Lincoln facility would not be completed. As a result of this
decision, the Company wrote-off software and related computer hardware assets
of $2,448,000. The write-off is recorded as a component of operating expenses
in the condensed consolidated statements of operations.
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 nine-month periods ended April 28, 2000, were
$13,950,000 and $40,641,000, respectively. For the periods under review, our
sales were 8 percent and 7 percent higher than for the same periods last year.
Sales of our core products (wastewater samplers, flow meters, and liquid
chromatography products) were up 16 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 down 14
percent. For the nine months, sales of our core products were up 13 percent. For
the same period, sales of our other products were down 6 percent.
Domestic sales for the three months and nine months were up 3 percent and 9
percent, respectively. Domestic sales of our core products for the same periods
were up 7 percent and 11 percent, respectively. Sales of samplers and
chromatography products contributed to the increase in the three-month period
sales over last year. All core products accounted for the increase in the
nine-month period sales over last year. Domestic sales of our other products for
the same periods were down 13 percent and up 15 percent, respectively. Sales of
SFE and process monitoring products accounted for the majority of the decrease
in the three-month period. The nine-month period increase was due primarily to
increased sales of SFE products offset by decreases in sales of syringe pumps
and Geomation products.
International sales for the three months and nine months were up 26 percent and
flat, respectively. International sales of our core products for the same
periods were up 58 percent and 21 percent, respectively. The three-month
increase was due to increased sales of all core products over last year. Sales
of samplers and chromatography products accounted for the increase in the
nine-month period sales over last year. International sales of our other
products for the same periods were down 15 percent and 22 percent, respectively.
The decrease for the three-month period was the result of decreases in sales of
Geomation and STIP products offset by increases in sales of SFE and syringe
pump products. The decrease in the nine-month period is due to lower sales of
all other products, except syringe pumps, over the prior year.
7
During the three months and nine months we received net orders of $14.0 million
and $40.0, respectively. The net orders we received were 1 percent higher over
the same periods last year. At April 28, 2000, our order backlog was $5.1
million, 11 percent lower than at the beginning of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
RESULTS OF OPERATIONS
The following table sets forth, for the three-month and nine-month periods
indicated, the percentages which certain components of the Condensed
Consolidated Statements of Operations bear to net sales and the percentage of
change of such components (based on actual dollars) compared with the same
periods of the prior year.
- --------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
-------------------------------- ---------------------------------
4/28/00 4/30/99 Change 4/28/00 4/30/99 Change
------- ------- ------ ------- ------- ------
Net sales 100.0 100.0 8.2 100.0 100.0 6.6
Cost of sales 46.5 47.2 6.6 45.7 46.7 4.4
----- ----- ----- -----
53.5 52.8 9.7 54.3 53.3 8.5
----- ----- ----- -----
Expenses:
Selling, general, & administrative 38.3 42.0 (1.3) 38.7 42.8 (3.6)
Research & engineering 10.2 11.4 (2.4) 10.2 11.8 (8.7)
Write-off of ERP operating system 17.6 0.0 -- 6.0 0.0 --
----- ----- ----- -----
66.1 53.4 34.0 54.9 54.6 7.1
----- ----- ----- -----
Operating income (loss) (12.6) (0.6) 2098.8 (0.6) (1.3) (50.7)
Non-operating income:
Investment income 1.4 0.8 107.2 0.8 0.7 33.6
Interest expense (0.6) (0.5) 39.1 (0.7) (0.4) 76.0
Other 0.4 (1.2) -- 0.8 0.5 47.6
----- ----- ----- -----
1.2 (0.9) -- 0.9 0.8 19.7
----- ----- ----- -----
Earnings (loss) before income taxes (11.4) (1.5) 710.7 0.3 (0.5) --
Income taxes (4.2) (0.5) 711.3 0.1 (0.4) --
----- ----- ----- -----
Net earnings (loss) (7.2) (1.0) 708.0 0.2 (0.1) --
===== ===== ===== =====
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We had operating losses of $1,759,000 and $248,000, respectively, for the three
months and nine months ended April 28, 2000. For the same periods last year, we
had operating losses of $80,000 and $503,000, respectively. All entities
contributed to the three month period loss. For the nine month period
Isco-Lincoln generated operating income which was offset by operating losses
from Geomation and STIP. The current year's three and nine month results were
negatively impacted by a $2.4 million write-off of software and hardware related
to Isco-Lincoln's ERP operating system project. Without this impact we would
have generated operating income of $689,000 and $2,200,000 for the current
year's three and nine month periods, respectively.
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. Since suspending the project, we have conducted
in-depth reviews of our alternatives. Considering all factors, we concluded that
the expected benefits of completing the implementation did not outweigh the
additional costs and risks of attempting to complete the implementation. In
addition, we have filed a lawsuit against Baan USA, Inc. to protect our rights
under various agreements with Baan and others involving the ERP system.
8
Gross margin percentages improved to 53.5 percent and 54.3 percent,
respectively, for the three months and nine months ended April 28, 2000. This
compares to gross margin percentages of 52.8 percent and 53.3 percent for the
same periods last year. These increases were the result of higher than normal
costs and inefficiencies in the prior year associated with the consolidation and
relocation of the manufacturing operations at Isco-Lincoln.
Our selling, general and administrative expenses declined by $72,000 and
$584,000, respectively, for the three months and nine months ended April 28,
2000 as compared to the same periods of the previous year. The decrease in the
three month period was primarily due to costs associated with temporary
reductions in staffing at Isco-Lincoln and STIP offset by increased professional
fees and Isco-Lincoln's profit sharing contribution. The decrease for the nine
month period is due to reductions in advertising costs, reduced staffing and
associated personnel costs for Isco-Lincoln and STIP, and the costs associated
with settlement of litigation in the second quarter of 1999. Increases in
commission costs and Isco-Lincoln's profit sharing contribution offset these
decreases.
Research and engineering expenses declined by $35,000 and $394,000,
respectively, for the three months and nine months ended April 28, 2000 as
compared to the same periods of the previous year. The decrease in the three
month period was due to reduced expenses at STIP. The decrease in the nine month
period is 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.
Non-operating income increased by $286,000 and $58,000, respectively, for the
three months and nine months ended April 28, 2000 as compared to the same
periods of the previous year. This increase is due to increased investment
income offset by interest expense. The prior year's results were also impacted
by the write-off of $335,000 of undepreciated building components that were
associated with the renovation of the Superior Street facility.
Our effective income tax rates for the three months and nine months ended April
28, 2000 were 36.5 percent and 40.6 percent, respectively. This compares to
effective tax rates of 36.3 percent and 81.8 percent for the same periods in the
previous year. The improvement in the nine month effective tax rate was due to
the change in the level of pre-tax income and greater benefits achieved in the
current fiscal year from utilization of our foreign sales corporation.
Additionally, the prior year effective rate was impacted by 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 $1.2 million for the nine months ended April 28,
2000, resulting in a cash balance of $4.6 million. This increase was primarily
generated from positive cash flows from operations of $2.5 million offset by
$1.1 million used for investments in plant, property, and equipment and
securities. Cash generated from operations is reflective of non-cash items of
depreciation and amortization, the write-off of the ERP operating system, and
other non-cash items totaling $4.7 million offset by changes in operating assets
and liabilities of $2.2 million. The change in operating assets and liabilities
was due to increases in inventory and refundable income taxes and a decrease in
accounts payable. 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 6 of the financial
statements. At April 28, 2000, our working capital was $20.8 million and our
current ratio was 4.0:1. Both of these items represented an improvement over our
position at July 30, 1999 and over the end of the previous fiscal quarter.
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 April 28, 2000, we had $4.4 million of fixed rate long-term debt and
$6.9 million of variable rate credit facilities. At April 28, 2000,
approximately $1.8 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.
9
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 included in 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 1. LEGAL PROCEEDINGS
On March 31, 2000, we filed an action in District Court for Lancaster County,
Nebraska against Baan USA, Inc. seeking monetary damages of not less than
$3,982,428 resulting from an alleged breach of contract with respect to an ERP
System purchased by us from Baan. Baan filed an answer containing a general
denial of our allegations and removed the case to United States District Court
in Lincoln, Nebraska. No discovery has been initiated or scheduled.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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: June 6, 2000 BY /s/ Robert W. Allington
-------------------------------------
Robert W. Allington, Chairman and
Chief Executive Officer
Date: June 6, 2000 BY /s/ Vicki L. Benne
-------------------------------------
Vicki L. Benne, Treasurer and
Chief Financial Officer
10