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 October 27, 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
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 24, 2000
COMMON STOCK, $0.10 PAR VALUE 5,645,848
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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 6. Exhibits and Reports on Form 8-K: 10
(a) Exhibits:
27 - Financial Data Schedule 11
(b) Reports on Form 8-K 10
2
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three months ended
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Oct 27 Oct 29
2000 1999
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Net sales $13,481 $13,183
Cost of sales 6,177 6,032
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7,304 7,151
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Expenses:
Selling, general, and administrative 5,576 5,134
Research and engineering 1,330 1,403
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6,906 6,537
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Operating income 398 614
Net non-operating income:
Investment income 157 65
Interest expense (94) (98)
Other 6 124
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69 91
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Earnings before income taxes 467 705
Income taxes 196 284
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Net earnings $ 271 $ 421
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Basic and diluted earnings per share $ .05 $ .07
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Weighted average number of shares outstanding 5,645 5,644
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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)
Oct 27 Jul 28
2000 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 887 $ 1,589
Short-term investments 3,417 1,981
Accounts receivable, net 9,325 9,934
Inventories (Note 3) 9,739 9,059
Refundable income taxes 471 498
Deferred income taxes 1,425 1,569
Other current assets 392 538
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Total current assets 25,656 25,168
Property, plant, and equipment, net 15,777 16,389
Long-term investments 3,734 3,728
Deferred income taxes 290 317
Other assets (Note 4) 5,310 4,840
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Total assets $50,767 $50,442
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,365 $ 782
Accrued expenses 3,134 3,167
Short-term borrowing 1,546 1,815
Current portion of long-term debt 1,008 993
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Total current liabilities 7,053 6,757
Long-term debt 2,881 3,164
Shareholders' equity:
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 5,645,848 and 5,643,992 shares 565 564
Additional paid-in capital 37,708 37,697
Retained earnings 2,471 2,200
Accumulated other comprehensive income 89 60
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Total shareholders' equity 40,833 40,521
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Total liabilities and shareholders' equity $50,767 $50,442
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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)
Three months ended
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Oct 27 Oct 29
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 271 $ 421
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization 566 655
Change in operating assets and liabilities 603 (1,252)
Other 69 340
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Total adjustments 1,238 (257)
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Net cash flows from operating activities 1,509 164
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities 500 --
Proceeds from sale of property, plant, and equipment 55 63
Purchase of held-to-maturity securities (1,936) --
Purchase of property, plant, and equipment (440) (433)
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Net cash flows from investing activities (1,821) (370)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt
(170) 130
Repayment of long-term debt
(232) (221)
Issuance of common stock 12 --
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Net cash flows from financing activities (390) (91)
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CASH AND CASH EQUIVALENTS:
Net decrease (702) (297)
Balance at beginning of year 1,589 3,423
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Balance at end of period $ 887 $ 3,126
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The Company made income tax payments (received refunds) of ($3,000) and $0
during the three-month periods ended October 27, 2000 and October 29, 1999,
respectively.
The Company made interest payments of $67,000 and $98,000 during the three-month
periods ended October 27, 2000 and October 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)
October 27, 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 intercompany 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 28, 2000.
NOTE 2: Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's 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 is as
follows:
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Oct 27, 2000 Jul 28, 2000
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Raw materials $4,287 $4,341
Work-in-process 3,485 3,476
Finished goods 1,967 1,242
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$9,739 $9,059
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Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,813,000 and $1,764,000 higher than reported on the
LIFO basis at October 27, 2000 and July 28, 2000, respectively.
NOTE 4: Other Assets
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Oct 27, 2000 Jul 28, 2000
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Intangibles, net of accumulated amortization of $1,259 $1,295
$427,000 and $391,000
Investment in AFTCO, net of accumulated 791 823
amortization of $194,000 and $175,000
Cash value of life insurance 1,444 1,437
Note receivable - related party 1,000 1,000
Other 816 285
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$5,310 $4,840
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6
NOTE 5: Comprehensive income, for the three months ended October 27, 2000 and
October 29, 1999, was as follows:
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Oct 27, 2000 Oct 29, 1999
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Net income $271 $421
Other comprehensive income, net of income tax:
Unrealized holding gains on available-for-sale
securities 2 --
Foreign currency translation adjustments 27 1
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Comprehensive income $300 $422
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NOTE 6: On October 16, 2000 Isco, Inc. completed the sale of the net assets of
Geomation, Inc., a wholly owned subsidiary of Isco, Inc., to an investment group
led by the management of Geomation. The loss resulting from this sale was
recorded in the fiscal 2000 financial statements. The current fiscal quarter
results include sales of approximately $113,000 and a pre-tax loss of $47,000
related to the Geomation operations through August 31, 2000.
NOTE 7: In November 2000, the Company reached an agreement to settle outstanding
litigation regarding its abandoned ERP software. The $425,000 pre-tax gain
related to this settlement will be recorded in the 2nd quarter of fiscal 2001.
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
2001 to 2000 Comparison
Our sales for the first quarter ended October 27, 2000 of $13,481,000 were two
percent above first quarter fiscal 2000 sales of $13,183,000. Sales of our core
products (wastewater samplers, flow meters, and liquid chromatography products)
were up 14 percent. This increase was due to a significant increase in sampler
sales offset by reductions in flow meter and chromatography sales. Sales of our
other products (process monitoring, supercritical fluid extraction (SFE),
syringe pumps, and Geomation products) were down approximately 25 percent
compared with the same period last year. SFE and Geomation products accounted
for the majority of the decrease with process monitoring and syringe pump
products providing small increases over the prior period. Geomation product
sales declined due to the divestiture of Geomation in early fiscal year 2001.
Excluding Geomation, sales of our other products declined by 18 percent.
U.S. sales of our core products increased 10 percent and international sales
increased by 34 percent. In both geographic markets significant increases in
sampler sales drove the improvement, while sales of both chromatography and flow
meters declined. U.S. sales of our other products (process monitoring, SFE,
syringe pumps, Geomation products) decreased by 60 percent. A decline in SFE
sales was the primary reason for the decrease along with reduced Geomation sales
due to the sale of the this entity. International sales of other products were
up 13 percent. Sales of SFE, syringe pump, and process monitoring products all
contributed to the increase.
Net orders of $14,523,000 were received during the first quarter of fiscal 2001,
an increase of approximately 16 percent compared with first quarter of fiscal
2000. The order backlog at October 27, 2000 was $5,597,000, up approximately 17
percent from the beginning of the year.
7
OPERATING INCOME ANALYSIS AND REVIEW
RESULTS OF OPERATIONS
The following table sets forth, for the three-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 period of the prior year.
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Three months ended
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10/27/00 10/29/99 Change
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Net sales 100.0 100.0 2.3
Cost of sales 45.8 45.8 2.4
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54.2 54.2 2.1
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Expenses
Selling, general, & administrative 41.3 38.9 8.6
Research & engineering 9.9 10.6 (5.2)
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51.2 49.5 5.6
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Operating income 3.0 4.7 (35.2)
Non-operating income
Investment income 1.2 .5 141.5
Interest expense (.7) (.7) (4.6)
Other .0 .9 (95.5)
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.5 .7 (23.6)
Earnings before income taxes 3.5 5.4 (33.7)
Income taxes 1.5 2.2 (31.1)
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Net earnings 2.0 3.2 (35.5)
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Our operating income for the first quarter of fiscal 2001 was $398,000, down
approximately 35 percent compared with an operating income of $614,000 for the
same period last year. The gross margin percentage for the first quarter held
steady at 54.2 percent compared with the same period last year. Higher operating
costs at the Lincoln operations resulted in the lower operating income.
Our selling, general, and administrative (SG&A) expenses increased by
approximately $442,000 when compared with the same period last year. This
increase is attributable to increased personnel costs as a result of filling a
number of open sales and marketing positions, increased sales commissions, and
increased promotional expenditures. These increases were offset by a reduction
of $200,000 in Geomation SG&A expenses resulting from the divestiture of this
entity.
Overall, our engineering expenses declined by approximately $73,000 when
compared with the same period last year. This reduction is due primarily to
timing of project expenditures and from reductions in staff and costs resulting
from the Geomation divestiture.
Investment income increased by $92,000 compared to the same period last year.
This was a result of larger investment balances available compared to the prior
period. Interest expense was slightly lower than the same period last year.
Other non-operating income decreased by $118,000 due to the sales of used
equipment being included in net sales in fiscal 2001.
Our effective income tax rate for the first quarter of fiscal 2001 was 41.9
percent compared to an effective income tax rate for the same period last year
of 40.3 percent. The increase in the effective tax rate is due to changes in the
currency exchange rates and a lower German tax rate that reduced the benefit of
STIP's net operating loss carry forwards.
8
FINANCIAL CONDITION AND LIQUIDITY
Operating activities generated $1,509,000 of cash flow during the current
quarter compared with $164,000 during the same period in the previous year. The
change in net operating assets was the primary reason for the improved cash
flow. An increase in accounts payable and a decrease in account receivables
provided $1,223,000 that was offset by an increase in inventory of $745,000.
This compares with the prior year where net operating assets consumed cash of
$1,252,000. We invested $1.8 million of cash in the current quarter for
investing activities compared to $0.4 million during the same period in the
previous year. The change was primarily due to investments made in marketable
securities during the current quarter. We reduced our short-term debt by
$170,000 during the current year compared to acquiring $130,000 of short-term
debt in the previous year.
At October 27, 2000, we had working capital of $18.6 million and a current ratio
of 3.6:1. At quarter-end, our total debt was $3.9 million with $1.0 million
payable within the next year. In addition, we had lines of credit with various
banks totaling $7.0 million of which $5.4 million was available for future
business needs.
MARKET RISK
Interest rate risk and currency exchange risks are the primary market risks to
which we are exposed. 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 October 27, 2000, we had approximately $3.9
million of fixed rate long-term debt. In addition, we had $7.0 million of
variable rate credit facilities of which 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.
Related to currency exchange, international sales of our United States based
operations are denominated in U.S. dollars and international sales of our German
subsidiary are denominated in Deutsche marks. The currency exchange risk at the
current level of activity is not material to our operating results or financial
position. Our market risk resulting from the translation of the profit and loss
of STIP and from our permanent investment in our foreign subsidiaries is not
material.
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 the market
conditions and the competitive environment. The general level of inflation in
the U.S. and German economies has been relatively low for the past several years
and has not, to date, had a significant effect on our company.
9
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 3. Legal Proceedings.
On November 28, 2000, the Company entered into an agreement with Baan USA, Inc.
to settle outstanding litigation originally filed against Baan on March 31, 2000
in the District Court for Lancaster County, Nebraska. The settlement amount was
$425,000.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on 8-K
On October 25, 2000, Form 8-K, which included the required financial
statements, was filed. The Form 8-K provided disclosure of the sale of
net assets of Geomation, Inc. a wholly owned subsidiary of Isco, Inc.
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: December 7, 2000 BY /s/ Robert W. Allington
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Robert W. Allington, Chairman and
Chief Executive Officer
Date: December 7, 2000 BY /s/ Vicki L. Benne
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Vicki L. Benne, Treasurer and
Chief Financial Officer
10