UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended July 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the Transition Period From _______________ to _______________
Commission File No 0-14429
Isco, Inc.
----------------------------------------------------
(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)
Registrant's telephone number, including area code: (402) 464-0231
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
-------------------------
(Title of Class)
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 10-K. [ ]
Indicate by check mark whether 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
---
As of October 15, 1999, 5,643,992 shares of Common Stock of Isco, Inc., were
outstanding and the aggregate market value of such Common Stock held by
nonaffiliates was approximately $12,645,866.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held December 9, 1999 -
Part III.
1
PART I
ITEM 1. BUSINESS.
GENERAL
Isco, Inc. was founded in 1959. We design, manufacture, and market products
worldwide. The majority of our revenues come from sales of products used by
industry and government to monitor compliance with water quality regulations and
a variety of research and testing laboratories.
Robert W. Allington, the founder of Isco, Inc., has been the controlling
shareholder, chairman of the board, and chief executive officer since inception.
Mr. Allington was president until October 6, 1995. Douglas M. Grant has been our
president and chief operating officer since October 6, 1995.
Our principal offices are located at 4700 Superior Street, Lincoln, Nebraska
68504-1398. Our telephone number is (402) 464-0231. As used herein, "Isco",
"we" or "our" refers to Isco, Inc., and its subsidiaries. "Isco-Lincoln"
refers to the activities and operations conducted by Isco, Inc.
Geomation, Inc. is a wholly owned subsidiary operating out of Golden, Colorado.
Isco, Inc. acquired a minority ownership position in fiscal year 1993 and
acquired the remaining equity during fiscal year 1998. Geomation designs,
manufactures, and markets measurement, data logging, and control systems for the
geotechnical and environmental markets. More than 70 percent of its sales are in
dam monitoring applications. Geomation's core technology and expertise is in
field collection, logging, and transmission of data.
STIP Siepmann und Teutscher GmbH (STIP) is a wholly owned subsidiary operating
out of Gross-Umstadt, Germany. Isco, Inc. acquired this entity during the
second quarter of fiscal year 1998. STIP designs, produces, and markets a broad
line of process monitoring and control instrumentation designed specifically for
municipal and industrial wastewater treatment applications. These products
assist our wastewater treatment customers in reducing operating costs and in
reliably managing the wastewater treatment process.
Isco, Inc. is a 50 percent partner in Advanced Flow Technologies Partnership,
Ltd. (AFTCO), a limited partnership, located in Lakeland, Florida. This
partnership was formed during fiscal year 1998. AFTCO designs, manufactures, and
markets electromagnetic full-pipe flow meters. Isco, Inc. is AFTCO's
distribution channel into the wastewater treatment market.
PRODUCTS AND APPLICATIONS
The contribution made by our core products to net sales for fiscal 1999, 1998,
and 1997, respectively, is as follows: wastewater samplers 33, 36, and 40
percent; open-channel and full-pipe flow meters 25, 21, and 23 percent; and
liquid chromatography (LC) products 14, 13, and 14 percent.
Isco's water quality customers use wastewater samplers to collect water samples
from surface waters and sewers for subsequent analysis in the laboratory. Our
open-channel flow meters are used to measure and record the flow rate of liquids
in unpressurized pipes and open channels. These flow meters can be linked with
wastewater samplers to collect water samples based on flow rate. The combined
use of these two products is well suited to conduct storm water runoff studies
in compliance with federal regulations. Cities may use our computer-based flow
logging systems and sophisticated Flowlink-TM- software to determine the state
of repair of their sewer systems. Other customers use those systems to store
flow, rainfall, and other sample data for later retrieval, analysis, and
reporting.
2
Isco's research customers include analytical laboratories that support the
development and manufacture of food, chemical, and pharmaceutical products as
well as those that study disease and basic life functions and environmental
quality. These liquid chromatography customers use pumps to deliver solvent
through columns packed with special media to separate a sample into its
component molecules. They then use our detectors to identify and quantify the
component molecules. Our fraction collectors are used to collect the separated
component molecules as they flow from the column. Combinatorial chemistry
applications for drug discovery use fully automated Isco ComiFlash-TM- systems
to sample, separate, detect, and collect purified fractions.
Other products which we believe will contribute to our future success include:
process monitoring analyzers; supercritical fluid extraction (SFE) products;
data logging and communication instruments; syringe pumps; and electromagnetic
full-pipe flow meters.
Wastewater treatment customers use our process monitoring analyzers to
continuously monitor and control the treatment process to ensure that it is
proceeding efficiently within established parameters. Our process monitors
quickly detect the presence of a variety of organic compounds. This allows the
plant operator to control operating costs and ensures high water quality.
SFE is a safe, cost-effective, environmentally friendly, and time saving
technique used to separate selected chemical compounds (target analytes) from
complex sample matrices. Our food and agri-products customers use SFE to ensure
that their products are maintained at a specified level of quality.
Our syringe pumps are used for specialized applications in the petroleum and
chemical industries, and for pumping supercritical fluids where high accuracy at
high pressures is required. At the beginning of fiscal 1997, Isco introduced a
line of electromagnetic full-pipe flow meters that we believe will be a
cost-effective alternative to existing electromagnetic and other full-pipe flow
meters.
The U.S. price range of individual products within our core products are $1,500
to $50,000 for water quality monitoring instruments and $300 to $20,000 for most
separation instruments.
MARKETING AND SALES
In the United States, independent manufacturers' representatives sell our water
quality monitoring products. Domestic sales of chemical separation instruments
are made by internal sales people assigned to specific products and located in
the prime domestic market areas. The manufacturers' representatives and our
internal sales people are supported with promotional programs, advertising,
applications specialists, applications bulletins, technical literature, and
applications seminars.
International sales constituted 28, 28, and 25 percent of our sales during
fiscal 1999, 1998, and 1997, respectively. We have not been adversely affected
by foreign currency fluctuations because all of our international sales are
denominated in the functional currency of the selling facility. Products
manufactured in the United States are not generally stocked outside the country.
Orders are filled from the facility that produces the product. To aid
international sales, many of our products are offered in multiple language
versions.
Isco's international sales are made primarily by independent dealers operating
in various countries around the world. The international dealers for our water
quality products in Europe and the Middle East are managed by the staff of Isco
Instruments (Europe) GmbH, the wholly owned Swiss subsidiary of Isco, Inc. The
dealers in the Asia-Pacific region are managed by an Isco employee residing in
the Philippines. Our other independent international dealers are supervised by
management in Lincoln, Nebraska and in Gross-Umstadt, Germany.
STIP sells directly in its home market of Germany. Sales of the STIP analyzers
in the USA are made by our manufacturers' representatives supervised by
management in Lincoln.
3
CUSTOMERS
Isco has a broad customer base. Currently no single customer, including any OEM
customer, accounts for more than three percent of our sales.
PRODUCT WARRANTY
The majority of our products have a one year warranty against defective
materials and workmanship. Our warranty claims have not been material in the
past and are not expected to be material in the future. We provide after-market
factory service for most products. We also provide on-site services in the
United States for process monitoring analyzers and automated SFE systems.
Customers may purchase an extended warranty for selected products at the time
they purchase a new instrument or while the instrument is still under warranty.
COMPETITION
We believe we have a strong competitive position in the markets for wastewater
samplers, open-channel flow meters, and SFE. We maintain a competitive position
in the LC market. The factors that contribute to our competitive position
include: a reputation for quality and service, technically advanced products
that provide cost-effective operation and unique features, an active research
and development program that allows us to maintain technical leadership, a
strong position in key markets, efficient production capabilities, and excellent
distribution capabilities.
Isco has several competitors manufacturing similar wastewater samplers. In the
United States, the major competitor is American Sigma, Inc., owned by the
Danaher Corporation. We estimate that we have approximately 40 percent of the
domestic wastewater sampler market, with American Sigma, Inc., having
approximately 30 percent. Other domestic competitors are small and offer little
competition. Significant competitors in Europe include; Buhler-Montec,
owned by the Fairey Group plc of the United Kingdom, and Endress + Hauser
Instruments of Switzerland.
There are numerous suppliers in the domestic open-channel flow meter market.
Based upon market information we believe to be accurate, Isco along with
Marsh-McBirney, Inc., Milltronics, and American Sigma, Inc. each hold
approximately 20 percent of the United States open-channel flow meter market.
Additional significant competitors in Europe include: Buhler-Montec and
Endress + Hauser Instruments.
With respect to low-pressure LC products, we believe we are a major producer of
fraction collectors. The largest low pressure LC competitor is Amershem
Pharmacia Biotech UK Ltd. Amersham Pharmacia Biotech has a greater market share
in international markets. However, for selected instruments sold in the United
States, our market share is comparable to that of Amersham Pharmacia Biotech.
Other major competitors are Bio-Rad Laboratories, Inc., and Gilson Medical
Electronics, Inc., an American-based company with much of its production in
France.
There are a number of suppliers for the process monitoring and control market
with market share varying from country to country. Limited information is
available, however we believe that the primary competitors are two German
companies: Dr. Lange, a subsidiary of the Danaher Corporation, and LAR Analytik
& Umwelt Messtechnik GmbH.
In the SFE equipment market, Isco is the market leader with approximately 40
percent market share. Management estimates that its competitors Applied
Separations, Inc. and Leco Corporation each have a market share of less than 20
percent, with the remaining market served by specialty engineering concerns.
In the geotechnical market, Isco's primary competitor is Campbell Scientific
Inc. In this market, the two companies have approximately equal market share.
With respect to syringe pumps, market share is difficult to estimate due to the
various niche markets we service. In the United States, our major competitor is
Quizix, Inc. We believe that Isco holds a dominant position relative to Quizix,
Inc. in all but one niche market.
4
RESEARCH AND ENGINEERING
Isco commits significant resources to ongoing research and engineering
activities. Our near-term goals are to improve, enhance, and expand the market
share of our existing product lines. Over the long-term, we are seeking new
market applications for our products as well as exploring present and related
markets that could utilize new products developed from our expanding technology
base. For fiscal years 1999, 1998, and 1997, we spent approximately $6,030,000
or 12 percent of sales, $6,315,000 or 13 percent of sales, and $4,526,000 or 11
percent of sales, respectively, on research and engineering.
PATENTS AND LICENSES
We believe we derive a competitive advantage from our patents. We have a policy
of obtaining patents wherever commercially feasible. We also vigorously assert
and defend our patents. Our products are covered by 69 United States patents, 67
of which are owned by Isco, and 2 under which we are the licensee. There are
also numerous corresponding patents issued by other countries. Our patents have
been assigned to us by the inventor on a royalty-free basis. We currently have
22 patent applications pending at the United States Patent Office.
REGULATION
Management believes Isco is in compliance with current environmental
regulations. Therefore, no unfavorable impact on competition or earnings is
expected. We have no government contracts that are subject to re-negotiation of
profits upon contract completion. Although our products are not subject to
significant U.S. government regulation, the markets for many of our products are
regulation driven.
BACKLOG
On September 24, 1999, Isco's order backlog was $6,234,000, of which
approximately 90 percent is scheduled for delivery prior to July 28, 2000, the
close of fiscal 2000. A year earlier, on September 25, 1998, the order backlog
was $4,859,000.
MANUFACTURING AND SOURCES OF SUPPLY
Isco-Lincoln's manufacturing operations are vertically integrated. We fabricate
most of the metal and plastic components used in our products and obtain the
required raw materials from several sources. Since we are not reliant upon
outside suppliers for these types of components, we are generally able to
produce them at a lower cost and maintain a consistently high level of quality.
Products produced by Isco-Lincoln use a variety of mechanical, electrical, and
electronic components. Most of these components are available from several
sources. Currently, we are not experiencing any shortage of raw materials or
components.
Isco-Lincoln uses a sophisticated computerized production control system. Based
on anticipated demand, inventory position, and production capacity, the system
determines the raw material and component requirements, the dates when these
materials are needed, and the dates production must begin in order to complete
the products on time. Through the use of production scheduling techniques, the
system enables us to control both labor and inventory costs.
Geomation's and STIP's manufacturing operations consist mainly of final assembly
and testing, with all other processes outsourced. Currently, we have not
experienced any shortages. Production planning is handled by computerized
production control systems which ensure that raw materials and sub-component
parts are received on time for final assembly.
5
EMPLOYEES
On September 24, 1999, we had 486 employees of whom 48 were leased or
temporary. There were 249 engaged in production, 67 in research and
engineering, 112 in marketing and sales, and 58 in administration. None of
our employees are represented by a labor union. We have never experienced a
work stoppage.
ITEM 2. PROPERTIES.
During this past August, we completed the expansion and renovation of our
Superior Street facility. We added approximately 56,000 square feet to the
existing main building, bringing the total square footage for all the
facilities at this location to approximately 168,000 square feet. The more
efficient layout of the renovated facility; the installation of space saving
and more efficient equipment; and an open office environment will allow us to
perform our operations using less floor space. The operations that were
housed in the existing Westgate facility have been relocated to the Superior
Street facility, which now houses our corporate, executive and administrative
offices along with our sales, research, engineering, manufacturing, and
maintenance activities. The buildings at 4700 Superior Street in Lincoln,
Nebraska are located on approximately 30 acres. The building at 531 Westgate
Boulevard, Lincoln, Nebraska contains approximately 156,000 square feet of
space and is located on approximately 10 acres. The Westgate property was
placed on the market early in fiscal 1999. Both facilities are owned and
unencumbered.
In August 1999, Geomation relocated from its existing leased location containing
7,092 square feet of space to a new location containing 8,089 square feet of
space in Golden, Colorado. The facility houses the engineering, manufacturing,
marketing, selling, and administrative activities of Geomation. The lease for
the new space expires August 31, 2004.
STIP leases 1,424 square meters in a building located in Gross-Umstadt,
Germany. The facility houses the engineering, manufacturing, marketing, sales,
and administrative activities of STIP. The lease expires December 31, 2000 and
STIP has the option to extend the lease for an additional three years.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings that, in the opinion of outside counsel, would
have a material impact on either the financial condition or operating results of
Isco.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1999, no issues were submitted to a vote of
shareholders.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
Common stock data: On September 24, 1999 - 5,643,992 shares outstanding and
approximately 309 shareholders of record.
Market: NASDAQ/NMS (Over-the-counter). Symbol: ISKO
Stock price: The high and low bid prices of the common stock and the cash
dividends paid for each quarter during the last two fiscal years are shown
below:
- --------------------------------------------------------------------------------------------------------------------
Common Stock Price Range Cash Dividends
--------------------------------------------------------- Per Share
1999 1998
---- ---- ---------
High Low High Low 1999 1998
---- --- ---- --- ---- ----
First quarter $6.75 $4.09 $10.25 $8.13 $.05 $.05
Second quarter 6.00 4.41 9.25 8.69 .05 .05
Third quarter 5.88 4.25 9.50 8.25 -- .05
Fourth quarter 6.63 5.00 9.00 6.31 -- .05
- --------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA.
Amounts in thousands except per share data.
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
FOR THE FISCAL YEAR:
Net sales $51,911 $47,912 $40,733 $39,981 $41,784
Gross margin 27,195 26,345 22,760 22,191 24,606
Operating income (loss)* (1,267) (2,510) 12 (115) 3,708
Non-operating income 329 860 1,565 1,462 1,437
Income taxes (tax benefit) (303) (453) 251 360 1,571
Net earnings (loss) (635) (1,197) 1,326 987 3,574
AT FISCAL YEAR-END:
Current assets 23,906 25,143 28,958 21,414 25,292
Working capital 16,023 19,022 25,255 17,437 22,529
Total assets 53,325 49,617 46,708 46,704 45,766
Long-term debt 3,996 690 -- -- --
Shareholders' equity 41,446 42,806 42,480 42,002 42,002
Average shares outstanding 5,645 5,607 5,351 5,353 5,370
PER SHARE DATA:
Basic earnings (loss) per share $(.11) $(.21) $.25 $.18 $.67
Cash dividends per share (declared) $ .10 $ .20 $.20 $.20 $.20
- -------------------------------------------------------------------------------------------------------------------
* Fiscal 1996 includes restructuring charges of $1,752,000 associated with the
consolidation of the divisions.
7
ITEM 7. 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 THROUGHOUT THIS DOCUMENT AS A RESULT OF THE
FACTORS SET FORTH BELOW IN THE SECTION ENTITLED "FACTORS EFFECTING FUTURE
RESULTS" AND ELSEWHERE IN THIS DOCUMENT.
All references to years mean our fiscal year.
SALES ANALYSIS AND REVIEW
1999 TO 1998 COMPARISON
Our 1999 sales of $51,911,000 were eight percent above 1998 sales of
$47,912,000. Approximately 40 percent of the year-over-year sales increase is
the result of a full year's sales contribution of STIP which was acquired
during the second quarter of last year. Sales of our core products
(wastewater samplers, flow meters, and liquid chromatography products) were
up 10 percent. Flow meters accounted for approximately 78 percent of this
increase, with liquid chromatography accounting for the remainder. Sales of
samplers were comparable with last year. Sales of our other products (process
monitoring, supercritical fluid extraction (SFE), syringe pumps, Geomation,
and STIP products) were eight percent higher. Excluding STIP, sales of other
products were down 11 percent. This decline was due to lower sales of syringe
pumps partially offset by an increase in process monitoring.
U.S. sales of our core products increased 11 percent over 1998, with flow
meters accounting for the majority of this increase. International sales of
these products increased seven percent. Liquid chromatography accounted for
approximately 60 percent of the increase with flow meters accounting for the
remainder. U.S. sales of our other products were approximately the same as
the prior year. We generated increases in all groups except syringe pumps.
International sales of our other products grew by 10 percent. Excluding sales
of STIP products, international sales of other products were down 32 percent.
Sales of SFE and Geomation products accounted for the majority of the
decrease.
Net orders of $54,111,000 were received during 1999, an increase of 14
percent compared with 1998. The backlog at July 30, 1999 was $5,789,000, up
31 percent from the beginning of the year. As of September 24, 1999, our
backlog was $6,234,000. We expect to deliver approximately 90 percent of this
backlog prior to July 28, 2000, the end of fiscal 2000.
1998 TO 1997 COMPARISON
Our 1998 sales of $47,912,000 were 18 percent above 1997 sales of
$40,733,000. Included in 1998's results were Geomation sales of $2,351,000
and STIP sales of $1,641,000. Compared with the previous year, sales of our
core products (wastewater samplers, open-channel flow meters, and liquid
chromatography products) were eight percent higher with all three product
groups contributing to this increase. Sales of our other products (process
monitoring, supercritical fluid extraction (SFE), syringe pumps, Geomation,
and STIP products) were 68 percent higher. Excluding Geomation and STIP,
sales were six percent higher with syringe pumps accounting for this increase.
U.S. sales of our core products increased eight percent over 1997 with all
three groups contributing to this increase. International sales of these
products increased nine percent with samplers accounting for the majority of
the increase. U.S. sales of our other products increased 65 percent in 1998.
Geomation accounted for 58 percent of the increase. Excluding Geomation,
sales increased 28 percent with syringe pumps accounting for the majority.
International sales of our other products increased 70 percent. Excluding
Geomation and STIP, sales were down 15 percent. Sales of process monitoring
products accounted for the majority of the decline.
8
Net orders of $47,473,000 were received during 1998, an increase of nearly 13
percent compared with 1997. Our July 31, 1998 order backlog of $4,420,000,
including the combined Geomation and STIP backlog of $750,000, was up 15
percent from the beginning of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
The following table summarizes, for the three years indicated, the
percentages which certain components of the Consolidated Statements of
Operations bear to net sales and the percentage change of such components
(based on actual dollars) compared with the prior year.
- -------------------------------------------------------------------------------------------------------------------
Year-to-Year
Increase(Decrease)
-------------------
Year Ended 1999 1998
----------------------------
Jul 30 Jul 31 Jul 25 vs. vs.
1999 1998 1997 1998 1997
------ ------ ------ ----- ------
Net sales 100.0 100.0 100.0 8.3 17.6
Cost of sales 47.6 45.0 44.1 14.6 20.0
------ ------ ------
52.4 55.0 55.9 3.2 15.8
------ ------ ------
Expenses:
Selling, general, and administrative 43.2 47.0 44.8 (.5) 23.7
Research and engineering 11.6 13.2 11.1 (4.5) 39.5
------ ------ ------
54.8 60.2 55.9 (1.4) 26.9
------ ------ ------
Operating income (loss) (2.4) (5.2) -- 49.5 --
------ ------ ------
Non-operating income
Investment income .6 1.1 2.4 (37.6) (46.4)
Interest expense (.6) (.2) (.1) 264.7 80.9
Other .6 .9 1.5 (25.9) (33.7)
------ ------ ------
.6 1.8 3.8 (61.7) (45.0)
------ ------ ------
Earnings (loss) before income taxes (1.8) (3.4) 3.8 43.2 --
Income taxes (tax benefit) (.6) (.9) .6 (33.1) --
------ ------ ------
Net earnings (loss) (1.2) (2.5) 3.2 47.0 --
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
1999 TO 1998 COMPARISON
We incurred an operating loss of $1,267,000 for fiscal 1999 compared with a
loss of $2,510,000 for fiscal 1998. All entities contributed to the current
year's loss. The gross margin, as a percentage of sales, declined from 55.0
percent in 1998 to 52.4 percent in 1999. The current year's lower gross
margin is a result of increased sales discounts and increased indirect
manufacturing costs associated with the Isco-Lincoln operations, and the
increase in STIP's contribution to the overall entity at a lower gross
margin. Isco-Lincoln's indirect manufacturing costs increased due to
additional costs incurred in support of the consolidation and relocation of
the manufacturing operations, the initiation of process improvement
activities, and activities associated with upgrading and converting data
related to the Superior Street facility's operating system.
Our selling, general, and administrative (SG&A) expenses, as a percentage of
sales, declined from 47.0 percent to 43.2 percent. Selling expenses, as a
percentage of sales, for all of the Company's entities, declined when
compared with last year. Selling expenses last year, included costs related
to the acquisition of Geomation and STIP, and higher amortization expenses.
During the current year, management was able to reduce the selling expenses
at STIP. Our general and administrative (G&A) expenses, as a percentage of
sales, increased when compared with last year. Last year G&A expenses of
Isco-Lincoln included the write-off of the Suprex intangibles that were
offset in the current year with the costs associated with making our
operating system Y2K compliant and with the settlement costs of the patent
infringement litigation. In addition, the G&A expenses of STIP and Geomation
increased.
9
Engineering expenses, as a percentage of sales, were 11.6 percent for fiscal
year 1999 compared with 13.2 percent for fiscal 1998. This is due to reduced
development activities that were nearing completion during the current fiscal
year. Last year's expenses included a one-time charge for "purchased R&D"
related to the acquisition of Geomation.
Investment income decreased 37.6 percent and interest expense increased 264.7
percent compared to last year. These changes were due to the continued sale
of investments that began last year and the acquisition of debt during the
current year to meet the cash needs for the expansion/renovation of the
Superior Street facility and the business software system. Other
non-operating income was down 25.9 percent due to the disposition of building
components related to the building renovation and a loss from the AFTCO joint
venture.
We realized a tax benefit of $303,000 for the current year compared with a
tax benefit of $453,000 last year. The current year's benefit was primarily
the result of the operating loss incurred. The current year included a
benefit from adjustments in prior years' state and federal tax estimates.
This benefit was offset by the establishment of a valuation allowance against
the tax benefits realized from the current year's operating losses incurred
by STIP and Geomation. Last year's benefit was primarily a result of the
operating loss generated.
1998 TO 1997 COMPARISON
We incurred an operating loss of $2,510,000 for fiscal year 1998 compared
with operating income of $12,000 in 1997. During 1998's product planning
review, it was determined that the capitalized intangibles arising out of the
Suprex acquisition had no remaining value for Isco. Only two of the former
Suprex products remained in the SFE product line. These two products were
only marginally viable because they were intended for market niches that
continue to require significant investment in methods development. These
market niches are outside the food market where we focus our SFE products. As
a result of these conditions, $1,021,000 of Suprex intangibles, including
goodwill were written-off with $603,000 charged to G&A, $263,000 charged to
selling, and $155,000 charged to engineering. In addition, we established an
inventory reserve of $625,000 against the year-end inventory of Suprex
product and components.
The gross margin, as a percent of sales, declined to 55.0 percent in 1998
from 55.9 percent in 1997. The decline was primarily the result of an
increase in indirect wages and benefits, and the inventory reserve discussed
above. The increase in benefits was the result of an increase in the cost of
self-funded health benefits and the 1997 anomaly of reduced health care costs
resulting from a plan-year change and our negotiation with our insurer for
17-month vs. normal 12-month specific "stop loss" coverage that provided for
significant recovery of health care costs in 1997. This also affected the
other functional areas reported below.
Our SG&A expenses, as a percentage of sales, increased to 47.0 percent in
1998 from 44.8 percent in 1997. Selling expenses increased as a percentage of
sales compared to last year. The increase occurred in the areas of salaries
and benefits for increased staff; increased advertising; materials and
supplies; and commissions to dealers and manufacturers' representatives. G&A
expenses also increased and were related to the implementation of the BaaN
enterprise resource planning (ERP) software; increased maintenance and
depreciation due to the upgrading of computer systems; increased salaries and
benefits; and the termination of an international dealer that resulted in the
write-off of related accounts receivable.
Our engineering expenses, as a percentage of sales, increased to 13.2 percent
in 1998 from 11.1 percent in 1997. This increase was related to the increase
in sub-contracted engineering services; increased salaries and benefits due
to increased staffing; and increased expenditures for materials and supplies.
Also included in this increase was $302,000 for "purchased R&D" resulting
from the Geomation acquisition.
Our 1998 investment income was reduced significantly as investments were sold
to meet the cash needs of our acquisition and facilities expansion
activities. Compared with an effective income tax rate of 15.9 percent for
1997, in 1998 we realized an income tax benefit resulting primarily from the
operating loss.
10
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $1,430,000 of cash flow during fiscal 1999
compared with $3,238,000 during fiscal 1998. The decline in cash flows was
due primarily to the increase in accounts receivable, which resulted from
strong sales performance near the close of the fiscal year. The increase in
accounts receivable was partially offset by a decrease in inventory. During
1999, we invested $3.8 million in the expansion and renovation of the
Superior Street facility and $5.3 million in equipment and software. These
activities were funded by the sale of investments and acquisition of debt.
At July 30, 1999, we had working capital of $16 million and a current ratio
of 3.0:1. We added a $5 million term loan to our capital structure during the
year. At year-end, our total debt was $5,176,000 with $1,180,000 payable next
year. In addition, we had lines of credit with various banks totaling $6.9
million of which $5.3 million was available for future business needs.
FUTURE EVENTS
In 1995, management acknowledged that the change of 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?
During this past fiscal year, each location either completed the upgrade of
its existing operating system and software or installed a new operating
system. In 1996, management decided that a new operating system for the
Isco-Lincoln operation would improve our future operational efficiency in
addition to resolving the Y2K compliance issue. Early in 1998, the BaaN
software operating system was selected as our future ERP system. That system
was scheduled to go on line early in the fourth quarter of fiscal 1999.
During the third quarter, management determined that it was in the best
interests of the company to temporarily suspend further work on the
implementation of the BaaN system because of continual instability problems.
We immediately began the search for a new BaaN implementation firm to assist
us in determining the cause(s) of the instability. Due to the uncertainty
surrounding BaaN, management determined that we must immediately begin the
process of upgrading one of our existing operating systems and software in
order to make it Y2K compliant. This process was completed on schedule, in
early fiscal 2000, and we are currently operating the business on a Y2K
compliant system. Management believes the upgrading of the existing operating
system and software does not provide a long-term solution for the company. We
currently are evaluating our longer-term options, focusing on reactivating
the suspended BaaN project.
The total amount invested, excluding internal labor costs, prior to the
suspension of the BaaN implementation was approximately $3.0 million. The
cost of bringing our existing systems into Y2K compliance was approximately
$500,000, most of which was expensed in the fourth quarter of 1999.
Our current products, with few exceptions, are compliant with Isco's Year
2000 Product Compliance Policies. The majority of our discontinued products
that still may be in service are compliant with our Y2K policies and those
that are not compliant have reasonable Y2K step-around procedures. We,
therefore, believe our liabilities are limited with respect to our products
being Y2K compliant.
We have contacted key vendors and have obtained assurance that product and
services provided by these vendors will not be affected after December 31,
1999.
No single customer accounts for more than three percent of our sales.
Therefore, we believe that any customer's inability to submit orders for our
products will have a minimal effect on our business.
11
FACTORS AFFECTING FUTURE RESULTS
Our future performance will be affected by the following factors: improved
sales growth; improvement of gross margins; controlled operating expenses;
integration of acquisitions; dealing with the external regulatory influences
on our primary markets; and dealing with the effect of the consolidation of
companies within the instrumentation industry.
During fiscal 2000, we will address these factors. We will focus on those
marketing and selling activities that will profitably grow our sales. We will
improve our gross margins through manufacturing process improvements and
controlling manufacturing overhead costs. In addition, we will be very
diligent in controlling operating expenses.
We will selectively invest in the development of products that will
contribute significantly to profitable sales growth or maintain our dominant
market position. We must also develop the marketing strategies which will
focus energy and resources in those areas which will allow our company to
grow sales profitably, thereby leveraging and diluting our fixed cost
structure.
The environmental market accounts for approximately 70 percent of our sales.
This is a regulation driven market that is strongly influenced by both the
perceived attitude and actions of various governmental agencies in the
promulgation and enforcement of environmental regulations. The effects of the
regulatory climate on the market are outside our ability to control and, for
any given period, may be either a positive or negative factor on our
performance.
As in many industries, consolidation of companies within our market is
on-going. As a result, we are dealing with the effects of larger, well
financed competitors who also have the organizational resources to compete
aggressively in the global market place.
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 July 30, 1999, we
had approximately $4.5 million of fixed rate debt. In addition, we had $6.9
million of variable rate credit facilities, of which approximately $1.6
million was outstanding under these credit facilities. We do not believe that
changes in interest rates on the debt and credit facilities would have a
material effect on our results of operations, given our current obligations
under these 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 our costs and our 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.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Isco, Inc.
We have audited the accompanying consolidated balance sheets of Isco, Inc.
and subsidiaries as of July 30, 1999 and July 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended July 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Isco, Inc. and subsidiaries as
of July 30, 1999 and July 31, 1998, and the results of their operations and
their cash flows for each of the three years in the period ended July 30,
1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Lincoln, Nebraska
October 1, 1999
13
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended
-----------------------------------------
July 30 July 31 July 25
1999 1998 1997
--------- ---------- -----------
Net sales $51,911 $47,912 $40,733
Cost of sales 24,716 21,567 17,973
--------- ---------- -----------
27,195 26,345 22,760
--------- ---------- -----------
Expenses:
Selling, general, and administrative 22,432 22,540 18,222
Research and engineering 6,030 6,315 4,526
--------- ---------- -----------
28,462 28,855 22,748
--------- ---------- -----------
Operating income (loss) (1,267) (2,510) 12
--------- ---------- -----------
Non-operating income:
Investment income 327 524 977
Interest expense (310) (85) (47)
Other 312 421 635
--------- ---------- -----------
329 860 1,565
--------- ---------- -----------
Earnings (loss) before income taxes (938) (1,650) 1,577
Income taxes (tax benefit) (Note H) (303) (453) 251
--------- ---------- -----------
Net earnings (loss) $ (635) $ (1,197) $ 1,326
--------- ---------- -----------
--------- ---------- -----------
Basic earnings (loss) per share $(.11) $(.21) $.25
--------- ---------- -----------
--------- ---------- -----------
Diluted earnings (loss) per share $(.11) $(.21) $.25
--------- ---------- -----------
--------- ---------- -----------
Weighted average number of shares outstanding 5,645 5,607 5,351
--------- ---------- -----------
--------- ---------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
14
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
July 30 July 31
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,423 $ 3,837
Short-term investments (Note C) -- 1,361
Accounts receivable, trade (Note B) 9,501 8,124
Inventories (Note D) 9,016 9,902
Refundable income taxes 383 279
Deferred income taxes (Note H) 1,134 1,023
Other current assets 449 617
-------- -------
Total current assets 23,906 25,143
Property, plant, and equipment (Note E) 20,019 15,658
Property held for sale 2,257 --
Long-term investments (Note C) -- 862
Deferred income taxes (Note H) 318 492
Other assets (Note F) 6,825 7,462
-------- -------
Total assets $53,325 $49,617
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,832 $ 1,915
Accrued expenses (Note G) 3,311 2,925
Income taxes payable -- 18
Short-term borrowing (Note I) 1,560 1,263
Current portion of long-term debt (Note J) 1,180 --
-------- -------
Total current liabilities 7,883 6,121
Long-term debt (Note J) 3,996 690
Commitments and contingencies (Note R)
Shareholders' equity (Notes K and P):
Preferred stock, $.10 par value, authorized 5,000,000
shares; issued none
Common stock, $.10 par value, authorized 15,000,000
shares; issued 5,643,992 and 5,672,092 shares 564 567
Additional paid-in capital 37,740 37,886
Retained earnings 3,152 4,352
Accumulated other comprehensive income (loss) (10) 1
-------- --------
Total shareholders' equity 41,446 42,806
-------- --------
Total liabilities and shareholders' equity $53,325 $49,617
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
15
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except per share data)
Accumulated
Additional other Total
Common paid-in Retained comprehensive Treasury shareholders'
stock capital earnings income (loss) stock equity
------ ---------- -------- ------------- -------- -------------
Balance, July 26, 1996 $598 $36,838 $ 6,428 $(198) $(1,664) $42,002
Net earnings 1,326 1,326
Unrealized investment gain 212 212
-------------
Total comprehensive income 1,538
Cash dividends ($.20 per share) (1,071) (1,071)
Issuance of common stock 8 3 11
------ ---------- -------- ------------- -------- -------------
Balance, July 25, 1997 $598 $36,846 $ 6,683 $ 14 $(1,661) $42,480
Net loss (1,197) (1,197)
Unrealized investment loss (10) (10)
Translation adjustments (3) (3)
-------------
Total comprehensive loss (1,210)
Cash dividends ($.20 per share) (1,134) (1,134)
Issuance of common stock 32 2,612 2,644
Issuance of director options 26 26
Retirement of treasury stock (63) (1,598) 1,661 --
------ ---------- -------- ------------- -------- -------------
Balance, July 31, 1998 $567 $37,886 $ 4,352 $ 1 $ -- $42,806
Net loss (635) (635)
Unrealized investment loss (4) (4)
Translation adjustments (7) (7)
-------------
Total comprehensive loss (646)
Cash dividends ($.10 per share) (565) (565)
Acquisition of common stock (3) (163) (166)
Issuance of director options 17 17
------ ---------- -------- ------------- -------- -------------
Balance, July 30, 1999 $564 $37,740 $ 3,152 $ (10) $ -- $41,446
====== ========== ======== ============= ======== =============
The accompanying notes are an integral part of the consolidated financial
statements.
16
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(columnar amounts in thousands)
Year Ended
------------------------------
July 30 July 31 July 25
1999 1998 1997
--------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (635) $(1,197) $ 1,326
Adjustments to reconcile net earnings (loss) to net cash flows
from operating activities:
Depreciation and amortization 2,415 2,784 2,234
Deferred income taxes 62 (839) (32)
(Gain) loss on sale of investments (4) 61 86
Gain on sale of property, plant, and equipment (222) (270) (268)
Provision for doubtful accounts (11) 207 126
Loss on impairment of assets (Note F) -- 1,646 --
Undistributed losses of AFTCO 254 93 --
Change in operating assets and liabilities:
Accounts receivable, trade-(increase) decrease (1,367) 1,622 (1,147)
Inventories-(increase) decrease 670 (837) (1,899)
Refundable income taxes-(increase) decrease (103) (210) (42)
Other current assets-(increase) decrease 254 144 207
Accounts payable-increase (decrease) (80) 237 87
Accrued expenses-increase (decrease) 390 213 (733)
Income taxes payable-increase (decrease) (18) (39) (115)
Other (175) (377) (93)
--------- ------- --------
Total adjustments 2,065 4,435 (1,589)
--------- ------- --------
Cash flows from operating activities 1,430 3,238 (263)
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity of available-for-sale securities 1,963 12,615 3,328
Proceeds from sale and maturity of held-to-maturity securities 250 500 770
Proceeds from sale of property, plant, and equipment 872 356 340
Purchase of available-for-sale securities -- (34) (556)
Purchase of property, plant, and equipment (9,016) (8,928) (1,394)
Issuance of note receivable -- (759) (305)
Purchase of subsidiaries and other acquisitions, net of cash acquired -- (4,159) (2,701)
Other 7 -- (758)
--------- ------- --------
Cash flows from investing activities (5,924) (409) (1,276)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (565) (1,134) (1,071)
Proceeds from borrowings 5,319 332 --
Repayment of debt (508) -- --
Purchase of common stock (166) -- --
--------- ------- --------
Cash flows from financing activities 4,080 (802) (1,071)
--------- ------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (414) 2,027 (2,610)
Balance at beginning of year 3,837 1,810 4,420
------- -------- --------
Balance at end of year $3,423 $ 3,837 $ 1,810
======= ======== ========
See Note M for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated financial
statements.
17
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended July 30, 1999, July 31, 1998, and July 25, 1997
(Columnar amounts in thousands, except share and per share data)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS. Isco, Inc. and its subsidiaries (the Company) design,
manufacture, and market products worldwide which are used by industry and
government to monitor compliance with water quality regulations and are used in
a variety of research and testing laboratories and by industry to monitor
product quality.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Isco, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated. Investments in
which the Company exercises significant influence over operating and financial
policies are accounted for using the equity method.
For fiscal reporting purposes, the Company operates under a 52/53 week year,
ending on the last Friday of July. Fiscal 1999 contained 52 weeks, 1998
contained 53 weeks, and 1997 contained 52 weeks.
USE OF ESTIMATES. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash, accounts
receivable, accounts payable, and short-term borrowing approximate fair value.
Investments are reported at fair value based on quoted market prices. The fair
value of long-term debt, which is based on the borrowing rates and terms
currently available to the Company, approximates carrying value.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash balances
and highly liquid investments with an original maturity of three months or less.
INVESTMENTS. The Company classifies investments into three categories
accounted for as follows: debt securities that the Company has the intent and
ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost; debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings; debt and equity securities not
classified as either held-to-maturity or trading are classified as
available-for-sale securities and reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of tax, as a
component of accumulated other comprehensive income. The Company held no
trading securities during the periods reported and generally does not trade
securities. Sales of available-for-sale securities are recognized using the
first-in, first-out method.
INVENTORIES. Inventories are valued at the lower of cost or market,
principally on the last-in, first-out (LIFO) basis.
LONG-LIVED ASSETS. The Company reviews long-lived assets and certain
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In such
cases, the expected future cash flows (undiscounted and without interest
charges) resulting from the use of the asset are estimated and an impairment
loss is recognized if the sum of such cash flows is less than the carrying
amount of the asset. Should such an assessment indicate that the value of a
long-lived asset or goodwill is impaired, an impairment loss is recognized
for the difference between the carrying value of the asset and its estimated
fair value. Impairments recognized by the Company during 1998 are discussed
in Note F.
18
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment are stated at
historical costs. Depreciation is provided using the straight-line and
declining balance methods over estimated useful asset lives of 10 to 40 years
for buildings and improvements and 3 to 20 years for machinery and equipment.
Property held for sale is stated at the lower of cost or net realizable value
and includes a building no longer used in the Company's operations. This
building was removed from service late in fiscal 1999.
OTHER ASSETS. Intangible assets are amortized on a straight-line basis over
estimated useful lives of 3 to 15 years. Intangibles include intellectual
property, engineering drawings, patents, licenses, customer or market lists,
and trade names.
REVENUE RECOGNITION. Sales of products, software and services are recorded
based on delivery of products and software or performance of services.
FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency of
the Company's wholly owned Swiss subsidiary. The Deutsche mark (DM) is the
functional currency of the Company's wholly owned German subsidiary. Exchange
gains and losses resulting from transactions denominated in currencies other
than the U.S. dollar are included in the results of operations for the year.
Assets and liabilities are translated to U.S. dollars at current exchange
rates as of each balance sheet date. Income and expense items are translated
using average exchange rates during the year. Cumulative currency translation
adjustments are presented as a component of accumulated other comprehensive
income. Transaction gains and losses and unrealized gains and losses on
intercompany receivables have not been material to date.
EMPLOYEE BENEFITS PLAN. Certain employee benefits, including the weekly
disability and medical protection plan and group insurance premiums are
funded by employee and Company contributions. Prior to January 1, 1998,
claims were paid by the Beneficial Employee Trust of Isco, a voluntary
employees beneficiary association, which was funded by employee and Company
contributions.
RESEARCH AND ENGINEERING COSTS. Research and engineering costs are expensed
as incurred.
INCOME TAXES. Income taxes are recorded using the liability method. This
method recognizes the amount of taxes payable or refundable for the current
year. Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts.
EARNINGS (LOSS) PER SHARE. Basic earnings (loss) per share is based on the
weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is based on the weighted average number of
common shares outstanding during the period and the dilutive effect of stock
options and common stock equivalents outstanding using the treasury stock
method. A reconciliation is provided in Note P.
COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for all periods
presented consists of net earnings (loss), unrealized gain (loss) on
securities available for sale, and foreign currency translation adjustments.
These results are incorporated into the Consolidated Statements of
Shareholders' Equity.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's presentation.
ACCOUNTING PRONOUNCEMENTS. In June 1998, Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued. This statement will become effective in the Company's
fiscal year 2001. The affect, if any, resulting from the adoption of this
statement is not presently known.
19
NOTE B. ALLOWANCE FOR DOUBTFUL ACCOUNTS.
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Allowance at beginning of period $286 $ 82 $ 72
Provision for doubtful accounts (11) 207 126
Accounts written-off (77) (75) (116)
------ ------ -------
Allowance at end of period $198 $286 $ 82
------ ------ -------
------ ------ -------
- -------------------------------------------------------------------------------------------------------------------
NOTE C. INVESTMENTS.
Proceeds from sales of available-for-sale securities during fiscal years 1999,
1998, and 1997 were $1,963,000, $2,648,000, and $3,328,000, respectively. Gross
gains of $4,000, $31,000, and $0 and gross losses of $0, $92,000, and $86,000,
were recognized in fiscal 1999, 1998, and 1997, respectively. As of July 30,
1999, the Company had liquidated all investment securities.
As of July 31, 1998:
- -------------------------------------------------------------------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
--------- ----------- ---------- ------ --------
Short-term investments:
Available-for-sale securities:
State and municipal securities $ 1,357 $ 4 $ -- $1,361 $ 1,361
-------- ---- ----- ------ -------
Total short-term investments 1,357 4 -- 1,361 1,361
-------- ---- ----- ------ -------
Long-term investments:
Held-to-maturity securities:
State and municipal securities 250 -- -- 250 250
Available-for-sale securities:
State and municipal securities 610 2 -- 612 612
-------- ---- ----- ------ -------
Total long-term investments 860 2 -- 862 862
-------- ---- ----- ------ -------
$ 2,217 $ 6 $ -- $2,223 $ 2,223
-------- ---- ----- ------ -------
-------- ---- ----- ------ -------
- -------------------------------------------------------------------------------------------------------------------
NOTE D. INVENTORIES.
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Raw materials $3,893 $3,831
Work-in-process 3,422 3,164
Finished goods 1,701 2,907
------- --------
$9,016 $9,902
------- --------
------- --------
-------------------------------------------------------------------------
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,214,000, and $1,377,000 higher than reported on the
LIFO basis at July 30, 1999 and July 31, 1998, respectively. Approximately 74
percent of inventory has been valued by the LIFO method at July 30, 1999 and
July 31, 1998, respectively.
20
NOTE E. PROPERTY, PLANT, AND EQUIPMENT.
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Land $ 413 $ 762
Buildings and improvements 10,956 9,297
Machinery and equipment 19,265 15,566
Software 1,607 1,571
Construction-in-progress 3,459 7,698
------- --------
35,700 34,894
Less accumulated depreciation 15,681 19,236
------- --------
$20,019 $ 15,658
------- --------
------- --------
----------------------------------------------------------------------------
NOTE F. OTHER ASSETS.
---------------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------------------------
Intangibles, net of accumulated amortization of $728,000 and $317,000 $3,051 $3,462
Investment in AFTCO, net of accumulated amortization of $100,000 and $25,000 1,058 1,386
Cash value of life insurance 1,358 1,060
Notes receivable due March 2008 at 8.0% - related party 1,000 1,000
Other 358 554
------- ------
$ 6,825 $7,462
------- ------
------- ------
---------------------------------------------------------------------------------------------------------
The Company's investment in Advanced Flow Technologies Partnership, Ltd.
(AFTCO) includes undistributed losses of $254,000 and $93,000 for fiscal
years 1999 and 1998, respectively.
Summarized financial information for AFTCO, since formation on March 31,
1998, is as follows:
----------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------------------------
Current assets $ 870 $1,140
Property and equipment, net 198 236
Current liabilities 301 64
Partners' capital 767 1,313
Net sales 1,357 495
Net loss 546 187
----------------------------------------------------------------------------------------------------------
The acquired Suprex product line failed to achieve the original projections
of operating performance. Furthermore, based on a reassessment of future
expectations of non-discounted cash flows and operating performance related
to the Suprex product line, management of the Company determined that certain
assets recorded in connection with the acquisition were impaired.
Accordingly, in fiscal 1998 an impairment charge was recorded for $1.6
million. This consisted of write-offs of intangibles of $1.0 million and
inventory reserves of $.6 million.
21
NOTE G. ACCRUED EXPENSES.
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Salaries, wages, and commissions $1,648 $1,287
Vacation/personal time 754 635
Property, payroll, and sales tax 532 365
Other 377 638
------ ------
$3,311 $2,925
------ ------
------ ------
----------------------------------------------------------------------
NOTE H. INCOME TAXES.
Income tax expense (benefit) consists of:
----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------
Federal:
Current $(309) $ 273 $215
Deferred 30 (771) (58)
State:
Current (28) 104 58
Deferred 32 (68) 26
International:
Current (28) 9 10
------- -------- ------
$(303) $(453) $251
------- -------- ------
------- -------- ------
----------------------------------------------------------------------------------------
The provision for income taxes is reconciled with the amount of income taxes
computed at the federal statutory rate as follows:
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
Computed "expected" federal tax expense (benefit) $(319) $(560) $ 536
Alternative minimum tax (AMT) -- 86 181
State income taxes, net of federal tax benefit (37) 7 72
International income taxes (28) 9 10
Exempt foreign sales corporation income -- (96) (111)
Tax-exempt income (29) (163) (265)
Permanent differences on intangibles 97 179 --
Prior years' federal & state income tax adjustments (193) (95) (139)
Other (14) 134 (33)
Change in valuation allowance 220 46 --
------ ------- -------
$(303) $(453) $ 251
------ ------- -------
------ ------- -------
---------------------------------------------------------------------------------------
22
The July 30, 1999 and July 31, 1998 components of deferred income tax assets and
liabilities resulting from temporary differences between financial and tax
reporting are as follows:
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------
Deferred assets:
Uniform capitalization of inventory costs $ 518 $ 510
Inventory valuation reserve 215 272
Vacation/personal time 178 179
Write-down of property 189 189
Reserve for doubtful accounts 68 81
Suprex intangibles 604 626
Net operating, capital and AMT credit loss carry forwards 831 736
Research and development credit carry forwards 225 143
Other 216 111
Valuation allowance (266) (46)
-------- ---------
Total deferred assets 2,778 2,801
-------- ---------
Deferred liabilities:
Depreciation 1,166 941
Prepaid expenses 160 210
Other -- 135
-------- ---------
Total deferred liabilities 1,326 1,286
-------- ---------
Net deferred assets $1,452 $1,515
-------- ---------
-------- ---------
---------------------------------------------------------------------------------------
At July 30, 1999, the Company had United States net operating loss carry
forwards of approximately $850,000 which expire in fiscal years 2003 through
2014 and an additional German net operating loss carry forward of $750,000
which is not subject to expiration. At July 30, 1999, the Company had a net
capital loss carry forward of approximately $150,000 which expires in fiscal
years 2000 through 2003. Realization of deferred tax assets associated with
the net operating loss and credit carry forwards is dependent upon generating
sufficient taxable income prior to their expiration. Although realization is
not assured for deferred tax assets, management believes it is more likely
than not that most deferred tax assets will be realized through future
taxable earnings or alternative tax strategies. For certain of the net
operating loss and tax credit carry forwards related to subsidiary
operations, management believes a greater degree of risk in realization
exists and portions may expire unused. Accordingly, management has
established a valuation allowance against them.
NOTE I. SHORT-TERM BORROWING.
At July 30, 1999, the Company had available $5,000,000 and $300,000 in lines
of credit expiring December 24, 1999 and December 1, 1999, respectively. The
$5,000,000 line is secured by inventory, accounts receivable, equipment, and
intangibles. The Company had no outstanding borrowings against its lines of
credit during the fiscal years ended July 30, 1999 and July 31, 1998.
The Company's German subsidiary, STIP Siepmann und Teutscher GmbH (STIP),
maintains a revolving credit agreement which provides for borrowing up to
DM3,000,000 (US$1,600,000) guaranteed by the Company. This agreement provides
for interest rates ranging from 4.7 percent to 8.5 percent and is renewable
on a quarterly basis. The amount outstanding at July 30, 1999 and July 31,
1998 was $1,560,000 and $1,263,000, respectively.
23
NOTE J. LONG-TERM DEBT.
Long-term debt at July 30, 1999 and July 31, 1998 consists of the following:
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Isco, Inc.
Note due December 2003, 6.50% $4,492 $ --
STIP
Note due March 2000, 7.50% 273 280
Note due June 2003, 7.50% 411 410
------ ----
5,176 690
Less current portion of long-term debt 1,180 --
------ ----
$3,996 $690
------ ----
------ ----
- -------------------------------------------------------------------------------------------------
In December of 1998, Isco, Inc. borrowed $5,000,000 from its primary
commercial bank. This term loan is repayable in equal installments over 60
months. The note is secured by inventory, accounts receivable, equipment, and
intangibles. The Company is in compliance with all terms of the loan
agreement.
At July 30, 1999, future principal payments due on debt in each of the next
five fiscal years are as follows: 2000, $1,180,000; 2001, $969,000; 2002,
$1,035,000; 2003, $1,516,000; 2004, $476,000.
NOTE K. STOCK OPTION PLANS.
Isco had three stock option plans in effect at July 30, 1999: the 1985
Incentive Stock Option Plan (1985 Plan), the 1996 Stock Option Plan (1996
Plan), and the 1996 Outside Directors' Stock Option Plan (1996 Directors'
Plan). Under each of these plans, options may be granted only during the 10
years following the inception of the plan.
In July 1985, the Company adopted the 1985 Plan, which authorized the future
issuance of up to 174,570 shares to officers and key employees. During fiscal
1997, the Company adopted the 1996 Plan, which authorized the future issuance
of up to 250,000 shares to officers, key employees, and designated
individuals. Under both plans, qualified options are to be granted at not
less than 100 percent of the fair market value of the common stock when
granted. The options are exercisable over a period not greater than 10 years
from the date of grant. A portion of the options are immediately exercisable
at date of grant and the remainder are contingent upon achieving specified
annual revenue and operating income targets. The 1996 Plan also authorized
the issuance of non-qualified options which may be granted at not less than
80 percent of the fair market value of the common stock when granted.
During fiscal 1997, the Company adopted the 1996 Directors' Plan, which
authorized the future issuance of up to 100,000 shares to non-employee
directors of the Company. The options are exercisable, at the date of grant,
over a period not greater than ten years. At the time the options are
granted, the fair value of the options is recorded as compensation expense
and this value is added to additional paid in capital.
24
Stock option activity under the Plans is as follows:
- -------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
-----------------------------------------------------------------------------------
1985 Plan 1996 Plan 1996 Directors' Plan
----------------- ---------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Option Price Shares Option Price Shares Option Price
------ ------------ ------ ------------ ------ ------------
Outstanding, July 26, 1996 153,190 $ 12.16 -- $ -- -- $ --
Granted -- -- 10,000 8.13 4,000 9.63
Canceled (18,745) 13.04 -- -- -- --
-------- ------ -----
Outstanding, July 25, 1997 134,445 $ 12.04 10,000 $ 8.13 4,000 $ 9.63
Granted -- -- 194,724 9.12 4,667 9.07
Canceled (3,335) 13.04 -- -- (2,000) 9.63
-------- ------ -----
Outstanding, July 31, 1998 131,110 $ 12.03 204,724 $ 9.07 6,667 $ 9.23
Granted -- -- -- -- 4,000 5.50
-------- ------ -----
Outstanding, July 30, 1999 131,110 $ 12.03 204,724 $ 9.07 10,667 $ 7.83
-------- ------ -----
-------- ------ -----
- -------------------------------------------------------------------------------------------------------------------
At July 30, 1999, 146,021 shares were exercisable at a weighted average
option price of $10.22.
No compensation cost has been recorded relative to the employee option plans.
The pro forma effect on fiscal 1998 and 1997 net earnings (loss) and earnings
(loss) per share of accounting for stock-based compensation using the fair
value method required by statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" is approximately $98,000 and $.02,
and $30,000 and $.01, respectively. Net loss and loss per share would not
have been affected in fiscal 1999 had the fair value method been utilized.
The fair value for options granted under the 1996 Plan was estimated at the
date of grant using the binomial option pricing model with the following
assumptions for 1998 and 1997, respectively: dividend yield of 2.2 and 2.5
percent; expected volatility of 25 and 30 percent; risk free interest rate of
6.0 and 7.0 percent; and expected lives of seven and seven years.
NOTE L. RETIREMENT PLAN.
The Company has a defined contribution retirement plan covering Isco, Inc.
employees who satisfy age and service requirements. The Company makes annual
contributions to the plan of approximately 7% of defined pre-tax earnings.
Company contributions to the plan are limited to 15% of aggregate
compensation of the participants. The Company's contributions approximated
$0, $0, and $112,000, for the fiscal years 1999, 1998, and 1997, respectively.
The Company also has 401(k) salary reduction plans for its Isco, Inc. and
Geomation employees. Under the terms of the plans, an employee may reduce his
or her salary by up to 12%. The Company matches the reduction, up to 10%,
with a 20% matching contribution. The combined amount is then contributed to
the plans on behalf of the employee. During fiscal years 1999, 1998, and
1997, the Company made matching contributions to the 401(k) salary reduction
plans of approximately $175,000, $152,000, and $138,000, respectively.
NOTE M. SUPPLEMENTAL CASH FLOW INFORMATION.
During fiscal years 1999, 1998, and 1997, the Company made income tax
payments (received refunds) of approximately ($252,000), $635,000, and
$435,000, respectively.
During fiscal years 1999 and 1998 the Company made interest payments of
$310,000 and $46,000, respectively.
25
NOTE N. GEOGRAPHIC AND PRODUCT GROUP SALES.
-------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------
United States $37,371 $34,523 $30,351
Europe 8,477 5,323 5,180
Asia 3,146 5,131 3,017
Other 2,917 2,935 2,185
------- ------- -------
$51,911 $47,912 $40,733
------- ------- -------
------- ------- -------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------
Samplers $17,180 $17,291 $16,129
Flow Meters 12,755 10,165 9,339
Chromatography 7,117 6,270 5,814
Other * 14,859 14,186 9,451
------- ------- -------
$51,911 $47,912 $40,733
------- ------- -------
------- ------- -------
-------------------------------------------------------------------------------
* Other includes non-core products and service revenues
NOTE O. ACQUISITIONS.
On September 17, 1997, the Company acquired all the outstanding shares of
Geomation, Inc., Golden, Colorado. The Company previously had owned 18
percent of the outstanding shares. The acquisition required approximately
$929,000 in cash and the issuance of 318,853 shares of the Company's common
stock. The transaction also included an earn-out provision, which depending
upon the performance of Geomation through July 1998, would have required the
payment of up to approximately $250,000 of additional cash and the issuance
of additional shares of the Company's common stock with a market value of up
to approximately $750,000. The earn-out thresholds were not achieved and
therefore the provision was not activated.
On December 29, 1997, the Company acquired all the outstanding shares of STIP
Siepmann und Teutscher GmbH (STIP), of Gross-Umstadt, Germany. STIP
produces a broad line of process monitoring instrumentation designed
specifically for wastewater treatment applications. The acquisition required
cash of approximately $232,000. In a separate and simultaneous transaction,
the Company also acquired 100 percent of the technology covering the products
produced by STIP. This technology was acquired from a partnership owned by
Messrs. Siepmann and Teutscher for cash of approximately $1,686,000. The
transaction also included an earn-out provision, which depending upon the
performance of STIP through December 1999, would require the payment of
additional cash of up to approximately $1,700,000. Based on the performance
of STIP through July 30, 1999, the Company does not anticipate that the
earn-out thresholds will be achieved.
The above transactions were accounted for as purchases.
On March 31, 1998, the Company and AMJ Equipment Corporation, Lakeland,
Florida, completed the formation of Advanced Flow Technologies Partnership,
Ltd. (AFTCO) a limited partnership located in Lakeland, Florida. Each partner
owns 50 percent of AFTCO. The Company's cash investment of approximately $1.5
million is accounted for under the equity method. The cost in excess of net
assets acquired of approximately $750,000 is being amortized on a
straight-line basis over 10 years. AFTCO designs, manufactures, and markets
electromagnetic full-pipe flow meters.
26
NOTE P. EARNINGS PER SHARE.
The following table provides a reconciliation between basic and diluted earnings
(loss) per share:
- -------------------------------------------------------------------------------------------------------------------
Computation of earnings (loss) per share
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Numerator:
Earnings (loss) for both basic and diluted earnings per share $ (635) $(1,197) $1,326
------ ------- -----
------ ------- -----
Denominator:
Denominator for basic earnings per share
Weighted average outstanding shares 5,645 5,607 5,351
Effect of dilutive securities:
Common stock equivalents and dilutive stock options -- -- 5
------ ------- -----
Denominator for diluted earnings per share 5,645 5,607 5,356
------ ------- -----
------ ------- -----
Earnings (loss) per share:
Basic $(.11) $(.21) $.25
------ ------- -----
------ ------- -----
Diluted $(.11) $(.21) $.25
------ ------- -----
------ ------- -----
- -------------------------------------------------------------------------------------------------------------------
Options and other common stock equivalents to purchase 367,128; 357,944; and
151,427 shares of common stock were outstanding during the periods ended July
30, 1999, July 31, 1998, and July 25, 1997, respectively, but were not
included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common stock and,
therefore, their effect would be anti-dilutive.
NOTE Q. RETIREMENT OF TREASURY STOCK.
Effective July 31, 1998, the Company's Board of Directors authorized the
retirement of all treasury shares.
NOTE R. COMMITMENTS AND CONTINGENCIES.
COMMITMENTS.
In the normal course of business, the Company is involved in various legal
actions. It is management's opinion that none of these legal actions will
materially affect the financial position of the Company.
Subsequent to year end, AFTCO received a $1,000,000 line of credit commitment
from the Company's primary commercial bank. The Company is the guarantor of
this line.
Isco has commitments under long-term operating leases for building space and
equipment, many of which contain renewal options. Future minimum rentals on
operating leases with non-cancelable lease terms at July 30, 1999 aggregate
$1,240,000 and are payable by fiscal years as follows: 2000, $370,000; 2001,
$312,000; 2002, $232,000; 2003, $231,000; 2004, $89,000; and thereafter,
$6,000.
27
STATEMENTS OF OPERATIONS BY QUARTER. (unaudited)
(Columnar amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- ----------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
Net sales $13,486 $11,500 $11,756 $10,384 $12,889 $13,246 $13,780 $ 12,782
Cost of sales 5,953 4,834 5,756 4,545 6,088 5,940 6,919 6,248
-------- ------- ------- ------- ------- ------- ------- -------
7,533 6,666 6,000 5,839 6,801 7,306 6,861 6,534
-------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Selling, general and
administrative 5,486 4,853 5,417 4,817 5,417 5,657 6,112 7,213
Research and engineering 1,514 1,594 1,539 1,447 1,464 1,700 1,513 1,574
-------- ------- ------- ------- ------- ------- ------- -------
7,000 6,447 6,956 6,264 6,881 7,357 7,625 8,787
-------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 533 219 (956) (425) (80) (51) (764) (2,253)
Non-operating income(loss):
Investment income 77 144 82 175 97 102 71 103
Interest expense (24) (2) (78) (3) (64) (46) (144) (34)
Other non-operating
income (loss) 85 81 272 103 (149) 129 104 108
-------- ------- ------- ------- ------- ------- ------- -------
138 223 276 275 (116) 185 31 177
-------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes 671 442 (680) (150) (196) 134 (733) (2,076)
Income taxes (tax benefit) 105 150 (202) (104) (71) (40) (135) (459)
-------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss) $ 566 $ 292 $ (478) $ (46) $ (125) $ 174 $ (598) $(1,617)
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Basic earnings (loss)
per share $.10 $.05 $(.08) $(.01) $(.02) $.03 $(.11) $(.28)
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
Weighted average shares
outstanding 5,657 5,497 5,644 5,672 5,644 5,672 5,644 5,672
-------- ------- ------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- ------- ------- -------
- -------------------------------------------------------------------------------------------------------------------
Quarterly per share amounts may not add to annual total due to rounding.
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.
Incorporated by reference from the Isco, Inc., Proxy Statement for Annual
Meeting of Shareholders to be held December 9, 1999, under the captions
ELECTION OF DIRECTORS, LIST OF CURRENT EXECUTIVE OFFICERS OF THE COMPANY, and
ADDITIONAL INFORMATION - Compliance with Section 16(a) of the Securities
Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Isco, Inc., Proxy Statement for Annual
Meeting of Shareholders to be held December 9, 1999, under the caption
EXECUTIVE COMPENSATION.
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Isco, Inc., Proxy Statement for Annual
Meeting of Shareholders to be held December 9, 1999, under the captions
GENERAL and ELECTION OF DIRECTORS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
page
a. The following documents are filed as a part of this report: number
1. Financial Statements:
Independent Auditors' Report 13
Consolidated Statements of Operations for fiscal years
ended July 30, 1999, July 31, 1998, and July 25, 1997 14
Consolidated Balance Sheets at July 30, 1999 and
July 31, 1998 15
Consolidated Statements of Shareholders' Equity for
fiscal years ended July 30, 1999,
July 31, 1998, and July 25, 1997 16
Consolidated Statements of Cash Flows for fiscal years
ended July 30, 1999, July 31, 1998, and July 25, 1997 17
Notes to Consolidated Financial Statements 18
Financial statements of the Registrant's subsidiaries
are omitted because the Registrant is, primarily, an
operating company and the subsidiaries
are wholly owned. --
2. Schedules:
Advanced Flow Technologies Partnership, Ltd. 32
Financial Statements for the year ended
July 31, 1999 and for the period from March 31, 1998
(Date of Formation) to July 31, 1998.
Schedules other than those listed above are omitted for
the reason that they are not required or are not
applicable or the required information is shown in
the financial statements or notes thereto.
b. Reports on Form 8-K filed for the three months ended July 30, 1999:
1. None
29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(CONTINUED)
page
number
c. Exhibits (Numbered in accordance with Item 601 of Regulation S-K):
(3) (i) Articles of Incorporation as amended and restated
through July 26, 1985 [Incorporated by
reference to Exhibit 3.1 to the Registration
Statement on Form S-1, File No. 2-99303
(the "Form S-1")] --
(ii) By-laws as amended through September 21, 1995
(Incorporated by reference to Annual Report on
Form 10-K for Isco, Inc. dated July 28, 1995) --
(10) Material contracts:
(iii)(a) 1985 Incentive Stock Option Plan (Incorporated
by reference to Exhibit 10.1 (ii) of
the Form S-1) --
(b) Directors' Deferred Compensation Plan
(Incorporated by reference to Registration
Statement of Form S-8, File No. 333-00421) --
(c) 1996 Stock Option Plan (Incorporated by reference
to Registration Statement of Form S-8,
File No 333-16637) --
(d) 1996 Outside Directors' Stock Option Plan
(Incorporated by reference to
Registration Statement of Form S-8,
File No. 333-16637) --
(21) List of Isco's Subsidiaries:
Isco Instruments (Europe) GmbH (organized under
the laws of Switzerland)
Isco, Ltd. (organized under the laws of Barbados)
Geomation, Inc. (incorporated in Nebraska)
STIP Siepmann und Teutscher GmbH (organized under
the laws of Germany)
(23) Independent Auditors' Consent 40
(27) Financial Data Schedule 41
(99) Plan Year 1999 Financial Statements of the Isco, Inc.
Retirement Plu$ Plan 42
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/Robert W. Allington By: /s/Philip M. Wittig
- -------------------------- ----------------------------
Robert W. Allington, Philip M. Wittig
Chief Executive Officer, Treasurer, Chief
and Director Financial Officer and
Director
Date: October 22, 1999 Date: October 22, 1999
By: /s/Douglas M. Grant By: /s/Donald E. Wademan
- ----------------------- ---------------------------
Douglas M. Grant, Donald E. Wademan,
President, Chief Operating Controller
Officer, and Director
Date: October 22, 1999 Date: October 22, 1999
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.
By: /s/Dale L. Young By: /s/James L. Linderholm
- -------------------- ---------------------------
Dale L. Young, James L. Linderholm,
Secretary and Director Director
Date: October 22, 1999 Date: October 22, 1999
By: /s/James L. Carrier By: /s/John J. Brasch
- ----------------------- ---------------------------
James L. Carrier, Director John J. Brasch, Director
Date: October 22, 1999 Date: October 20, 1999
31
ADVANCED FLOW TECHNOLOGIES PARTNERSHIP, LTD
(A LIMITED PARTNERSHIP)
Financial Statements
For the year ended July 30, 1999 and for the Period
From March 31, 1998 (Date of Formation) to July 31, 1998
and Independent Auditors' Report
32
INDEPENDENT AUDITORS' REPORT
Board of Directors
Advanced Flow Technologies Partnership, Ltd (A Limited Partnership)
Lakeland, Florida
We have audited the accompanying balance sheets of Advanced Flow Technologies
Partnership, Ltd (A Limited Partnership) as of July 30, 1999 and July 31, 1998,
and the related statements of operations, partners' capital and cash flows for
the year ended July 30, 1999 and for the period from March 31, 1998 (date of
formation) to July 31, 1998. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Advanced Flow Technologies Partnership, Ltd
(A Limited Partnership) as of July 30, 1999 and July 31, 1998, and the results
of its operations and its cash flows for the year ended July 30, 1999 and for
the period from March 31, 1998 to July 31, 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Lincoln, Nebraska
October 22, 1999
33
ADVANCED FLOW TECHNOLOGIES PARTNERSHIP, LTD
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
For the period from
For the year ended March 31, 1998 to
July 30, 1999 July 31, 1998
------------- -------------
Net sales $1,356,916 $ 495,314
Cost of sales 1,029,621 377,588
---------- ---------
327,295 117,726
---------- ---------
Expenses:
Selling, general, and administrative 628,241 236,946
Research and engineering 252,933 74,498
---------- ---------
881,174 311,444
---------- ---------
Operating loss (553,879) (193,718)
---------- ---------
Other income:
Interest, net 8,094 6,391
---------- ---------
Net loss $(545,785) $(187,327)
---------- ---------
---------- ---------
The accompanying notes are an integral part of the financial statements.
34
ADVANCED FLOW TECHNOLOGIES PARTNERSHIP, LTD
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
July 30, 1999 July 31, 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 59,979 $ 602,832
Accounts receivable, net of allowance of $12,000 and $0 236,219 125,819
Inventories:
Raw materials 357,127 302,154
Work-in-process 103,891 75,959
Finished goods 112,994 33,561
---------- ----------
Total inventories 574,012 411,674
---------- ----------
Total current assets 870,210 1,140,325
Machinery and equipment 312,612 270,855
Less accumulated depreciation (114,941) (34,923)
---------- ----------
197,671 235,932
---------- ----------
Total Assets $1,067,881 $1,376,257
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 214,724 $ 57,345
Accrued expenses and other current liabilities 6,269 6,239
Line of credit 80,000 --
---------- ----------
Total current liabilities 300,993 63,584
Commitments and contingencies (Note F)
Partners' capital 766,888 1,312,673
---------- ----------
Total Liabilities & Partners' Capital $1,067,881 $1,376,257
---------- ----------
---------- ----------
The accompanying notes are an integral part of the financial statements.
35
ADVANCED FLOW TECHNOLOGIES PARTNERSHIP, LTD
(A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
Limited Partners Total
General ------------------ Partners'
Partner Isco AMJ Capital
------- ------ ----- ----------
Initial capital contribution, March 31, 1998 (Note A) $ -- $1,500,000 $ -- $1,500,000
Allocation of net loss (Note A) -- (93,664) (93,663) (187,327)
----- ---------- -------- ----------
Balance, July 31, 1998 $ -- $1,406,336 $(93,663) $1,312,673
Allocation of net loss (Note A) -- (272,892) (272,893) (545,785)
----- ---------- -------- ----------
Balance, July 30, 1999 $ -- $1,133,444 $(366,556) $ 766,888
----- ---------- -------- ----------
----- ---------- -------- ----------
The accompanying notes are an integral part of the financial statements.
36
ADVANCED FLOW TECHNOLOGIES PARTNERSHIP, LTD
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM
FOR THE YEAR ENDED MARCH 31, 1998 TO
JULY 30, 1999 JULY 31, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(545,785) $ (187,327)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation 80,018 34,923
Provision for doubtful accounts 12,000 --
Changes in operating assets and liabilities:
Trade receivables (122,400) (125,819)
Inventories (162,338) (411,674)
Accounts payable 157,379 57,345
Accrued expenses and other current liabilities 30 6,239
------------- -------------
Cash flows from operating activities (581,096) (626,313)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery and equipment (41,757) (270,855)
------------- -------------
Cash flows from investing activities (41,757) (270,855)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit 80,000 --
Capital contributions -- 1,500,000
------------- -------------
Cash flows from financing activities 80,000 1,500,000
------------- -------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (542,853) 602,832
Balance at beginning of period 602,832 --
------------- -------------
Balance at end of period $ 59,979 $ 602,832
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 543 $ --
------------- -------------
------------- -------------
The accompanying notes are an integral part of the financial statements.
37
ADVANCED FLOW TECHNOLOGIES PARTNERSHIP, LTD
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
For the year ended July 30, 1999 and for the period from March 31, 1998 to
July 31, 1998
NOTE A. ORGANIZATION
The Partnership is organized as a limited partnership, operating under the laws
of the State of Florida, and began operations on March 31, 1998. The Partnership
is comprised of a general partner (Advanced Flow Technologies, Inc.) and two
limited partners, Isco, Inc. (Isco) and AMJ Equipment Corporation (AMJ). The
period of duration of the Partnership ends on December 31, 2028, unless the
Partnership is dissolved prior to such date in accordance with the terms of the
Partnership Agreement. Prior to dissolution, certain buy/sell and change of
control provisions are specified by the Partnership Agreement. If no buy/sell or
change of control has occurred prior to March 31, 2008, Isco will purchase AMJ's
partnership units at a formula purchase price as specified in the Partnership
Agreement.
The limited partners each own 50% of the partnership units. Isco contributed
cash of $1,500,000 to the Partnership for its undivided 50% interest (1,500
limited partnership units) and AMJ contributed intellectual property for its
undivided 50% interest (1,500 limited partnership units). The intellectual
property contributed by AMJ has been recorded at AMJ's carryover basis in such
property, which was zero. The Partnership Agreement provides that net income
(loss) is shared equally by the limited partners.
The Partnership designs, manufactures and markets electromagnetic full-pipe flow
meters.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - For fiscal reporting purposes, the Partnership operates under a
52/53 week year, ending on the last Friday of July. Fiscal 1999 contained 52
weeks.
USE OF ESTIMATES - In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of income and expenses for
the reporting period. Actual results could differ significantly from those
estimates.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Partnership considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market using the
weighted average cost method.
MACHINERY AND EQUIPMENT - Machinery and equipment are recorded at cost. The
Partnership computes depreciation on its machinery and equipment using the
accelerated cost recovery method over the estimated useful lives of 3 to 7
years.
REVENUE RECOGNITION - Sales are recorded at the time of product shipment.
RESEARCH AND ENGINEERING COSTS - Research and engineering costs are expensed as
incurred.
INCOME TAXES - The Partnership is organized under the limited partnership
company statutes of the State of Florida. Accordingly, income or loss of the
Partnership is reportable in the separate returns of the partners and no
provision or benefit has been recorded for income taxes in the Partnership's
financial statements.
38
NOTE C. RELATED PARTY TRANSACTIONS
The Partnership distributes products through Isco and AMJ. The Partnership also
shares warehouse space, personnel and office equipment with AMJ and reimburses
AMJ for the allocated cost of these items. The dollar amounts of related party
transactions as of July 30, 1999 and July 31, 1998 and for the year ended July
30, 1999 and for the period ended July 31, 1998 are as follows:
-------------------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
AMJ Isco Total AMJ Isco Total
-------- ------- --------- -------- --------- ---------
Accounts receivable $ 36,897 $ 97,639 $ 134,536 $ 50,949 $ 71,839 $122,788
Personnel and operating expenses 111,319 -- 111,319 108,128 -- 108,128
Sales 220,041 884,325 1,104,366 125,991 369,323 495,314
Inventory purchases -- -- -- 403,626 -- 403,626
Machinery and equipment purchases -- -- -- 246,374 -- 246,374
-------------------------------------------------------------------------------------------------------------------
Transactions with related parties are not necessarily indicative of transactions
which would have occurred had the parties not been related.
NOTE D. LINE OF CREDIT
At July 30, 1999 the Partnership had available a $100,000 line of credit with a
bank. This line was secured by all assets of the Partnership. The Partnership
had outstanding borrowings on this line of $80,000 at July 30, 1999. This line
expired subsequent to July 30, 1999 and was repaid with proceeds from the
revolving line discussed in Note G.
NOTE E. OPTION PLAN
During fiscal 1999, the Board of Directors of Advanced Flow Technologies, Inc.
approved an option plan which provides for the future issuance of options to
partnership employees to purchase up to an 8 percent interest in the Partnership
equity. No options were issued during the year ended July 30, 1999.
NOTE F. COMMITMENTS AND CONTINGENCIES
The Partnership is responsible for the purchase of certain inventory from a
third party under a royalty arrangement entered into by AMJ. Any inventory that
the Partnership is required to purchase under this agreement and which is not
sold by the Partnership will be purchased by AMJ at the Partnership's cost at a
time and in quantities determined by the General Partner. All royalty payments
received under this agreement are income to AMJ.
The Partnership has a separate royalty agreement with a related party. Under
this agreement, sales are subject to a royalty of up to 2 percent.
The Partnership has a consulting agreement with a third party requiring cash
payments of $40,000 per year. This agreement is cancelable by either party with
a 30 day advance notice.
NOTE G. SUBSEQUENT EVENT
Subsequent to July 30, 1999, the Partnership received a line of credit
commitment from a bank for up to $1,000,000 at a variable interest rate (8%
initial rate). The interest rate is the highest prime rate published in the Wall
Street Journal "Money Rate" table. The line is secured by operating assets of
the Partnership and the maximum amount available is determined based on a
percentage of accounts receivable and inventory. The maximum available under the
borrowing base formula at origination was $471,000. The line is guaranteed by
Isco, Inc. The line expires on June 30, 2000.
39