UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 0-14429
-------------------
Isco, Inc.
------------------------------------------------------
(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
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(402) 464-0231
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 27, 1998:
Common Stock, $0.10 par value 5,643,992
- ------------------------------ ----------------
Class Number of Shares
ISCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 - Financial Data Schedule 11
2
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
- --------------------------------------------
Three months ended
----------------------
Oct 30 Oct 24
1998 1997
--------- --------
Net sales $13,486 $11,500
Cost of sales 5,953 4,834
--------- --------
7,533 6,666
--------- --------
Expenses:
Selling, general, and administrative 5,486 4,853
Research and engineering 1,514 1,594
--------- --------
7,000 6,447
--------- --------
Operating income 533 219
Net non-operating income 162 232
Interest expense (24) (9)
--------- --------
Earnings before income taxes 671 442
Income tax provision 105 150
--------- --------
Net earnings $ 566 $ 292
--------- --------
--------- --------
Basic earnings per share $.10 $.05
------ -----
------ -----
Diluted earnings per share $.10 $.05
------ -----
------ -----
Weighted average number of shares outstanding 5,648 5,497
Additional shares assuming exercise of common stock
equivalents and dilutive stock options 9 8
--------- --------
Total 5,657 5,505
--------- --------
--------- --------
Cash dividend per share $.05 $.05
------ -----
------ -----
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
- -------------------------------
Oct 30 Jul 31
1998 1998
------------ ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,939 $ 3,837
Short-term investments 1,187 1,361
Accounts receivable - trade, net of allowance for doubtful accounts
of $192,000 and $214,000 9,247 8,124
Inventories (Note 3) 10,022 9,902
Refundable income taxes 453 279
Deferred income taxes 803 1,023
Other current assets 636 617
---------- --------
Total Current Assets 24,287 25,143
Property, plant, and equipment, net of accumulated depreciation
of $19,537,000 and $19,236,000 17,618 15,658
Long-term investments 372 862
Deferred income taxes 464 492
Other assets (Note 4) 7,369 7,462
---------- --------
Total Assets $50,110 $49,617
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,799 $ 1,915
Note payable 1,451 1,263
Other current liabilities 3,187 2,943
---------- --------
Total Current Liabilities 6,437 6,121
Long-term debt 756 690
Total Liabilities 7,193 6,811
Shareholders' equity (Note 5):
Preferred stock, $.10 par value, authorized 5,000,000 shares; issued none -- --
Common stock, $.10 par value, authorized 15,000,000 shares; issued 5,643,992
and 5,672,093 shares 564 567
Additional paid-in capital 37,723 37,886
Retained earnings 4,631 4,352
Accumulated other comprehensive income (loss) (1) 1
---------- --------
Total Shareholders' Equity 42,917 42,806
---------- --------
Total Liabilities and Shareholders' Equity $50,110 $49,617
---------- --------
---------- --------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Columnar amounts in thousands)
- -------------------------------
Three months ended
---------------------
Oct 30 Oct 24
1998 1997
--------- --------
Cash flows from operating activities:
Net earnings $ 566 $ 292
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 560 581
Change in operating assets and liabilities (1,008) (287)
Other (90) 47
-------- --------
Total adjustments (538) 643
-------- --------
Net cash flows from operating activities 28 935
-------- --------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 660 4,456
Proceeds from sale of property, plant, and equipment 130 41
Purchase of available-for-sale securities -- (23)
Purchase of property, plant, and equipment (2,377) (767)
Purchase of Geomation - net of cash and cash equivalents acquired -- (760)
Other 2 (309)
-------- --------
Net cash flows from investing activities (1,585) 2,638
-------- --------
Cash flows from financing activities:
Net increase in short-term debt 106 --
Cash dividends paid (282) (284)
Purchase of common stock (165) --
-------- --------
Net cash flows from financing activities (341) (284)
-------- --------
Cash and cash equivalents:
Net increase (decrease) (1,898) 3,289
Balance at beginning of year 3,837 1,810
-------- --------
Balance at end of period $ 1,939 $5,099
-------- --------
-------- --------
The Company made income tax payments of approximately $1,000 during each of
the three-month periods ended October 30, 1998 and October 24, 1997.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in thousands, except per share data)
October 30, 1998
NOTE 1: In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments necessary for a
fair presentation of the financial position of the Company and the results of
operations for the interim periods presented herein. All such adjustments
are of a normal recurring nature. Results of operations for the current
unaudited interim period are not necessarily indicative of the results which
may be expected for the entire fiscal year. All significant inter-company
transactions and accounts have been eliminated.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in the Annual Report on Form 10K for the year ended July
31, 1998.
NOTE 2: Certain reclassifications have been made to the prior period's
financial statements to conform to the current period's presentation.
NOTE 3: Inventories are valued at the lower of cost or market, principally on
the last-in, first-out (LIFO) basis. The composition of inventories is as
follows:
------------------------------------------------------------------------
Oct 30, 1998 Jul 31, 1998
------------ ------------
Raw materials $ 3,804 $3,831
Work-in-process 3,321 3,164
Finished goods 2,897 2,907
-------- -------
$ 10,022 $9,902
-------- -------
-------- -------
------------------------------------------------------------------------
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,348,000 and $1,377,000 higher than reported on the
LIFO basis at October 30, 1998 and July 31, 1998, respectively.
NOTE 4: Other Assets
------------------------------------------------------------------------
Oct 30, 1998 Jul 31, 1998
------------ ------------
Intangibles, net of accumulated amortization
of $465,000 and $317,000 $3,656 $3,462
Investment in AFTCO, net of accumulated
amortization of $43,750 and $25,000 1,339 1,386
Cash value of life insurance 1,081 1,060
Note receivable - related party 1,000 1,000
Other 293 554
------ ------
$7,369 $7,462
------ ------
------ ------
------------------------------------------------------------------------
NOTE 5: On November 19, 1998, the Board of Directors declared a quarterly cash
dividend of $.05 per share, payable January 5, 1999 to shareholders of record on
December 11, 1998.
6
NOTE 6: Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The
adoption of SFAS No. 130 did not have a material impact on the consolidated
financial statements. Comprehensive income, which is defined as the change in
equity from transactions and other events from non-owner sources, for the three
months ended October 30, 1998 and October 24, 1997 was as follows:
-------------------------------------------------------------------------
1998 1997
---- ----
Net income $566 $292
Other comprehensive income, net of income tax:
Foreign currency translation adjustment (3) --
Unrealized holding gains (losses) on
Available-for-sale securities 1 10
---- ----
Comprehensive income $564 $302
---- ----
---- ----
-------------------------------------------------------------------------
NOTE 7: On December 3, 1998, the Company entered into an agreement with
Zellweger Analytics, Inc. settling the litigation originally filed against Isco
on January 22, 1998 in the United States District Court in Galveston, Texas.
The settlement amount was $250,000.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAIN TREND ANALYSIS AND TOGETHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS WITHIN THIS DOCUMENT.
SALES ANALYSIS AND REVIEW
Our first quarter sales were $13,486,000, 17 percent above the same period
last year. Sales of wastewater samplers, flow meters, and liquid
chromatography products, our core products, were up six percent compared with
the same period last year. Sales of our other products were up 37 percent
compared with the same period last year. Syringe pumps, supercritical fluid
extraction (SFE), geo-technical, and process monitoring products are included
in other products category.
Our first quarter domestic sales were 18 percent above the same period last
year. The domestic sales of our core products increased 13 percent. Domestic
sales of our other products increased 67 percent.
Our first quarter international sales were 14 percent above the same period last
year. International sales of our core products declined 17 percent.
International sales of our other products increased 87 percent.
We received net orders of $13.2 million from our customers during the first
quarter. Net orders received were 21 percent higher than the same period last
year. Our order backlog was reduced, during the quarter, by approximately five
percent to $4.2 million.
OPERATING INCOME ANALYSIS AND REVIEW
Our operating income for the first quarter of fiscal 1999 was $533,000, up 143
percent compared with operating income of $219,000 for the same period last
year. Our gross margin percentage for the first quarter was 56 percent compared
with 58 percent for the same period last year. This decline was the result of
two factors. Some of the product delivered during the first quarter was
affected by price discounting. Manufacturing overhead increased due to higher
indirect salaries and wages for additional staffing to assist in re-location of
manufacturing processes, the acquisition of additional tooling, and increased
maintenance and repairs.
7
The increase in selling, general and administrative (SG&A) expenses over the
previous year's first quarter includes the SG&A expenses of STIP which was
acquired late in the second quarter of last fiscal year. The increase also
includes higher salaries and wages due to some increased staffing.
Overall, our engineering expenses declined by $80,000 when compared with the
same period last year. However, the first quarter last year included
$302,000 of acquired research and development resulting from the Geomation
acquisition. During the first quarter, salaries and benefit expense increased
because of a small increase in staff. In addition, subcontracted services
and continuing education expenses increased.
RESULTS OF OPERATIONS.
The following table sets forth, for the three-month period indicated, the
percentages which certain components of the Condensed Consolidated Statements of
Operations bear to net sales and the percentage of change of such components
(based on actual dollars) compared with the same periods of the prior year.
- --------------------------------------------------------------------------------
Three months ended
--------------------------------------
10/30/98 10/24/97 Change
-------- -------- -------
Net sales 100.0 100.0 17.3
Cost of sales 44.1 42.0 23.1
----- -----
55.9 58.0 13.0
----- -----
Expenses:
Selling, general, & administrative 40.7 42.2 13.0
Research & engineering 11.2 13.8 (5.0)
----- -----
51.9 56.0 8.6
----- -----
Operating income 4.0 2.0 143.4
Non-operating income 1.2 2.0 (30.2)
Interest expense .2 .1 166.7
----- -----
Earnings before income taxes 5.0 3.9 51.8
Income taxes .8 1.3 (.3)
----- -----
Net earnings 4.2 2.6 93.8
----- -----
----- -----
- --------------------------------------------------------------------------------
The underlying reasons for the changes in operating income were discussed in the
previous section. Investment income for the first quarter fiscal 1999 was lower
than for the same period last year because we liquidated investments to acquire
STIP; form the AFTCO partnership; and expand, renovate, and equip our Superior
Street facility.
Our effective income tax rate for the first quarter of fiscal 1999 was 15.7
percent. Our effective income tax rate for the same period last year was 33.9
percent. The relatively high effective income tax rate last year is the result
of the non-deductible "acquired R&D" and goodwill arising out of our acquisition
of Geomation.
FINANCIAL CONDITION AND LIQUIDITY
At October 30, 1998, our working capital was nearly $18 million and our current
ratio was 3.8:1. Operating activities generated cash flows of $28,000 during
the first quarter. That reflects the $1.1 million growth in trade accounts
receivable. During that time, trade accounts receivable more than 15 days past
due declined from 28 percent to 19 percent.
We have a $5.0 million term loan commitment from our primary commercial bank.
In addition, we have in place unsecured lines of credit with our various banks
totaling $6.7 million.
8
FUTURE EVENTS
Management acknowledges the change of the century could have a significant
effect upon our company's operations. We considered the following aspects as we
evaluated our situation. One, the effect on the computer systems used to manage
our business. Two, determine the effect of the year 2000 on our products which
may be year sensitive. Three, whether or not key vendors will be able to
deliver materials and services after 12:01 am, January 1, 2000. Four, whether
or not key customers have the ability to continue to submit orders for our
products.
We began the process of evaluating the effect of the millennium (Y2K) on our
computer systems in 1995. In 1996, we determined that replacing our aging
purchased and internally developed software with technologically current
software would not only resolve the Y2K compliance issue but would also improve
our operational efficiency. Early in 1998, we selected Y2K compliant BaaN
software as our ERP system. That system is scheduled to go on line during the
last half of fiscal 1999, the beginning of our third quarter. The total cost of
that project is expected to be approximately $2.8 million including an estimated
$780,000 which was expensed as incurred.
Our current products, with few exceptions, are compliant with Isco's Year 2000
Product Compliance Policy. The majority of our discontinued products still
believed to be in service are compliant with our Y2K policy; those that are not
have reasonable Y2K step-around procedures. Therefore, we believe our
liabilities are limited with respect to our products being Y2K compliant.
Management has determined that of the vendors providing materials and services,
the most critical are the providers of utility services - electric, natural gas,
and telephone service. Without these services, having otherwise compliant
systems is of minimal value. The local utility providers have indicated that
they are Y2K compliant, however that is of little value if other parts of the
backbone are not functional. For example, due to our significant demand for
electric power, there is no economically feasible option but to temporarily
suspend operations in the event the nation's electric utility power grid fails
and prevents the local electric utility from delivering electric power on
January 1, 2000.
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.
INFLATION
The effect of inflation on the costs of our company and its ability to pass on
cost increases in the form of increased prices is dependent upon the market
conditions and the competitive environment. The general level of inflation in
the U.S. economy has been relatively low for the past several years and has not,
to date, had a significant effect on our company.
9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
A. On December 3, 1998, we entered into an agreement with Zellweger Analytics,
Inc. settling the litigation originally filed against Isco on January 22,
1998 in the United States District Court in Galveston, Texas. The
settlement amount was $250,000.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on 8-K - None
SIGNATURES.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISCO, INC.
Date: December 9, 1998 BY /s/ Robert W. Allington
-----------------------------------
Robert W. Allington, Chairman and
Chief Executive Officer
Date: December 9, 1998 BY /s/ Philip M. Wittig
--------------------------------
Philip M. Wittig, Treasurer and
Chief Financial Officer
10