UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission file number 0-14429
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Isco, Inc.
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(Exact name of registrant as specified in its charter)
Nebraska 47-0461807
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(State of Incorporation) (I.R.S. Employer Identification No)
4700 Superior Street, Lincoln, Nebraska 68504-1398
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(Address of principal executive offices) (Zip Code)
(402) 464-0231
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 26, 1999:
Common Stock, $0.10 par value 5,643,992
- ----------------------------- ----------------
Class Number of Shares
ISCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 - Financial Data Schedule 12
(b) Reports on Form 8-K 11
2
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three months ended Six months ended
-------------------------- -------------------------
Jan 29 Jan 23 Jan 29 Jan 23
1999 1998 1999 1998
-------- ------- ------- -------
Net sales $ 11,756 $10,384 $25,242 $21,885
Cost of sales 5,756 4,545 11,709 9,379
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6,000 5,839 13,533 12,506
-------- ------- ------- -------
Expenses:
Selling, general, and administrative 5,416 4,817 10,903 9,670
Research and engineering 1,540 1,447 3,053 3,042
-------- ------- ------- -------
6,956 6,264 13,956 12,712
-------- ------- ------- -------
Operating loss (956) (425) (423) (206)
Interest expense (78) -- (102) --
Non-operating income 354 275 516 498
-------- ------- ------- -------
Earnings (loss) before income taxes (680) (150) (9) 292
Income tax provision (benefit) (202) (104) (97) 46
-------- ------- ------- -------
Net earnings (loss) $ (478) $ (46) $ 88 $ 246
-------- ------- ------- -------
-------- ------- ------- -------
Basic earnings (loss) per share $ (.08) $ (.01) $ .02 $ .04
-------- ------- ------- -------
-------- ------- ------- -------
Diluted earnings (loss) per share $ (.08) $ (.01) $ .02 $ .04
-------- ------- ------- -------
-------- ------- ------- -------
Weighted average number of shares outstanding 5,644 5,672 5,656 5,593
-------- ------- ------- -------
-------- ------- ------- -------
Cash dividend per share $ .05 $ .05 $ .10 $ .10
-------- ------- ------- -------
-------- ------- ------- -------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Columnar amounts in thousands)
Jan 29 Jul 31
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 5,829 $ 3,837
Short-term investments 147 1,361
Accounts receivable - trade, net of allowance for doubtful
accounts of $205,000 and $214,000 8,291 8,124
Inventories (Note 3) 10,481 9,902
Refundable income taxes -- 279
Deferred income taxes 1,052 1,023
Other current assets 459 617
-------- ---------
Total Current Assets 26,259 25,143
Property, plant, and equipment, net of accumulated depreciation
of $19,819,000 and $19,236,000 19,178 15,658
Long-term investments 368 862
Deferred income taxes 572 492
Other assets (Note 4) 7,185 7,462
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Total Assets $ 53,562 $ 49,617
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,203 $ 1,915
Notes payable 2,412 1,263
Other current liabilities 3,018 2,943
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Total Current Liabilities 6,633 6,121
Long-term debt 4,775 690
-------- ---------
Total Liabilities 11,408 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 3,876 4,352
Accumulated other comprehensive income (loss) (9) 1
-------- ---------
Total Shareholders' Equity 42,154 42,806
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Total Liabilities and Shareholders' Equity $ 53,562 $ 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)
Six months ended
-----------------------------
Jan 29 Jan 23
1999 1998
--------- ----------
Cash flows from operating activities:
Net earnings $ 88 $ 246
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,119 1,202
Change in operating assets and liabilities (1,237) 423
Other (1) 73
--------- ----------
Total adjustments (119) 1,698
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Net cash provided by (used for) operating activities (31) 1,944
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Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 1,699 2,674
Proceeds from maturity of available-for-sale securities -- 6,999
Proceeds from maturity of held-to-maturity securities -- 500
Proceeds from sale of property, plant, and equipment 384 128
Purchase of available-for-sale securities -- (34)
Purchase of property, plant, and equipment (4,469) (3,538)
Disbursements for issuance of notes receivable -- (350)
Purchase of Geomation and STIP - Net of cash and
cash equivalents acquired -- (2,654)
Other 8 (179)
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Net cash provided by (used in) investing activities (2,378) 3,546
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Cash flows from financing activities:
Cash dividends paid (564) (567)
Proceeds from borrowings 5,205 --
Repayment of debt (75) --
Purchase of common stock (165) --
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Net cash provided by (used in) financing activities 4,401 (567)
Cash and cash equivalents:
Net increase 1,992 4,923
Balance at beginning of year 3,837 1,810
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Balance at end of period $ 5,829 $ 6,733
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Supplemental disclosures of cash flows:
Income taxes paid (refunds received) $(289,000) $ 477,000
Interest paid $ 78,000 $ --
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in thousands, except per share data)
January 29, 1999
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 periods'
financial statements to conform to the current periods' presentation.
NOTE 3: Inventories are valued at the lower of cost or market, principally on
the last-in, first-out (LIFO) basis. The composition of inventories was as
follows:
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Jan 29, 1999 Jul 31, 1998
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Raw materials $ 4,293 $3,831
Work-in-process 3,649 3,164
Finished goods 2,539 2,907
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$10,481 $9,902
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Had inventories been valued on the first-in, first-out (FIFO) basis, they
would have been approximately $1,300,000 and $1,377,000 higher than reported
on the LIFO basis at January 29, 1999 and July 31, 1998, respectively.
NOTE 4: Other Assets
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Jan 29, 1998 Jul 31, 1998
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Intangibles, net of accumulated amortization
of $525,000 and $317,000 $3,254 $3,462
Investment in AFTCO, net of accumulated
amortization of $63,000 and $25,000 1,220 1,386
Cash value of life insurance 1,326 1,247
Note receivable - related party 1,000 1,000
Other 385 367
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$7,185 $7,462
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6
NOTE 5: LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
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Jan 29, 1999 Jul 31, 1998
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Isco, Inc.
Note due December 2003, 6.50% $4,925 $ --
STIP
Note due March 2000, 7.50% 291 280
Note due June 2003, 7.50% 437 410
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5,653 690
Less current portion of long-term debt 878 --
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$4,775 $690
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In December of 1998, Isco, Inc. borrowed $5,000,000 from its primary
commercial bank. This debt is repayable in equal installments over a period
of 60 months. The Company is required to maintain an agreed upon fixed charge
coverage ratio as defined in the loan agreement. The Company was in
compliance with terms of the agreement as of the balance sheet date.
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 materially affect the consolidated financial
statements. Comprehensive income is defined as the change in equity resulting
from transactions and other events from non-owner sources. Comprehensive income,
for the six months ended January 29, 1999 and January 23, 1998, was as follows:
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Jan 29, 1999 Jan 23, 1998
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Net income $ 88 $246
Other comprehensive income, net of income tax:
Foreign currency translation adjustment (6) --
Unrealized holding gains (losses) on
available-for-sale securities (4) --
---- ----
Comprehensive income $ 78 $246
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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.
7
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 sales for the three-month and six-month periods, ended January 29, 1999,
were $11,756,000 and $25,242,000, respectively. The sales for those periods
included STIP sales of $1,240,000 and $2,033,000, respectively. For the
periods under review, our sales were 13 percent and 15 percent higher than
for the same periods last year. STIP was not part of our company during the
first six months of last year. Sales of our core products were up 13 percent
for the three months. Our core products include: wastewater samplers, flow
meters, and liquid chromatography products. For the same period, sales of our
other products were up 19 percent. Our other products include: syringe pumps,
STIP products, supercritical fluid extraction (SFE) products, Geomation
products, and process monitoring products. For the six months, sales of our
core products were up nine percent. For the same period, sales of our other
products were up 45 percent. Excluding sales of STIP products, sales of our
other products were down 13 percent and flat, respectively, for the three
months and six months.
Our U.S. sales for the three months and six months were up three percent and
11 percent, respectively, when compared with the same periods last year. The
U.S. sales of our core products for the same periods were up 16 percent and
14 percent, respectively. The U.S. sales of our other products for the same
periods were up 45 percent and seven percent, respectively.
Our international sales for the three months and six months were up 39
percent and 26 percent, respectively, when compared with the same periods
last year. Excluding sales of STIP products, our international sales for the
same periods were down four percent and eight percent, respectively.
International sales of our core products for the same periods were up five
percent and down seven percent, respectively. International sales of our
other products, excluding STIP products, for the same periods were down 16
percent and 12 percent, respectively.
During the three months and six months we received net orders of $12.4
million and $25.5 million, respectively. The net orders we received were 19
percent and 20 percent higher than the same periods last year. These
increases include the orders received by STIP of $1.2 million and $2.1
million during those periods, respectively. Excluding orders received by
STIP, our net orders were eight percent and 10 percent higher, respectively.
At mid-year, our order backlog, including $357,000 backlog of STIP, was $4.6
million, five percent higher than at the beginning of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
We had operating losses of $956,000 and $423,000, respectively, for the three
months and six months ended January 29, 1999. For the same periods last year,
we had operating losses of $425,000 and $206,000, respectively. Our gross
margin percentage declined 5.2 percent and 3.5 percent, respectively, for the
periods under review. The decline in our gross margin was the result of
increased sales discounts granted, additional costs associated with the
consolidation and relocation of the manufacturing operations to the expanded
Superior Street facility, and employee costs associated with the preparation
and the training necessary to bring the new ERP system on-line early in the
fourth quarter of fiscal 1999. These increases were offset by a reduction in
the LIFO reserve.
Our selling, general, and administrative (SG&A) expenses for the periods
under review increased 12 percent and 13 percent, respectively, when compared
with the same periods last year. When compared with the periods last year,
approximately 60 percent of the increase in SG&A expenses for the current
periods are from STIP which became part of our company late in the second
quarter last year. The majority of the remaining increase is the result of
the cost arising from the settlement of the Zellweger Analytics, Inc.
litigation during the second quarter. Late in fiscal 1998, we wrote-off the
intangibles arising out of the Suprex acquisition. The amortization that
would have occurred from those intangibles was offset by increased
advertising costs during the six months.
8
Our engineering expenses for the three months and six months increased six
percent and remained flat, respectively, when compared with the same periods
last year. The engineering costs of STIP account for the increase in this
operating expense category during the second quarter because the STIP
operations were not included in the similar period last year.
RESULTS OF OPERATIONS
The following table sets forth, for the three-month and six-month periods
indicated, the percentages which certain components of the Condensed
Consolidated Statements of Operations bear to net sales and the percentage of
change of such components (based on actual dollars) compared with the same
periods of the prior year.
Three months ended Six months ended
----------------------------------- ------------------------------------
1/29/99 1/23/98 Change 1/29/99 1/23/98 Change
------- ------- ------ ------- ------- ------
Net sales 100.0 100.0 13.2 100.0 100.0 15.3
Cost of sales 48.9 43.8 26.6 46.4 42.9 24.8
---- ---- ---- ----
51.1 56.2 2.8 53.6 57.1 8.2
---- ---- ---- ----
Expenses:
Selling, general, & administrative 46.1 46.4 12.4 43.2 44.2 12.8
Research & engineering 13.1 13.9 6.4 12.1 13.9 .4
---- ---- ---- ----
59.2 60.3 11.0 55.3 58.1 9.8
---- ---- ---- ----
Operating loss (8.1) (4.1) 124.9 (1.7) (1.0) 105.2
Interest expense (.7) -- -- (.4) -- --
Non-operating income 3.0 2.6 (7.9) 2.0 2.3 (16.8)
---- ---- ---- ----
Earnings (loss) before income taxes (5.8) (1.5) 350.7 (.1) 1.3 (103.0)
Income taxes (1.7) (1.0) 93.2 (.4) .2 (312.0)
---- ---- ---- ----
Net earnings (loss) (4.1) (.5) 931.5 .3 1.1 (64.2)
---- ---- ---- ----
---- ---- ---- ----
The underlying reasons for the changes in operating income were discussed in
the previous section. During the second quarter we began incurring interest
charges on the term loan arranged with our primary commercial bank.
For the three months and six months ended January 29, 1999, we experienced
income tax benefits of $202,000 and $97,000, respectively. For the same
periods last year we reported an income tax benefit of $104,000 and an income
tax expense of $46,000, respectively. These changes are the result of a
significant reduction in income before taxes and a reduction in the income
tax rate for our subsidiary in Switzerland. We also had increased engineering
activity qualifying for the research and development tax credit.
FINANCIAL CONDITION AND LIQUIDITY
As of January 29, 1999, our working capital was $20 million and our current
ratio was 3.96:1. The term loan that we added to our capital structure
contributed to the increase in our working capital. For the six months ended
January 29, 1999, our operating activities required funding in the amount of
$31,000 because we increased inventories and reduced accounts payable.
In addition to the $5 million term loan that we added to our capital
structure during the second quarter, we have a $5 million revolving, unused
line of credit with our primary commercial bank. At the present time we do
not expect to use that available credit to complete the renovation of the
Superior Street facility.
Based upon our current cash position and projected cash requirements along
with our performance during the first six months of fiscal 1999, the Board of
Directors did not declare the April 1999 quarterly cash dividend.
9
FUTURE EVENTS
Management acknowledges the change of the century (Y2K) could have a significant
effect upon our company's 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?
Our company began the process of evaluating the effect of Y2K on our computer
systems in 1995. In 1996, we determined that replacing our aging purchased
and internally developed computer software with technologically current
software would not only resolve the Y2K compliance issue but would also
improve our future operational efficiency. Early in 1998, we selected Y2K
compliant BaaN software as our ERP system. That system is scheduled to go on
line early in the fourth quarter of fiscal 1999. The total cost of the
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
that still may be in service are compliant with our Y2K policy 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.
Management has determined that of the vendors providing materials and
services, the most critical are the providers of utility services -
electricity, 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.
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 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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
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 of Galveston, Texas. The
settlement amount was $250,000.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Our company's annual meeting of shareholders was held on December 10, 1998.
A. The following persons were elected to serve a two-year term on our
Board of Directors:
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Nominee Votes
----------------- ----------------------------
In Favor Withheld
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John J. Brasch 4,938,710 392,577
James L. Carrier 4,976,480 343,747
Douglas M. Grant 4,986,627 344,660
Philip M. Wittig 4,984,668 346,619
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10
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISCO, INC.
Date: March 11, 1999 BY /s/ Robert W. Allington
-------------------------------------
Robert W. Allington, Chairman and
Chief Executive Officer
Date: March 11, 1999 BY /s/ Philip M. Wittig
-------------------------------------
Philip M. Wittig, Treasurer and
Chief Financial Officer
11