UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 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
Isco, Inc.
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(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)
(402) 464-0231
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 28, 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 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
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 Nine months ended
------------------ -----------------
Apr 30 Apr 24 Apr 30 Apr 24
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 12,889 $ 13,246 $ 38,131 $ 35,131
Cost of sales 6,088 5,940 17,797 15,320
-------- -------- -------- --------
6,801 7,306 20,334 19,811
-------- -------- -------- --------
Expenses:
Selling, general, and administrative 5,417 5,657 16,320 15,326
Research and engineering 1,464 1,700 4,517 4,742
-------- -------- -------- --------
6,881 7,357 20,837 20,068
-------- -------- -------- --------
Operating loss (80) (51) (503) (257)
Interest expense (64) (46) (166) (50)
Non-operating income (loss) (52) 231 464 733
-------- -------- -------- --------
Earnings (loss) before income taxes (196) 134 (205) 426
Income tax provision (benefit) (71) (40) (168) 6
-------- -------- -------- --------
Net earnings (loss) $ (125) $ 174 $ (37) $ 420
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per share $ (.02) $ .03 $ (.01) $ .08
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings (loss) per share $ (.02) $ .03 $ (.01) $ .08
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares outstanding 5,644 5,688 5,646 5,599
-------- -------- -------- --------
-------- -------- -------- --------
Cash dividend per share $ .00 $ .05 $ .10 $ .15
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Columnar amounts in thousands)
Apr 30 Jul 31
1999 1998
------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 3,847 $ 3,837
Short-term investments -- 1,361
Accounts receivable - trade, net of allowance
for doubtful accounts of $195,000 and $214,000 8,928 8,124
Inventories (Note 3) 10,476 9,902
Refundable income taxes 64 279
Deferred income taxes 1,060 1,023
Other current assets 647 617
-------- --------
Total Current Assets 25,022 25,143
Property, plant, and equipment, net of accumulated depreciation
of $19,045,000 and $19,236,000 20,810 15,658
Long-term investments -- 862
Deferred income taxes 566 492
Other assets (Note 4) 7,057 7,462
-------- --------
Total Assets $ 53,455 $ 49,617
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,905 $ 1,915
Notes payable 2,607 1,263
Other current liabilities 2,677 2,943
-------- --------
Total Current Liabilities 7,189 6,121
Long-term debt (Note 5) 4,238 690
-------- --------
Total Liabilities 11,427 6,811
Shareholders' equity:
Preferred stock, $.10 par value, authorized
5,000,000 shares; issued none
Common stock, $.10 par value, authorized
15,000,000 shares; issued 5,643,992
and 5,672,093 shares 564 567
Additional paid-in capital 37,723 37,886
Retained earnings 3,750 4,352
Accumulated other comprehensive income (loss) (9) 1
-------- --------
Total Shareholders' Equity 42,028 42,806
-------- --------
Total Liabilities and Shareholders' Equity $ 53,455 $ 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)
Nine months ended
-----------------
Apr 30 Apr 24
1999 1998
------ ------
Cash flows from operating activities:
Net earnings (loss) $ (37) $ 420
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,775 2,127
Change in operating assets and liabilities (1,536) (833)
Other (82) (270)
-------- --------
Total adjustments 157 1,024
-------- --------
Net cash flow from operating activities 120 1,444
-------- --------
Cash flows from investing activities:
Proceeds from sale and maturity of available-for-sale securities 1,963 10,069
Proceeds from sale and maturity of held-to-maturity securities 250 500
Proceeds from sale of property, plant, and equipment 521 239
Purchase of available-for-sale securities -- (34)
Purchase of property, plant, and equipment (6,994) (5,359)
Disbursements for issuance of notes receivable -- (759)
Purchase of Geomation and STIP - Net of cash and cash
equivalents acquired -- (2,654)
Investment in AFTCO -- (1,505)
Other 8 (168)
-------- --------
Net cash flow from investing activities (4,252) 329
-------- --------
Cash flows from financing activities:
Cash dividends paid (564) (851)
Proceeds from borrowings 5,161 --
Repayment of debt (290) --
Purchase of common stock (165) --
-------- --------
Net cash flow from financing activities 4,142 (851)
-------- --------
Cash and cash equivalents:
Net increase 10 922
Balance at beginning of year 3,837 1,810
-------- --------
Balance at end of period $ 3,847 $ 2,732
-------- --------
-------- --------
Supplemental disclosures of cash flows:
Income taxes paid (refunds received) $ (264) $ 637
Interest paid $ 166 $ 50
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in thousands, except per share data)
April 30, 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 period 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:
Apr 30, 1999 Jul 31, 1998
------------ ------------
Raw materials $ 4,166 $ 3,831
Work-in-process 3,667 3,164
Finished goods 2,643 2,907
--------- --------
$ 10,476 $ 9,902
--------- --------
--------- --------
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,166,000 and $1,377,000 higher than reported on the
LIFO basis at April 30, 1999 and July 31, 1998, respectively.
NOTE 4: Other Assets
Apr 30, 1999 Jul 31, 1998
------------ ------------
Intangibles, net of accumulated amortization
of $629,000 and $317,000 $ 3,150 $ 3,462
Investment in AFTCO, net of accumulated
amortization of $81,800 and $25,000 1,182 1,386
Cash value of life insurance 1,342 1,247
Note receivable - related party 1,000 1,000
Other 383 367
-------- --------
$ 7,057 $ 7,462
-------- --------
-------- --------
6
NOTE 5: LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
Apr 30, 1999 Jul 31, 1998
------------ ------------
Isco, Inc.
Note due December 2003, 6.50% $ 4,710 $ --
STIP
Note due March 2000, 7.50% 279 280
Note due June 2003, 7.50% 419 410
-------- ------
5,408 690
Less current portion of long-term debt 1,170 --
-------- ------
$ 4,238 $ 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 Company, for the current balance sheet date, did not maintain the
agreed upon fixed charge coverage ratio as defined in the loan agreement.
However, the bank has waived this requirement for the next twelve months. The
Company is in compliance with all other terms of the loan agreement.
A portion of the interest incurred on the term loan during the period of
remodeling and construction at the Company's headquarters is capitalized. The
interest capitalized in the current period was $51,000 and no interest was
capitalized in 1998.
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 nine months ended April 30, 1999 and April 24, 1998, was as
follows:
Apr 30, 1999 Apr 24, 1998
------------ ------------
Net income (loss) $ (37) $ 420
Other comprehensive income, net of income tax:
Foreign currency translation adjustments (6) (7)
Unrealized holding gains (losses) on
available-for-sale securities (4) (6)
------ -------
Comprehensive income (loss) $(47) $407
------ -------
------ -------
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAIN TREND ANALYSIS AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS WITHIN THIS DOCUMENT.
SALES ANALYSIS AND REVIEW
Our sales for the three month and nine month periods ended April 30, 1999,
were $12.9 million and $38.1 million, respectively. STIP was not part of our
company during the first six months of last year. The sales for the nine
month period included STIP sales of $2.8 million compared with $941,000 for
the same period last year. For the periods under review, our sales were down
three percent and up nine percent compared with the same periods last year.
Sales of our core products (wastewater samplers, flow meters, and liquid
chromatography products) were up nine percent compared with the same periods
last year. This increase was due primarily to increased sales of flow meter
products. The sales of our other products (syringe pumps, supercritical fluid
extraction (SFE), STIP, Geomation, and process monitoring products) were down
33
7
percent and up 10 percent for the periods under review. Excluding sales of
STIP products, the nine month sales of our other products were down 15
percent. The three month and nine month results were affected mainly by the
decrease in sales of SFE and syringe pump products.
Our domestic sales for the three month and nine month periods were up 12
percent when compared with last year. The domestic sales of core products for
the same periods were up 16 percent and 15 percent, respectively. The
increases are due to higher sales of flow meter products. The domestic sales
of our other products for the same periods were down four percent and up four
percent, respectively. The results for the three month and nine month periods
are due to the combined effect of the growth in sales of Geomation products
and decreases in sales of SFE and syringe pump products.
Our international sales for the three months and nine months were down 31
percent and up two percent, respectively, when compared with the same periods
last year. International sales of core products for the same periods were
down 14 percent and nine percent, respectively. The three month results are
due to the reduction in sales of sampler products, while the nine month
results are due to deceases in sales of sampler and flow meter products.
International sales of our other products for the same periods were down 48
percent and up 16 percent, respectively. Excluding sales of STIP products,
the nine month sales of other products were down 50 percent. Both the three
month and nine month results were affected by the decline in sales of SFE,
syringe pump, and Geomation products.
During the three months and nine months we received net orders of $13.9
million and $39.4 million, respectively. The net orders received were 10
percent and 16 percent higher than the same periods last year. The nine month
increase includes orders received by STIP of $3.1 million. Excluding orders
by STIP, nine month net orders were nine percent higher than last year. The
increase in orders, excluding STIP products, is due to increases in orders
for flow meter and chromatography products. At April 30, 1999, our order
backlog was $5.5 million, 24 percent higher than at the beginning of the
fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
We had operating losses of $80,000 and $503,000, respectively, for the three
months and nine months ended April 30, 1999. For the same periods last year,
we had operating losses of $51,000 and $257,000, respectively. Our gross
margin declined 2.4 and 3.1 percentage points, 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 work on our operating
systems to address the Y2K issue. These increases were off-set by a reduction
in the LIFO reserve.
Our selling, general, and administrative (SG&A) expenses, as a percentage of
sales, for the periods under review were up one percent compared with the
same periods last year. Total SG&A expenses for the three months and nine
months decreased four percent and increased seven percent respectively, when
compared with the same periods last year. The decrease for the three month
period is due to several factors. The prior year's expenses included costs
related to the acquisitions of Geomation and STIP and higher amortization
expense. These reductions combined with the current years lower operating
expenses were partially off-set by increased sales commissions. Excluding the
SG&A expenses of STIP, our SG&A expenses for the nine months were flat when
compared with last year. During the current year, the second quarter
settlement costs of the Zellweger Analytics, Inc. litigation off-set the
reductions in our other SG&A expenses.
Our engineering expenses for the three months and nine months decreased 14
percent and five percent, respectively, when compared with the same periods
last year. The reduction in expenses for the three month period is due to the
focused product development activities that are nearing completion. Excluding
STIP, expenses for the nine month period were down seven percent compared with
last year. This decrease is due to last year's expenses including a one time
charge of "purchased R&D" related to the acquisition of Geomation.
8
RESULTS OF OPERATIONS
The following table sets forth, for the three month and nine month periods
indicated, the percentages which certain components of the Condensed
Consolidated Statements of Operations bear to net sales and the percentage of
change of such components (based on actual dollars) compared with the same
periods of the prior year.
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
--------------------------------- --------------------------------
4/30/99 4/24/98 Change 4/30/99 4/24/98 Change
------- ------- ------ ------- ------- ------
Net sales 100.0 100.0 (2.7) 100.0 100.0 8.5
Cost of sales 47.2 44.8 2.5 46.7 43.6 16.2
------ ----- ----- -----
52.8 55.2 (6.9) 53.3 56.4 2.6
------ ----- ----- -----
Expenses:
Selling, general, & administrative 42.0 42.7 (4.2) 42.8 43.6 6.5
Research & engineering 11.4 12.9 (13.9) 11.8 13.5 (4.7)
------ ----- ----- -----
53.4 55.6 (6.5) 54.6 57.1 3.8
------ ----- ----- -----
Operating income (loss) (.6) (.4) 57.8 (1.3) (.7) 95.8
Interest expense (.5) (.3) 40.5 (.4) (.2) 228.4
Non-operating income (loss) (.4) 1.7 (122.9) 1.2 2.1 (36.8)
------ ----- ----- -----
Earnings (loss) before income taxes (1.5) 1.0 (246.5) (.5) 1.2 (148.3)
Income tax (benefit) (.6) (.3) 81.0 (.4) .0 (2822.0)
------ ----- ----- -----
Net earnings (loss) (.9) 1.3 (172.2) (.1) 1.2 (108.9)
------ ----- ----- -----
------ ----- ----- -----
- ---------------------------------------------------------------------------------------------------------------------------
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.
We had a non-operating loss of $52,000 and non-operating income of $464,000,
respectively, for the three months and nine months ended April 30, 1999. For
the same periods last year, we had non-operating income of $231,000 and
$733,000, respectively. During the current quarter, we entered the final
renovation stage of the Superior Street facility. As a result of the
renovation, we have written-off $335,000 of undepreciated building components
that were demolished.
For the three months and nine months ended April 30, 1999, we experienced
income tax benefits of $71,000 and $168,000, respectively. For the same
periods last year we reported an income tax benefit of $40,000 and an income
tax expense of $6,000, respectively. The change reported for the three months
is the results of the tax benefit generated due to the write-off discussed in
the preceding paragraph. The affect of this write-off was partially off-set
by an increase in our taxable income.
FINANCIAL CONDITION AND LIQUIDITY
As of April 30, 1999, our working capital was $18 million and our current
ratio was 3.48:1. The term loan that we added to our capital structure
contributed to the increase in our working capital. For the nine months ended
April 30, 1999, our operating activities generated cash of $120,000.
Operating assets and liabilities used $1.5 million of cash, primarily for
growth in accounts receivable and inventories.
In addition to the $5.0 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. For the current balance
sheet date, we did not maintain the agreed upon fixed charge coverage ratio
as defined in the loan agreement. However, the bank has waived this
requirement for the next twelve months. We are in compliance with all other
terms of the loan agreement. It may be necessary to use a portion of our
available line of credit to meet the combined future cash needs to complete
the renovation of the Superior Street facility and the additional costs
associated with decisions regarding Isco's operating systems.
9
Based upon our current cash position and projected cash requirements along
with our performance during the first nine months of fiscal 1999, the Board
of Directors did not declare the July 1999 quarterly cash dividend.
FUTURE EVENTS AND YEAR 2000
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 future ERP system.
That system was scheduled to go on line early in the fourth quarter of fiscal
1999. Within the third quarter, management determined that it was in the best
interests of our company to temporarily suspend further work on the
implementation of the BaaN system because we began experiencing stability
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 our old operating system and software in order
to make them Y2K compliant. This process is progressing on schedule and will
go on line in early August. Management believes the upgrading of the existing
operating system and software does not provide a long-term solution for our
company. We are currently evaluating our longer-term options, focusing on
reactivating the suspended project. During the third quarter a new BaaN
implementation firm was retained to assist us in this evaluation.
The total amount invested, excluding internal labor costs, prior to the
suspension of the BaaN implementation was approximately $3.0 million
including approximately $250,000 that was expensed as incurred. The
additional cost of bringing our existing systems into Y2K compliance is
approximately $500,000, most of which will be incurred and expensed in the
fourth quarter.
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.
MARKET RISK
We do not use derivative financial or commodity instruments. Our other
financial instruments include cash and cash equivalents, accounts and notes
receivable, accounts and notes payable, and long-term debt. Our cash and cash
equivalents, accounts and notes receivable, and accounts and notes payable
balances are generally short-term in nature and do not expose our company to
material market risk. At April 30, 1999, we had $4.2 million of fixed rate
long-term debt and $7.6 million of variable rate credit facilities. At April
30, 1999, approximately $1.4 million was outstanding under these credit
facilities. We do not believe that changes in interest rates on the long-term
debt and credit facilities would have a material effect on our company's
results of operations given our current obligations under those long-term
debt and credit facilities.
10
INFLATION
The effect of inflation on the costs of our company and its ability to pass
on cost increases in the form of increased prices is dependent upon market
conditions and the competitive environment. The general level of inflation in
the U.S. economy has been relatively low for the past several years and has
not, to date, had a significant effect on our company.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference to the
section entitled "Market Risk" in Part I, Item 2, Management's Discussion and
Analysis of Results of Operations and Financial Condition.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISCO, INC.
Date: June 11, 1999 BY /s/ Robert W. Allington
---------------------------------
Robert W. Allington, Chairman and
Chief Executive Officer
Date: June 11, 1999 BY /s/ Philip M. Wittig
---------------------------------
Philip M. Wittig, Treasurer and
Chief Financial Officer
11