<PAGE>
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 25, 1997
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
----------------------- ------------------------------------
(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 30, 1997:
Common Stock, $0.10 par value 5,351,931
----------------------------- -----------------
Class Number of Shares
<PAGE>
TABLE OF CONTENTS
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Earnings 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 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
11 - Computation of earnings per share for the
three months and nine months ended
April 25, 1997 and April 26, 1996. 11
27 - Financial Data Schedule. 12
2
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------- --------------------
Apr 25 Apr 26 Apr 25 Apr 26
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $10,282 $9,781 $29,353 $29,473
Cost of sales 4,228 4,320 12,832 13,093
------- ------- ------- -------
6,054 5,461 16,521 16,380
------- ------- ------- -------
Expenses:
Selling, general, and administrative 4,729 3,978 13,464 11,859
Research and engineering 1,086 1,130 3,280 3,427
------- ------- ------- -------
5,815 5,108 16,744 15,286
------- ------- ------- -------
Operating income(loss) 239 353 (223) 1,094
Non-operating income 315 486 1,092 1,218
------- ------- ------- -------
Earnings before income taxes 554 839 869 2,312
Income taxes 91 251 98 626
------- ------- ------- -------
Net earnings $ 463 $ 588 $ 771 $ 1,686
------- ------- ------- -------
------- ------- ------- -------
Net earnings per share $.09 $.11 $.14 $.32
------- ------- ------- -------
------- ------- ------- -------
Weighted average number
of shares outstanding 5,357 5,352 5,356 5,352
------- ------- ------- -------
------- ------- ------- -------
Cash dividend per share $.05 $.05 $.15 $.15
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
Apr 25 Jul 26
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,478 $ 4,420
Short-term investments 4,317 2,749
Accounts receivable - trade, net of allowance for
doubtful accounts of $96,000 and $72,000 7,072 7,131
Inventories (Note 3) 7,741 5,343
Other current assets 2,140 1,771
------ ------
Total current assets 23,748 21,414
Property, plant, and equipment, net of accumulated
depreciation of $16,921,000 and $15,265,000 7,075 7,075
Long-term investments 12,010 16,035
Other assets 3,723 2,180
------ ------
Total assets $46,556 $46,704
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,280 $ 862
Other current liabilities 2,641 3,115
------ ------
Total current liabilities 3,921 3,977
Deferred income taxes 548 725
Shareholders' equity (Note 4):
Preferred stock, $.10 par value, authorized
5,000,000 shares; issued none
Common stock, $.10 par value, authorized
15,000,000 shares; issued 5,978,538 shares 598 598
Additional paid-in capital 36,838 36,838
Retained earnings 6,396 6,428
Net unrealized holding gain(loss) on
available-for-sale securities (81) (198)
Treasury stock, at cost, 626,607 shares (1,664) (1,664)
------ ------
Total shareholders' equity 42,087 42,002
------ ------
Total liabilities and shareholders' equity $46,556 $46,704
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
--------------------
Apr 25 Apr 26
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 771 $ 1,686
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,666 1,483
Change in operating assets and liabilities (2,076) 1,127
Other 130 (213)
------- -------
Total adjustments (280) 2,397
------- -------
Net cash provided by operating activities 491 4,083
------- -------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 1,348 155
Proceeds from maturity of available-for-sale securities 871 --
Proceeds from maturity of held-to-maturity securities 770 4,779
Proceeds from sale of property, plant, and equipment 215 158
Purchase of available-for-sale securities (491) (6,464)
Purchase of held-to-maturity securities -- (475)
Purchase of property, plant, and equipment (937) (668)
Disbursements for issuance of notes receivable (100) --
Purchase of Suprex assets (2,624) --
Other (682) (274)
------- -------
Net cash used in investing activities (1,630) (2,789)
------- -------
Cash flows from financing activities:
Cash dividends paid (803) (803)
------- -------
Net cash used in financing activities (803) (803)
------- -------
Cash and cash equivalents:
Net increase (decrease) (1,942) 491
Balance at beginning of year 4,420 4,063
------- -------
Balance at end of period $ 2,478 $ 4,554
------- -------
------- -------
</TABLE>
During the nine months ended April 25, 1997 and April 26, 1996, the Company
made income tax payments and received income tax refunds of approximately
$426,000 and $158,000, respectively.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in thousands)
April 25, 1997
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
26, 1996.
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:
Apr 25, 1997 Jul 26, 1996
------------ ------------
Raw materials $3,149 $2,049
Work-in-process 2,873 1,935
Finished goods 1,719 1,359
------ ------
$7,741 $5,343
------ ------
------ ------
Had inventories been valued on the first-in, first-out (FIFO) basis, they
would have been approximately $1,391,000 and $1,275,000 higher than reported
on the LIFO basis at April 25, 1997 and July 26, 1996, respectively.
Note 4: On May 15, 1997, the Board of Directors declared a quarterly cash
dividend of $.05 per share, payable July 1, 1997 to shareholders of record on
June 13, 1997.
Note 5: In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings Per Share which specifies the computation,
presentation and disclosure requirements for earnings per share. The
objective of the statement is to simplify the computation of earnings per
share. The impact on the Company's earnings per share is not materially
different than earnings per share determined in accordance with current
guidance. SFAS No. 128 is applicable for fiscal years ending after December
15, 1997.
Note 6: On August 21, 1996, Isco acquired substantially all of the assets
and assumed selected liabilities of Suprex Corporation, a Pennsylvania
corporation, located in Pittsburgh, Pennsylvania. Suprex manufactured a
variety of supercritical fluid extraction (SFE) products, principally for use
in the food products industry. The Company has integrated the Suprex SFE
products with its existing line. The transaction was accounted for as a
purchase.
6
<PAGE>
The purchase price, based on current estimates, was comprised of the
following consideration:
Amount paid to seller:
Cash paid at close $2,624
Liabilities assumed:
Current liabilities 499
------
Total consideration $3,123
------
------
The initial purchase price allocation, based on current estimates, is
summarized as follows:
Current assets:
Accounts receivable $ 305
Inventory 762
Property and equipment 219
Other asset(1):
Customer lists/trade names 807
Engineering drawings 304
Goodwill 726
------
$3,123
------
------
(1) The life of these intangibles ranges from 3 to 8 years.
The following unaudited pro forma financial information sets forth the
results of operations of Isco, Inc. as if the acquisition of Suprex had
occurred on July 29, 1995:
Pro forma financial information
(unaudited)
Three months ended Nine months ended
----------------- ------------------
4/25/97 4/26/96 4/25/97 4/26/96
------- ------- ------- --------
Net sales $10,282 $10,269 $29,353 $32,558
Net earnings 463 104 771 883
Net earnings per share $.09 $.02 $.14 $.16
Weighted average number of
shares outstanding 5,357 5,352 5,356 5,352
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
(Columnar amounts in thousands)
SALES ANALYSIS AND REVIEW.
Sales for the three-month and nine-month periods ended April 25, 1997, were
up five percent and flat, respectively, when compared with the same periods
last year. Sales of the Company's core products (wastewater samplers, flow
meters, and chromatography products) were down one percent for the three
months. For the same period, sales of the other products such as
supercritical fluid extraction (SFE) products, syringe pumps, and total
organic carbon (TOC) analyzer products increased 38 percent. For the nine
months, sales of the core products declined two percent. For the same
period, sales of the other products were up seven percent.
Domestic sales of the core products increased four percent for the three
months and nine months when compared with the same periods last year. For
the same periods, international sales of the core products declined 16
percent and 20 percent, respectively.
Domestic sales of the other products increased 11 percent and declined 14
percent, respectively, for the three months and nine months when compared
with the same periods last year. For the same periods, international sales
of the other products increased 80 percent and 39 percent, respectively.
Net orders of $10.6 and $31.2 million received during the three months and
nine months of fiscal 1997 were eight percent and seven percent higher,
respectively, when compared with the same periods last year. The Company's
order backlog, at the close of the third quarter, was $4.2 million, an
increase of 66 percent from the beginning of the fiscal year. The rate of
incoming orders, since the end of the quarter, has continued to be strong.
OPERATING INCOME ANALYSIS AND REVIEW.
The Company had operating income of $239,000 and an operating loss of
$223,000, respectively, for the three months and nine months ended April 25,
1997 which compares with operating income of $353,000 and $1,094,000 for the
same periods one year ago. Year-to-year, the gross margin percentage for the
quarter improved from 55.8 percent to 58.9 percent and for the nine months it
improved slightly from 55.6 percent to 56.3 percent.
Research and engineering expenses for the nine months were below the same
period last year. This reduction is primarily the result of reduced salaries
and subcontracted services which exceeded the $170,000 of transition expenses
and amortization of intangibles arising out of the Suprex acquisition.
For the same nine-month periods, selling expenses were nearly $960,000
higher. The increase included $320,000 of transition expenses and
amortization of intangibles related to the Suprex acquisition which were
allocated to sales. Increases in the following categories accounted for most
of the remaining $640,000: travel, exhibition, and promotional expenses;
communication and mailing expenses; expenditures for consulting and
subcontracted services; temporary help; and the costs associated with
managing the Company's distribution channels along with commissions earned by
the manufacturers' representatives from increased sales.
8
<PAGE>
Since the consolidation of the Company's two operating divisions late last
fiscal year, management has been focusing on making a successful and
expeditious transition to a unified organization. In that effort, management
has enlisted external resources to assist in the training of its management
staff, selection of new enterprise resource planning (ERP) software to
support its restructured business processes, and planning the expansion of
the Company's facilities. These activities along with the $230,000, allocated
to general and administrative, of transition expenses and the amortization of
intangibles arising out of the Suprex acquisition have been the primary
drivers in the increase in general and administrative expenses during the
first nine months of fiscal 1997. Approximately $75,000 of bad debt expense
was incurred as a result of the failure of two international distributors to
fulfill their financial obligations.
As reported three months ago, the Company will not realize fully the
anticipated benefits of restructuring the Company because personnel
reductions in customer service and product development were too aggressive
and some positions which were eliminated have been re-instated.
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 Earnings 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.
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------- --------------------------
4/25/97 4/26/96 Change 4/25/97 4/26/96 Change
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 5.1 100.0 100.0 (0.4)
Cost of sales 41.1 44.2 (2.1) 43.7 44.4 (2.0)
----- ----- ----- ----- -----
58.9 55.8 10.9 56.3 55.6 0.9
----- ----- ----- ----- -----
Expenses:
Selling, general,
& administrative 46.0 40.6 18.9 45.9 40.3 13.5
Research
& engineering 10.6 11.6 (3.9) 11.2 11.6 (4.3)
----- ----- -----
56.6 52.2 13.8 57.1 51.9 9.5
----- ----- ----- -----
Operating income(loss) 2.3 3.6 (32.3) (0.8) 3.7 --
Non-operating
income 3.1 5.0 (35.2) 3.7 4.1 (10.4)
----- ----- ----- -----
Earnings before
income taxes 5.4 8.6 (34.0) 2.9 7.8 (62.4)
Income taxes 0.9 2.6 (63.9) 0.3 2.1 (84.4)
----- ----- ----- -----
Net earnings 4.5 6.0 (21.2) 2.6 5.7 (54.2)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
The underlying reasons for the changes in operating results were discussed in
the previous section. The Company continues to generate a significant amount
of tax-exempt income. This tax-exempt income combined with the lower net
income before taxes in fiscal 1997 is the major reason for the lower income
tax provision when compared with fiscal 1996.
9
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY.
At April 25, 1997, the Company's working capital was nearly $20 million. On
that date the current ratio was 6.1:1 compared with 5.4:1 at the end of
fiscal 1996. During the nine months of fiscal 1997, the Company liquidated a
portion of its cash equivalents to complete the Suprex transaction. In
addition, a portion of its other investments was liquidated to acquire
computer hardware along with engineering software and acquire additional
inventory in anticipation of improved customer demand for products. It is
anticipated that additional investments will be liquidated to acquire the ERP
software discussed in a previous section of this report.
INFLATION.
The impact of inflation on the costs of the Company and its ability to pass
on cost increases in the form of increased prices is dependent upon market
conditions and the competitive environment for each of its business segments.
The general level of inflation in the domestic economy has been relatively
low for the past several years, and has not had a significant impact on the
Company.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 - Computation of earnings per share for the three months and
nine months ended April 25, 1997 and April 26, 1996.
27 - Financial Data Schedule.
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.
BY /s/ Robert W. Allington
----------------------------
Robert W. Allington, Chairman
BY /s/ Philip M. Wittig
----------------------------
Philip M. Wittig, Treasurer
and Chief Financial Officer
Date: June 4, 1997
10
<PAGE>
EXHIBIT 11
COMPUTATION OF NET EARNINGS PER SHARE
(Amount in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Apr 25 Apr 26 Apr 25 Apr 26
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Primary:
Average number of shares
of common stock outstanding 5,352 5,352 5,352 5,352
------ ------ ------ ------
Additional shares assuming
exercise of dilutive
stock options 5 -- 4 --
------ ------ ------ ------
Total 5,357 5,352 5,356 5,352
------ ------ ------ ------
------ ------ ------ ------
Net earnings $463 $588 $771 $1,686
------ ------ ------ ------
------ ------ ------ ------
Per share amount $0.09 $0.11 $0.14 $0.32
------ ------ ------ ------
------ ------ ------ ------
Fully Diluted:
Average number of shares
of common stock outstanding 5,352 5,352 5,352 5,352
------ ------ ------ ------
Additional shares assuming
exercise of dilutive
stock options 5 -- 3 --
------ ------ ------ ------
Total 5,357 5,352 5,355 5,352
------ ------ ------ ------
------ ------ ------ ------
Net earnings $463 $588 $771 $1,686
------ ------ ------ ------
------ ------ ------ ------
Per share amount $0.09 $0.11 $0.14 $0.32
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and Statement of Earnings for April 25, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-24-1997
<PERIOD-START> JAN-25-1997
<PERIOD-END> APR-25-1997
<CASH> 2,478
<SECURITIES> 4,317
<RECEIVABLES> 7,168
<ALLOWANCES> 96
<INVENTORY> 7,741
<CURRENT-ASSETS> 23,748
<PP&E> 23,996
<DEPRECIATION> 16,921
<TOTAL-ASSETS> 46,556
<CURRENT-LIABILITIES> 3,921
<BONDS> 0
0
0
<COMMON> 598
<OTHER-SE> 41,489
<TOTAL-LIABILITY-AND-EQUITY> 46,556
<SALES> 29,353
<TOTAL-REVENUES> 29,353
<CGS> 12,832
<TOTAL-COSTS> 12,832
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 869
<INCOME-TAX> 98
<INCOME-CONTINUING> 771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 771
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
