<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 January 24, 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
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 February 27, 1997:
Common Stock, $0.10 par value 5,351,931
- ----------------------------- ----------------
Class Number of Shares
<PAGE>
ISCO, INC. AND SUBSIDIARIES
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 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
11 - Computation of earnings per share for the three months
and six months ended January 24, 1997 and
January 26, 1996. 12
27 - Financial Data Schedule. 13
(b) Reports on Form 8-KA 11
2
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Amounts in thousands, except per share data)
- --------------------------------------------
Three months ended Six months ended
------------------ ----------------
Jan 24 Jan 26 Jan 24 Jan 26
1997 1996 1997 1996
------- ------ ------- -------
Net sales . . . . . . . . . . . . . . . $9,846 $9,940 $19,071 $19,692
Cost of sales . . . . . . . . . . . . . 4,448 4,467 8,604 8,774
------- ------ ------- -------
5,398 5,473 10,467 10,918
------- ------ ------- -------
Expenses:
Selling, general, and administrative . 4,417 3,856 8,734 7,880
Research and engineering . . . . . . . 1,103 1,180 2,194 2,297
------- ------ ------- -------
5,520 5,036 10,928 10,177
------- ------ ------- -------
Operating income(loss). . . . . . . . . (122) 437 (461) 741
Non-operating income . . . . . . . . . 410 368 776 732
------- ------ ------- -------
Earnings before income taxes. . . . . . 288 805 315 1,473
Income taxes provision. . . . . . . . . 69 185 7 375
------- ------ ------- -------
Net earnings. . . . . . . . . . . . . . $ 219 $ 620 $ 308 $ 1,098
------- ------ ------- -------
------- ------ ------- -------
Net earnings per share. . . . . . . . . $.04 $.12 $.06 $.21
------- ------ ------- -------
------- ------ ------- -------
Weighted average number
of shares outstanding. . . . . . . . . 5,356 5,352 5,354 5,352
------- ------ ------- -------
------- ------ ------- -------
Cash dividend per share . . . . . . . . $.05 $.05 $.10 $.10
------- ------ ------- -------
------- ------ ------- -------
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)
- -------------------------------
Jan 24 Jul 26
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 2,076 $ 4,420
Short-term investments. . . . . . . . . . . . . . . . 4,177 2,749
Accounts receivable - trade, net of allowance for
doubtful accounts of $96,700 and $72,000. . . . . . 7,074 7,131
Inventories (Note 3). . . . . . . . . . . . . . . . . 7,187 5,343
Other current assets. . . . . . . . . . . . . . . . . 2,326 1,771
------- -------
Total Current Assets . . . . . . . . . . . . . . . 22,840 21,414
Property, plant, and equipment, net of accumulated
depreciation of $16,578,000 and $15,265,000 . . . . . 6,976 7,075
Long-term investments . . . . . . . . . . . . . . . . . 12,981 16,035
Other assets. . . . . . . . . . . . . . . . . . . . . . 3,373 2,180
------- -------
Total Assets. . . . . . . . . . . . . . . . . . . . . . $46,170 $46,704
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . $ 1,433 $ 862
Other current liabilities . . . . . . . . . . . . . . 2,259 3,115
------- -------
Total Current Liabilities . . . . . . . . . . . . . 3,692 3,977
Deferred income taxes . . . . . . . . . . . . . . . . . 593 725
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 . . . . . . . . . . . . . . . . . . 6,200 6,428
Net unrealized holding gain(loss) on
available-for-sale securities . . . . . . . . . . . (87) (198)
Treasury stock, at cost, 626,607 shares . . . . . . . (1,664) (1,664)
------- -------
Total Shareholders' Equity . . . . . . . . . . . . 41,885 42,002
------- -------
Total Liabilities and Shareholders' Equity. . . . . . . $46,170 $46,704
------- -------
------- -------
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)
Six months ended
----------------
Jan 24 Jan 26
(Columnar amounts in thousands) 1997 1996
- ------------------------------ ------- -------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 308 $ 1,098
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 1,103 1,008
Change in operating assets and liabilities . . . . . . (1,894) 697
Other. . . . . . . . . . . . . . . . . . . . . . . . . 131 (126)
------- -------
Total adjustments. . . . . . . . . . . . . . . . . . . . . (660) 1,579
------- -------
Net cash provided by(used for) operating activities. . . . (352) 2,677
------- -------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities. . . . 619 25
Proceeds from maturity of available-for-sale securities. . 771 --
Proceeds from maturity of held-to-maturity securities. . . 770 3,493
Proceeds from sale of property, plant, and equipment . . . 168 127
Purchase of available-for-sale securities. . . . . . . . . (441) (2,362)
Purchase of held-to-maturity securities. . . . . . . . . . -- (475)
Purchase of property, plant, and equipment . . . . . . . . (468) (476)
Disbursements for issuance of notes receivable . . . . . . (100) --
Purchase of Suprex assets. . . . . . . . . . . . . . . . . (2,624) --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . (151) (100)
------- -------
Net cash used in investing activities. . . . . . . . . . . (1,456) 232
------- -------
Cash flows from financing activities:
Cash dividends paid. . . . . . . . . . . . . . . . . . . . (536) (536)
------- -------
Net cash used in financing activities. . . . . . . . . . . (536) (536)
------- -------
Cash and cash equivalents:
Net increase (decrease). . . . . . . . . . . . . . . . . . (2,344) 2,373
Balance at beginning of year . . . . . . . . . . . . . . . 4,420 4,063
------- -------
Balance at end of period . . . . . . . . . . . . . . . . . $ 2,076 $ 6,436
------- -------
------- -------
During the six months ended January 24, 1997 and January 26, 1996, the Company
made income tax payments and received income tax payments of approximately
$423,000 and $37,000, 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)
January 24, 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:
Jan 24, 1997 Jul 26, 1996
------------ ------------
Raw materials $3,369 $2,049
Work-in-process 2,328 1,935
Finished goods 1,490 1,359
------ ------
$7,187 $5,343
------ ------
------ ------
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,410,000 and $1,275,000 higher than reported on the
LIFO basis at January 24, 1997 and July 26, 1996, respectively.
Note 4: On February 27, 1997, the Board of Directors declared a quarterly cash
dividend of $.05 per share, payable April 1, 1997 to shareholders of record on
March 14, 1997.
Note 5: 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 Six months ended
------------------ ----------------
1/24/97 1/26/96 1/24/97 1/26/96
------- ------- ------- -------
Net sales $9,846 $11,416 $19,071 $22,289
Net earnings(loss) 219 498 308 779
Net earnings(loss) per share $.04 $.09 $.06 $.15
Weighted average number of
shares outstanding 5,356 5,352 5,354 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 six-month periods, ended January 24, 1997, were
down one percent and three percent, respectively, when compared with the same
periods last year. Sales of the Company's core products (wastewater
samplers, flow meters, and chromatography products) were up two percent for
the three months, while for the same period, sales of other products such as
supercritical fluid extraction (SFE) products, syringe pumps, and total
organic carbon (TOC) products were down approximately 18 percent. For the
six months, sales of the core products declined two percent. For the same
period, weakness in the sales of SFE product and syringe pumps was off-set by
strength in TOC products.
Domestic sales of the core products increased seven percent and five percent,
respectively, for the three months and six months when compared with the same
periods last year. For the same periods, international sales of the core
products declined 13 percent and 21 percent, respectively.
Domestic sales of the other products declined 33 percent and 23 percent,
respectively, for the three months and six months when compared with the same
periods last year. For the same periods, international sales of the other
products increased 33 percent and 37 percent, respectively.
Net orders of $9.8 and $20.6 million received during the three months and six
months of fiscal 1997 were two percent lower and five percent higher,
respectively, when compared to the same periods last year. The Company's order
backlog, at mid-year, was $3.9 million, an increase of 54 percent from the
beginning of the fiscal year. The Company expects to reduce its order backlog
significantly during the remainder of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW.
The Company had an operating loss of $122,000 and $461,000, respectively, for
the three months and six months ended January 24, 1997 which compares with an
operating profit of $437,000 and $741,000 for the same periods one year ago. In
spite of the significant, year-to-year, reduction made in manufacturing overhead
during the first six months of fiscal 1997, the gross margin percentage for the
period declined slightly.
When comparing engineering expenses for the recent six months with one year ago,
reduced salaries and subcontracted services, and a non-recurring saving in
benefits exceeded the $150,000 of transition expenses and amortization of
intangibles arising out of the Suprex acquisition. For the same period, higher
sales expenses were the result of approximately $180,000 from increased
advertising, exhibition, other marketing expenses, and expenses related to
managing the distribution channels along with nearly $240,000 of transition
expenses and amortization of intangibles related to the Suprex acquisition. It
should be noted, that the Company will not be able to realize fully the
anticipated benefits of restructuring the Company because management has
recognized that the personnel reductions in customer service and product
development were too aggressive and some were rehired.
8
<PAGE>
In the aftermath of restructuring the Company, management decided that
specialized training would assist the management staff in making a successful
and expeditious transition to a unified organization. Also, it was decided to
accelerate the implementation of technology in the Company's business processes
by upgrading the computer networks and engineering software and hardware. The
Company has incurred significant expenses for these activities. Management is
committed to completing the improvement and overall restructuring of its
business processes within the next twelve months. The cost, of these
activities, approximating $270,000, along with $190,000 of the transition
expenses and amortization of intangibles arising out of the Suprex acquisition
have been the primary drivers of the increase in general and administrative
expenses during the first six months of fiscal 1997. The reduction in value of
the accounts receivable due from two international distributors whose contracts
were terminated further increased general and administrative expenses.
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 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.
Three months ended Six months ended
-------------------------- --------------------------
1/24/97 1/26/96 Change 1/24/97 1/26/96 Change
------- ------- ------ ------- ------- ------
Net sales 100.0 100.0 (.9) 100.0 100.0 (3.2)
Cost of sales 45.2 44.9 (.4) 45.1 44.5 (1.9)
----- ----- ----- -----
54.8 55.1 (1.4) 54.9 55.5 (4.1)
----- ----- ----- -----
Expenses:
Selling, general,
& administrative 44.9 38.8 14.5 45.8 40.0 10.8
Research
& engineering 11.2 11.9 (6.5) 11.5 11.7 (4.5)
----- ----- ----- -----
56.1 50.7 9.6 57.3 51.7 7.4
----- ----- ----- -----
Operating income(loss) (1.3) 4.4 -- (2.4) 3.8 --
Non-operating
income 4.2 3.7 11.4 4.1 3.7 6.0
----- ----- ----- -----
Earnings before
income taxes 2.9 8.1 (64.2) 1.7 7.5 (78.6)
Income taxes .7 1.9 (62.7) 0.1 1.9 (98.1)
----- ----- ----- -----
Net earnings 2.2 6.2 (64.7) 1.6 5.6 (71.9)
----- ----- ----- -----
----- ----- ----- -----
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 in fiscal 1997. 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 January 24, 1997, the Company's working capital exceeded $19 million. On
that date the current ratio was 6.2:1 compared with 5.4:1 at the end of fiscal
1996. During the first six 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 the
computer hardware and software discussed in a preceding section and also acquire
additional inventory in anticipation of improved customer demand for products.
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 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of shareholders was held on December 12, 1996.
A. The following persons were elected to serve a two-year term on the Company's
Board of Directors:
Votes
---------------------------------
Nominee In Favor Withheld
- ---------------- --------- --------
Douglas M. Grant 4,829,543 18,701
Robert B. Harris 4,580,763 18,701
Harris Wagenseil 4,459,241 18,701
Philip M. Wittig 4,821,357 18,701
B. The Isco, Inc. 1996 Stock Option Plan was approved by the shareholders.
Votes
---------------------------------
In Favor Opposed Withheld
--------- ------- --------
4,580,985 84,231 26,311
This plan provides for the granting of incentive stock options to employees and
non-incentive stock options to employees, officers, and other persons rendering
substantial services to the Company and its subsidiaries, provided, however,
that only employees of the Company or any subsidiary thereof shall be eligible
to receive an incentive stock option. A total of 250,000 shares of common stock
has been reserved for issuance under this plan.
10
<PAGE>
C. The Isco, Inc. 1996 Outside Directors Stock Option Plan was approved by the
shareholders.
Votes
---------------------------------
In Favor Opposed Withheld
--------- ------- --------
4,517,327 146,855 27,345
This plan provides for the granting of non-incentive stock options to the
members of the Board of Directors who are not employees of the Company or any
subsidiary or affiliate of the Company on the date of grant. A total of 100,000
shares of common stock has been reserved for issuance under this plan.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 - Computation of earnings per share for the three months and
six months ended January 26, 1996 and January 24, 1997.
27 - Financial Data Schedule.
(b) Reports on Form 8-KA.
On December 30, 1996, Form 8-KA, which included the required
financial statements, was filed. The Form 8-KA completed the
reporting of the acquisition of substantially all of the assets
and the assumption of selected liabilities of Suprex Corporation,
a Pennsylvania corporation, located in Pittsburgh, Pennsylvania.
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: March 7, 1997
<PAGE>
EXHIBIT 11
COMPUTATION OF NET EARNINGS PER SHARE
(Amount in thousands, except per share data)
Three months ended Six months ended
------------------ ----------------
Jan 24 Jan 26 Jan 24 Jan 26
1997 1996 1997 1996
------ ------ ------ ------
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. . . . . . . . . . 4 -- 2 --
----- ----- ----- -----
Total. . . . . . . . . . . . . 5,356 5,352 5,354 5,352
----- ----- ----- -----
----- ----- ----- -----
Net earnings. . . . . . . . . $219 $620 $308 $1,098
----- ----- ----- -----
----- ----- ----- -----
Per share amount. . . . . . . $0.04 $0.12 $0.06 $0.21
----- ----- ----- -----
----- ----- ----- -----
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. . . . . . . . . . 4 -- 2 --
----- ----- ----- -----
Total. . . . . . . . . . . . . 5,356 5,352 5,354 5,352
----- ----- ----- -----
----- ----- ----- -----
Net earning. . . . . . . . . . $219 $620 $308 $1,098
----- ----- ----- -----
----- ----- ----- -----
Per share amount . . . . . . . $0.04 $0.12 $0.06 $0.21
----- ----- ----- -----
----- ----- ----- -----
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF EARNINGS FOR JANUARY 24, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-25-1997
<PERIOD-START> OCT-26-1996
<PERIOD-END> JAN-24-1997
<CASH> 2,076
<SECURITIES> 4,177
<RECEIVABLES> 7,171
<ALLOWANCES> 97
<INVENTORY> 7,187
<CURRENT-ASSETS> 22,840
<PP&E> 23,554
<DEPRECIATION> 16,578
<TOTAL-ASSETS> 46,170
<CURRENT-LIABILITIES> 3,692
<BONDS> 0
0
0
<COMMON> 598
<OTHER-SE> 41,287
<TOTAL-LIABILITY-AND-EQUITY> 46,170
<SALES> 19,071
<TOTAL-REVENUES> 19,071
<CGS> 8,604
<TOTAL-COSTS> 8,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 315
<INCOME-TAX> 7
<INCOME-CONTINUING> 308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
