<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 24, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-14429
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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 29, 1998:
COMMON STOCK, $0.10 PAR VALUE 5,672,092
- ----------------------------- ---------
Class Number of Shares
1
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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 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 - Financial Data Schedule 13
<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 24 Apr 25 Apr 24 Apr 25
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $13,246 $10,282 $35,131 $29,353
Cost of sales 5,940 4,228 15,320 12,832
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7,306 6,054 19,811 16,521
------- ------- ------- -------
Expenses:
Selling, general, and administrative 5,657 4,729 15,326 13,464
Research and engineering 1,700 1,086 4,742 3,280
------- ------- ------- -------
7,357 5,815 20,068 16,744
------- ------- ------- -------
Operating income(loss) (51) 239 (257) (223)
Non-operating income 185 315 683 1,092
------- ------- ------- -------
Earnings before income taxes 134 554 426 869
Income tax provision (benefit) (40) 91 6 98
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Net earnings $ 174 $ 463 $ 420 $ 771
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------- ------- ------- -------
Basic earnings per share $ .03 $ .09 $ .08 $ .14
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------- ------- ------- -------
Diluted earnings per share $ .03 $ .09 $ .08 $ .14
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of shares outstanding 5,672 5,351 5,585 5,351
Additional shares assuming exercise of common stock
equivalents and dilutive stock options 16 5 14 3
------- ------- ------- -------
TOTAL 5,688 5,356 5,599 5,354
------- ------- ------- -------
------- ------- ------- -------
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 24 Jul 25
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,732 $ 1,810
Short-term investments 3,483 8,813
Accounts receivable - trade, net of allowance for doubtful accounts
of $82,000 and $82,000 9,739 8,456
Inventories (Note 3) 10,535 8,005
Other current assets 2,386 1,874
-------- --------
Total Current Assets 28,875 28,958
Property, plant, and equipment, net of accumulated depreciation
of $19,260,000 and $17,947,000 12,477 7,901
Long-term investments 1,294 6,602
Other assets (Note 4) 8,951 3,247
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Total Assets $ 51,597 $ 46,708
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-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,587 $ 1,325
Note payable (Note 5) 1,261 --
Other current liabilities 2,874 2,378
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Total Current Liabilities 5,722 3,703
Long-term debt (Note 5) 684 --
Deferred income taxes 511 525
-------- --------
Total Liabilities 6,917 4,228
Shareholders' equity (Note 6):
Preferred stock, $.10 par value, authorized 5,000,000 shares;
issued none
Common stock, $.10 par value, authorized 15,000,000 shares;
issued 6,297,391 and 5,978,538 shares 630 598
Additional paid-in capital 39,458 36,846
Retained earnings 6,252 6,683
Net unrealized holding gain on available-for-sale securities 8 14
Translation Adjustments (7) --
Treasury stock, at cost, 625,299 shares (1,661) (1,661)
-------- --------
Total Shareholders' Equity 44,680 42,480
-------- --------
Total Liabilities and Shareholders' Equity $ 51,597 $ 46,708
-------- --------
-------- --------
</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 24 Apr 25
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 420 $ 771
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,127 1,666
Change in operating assets and liabilities (833) (2,076)
Other (270) 130
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Total adjustments 1,024 (280)
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Net cash provided by operating activities 1,444 491
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Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 2,674 1,348
Proceeds from maturity of available-for-sale securities 7,395 871
Proceeds from maturity of held-to-maturity securities 500 770
Proceeds from sale of property, plant, and equipment 239 215
Purchase of available-for-sale securities (34) (491)
Purchase of property, plant, and equipment (5,359) (937)
Disbursements for issuance of notes receivable (759) (100)
Purchase of Suprex assets -- (2,624)
Purchase of Geomation and STIP - Net of cash and
cash equivalents acquired (2,654) --
Investment in AFTCO (1,505) --
Other (168) (682)
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Net cash (used in) provided by investing activities 329 (1,630)
------ ------
Cash flows from financing activities:
Cash dividends paid (851) (803)
------ ------
Net cash used in financing activities (851) (803)
------ ------
Cash and cash equivalents:
Net increase (decrease) 922 (1,942)
Balance at beginning of year 1,810 4,420
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Balance at end of period $ 2,732 $ 2,478
------ ------
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</TABLE>
During the nine months ended April 24, 1998 and April 25, 1997, the Company
made income tax payments of approximately $637,000 and $426,000, 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, except per share data)
April 24, 1998
NOTE 1: In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments necessary for a
fair presentation of the financial position of the Company and the results of
operations for the interim periods presented herein. All such adjustments
are of a normal recurring nature. Results of operations for the current
unaudited interim period are not necessarily indicative of the results which
may be expected for the entire fiscal year. All significant inter-company
transactions and accounts have been eliminated.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in the Annual Report on Form 10K for the year ended July
25, 1997.
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
APR 24, 1998 JUL 25, 1997
------------ ------------
<S> <C> <C>
Raw materials $ 4,306 $ 3,389
Work-in-process 3,367 2,755
Finished goods 2,862 1,861
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$ 10,535 $ 8,005
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-------- ------
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</TABLE>
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,404,000 and $1,391,000 higher than reported on the
LIFO basis at April 24, 1998 and July 25, 1997, respectively.
NOTE 4: Other Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
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<S> <C> <C>
Intangibles, net of accumulated
amortization of $1,296,000 and $449,000 $5,303 $1,490
Investment in AFTCO, net of
accumulated amortization of $6,000 1,499 --
Cash value of life insurance 1,048 996
Note receivable 1,000 241
Investment in Geomation, Inc. -- 480
Other 101 40
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$8,951 $3,247
------ ------
------ ------
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</TABLE>
6
<PAGE>
NOTE 5: Debt of STIP Siepmann and Teutscher GmbH (STIP) (refer to Note 8)
consists of the following:
Short-term debt: STIP maintains a revolving credit agreement which provides
for borrowing up to DM2,500,000 (US$1.4 million) guaranteed by the Company.
This agreement provides for interest rates ranging from 5.7 percent to 8.5
percent and matures on March 1, 1999. The amount outstanding at April 24,
1998 was DM2,306,000 (US$1,261,000).
Long-term debt:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
APR 24, 1998
------------
<S> <C>
Note due March 2000, 7.5% $274
Note due June 2003, 7.5% 410
----
$684
----
----
- -----------------------------------------------------------------
</TABLE>
NOTE 6: On May 21, 1998, the Board of Directors declared a quarterly cash
dividend of $.05 per share, payable July 1, 1998 to shareholders of record on
June 12, 1998.
NOTE 7: ACCOUNTING PRONOUNCEMENTS. Statement of Financial Accounting
Standards No. 130 "Report Comprehensive Income", and Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information", have been issued by the Financial Accounting Standards
Board. The Company does not expect the adoption of these statements to be
material to the consolidated financial statements.
NOTE 8: On September 17, 1997, the Company acquired the remaining
approximately 82 percent of Geomation, Inc., Golden, Colorado. The
acquisition required approximately $929,000 in cash and the issuance of
318,853 shares of the Company's common stock. The transaction also included
an earn-out provision, which depending upon the performance of Geomation
through July 1998, may require the payment of up to approximately $250,000 of
additional cash and the issuance of additional shares of the Company's common
stock with a market value of up to approximately $750,000. The transaction
was accounted for as a purchase with resulting intangibles of approximately
$2,093,000 being amortized over periods ranging from 3 to 15 years. The
transaction also included approximately $302,000 of "purchased R&D" which was
expensed in the first quarter of fiscal 1998.
On December 29, 1997, the Company acquired 100 percent of the STIP Siepmann
and Teutscher GmbH (STIP), of Gross Umstadt, Germany. The share purchase of
STIP required cash of approximately $230,000. STIP produces a broad line of
process monitoring instrumentation designed specifically for wastewater
treatment applications. In a separate and simultaneous transaction, the
Company also acquired 100 percent of the technology covering the products
produced by STIP. This technology was acquired from a partnership owned by
Messrs. Siepmann and Teutscher for cash of approximately $1,690,000. The
acquisition includes an earn-out from January 1, 1998 through December 31,
1999. Based on the performance (with respect to sales and profitability of
STIP) during the earn-out period, the amount of the earn-out payment could
range up to $1.7 million. The two transactions are being accounted for as
purchases with the resulting intangibles of approximately $1,690,000 being
amortized over periods ranging from 7 to 15 years.
The following unaudited pro forma financial information sets forth the
results of operations of Isco, Inc. as if the acquisition of Geomation and
STIP had occurred on July 27, 1996:
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
4/24/98 4/25/97 4/24/98 4/25/97
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<S> <C> <C> <C> <C>
Net sales $13,246 $11,949 $37,212 $34,690
Net earnings $174 $294 $514 $208
Basic earnings per share $.03 $.05 $.09 $.04
Weighted average number of
shares outstanding 5,672 5,671 5,672 5,671
- ------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
On March 31, 1998, the Company and AMJ Equipment Corporation, Lakeland,
Florida, completed the formation of Advanced Flow Technologies, Partnership
Ltd., (AFTCO) with each owning 50 percent of AFTCO. The Company's investment
of $1.5 million will be accounted for under the equity method. The cost in
excess of net assets acquired of approximately $750,000 will be amortized on
a straight-line basis over 10 years. AFTCO designs, manufactures, and
markets electromagnetic closed pipe flow meters.
NOTE 9: On January 22, 1998, Zellweger Analytics, Inc. ("Zellweger") filed
an action against the Company in the United States District Court for the
Southern District of Texas in Galveston, Texas, alleging patent and trade
dress infringement involving the EZ TOC product of the Company. Zellweger
sought to enjoin the Company from making, using, and selling the EZ TOC and
seeks unspecified damages. On January 23, 1998, the Court issued a
preliminary injunction, expiring July 8, 1998, enjoining the Company's
production, use, and sales of EZ TOC. Zellweger was required to post a
$500,000 bond for the injunction to become operative.
The Company has filed a Motion to Dismiss the action. On February 12, 1998,
Zellweger posted the bond to make the injunction operative. Management does
not believe that the number of EZ TOC products manufactured and sold to date
would subject it to any material damage claims. The Company intends to
vigorously defend the charges and believes that it will ultimately prevail in
this matter.
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.
Sales for the three-month and nine-month periods, ended April 24, 1998, were
$13,246,000 and $35,131,000, respectively. Included, in the periods under
review were Geomation sales of $886,000 and $1,523,000, respectively, and
STIP Siepmann and Teutscher, GmbH (STIP) sales of $941,000 for the
three-month period. For the periods under review, sales were 29 percent and
20 percent higher than for the same periods one year earlier. Sales of the
Company's core products (wastewater samplers, flow meters, and liquid
chromatography products) for the three months were 14 percent higher, while
for the same period, sales of other products which include: syringe pumps,
supercritical fluid extraction (SFE) products, STIP products, Geomation
products, and process monitoring products, were 110 percent higher. During
the three months, sales of wastewater samplers and flow meters recovered and
contributed to the sales growth of the core products. Also, the delivery of
the new chromatography products for the combinatorial chemistry market during
this period contributed to the sales growth of the core products. For the
nine months, sales of the core products were up 10 percent, while for the
same period, sales of other products were up 66 percent.
The Company's three-month and nine-month U.S. sales were up 16 percent and
13 percent, respectively, when compared with the same periods last year.
Excluding Geomation and STIP sales, the Company's U.S. sales for the same
periods were up 14 percent and 11 percent, respectively. The U.S. sales of
the core products for the same periods were up 14 percent and six percent,
respectively. The U.S. sales of the other products, including Geomation and
STIP products, for the same periods were up 56 percent and 72 percent,
respectively. The realignment of the Company's U.S. sales force along
product lines, recognizing specialized market expertise of sales staff,
continues to be successful for delivering sales for both new and non-core
products
The Company's three-month and nine-month international sales were up 62
percent and 39 percent, respectively, when compared with the same periods
last year. Excluding Geomation and STIP sales, the Company's international
sales for the same periods were up four percent and 14 percent, respectively.
International sales of the core products for the same periods were up 16
percent and 25 percent, respectively. During the three months, wastewater
samplers and chromatography products provided the growth in the international
sales of the core products. International sales of the other products,
including Geomation and STIP products, for the same periods were up 157
percent and 60 percent, respectively. Management believes that initiatives
begun last fiscal year to provide more sales and marketing support for the
Company's
8
<PAGE>
international dealers continue to be successful and that the Company has
large opportunities to gain international market share.
Net orders for the three months and nine months were $12 million and $34
million, respectively. Orders were 16 percent and nine percent higher,
respectively, for the periods compared with the same periods one year ago.
During the current year's reporting periods, orders received by Geomation
were $354,000 and $1,517,000, respectively, and orders received by STIP were
$599,000 for the three months ended April 24, 1998. At April 24, 1998, the
Company's order backlog, including $42,000 and $605,000, respectively, of
Geomation and STIP order backlogs, was $4 million, which is flat when
compared with the beginning of the fiscal year, prior to the acquisition of
Geomation and STIP. The Company's order backlog normally includes
approximately $1 million of orders from contractors requesting delayed
delivery of three to 12 months and orders from OEM customers with scheduled
deliveries over a period of up to one year. The Company expects to deliver
nearly all of the remaining orders in the normal order backlog under its
regular delivery schedule of three days to three weeks.
OPERATING INCOME ANALYSIS AND REVIEW.
For the three months and nine months ended April 24, 1998, the Company,
including Geomation and STIP operations, had consolidated operating losses of
$51,000 and $257,000, respectively. This compares with operating income of
$239,000 and operating loss of $223,000, respectively, for the same periods
last year. For the same periods, the gross margin percentage declined 3.7
percent and was flat, respectively, when compared with the same periods last
year. The decline in gross margin during the recent three-month period is
the result of increased international sales of the Company's core products
where dealer discounts are a reduction of the selling price, thus reducing
"net sales", the base for this calculation.
Selling, general, and administrative expenses (on a consolidated basis)
increased 20 percent and 14 percent, respectively, for the three months and
nine months of fiscal 1998 when compared with the same periods last year.
The growth in selling expenses was primarily the result of: increased
personnel expenses (salaries and benefits) which included nine additional
employees along with increased travel expenses to better serve the customers;
the planned increase in more focused advertising; increased commissions on
higher sales volume by manufacturers' representatives and distributors; and
the amortization of intangibles arising out of acquisitions. In the general
and administrative area, the increase included: increased personnel expenses
which included three additional employees; higher continuing education
expenses arising out of management's effort to upgrade the computer
utilization skills of employees, company-wide, in preparation for
implementing the enterprise resource planning (ERP) system. The Company
incurred significant expenses related to the implementation of the ERP
system. These increased expenditures will continue into the second fiscal
quarter of 1999.
Research and engineering expenses (on a consolidated basis) increased
57 percent and 45 percent, respectively, for the three months and nine months
of fiscal 1998 when compared with the same periods last year. The growth in
expenses for the nine-month period includes approximately $302,000 of
"purchased R&D" acquired in the Geomation acquisition. Management's focus on
getting new products to market faster and ensuring that the new products more
adequately meet the needs of the customer has been the driver for the growth
in engineering expenses. There has been a small increase in staff along with
a significant increase in expenditures during the recently completed three
months for outside professional services and consultants to achieve the
accelerated pace of product introduction.
9
<PAGE>
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
------------------------------------- -------------------------------------
4/24/98 4/25/97 CHANGE 4/24/98 4/25/97 CHANGE
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 28.8 100.0 100.0 19.7
Cost of sales 44.8 41.1 40.5 43.6 43.7 19.4
----- ----- ----- -----
55.2 58.9 20.7 56.4 56.3 19.9
----- ----- ----- -----
Expenses:
Selling, general, & administrative 42.8 46.0 19.6 43.6 45.9 13.8
Research & engineering 12.8 10.6 56.5 13.5 11.2 44.6
----- ----- ----- -----
55.6 56.6 26.5 57.1 57.1 19.9
----- ----- ----- -----
Operating income (loss) (.4) 2.3 -- (.7) (.8) (15.4)
Non-operating income 1.4 3.1 (41.3) 1.9 3.7 (37.5)
----- ----- ----- -----
Earnings before income taxes 1.0 5.4 (75.8) 1.2 2.9 (51.0)
Income taxes (benefit) (.3) .9 -- .0 .3 (93.9)
----- ----- ----- -----
Net earnings 1.3 4.5 (62.4) 1.2 2.6 (45.6)
----- ----- ----- -----
----- ----- ----- -----
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The underlying reasons for the changes in operating income were discussed in
the previous section. The Company's investment income for fiscal year 1998
to-date is lower than the same period last year due to the liquidation of
investments to fund the acquisition of Geomation, Inc., STIP, and the
investment in Advanced Flow Technologies, Partnership Ltd. (see Recent
Developments section), to improve the Company's computer technological
capabilities, and to make progress payments related to the expansion and
renovation of the Company's Superior Street facility.
For the three months ended April 24, 1998, the Company had an income tax
benefit compared with an effective income tax rate of 16.3 percent for the
same period last year. That change is the result of lower earnings and a R&D
tax credit resulting from higher levels of qualified research and engineering
spending during the period. Those same causes account for the decline in
effective income tax rate to 1.5 percent for the nine months of fiscal 1998
from 11.3 percent for the same period last year.
FINANCIAL CONDITION AND LIQUIDITY.
At April 24, 1998, the Company's working capital was nearly $23 million. The
Company has in place, with its primary U.S. commercial bank, an unused,
unsecured $3 million line of credit.
The Company, after many years of being debt-free, now has both short-term and
long-term debt on its balance sheet. The share purchase of STIP included
retaining on STIP's balance sheet the existing bank loan, with the Company
guaranteeing bank borrowings up to DM2.5 million (US$1.4 million). Also
remaining, in place, were two long-term economic development loans totaling
DM1.25 million (US$684,000) from the State of Hessen, Germany.
During the recent three-month period, the Company's inventories (excluding
the Geomation and STIP inventories of $1,767,000) declined $505,000.
Excluding Geomation and STIP, during the recent three-month period the
Company's accounts payable declined $279,000.
10
<PAGE>
The Company will continue to have significant cash needs during the remainder
of calendar year 1998. During this time frame, management expects to
complete the expansion and renovation of the Superior Street facility and the
acquisition of significantly more efficient production machinery, and
complete the installation and implementation of the (ERP) system.
The Company, in 1995, began the process of evaluating its options with regard
to dealing with the millennium (Y2K) issue and its effect on the Company's
computer systems. In 1996, the Company determined that replacing its aging
purchased and home-grown software with technologically current software would
improve operational efficiency and as a by-product resolve the Y2K problem.
Early in fiscal 1998, the Company selected BaaN software as its ERP system
which is scheduled to go on line at the beginning of the second quarter of
fiscal 1999. The cost of the BaaN software along with consultation costs
and other interfaced software is being capitalized while internal
implementation costs are being expensed currently. The total cost of the
project is expected to be approximately $2.5 million including an estimated
$465,000 to be expensed as incurred. Management does not expect Y2K costs
relating to systems other than ERP or to the software in the Company's
products to be significant.
RECENT DEVELOPMENTS.
Management believes that the December 29, 1997 acquisition of STIP Siepmann
and Teutscher GmbH and the related process monitoring instrumentation
technologies will enhance significantly the Company's existing presence in
the wastewater treatment market. The Company, as the U.S. and Canadian
distributor of STIP products, now will be able to provide additional high
quality and innovative products to its U.S. customers to improve their
wastewater treatment processes and reduce their operating costs.
On March 31,1998, the Company and AMJ Equipment Corporation, Lakeland,
Florida, completed the formation of Advanced Flow Technologies, Partnership
Ltd., (AFTCO) with each owning 50 percent of AFTCO. AFTCO designs,
manufactures, and markets electromagnetic closed-pipe flow meters. The
Company will be the distribution channel for AFTCO products into the
wastewater treatment market. Management believes these products fill an
important need of the Company's customers and at the same time leverages the
capacity of its existing distribution channel.
Management believes that the Asian monetary crisis will have a small negative
effect upon sales of the Company in the near-term. However, it believes that
in the long-term the Company must grow its presence in that region. This
will be accomplished by providing increased sales and marketing support for
its key dealer relationships in the region.
INFLATION.
The effect 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. 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 the Company.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
A. On January 22, 1998, Zellweger Analytics, Inc. ("Zellweger") filed an
action against the Company in the United States District Court for the
Southern District of Texas in Galveston, Texas, alleging patent and trade
dress infringement involving the EZ TOC product of the Company. Zellweger
sought to enjoin the Company from making, using, and selling the EZ TOC and
seeks unspecified damages. On January 23, 1998, the Court issued a
preliminary injunction, expiring July 8, 1998, enjoining the Company's
production, use, and sales of EZ TOC. Zellweger was required to post a
$500,000 bond for the injunction to become operative.
The Company has filed a Motion to Dismiss the action. On February 12, 1998,
Zellweger posted the bond to make the injunction operative. Management does
not believe that the number of EZ TOC products manufactured and sold to date
would subject it to any material damage claims. The Company intends to
vigorously defend the charges and believes that it will ultimately prevail in
this matter.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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.
Date: June 5, 1998 BY /s/ Robert W. Allington
-----------------------------------
Robert W. Allington, Chairman
Date: June 5, 1998 BY /s/ Philip M. Wittig
-----------------------------------
Philip M. Wittig, Treasurer
and Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF EARNINGS FOR APRIL 24, 1998 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-31-1998
<PERIOD-START> JUL-26-1997
<PERIOD-END> APR-24-1998
<CASH> 2,732
<SECURITIES> 3,483
<RECEIVABLES> 9,821
<ALLOWANCES> 82
<INVENTORY> 10,535
<CURRENT-ASSETS> 28,875
<PP&E> 31,737
<DEPRECIATION> 19,260
<TOTAL-ASSETS> 51,597
<CURRENT-LIABILITIES> 5,722
<BONDS> 684
0
0
<COMMON> 630
<OTHER-SE> 44,050
<TOTAL-LIABILITY-AND-EQUITY> 51,597
<SALES> 35,131
<TOTAL-REVENUES> 35,131
<CGS> 15,320
<TOTAL-COSTS> 15,320
<OTHER-EXPENSES> 20,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 426
<INCOME-TAX> 6
<INCOME-CONTINUING> 420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 420
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
