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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[Fee Required]
For the fiscal year ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
For the Transition Period From to
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Commission File No 0-14429
Isco, Inc.
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(Exact name of Registrant as specified in its charter)
Nebraska 47-0461807
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(State of incorporation) (I.R.S. Employer Identification No.)
4700 Superior Street, Lincoln, Nebraska 68504-1398
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 464-0231
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
-----------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 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
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As of September 25, 1998, 5,643,992 shares of Common Stock of Isco, Inc., were
outstanding and the aggregate market value of such Common Stock held by
nonaffiliates was approximately $15,518,783.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held December 10,
1998 - Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Isco, Inc. was founded in 1959. We design, manufacture, and market products
worldwide. Our products are used by industry and government to monitor
compliance with water quality regulations and are used in a variety of research
and testing laboratories and by industry to monitor product quality.
Isco's founder, Robert W. Allington, has been the controlling shareholder,
chairman of the board, and chief executive officer since inception. Mr.
Allington was president until October 6, 1995. Douglas M. Grant has been our
president and chief operating officer since October 6, 1995.
Our principal offices are located at 4700 Superior Street, Lincoln, Nebraska
68504-1398. Our telephone number is (402) 464-0231. As used herein, "Isco",
"we" or "our" refers to Isco, Inc., and its subsidiaries, unless the context
otherwise requires.
During the first quarter of fiscal year 1998, Isco acquired the remaining
equity of Geomation, Inc., Golden, Colorado. Geomation designs, manufactures,
and markets measurement, data logging, and control systems for the geotechnical
and environmental markets. More than 70 percent of its sales are in dam
monitoring applications. Geomation's core technology and expertise in field
data collection, logging, and transmission are capabilities which are
increasingly being required by our wastewater and flow meter customers.
Geomation operates in Golden, Colorado as our wholly owned subsidiary.
During the second quarter of fiscal year 1998, Isco acquired 100% of STIP
Siepmann und Teutscher GmbH (STIP), GroB-Umstadt, Germany. STIP designs,
produces, and markets a broad line of process monitoring and control
instrumentation designed specifically for municipal and industrial wastewater
treatment applications. These products will assist our wastewater treatment
customers in reducing operating costs and in reliably managing the wastewater
treatment process. STIP operates in GroB-Umstadt as our wholly owned
subsidiary.
During the third quarter of fiscal year 1998, Isco and AMJ Equipment
Corporation, Lakeland, Florida, formed Advanced Flow Technology Co. (AFTCO), a
limited partnership, located in Lakeland, Florida. The partners each own 50%
of AFTCO. AFTCO designs, manufactures, and markets electromagnetic full-pipe
flow meters. Isco is AFTCO's distribution channel into the wastewater
treatment market.
PRODUCTS AND APPLICATIONS
The contribution made by our core products to net sales for fiscal 1998, 1997,
and 1996, respectively, is as follows: wastewater samplers 36, 34, and 35
percent; open-channel and full-pipe flow meters 21, 20, and 19, percent; and
liquid chromatography (LC) products 13, 12, and 14 percent.
Isco's water quality control customers use wastewater samplers to collect water
samples from surface waters and sewers for subsequent analysis in the
laboratory. Our open-channel flow meters are used to measure and record the
flow rate of liquids in unpressurized pipes and open channels. These flow
meters can be linked with wastewater samplers to collect water samples based on
flow rate. The combined use of these two products is well suited to conduct
storm water runoff studies in compliance with federal regulations. Cities may
use our computer-based flow logging systems and sophisticated Flowlink-TM-
software to determine the state of repair of their sewer systems. Other
customers use those systems to store flow, rainfall, and other sample data for
later retrieval, analysis, and reporting.
Isco's research customers use pumps to deliver solvent through columns packed
with special media to separate a sample into its component molecules. They
then use our detectors to identify and quantify the component molecules. Our
fraction collectors are used to collect the separated component molecules as
they flow from the column. Customers include analytical laboratories which
support the development and manufacture of food, chemical, and pharmaceutical
products as well as those which study disease and basic life functions and
environmental quality.
2
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Other products which we believe will contribute to our future success include:
supercritical fluid extraction (SFE) products; process monitoring analyzers;
data logging and communication instruments; syringe pumps; and full-pipe flow
meters.
SFE is a safe, cost-effective, environmentally friendly, and time saving
technique used to separate selected chemical compounds (target analytes) from
complex sample matrices. Our food and agri-products customers use SFE to
assure their products are maintained at a specified level of quality.
Wastewater treatment customers use our process monitoring analyzers to
continuously monitor and control the treatment process to ensure that it is
proceeding efficiently within established parameters. Our process monitors
quickly detect the presence of a variety of organic compounds. This allows the
plant operator to maintain control and ensure safe treatment and high water
quality.
Our syringe pumps are used for specialized applications in the petroleum and
chemical industries, and for pumping supercritical fluids where high accuracy
at high pressures is required. At the beginning of fiscal 1997, Isco
introduced a line of electromagnetic full-pipe flow meters which we believe
will be a cost-effective alternative to existing magnetic and other full-pipe
flow meters.
The U.S. price range of our individual products is: $1,500 to $50,000 for water
quality monitoring instruments and $300 to $20,000 for most separation
instruments. The price for a complete and fully automated SFE system can
exceed $75,000.
MARKETING AND SALES
In the United States, independent manufacturers' representatives sell our water
quality monitoring products. Domestic sales of chemical separation instruments
are made by sales people assigned to specific products. Our people are located
in prime domestic market areas for those products. The manufacturers'
representatives and our own sales people are supported with promotional
programs, advertising, applications specialists, applications bulletins,
technical literature, and applications seminars.
International sales constituted 28, 26, and 27 percent of our sales during
fiscal 1998, 1997, and 1996, respectively. We have not been adversely affected
by foreign currency fluctuations because all of our international sales are
denominated in the functional currency of the selling facility. Products
manufactured in the United States are not stocked outside the country. They
are delivered from inventory at the facility where the products are produced.
To aid international sales, we offer wastewater samplers and flow meters in
French, German, and Spanish language versions. The results are displayed in
metric units.
Isco's international sales are made primarily by independent dealers operating
in various countries around the world. Sales of the STIP analyzers in the USA
are made by our manufacturers' representatives supervised by management in
Lincoln.
The international dealers for our water quality products in Europe and the
Middle East are managed by the staff of Isco Instruments (Europe) GmbH, our
wholly owned Swiss subsidiary. The dealers in the Asian-Pacific region are
managed by an Isco employee residing in the Philippines. We have an
applications laboratory and a sales manager in the United Kingdom to support
and manage our separation instrument sales effort in Europe and the Middle
East. Our other independent international dealers are supervised by management
in Lincoln.
CUSTOMERS
Isco has a broad customer base. Currently no single customer, including any OEM
customer, accounts for more than three percent of our sales.
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PRODUCT WARRANTY
We warrant our products for one year against defective materials and
workmanship. Our warranty claims have not been material in the past and are
not expected to be material in the future. We provide after-market factory
service for most of the products. We also provide on-site services in the
United States for automated SFE systems and the process monitoring analyzers.
Our customers may purchase an extended warranty at the time they purchase a new
instrument or while the instrument is still under warranty.
COMPETITION
We believe we have a strong competitive position in the markets for wastewater
samplers and open-channel flow meters. We maintain a competitive position in
the LC market. We believe these factors contribute to our competitive
position: a reputation for quality and service, technically advanced products
that provide cost-effective operation and unique features, an active research
and development program that allows us to maintain technical leadership, a
strong position in key markets, efficient production capabilities, and
excellent distribution capabilities.
Isco has several competitors manufacturing similar wastewater samplers. In the
United States, the major competitor is American Sigma, Inc., owned by the
Danaher Corporation. We believe we have approximately 40 percent of the
domestic wastewater sampler market, with American Sigma, Inc., having
approximately 30 percent. Other domestic competitors are small and offer
little significant competition. Significant competitors in Europe include:
Buhler-Montec, recently acquired by Servomex plc; and Endress + Hauser
Instruments, of Switzerland.
There are numerous suppliers in the domestic open-channel flow meter market.
Based upon market information we believe to be accurate, Isco along with Marsh-
McBirney, Inc., Milltronics, and American Sigma, Inc. each hold approximately
20 percent of the United States open-channel flow meter market. Additional
significant competitors in Europe include: Buhler-Montec, recently acquired by
Servomex plc; and Endress + Hauser Instruments, of Switzerland.
With respect to LC products, we believe we are a major producer of fraction
collectors. The largest LC competitor is Pharmacia Biotech, a Swedish company.
Pharmacia Biotech has a greater market share in international markets.
However, for selected instruments sold in the United States, our market share
is comparable to that of Pharmacia Biotech. Other major competitors are Bio-
Rad Laboratories, Inc., and Gilson Medical Electronics, Inc., an American-based
company, with much of its production in France.
There are a number of suppliers for the process monitoring and control market
with market share varying from country to country. Limited information is
available, however we believe that the primary competitors are two German
companies: Dr. Lange, a subsidiary of the Danaher Corporation, and LAR Analytik
& Umwelt Messtechnik GmbH.
In the geotechnical market, Isco's primary competitor is Campbell Scientific
Inc. In this market, the two companies have approximately equal market share.
In the SFE equipment market, Isco is the market leader with approximately 40
percent market share. Management estimates that its competitors; Hewlett-
Packard Company (it recently announced the discontinuation of its SFE product
line); Applied Separations, Inc.; and Leco Corporation each have a market share
of less than 20 percent.
RESEARCH AND ENGINEERING
Isco commits significant resources to ongoing research and engineering
activities. Our near-term goals are to improve, enhance, and expand the market
share of our existing product lines. Over the long-term, we are seeking new
market applications for our products as well as exploring present and related
markets which could utilize new products developed from our expanding
technology base. For fiscal years 1998, 1997, and 1996, we spent approximately
$6,315,000 or 13 percent of sales $4,526,000 or 11 percent of sales, and
$4,775,000 or 12 percent of sales, respectively, on research and engineering.
4
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PATENTS AND LICENSES
We believe we derive a competitive advantage from our patents. We have a
policy of obtaining patents wherever commercially feasible. We also vigorously
assert and defend our patents. Our products are covered by 68 United States
patents, 65 of which are owned by Isco, and 3 under which we are the licensee.
There are also numerous corresponding patents issued by other countries. Our
patents have been assigned to us by the inventor on a royalty-free basis. We
currently have 29 patent applications pending at the United States Patent
Office.
REGULATION
Management believes Isco is in compliance with environmental regulations.
Therefore, no unfavorable impact on competition or earnings is expected. We
have no government contracts which are subject to re-negotiation of profits
upon contract completion. Although our products are not subject to significant
U.S. government regulation, the markets for many of our products are regulation
driven.
BACKLOG
On September 25, 1998, Isco's order backlog was $4,859,000, of which
approximately 99 percent is scheduled for delivery prior to July 30, 1999, the
close of our current fiscal year. A year earlier, on September 26, 1997, the
order backlog was $3,626,000.
MANUFACTURING AND SOURCES OF SUPPLY
Isco's manufacturing and assembly operations are vertically integrated. We
fabricate most of the metal and plastic components used in our products and
obtain the required raw materials from several sources. Since we are not
reliant upon outside suppliers for these types of components, we are generally
able to produce them at a lower cost and maintain a consistently high level of
quality.
Isco's products use a variety of mechanical, electrical, and electronic
components, including microprocessors. Most of these components are available
from several sources. Currently, we are not experiencing any shortage of raw
materials or components.
We use computerized production control systems. Based on anticipated demand,
inventory position, and production capacity, these systems determine the raw
material and component requirements, the dates when these materials are needed,
and the dates production must begin in order to complete the products on time.
Through the use of production scheduling techniques, these systems enable us to
control both labor and inventory costs.
EMPLOYEES
On September 25, 1998, we had 488 employees of whom 44 were leased or
temporary. There were 232 engaged in production, 80 in research and
engineering, 117 in marketing and sales, and 59 in administration. None of our
employees are represented by a labor union. We have never experienced a work
stoppage.
ITEM 2. PROPERTIES.
The facilities which house Isco's Lincoln operations are owned and
unencumbered. The buildings at 4700 Superior Street in Lincoln, Nebraska
contain approximately 113,000 square feet of space and are located on
approximately 30 acres. The building at 531 Westgate Boulevard contains
approximately 156,000 square feet of space and is located on approximately 10
acres. These facilities currently house our corporate, executive and
administrative offices along with our sales, research, engineering,
manufacturing, and maintenance activities.
A 56,000 square foot expansion and the renovation of our Superior Street
facility to be completed during the third quarter of fiscal 1999 will house our
entire Lincoln operations. The more efficient layout of the renovated
facility; the installation of space saving and more efficient equipment; and an
open office environment will allow us to perform our operations using less
floor space. The Westgate property was placed on the market early in fiscal
1999.
5
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Geomation leases 7,092 square feet of space in Golden, Colorado. The facility
houses the engineering, manufacturing, marketing, selling, and administrative
activities of Geomation. The lease for this space expires early in fiscal
2000. Geomation is reviewing its options and its projected space requirements
for the next five years.
STIP leases 1,424 square meters in a building located in GroB-Umstadt, Germany.
The facility houses the engineering, manufacturing, marketing, sales, and
administrative activities of STIP. The lease expires December 31, 2000 and
STIP has the option to extend the lease for an additional three years.
ITEM 3. LEGAL PROCEEDINGS.
On January 22, 1998, Zellweger Analytics, Inc. ("Zellweger") filed an action
against Isco in the United States District Court in Galveston, Texas. The suit
alleges patent and trade dress infringement involving our EZ TOC product.
Zellweger sought to enjoin Isco 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 Isco's production, use, and sale
of EZ TOC. Zellweger was required to post a $500,000 bond for the injunction
to become operative. That bond was posted on February 12, 1998.
We believe the EZ TOC did not infringe either the patent or trade dress. Isco
intends to vigorously defend the charges and believes that it will ultimately
prevail in this matter. We do not believe that the number of EZ TOC products
manufactured and sold to date would subject Isco to any material damage claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1998, no issues were submitted to a vote of
shareholders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
Common stock data: On September 25, 1998 - 5,643,992 shares outstanding and
approximately 320 shareholders of record.
Market: Over-the-counter (NASDAQ/NMS). Symbol: ISKO
Stock price: The high and low bid prices of the common stock and the cash
dividends paid for each quarter during the last two fiscal years are shown
below:
<TABLE>
<CAPTION>
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Common Stock Price Range
-------------------------------------- Cash Dividends
1998 1997 Per Share
----------------- ----------------- --------------
High Low High Low 1998 1997
------- ------ ------- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
First quarter $10.250 $8.125 $10.250 $9.625 $.05 $.05
Second quarter 9.250 8.688 9.250 8.500 .05 .05
Third quarter 9.500 8.250 9.000 7.750 .05 .05
Fourth quarter 9.000 6.313 9.000 7.750 .05 .05
- -------------------------------------------------------------------------------
</TABLE>
Dividends: On August 20, 1998, the Board of Directors declared a quarterly
cash dividend of $.05 per share, payable October 1, 1998 to shareholders of
record on September 11, 1998.
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ITEM 6. SELECTED FINANCIAL DATA.
Amounts in thousands except per share data.
<TABLE>
<CAPTION>
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Fiscal Year
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1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
FOR THE FISCAL YEAR:
Net sales $47,912 $40,733 $39,981 $41,784 $38,706
Gross margin 26,345 22,760 22,191 24,606 22,971
Operating income (loss)** (2,510) 12 (115) 3,708 3,760
Non-operating income 860 1,565 1,462 1,437 1,313
Income taxes (tax benefit) (453) 251 360 1,571 1,594
Net earnings (loss) (1,197) 1,326 987 3,574 3,479
AT FISCAL YEAR-END:
Current assets 25,143 28,958 21,414 25,292 25,946
Working capital 19,022 25,255 17,437 22,529 22,836
Total assets 49,617 46,708 46,704 45,766 43,966
Long-term debt 690 0 0 0 0
Shareholders' equity 42,806 42,480 42,002 42,002 39,745
Average shares outstanding* 5,607 5,356 5,353 5,370 5,485
PER SHARE DATA:
Basic earnings (loss) per share* $(.21) $.25 $.18 $.67 $.63
Cash dividends per share (declared)* $ .20 $.20 $.20 $.20 $.19
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for a 15 percent stock dividend distributed on December 9, 1993.
** Fiscal 1996 includes restructuring charges of $1,752,000 associated with the
consolidation of the divisions.
ITEM 7. 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 THROUGHOUT THIS DOCUMENT AS A RESULT OF THE FACTORS SET
FORTH BELOW IN THE SECTION ENTITLED "FACTORS EFFECTING FUTURE RESULTS" AND
ELSEWHERE IN THIS DOCUMENT.
All references to years means our fiscal year.
SALES ANALYSIS AND REVIEW
1998 TO 1997 COMPARISON
Our 1998 sales of $47,912,000 were 18 percent above 1997 sales of $40,733,000.
Included in 1998 were Geomation sales of $2,351,000 and STIP Siepmann und
Teutscher (STIP) sales of $1,641,000. Compared with the previous year, sales
of our core products (wastewater samplers, open-channel flow meters, and liquid
chromatography products) were eight percent higher. Sales of our other
products such as syringe pumps, supercritical fluid extraction (SFE) products,
Geomation products, STIP products, and process monitoring products were 68
percent higher.
U.S. sales of our core products increased eight percent over 1997.
International sales of these products increased nine percent. U.S. sales of
our other products increased 71 percent in 1998 while international sales of
our other products increased 65 percent.
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Net orders of $47,473,000 were received during 1998, an increase of nearly 13
percent compared with 1997. Our July 31, 1998 order backlog of $4,420,000,
including the combined Geomation and STIP backlog of $750,000 was up 15 percent
from the beginning of the fiscal year. As of September 25, 1998, our order
backlog was $4,859,000 which included the combined backlog of $971,000 of
Geomation and STIP. We expect to deliver 99 percent of that backlog prior to
July 30, 1999, the end of our current fiscal year.
1997 TO 1996 COMPARISON
Our 1997 sales of $40,733,000 were two percent above 1996 sales of $39,981,000.
Compared with 1996, sales of our core products increased one percent, while
sales of our other products were six percent higher.
Our 1997 U.S. sales of our core products increased six percent over 1996.
International sales of these products declined 12 percent. For the comparable
periods, U.S. sales of our other products declined six percent while
international sales of our other products increased 25 percent.
Net orders of $42,130,000 were received during 1997, an increase of nearly nine
percent compared with fiscal 1996. International orders, primarily from
Europe, were up nearly ten percent and domestic orders were eight percent
above the prior year. Our July 25, 1997 order backlog was $3,828,000, up
nearly 50 percent from the beginning of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
1998 TO 1997 COMPARISON
The operating loss for 1998 was $2,510,000 compared with operating income of
$12,000 in 1997. During our fourth quarter product planning review, we
determined that the capitalized intangibles arising out of the Suprex
acquisition had no remaining value for Isco. Only two of the former Suprex
products remain in the SFE product line. These two products are only
marginally viable because they were intended for market niches which continue
to require significant investment in methods development. These market niches
are outside the fat in food market where we focus our SFE products. During the
fourth quarter we strengthened our position in the fat in food market with the
successful introduction of the FastFat-TM-. As a result of these fourth
quarter events, the $1,021,000 of Suprex intangibles, including goodwill were
written-off with $603,000 charged to General and Administrative, $263,000
charged to Marketing and Selling, and $155,000 charged to Engineering. In
addition, we established an inventory reserve of $625,000 against the year-end
inventory of Suprex product and components. We also expensed $302,000 of
acquired research and development resulting from the Geomation acquisition.
The gross margin, as a percent of sales, declined to 55.0 percent in 1998 from
55.9 percent in 1997. The decline was primarily the result of an increase in
indirect wages and benefits, and the inventory reserve discussed above. The
increase in benefits was the result of an increase in the cost of self-funded
health benefits and the 1997 anomaly of reduced health care costs resulting
from a plan-year change and our negotiation with our insurer for 17-month vs.
normal 12-month specific "stop loss" coverage which provided for significant
recovery of health care costs in 1997. This also affected the other functional
areas reported below.
The growth in marketing and selling expense occurred in the areas of salaries
and benefits for increased staff; increased advertising; materials and
supplies; and commissions to dealers and manufacturers' representatives. The
increase in general and administrative expenses was related to the
implementation of the enterprise resource planning (ERP) software; increased
maintenance and depreciation due to the upgrading of computer systems;
increased salaries and benefits; and the termination of an international dealer
which resulted in the write-off of related accounts receivable. The growth in
engineering expenses was related to the increase in sub-contracted engineering
services; increased salaries and benefits due to increased staffing; and
increased expenditures for materials and supplies.
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1997 TO 1996 COMPARISON
Operating income for 1997 was $12,000 compared with an operating loss of
$115,000 for 1996 which included a one-time restructuring charge of $1,752,000.
The gross margin, as a percent of sales, improved slightly from 55.5 percent
for 1996 to 55.9 percent for 1997. As a result of the July 1996 restructuring,
indirect salaries and wages along with benefit expenses were reduced.
Depreciation expense declined for the year due to certain facility improvements
and several major pieces of equipment reaching the end of their depreciable
lives. Overall, for 1997, indirect manufacturing expenses were reduced 13
percent.
Compared with 1996, aggregate operating expenses for 1997 increased $442,000.
That increase includes $930,000 of transition and amortization expenses related
to the Suprex acquisition completed during the year.
The majority of the growth in the selling expense portion of the selling,
general and administrative (SG&A) expense category was the result of increased
salaries and wages for additional staff to support new sales initiatives and
provide a higher level of applications support for environmental products;
exhibition, travel, marketing, and communication expenses; and commissions and
dealer management expenses. The majority of the growth in general and
administrative expenses was the result of increased consulting fees for
business process improvement, the selection of enterprise resource planning
(ERP) software, improved manufacturing processes, and more efficient building
layout; company wide computer training; communication expense, and depreciation
of the upgraded computer hardware.
The decline in engineering expenses, for 1997, was the result of decreased
salaries and wages along with lower benefit expenses, and the completion in
1996 of an out-sourced development project. These savings were partially off-
set by the increased consulting fees for training in computer-aided design
(CAD) and consultation for product styling.
RESULTS OF OPERATIONS
The following table summarizes, for the three years indicated, the percentages
which certain components of the Consolidated Statements of Operations bear to
net sales and the percentage change of such components (based on actual
dollars) compared with the prior year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year-to-Year
Increase(Decrease)
Year Ended ------------------
---------------------------- 1998 1997
Jul 31 Jul 25 Jul 26 vs. vs.
1998 1997 1996 1997 1996
------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 17.6 1.9
Cost of sales 45.0 44.1 44.5 20.0 1.0
------ ------ ------
55.0 55.9 55.5 15.8 2.6
------ ------ ------
Expenses:
Selling, general, and administrative 47.0 44.8 39.5 23.7 15.5
Research and engineering 13.2 11.1 11.9 39.5 (5.2)
Restructuring charges -- -- 4.4 -- --
------ ------ ------
60.2 55.9 55.8 26.9 2.0
------ ------ ------
Operating income (loss) (5.2) -- (.3) -- --
Non-operating income 1.8 3.8 3.7 (55.1) 6.9
------ ------ ------
Earnings (loss) before income taxes (3.4) 3.8 3.4 -- 17.0
Income taxes (tax benefit) (.9) .6 .9 -- (30.3)
------ ------ ------
Net earnings (loss) (2.5) 3.3 2.5 -- 34.3
------ ------ ------
------ ------ ------
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</TABLE>
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1998 TO 1997 COMPARISON
Our 1998 investment income was reduced significantly as investments were sold
to meet the cash needs for our acquisition and facilities expansion activities.
Compared with an effective income tax rate of 15.9 percent for 1997, in 1998 we
experienced an income tax benefit resulting primarily from the operating loss.
1997 TO 1996 COMPARISON
Our 1997 effective income tax rate was 15.9 percent compared with 26.7 percent
for the previous year. The decline in the 1997 effective income tax rate was
the result of minimal taxable income and a large amount of tax-exempt income.
Our 1996 effective income tax rate includes the repayment of approximately
$89,000 of non-qualifying tax benefits arising out of our decision to cancel
our incentive tax contract with the State of Nebraska.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, we had working capital of $19 million and a current ratio of
4.1:1. On that date we had lines of credit with our various banks totaling
$4.7 million of which we had drawn $1.3 million on the credit line with our
German bank. During fiscal 1998, our operating activities generated cash flows
of $3.2 million. During 1998, we invested the following: $5.2 million in the
expansion and renovation of the Superior Street facility; $3.7 million in
equipment and software; and $4.2 million in the business combinations of
Geomation, STIP, and AFTCO. These activities were funded by the liquidation of
investments.
As of September 25, 1998, the completion of the renovation of the Superior
Street facility and the acquisition of more efficient production equipment will
require the expenditure of approximately $3.0 million. We have a $5.0 million
term loan commitment from our primary commercial bank. In addition, we have in
place unsecured lines of credit with our various banks totaling $6.7 million.
FUTURE EVENTS
There were a number of aspects which management addressed in evaluating the
effect of the change of the century on our operations. In order of importance,
they are: the effect on the computer systems which are used to manage our
business; our products which may be year sensitive to the year 2000; the
capability of key vendors to continue to deliver direct materials and services
after 12:01 am, January 1, 2000; and the ability of key customers to continue
to submit purchase orders for our products.
In 1995, we began the process of evaluating the effect of the millennium (Y2K)
on the computer systems. In 1996, we determined that replacing our aging
purchased and home-grown software with technologically current software would
improve our operational efficiency and at the same time resolve the millennium
compliance issue. Early in 1998, we selected Y2K compliant BaaN software as
our ERP system. It is scheduled to go on line at the beginning of the third
quarter of 1999. The total cost of the project is expected to be approximately
$2.8 million including an estimated $780,000 which was expensed as incurred.
Management believes we do not have any significant Y2K liabilities regarding
our products. Our products currently in production are compliant with the Isco
Year 2000 Product Compliance Policy, with few exceptions. The majority of our
discontinued products still believed to be in service are compliant with the
Y2K policy; those that are not have reasonable Y2K step-around procedures.
10
<PAGE>
Management has determined that of the vendors providing direct materials and
services, the most critical are the providers of utility services - electric,
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, however that is of little value if other
parts of the backbone are not functional. For example, due to our significant
demand for electric power, there is no economically feasible option but to
temporarily suspend operations in the event the nation's electric utility power
grid fails and prevents the local electric utility from delivering electric
power on January 1, 2000.
No one customer accounts for more than three percent of our sales. Therefore,
we believe that the effect on our business of any customer's inability to
submit orders for our products will have a minimal effect.
FACTORS AFFECTING FUTURE RESULTS
Factors which we believe may affect our future financial performance include
but are not limited to: the successful implementation of manufacturing and
business processes which will reduce costs and improve efficiency; the
investment in engineering and marketing activities which lead to improved sales
growth; the successful integration of acquisitions into our operations; dealing
with the external regulatory influences on our primary markets; the effect on
the competitive environment resulting in the consolidation of companies within
the instrumentation industry; and the effect on the global economy of the Asian
monetary crisis.
In 1997, we began investing in initiatives which, when fully implemented, are
expected to improve the effectiveness and efficiency of our business and
manufacturing processes. The investment in these initiatives will continue
into the second quarter of 1999. We will begin realizing the benefits of the
successful implementation of those processes during the last half of 1999.
We will selectively invest in the development of products which will contribute
significantly to profitable sales growth or maintain our dominant market
position. We must also develop the marketing strategies which will focus
energy and resources in those areas which will allow our company to grow sales
profitably, thereby leveraging and diluting our fixed cost structure.
During 1998, we completed the acquisition of Geomation and STIP. We are in the
process of adapting the Geomation field data collection and transmission
technology into our flow meter and wastewater sampler product lines. The STIP
process monitoring products expand the product offering available to our
wastewater treatment customers. We expect to successfully integrate these
technologies into our product lines during 1999.
The environmental market accounts for approximately 70 percent of our company's
sales. This is a regulation driven market which is strongly influenced by both
the perceived attitude and actions of the various governmental agencies in the
promulgation and the enforcement of environmental regulations. The effects of
the regulatory climate on the market are outside our ability to control and,
for any given period, may be either a positive or negative factor on our
company's performance.
As in many industries, consolidation of companies within our market is on-
going. As a result, we are dealing with the effects of larger, well financed
competitors who also have the organizational resources to compete aggressively
in the global market place.
We continue to monitor the Asian monetary crisis and its effect upon our
international sales. We could experience a significant negative effect on our
performance, should that monetary crisis expand to the European economies.
We, however, believe that in the long-term we must grow our presence in the
Asia and Pacific region. This is being accomplished by providing on site-sales
and marketing support for our key dealer relationships in the region.
11
<PAGE>
MARKET RISK
Interest rate risk and currency exchange risk are the primary market risks to
which we are exposed. Prior to 1998, we had a significant exposure to interest
rate risk through the fixed-rate bonds in our securities investment portfolio.
However, during 1998, our investment portfolio was reduced significantly to
provide the necessary funds for our acquisition and facility expansion
programs. While we have international operations and a significant portion of
our sales are to international customers, we consider the currency exchange
market risk related to those activities to be immaterial.
Interest Rate - Our fixed-rate medium and short-term borrowing and our tax-
exempt bond investments are subject to market risk. The debt securities in our
portfolio at the end of 1998 have matured or been called and the funds used for
our facility expansion. Hence, a 100 to 400 basis point shift in interest
rates would not materially effect our operating results or our financial
position. During 1999, will have in place a five year term borrowing at a
relatively low fixed interest rate. After completion of this borrowing, a
sudden upward surge in interest rates would not materially effect Isco's
operating results.
Currency Exchange - The international sales of our United States based
operations are denominated in U.S. dollars. The international sales of our
German subsidiary are denominated in Deutsche marks. The currency exchange
risk at the current level of activity is not material to our operating results
or financial position. Our market risk resulting from the translation of the
profit and loss of STIP and from our permanent investment in our foreign
subsidiaries is not material.
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Isco, Inc.
We have audited the accompanying consolidated balance sheets of Isco, Inc. and
subsidiaries as of July 31, 1998 and July 25, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended July 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Isco, Inc. and subsidiaries as of
July 31, 1998 and July 25, 1997, and the results of their operations and their
cash flows for each of the three years in the period ended July 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Lincoln, Nebraska
October 2, 1998
12
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
July 31 July 25 July 26
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales $47,912 $40,733 $39,981
Cost of sales 21,567 17,973 17,790
------- ------- -------
26,345 22,760 22,191
------- ------- -------
Expenses:
Selling, general, and administrative 22,540 18,222 15,779
Research and engineering 6,315 4,526 4,775
Restructuring charges (Note M) -- -- 1,752
------- ------- -------
28,855 22,748 22,306
------- ------- -------
Operating income (loss) (2,510) 12 (115)
------- ------- -------
Non-operating income:
Investment income 515 930 1,088
Other 345 635 374
------- ------- -------
860 1,565 1,462
------- ------- -------
Earnings (loss) before income taxes (1,650) 1,577 1,347
Income taxes (tax benefit) (Note H) (453) 251 360
------- ------- -------
Net earnings (loss) $(1,197) $ 1,326 $ 987
------- ------- -------
------- ------- -------
Basic earnings (loss) per share $(.21) $.25 $.18
------- ------- -------
------- ------- -------
Diluted earnings (loss) per share $(.21) $.25 $.18
------- ------- -------
------- ------- -------
Weighted average number of shares outstanding 5,607 5,351 5,353
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
July 31 July 25
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,837 $ 1,810
Short-term investments (Note C) 1,361 8,813
Accounts receivable, trade (Note B) 8,124 8,456
Inventories (Note D) 9,902 8,005
Refundable income taxes 279 69
Deferred income taxes (Note H) 1,023 481
Other current assets 617 1,324
------- -------
Total current assets 25,143 28,958
Property, plant, and equipment (Note E) 15,658 7,901
Long-term investments (Note C) 862 6,602
Deferred income taxes (Note H) 492 --
Other assets (Note F) 7,462 3,247
------- -------
Total assets $49,617 $46,708
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,915 $ 1,325
Accrued expenses (Note G) 2,925 2,321
Income taxes payable 18 57
Notes payable (Note I) 1,263 --
------- -------
Total current liabilities 6,121 3,703
------- -------
Long-term debt (Note J) 690 --
Deferred income taxes (Note H) -- 525
Shareholders' equity (Notes K and R):
Preferred stock, $.10 par value, authorized 5,000,000
shares; issued none
Common stock, $.10 par value, authorized 15,000,000
shares; issued 5,672,093 and 5,978,538 shares 567 598
Additional paid-in capital 37,886 36,846
Retained earnings 4,352 6,683
Net unrealized gain on available-for-sale securities 4 14
Translation adjustments (3) --
------- -------
42,806 44,141
Less treasury stock, at cost, 0 and 625,299 shares -- 1,661
------- -------
Total shareholders' equity 42,806 42,480
------- -------
Total liabilities and shareholders' equity $49,617 $46,708
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net Net
unrealized accumulated
gain(loss) foreign
Common stock Additional on available- currency Treasury stock
------------------ paid-in Retained for-sale translation ---------------------
shares amount capital earnings securities adjustments shares amount
--------- ------ ---------- --------- ------------ ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 28, 1995 5,978,538 $598 $36,838 $ 6,511 $(281) $-- 626,607 $(1,664)
Net earnings -- -- -- 987 -- -- -- --
Cash dividends ($0.20 per share) -- -- -- (1,070) -- -- -- --
Net change in net unrealized
gain on available-
for-sale securities -- -- -- -- 83 -- -- --
--------- ---- ------- -------- ----- --- ------- -------
Balance, July 26, 1996 5,978,538 $598 $36,838 $ 6,428 $(198) -- 626,607 $(1,664)
Net earnings -- -- -- 1,326 -- -- -- --
Issuance of common stock -- -- 8 -- -- -- (1,308) 3
Cash dividends ($0.20 per share) -- -- -- (1,071) -- -- -- --
Net change in net unrealized
gain on available-for-
sale securities -- -- -- -- 212 -- -- --
--------- ---- ------- -------- ----- --- ------- -------
Balance, July 25, 1997 5,978,538 $598 $36,846 $ 6,683 $ 14 -- 625,299 $(1,661)
Net loss -- -- -- (1,197) -- -- -- --
Issuance of common stock 318,853 32 2,612 -- -- -- -- --
Retirement of treasury stock (625,299) (63) (1,598) -- -- -- (625,299) 1,661
Issuance of director options -- -- 26 -- -- -- -- --
Cash dividends ($0.20 per share) -- -- -- (1,134) -- -- -- --
Net change in net unrealized
(loss) on available-for-
sale securities -- -- -- -- (10) -- -- --
Net change in accumulated
foreign currency
translation adjustments -- -- -- -- -- $(3) -- --
--------- ---- ------- -------- ----- --- ------- -------
Balance, July 31, 1998 5,672,092 $567 $37,886 $ 4,352 $ 4 $(3) -- --
--------- ---- ------- -------- ----- --- ------- -------
--------- ---- ------- -------- ----- --- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(columnar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
July 31 July 25 July 26
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,197) $ 1,326 $ 987
Adjustments to reconcile net earnings (loss) to
net cash flows from operating activities:
Depreciation and amortization 2,784 2,234 1,931
Deferred income taxes (839) (32) (543)
(Gain) loss on sale of investments 61 86 (6)
Gain on sale of property, plant, and equipment (270) (268) (193)
Provision for doubtful accounts 207 126 81
Loss on impairment of assets 1,646 -- 500
Change in operating assets and liabilities:
Accounts receivable, trade-(increase) decrease 1,622 (1,147) (262)
Inventories-(increase) decrease (837) (1,899) 1,469
Refundable income taxes-(increase) decrease (210) (42) 446
Other current assets-(increase) decrease 144 207 (414)
Accounts payable-increase (decrease) 237 87 316
Accrued expenses-increase (decrease) 213 (733) 746
Income taxes payable-increase (decrease) (39) (115) 152
Other (284) (93) 114
------- ------- -------
Total adjustments 4,435 (1,589) 4,337
------- ------- -------
Cash flows provided by (used for) operating activities 3,238 (263) 5,324
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities 2,648 3,328 91
Proceeds from maturity of available-for-sale securities 9,967 -- 105
Proceeds from maturity of held-to-maturity securities 500 770 6,261
Proceeds from sale of property, plant, and equipment 356 340 225
Purchase of available-for-sale securities (34) (556) (8,371)
Purchase of held-to-maturity securities -- -- (476)
Purchase of property, plant, and equipment (8,928) (1,394) (940)
Issuance of note receivable (759) (305) (500)
Purchase of subsidiaries and other acquisitions,
net of cash acquired (4,159) (2,701) --
Other -- (758) (292)
------- ------- -------
Cash flows used for investing activities (409) (1,276) (3,897)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,134) (1,071) (1,070)
Proceeds from borrowings 332 -- --
------- ------- -------
Cash flows used for financing activities (802) (1,071) (1,070)
------- ------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 2,027 (2,610) 357
Balance at beginning of year 1,810 4,420 4,063
------- ------- -------
Balance at end of year $ 3,837 $ 1,810 $ 4,420
------- ------- -------
------- ------- -------
</TABLE>
See Note N for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended July 31, 1998, July 25, 1997, and July 26, 1996
(Columnar amounts in thousands, except share and per share data)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS. Isco, Inc. and its subsidiaries (the Company) design,
manufacture, and market products worldwide which are used by industry and
government to monitor compliance with water quality regulations and are used in
a variety of research and testing laboratories and by industry to monitor
product quality.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated. Investments in
which the Company exercises significant influence over operating and financial
policies are accounted for using the equity method.
For fiscal reporting purposes, the Company operates under a 52/53 week year,
ending on the last Friday of July. Fiscal 1998 contained 53 weeks while fiscal
1997 and 1996 each contained 52 weeks.
USE OF ESTIMATES. The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash, accounts
receivable and accounts payable approximate fair value. Investments are
reported at fair value based on quoted market prices. The fair value of long-
term debt, which is based on the borrowing rates and terms currently available
to the Company, approximates carrying value.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash balances
and highly liquid investments with an original maturity of three months or
less.
INVESTMENTS. The Company classifies investments into three categories
accounted for as follows: Debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost; debt and equity securities that are
bought and held principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings; debt and equity securities
not classified as either held-to-maturity or trading are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported, net of tax, in a separate
component of shareholders' equity. The Company held no trading securities
during the periods reported and generally does not trade securities. Sales of
available-for-sale securities are recognized using the first-in, first-out
method.
INVENTORIES. Inventories are valued at the lower of cost or market,
principally on the last-in, first-out (LIFO) basis.
LONG-LIVED ASSETS. The Company follows the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS No. 121) "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement
requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In such cases, the
expected future cash flows (undiscounted and without interest charges)
resulting from the use of the asset are estimated and an impairment loss is
recognized if the sum of such cash flows is less than the carrying amount of
the asset. Should such an assessment indicate that the value of a long-lived
asset or goodwill is impaired, an impairment loss is recognized for the
difference between the carrying value of the asset and its estimated fair
value. Impairments recognized by the Company during 1998 and 1996 are
discussed in Notes F and M, respectively.
17
<PAGE>
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment are stated at
historical costs. Depreciation is provided using the straight-line and
declining balance methods over estimated useful asset lives of 10 to 35 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
OTHER ASSETS. Intangible assets are amortized on a straight-line basis over
estimated useful lives of 3 to 20 years.
REVENUE RECOGNITION. Sales of products and services are recorded based on
shipment of products or performance of services. Revenue from extended
warranty contracts is deferred and recognized on a pro rata basis over the life
of the contracts.
FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency of
the Company's wholly owned Swiss subsidiary. The Deutsche mark (DM) is the
functional currency of the Company's wholly owned German subsidiary. Exchange
gains and losses resulting from transactions denominated in currencies other
than the U.S. dollar are included in the results of operations for the year.
Assets and liabilities are translated to U.S. dollars at current exchange rates
as of each balance sheet date. Income and expense items are translated using
average exchange rates during the year. Cumulative currency translation
adjustments are presented as a separate component of stockholders' equity.
Transaction gains and losses and unrealized gains and losses on intercompany
receivables have not been material to date.
EMPLOYEE BENEFITS PLAN. The Beneficial Employee Trust of Isco (BETI), a
voluntary employees' beneficiary association, was funded by Company and
employee contributions. Certain employee benefits, including the weekly
disability and medical protection plan and group insurance premiums, were paid
by the BETI. Effective December 31, 1997, the Company terminated the trust to
which contributions were made, assets held, and benefits paid. Subsequent to
December 31, 1997, claims and expenses in excess of employee contributions and
insurance reimbursements are funded directly by the Company.
RESEARCH AND ENGINEERING COSTS. Research and engineering costs are expensed as
incurred.
INCOME TAXES. Income taxes are recorded using the liability method which
recognizes the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
NET EARNINGS PER SHARE. Net earnings per share are calculated in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share."
This Statement requires dual presentation of basic and diluted earnings per
share, as well as restatement of earnings per share for all periods for which a
statement of earnings is presented. Basic earnings per share data are based on
the weighted average number of common shares outstanding during the period.
Diluted earnings per share data are based on the weighted average number of
common shares outstanding during the period and the dilutive effect of stock
options and common stock equivalents outstanding using the treasury stock
method. A reconciliation is provided in Note Q.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's presentation.
ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Boards issued
Statement of Financial Accounting Standards No. 130. "Reporting Comprehensive
Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131.
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 130 establishes standards for reporting comprehensive
income and its components in the consolidated financial statements. SFAS No.
131 establishes standards for reporting information on operating segments in
interim and annual financial statements. SFAS No. 130 and SFAS No. 131 will
become effective for the Company beginning in fiscal 1999. SFAS No. 130 and
SFAS No. 131 require disclosure only, and will have no impact on the Company's
consolidated financial position and results of operations. The Financial
Accounting Standards Board has issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivatives and Hedging Activities". The
Company does not expect this statement to have a material impact on the
financial position or results of operations of the Company.
18
<PAGE>
NOTE B. ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance at beginning of period $ 82 $ 72 $ 74
Provision for doubtful accounts 207 126 81
Accounts written-off (75) (116) (83)
---- ----- -----
Allowance at end of period $214 $ 82 $ 72
---- ----- -----
---- ----- -----
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE C. INVESTMENTS.
As of July 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term investments:
Available-for-sale securities:
State and municipal securities $ 1,357 $ 4 $ -- $ 1,361 $ 1,361
-------- ---- ----- -------- --------
Total short-term investments 1,357 4 -- 1,361 1,361
-------- ---- ----- -------- --------
Long-term investments:
Held-to-maturity securities:
State and municipal securities 250 -- -- 250 250
Available-for-sale securities:
State and municipal securities 610 2 -- 612 612
-------- ---- ----- -------- --------
Total long-term investments 860 2 -- 862 862
-------- ---- ----- -------- --------
$ 2,217 $ 6 $ -- $ 2,223 $ 2,223
-------- ---- ----- -------- --------
-------- ---- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of July 25, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term investments:
Held-to-maturity securities:
State and municipal securities $ 500 $ 1 $ -- $ 501 $ 500
Available-for-sale securities:
Mutual funds 4,268 -- (64) 4,204 4,204
State and municipal securities 4,092 17 -- 4,109 4,109
-------- ---- ----- -------- --------
Total short-term investments 8,860 18 (64) 8,814 8,813
-------- ---- ----- -------- --------
Long-term investments:
Held-to-maturity securities:
State and municipal securities 250 -- (1) 249 250
Available-for-sale securities:
State and municipal securities 6,026 43 -- 6,069 6,069
Preferred stock 259 24 -- 283 283
-------- ---- ----- -------- --------
Total long-term investments 6,535 67 (1) 6,601 6,602
-------- ---- ----- -------- --------
$ 15,395 $ 85 $ (65) $ 15,415 $ 15,415
-------- ---- ----- -------- --------
-------- ---- ----- -------- --------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
The contractual maturities of securities range from less than one year to
fifteen years. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of available-for-sale securities during fiscal years 1998,
1997, and 1996 were $2,648,000, $3,328,000, and $91,000, respectively. Gross
gains of $31,000, $0, and $6,000 and gross losses of $92,000, $86,000, and $0,
were recognized in fiscal 1998, 1997, and 1996, respectively.
NOTE D. INVENTORIES.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $3,831 $3,389
Work-in-process 3,164 2,755
Finished goods 2,907 1,861
------ ------
$9,902 $8,005
------ ------
------ ------
- --------------------------------------------------------------------------------
</TABLE>
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,377,000, and $1,344,000 higher than reported on the
LIFO basis at July 31, 1998 and July 25, 1997, respectively. Approximately 74
percent and 77 percent of inventory has been valued by the LIFO method at July
31, 1998 and July 25, 1997, respectively.
NOTE E. PROPERTY, PLANT, AND EQUIPMENT.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 762 $ 762
Buildings and improvements 9,297 8,368
Machinery and equipment 15,566 14,767
Software 1,571 1,482
Construction-in-progress 7,698 469
------- --------
34,894 25,848
Less accumulated depreciation 19,236 17,947
------- --------
$15,658 $ 7,901
------- --------
------- --------
- --------------------------------------------------------------------------------
</TABLE>
NOTE F. OTHER ASSETS.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Intangibles, net of accumulated amortization of $317,000
and $449,000 $3,462 $1,466
Investment in AFTCO net of accumulated amortization of
$25,000 and $0 1,386 --
Investment in Geomation, Inc. -- 480
Cash value of life insurance 1,060 996
Notes receivable - related party 1,000 241
Other 554 64
------ ------
$7,462 $3,247
------ ------
------ ------
- ---------------------------------------------------------------------------------
</TABLE>
Intangibles include intellectual property, engineering drawings, patents,
licenses, customer or market lists and trade names. The increase in
intangibles during 1998 resulted principally from the three business
combinations consummated in 1998, discussed in Note P.
20
<PAGE>
The Suprex product line acquired has failed to achieve the original projections
of operating performance. Furthermore, based on a reassessment of future
expectations of non-discounted cash flows and operating performance related to
the Suprex product line, management of the Company has determined that certain
assets recorded in connection with the acquisition are impaired. Accordingly,
an impairment charge was recorded for $1.6 million. This consists of write-
offs of intangibles of $1.0 million and inventory reserves of $.6 million.
NOTE G. ACCRUED EXPENSES.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages, and commissions $1,287 $1,063
Profit sharing contribution -- 112
Vacation/personal time 635 569
Property, payroll, and sales tax 365 343
Other 638 234
------ ------
$2,925 $2,321
------ ------
------ ------
- --------------------------------------------------------------------------------
</TABLE>
NOTE H. INCOME TAXES.
Income tax expense consists of:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 273 $215 $ 618
Deferred (771) (58) (468)
State:
Current 104 58 276
Deferred (68) 26 (75)
Foreign:
Current 9 10 9
----- ---- ------
$(453) $251 $ 360
----- ---- ------
----- ---- ------
- ------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes is reconciled with the amount of income taxes
computed at the federal statutory rate as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected federal" tax expense $(560) $ 536 $ 458
Alternative minimum tax (AMT) 86 181 --
State income taxes, net of federal tax benefit 7 72 71
Foreign income taxes 9 10 9
Exempt foreign sales corporation income (96) (111) (70)
Tax-exempt income (163) (265) (292)
Permanent differences on intangibles 179 -- --
Prior years' federal & state income tax adjustments (95) (139) 166
Other 180 (33) 18
----- ------ ------
$(453) $ 251 $ 360
----- ------ ------
----- ------ ------
- ------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
The July 31, 1998 and July 25, 1997 components of deferred income tax assets
and liabilities resulting from temporary differences between financial and tax
reporting are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred assets:
Uniform capitalization of inventory costs $ 510 $ 455
Inventory valuation reserve 272 --
Vacation/personal time 179 158
Restructuring charges -- 2
Write-down of property 189 189
Capital loss carry forward 75 51
AMT credit carry forward 86 181
Reserve for doubtful accounts 81 31
Suprex intangibles 626 121
Deferred warranty income 14 16
Organization expenses 39 25
Net operating loss carry forwards 529 --
Research and development credit carry forwards 143 --
Other 58 53
------- ------
Total deferred assets 2,801 1,282
------- ------
Deferred liabilities:
Depreciation 941 872
Prepaid expenses 210 264
BETI contribution -- 92
Securities valuations 2 8
Other 133 90
------- ------
Total deferred liabilities 1,286 1,326
------- ------
Net deferred liabilities (assets) $(1,515) $ 44
------- ------
------- ------
- ---------------------------------------------------------------------------------
</TABLE>
At July 31, 1998, the Company had United States net operating loss carry
forwards of approximately $700,000 which expire in fiscal years 2003 through
2011 and an additional German net operating loss carry forward of $700,000
which is not subject to expiration. At July 31, 1998, the Company had a net
capital loss carry forward of approximately $200,000 which expires in fiscal
years 2000 through 2003.
NOTE I. SHORT-TERM BORROWING.
At July 31, 1998, the Company had available $3,000,000 and $300,000 in
unsecured lines of credit expiring December 31, 1998 and May 31, 1999,
respectively. The Company had no outstanding borrowings against its lines of
credit during the fiscal years ended July 31, 1998 and July 25, 1997.
The Company's German subsidiary, STIP Siepmann und Teutscher GmbH (STIP) (refer
to Note P), maintains a revolving credit agreement which provides for borrowing
up to DM3,000,000 (US$1,400,000) 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 July 31, 1998 was DM2,288,000
(US$1,263,000).
NOTE J. LONG-TERM DEBT AT JULY 31, 1998 CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1998
- ------------------------------------------------------------------
<S> <C>
Note due March 2000, 7.5% $280
Note due June 2003, 7.5% 410
----
$690
----
----
- ------------------------------------------------------------------
</TABLE>
Interest payments are due on a quarterly basis and principal is due at
maturity.
22
<PAGE>
NOTE K. STOCK OPTION PLANS.
Isco had three stock option plans in effect at July 31, 1998: the 1985
Incentive Stock Option Plan (1985 Plan), the 1996 Stock Option Plan (1996
Plan), and the 1996 Outside Directors' Stock Option Plan (1996 Directors'
Plan). Under each of these plans, options may be granted only during the 10
years following the inception of the plan.
In July 1985, the Company adopted the 1985 Plan, which authorized the future
issuance of up to 174,570 shares to officers and key employees. During fiscal
1997, the Company adopted the 1996 Plan, which authorized the future issuance
of up to 250,000 shares to officers, key employees, and designated individuals.
Under both plans, qualified options are to be granted at not less than 100
percent of the fair market value of the common stock when granted. The options
are exercisable over a period not greater than 10 years from the date of grant.
A portion of the options are immediately exercisable at date of grant and the
remainder are contingent upon achieving specified annual revenue and operating
income targets. The 1996 Plan also authorized the issuance of non-qualified
options which may be granted at not less than 80 percent of the fair market
value of the common stock when granted.
During fiscal 1997, the Company adopted the 1996 Directors' Plan, which
authorized the future issuance of up to 100,000 shares to non-employee
directors of the Company. The options are exercisable, at the date of grant,
over a period not greater than ten years. At the time the options are granted,
the fair value of the options is recorded as compensation expense and this
value is added to additional paid in capital.
Stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
----------------------------------------------------------------------------------------
1985 Plan 1996 Plan 1996 Directors' Plan
--------------------------- ---------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Shares Option Price Shares Option Price Shares Option Price
--------- ---------------- -------- ---------------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, July 28, 1995 163,195 $12.22 -- $ -- -- $ --
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Canceled (10,005) 13.04 -- -- -- --
------- ------- ------
Outstanding, July 26, 1996 153,190 12.16 -- -- -- --
Granted -- -- 10,000 8.13 4,000 9.63
Exercised -- -- -- -- -- --
Canceled (18,745) 13.04 -- -- -- --
------- ------- ------
Outstanding, July 25, 1997 134,445 12.04 10,000 8.13 4,000 9.63
Granted -- -- 194,724 9.12 4,667 9.07
Exercised -- -- -- -- --
Canceled (3,335) 13.04 -- -- (2,000) 9.63
------- ------- ------
Outstanding, July 31, 1998 131,110 $12.03 204,724 $9.07 6,667 $9.23
------- ------- ------
------- ------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At July 31, 1998, 124,781 shares were exercisable at a weighted average option
price of $10.27.
No compensation cost has been recorded relative to the employee option plans.
The pro forma effect on fiscal 1998 and 1997 net earnings (loss) and earnings
(loss) per share of accounting for stock-based compensation using the fair
value method required by statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" is approximately $98,000 and $.02,
and $30,000 and $.01, respectively. The fair value for options granted under
the 1996 Plan was estimated at the date of grant using the binomial option
pricing model with the following assumptions for 1998 and 1997, respectively:
dividend yield of 2.2 and 2.5 percent; expected volatility of 25 and 30
percent; risk free interest rate of 6.0 and 7.0 percent; and expected lives of
seven and seven years.
23
<PAGE>
NOTE L. RETIREMENT PLAN.
The Company has a defined contribution retirement plan covering its United
States employees operating out of the headquarters and who satisfy age and
service requirements. The Company makes annual contributions to the plan of
approximately 7% of defined pre-tax earnings. Company contributions to the
plan are limited to 15% of aggregate compensation of the participants. The
Company's contributions approximated $0, $112,000, and $97,000, for the fiscal
years 1998, 1997, and 1996, respectively.
The Company also has 401(k) salary reduction plans for its United States-based
employees. Under the terms of the plans, an employee may reduce his or her
salary by up to 12%. The Company matches the reduction, up to 10%, with a 20%
matching contribution. The combined amount is then contributed to the plans on
behalf of the employee. During fiscal years 1998, 1997, and 1996, the Company
made matching contributions to the 401(k) salary reduction plans of
approximately $152,000, $138,000, and $148,000, respectively.
NOTE M. RESTRUCTURING CHARGES.
Operating expenses for the year ended July 26, 1996, include a pre-tax charge
of $1,752,000 for the restructuring costs associated with the consolidation of
the Company's two divisions and are comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1996
- -------------------------------------------------------------------
<S> <C>
Workforce reduction costs $1,165
Write down of facility 500
Other restructuring costs 87
------
$1,752
------
------
- -------------------------------------------------------------------
</TABLE>
The restructuring resulted in the elimination of approximately 40 positions.
The Company provided severance payments and outplacement services for the
terminated employees with costs of approximately $877,000 and $212,000,
respectively. Substantially all of the restructuring charges were paid in
fiscal 1997.
As a result of the restructuring, one of its operating facilities will be sold.
As required by SFAS No. 121, the value of the facility was reduced to its
estimated fair value.
NOTE N. SUPPLEMENTAL CASH FLOW INFORMATION.
During fiscal years 1998, 1997, and 1996, the Company made income tax payments
of approximately $635,000, $435,000, and $305,000, respectively.
During fiscal 1998 the Company made interest payments on debt of $46,000.
NOTE O. INTERNATIONAL SALES.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Europe $ 5,323 $ 5,180 $ 5,075
Asia 5,131 3,017 3,122
North America 1,243 1,126 1,238
Other 1,512 1,059 1,228
------- ------- -------
$13,209 $10,382 $10,663
------- ------- -------
------- ------- -------
- ---------------------------------------------------------------------------
</TABLE>
24
<PAGE>
NOTE P. ACQUISITIONS.
On September 17, 1997, the Company acquired all the outstanding shares of
Geomation, Inc., Golden, Colorado. The Company previously had owned 18 percent
of the outstanding shares. 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, would have required 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 earn-out thresholds were not achieved and therefore the
provision was not activated.
On December 29, 1997, the company acquired all the outstanding shares STIP
Siepmann und Teutscher GmbH (STIP), of GroB-Umstadt, Germany. STIP produces a
broad line of process monitoring instrumentation designed specifically for
wastewater treatment applications. The acquisition required cash of
approximately $232,000. 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 und Teutscher for cash of approximately $1,686,000. The
transaction also included an earn-out provision, which depending upon the
performance of STIP through December 1999, may require the payment of
additional cash of up to approximately $1,700,000.
The transactions were accounted for as purchases.
The purchase price was comprised of the following consideration:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Geomation STIP
--------- -------
<S> <C> <C>
Amount paid to sellers for stock and technology:
Cash paid $ 929 $1,918
Common stock issued 2,644 --
Note receivable forgiven 556 --
Original interest in investee 440 --
Liabilities assumed 180 2,208
------ ------
Total consideration $4,749 $4,126
------ ------
------ ------
- ---------------------------------------------------------------------------------
</TABLE>
The purchase price allocation is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Geomation STIP
--------- -------
<S> <C> <C>
Cash $ 169 $ 24
Accounts Receivable 825 680
Inventory 572 1,114
Property and equipment 332 143
Deferred tax asset 456 258
Other assets*:
Customer lists/trade names 164 --
Engineering drawings and technology 472 1,686
Acquired R&D 302 --
Goodwill 1,457 --
Other -- 221
------ ------
$4,749 $4,126
------ ------
------ ------
* The life of these intangibles ranges from 3 to 15 years. The
"acquired R&D" was expensed in the first quarter of fiscal 1998.
- ---------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
The following unaudited pro forma financial information sets forth the results
of operations of Isco, Inc. as if the acquisitions of Geomation and STIP had
occurred on July 27, 1996:
Pro forma financial information (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998
--------------------------------------------------------
Geomation STIP
Isco as Pro forma Pro forma Consolidated
Reported Impact Impact Pro forma
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $47,912 $ 141 $1,990 $50,043
Net earnings (loss) (1,197) 326 37 (834)
Net earnings (loss) per share $(.21) $.05 $.01 $(.15)
Weighted average number of shares outstanding 5,607 65 -- 5,672
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Geomation STIP
Isco as Pro forma Pro forma Consolidated
Reported Impact Impact Pro forma
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $40,733 $3,024 $4,217 $47,974
Net earnings (loss) 1,326 (208) (489) 629
Net earnings (loss) per share $.25 $(.04) $(.10) $.11
Weighted average number of shares outstanding 5,351 319 -- 5,670
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1998, the Company and AMJ Equipment Corporation, Lakeland,
Florida, completed the formation of Advanced Flow Technology Co. (AFTCO) a
limited partnership located in Lakeland, Florida. Each partner owns 50 percent
of AFTCO. The Company's cash investment of approximately $1.5 million is
accounted for under the equity method. The cost in excess of net assets
acquired of approximately $750,000 is being amortized on a straight-line basis
over 10 years. AFTCO designs, manufactures, and markets electromagnetic full-
pipe flow meters.
26
<PAGE>
NOTE Q. EARNINGS PER SHARE.
The following table provides a reconciliation between basic and diluted
earnings per share:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Computation of earnings per share
- -------------------------------------------------------------------------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Numerator:
Net earnings (loss) for both basic and diluted
earnings per share $(1,197) $1,326 $987
------- ------ ------
------- ------ ------
Denominator:
Denominator for basic earnings per share
Weighted average outstanding shares 5,607 5,351 5,353
Effect of dilutive securities:
Common stock equivalents and dilutive stock options -- 5 --
------- ------ ------
Denominator for diluted earnings per share 5,607 5,356 5,353
------- ------ ------
------- ------ ------
Net earnings (loss) per share:
Basic $(.21) $.25 $.18
------- ------ ------
------- ------ ------
Diluted $(.21) $.25 $.18
------- ------ ------
------- ------ ------
- -------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 357,944, 151,427, and 142,820 shares of common stock were
outstanding during the periods ended July 31, 1998, July 25, 1997, and July 26,
1996, respectively, but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price
of the common stock and, therefore, their effect would be anti-dilutive.
NOTE R. RETIREMENT OF TREASURY STOCK.
Effective July 31, 1998, the Company's Board of Directors authorized the
retirement of all treasury shares.
NOTE S. COMMITMENTS AND CONTINGENCIES.
COMMITMENTS. As of September 25, 1998, the Company has commitments totaling
approximately $3 million relating to building expansion.
On January 22, 1998, Zellweger Analytics, Inc. ("Zellweger") filed an action
against Isco in the United States District Court in Galveston, Texas. The suit
alleges patent and trade dress infringement involving our EZ TOC product.
Zellweger sought to enjoin Isco 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 Isco's production, use, and sale
of EZ TOC. Zellweger was required to post a $500,000 bond for the injunction
to become operative. That bond was posted on February 12, 1998.
We believe the EZ TOC did not infringe either the patent or trade dress. Isco
intends to vigorously defend the charges and believes that it will ultimately
prevail in this matter. We do not believe that the number of EZ TOC products
manufactured and sold to date would subject Isco to any material damage claims.
In the normal course of business, the Company is involved in various legal
actions. Management is of the opinion that none of these legal actions will
materially affect the financial position of the Company.
27
<PAGE>
STATEMENTS OF OPERATIONS BY QUARTER. (unaudited)
(Columnar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------- ---------------------- ---------------------- ---------------------
1998 1997 1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $11,500 $9,224 $10,384 $9,846 $13,246 $10,282 $12,782 $11,381
Cost of sales 4,834 4,156 4,545 4,448 5,940 4,228 6,248 5,141
------- ------ ------- ------ ------- ------- ------- -------
6,666 5,068 5,839 5,398 7,306 6,054 6,534 6,240
------- ------ ------- ------ ------- ------- ------- -------
Expenses:
Selling, general and
administrative 4,853 4,317 4,817 4,417 5,657 4,729 7,213 4,759
Research and engineering 1,594 1,091 1,447 1,103 1,700 1,086 1,574 1,246
------- ------ ------- ------ ------- ------- ------- -------
6,447 5,408 6,264 5,520 7,357 5,815 8,787 6,005
------- ------ ------- ------ ------- ------- ------- -------
Operating income (loss) 219 (340) (425) (122) (51) 239 (2,253) 235
Non-operating income 223 367 275 410 185 315 177 473
------- ------ ------- ------ ------- ------- ------- -------
Earnings (loss) before
income taxes 442 27 (150) 288 134 554 (2,076) 708
Income taxes (tax benefit) 150 (61) (104) 69 (40) 91 (459) 152
------- ------ ------- ------ ------- ------- ------- -------
Net earnings (loss) $ 292 $ 88 $ (46) $ 219 $ 174 $ 463 $ (1,617) $ 556
------- ------ ------- ------ ------- ------- ------- -------
------- ------ ------- ------ ------- ------- ------- -------
Basic earnings (loss)
per share $.05 $.02 $(.01) $.04 $.03 $.09 $(.28) $.10
------- ------ ------- ------ ------- ------- ------- -------
------- ------ ------- ------ ------- ------- ------- -------
Weighted average shares
outstanding 5,497 5,354 5,672 5,356 5,672 5,357 5,672 5,359
------- ------ ------- ------ ------- ------- ------- -------
------- ------ ------- ------ ------- ------- ------- -------
Quarterly per share amounts may not add to annual total due to rounding.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Isco, Inc., Proxy Statement for Annual
Meeting of Shareholders to be held December 10, 1998, under the captions
ELECTION OF DIRECTORS, LIST OF CURRENT EXECUTIVE OFFICERS OF THE COMPANY, and
ADDITIONAL INFORMATION - Compliance with Section 16(a) of the Securities
Exchange Act of 1934.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Isco, Inc., Proxy Statement for Annual
Meeting of Shareholders to be held December 10, 1998, under the caption
EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Isco, Inc., Proxy Statement for Annual
Meeting of Shareholders to be held December 10, 1998, under the captions
GENERAL and ELECTION OF DIRECTORS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
page
number
<S> <C>
1. Financial Statements:
Independent Auditors' Report 12
Consolidated Statements of Operations for fiscal years
ended July 31, 1998, July 25, 1997, and July 26, 1996 13
Consolidated Balance Sheets at July 31, 1998 and July 25, 1997 14
Consolidated Statements of Shareholders' Equity for fiscal years ended
July 31, 1998, July 25, 1997, and July 26, 1996 15
Consolidated Statements of Cash Flows for fiscal years ended July 31,
1998, July 25, 1997, and July 26, 1996 16
Notes to Consolidated Financial Statements 17
Financial statements of the Registrant's subsidiaries are omitted because
the Registrant is, primarily, an operating company and the subsidiaries
are wholly owned.
29
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(CONTINUED)
2. Schedules:
The required schedules have been omitted because the required information
is provided in the financial statements and notes thereto.
b. Reports on Form 8-K filed for the three months ended July 31, 1998:
1. None
c. Exhibits (Numbered in accordance with Item 601 of Regulation S-K):
(3) (i) Articles of Incorporation as amended and restated through July 26,
1985 [Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, File No. 2-99303 (the "Form S-1")] -
(ii) By-laws as amended through September 21, 1995 (Incorporated by
reference to Annual Report on Form 10-K for Isco, Inc. dated July 28,
1995) -
(10) Material contracts:
(iii) (a) 1985 Incentive Stock Option Plan (Incorporated by reference
to Exhibit 10.1 (ii) of the Form S-1) -
(b) Directors' Deferred Compensation Plan (Incorporated by
reference to Registration Statement of Form S-8,
File No. 333-00421) -
(c) 1996 Stock Option Plan (Incorporated by reference to
Registration Statement of Form S-8, File No 333-16637) -
(d) 1996 Outside Directors' Stock Option Plan (Incorporated by
reference to Registration Statement of Form S-8, File
No. 333-16637) -
(21) List of Isco's Subsidiaries:
Isco Instruments (Europe) GmbH (organized under the laws of Switzerland)
Isco, Ltd. (organized under the laws of Barbados)
Geomation, Inc. (incorporated in Nebraska)
STIP Siepmann und Teutscher GmbH (organized under the laws of Germany)
(23) Independent Auditors' Consent 32
(27) Financial Data Schedule 33
(99) Plan Year 1998 Financial Statements of the Isco, Inc. Retirement Plu$
Plan 34
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/Philip M. Wittig
--------------------------------- ----------------------------------
Robert W. Allington, Philip M. Wittig
Chief Executive Officer, Treasurer, Chief Financial
and Director Officer and Director
Date: October 22, 1998 Date: October 22, 1998
By: /s/Douglas M. Grant By: /s/Vicki L. Benne
--------------------------------- ----------------------------------
Douglas M. Grant, Vicki L. Benne, Controller
President, Chief Operating
Officer, and Director
Date: October 22, 1998 Date: October 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/Dale L. Young By: /s/James L. Linderholm
--------------------------------- ----------------------------------
Dale L. Young, Secretary and James L. Linderholm, Director
Director
Date: October 21, 1998 Date: October 22, 1998
By: /s/James L. Carrier By: /s/John J. Brasch
--------------------------------- ----------------------------------
James L. Carrier, Director John J. Brasch, Director
Date: October 22, 1998 Date: October 22, 1998
31
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Numbers
33-4190, 33-41201, 333-00421 and 333-16637 of Isco, Inc. and subsidiaries on
Form S-8 of our report dated October 2, 1998 (which report expresses an
unqualified opinion) appearing in the Annual Report on Form 10-K of Isco, Inc.
and subsidiaries for the year ended July 31, 1998.
Deloitte & Touche LLP
Lincoln, Nebraska
October 22, 1998
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> JUL-26-1997
<PERIOD-END> JUL-31-1998
<CASH> 3,837
<SECURITIES> 1,361
<RECEIVABLES> 8,338
<ALLOWANCES> 214
<INVENTORY> 9,902
<CURRENT-ASSETS> 25,143
<PP&E> 34,894
<DEPRECIATION> 19,236
<TOTAL-ASSETS> 49,617
<CURRENT-LIABILITIES> 6,121
<BONDS> 690
0
0
<COMMON> 567
<OTHER-SE> 42,239
<TOTAL-LIABILITY-AND-EQUITY> 49,617
<SALES> 47,912
<TOTAL-REVENUES> 47,912
<CGS> 21,567
<TOTAL-COSTS> 21,567
<OTHER-EXPENSES> 28,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,650)
<INCOME-TAX> (453)
<INCOME-CONTINUING> (1,197)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,197)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
<PAGE>
EXHIBIT 99
ISCO, INC. RETIREMENT PLU$ PLAN
Financial Statements And Supplemental
Schedules For The Years Ended
July 31, 1998 and 1997
And Independent Auditors' Report
34
<PAGE>
ISCO, INC. RETIREMENT PLU$ PLAN
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
AND INDEPENDENT AUDITORS' REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report 36
Statements of Net Assets Available for Benefits 37
Statements of Changes in Net Assets Available for Benefits 38
Notes to Financial Statements 39
SUPPLEMENTAL SCHEDULES:
Item 27a - Schedule of Assets Held for Investment Purposes -
July 31, 1998 46
Item 27d - Schedule of Reportable Transactions - Year Ended
July 31, 1998 47
</TABLE>
Schedules not filed herein are omitted because of the absence of the
conditions under which they are required.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
Plan Committee
Isco, Inc. Retirement Plu$ Plan
Lincoln, Nebraska
We have audited the accompanying statements of net assets available for
benefits of the Isco, Inc. Retirement Plu$ Plan as of July 31, 1998 and 1997
and the related statements of changes in net assets available for benefits
for the years then ended. These financial statements are the responsibility
of the Plan's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the net assets available for benefits of the Isco, Inc. Retirement
Plu$ Plan as of July 31, 1998 and 1997, and the changes in net assets
available for benefits for the years then ended, in conformity with generally
accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of (1)
assets held for investment purposes as of July 31, 1998, and (2) reportable
transactions for the year ended July 31, 1998, are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements, but are supplementary information required by the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. The supplemental information by fund
in the statements of net assets available for benefits and the statements of
changes in net assets available for benefits is presented for the purpose of
additional analysis rather than to present the net assets available for
benefits and changes in net assets available for benefits of the individual
funds. The supplemental schedules and supplemental information by fund is the
responsibility of the Plan's management. Such supplemental schedules and
supplemental information by fund have been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion, are
fairly stated in all material respects when considered in relation to the basic
financial statements taken as a whole.
Deloitte & Touche LLP
Lincoln, Nebraska
October 2, 1998
36
<PAGE>
ISCO, INC. RETIREMENT PLU$ PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
(amounts in thousands)
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1997
----------------------------------- ------------------------------------
Supplemental Information Supplemental Information
by Fund by Fund
-------------------------- ------------------------
Employer Participant Employer Participant
Directed Directed Total Directed Directed Total
-------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair value as
determined by quoted
market prices (Note C):
Money market funds $228 $ 1,864 $ 2,092 $204 $ 1,666 $ 1,870
Mutual funds -- 20,845 20,845 -- 17,612 17,612
Bank collective funds -- 428 428 -- 303 303
Isco, Inc. common stock fund -- 442 442 -- 503 503
Investments, at estimated fair
value (Note C):
Other investments 13 -- 13 41 -- 41
----- -------- -------- ---- -------- -------
241 23,579 23,820 245 20,084 20,329
Participant loans -- 501 501 -- 489 489
----- -------- -------- ---- -------- -------
Total investments 241 24,080 24,321 245 20,573 20,818
Employer contributions receivable -- -- -- -- 112 112
Accrued income -- -- -- 1 -- 1
----- -------- -------- ---- -------- -------
Net assets available for benefits $241 $24,080 $24,321 $246 $20,685 $20,931
----- -------- -------- ---- -------- -------
----- -------- -------- ---- -------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements
37
<PAGE>
ISCO, INC. RETIREMENT PLU$ PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
(amounts in thousands)
<TABLE>
<CAPTION>
July 31, 1998 July 31, 1997
----------------------------------- ------------------------------------
Supplemental Information Supplemental Information
by Fund by Fund
-------------------------- ------------------------
Employer Participant Employer Participant
Directed Directed Total Directed Directed Total
-------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Investment income (Notes C and F):
Dividends, interest, gain distributions,
and other income $ 29 $ 2,893 $ 2,922 $ 60 $ 1,329 $ 1,389
Net realized and unrealized
appreciation(depreciation) in fair
value of investments (28) 340 312 (47) 4,153 4,106
----- -------- -------- ---- -------- --------
Net investment income 1 3,233 3,234 13 5,482 5,495
----- -------- -------- ---- -------- --------
Contributions (Note F):
Employer annual profit sharing -- -- -- -- 112 112
Employer 401(k) matching -- 152 152 -- 138 138
Participant -- 802 802 -- 729 729
----- -------- -------- ---- -------- --------
-- 954 954 -- 979 979
----- -------- -------- ---- -------- --------
Total additions 1 4,187 4,188 13 6,461 6,474
Benefits paid (Note F): (6) (792) (798) (26) (1,523) (1,549)
Transfers -- -- -- (101) 101 --
----- -------- -------- ---- -------- --------
Increase (decrease) in net assets
available for benefits (5) 3,395 3,390 (114) 5,039 4,925
Net assets available for benefits:
Beginning of year 246 20,685 20,931 360 15,646 16,006
----- -------- -------- ---- -------- --------
End of year $241 $24,080 $24,321 $246 $20,685 $20,931
----- -------- -------- ---- -------- --------
----- -------- -------- ---- -------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements
38
<PAGE>
ISCO, INC. RETIREMENT PLU$ PLAN
NOTES TO FINANCIAL STATEMENTS
Years ended July 31, 1998 and 1997
(Columnar amounts in thousands, except share data)
NOTE A. DESCRIPTION OF PLAN.
GENERAL. The following brief description of the Isco, Inc. Retirement Plu$
Plan (the Plan) is provided for general information purposes only.
Participants should refer to the Plan document for more complete information.
The Plan was established, effective August 1, 1972, to provide retirement
benefits for the employees of Isco, Inc. (the Company). The Plan was last
amended effective August 1, 1995. Effective August 1, 1987, a 401(k) salary
reduction option was incorporated into the Plan. Employees are eligible for
participation after they have completed one year of service and are at least 21
years of age. A year of service is defined as the accumulation of 1,000 hours
of credited service during a one-year period beginning on the employment date.
Participant contributions, employer 401(k) matching contributions, and employer
annual profit sharing contributions, are invested at American Century
Investments under the direction of the plan participants.
CONTRIBUTIONS. Contributions to the Plan are provided from the following
sources:
EMPLOYER ANNUAL PROFIT SHARING CONTRIBUTION (PARTICIPANT DIRECTED). The
Employer is required to contribute an amount equal to the lesser of 7% of the
current net profit of the Company or the maximum amount allowed by the Internal
Revenue Code. The contributed amount received by each participant is based on
their percentage of total eligible compensation.
PARTICIPANT CONTRIBUTIONS (PARTICIPANT DIRECTED). Plan participants may elect
to reduce their compensation by a maximum of 12%, subject to IRS limitations.
The Employer then contributes the amount of reduction in compensation to the
Plan on behalf of each participant.
EMPLOYER 401(k) MATCHING CONTRIBUTION (PARTICIPANT DIRECTED). The Employer is
required to match 20% of the contribution made on behalf of each participant
electing salary reductions up to a maximum of 10% of the participant's eligible
compensation.
PARTICIPANT ACCOUNTS. Each participant's account is credited with the
participant's contribution, the Company's matching contribution and the
allocated portion of the Company's annual contribution and the forfeited
portion of terminated participants' non-vested accounts. Any 401(k)
forfeitures are allocated, based on a participant's contributions to the 401(k)
plan during the plan year. The Company's annual profit sharing contribution
and related forfeitures are allocated to each participant's account based on
the percentage of the participant's eligible compensation for the plan year to
the total compensation of all eligible participants for the plan year.
Earnings are credited directly to each investment option in which the
participant had an investment on the record date of the dividend or interest
distribution.
USE OF ESTIMATES. The preparation of the financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of net assets
available for benefits and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of changes in net
assets available for benefits during the reporting period. Actual results
could differ from those estimates.
VESTING. Participant contributions (i.e. employee salary reduction amounts)
and participant rollover contributions are immediately fully vested and
nonforfeitable. Employer profit sharing contributions and the Employer 401(k)
matching contributions vest 20% upon completion of three years of credited
service, increasing 20% per year until fully vested upon completion of seven
years of credited service.
39
<PAGE>
PAYMENT OF BENEFITS. On termination of service due to death, disability or
retirement, a participant with a vested balance greater than $5,000 may elect
to receive either a lump sum equal to the participant's vested interest in his
or her account, or monthly installments. A participant with a vested balance
less than $5,000 is entitled to receive a lump sum payment equal to the
participant's vested account balance.
Plan participants are eligible for normal retirement at age 65 but may elect to
retire at a later date. Upon attainment of 65 years of age, death, or
determination of disability, a participant becomes 100% vested regardless of
the number of credited years of service completed.
PLAN EXPENSES. As an additional benefit to the participants, the Employer,
without reimbursement, pays for all costs, except for loan origination and loan
maintenance fees, required to administer the Plan. These administration costs
are not reflected in the Plan's financial statements.
EMPLOYER DIRECTED. Employer directed funds are invested in the Restricted
Fund, which is managed by the employer. Assets in the Restricted Fund at
July 31, 1998 and 1997 include: Balcor Pension Investors II and III, Benham
Stable Value Government Fund, and Chase Manhattan Bank Pooled Investment.
Transfers from the Restricted Fund to the Unrestricted Fund are directed by the
Plan Committee.
INVESTMENT OPTIONS:
PARTICIPANT DIRECTED. Participant directed contributions may be invested in
one or more of thirteen funds. A brief summary description of each investment
option follows:
BENHAM STABLE VALUE GOVERNMENT FUND. A fund which seeks to provide current
income while maintaining a stable share price. It is managed by SEI Trust Co.
BENHAM PREMIUM BOND FUND. A fund which seeks a high level of income from a
portfolio of longer-term bonds and other debt obligations.
AMERICAN CENTURY BALANCED FUND. A fund which seeks capital growth and current
income by investing in equity securities with prospects for growth and in
investment grade bonds and other fixed income securities.
TWENTIETH CENTURY SELECT FUND. A fund comprised primarily of income-producing
equity securities of larger companies with the potential for appreciation.
TWENTIETH CENTURY ULTRA FUND. A fund comprised primarily of equity securities
of medium and smaller companies with the potential for appreciation.
TWENTIETH CENTURY INTERNATIONAL GROWTH FUND. A fund which seeks capital growth
by investing primarily in an internationally diversified portfolio of common
stocks.
BARCLAYS EQUITY INDEX FUND. A fund invested primarily in stocks of a broad
array of established U.S. companies. It invests to match the performance of
the S&P 500 Index by investing in most of the same companies.
AMERICAN CENTURY STRATEGIC ALLOCATION: CONSERVATIVE. A fund seeking to provide
regular income through emphasizing investment in bonds and money market
securities combined with the potential for moderate long-term return as the
result of its stake in equity securities.
AMERICAN CENTURY STRATEGIC ALLOCATION: MODERATE. A fund emphasizing investment
in equity securities but maintaining a sizable stake in bonds and money market
securities.
AMERICAN CENTURY STRATEGIC ALLOCATION: AGGRESSIVE. A fund emphasizing
investment in equity securities, but maintaining a smaller portion of its
assets in bonds and money market securities.
AMERICAN CENTURY VALUE FUND. A fund investing primarily in equity securities
of well established companies with intermediate to large market capitalizations
that are believed by fund management to be undervalued at the time of purchase.
40
<PAGE>
TWENTIETH CENTURY VISTA FUND. A fund investing primarily in medium sized and
smaller companies with above average prospects for appreciation.
ISCO, INC. COMMON STOCK FUND. A fund invested primarily in Isco, Inc. common
stock. Isco, Inc. is a party-in-interest and sponsor of the Plan.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING. The financial statements of the Plan are prepared under
the accrual method of accounting.
INVESTMENT VALUATION AND INCOME RECOGNITION. Investments are stated at fair
value. Fair value of marketable securities is determined by reference to the
closing quoted price by the exchange on which the security is listed or the
closing net asset value as reported by the mutual fund. Participant loans are
stated at their outstanding principal balance. The amounts shown, in Note C,
for securities that do not have a quoted market price represent fair value
estimated by an independent third party.
Investment transactions are recognized on a settlement date basis. The net
realized and unrealized appreciation (depreciation) of investments is
recognized in the statements of changes in net assets available for benefits.
The fair value at the beginning of the plan year, or the purchased cost if
acquired during the year, is used in determining realized and unrealized gains
and losses on the sale of each investment.
PAYMENT OF BENEFITS. The Plan's policy is to record benefit payments upon
distribution to the participants. Benefits payable to retired and terminated
participants were $19,853 and $35,614 at July 31, 1998 and 1997, respectively.
CONTRIBUTIONS. The employer profit sharing contribution is computed as of the
end of the Employer's fiscal year and is recorded by the Plan in the
corresponding period, but is allocated to participants' accounts in the plan
quarter in which the profit sharing contribution is made to the Plan.
Participant contributions are recorded in the period in which the bi-weekly
payroll deductions are made. The Employer 401(k) matching contributions are
also recorded in the period that the payroll deductions are made.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
years' financial statements to conform to the current years' presentation.
41
<PAGE>
NOTE C. INVESTMENTS
The following schedules present the fair values of investments.
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares/Units Fair Value
------------- ----------
<S> <C> <C>
Investments at fair value as determined by quoted
market price:
Money Market:
Benham Stable Value Government Fund 2,027,891 $ 2,028
Chase Manahattan Bank Pooled Investment 64,480 64
Mutual Funds:
Twentieth Century International Growth Fund 165,207 1,763
Twentieth Century Ultra Fund 176,386 6,010
Twentieth Century Select Fund 154,747 7,884
American Century Balanced Fund 148,742 3,034
Benham Premium Bond Fund 78,246 797
American Century Value Fund 88,713 621
Twentieth Century Vista Fund 28,513 331
American Century Strategic Allocation: Conservative 12,873 72
American Century Strategic Allocation: Moderate 29,789 189
American Century Strategic Allocation: Aggressive 21,158 144
Bank Collective Funds:
Barclays Equity Index Fund 16,122 428
Other Investments:
Isco, Inc. Common Stock Fund 68,021 442
Investments at estimated fair value:
Balcor Pension Investors II 101 8
Balcor Pension Investors III 202 5
-------
Total Investments at Fair Value $23,820
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
July 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of
Shares/Units Fair Value
------------ ----------
<S> <C> <C>
Investments at fair value as determined by quoted
market price:
Money Market:
Benham Stable Value Government Fund 1,819,342 $ 1,819
Chase Manhattan Bank Pooled Investment 50,767 51
Mutual Funds:
Twentieth Century International Growth Fund 144,894 1,459
Twentieth Century Ultra Fund 134,306 4,874
Twentieth Century Select Fund 129,518 6,550
American Century Balanced Fund 135,438 2,693
Benham Premium Bond Fund 69,224 703
American Century Value Fund 73,929 580
Twentieth Century Vista Fund 25,255 372
American Century Strategic Allocation: Conservative 9,340 52
American Century Strategic Allocation: Moderate 34,308 204
American Century Strategic Allocation: Aggressive 19,795 125
Bank Collective Funds:
Barclays Equity Index Fund 13,590 303
Other Investments:
Isco, Inc. Common Stock Fund 61,910 503
Investments at estimated fair value:
Balcor Pension Investors II 101 14
Balcor Pension Investors III 202 27
-------
Total Investments at Fair Value $20,329
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
During the years ended July 31, 1998 and 1997, the Plan's investments
appreciated (depreciated) as follows:
Net Realized and Unrealized Appreciation (Depreciation) in Fair Value
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Investments at fair value as determined by quoted
market price:
Mutual Funds:
Twentieth Century International Growth Fund $ 144 $ 308
Twentieth Century Ultra Fund (20) 1,348
Twentieth Century Select Fund 287 1,922
American Century Balanced Fund 106 399
Benham Premium Bond Fund 3 28
American Century Value Fund (65) 81
Twentieth Century Vista Fund (82) 78
American Century Strategic Allocation: Conservative -- 4
American Century Strategic Allocation: Moderate 8 17
American Century Strategic Allocation: Aggressive 10 17
Bank Collective Funds:
Barclays Equity Index Fund 65 50
Other Investments:
Isco, Inc. Common Stock Fund (116) (99)
Investments at estimated fair value:
Balcor Pension Investors II (6) (29)
Balcor Pension Investors III (22) (18)
------ ------
$ 312 $4,106
------ ------
------ ------
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE>
NOTE D. PLAN TERMINATION
Although the Company has not expressed any intent to terminate the Plan, it may
do so at any time by giving 30 days notice to the Plan Committee, the Plan
Administrator, and the Trustee. In the event of such termination, Plan assets
would be valued and participants' accounts would be adjusted to reflect the
allocation of net gains and losses of the underlying investments. At that
time, participants' accounts would become fully vested and nonforfeitable.
NOTE E. FEDERAL INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated September 7, 1995, which states that the Plan, as amended June 17, 1994,
meets the requirements of Section 401(a) of the Internal Revenue Code and is,
therefore, exempt from Federal income tax under Section 501(a) of the Code.
The Plan administrator believes that the Plan is in compliance with current
regulations. Therefore, no provision for income taxes is provided in the
financial statements of the Plan.
Plan income, participant pretax contributions, and employer contributions
represent taxable income to the participating employees at the time of
distribution.
NOTE F. FUND INFORMATION
Dividends, interest, gain distributions, and other income, participant
contributions and benefit payments, by fund are as follows for the years ended
July 31, 1998 and 1997.
Dividends, interest, gain distributions, and other income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Benham Stable Value Government Fund $ 106 $ 93
Twentieth Century International Growth Fund 189 123
Twentieth Century Ultra Fund 1,003 187
Twentieth Century Select Fund 1,066 542
American Century Balanced Fund 272 276
American Century Value Fund 102 2
American Century Vista Fund 21 --
American Century Strategic Allocation: Conservative 5 1
American Century Strategic Allocation: Moderate 6 2
American Century Strategic Allocation: Aggressive 6 --
Barclays Equity Index Fund 9 --
Isco, Inc. Common Stock Fund 12 13
Benham Premium Bond Fund 51 49
Participant loans 45 41
------ ------
Total $2,893 $1,329
------ ------
------ ------
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
Participant contributions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Benham Stable Value Government Fund $ 60 $ 53
Twentieth Century International Growth Fund 77 80
Twentieth Century Ultra Fund 215 218
Twentieth Century Select Fund 187 181
American Century Balanced Fund 93 102
American Century Value Fund 41 9
Twentieth Century Vista Fund 30 7
American Century Strategic Allocation: Conservative 3 1
American Century Strategic Allocation: Moderate 8 2
American Century Strategic Allocation: Aggressive 8 2
Barclays Equity Index Fund 19 5
Isco, Inc. Common Stock Fund 36 41
Benham Premium Bond Fund 25 28
----- -----
Total $ 802 $ 729
----- -----
----- -----
</TABLE>
- --------------------------------------------------------------------------------
Benefits paid
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----- ------
<S> <C> <C>
Benham Stable Value Government Fund $ 30 $ 68
Twentieth Century International Growth Fund 108 141
Twentieth Century Ultra Fund 70 372
Twentieth Century Select Fund 175 331
American Century Balanced Fund 173 318
American Century Value Fund 61 --
American Century Vista Fund 20 --
American Century Strategic Allocation: Conservative 7 --
American Century Strategic Allocation: Moderate 61 --
American Century Strategic Allocation: Aggressive 7 --
Barclays Equity Index Fund 15 --
Isco, Inc. Common Stock Fund 2 68
Benham Premium Bond Fund 29 144
Participant loans 34 81
----- ------
Total $ 792 $1,523
----- ------
----- ------
</TABLE>
- --------------------------------------------------------------------------------
45
<PAGE>
ISCO, INC. RETIREMENT PLU$ PLAN
PN 001
EIN #47-0461807
(amounts in thousands, except per share/unit data)
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
<TABLE>
<CAPTION>
July 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
Column B Column C Column D Column E
- -------------------------------------------- ------------------------ -------- --------
Description of
investment including
collateral, rate of
Identity of issue, borrower, lessor or interest, maturity date, Current
similar party par or maturity value Cost Value
- -------------------------------------------- ------------------------ -------- --------
<S> <C> <C> <C>
MONEY MARKET:
*Benham Stable Value Government Fund 2,027,891 shares $2,028 $ 2,028
*Chase Manhattan Bank Pooled Investment 64,480 shares 64 64
MUTUAL FUNDS:
*Twentieth Century Select Fund 154,747 shares 6,268 7,884
*American Century Balanced Fund 148,742 shares 2,458 3,034
*Benham Premium Bond Fund 78,246 shares 782 797
*Twentieth Century Ultra Fund 176,386 shares 4,519 6,010
*Twentieth Century International Growth Fund 165,207 shares 1,295 1,763
*Twentieth Century Vista Fund 28,513 shares 339 331
*American Century Value Fund 88,713 shares 610 621
*American Century Strategic Allocation: Conservative 12,873 shares 68 72
*American Century Strategic Allocation: Moderate 29,789 shares 175 189
*American Century Strategic Allocation: Aggressive 21,158 shares 117 144
BANK COLLECTIVE FUNDS:
Barclays Equity Index Fund 16,122 Units 330 428
OTHER INVESTMENTS:
*Isco, Inc. Common Stock Fund 68,021 shares 442
*Participant loans Interest rates ranging
from 7.25% to 10.25%
maturing August 1998
through June 2002 -- 501
Balcor Pension Investors II 101 Units 61 8
Balcor Pension Investors III 202 Units 60 5
-------
*Party-in-interest $24,321
-------
-------
</TABLE>
46
<PAGE>
ISCO, INC. RETIREMENT PLU$ PLAN
PN 001
EIN #47-0461807
(amounts in thousands, except number of transactions data)
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
SERIES OF TRANSACTIONS
FOR THE YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- ------------------ ---------------------------- ------------ ------------ -------------- --------
Total Dollar
Identity of Number of Value of Total Dollar
Party Involved Description of Asset Transactions Purchases Value of Sales Net Gain
- ------------------ ---------------------------- ------------ ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
*Twentieth Century Select Fund 86 $2,754 $ -- $ --
*Twentieth Century Select Fund 55 -- 1,707 82
*Twentieth Century Ultra Fund 88 2,450 -- --
*Twentieth Century Ultra Fund 59 -- 1,295 48
*Benham Stable Value Government Fund 94 3,581 -- --
*Benham Stable Value Government Fund 40 -- 3,373 --
*Barclays Equity Index Fund 50 998 -- --
*Barclays Equity Index Fund 25 -- 938 13
</TABLE>
*Party-in-interest
47
