<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-14429
Isco, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0461807
------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No)
4700 Superior Street, Lincoln, Nebraska 68504-1398
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(402) 464-0231
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 26, 1999:
Common Stock, $0.10 par value 5,643,992
- ----------------------------- ----------------
Class Number of Shares
1
<PAGE>
ISCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K: 10
(a) Exhibits:
27 - Financial Data Schedule 11
</TABLE>
2
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------
Oct 29 Oct 30
1999 1998
------ ------
<S> <C> <C>
Net sales $13,183 $13,486
Cost of sales 6,032 6,116
------- -------
7,151 7,370
------- -------
Expenses:
Selling, general, and administrative 5,134 5,323
Research and engineering 1,403 1,514
------- -------
6,537 6,837
------- -------
Operating income 614 533
Net non-operating income:
Investment income 65 77
Interest expense (98) (37)
Other 124 98
------- -------
91 138
------- -------
Earnings before income taxes 705 671
Income taxes 284 105
------- -------
Net earnings $ 421 $ 566
------- -------
------- -------
Basic earnings per share $.07 $.10
---- ----
---- ----
Diluted earnings per share $.07 $.10
---- ----
---- ----
Weighted average number of shares outstanding 5,644 5,648
Additional shares assuming exercise of common stock
equivalents and dilutive stock options 20 9
------- -------
Total 5,664 5,657
------- -------
------- -------
Cash dividend per share $.00 $.05
---- ----
---- ----
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
Oct 29 Jul 30
1999 1999
----------- ------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,126 $ 3,423
Accounts receivable -- trade, net of allowance
for doubtful accounts of $214,000 and $198,000 9,674 9,501
Inventories (Note 3) 9,115 9,016
Refundable income taxes 138 383
Deferred income taxes 1,252 1,134
Other current assets 508 449
------- -------
Total Current Assets 23,813 23,906
Property, plant, and equipment, net of accumulated
depreciation of $16,139,000 and $15,681,000 19,853 20,019
Property held for sale 2,257 2,257
Deferred income taxes 157 318
Other assets (Note 4) 6,641 6,825
------- -------
Total assets $52,721 $53,325
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,401 $ 1,832
Short-term borrowing 1,661 1,560
Current portion of long-term debt 1,189 1,180
Accrued expenses 2,848 3,311
------- -------
Total current liabilities 7,099 7,883
Long-term debt 3,754 3,996
Shareholders' equity (Note 5):
Preferred stock, $.10 par value, authorized
5,000,000 shares; issued none -- --
Common stock, $.10 par value, authorized 15,000,000
shares; issued 5,643,992 and 5,643,992 shares 564 564
Additional paid-in capital 37,740 37,740
Retained earnings 3,573 3,152
Accumulated other comprehensive income (loss) (9) (10)
------- -------
Total shareholders' equity 41,868 41,446
------- -------
Total liabilities and shareholders' equity $52,721 $53,325
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
Three months ended
------------------
Oct 29 Oct 30
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 421 $ 566
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 655 560
Change in operating assets and liabilities (1,252) (1,008)
Other 340 (90)
------- -------
Total adjustments (257) (538)
------- -------
Cash flows from operating activities 164 28
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities -- 660
Proceeds from sale of property, plant, and equipment 63 130
Purchase of property, plant, and equipment (433) (2,377)
Other -- 2
------- -------
Cash flows from investing activities (370) (1,585)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term debt 130 106
Repayment of debt (221) --
Cash dividends paid -- (282)
Purchase of common stock -- (165)
------- -------
Cash flows from financing activities (91) (341)
------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (297) (1,898)
Balance at beginning of year 3,423 3,837
------- -------
Balance at end of period $ 3,126 $ 1,939
------- -------
------- -------
</TABLE>
The Company made income tax payments of $0 and $1,000 during the three-month
periods ended October 29, 1999 and October 30, 1998, respectively.
The Company made interest payments of $98,000 and $37,000 during the three
month periods ended October 29, 1999 and October 30, 1998, respectively.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in thousands, except per share data)
October 29, 1999
NOTE 1: In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments necessary for a
fair presentation of the financial position of the Company and the results of
operations for the interim periods presented herein. All such adjustments are
of a normal recurring nature. Results of operations for the current unaudited
interim period are not necessarily indicative of the results that may be
expected for the entire fiscal year. All significant intercompany
transactions and accounts have been eliminated.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in the Annual Report on Form 10K for the year ended July
30, 1999.
NOTE 2: Certain reclassifications have been made to the prior period's
financial statements to conform to the current period's presentation.
NOTE 3: Inventories are valued at the lower of cost or market, principally on
the last-in, first-out (LIFO) basis. The composition of inventories is as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Oct 29, 1999 Jul 30, 1999
------------ ------------
<S> <C> <C>
Raw materials $3,799 $3,893
Work-in-process 3,716 3,422
Finished goods 1,600 1,701
------ ------
$9,115 $9,016
------ ------
------ ------
---------------------------------------------------------------------
</TABLE>
Had inventories been valued on the first-in, first-out (FIFO) basis, they
would have been approximately $1,277,000 and $1,214,000 higher than reported
on the LIFO basis at October 29, 1999 and July 30, 1999, respectively.
Effective July 31, 1999, the Company changed from the double-extension method
of valuing LIFO inventories to the link-chain index method and combined two
existing LIFO valuation pools into a single pool. Management believes this
change will provide a greater income tax benefit. Combined with this change
is a change in the method of applying indirect manufacturing costs to product
costs for a significant portion of the total inventory. Management believes
this change will result in a more appropriate measurement of operating
results. The cumulative effect of these changes is reported in the current
reporting period, and resulted in an increase in the valuation of inventory
and a benefit to the cost of goods sold of approximately $200,000 for the
first quarter of fiscal 2000.
NOTE 4: Other Assets
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Oct 29, 1999 Jul 30, 1999
------------ ------------
<S> <C> <C>
Intangibles, net of accumulated
amortization of $828,000 and
$728,000 $2,951 $3,051
Investment in AFTCO, net of
accumulated amortization of
$119,000 and $100,000 951 1,058
Cash value of life insurance 1,382 1,358
Note receivable -- related party 1,000 1,000
Other 357 358
------ ------
$6,641 $6,825
------ ------
------ ------
---------------------------------------------------------------------
</TABLE>
6
<PAGE>
NOTE 5: Comprehensive income, for the three months ended October 29, 1999 and
October 30, 1998, was as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Oct 29, 1999 Oct 30, 1998
------------ ------------
<S> <C> <C>
Net income (loss) $421 $566
Other comprehensive income, net of
income tax:
Foreign currency translation
adjustments 1 (4)
Unrealized holding gains
(losses) on available-for-sale
securities 0 2
---- ----
Comprehensive income (loss) $422 $564
---- ----
---- ----
---------------------------------------------------------------------
</TABLE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAIN TREND ANALYSIS AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS WITHIN THIS DOCUMENT.
SALES ANALYSIS AND REVIEW
Our first quarter sales of $13,183,000 were approximately two percent lower
than sales for the same period last year. In total, sales of wastewater
samplers, flow meters, and liquid chromatography products (our core products)
were flat. Samplers declined by approximately 13 percent. This decline was
offset by increases in flow meter and liquid chromatography. Sales of our
other products (process monitoring, supercritical fluid extraction (SFE),
syringe pumps, Geomation, and STIP products) were down approximately seven
percent compared with the same period last year. We incurred decreases in all
of our other products with the exception of SFE.
Our first quarter domestic sales were approximately three percent higher than
sales for the same period last year. Domestic sales of our core products were
basically flat. Flow meter and liquid chromatography sales increased over the
same period last year while samplers declined. Sales of our other products
increased by approximately 20 percent. Sales of SFE products accounted for
the majority of this increase, offset by decreases in sales of syringe pumps
and Geomation products.
Our first quarter international sales were approximately 16 percent lower
than sales for the same period last year. International sales of our core
products increased by approximately two percent. This increase was a result
of an increase in sales of chromatography products over last year, offset by
decreases in sales of samplers and flow meters. Sales of our other products
decreased by approximately 38 percent. This decrease is due primarily to a
reduction in sales of SFE products.
Net orders of $12,527,000 million were received during the first quarter of
FY2000, a decrease of approximately six percent compared with first quarter
of FY1999. The order backlog at October 29, 1999 was $5,566,000, down
approximately four percent from the beginning of the year.
OPERATING INCOME ANALYSIS AND REVIEW
RESULTS OF OPERATIONS
The following table sets forth, for the three-month period indicated, the
percentages which certain components of the Condensed Consolidated Statements
of Operations bear to net sales and the percentage of change of such
components (based on actual dollars) compared with the same period of the
prior year.
7
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Three months ended
------------------------------
10/29/99 10/30/98 Change
-------- -------- ------
<S> <C> <C> <C>
Net sales 100.0 100.0 (2.3)
Cost of sales 45.8 45.4 1.4
----- -----
54.2 54.6 (3.0)
----- -----
Expenses:
Selling, general, & administrative 38.9 39.5 (3.6)
Research & engineering 10.6 11.2 (7.3)
----- -----
49.5 50.7 (4.4)
----- -----
Operating income 4.7 3.9 15.3
Non-operating income
Investment income .5 .6 (15.6)
Interest expense (.7) (.3) 164.9
Other .9 .7 26.5
----- -----
.7 1.0 (34.1)
Earnings before income taxes 5.4 4.9 5.0
Income taxes 2.2 .8 170.3
----- -----
Net earnings 3.2 4.2 (25.7)
----- -----
----- -----
- -----------------------------------------------------------------------------
</TABLE>
Our operating income for the first quarter of fiscal 2000 was $614,000, up
approximately 15 percent compared with an operating income of $533,000 for
the same period last year. This increase was attributable to the performance
of Isco-Lincoln offset by operating losses incurred by Geomation and STIP.
The gross margin percentage for the first quarter was 54.2 percent compared
with 54.6 percent for the same period last year. This decrease was primarily a
result of reductions in the gross margins of Geomation and STIP. The current
period also received a one-time benefit of a change in the method of
valuation of product costs related to Isco-Lincoln. This change is discussed
in greater detail in Note 3 of the financial statements.
Our selling, general, and administrative (SG&A) expenses declined by
approximately $189,000 when compared with the same period last year.
Isco-Lincoln's operation accounted for this decline. The decrease in selling
expenses is due mainly to reduced advertising and commission expenses.
Administrative expenses were down due to reductions in staffing and reduced
patent related costs.
Overall, our engineering expenses declined by approximately $111,000 when
compared with the same period last year. This reduction was due primarily to
reduced costs associated with a reduction in staff at Isco-Lincoln that
occurred in FY1999. This reduction was offset by an increase in engineering
expenses at STIP.
Non-operating income decreased by approximately 34 percent compared to the
same period last year. This decrease was due to increased interest expense
and a loss incurred from Isco's partnership investment in AFTCO.
Our effective income tax rate for the first quarter of fiscal 2000 was 40.3
percent compared to an effective income tax rate for the same period last
year of 15.7 percent. The main factors in the tax rate increase were the
non-recognition of tax benefits generated from subsidiaries' losses and
adjustments in tax estimates from prior years.
8
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
Our cash position decreased by $297,000 during the current quarter, resulting
in a cash balance of $3,126,000. This decrease was due to the purchase of
equipment and fixtures by Isco-Lincoln and Geomation in excess of the cash
generated from operating activities of $164,000. Cash generated from
operations was due to contributions from net earnings, depreciation and other
adjustments of $1,400,000 offset by $1,200,000 from the reduction in accounts
payable and other accruals of $894,000 and a $272,000 increase in accounts
receivable and inventory. At October 29, 1999, our working capital was nearly
$17 million and our current ratio was 3.4:1. This represents an improvement
over our position at July 30, 1999.
FUTURE EVENTS
In 1995, management acknowledged that the change in the century (Y2K) could
have a significant effect upon our operations. We evaluated our situation in
the light of the following questions.
- - Will the computer systems that we use to manage our business function
properly after December 31, 1999?
- - Will our products continue to function properly after December 31, 1999?
- - Will our key vendors be able to continue to deliver materials and
services after December 31, 1999?
- - Will our key customers be able to submit orders for our products after
December 31, 1999?
As of July 31, 1999 all Isco entities are operating on Y2K compliant systems.
This was accomplished by either the upgrading of existing systems and
software applications or the installation of new operating systems.
Our current products, with few exceptions, are compliant with Isco's Year
2000 Product Compliance Policy. The majority of our discontinued products
that still may be in service are compliant with our Y2K policies and those
that are not have reasonable Y2K step-around procedures. Therefore, we
believe our liabilities are limited with respect to our products being Y2K
compliant.
We have contacted key vendors and have obtained assurance that product and
services provided by these vendors will not be affected after December 31,
1999.
No single customer accounts for more than three percent of our sales.
Therefore, we believe that any customer's inability to submit orders for our
products will have a minimal effect on our business.
MARKET RISK
We do not use derivative financial or commodity instruments. Our other
financial instruments include cash and cash equivalents, accounts and notes
receivable, accounts and notes payable, and long-term debt. Our cash and cash
equivalents, accounts and notes receivable, and accounts and notes payable
balances are generally short-term in nature and do not expose our company to
material market risk. At October 29, 1999, we had $4.9 million of fixed rate
long-term debt and $7.0 million of variable rate credit facilities. At
October 29, 1999, approximately $1.7 million was outstanding under these
credit facilities. We do not believe that changes in interest rates on the
long-term debt and credit facilities would have a material effect on our
company's results of operations given our current obligations under those
long-term debt and credit facilities.
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 the
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.
9
<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference to the
section entitled "Market Risk" in Part I, Item 2, Management's Discussion and
Analysis of Results of Operations and Financial Condition.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISCO, INC.
Date: December 9, 1999 BY /s/ Robert W. Allington
---------------------------------
Robert W. Allington, Chairman and
Chief Executive Officer
Date: December 9, 1999 BY /s/ Philip M. Wittig
---------------------------------
Philip M. Wittig, Treasurer and
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR OCTOBER 29, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-28-2000
<PERIOD-START> JUL-31-1999
<PERIOD-END> OCT-29-1999
<CASH> 3,126
<SECURITIES> 0
<RECEIVABLES> 9,888
<ALLOWANCES> 214
<INVENTORY> 9,115
<CURRENT-ASSETS> 23,813
<PP&E> 35,992
<DEPRECIATION> 16,139
<TOTAL-ASSETS> 52,721
<CURRENT-LIABILITIES> 7,099
<BONDS> 3,754
0
0
<COMMON> 564
<OTHER-SE> 41,304
<TOTAL-LIABILITY-AND-EQUITY> 52,721
<SALES> 13,183
<TOTAL-REVENUES> 13,183
<CGS> 6,032
<TOTAL-COSTS> 6,032
<OTHER-EXPENSES> 6,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 705
<INCOME-TAX> 284
<INCOME-CONTINUING> 421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 421
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
