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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 28, 2000
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_____________________
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
--------------
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
--- ---
As of October 13, 2000, 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 $10,341,266.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held December 14, 2000
- 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. The majority of our revenues come from sales of products used by
industry and government to monitor compliance with water quality regulations
and a variety of research and testing laboratories.
Robert W. Allington, the founder of Isco, Inc., has been the controlling
shareholder, chairman of the board, and chief executive officer since
inception. Dr. 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. "Isco-Lincoln"
refers to the activities and operations conducted by Isco, Inc.
Geomation, Inc. is a wholly owned subsidiary. Isco, Inc. acquired a minority
ownership position in fiscal year 1993 and acquired the remaining equity
during fiscal year 1998. On October 16, 2000 the operating assets of this
entity were sold to an investment group led by the current management of
Geomation. This transaction was structured as an asset sale. Details related
to this sale are discussed below under the heading of Recent Developments.
STIP ISCO GmbH (STIP) is a wholly owned subsidiary located in GroB-Umstadt,
Germany. Isco, Inc. acquired this entity during the second quarter of fiscal
year 1998. 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 assist our
wastewater treatment customers in reducing operating costs and in reliably
managing the wastewater treatment process. Late in fiscal year 2000, STIP
became the distributor of Isco's core environmental products in Germany.
Isco, Inc. is a 50 percent partner in Advanced Flow Technologies Partnership,
Ltd. (AFTCO), a limited partnership, located in Lakeland, Florida. This
partnership was formed during fiscal year 1998. AFTCO designs, manufactures,
and markets electromagnetic flow meters. Isco, Inc. is AFTCO's distribution
channel into the wastewater treatment market.
RECENT DEVELOPMENTS
On October 16, 2000 we sold all of the net operating assets of Geomation to an
investment group led by the current management of Geomation for approximately
$109,000 in cash. This transaction resulted in the recognition of a non-cash
pre-tax write-off of $1.4 million related to intangible assets and a pre-tax
loss of $700,000 related to the sale of the net operating assets. The losses
are reflected in fiscal 2000 results of operations. Details of this
transaction are discussed in Note S of the financial statements. Geomation was
acquired for technology and market synergies. Unfortunately, these synergies
were not realized. In addition, Geomation's operating performance in fiscal
year 2000 significantly deteriorated as sales declined, operating losses
widened, and net cash flow turned negative. The decision to divest Geomation
resulted from a review of the corporation's overall strategy and financial
options; it was concluded that Isco's optimal action was to divest Geomation.
PRODUCTS AND APPLICATIONS
The contribution made by our core products to net sales for fiscal 2000, 1999,
and 1998, respectively, is as follows: wastewater samplers 34, 35 and 37
percent; flow meters 22, 23 and 20 percent; and liquid chromatography (LC)
products 18, 14 and 13 percent.
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Isco's water quality 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 liquid chromatography customers include pharmaceutical laboratories
involved in drug discovery and development, and laboratories that support the
development and manufacture of food, chemical, and other products as well as
those that study disease and basic life functions. Customers in these
laboratories, use our 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 compounds as they flow from the
column. Our sequential and parallel organic purification CombiFlash(TM)
systems are used in the drug discovery process to sample, separate, detect,
and collect purified fractions.
Other products which we believe will contribute to our future success include:
process monitoring analyzers, supercritical fluid extraction (SFE) products,
syringe pumps, and electromagnetic flow meters.
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 measure broad load parameters or detect the presence and concentration
of a variety of compounds. Knowledge of these measurements allows the plant
operator to control operating costs and ensures high water quality.
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
ensure that their products are maintained at a specified level of 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 flow meters that we believe are a
cost-effective alternative to existing electromagnetic and other flow meters.
The U.S. price ranges of individual products within our core products are
$1,500 to $50,000 for water quality monitoring instruments and $1,500 to
$75,000 for separation instruments.
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 direct sales people assigned to specific products and
located in the prime domestic market areas. The manufacturers' representatives
and our direct sales people are supported with promotional programs,
advertising, applications specialists, applications bulletins, technical
literature, and applications seminars.
International sales constituted 26, 28 and 28 percent of our sales during
fiscal 2000, 1999 and 1998, respectively. We have not been materially 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 generally stocked outside the
country. Orders are generally filled from the facility that produces the
product. To aid international sales, many of our products are offered in
multiple language versions.
Isco's international sales are made primarily by independent dealers operating
in various countries around the world. International dealers receive sales
management and local marketing support from regional sales and marketing
managers that reside in Lincoln, Nebraska, Germany, Switzerland, and the
Philippines.
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STIP sells directly in its home market of Germany. Sales of the STIP products
in the USA are made by our manufacturers' representatives supported by sales
and marketing staff in Lincoln, Nebraska.
CUSTOMERS
Isco has a broad customer base. Currently no single customer, including any
OEM customer, accounts for more than three percent of our sales.
PRODUCT WARRANTY
The majority of our products have a one-year warranty 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 products in the United States and
Germany. We also provide on-site services in the United States and Germany for
process monitoring analyzers along with on-site services in the United States
for automated LC and SFE systems. Customers within the United States may
purchase an extended warranty for selected products 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, open-channel flow meters, and SFE. We maintain a competitive niche
position in the LC market. The factors that contribute to our competitive
position include: a reputation for high 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 estimate that we have approximately 55 percent of the
domestic wastewater sampler market, with American Sigma, Inc., having
approximately 40 percent. Other domestic competitors are small and offer
little competition. Significant competitors in Europe include: Buhler-Montec,
owned by the Danaher Corporation, 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 and
Endress + Hauser Instruments.
With respect to LC products, we believe we are the major producer of fraction
collectors. The largest LC systems competitor is Amershem Pharmacia Biotech UK
Ltd. Amersham Pharmacia Biotech has a greater market share in the United
States and international markets for systems. Other major competitors include
Bio-Rad Laboratories, Inc., Jones Chromatography, Biotage, 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 SFE equipment market, Isco is the market leader with approximately 40
percent market share. Management estimates that its competitors Applied
Separations, Inc. and Leco Corporation each have a market share of less than
20 percent, with the remaining market served by specialty engineering firms.
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With respect to syringe pumps, market share is difficult to estimate due to
the various niche markets we service. In the United States, our major
competitor is Quizix, Inc. We believe that Isco holds a dominant position
relative to Quizix, Inc. in all but one niche market.
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 that could utilize new products developed from our expanding
technology base. For fiscal years 2000, 1999 and 1998, we spent approximately
$5,532,000 or 10 percent of sales, $6,030,000 or 12 percent of sales, and
$6,315,000 or 13 percent of sales, respectively, on research and engineering.
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. Isco, Inc.'s products are covered by 74 United
States patents, 72 of which are owned by Isco, Inc. and 2 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 13 patent applications pending at the
United States Patent Office.
REGULATION
Management believes Isco is in compliance with current environmental
regulations. Therefore, no unfavorable impact on competition or earnings is
expected. We have no government contracts that 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 29, 2000, Isco's order backlog was $4,516,061, all of which is
scheduled for delivery prior to July 27, 2001, the close of fiscal 2001. A
year earlier, on September 24, 1999, the order backlog was $6,169,200.
Geomation's data is not included for both years presented due to the sale of
this entity.
MANUFACTURING AND SOURCES OF SUPPLY
Isco-Lincoln's manufacturing 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. Production planning is
handled by a computerized production control system that ensures raw materials
and sub-component parts are received on time for final assembly. 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.
Products produced by Isco-Lincoln use a variety of mechanical, electrical, and
electronic components. Most of these components are available from several
sources. Currently, we are not experiencing any shortage of raw materials or
components.
STIP's manufacturing operations consist mainly of final assembly and testing,
with all other processes outsourced. Currently, we have not experienced any
shortages. Production planning is handled by computerized production control
systems that ensure raw materials and sub-component parts are received on time
for final assembly.
EMPLOYEES
On September 29, 2000, we had 488 employees of whom 15 were leased or
temporary. There were 256 engaged in production, 66 in research and
engineering, 118 in marketing and sales, and 48 in administration. None of our
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employees are represented by a labor union. We have never experienced a work
stoppage. Geomation's employee (14 at September 29, 2000) data is excluded
from the above counts.
ITEM 2. PROPERTIES.
The expansion and renovation of our Superior Street facility was completed in
August 1999. We added approximately 56,000 square feet to the existing main
building, bringing the total square footage for all the facilities at this
location to approximately 168,000 square feet. The layout of the renovated
facility, the installation of space saving and more efficient equipment, and
an open office environment allows us to perform our operations using less
floor space. The Superior Street facility houses our corporate, executive and
administrative offices along with sales, research, engineering, manufacturing,
and maintenance activities. The buildings at 4700 Superior Street in Lincoln,
Nebraska are located on approximately 30 acres. The Superior Street facility
is owned and unencumbered. The building at 531 Westgate Boulevard, Lincoln,
Nebraska was sold in February 2000.
STIP leases 1,424 square meters in a building located in GroB-Umstadt,
Germany. The facility houses the engineering, manufacturing, marketing,
selling, and administrative activities of STIP. The lease expires December 31,
2003. STIP has the option to extend the lease for an additional three years.
ITEM 3. LEGAL PROCEEDINGS.
On March 31, 2000 we filed an action in District Court for Lancaster County,
Nebraska against Baan USA, Inc. seeking monetary damages of not less than
$3,982,428 resulting from an alleged breach of contract with respect to an
Enterprise Resource Planning (ERP) System purchased by us from Baan. Baan
filed an answer containing a general denial of our allegations and removed the
case to the United States District Court in Lincoln, Nebraska. The court
issued a Progression Order that includes various milestone dates and set the
case for trial in October 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 2000, 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 29, 2000 - 5,643,992 shares outstanding and
approximately 287 shareholders of record.
Market: NASDAQ/NMS (Over-the-counter). 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
2000 1999 Per Share
------------------- -------------------- --------------------
HIGH LOW HIGH LOW 2000 1999
----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First quarter $5.93 $4.00 $6.75 $4.09 $-- $.05
Second quarter 6.25 4.00 6.00 4.41 -- .05
Third quarter 5.50 3.88 5.88 4.25 -- --
Fourth quarter 5.25 3.63 6.63 5.00 -- --
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</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA.
Amounts in thousands except per share data.
<TABLE>
<CAPTION>
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Fiscal Year
------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
FOR THE FISCAL YEAR:
Net sales $ 55,183 $ 51,911 $ 47,912 $ 40,733 $ 39,981
Gross margin 29,407 27,195 26,345 22,760 22,191
Operating income (loss)* (1,589) (1,267) (2,510) 12 (115)
Non-operating income 514 329 860 1,565 1,462
Income taxes (tax benefit) (123) (303) (453) 251 360
Net earnings (loss) (952) (635) (1,197) 1,326 987
AT FISCAL YEAR-END:
Current assets 25,168 23,906 25,143 28,958 21,414
Working capital 18,411 16,023 19,022 25,255 17,437
Total assets 50,442 53,325 49,617 46,708 46,704
Long-term debt, less current portion 3,164 3,996 690 -- --
Shareholders' equity 40,521 41,446 42,806 42,480 42,002
Average shares outstanding 5,644 5,645 5,607 5,351 5,353
PER SHARE DATA:
Basic and diluted earnings (loss) per share $ (.17) $ (.11) $ (.21) $ .25 $ .18
Cash dividends per share (declared) -- .10 $ .20 $ .20 $ .20
PRO FORMA DATA (UNAUDITED):
Pro forma net sales 53,748 49,847 45,561 40,733 39,981
Pro forma operating income (loss) 3,748 (151) (591) 12 1,637
Pro forma net earnings 2,899 617 221 1,326 2,108
Pro forma basic and diluted earnings
per share $ .51 $ .11 $ .04 $ .25 $ .39
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</TABLE>
*
Fiscal 2000 includes charges of $4.5 million associated with the write-off of
intangibles and sale of net operating assets of Geomation and the write-off of
the ERP Operating System.
Fiscal 1999 includes charges of $1.3 million associated with the settlement
of a lawsuit, the Superior Street facility renovation related asset
write-off, costs associated with the Y2K computer system conversion, and the
write-off of inventory related to Suprex.
Fiscal 1998 includes impairment charges of $1.6 million associated with the
write-off of intangibles and inventory related to the disposition of assets
related to the Suprex product line.
Fiscal 1996 includes restructuring charges of $1.8 million associated with
the consolidation of the divisions.
The Pro Forma data presented above removes the impact of the non-recurring
charges listed above and the operations of Geomation since fiscal 1998.
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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 mean our fiscal year.
SALES ANALYSIS AND REVIEW
2000 TO 1999 COMPARISON
Our sales for the year ended July 28, 2000 of $55,183,000 were six percent
above 1999 sales of $51,911,000. Sales of our core products (wastewater
samplers, flow meters, and liquid chromatography products) were up 11
percent. Liquid chromatography sales accounted for 79 percent of the increase
in core product sales, samplers accounted for 17 percent, and flow meters
accounted for four percent. Sales of our other products (process monitoring,
supercritical fluid extraction (SFE), syringe pumps, Geomation, and STIP
products) were comparable to fiscal 1999 levels. SFE, process monitoring and
syringe pumps all provided increased sales while Geomation and STIP sales
were down compared to 1999.
U.S. sales of our core products increased 11 percent over 1999, with
chromatography accounting for the majority of this increase. International
sales of these products increased by eight percent. Liquid chromatography
products accounted for the majority of the international sales increase. U.S.
sales of our other products (process monitoring, supercritical fluid
extraction (SFE), syringe pumps, Geomation, and STIP products) increased by
10 percent compared to 1999. SFE and process monitoring domestic sales
increased while syringe pump and Geomation sales were down compared to 1999.
International sales of non-core products were down 10 percent. Sales of
Geomation and STIP products accounted for the majority of the decrease.
We received net orders of $54,168,000. This was comparable to net orders of
$54,111,000 received in fiscal 1999. The backlog, including Geomation's
backlog of $18,000, at July 28, 2000 was $4,774,000, down 18 percent from the
beginning of the year. As of September 29, 2000 our backlog, excluding
Geomation, was $4,516,061, all of which is scheduled for delivery prior to
July 27, 2001, the close of fiscal 2001.
1999 TO 1998 COMPARISON
Our 1999 sales of $51,911,000 were eight percent above 1998 sales of
$47,912,000. Approximately 46 percent of the year-over-year sales increase
was the result of a full year's sales contribution of STIP that was acquired
during the second quarter of last year. Sales of our core products
(wastewater samplers, flow meters, and liquid chromatography products) were
up 10 percent. Flow meter sales accounted for 66 percent of the increase in
core product sales, liquid chromatography accounted for 24 percent, and
samplers accounted for 10 percent. Sales of our other products (process
monitoring, supercritical fluid extraction (SFE), syringe pumps, Geomation,
and STIP products) were eight percent higher. Excluding STIP, sales of other
products were down 11 percent. This decline was due to lower sales of syringe
pumps partially offset by an increase in process monitoring.
U.S. sales of our core products increased 11 percent over 1998, with flow
meters accounting for the majority of this increase. International sales of
these products increased six percent. Flow meter sales accounted for 55
percent of this increase, with liquid chromatography accounting for 50
percent and samplers declined by five percent. U.S. sales of our other
products were up six percent over the prior year. We generated increases in
all groups except syringe pumps. International sales of our other products
grew by 10 percent. Excluding sales of STIP products, international sales of
other products were down 31 percent. Sales of SFE and Geomation products
accounted for the majority of the decrease.
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Net orders of $54,111,000 were received during 1999, an increase of 14
percent compared with 1998. The backlog at July 30, 1999 was $5,789,000, up
31 percent from the beginning of the year.
OPERATING INCOME ANALYSIS AND REVIEW
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 -------------------
------------------------------------- 2000 1999
Jul 28 Jul 30 Jul 31 vs. vs.
2000 1999 1998 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 6.3 8.3
Cost of sales 46.7 47.6 45.0 4.3 14.6
------ ------ ------
53.3 52.4 55.0 8.1 3.2
------ ------ ------
Expenses:
Selling, general, and administrative 38.0 43.2 47.0 (6.6) (.5)
Research and engineering 10.0 11.6 13.2 (8.3) (4.5)
Loss on impairments and sale of Geomation 3.7 -- -- -- --
Write-off of ERP Operating System 4.5 -- -- -- --
------ ------ ------
56.2 54.8 60.2 8.9 (1.4)
------ ------ ------
Operating loss (2.9) (2.4) (5.2) 25.5 49.5
------ ------ ------
Non-operating income
Investment income .9 .6 1.1 49.6 (37.6)
Interest expense (.7) (.6) (.2) 28.9 264.7
Other .8 .6 .9 36.0 (25.9)
------ ------ ------
1.0 .6 1.8 56.2 (61.7)
------ ------ ------
Loss before income taxes (1.9) (1.8) (3.4) 14.7 43.2
Income tax benefit (.2) (.6) (.9) (61.8) (33.1)
------ ------ ------
Net loss (1.7) (1.2) (2.5) 51.2 47.0
====== ====== ======
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</TABLE>
The operating performances over the last five years have been negatively
impacted by significant non-recurring charges. These items are identified
under item 6, Selected Financial Data. Pro forma data has been included in
this selected financial data that removes the impact of these non-recurring
charges and the operations of Geomation since fiscal 1998.
2000 TO 1999 COMPARISON
We incurred an operating loss of $1,589,000 for fiscal 2000 compared with a
loss of $1,267,000 for fiscal 1999. During the fourth quarter of the fiscal
year management determined that it was in the best interest of the
shareholders to sell the Geomation operations. This decision was a result of
reviewing the strategic fit of Geomation with the overall Isco strategy and
the deterioration in the operating performance of Geomation during the fiscal
year. This decision resulted in recording a $2,056,000 operating loss on the
impairments and disposition of Geomation assets. The net operating assets of
Geomation were sold on October 16, 2000 to an investment group led by the
current management of Geomation. Details related to this sale are disclosed
in Note S of the financial statements.
During the third quarter of the fiscal year management decided not to
complete the suspended implementation of the ERP operating system at the
Isco-Lincoln facility. This implementation project was originally suspended
during the third quarter of fiscal year 1999 because of continual software
instability problems. This decision resulted in a non-cash operating charge
of $2,448,000 for fiscal year 2000.
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Without these two items fiscal year 2000 would have generated an operating
income of $2,915,000, a significant improvement over fiscal year 1999. This
improvement is due to an improved gross margin and reduced operating expenses
in dollars and as a percentage of sales.
The gross margin, as a percentage of sales, improved to 53.3 percent in 2000
from 52.4 percent in 1999. This improvement was the result of several
factors. We generated operational improvements at our Isco-Lincoln facility
that resulted in reduced indirect manufacturing costs as a percentage of
sales. These improvements were partially offset by an increase in STIP's
contribution to the overall entity at a lower gross margin. Isco-Lincoln's
indirect manufacturing costs, as a percentage of sales, were higher in fiscal
1999 due to the additional labor hours and inefficiencies that were
associated with the consolidation and relocation of the manufacturing
operations, the initiation of process improvement activities, and activities
associated with upgrading and converting data related to the Superior Street
facility's ERP operating system.
We reduced our selling, general, and administrative (SG&A) expenses by
$1,472,000 and approximately five percent as a percentage of sales from the
fiscal year 1999 level. This improvement was due to reduced marketing
expenditures and temporarily open marketing and sales positions. In addition,
fiscal year 1999 was impacted by costs related to the Y2K conversion activity.
Research and engineering expenses declined by approximately $500,000 and by
approximately one percent as a percentage of sales from the fiscal year 1999
level. This improvement was a result of reductions in staffing at
Isco-Lincoln and the timing of expenditures for product development projects.
Investment income increased by approximately 50 percent compared to last
year. This increase was a result of increased excess cash reserves available
for investment in fiscal 2000 over fiscal 1999. Interest expense increased by
approximately 29 percent compared to last year. This increase was due to the
loan, obtained by Isco-Lincoln in December 1998, only being in place for a
portion of fiscal 1999. Other non-operating income increased by approximately
36 percent compared to 1999. Fiscal year 1999 included the write-off of
$335,000 of undepreciated building components that were associated with the
renovation of the Superior Street facility.
We recognized a net tax benefit of $123,000 or an effective tax benefit rate
of approximately 11 percent for the current year compared with a net tax
benefit of $303,000 or an effective tax benefit rate of approximately 32
percent last year. The current year's effective rate was significantly
reduced due to the non-deductibility on the write-off of the intangible
assets related to the disposition of Geomation. Tax benefits generated by
Isco's foreign sales corporation helped to offset this impact. Last year's
tax benefit was reduced by the establishment of a valuation allowance against
the tax benefits generated on the net operating losses incurred by STIP and
Geomation.
1999 TO 1998 COMPARISON
We incurred an operating loss of $1,267,000 for fiscal 1999 compared with a
loss of $2,510,000 for fiscal 1998. All entities contributed to the current
year's loss. The gross margin, as a percentage of sales, declined from 55.0
percent in 1998 to 52.4 percent in 1999. The current year's lower gross
margin is a result of increased sales discounts and increased indirect
manufacturing costs associated with the Isco-Lincoln operations, and the
increase in STIP's contribution to the overall entity at a lower gross
margin. Isco-Lincoln's indirect manufacturing costs increased due to
additional costs incurred in support of the consolidation and relocation of
the manufacturing operations, the initiation of process improvement
activities, and activities associated with upgrading and converting data
related to the Superior Street facility's ERP operating system.
Our selling, general, and administrative (SG&A) expenses, as a percentage of
sales, declined from 47 percent to 43 percent. Selling expenses, as a
percentage of sales, for all of the Company's entities, declined when
compared with last year. Selling expenses last year included costs related to
the acquisition of Geomation and STIP, and higher amortization expenses.
During the current year, management was able to reduce the selling expenses
at STIP. Our general and administrative (G&A) expenses, as a percentage of
sales, increased when compared with last year. Last year G&A expenses of
Isco-Lincoln included the write-off of the Suprex intangibles that were
offset in the current year with the costs associated with making our ERP
operating system Y2K compliant and with the settlement costs of the patent
infringement litigation. In addition, the G&A expenses of STIP and Geomation
increased.
10
<PAGE>
Engineering expenses, as a percentage of sales, were approximately 12 percent
for fiscal 1999 compared with approximately 13 percent for fiscal 1998. This
is due to reduced development activities that were nearing completion during
the current fiscal year. Last year's expenses included a one-time charge for
"purchased R&D" related to the acquisition of Geomation.
Investment income decreased by approximately 38 percent and interest expense
increased approximately 265 percent compared to last year. These changes were
due to the continued sale of investments that began last year and the
acquisition of debt during the current year to meet the cash needs for the
expansion/renovation of the Superior Street facility and the ERP operating
system. Other non-operating income was down approximately 26 percent due to
the disposition of building components related to the building renovation and
a loss from the AFTCO joint venture.
We realized a tax benefit of $303,000 or an effective tax benefit rate of
approximately 32 percent for the current year compared with a net tax benefit
of $453,000 or an effective tax benefit rate of approximately 27 percent last
year. For both fiscal years the tax benefits were primarily the result of the
operating losses incurred. The fiscal 1999 benefit included a benefit from
adjustments in prior years' state and federal tax estimates offset by the
establishment of a valuation allowance against the tax benefits realized from
the current year's operating losses incurred by STIP and Geomation and
reduced tax benefits from tax-exempt income. The fiscal 1998 benefit included
a benefit from tax-exempt income offset by the non-deductibility of
amortization expense on intangibles.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities generated $3.3 million of cash flow during fiscal 2000
compared with $1.4 million during fiscal 1999. This increase is due to the
improved operational performance. The net loss for fiscal year 2000 when
adjusted for depreciation, the write off of the ERP system, and the loss on
the impairments and disposition of Geomation assets provided us with $6.1
million of cash from operations before $2.1 million of investments in net
operating assets. In fiscal 1999 the net loss when adjusted for depreciation
provided us with $1.8 million of cash from operations before $254,000 of
investments in net operating assets. In February 2000, we completed the sale
of the Westgate facility. This sale plus proceeds from sales of used
equipment provided us with $2.4 million in cash. We invested the cash
generated from operations and the proceeds from the sales of equipment and
building into long-term and short-term investments of $5.7 million. Our net
cash position decreased by $1.8 million. This decrease was a result of
investments in property, plant and equipment of $1.4 million and a net
reduction in debt of $400,000.
At July 28, 2000, we had working capital of $18.4 million and a current ratio
of 3.7:1. At year-end, our total debt was $4,157,000 with $993,000 payable
next year. In addition, we had lines of credit with various banks totaling
$7.0 million of which $5.2 million was available for future business needs.
FUTURE EVENTS
The change of the century (Y2K) did not impact Isco relative to our internal
operating systems, our ability to deliver product to customers, and our
products continued to function as intended. We continue to work to resolve
the current lawsuit related to the Baan Enterprise Resource Planning (ERP)
software that was intended to be Isco-Lincoln's operating system solution to
the change of the century problem. The details on this lawsuit are discussed
Part I, Item 3, Legal Proceedings.
11
<PAGE>
FACTORS AFFECTING FUTURE RESULTS
The factors affecting our future performance remain the same as last year.
These factors are: improved sales growth; improvement of gross margins;
controlled operating expenses; integration and coordination between Isco
entities and our joint venture; dealing with the external regulatory
influences on our primary markets; and dealing with the effect of the
consolidation of companies within the instrumentation industry.
We accomplished many of our focused goals this past fiscal year related to
sales growth, improved gross margins, and controlling our operating expenses.
We believe there are still improvements to be made in these areas. Late in
fiscal year 2000 we changed the distribution of environmental products within
Germany. Our focus in fiscal 2001 will be to ensure that we are meeting our
customer needs within Germany and improve our internal operations between the
STIP and Isco-Lincoln facilities to benefit our customers and shareholders.
Our environmental market still accounts for a significant amount of our
sales. This market is regulation driven and is strongly influenced by both
the perceived attitude and actions of various governmental agencies in the
promulgation and 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
performance.
As in many industries, consolidation of companies within our market is
ongoing. 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.
MARKET RISK
Interest rate risk and currency exchange risks are the primary market risks
to which we are exposed. 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 July 28, 2000, we
had approximately $4.2 million of fixed rate debt. In addition, we had $7.0
million of variable rate credit facilities, of which approximately $1.8
million was outstanding under these credit facilities. We do not believe that
changes in interest rates on the debt and credit facilities would have a
material effect on our results of operations, given our current obligations
under these debt and credit facilities.
Related to currency exchange, international sales of our United States based
operations are denominated in U.S. dollars and 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 our costs and our 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.
12
<PAGE>
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 28, 2000 and July 30, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended July 28, 2000. 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 auditing standards generally
accepted in the United States of America. 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 28, 2000 and July 30, 1999, and the results of their operations and
their cash flows for each of the three years in the period ended July 28,
2000 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Lincoln, Nebraska
October 16, 2000
13
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 28 July 30 July 31
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 55,183 $ 51,911 $ 47,912
Cost of sales 25,776 24,716 21,567
-------- -------- --------
29,407 27,195 26,345
-------- -------- --------
Expenses:
Selling, general, and administrative 20,960 22,432 22,540
Research and engineering 5,532 6,030 6,315
Loss on impairments and sale of Geomation 2,056 -- --
Write-off of ERP Operating System 2,448 -- --
-------- -------- --------
30,996 28,462 28,855
-------- -------- --------
Operating loss (1,589) (1,267) (2,510)
-------- -------- --------
Non-operating income:
Investment income 490 327 524
Interest expense (400) (310) (85)
Other 424 312 421
-------- -------- --------
514 329 860
-------- -------- --------
Loss before income taxes (1,075) (938) (1,650)
Income tax benefit (Note H) (123) (303) (453)
-------- -------- --------
Net loss $ (952) $ (635) $ (1,197)
======== ======== ========
Basic loss per share $ (.17) $ (.11) $ (.21)
======== ======== ========
Diluted loss per share $ (.17) $ (.11) $ (.21)
======== ======== ========
Weighted average number of shares outstanding 5,644 5,645 5,607
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
July 28 July 30
2000 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,589 $ 3,423
Short-term investments (Note C) 1,981 --
Accounts receivable, trade (Note B) 9,934 9,501
Inventories (Note D) 9,059 9,016
Refundable income taxes 498 383
Deferred income taxes (Note H) 1,569 1,134
Other current assets 538 449
-------- --------
Total current assets 25,168 23,906
Property, plant, and equipment, net (Note E) 16,389 20,019
Property held for sale -- 2,257
Long-term investments (Note C) 3,728 --
Deferred income taxes (Note H) 317 318
Other assets (Note F) 4,840 6,825
-------- --------
Total assets $ 50,442 $ 53,325
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 782 $ 1,832
Accrued expenses (Note G) 3,167 3,311
Short-term borrowing (Note I) 1,815 1,560
Current portion of long-term debt (Note J) 993 1,180
-------- --------
Total current liabilities 6,757 7,883
Long-term debt (Note J) 3,164 3,996
Commitments and contingencies (Note R)
Shareholders' equity (Notes K and P):
Preferred stock, $.10 par value, authorized 5,000,000
shares; issued none
Common stock, $.10 par value, authorized 15,000,000
shares; issued and outstanding 5,643,992 and 5,643,992 shares 564 564
Additional paid-in capital 37,697 37,740
Retained earnings 2,200 3,152
Accumulated other comprehensive income (loss) 60 (10)
-------- --------
Total shareholders'equity 40,521 41,446
-------- --------
Total liabilities and shareholders' equity $ 50,442 $ 53,325
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
<TABLE>
<CAPTION>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except per share data)
Accumulated
Additional other Total
Common paid-in Retained comprehensive Treasury shareholders'
stock capital earnings income (loss) stock equity
-------- ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 25, 1997 $ 598 $ 36,846 $ 6,683 $ 14 $ (1,661) $ 42,480
Net loss (1,197) (1,197)
Unrealized investment loss (10) (10)
Translation adjustments (3) (3)
--------
Total comprehensive loss (1,210)
Cash dividends ($.20 per share) (1,134) (1,134)
Issuance of common stock 32 2,612 2,644
Issuance of director options 26 26
Retirement of treasury stock (63) (1,598) 1,661 -
-------- -------- -------- -------- -------- --------
Balance, July 31, 1998 $ 567 $ 37,886 $ 4,352 $ 1 $ -- $ 42,806
Net loss (635) (635)
Unrealized investment loss (4) (4)
Translation adjustments (7) (7)
--------
Total comprehensive loss (646)
Cash dividends ($.10 per share) (565) (565)
Acquisition of common stock (3) (163) (166)
Issuance of director options 17 17
-------- -------- -------- -------- -------- --------
Balance, July 30, 1999 $ 564 $ 37,740 $ 3,152 $ (10) $ -- $ 41,446
Net loss (952) (952)
Unrealized investment loss (2) (2)
Translation adjustments 72 72
--------
Total comprehensive loss (882)
Reversal of director options (Note K) (43) (43)
-------- -------- -------- -------- -------- --------
Balance, July 28, 2000 $ 564 $ 37,697 $ 2,200 $ 60 $ -- $ 40,521
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Columnar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended
July 28 July 30 July 31
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (952) $ (635) $ (1,197)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 2,569 2,415 2,784
Deferred income taxes (433) 62 (839)
(Gain) loss on sale of investments -- (4) 61
Gain on sale of property, plant, and equipment (54) (222) (270)
Provision for doubtful accounts (71) (11) 279
Loss on impairments and sale of Geomation (Note S) 2,056 -- 1,646
Write-off of ERP Operating System (Note E) 2,448 -- --
Undistributed losses of AFTCO 160 254 93
Change in operating assets and liabilities:
Accounts receivable, trade-(increase) decrease (504) (1,367) 1,550
Inventories-(increase) decrease (399) 670 (837)
Refundable income taxes-(increase) decrease (116) (103) (210)
Other current assets-(increase) decrease (119) 254 144
Accounts payable-increase (decrease) (994) (80) 237
Accrued expenses-increase (decrease) (12) 390 213
Income taxes payable-increase (decrease) -- (18) (39)
Other (281) (175) (377)
-------- -------- --------
Total adjustments 4,250 2,065 4,435
-------- -------- --------
Net cash flows from operating activities 3,298 1,430 3,238
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale and maturity of available-for-sale securities -- 1,963 12,615
Proceeds from sale and maturity of held-to-maturity securities -- 250 500
Proceeds from sale of property, plant, and equipment 2,431 872 356
Purchase of held-to-maturity securities (5,461) -- --
Purchase of available-for-sale securities (250) -- (34)
Purchase of property, plant, and equipment (1,405) (9,016) (8,928)
Issuance of note receivable -- -- (759)
Purchase of subsidiaries and other acquisitions, net of cash acquired -- -- (4,159)
Other -- 7 --
-------- -------- --------
Net cash flows from investing activities (4,685) (5,924) (409)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid -- (565) (1,134)
Net change in short-term borrowings 485 319 332
Proceeds from long-term debt -- 5,000 --
Repayment of debt (932) (508) --
Purchase of common stock -- (166) --
-------- -------- --------
Net cash flows from financing activities (447) 4,080 (802)
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) (1,834) (414) 2,027
Balance at beginning of year 3,423 3,837 1,810
-------- -------- --------
Balance at end of year $ 1,589 $ 3,423 $ 3,837
======== ======== ========
</TABLE>
See Note M for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended July 28, 2000, July 30, 1999, and July 31, 1998
(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 that 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 Isco, Inc. 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 2000 and 1999 contained 52 weeks and
1998 contained 53 weeks.
USE OF ESTIMATES. The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
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, accounts payable, and short-term borrowing approximate fair value.
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 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, as a
component of accumulated other comprehensive income. 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 reviews long-lived assets and certain
intangibles 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 fiscal years 2000 and 1998
are discussed in Notes F and S.
18
<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 40 years
for buildings and improvements and 3 to 20 years for machinery and equipment.
Property held for sale is stated at the lower of cost or net realizable value
and at July 30, 1999 included a building no longer used in the Company's
operations. This building was removed from service late in fiscal 1999 and
sold in fiscal 2000 at a pre-tax loss of approximately $50,000. Geomation
operating assets held for sale as of July 28, 2000 are reflected in other
current assets.
OTHER ASSETS. Intangible assets are amortized on a straight-line basis over
estimated useful lives of 3 to 15 years. Intangibles include intellectual
property, engineering drawings, patents, licenses, customer or market lists,
and trade names.
REVENUE RECOGNITION. Sales of products, software and services are recorded
based on receipt of an unconditional order and delivery of products and
software or performance of services. The Company's sales terms generally do
not provide for the right of return unless the product is damaged or defective.
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 component of accumulated other comprehensive
income (loss). Transaction gains and losses and unrealized gains and losses on
intercompany receivables have not been material to date.
EMPLOYEE BENEFITS PLAN. Employee and Company contributions fund certain
employee benefits, including the weekly disability and medical protection plan
and group insurance premiums. Prior to January 1, 1998, claims were paid by
the Beneficial Employee Trust of Isco, a voluntary employees beneficiary
association, which was funded by employee and Company contributions.
RESEARCH AND ENGINEERING COSTS. Research and engineering costs are expensed as
incurred.
INCOME TAXES. Income taxes are recorded using the liability method. This
method recognizes the amount of taxes payable or refundable for the current
year. Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts.
EARNINGS (LOSS) PER SHARE. Basic earnings (loss) per share are based on the
weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is 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.
COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for all periods
presented consists of net earnings (loss), unrealized gain (loss) on
securities available for sale, and foreign currency translation adjustments.
These results are incorporated into the Consolidated Statements of
Shareholders' Equity.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's presentation.
ACCOUNTING PRONOUNCEMENTS. In December 1999, SEC Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" was issued. This Staff
Accounting Bulletin will become effective in the Company's fiscal year 2001.
The Company does not believe the impact of this Staff Accounting Bulletin will
be material to the consolidated financial statements. In June 1998, Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" was issued. This statement will become
effective in the Company's fiscal year 2001. The Company does not believe the
impact of this statement will be material to the consolidated financial
statements.
19
<PAGE>
NOTE B. ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance at beginning of period $198 $286 $ 82
Provision for doubtful accounts (71) (11) 279
Accounts recovered (written-off) 30 (77) (75)
---- ---- ----
Allowance at end of period $157 $198 $286
==== ==== ====
-------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE C. INVESTMENTS.
Proceeds from sales of available-for-sale securities during fiscal years
2000, 1999, and 1998 were $0, $1,963,000, and $2,648,000 respectively. Gross
gains of $0, $4,000, and $31,000, and gross losses of $0, $0, and $92,000
were recognized in fiscal 2000, 1999, and 1998, respectively. As of July 30,
1999, the Company held no investment securities.
As of July 28, 2000:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Short-term investments:
Held-to-maturity securities:
Corporate bonds $1,981 $ -- $ 1 $1,980 $1,981
--------- ---------- ---------- --------- ---------
Total short-term investments 1,981 -- 1 1,980 1,981
--------- ---------- ---------- --------- ---------
Long-term investments:
Held-to-maturity securities:
Mortgage backed securities 2,491 -- 5 2,486 2,491
Corporate bonds 990 -- 2 988 990
--------- ---------- ---------- --------- ---------
Total held-to-maturity securities 3,481 -- 7 3,474 3,481
--------- ---------- ---------- --------- ---------
Available-for-sale securities:
Mutual funds 250 -- -- 247 247
--------- ---------- ---------- --------- ---------
Total long-term investments 3,731 -- 7 3,721 3,728
--------- ---------- ---------- --------- ---------
$5,712 $ -- $ 8 $5,701 $5,709
========= ========== ========== ========= =========
-------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE D. INVENTORIES.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
<C> <C> <C>
Raw materials $4,341 $3,893
Work-in-process 3,476 3,422
Finished goods 1,242 1,701
------ ------
$9,059 $9,016
====== ======
---------------------------------------------------------------------------
</TABLE>
Had inventories been valued on the first-in, first-out (FIFO) basis, they
would have been approximately $1,764,000 and $1,214,000 higher than reported
on the LIFO basis at July 28, 2000 and July 30, 1999, respectively.
Approximately 72 and 74 percent of inventory has been valued by the LIFO
method at July 28, 2000 and July 30, 1999, respectively.
20
<PAGE>
NOTE E. PROPERTY, PLANT, AND EQUIPMENT.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------
<C> <C> <C>
Land $ 413 $ 413
Buildings and improvements 11,682 10,956
Machinery and equipment 16,449 19,265
Software 1,561 1,607
Construction-in-progress 167 3,459
-------- ----------
30,272 35,700
Less accumulated depreciation 13,883 15,681
-------- ----------
$ 16,389 $ 20,019
======== ==========
---------------------------------------------------------------------------------------------
</TABLE>
In April 2000, management of the Company determined that the previously
suspended implementation of the ERP operating software system for the
Isco-Lincoln facility would not be completed. As a result of this decision,
the Company wrote-off software and related computer hardware assets of
$2,448,000. The write-off is recorded as a component of operating expenses in
the consolidated statements of operations.
NOTE F. OTHER ASSETS.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intangibles, net of accumulated amortization of $391,000 and $728,000 $1,295 $3,051
Investment in AFTCO, net of accumulated amortization of $175,000 and $100,000 823 1,058
Cash value of life insurance 1,437 1,358
Notes receivable due March 2008 at 8.0% - related party 1,000 1,000
Other 285 358
------ ------
$4,840 $6,825
====== ======
--------------------------------------------------------------------------------------------------------------
</TABLE>
Summarized financial information for AFTCO, since formation on March 31, 1998,
is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,689 $1,357 $ 495
Net loss 359 546 187
Current assets 906 870 1,140
Property and equipment, net 160 198 236
Current liabilities 657 301 64
Partners' capital 408 767 1,313
----------------------------------------------------------------------------------------------------------
</TABLE>
The acquired Suprex product line 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 determined that certain
assets recorded in connection with the acquisition were impaired.
Accordingly, in fiscal 1998 an impairment charge was recorded for $1.6
million. This consisted of write-offs of intangibles of $1.0 million and
inventory reserves of $0.6 million.
21
<PAGE>
NOTE G. ACCRUED EXPENSES.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages, and commissions $1,480 $1,648
Vacation/personal time 710 754
Profit sharing contribution 345 --
Property, payroll, and sales tax 272 532
Other 360 377
------ ------
$3,167 $3,311
====== ======
------------------------------------------------------------------------
</TABLE>
NOTE H. INCOME TAXES.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 228 $(309) $ 273
Deferred (363) (32) (771)
State:
Current 9 (28) 104
Deferred (24) 32 (68)
International:
Current 73 (28) 9
Deferred (108) (158) (46)
Change in valuation allowance 62 220 46
----- ------ ------
$(123) $(303) $(453)
===== ====== =====
-------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes is reconciled with the amount of income taxes
computed at the federal statutory rate as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" federal tax expense (benefit) $(366) $(319) $(560)
Alternative minimum tax (AMT) -- -- 86
State income taxes, net of federal tax benefit (43) (37) 7
International income taxes (40) (28) 9
Exempt foreign sales corporation income (161) -- (96)
Tax-exempt income -- (29) (163)
Permanent differences on intangibles 639 97 179
Prior years' federal & state income tax adjustments (146) (193) (95)
Other (68) (14) 134
Change in valuation allowance 62 220 46
------ ----- -----
$(123) $(303) $(453)
====== ===== =====
--------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
The July 28, 2000 and July 30, 1999 components of deferred income tax assets
and liabilities resulting from temporary differences between financial and
tax reporting are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Uniform capitalization of inventory costs $ 478 $ 518
Inventory valuation reserve -- 215
Vacation/personal time 167 178
Write-down of property -- 189
Reserve for doubtful accounts 41 68
Suprex intangibles 530 578
Net operating, capital and AMT credit loss carry forwards 1,773 832
Research and development credit carry forwards 365 225
Other 154 245
------- ------
Gross deferred tax assets 3,508 3,048
Valuation allowance (332) (270)
------- ------
Deferred tax liabilities:
Depreciation (1,287) (1,166)
Prepaid expenses -- (160)
Other (3) --
------- ------
Gross deferred tax liabilities (1,290) (1,326)
------- ------
Net deferred tax assets $ 1,886 $1,452
======= ======
------------------------------------------------------------------------------------------
</TABLE>
At July 28, 2000, the Company had United States net operating loss carry
forwards of approximately $2,000,000 which expire in fiscal years 2003
through 2020 and an additional German net operating loss carry forward of
$1,500,000 which is not subject to expiration. At July 28, 2000, the Company
had a net capital loss carry forward of approximately $65,000, which expires
in fiscal years 2001 through 2003. Realization of deferred tax assets
associated with the net operating loss and credit carry forwards is dependent
upon generating sufficient taxable income prior to their expiration. Although
realization is not assured for deferred tax assets, management believes it is
more likely than not that most deferred tax assets will be realized through
future taxable earnings or alternative tax strategies. For certain of the net
operating loss and tax credit carry forwards related to subsidiary
operations, management believes a greater degree of risk in realization
exists and portions may expire unused. Accordingly, management has
established a valuation allowance against them.
NOTE I. SHORT-TERM BORROWING.
At July 28, 2000, the Company had available $7,000,000 in lines of credit
expiring January 31, 2001. The $7,000,000 line is secured by inventory,
accounts receivable, equipment, and intangibles. The line of credit also
supports the revolving credit agreements of the Company's German subsidiary.
As such, availability under the line of credit is reduced by the credit
available under those revolving credit agreements, currently DM4,000,000
(US$1,907,000).
The Company's German subsidiary maintains a revolving credit agreement that
provides for borrowing up to DM4,000,000 (US$1,907,000) guaranteed by the
Company. This agreement provides for interest rates ranging from 4.7 percent
to 8.5 percent and is renewable on a quarterly basis. The amount outstanding
at July 28, 2000 and July 30, 1999 was $1,815,000 and $1,560,000 respectively.
The net amount available for borrowing to the Company, under the lines of
credit and revolving credit agreements, at July 28, 2000 was $5,185,000.
23
<PAGE>
NOTE J. LONG-TERM DEBT.
Long-term debt at July 28, 2000 and July 30, 1999 consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Isco, Inc.
Note due December 2003, 6.50% $3,585 $4,492
STIP
Note due March 2009, 7.50% 215 273
Note due June 2003, 7.50% 357 411
------ ------
4,157 5,176
Less current portion of long-term debt 993 1,180
------ ------
$3,164 $3,996
====== ======
--------------------------------------------------------------------------------------
</TABLE>
In December of 1998, Isco, Inc. borrowed $5,000,000 from its primary
commercial bank. This term loan is repayable in equal installments over 60
months. The note is secured by inventory, accounts receivable, equipment, and
intangibles. The Company is in compliance with all terms of the loan
agreement.
The STIP note due March 2009 is repayable in annual installments of DM 50,000
(US $24,000) with interest payable on a quarterly basis. The STIP note due
June 2003 requires quarterly interest payments with principal due at June
2003.
At July 28, 2000, future principal payments due on debt in each of the next
five fiscal years are as follows: 2001 $993,000; 2002, $1,059,000; 2003,
$1,130,000; 2004, $499,000; 2005, $24,000; thereafter, $452,000.
NOTE K. STOCK OPTION PLANS.
Isco had three stock option plans in effect at July 28, 2000: 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. This plan was amended in fiscal year 2000 to increase the number
of shares available for options to 500,000. 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
that 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. Prior to fiscal year 2000, at the
time the options were granted, the fair value of the options were recorded as
compensation expense and this value was added to additional paid-in capital.
During fiscal year 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation". This interpretation requires that for purposes of accounting
for certain stock options granted to outside directors that they be treated
as employees. As such, this interpretation changes the accounting treatment
from immediate recognition of expense to recognition of expense at the time
of exercise. Adoption of this interpretation during fiscal 2000 required
reversing previously recognized compensation expense and debiting additional
paid-in capital in the amount of $43,000.
24
<PAGE>
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 25, 1997 134,445 $ 12.04 10,000 $ 8.13 4,000 $ 9.63
Granted - - 194,724 9.12 4,667 9.07
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
Granted - - - - 4,000 5.50
------- ------- ------
Outstanding, July 30, 1999 131,110 $ 12.03 204,724 $ 9.07 10,667 $ 7.83
------- ------- ------
Granted - 75,448 4.99 5,417 5.28
Canceled (18,170) 13.04 (21,224) 9.19 - -
------- ------- ------
Outstanding July 28, 2000 112,940 $ 11.85 258,948 $ 7.87 16,084 $ 6.97
======= ======= ======
-------------------------------------------------------------------------------------------------------------------
</TABLE>
At July 28, 2000, 186,878 shares were exercisable at a weighted average option
price of $8.98.
No compensation cost has been recorded relative to the employee option plans.
The pro forma effect on fiscal 2000, 1999 and 1998 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 $267,000 and
$.05, $17,000 and $.00 and $98,000 and $.02, respectively. The fair value for
options granted under the 1996 Directors' Plan and 1996 Plan was estimated at
the date of grant using the Black Scholes pricing model with the following
assumptions for 2000, 1999 and 1998, respectively: dividend yield of 0.0, 0.0
and 2.2 percent; expected volatility of 106, 67 and 25 percent; risk free
interest rate of 6.22, 4.65 and 7.0 percent; and expected lives of seven years.
NOTE L. RETIREMENT PLAN.
The Company has a defined contribution retirement plan covering Isco, Inc.
employees 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 $345,000, $0 and
$0 for the fiscal years 2000, 1999 and 1998 respectively.
The Company also has 401(k) salary reduction plans for its Isco, Inc. and
Geomation 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 2000, 1999 and 1998, the
Company made matching contributions to the 401(k) salary reduction plans of
approximately $175,000, $175,000 and $152,000 respectively.
NOTE M. SUPPLEMENTAL CASH FLOW INFORMATION.
During fiscal years 2000, 1999 and 1998, the Company made income tax payments
(received refunds) of approximately $425,000, ($252,000) and $635,000
respectively.
During fiscal years 2000, 1999 and 1998, the Company made interest payments of
$410,000, $310,000 and 46,000 respectively.
25
<PAGE>
NOTE N. GEOGRAPHIC AND PRODUCT GROUP SALES.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $40,792 $37,371 $34,523
Europe 8,514 8,477 5,323
Asia 2,860 3,146 5,131
Other 3,017 2,917 2,935
------- ------- -------
$55,183 $51,911 $47,912
======= ======= =======
----------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------
Samplers $18,713 $18,068 $17,759
Flow Meters 12,022 11,853 9,721
Chromatography 10,116 7,019 6,249
Other * 14,332 14,971 14,183
------- ------- -------
$55,183 $51,911 $47,912
======= ======= =======
----------------------------------------------------------------------------------
* Other includes non-core products and service revenues
</TABLE>
NOTE O. ACQUISITIONS.
On December 29, 1997, the Company acquired all the outstanding shares of STIP
ISCO (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 and 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,
required the payment of additional cash of up to approximately $1,700,000. The
earn-out thresholds were not achieved.
On September 17, 1997, the Company acquired all the outstanding shares of
Geomation, Inc., of 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, 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. On October
16, 2000 the net operating assets of this entity were sold. For details of
this sale see Note S of the financial statements.
The above transactions were accounted for as purchases.
On March 31, 1998, the Company and AMJ Equipment Corporation, Lakeland,
Florida, completed the formation of Advanced Flow Technologies Partnership,
Ltd. (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 flow meters.
26
<PAGE>
NOTE P. EARNINGS PER SHARE.
The following table provides a reconciliation between basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Computation of earnings (loss) per share
-------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Earnings (loss) for both basic and diluted earnings per share $ (952) $ (635) $(1,197)
======= ======= =======
Denominator:
Denominator for basic earnings per share
Weighted average outstanding shares 5,644 5,645 5,607
Effect of dilutive securities:
Common stock equivalents and dilutive stock options - - -
------- ------- -------
Denominator for diluted earnings per share 5,644 5,645 5,607
======= ======= =======
Earnings (loss) per share:
Basic $ (.17) $ (.11) $ (.21)
======= ======= =======
Diluted $ (.17) $ (.11) $ (.21)
======= ======= =======
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Options and other common stock equivalents to purchase 364,529 shares, 367,128
shares and 357,944 shares of common stock were outstanding during the periods
ended July 28, 2000, July 30, 1999 and July 31, 1998 respectively, but were
not included in the computation of diluted EPS because of the net loss
incurred or the options' exercise price was greater than the average market
price of the common stock and, therefore, their effect would be anti-dilutive.
NOTE Q. RETIREMENT OF TREASURY STOCK.
Effective July 31, 1998, the Company's Board of Directors authorized the
retirement of all treasury shares.
NOTE R. COMMITMENTS AND CONTINGENCIES.
COMMITMENTS.
In the normal course of business, the Company is involved in various legal
actions. It is management's opinion that none of these legal actions will
materially affect the financial position of the Company.
During fiscal year 2000, AFTCO received a $1,000,000 line of credit commitment
from the Company's primary commercial bank. The Company is the guarantor of
this line.
Isco has commitments under long-term operating leases for building space and
equipment, many of which contain renewal options. Future minimum rentals on
operating leases with non-cancelable lease terms at July 28, 2000 aggregate
$1,489,000 and are payable by fiscal years as follows: 2001, $417,000; 2002,
$413,000; 2003, $351,000; 2004, $273,000; 2005, $35,000; and thereafter, $0.
Isco, Inc., via Geomation, Inc., continues to lease the facilities that house
the Geomation operations. Geomation, Inc. entered into a sublease agreement
with the new entity that purchased the assets of Geomation, Inc. The lease for
this facility expires August 31, 2004. The effects of these sub-lease
arrangements have not been considered against the future minimum rentals.
NOTE S. SUBSEQUENT EVENTS
On October 16, 2000, the Company sold certain assets and transferred
liabilities of Geomation, Inc. to an investment group led by the current
management of Geomation for approximately $109,000 in cash. The impact of this
transaction resulted in the recognition of a non-cash pre-tax write-off of
$1.4 million related to impairment of intangible assets and a pre-tax loss of
$700,000 related to the sale of the net operating assets. The assets sold per
the agreement included all operating assets net of operating liabilities of
Geomation. The Company retained intangibles, the deferred tax assets related
to net operating loss carry forwards and research and development tax credits,
and recorded expected liabilities for closing the transaction. The intangibles
were considered impaired as a
27
<PAGE>
result of the continuing losses from operations of the Geomation products and
the remaining book value of these assets were reduced to zero. The loss is
reflected in Fiscal 2000 operations and the estimated fair value of Geomation
net assets held for sale as of July 28, 2000 are reflected in other current
assets.
The following unaudited, pro forma, condensed, consolidated financial
information assumes the removal of the results of operations of Geomation,
Inc. since acquisition in fiscal 1998. This information does not purport to be
indicative of what actual results would have looked like had this acquisition
never occurred or of results that may occur in the future.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
PROFORMA DATA. (unaudited)
(In thousands, except per share data) 2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Proforma net sales $53,748 $49,847 $45,561
Proforma operating income (loss) 1,300 (841) (2,237)
Proforma net income (loss) 1,357 (238) (832)
Proforma earnings (loss) per share - basic $.24 $(.04) $(.15)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF OPERATIONS BY QUARTER. (unaudited)
(Columnar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------- ------------------- ----------------- -----------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- --------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $13,183 $13,486 $13,508 $11,756 $13,950 $12,889 $14,542 $13,780
Cost of sales 6,032 5,953 6,063 5,756 6,487 6,088 7,194 6,919
-------- --------- --------- --------- ------- ------- ------- -------
7,151 7,533 7,445 6,000 7,463 6,801 7,348 6,861
-------- --------- --------- --------- ------- ------- ------- -------
Expenses:
Selling, general and
administrative 5,134 5,486 5 ,257 5,417 5,345 5,417 5,224 6,112
Research and engineering 1,403 1,514 1,291 1,539 1,429 1,464 1,409 1,513
Loss on impairments and
sale of Geomation -- -- -- -- -- -- 2,056 --
Write-off ERP Operating
System -- -- -- -- 2,448 -- -- --
-------- --------- --------- --------- ------- ------- ------- -------
6,537 7,000 6,548 6,956 9,222 6,881 8,689 7,625
-------- --------- --------- --------- ------- ------- ------- -------
Operating income (loss) 614 533 897 (956) (1,759) (80) (1,341) (764)
Non-operating income (loss):
Investment income 65 77 76 82 201 97 148 71
Interest expense (98) (24) (105) (78) (89) (64) (108) (144)
Other income (loss) 124 85 124 272 58 (149) 118 104
-------- --------- --------- --------- ------- ------- ------- -------
91 138 95 276 170 (116) 158 31
-------- --------- --------- --------- ------- ------- ------- -------
Earnings (loss) before
income taxes 705 671 992 (680) (1,589) (196) (1,183) (733)
Income taxes (tax benefit) 284 105 339 (202) (579) (71) (167) (135)
-------- --------- --------- --------- ------- ------- ------- -------
Net earnings (loss) $421 $566 $653 $(478) $ (1,010) $ (125) $(1,016) $ (598)
======== ========= ========= ========= ======== ======= ======= =======
Basic earnings (loss)
per share $ .07 $ .10 $ .12 $ (.08) $ (.18) $ (.02) $ (.18) $ (.11)
======== ========= ========= ========= ======== ======= ======= =======
Weighted average shares
outstanding 5,644 5,657 5,644 5,644 5,644 5,644 5,644 5,644
======== ========= ========= ========= ======== ======= ======= =======
------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly per share amounts may not add to annual total due to rounding.
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 14, 2000, 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 14, 2000, 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 14, 2000, 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.
<TABLE>
<CAPTION>
page
a. The following documents are filed as a part of this report: number
<S> <C>
1. Financial Statements:
Independent Auditors' Report 13
Consolidated Statements of Operations for fiscal years
ended July 28, 2000, July 30, 1999, and July 31, 1998 14
Consolidated Balance Sheets at July 28, 2000 and July 30, 1999 15
Consolidated Statements of Shareholders' Equity for fiscal years ended July 28, 2000,
July 30, 1999, and July 31, 1998 16
Consolidated Statements of Cash Flows for fiscal years ended July 28, 2000,
July 30, 1999, and July 31, 1998 17
Notes to Consolidated Financial Statements 18
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)
page
number
2. Schedules:
Schedules other than those listed above are omitted for the
reason that they are not required or are not applicable or the
required information is shown in the financial statements or
notes thereto.
b. Reports on Form 8-K filed for the three months ended July 28, 2000:
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 ISCO GmbH (organized under the laws of Germany)
(23) Independent Auditors' Consent 32
(27) Financial Data Schedule 33
(99) Plan Year 2000 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/ Vicki L. Benne
----------------------------------- ------------------------------
Robert W. Allington, Vicki L. Benne,
Chief Executive Officer Treasurer and Chief
and Director Financial Officer
Date: October 24, 2000 Date: October 24, 2000
By: /s/ Douglas M. Grant By: /s/ Donald E. Wademan
----------------------------------- ------------------------------
Douglas M. Grant, Donald E. Wademan,
President, Chief Operating Controller
Officer and Director
Date: October 24, 2000 Date: October 24, 2000
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 24, 2000 Date: October 24, 2000
By: /s/ James L. Carrier By: /s/ Ronald K. Jester
----------------------------------- ------------------------------
James L. Carrier, Director Ronald K. Jester, Director
Date: October 24, 2000 Date: October 24, 2000
By: /s/ Philip M. Wittig
-----------------------------------
Philip M. Wittig, Director
Date: October 24, 2000
31
