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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 26, 1996
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
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nebraska 47-0461807
----------------------- -----------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
4700 Superior Street, Lincoln, Nebraska 68504-1398
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
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 September 27, 1996, 5,351,931 shares of Common Stock of Isco, Inc., were
outstanding and the aggregate market value of such Common Stock held by
nonaffiliates was approximately $25,026,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held December 12, 1996
- - Part III.
PART I
ITEM 1. BUSINESS.
GENERAL
Isco, Inc. was founded as a Nebraska corporation in 1959 under the name
Instrumentation Specialties Company, Inc. The Company designs, manufactures,
and markets worldwide two types of products: its water quality monitoring
products are used by industry and government to monitor compliance with water
quality regulations and its laboratory-scale separation instruments products are
used in a variety of research and testing laboratories and by industry to
monitor product quality. For segment information reference the Notes to the
Financial Statements, and Management's Discussion and Analysis (MD&A).
The Company's founder, Robert W. Allington, has been the controlling
shareholder, chairman of the board, chief executive officer since inception, and
president until October 6, 1995. Douglas M. Grant has been president and chief
operating officer of the Company since October 6, 1995.
The Company's principal offices are located at 4700 Superior Street, Lincoln,
Nebraska 68504-1398, and its telephone number is (402)464-0231. As used herein,
"Company" or "Isco" refers to Isco, Inc., and its subsidiaries, unless the
context otherwise requires.
In September 1993, the Company acquired a minority ownership position in
Geomation, Inc., a privately held company in Golden, Colorado. The Company has
the option to acquire complete ownership of Geomation, Inc. That option is
exercisable during the first quarter of fiscal 1998.
RECENT DEVELOPMENTS
In July 1996 after operating for many years with two divisions, the Company
merged the divisions into one operating unit. Refer to MD&A for additional
information on the restructuring.
Subsequent to the close of fiscal year 1996, the Company acquired substantially
all of the assets and assumed selected liabilities of Suprex Corporation,
Pittsburgh, Pennsylvania. Suprex was a significant producer of supercritical
fluid extraction (SFE) products with a major focus in the food industry. For
example, Frito-Lay, Inc., a leading food producer, makes extensive use of Suprex
SFE products in ensuring high quality foods. By combining the Suprex SFE
products with those of the Company, management believes the Company has achieved
the leading market position in SFE. The Company is integrating Suprex into its
Lincoln, Nebraska operation.
PRODUCTS AND APPLICATIONS
The contribution made by the principal product lines to the Company's net sales
for fiscal 1996, 1995, and 1994, respectively, is as follows: wastewater
samplers 35, 34, and 37 percent; open channel flowmeters 19, 20, and 18 percent;
and liquid chromatography 14, 12, and 16 percent.
The Company's water quality control customers use wastewater samplers to
collect water samples from streams and sewers for subsequent analysis in the
laboratory. Its open channel flow meters are used to measure and
2
record the flow rate of liquids in unpressurized pipes and open channels.
These flow meters can be linked with wastewater samplers to trigger the
collection of water samples based on flow rate. Also, the combined use of
these two products is well suited to conduct storm water runoff studies in
compliance with federal regulations. Cities may use the Company's
computer-based flow logging systems 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.
The Company's liquid chromatography (LC) customers use pumps to deliver solvent
through columns packed with special media to separate a sample, placed on the
column, into its component molecules, detectors to identify and quantify the
component molecules, and fraction collectors to collect the separated component
molecules as they elute from the column. Customers include analytical
laboratories which support the development and manufacture of food, chemical,
and pharmaceutical products as well as those which study disease and basic life
functions.
Other products which management believes will contribute to the Company's future
success include: SFE products, total organic carbon (TOC) analyzers, parameter
monitoring products, syringe pumps, and closed pipe flow meters. SFE is a safe,
cost-effective, and time saving technique used to separate selected chemical
compounds (target analytes) from complex sample matrices. The Company's food,
agriproducts, and plastics producing customers use SFE to assure their products
are maintained at a specified level of quality. TOC measurement is an excellent
overall indicator of water quality, and is becoming a method of choice for
continuous on-line screening for the presence of a variety of organic compounds,
without having to test for each substance individually and without waiting up to
five days for test results. The Company's wastewater treatment customers use
TOC analyzers to monitor continuously the treatment process to ensure that it is
proceeding within established parameters. The Company is an emerging participant
in the parameter measuring market. These parameters include pH, conductivity,
temperature, turbidity, dissolved oxygen, and oxygen reduction potential. The
Company's syringe pumps are used for specialized applications in the petroleum
and chemical industries, for pumping supercritical fluids, and in the analytical
chemistry laboratory where high precision and accuracy are required. The
Company, at the beginning of fiscal 1997, introduced a line of electro-magnetic
closed pipe flow meters which management believes will be a cost-effective
alternative to existing magnetic and other closed pipe flow meters.
The U.S. price range of the Company's individual products is: $1,500 to $17,000
for water quality monitoring instruments and $300 to $10,000 for separation
instruments. The price for a complete SFE system can exceed $60,000.
MARKETING AND SALES
During 1996, the Company's water quality monitoring instruments were sold to
approximately 10,000 accounts, consisting of commercial and industrial
enterprises, municipalities in all 50 states, consulting engineers, testing
laboratories, and governmental organizations. The Company's separation
instruments were sold to approximately 1,800 accounts, consisting of industrial
and commercial enterprises, universities, original equipment manufacturers
(OEMs), and governmental organizations. The number of individual customers
substantially exceeds
3
the number of accounts, due to the departmental structure
and funding arrangements used by industries, universities, and government
research centers.
In the United States, a group of 31 independent manufacturers' representative
organizations handle direct sales and the solicitation of orders for water
quality monitoring instruments. These manufacturers' representatives are
supported by promotional programs, trade show exhibitions, and field assistance
by factory-based application specialists and territory sales managers. A sales
manager and staff manage and support the manufacturers' representative
organizations. Domestic selling activities for separation instruments are
conducted by a sales force consisting of a national sales manager and company
sales representatives located in major domestic market areas. Some independent
manufacturers' representatives, selling a limited number of products, are used
to enhance market coverage. The sales staff is supported with an application
specialist and a staffed applications laboratory, with advertising, product and
applications bulletins, technical literature, and applications seminars.
The Company's international sales constituted 27, 22, and 21 percent of the
Company's sales during fiscal 1996, 1995, and 1994, respectively. Isco, Ltd., a
wholly owned foreign sales corporation, transacts the international sales of the
Company's products. The Company has not been adversely affected by foreign
currency fluctuations because all of its international sales are denominated in
United States Dollars. Products are not stocked outside the United States but
are delivered from the Company's inventory in Lincoln, Nebraska. To aid
international sales, the Company offers wastewater samplers and flow meters in
French, German, and Spanish language versions, with results displayed in metric
units.
Isco's international sales are made primarily by independent dealers operating
in various countries around the world. Isco Instruments (Europe) AG, a wholly
owned subsidiary, manages and promotes the sale of the Company's products
through Isco's independent dealers in Europe and the Middle East. The
independent dealers in the other countries are managed by an export manager
based in Lincoln. The Company has an SFE applications laboratory in the United
Kingdom to support its SFE sales effort in Europe.
CUSTOMERS
In the United States, during fiscal year 1996, commercial and industrial
customers accounted for 49 percent of total water quality monitoring instrument
sales; municipalities for 32 percent; consulting engineers and laboratories for
9 percent; and federal and state governmental organizations for 10 percent. For
the same period, commercial and industrial customers accounted for approximately
61 percent of total separation instruments sales; state, municipal, and
nonprofit institutions, including university and hospital laboratories accounted
for 18 percent; OEMs for 15 percent; and federal government laboratories for 6
percent.
The Company has a broad customer base. Currently no single customer, including
any OEM customer, accounts for more than two percent of its sales.
4
PRODUCT WARRANTY
Isco warrants its products for one year against defective materials and
workmanship. The Company's warranty claims have not been material in the past.
Further, it is anticipated that the Company's warranty claims will not be
material in the future since it emphasizes quality-based design practices and
manufacturing processes for both its current and new products. The Company
provides after sales factory service for most of the products it sells along
with on-site services in the United States for automated SFE systems and the TOC
product. The Company has an extended warranty program available, which
customers may purchase at the time they purchase a new instrument or while the
instrument is under warranty.
COMPETITION
The Company believes that it has a strong competitive position in the markets
for wastewater samplers and open channel flow meters, and maintains a
competitive position in the LC market. The factors which the Company believes
contribute to its competitive position include: its reputation for quality and
service; technically advanced products that provide cost-effective operation and
unique features; an active research and development program that allows the
Company to maintain technical leadership; a strong position in key markets;
efficient production capabilities; and direct sales and manufacturers'
representatives that provide excellent distribution.
The Company has several competitors manufacturing similar wastewater samplers.
In the United States, the major competing company is American Sigma, Inc.,
recently acquired by Danaher Corporation. According to various sources, the
Company believes it has approximately 50 percent of the domestic wastewater
sampler market, with American Sigma, Inc., having approximately 45 percent.
Other domestic competitors are small and offer little significant competition.
Significant competitors in Europe include: Montec Holdings Limited, of the
Untied Kingdom and Germany; and Endress + Hauser Instruments, of Switzerland.
There are numerous suppliers in the domestic open channel flow meter market.
Based upon market information developed from internal and external sources and
analyzed by the Company, management believes the Company, along with Marsh-
McBirney, Inc. and Milltronics, each hold approximately 15 to 20 percent of the
United States open channel flow meter market. American Sigma, Inc. is believed
to hold approximately 10 percent of the domestic market. Additional significant
competitors in Europe include: Montec Holdings Limited, of the United Kingdom
and Germany; and Endress + Hauser Instruments, of Switzerland.
With respect to LC products, the Company believes it is a major producer of
fraction collectors. The largest competitor for these products is Pharmacia
Biotech, a Swedish company, whose products are manufactured in several European
countries. Pharmacia Biotech has a greater market share in international
markets. However, for selected instruments sold in the United States, the
Company's market share is comparable to that of Pharmacia Biotech. Other major
competitors are Bio-Rad Laboratories, Inc., and Gilson Medical Electronics,
Inc., an American-based company, with much of its production in France.
5
RESEARCH AND ENGINEERING
The Company commits significant resources to ongoing research and engineering
activities. The Company's near-term goals are to focus these activities toward
improving, enhancing, and expanding the market share of its existing product
lines. Over the long-term, the Company is seeking new market applications for
its products as well as exploring present and related markets which could
utilize new products developed from the Company's expanding technology base.
For fiscal years 1996, 1995, and 1994, the Company spent approximately
$4,775,000 or 12 percent of sales, $4,468,000 or 11 percent of sales, and
$4,595,000 or 12 percent of sales, respectively, on research and engineering.
PATENTS AND LICENSES
The Company believes it derives a competitive advantage from its patents.
Therefore, the Company has a policy of obtaining patents wherever commercially
feasible, as well as vigorously asserting and defending them. Company products
are covered by 61 United States patents, 57 of which are owned by Isco, and four
under which Isco is a licensee. There are also numerous corresponding patents
issued by other countries. The Company-owned patents have been assigned to the
Company with no royalties being paid for their use. The Company currently has
30 patent applications pending at the United States Patent Office.
REGULATION
Management believes it is in compliance with environmental regulations.
Therefore, no unfavorable impact on competition or earnings is expected. The
Company has no government contracts which are subject to renegotiation of
profits upon contract completion. Although the Company's products are not
subject to significant U.S. government regulation, the markets for many of its
products are regulation driven.
BACKLOG
On September 27, 1996, the Company's order backlog was $3,283,000. A year
earlier, on September 22, 1995, the order backlog was $3,396,000.
MANUFACTURING AND SOURCES OF SUPPLY
The Company's manufacturing and assembly operations are vertically integrated.
The Company fabricates most of the metal and plastic components used in its
products and obtains the required raw materials from several sources. Since the
Company is not reliant upon outside suppliers for these types of components, it
is generally able to produce them at a lower cost and maintain a consistently
high level of quality.
The Company's products use a variety of mechanical, electrical, and electronic
components, including microprocessors. Most of these components are available
from several sources. Currently, Isco is not experiencing any shortage of raw
materials or components.
The Company uses computerized production control systems. Based on anticipated
demand, inventory position, and production capacity, these systems determine the
raw material and component requirements, the dates when these materials are
needed, and the dates production must begin in order to complete the products on
time. Through the use of production scheduling techniques, these systems enable
the Company to control both
6
labor and inventory costs. These systems enable it
to periodically monitor the production costs of each of its products to assure
that the cost structure remains competitive and is consistent with the Company's
profit objectives.
EMPLOYEES
On September 27, 1996, the Company had 377 employees, worldwide, of whom 191
were engaged in production, 59 in research and engineering, 77 in marketing and
sales, and 50 in administration. None of the Company's employees are
represented by a labor union and the Company has never experienced a work
stoppage.
ITEM 2. PROPERTIES.
The facilities which house the Company's operations are owned and unencumbered.
The buildings at 4700 Superior Street in Lincoln, Nebraska contain approximately
113,000 square feet of space and are located on approximately 30 acres. The
building at 531 Westgate Boulevard in Lincoln, Nebraska contains approximately
156,000 square feet of space and is located on approximately 10 acres.
These facilities house the corporate, executive and administrative offices along
with its sales, research, engineering, manufacturing, and maintenance
activities. Management plans to expand the Superior Street facility so that all
operations can be consolidated at one location. When the consolidation is
complete, steps will be taken to dispose of the Westgate property.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings which, in the opinion of outside counsel, would
have a material impact on either the financial condition or operating results of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1996, 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 27, 1996 -- 5,351,931 shares outstanding and
approximately 380 shareholders of record.
Market: Over-the-counter (NASDAQ/NMS). Symbol: ISKO
7
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:
- -------------------------------------------------------------------------------
Common Stock Price Range
---------------------------------- Cash Dividends
1996 1995 Per Share
---------------- --------------- --------------
High Low High Low 1996 1995
------- ------ ------- ------ ---- ----
First quarter $12 1/4 $10 1/8 $ 9 1/2 $ 8 $.05 $.05
Second quarter 10 7/8 8 9 3/4 8 1/4 .05 .05
Third quarter 9 3/4 8 12 9 1/4 .05 .05
Fourth quarter 13 9 12 1/4 9 7/8 .05 .05
- -------------------------------------------------------------------------------
Dividends: On August 22, 1996, the Board of Directors declared a quarterly cash
dividend of $.05 per share, payable October 1, 1996 to shareholders of record on
September 13, 1996.
ITEM 6. SELECTED FINANCIAL DATA.
Amounts in thousands except per share data.
- -------------------------------------------------------------------------------
Fiscal Year
---------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
For the fiscal year:
Net sales $39,981 $41,784 $38,706 $37,644 $42,847
Gross margin 22,191 24,606 22,971 22,490 26,477
Operating income(loss)** (115) 3,708 3,760 3,255 7,569
Non-operating income 1,462 1,437 1,313 1,183 1,079
Income taxes 360 1,571 1,594 1,244 2,940
Net earnings 987 3,574 3,479 3,435 5,708
At fiscal year-end:
Current assets 21,414 25,292 25,946 23,686 26,463
Working capital 17,437 22,529 22,836 21,239 22,767
Total assets 46,704 45,766 43,966 42,225 41,210
Long-term debt 0 0 0 0 0
Shareholders' equity 42,002 42,002 39,745 38,592 36,082
Average shares
outstanding* 5,353 5,370 5,485 5,488 5,487
Per Share Data:
Net earnings per share* $.18 $.67 $.63 $.63 $1.04
Cash dividends per
share (declared)* $.20 $.20 $.19 $.17 $.17
- -------------------------------------------------------------------------------
Fiscal 1993 data includes a one-time increase in net earnings of approximately
$241,000 or $.04 per share from the implementation of SFAS No. 109, "Accounting
for Income Taxes."
* Adjusted for 15 percent stock dividends distributed on September 27, 1991 and
on December 9, 1993.
** Fiscal 1996 includes restructuring charges of $1,752,000 associated with the
consolidation of the divisions.
8
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.
SALES ANALYSIS AND REVIEW
Net Sales to Unaffiliated Customers by Business Segment
- -------------------------------------------------------------------------------
(amounts in thousands)
1996 1995 1994
------- ------- -------
Water Quality Monitoring Instruments $27,050 $28,739 $26,280
Separation Instruments 12,931 13,045 12,426
------- ------- -------
Total Net Sales $39,981 $41,784 $38,706
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------
1996 to 1995 Comparison
Water Quality Monitoring Instruments. Fiscal 1996 sales of $27,050,000 were six
percent below fiscal 1995 sales. Compared with fiscal 1995, domestic sales were
down 14 percent while international sales of $6,198,000 were up 38 percent. The
decline in domestic sales can be attributed to both the anti-environmental
posture of the Congress and the federal budget debate with the resulting
uncertainty over the funding of EPA programs and enforcement activities. Sales
of wastewater samplers, open channel flowmeters, and parameter monitoring
products were down, while sales of TOC analyzers were up. The segment's order
backlog, at year-end, was $1.7 million, an increase of eight percent from the
beginning of the fiscal year.
Separation Instruments. Fiscal 1996 sales of $12,931,000 were one percent below
fiscal 1995 sales. Compared with fiscal 1995, domestic sales were up four
percent while international sales of $4,465,000 were down nine percent. Sales
of liquid chromatography products were up, syringe pump sales were flat, and
sales of SFE products were down. The segment's order backlog, at year-end, was
$878,000, a decrease of 50 percent from the beginning of the fiscal year.
1995 to 1994 Comparison
Water Quality Monitoring Instruments. Fiscal 1995 sales of $28,739,000 were
nine percent above fiscal 1994 sales. Compared with fiscal 1994, domestic
sales were up nine percent while international sales of $4,485,000 were up 13
percent. Wastewater sampler sales grew nine percent, reversing a three-year
decline. Open channel flow meter sales and leasing revenues showed growth
which was consistent with that of the segment, while sales of parameter
products were even with 1994. The segment introduced a TOC analyzer in
mid-fiscal 1995 in an effort to expand its market base. The TOC analyzer did
not contribute significantly to revenues during fiscal 1995. The segment's
order
9
backlog, at year-end, was $1.5 million, a decrease of 24 percent from the
beginning of the fiscal year.
Separation Instruments. Fiscal 1995 sales of $13,045,000 were five percent
above fiscal 1994 sales. Compared with fiscal 1994, domestic sales declined
two percent while international sales of $4,887,000 were up 20 percent. SFE
products and syringe pump sales accounted for nearly 50 percent of the
segment's 1995 sales. The growth of these two product lines more than offset
the decline in liquid chromatography products and other traditional products
of the segment. The segment's order backlog, at year-end, was $1.7 million, a
decrease of four percent from the beginning of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
Operating Income(Loss) by Business Segment
- -------------------------------------------------------------------------------
(amounts in thousands)
1996 1995 1994
------ ------ ------
Water Quality Monitoring Instruments $1,393 $4,601 $3,581
Separation Instruments (1,508) (893) 179
------ ------ ------
Total Operating Income(Loss) $ (115) $3,708 $3,760
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------
1996 to 1995 Comparison
Water Quality Monitoring Instruments. This segment generated operating income of
$1,393,000 during fiscal 1996, a 70 percent decrease from fiscal 1995. During
fiscal 1996 the Company announced the merger of its two divisions and as a
result incurred restructuring charges, which accounted for 27 percent of the
decrease in operating income. The restructuring charges are discussed in a
following section. During fiscal 1996, the gross margin percentage, as a
percentage of sales, declined four percent. Approximately half of the decrease
in the margin is a result of the growth in international sales as a percentage
of total sales. International sales are through dealers who receive discounts
off list prices, whereas, domestic sales are through manufacturers'
representatives who purchase at list prices and are paid commissions. Discounts
are recorded as reductions in sales whereas commissions are recorded as selling
expenses. The remainder of the decrease in the margin is the result of
increased manufacturing costs, mainly from increases in overhead costs. For the
year, research and engineering expenses increased 12 percent, due primarily to
costs incurred relative to the development of a closed pipe flow meter and the
continued development of TOC analyzers. Selling, general, and administrative
(SG&A) expenses remained flat. Decreases in legal fees and the Company's profit
sharing contribution more than offset increases in wages and related benefits,
advertising expenses, and collection expenses. During fiscal 1996, legal
expenses returned to a more normal level from fiscal 1995 when the Company
incurred significant legal expenses defending against a lawsuit brought by Marsh
McBirney, Inc., an open channel flow meter competitor. In fiscal 1995, a
judgment was entered in favor of the Company, however, the plaintiff appealed
the decision. During fiscal 1996, the judgment was sustained by an appellate
court.
Separation Instruments. This segment incurred an operating loss of $1,508,000
during fiscal 1996 compared with a operating loss of $893,000 in fiscal 1995.
During fiscal 1996 the Company announced the merger of
10
its two divisions and as a result incurred restructuring charges. If
restructuring charges had not been incurred, the segment would have improved
its operating performance by 29 percent when compared with 1995. The
restructuring charges are discussed in a following section. During 1995, the
gross margin percentage, as a percentage of sales, declined two percent. The
margin was negatively affected by the increase in the LIFO reserve, this
accounted for over half of the decrease in the margin. The remainder of the
decrease was due to the sales mix shifting back to lower margin liquid
chromatography products. Research and engineering expenses remained flat,
while SG&A expenses decreased 10 percent. Reduced expenses to support
international dealers and domestic manufacturers' representatives, the
Company's profit sharing contribution, costs associated with equipment on
loan to potential customers, advertising expenses, and other marketing
related program expenses accounted for the majority of the decrease in SG&A
expenses.
1995 to 1994 Comparison
Water Quality Monitoring Instruments. This segment generated operating income
of $4,601,000 during fiscal 1995, a 28 percent increase over fiscal 1994.
During 1995, the gross margin percentage declined slightly. For the year,
research and engineering expenses declined nine percent due, primarily, to
reduced expenditures for external research and engineering services. During the
year, SG&A expenses increased six percent mainly as a result of the legal
expenses associated in defending against the lawsuit discussed above.
Separation Instruments. This segment incurred an operating loss of $893,000
during fiscal 1995 compared with a operating profit of $179,000 in fiscal 1994.
During 1995, the gross margin percentage declined slightly. Increased
expenditures for external research and engineering services, and materials and
supplies represent the majority of the six percent increase in research and
engineering expenses. Increased sales salaries, expenses to support
international dealers and domestic manufacturers' representatives, sales
materials, commissions, sales and marketing travel expenses, and patent expenses
represented the majority of the 25 percent increase in SG&A expenses. The
segment's operating income was reduced as a result of expensive field service
and engineering activities required to correct operational problems of the SFX
3560 automated supercritical fluid extractor. These problems were resolved and
a reliable product delivered to the segment's customers.
RESULTS OF OPERATIONS
The following table summarizes, for the three years indicated, the percentages
which certain components of the Consolidated Statements of Earnings bear to net
sales and the percentage change of such components (based on actual dollars)
compared with the prior year. The year-to-year analysis which follows relates
to the Company-wide elements which cannot be attributed to a particular segment.
11
- -------------------------------------------------------------------------------
Year-to-Year
Increase(Decrease)
Year Ended ------------------
------------------------ 1996 1995
Jul 26 Jul 28 Jul 29 vs. vs.
1996 1995 1994 1995 1994
------ ------ ------ ---- ----
Net sales 100.0 100.0 100.0 (4.3) 8.0
Cost of sales 44.5 41.1 40.7 3.6 9.2
------ ------ ------
55.5 58.9 59.3 (9.8) 7.1
------ ------ ------
Expenses:
Selling, general, and
administrative 39.5 39.3 37.8 (4.0) 12.4
Research and engineering 11.9 10.7 11.9 6.9 (2.8)
Restructuring charges 4.4 -- -- -- --
------ ------ ------
55.8 50.0 49.7 6.7 8.8
------ ------ ------
Operating income(loss) (.3) 8.9 9.6 -- (1.4)
Non-operating income 3.7 3.4 3.4 1.7 9.4
------ ------ ------
Earnings before
income taxes 3.4 12.3 13.0 (73.8) 1.4
Income taxes .9 3.8 4.1 (77.1) (1.4)
------ ------ ------
Net earnings 2.5 8.5 8.9 (72.4) 2.7
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------
1996 to 1995 Comparison
The Company's fiscal year 1996 effective income tax rate was 26.7 percent
compared with 30.5 percent for the previous year. The decline in the current
year's effective income tax rate was the result of lower taxable income relative
to increased tax-exempt income. The current year's effective income tax rate
was also affected by the Company's decision to cancel its incentive tax contract
with the State of Nebraska requiring the repayment of approximately $89,000 of
non-qualifying tax benefits.
1995 to 1994 Comparison
The Company's fiscal year 1995 effective income tax rate was 30.5 percent
compared with 31.4 percent for the previous year. The decrease was due, to the
combination of increased tax-exempt income relative to operating income and
adjusting for the prior year's estimate of currently payable federal and state
income tax.
RESTRUCTURING CHARGES
On July 15, 1996, the Company announced the merger of its two divisions.
Management believes that the restructuring will result in improved medium to
longer term financial performance, and ensure the vitality and competitiveness
of the Company. The restructuring resulted in the elimination of approximately
40 positions, many of which were in duplicated management and supervisory
positions. It is expected that these reductions will lower operating and
manufacturing costs by approximately $1.5 to $1.9 million per year. The costs
associated with this restructuring are approximately $1,752,000. Details of the
charges are in Note K of the financial statements. The Company plans to expand
and remodel the Superior Street facility to house all of the Company's
operations that are currently distributed between the Superior and Westgate
facilities. The estimated cost associated with the Superior
12
expansion and remodeling will be in the $5.5 to $6.0 million range. The
expansion and remodeling will be funded from working capital and the
liquidation of investments. After the expansion is completed the Company
plans to sell the Westgate facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to have a strong financial position with no debt
obligations. At July 26, 1996, working capital was $17,437,000 and the current
ratio was a healthy 5.4:1. At July 26, 1996, the Company had in place with its
commercial bank an unused, unsecured $3 million line of credit.
Cash flows from operations were $5,324,000 for fiscal year 1996 compared with
$2,205,000 for the previous year. A majority of the improvement in cash flows
was from management's follow through on the commitment to reduce inventory.
This reduction more than offset the reduction in net income. Additional
benefits provided to cash flows came from increases in accrued expenses and
accounts payable combined with a smaller increase in accounts receivable.
Accrued expenses are up due to costs associated with the Company's
restructuring.
RECENT DEVELOPMENTS
In a continued effort to expand its share of the SFE market the Company, in
August 1996, acquired substantially all the assets of Suprex Corporation, its
leading competitor. The acquisition required approximately $2,850,000 in cash
and the assumption of approximately $300,000 in trade payables. As a result of
the acquisition, the Company expects an increase in sales of SFE products to the
$5 to $6 million range. The impact on the fiscal 1997 operating income is
expected to be negligible as a result of the additional costs associated with
merging the operations. The Company anticipates that the Suprex operations will
be merged into its Superior Street location facility during the second quarter
of fiscal 1997. Currently, an analysis of the current product offerings is
being performed to determine the appropriate products to provide to the market.
During fiscal 1996, the Company and Geomation, Inc. agreed to delay the
acquisition of Geomation, Inc. for one year, until the first quarter of fiscal
1998. At that time of the agreement the Company loaned Geomation $500,000.
Details of the loan are in Note E of the financial statements.
FACTORS AFFECTING FUTURE RESULTS
The factors which management believes may affect the future financial
performance of the Company include, but are not limited to: investment in
research and engineering activities which lead to improved sales growth,
successful integration of acquisitions into the Company's operations, increased
financial strength of a major competitor, and dealing with external regulatory
influences on the Company's primary markets.
The primary factor which could affect the Company's earnings performance is that
the domestic growth rates in the Company's core areas of wastewater samplers,
open channel flow meters, and liquid chromatography
13
are at or slightly above the general economic growth rate. The Company must
allocate and direct its research and engineering resources into development
activities which result in products that contribute to profitable sales
growth. It is the Company's goal to invest approximately 10 percent of net
sales in research and engineering activities. Management's challenge is to
direct sufficient research and engineering resources to protect the Company's
market position in its core product areas, while at the same time investing
in research and engineering activities which move the Company into new areas
with the potential to add significant profitable sales. Recent examples of
moves into new product areas include the development of an on-line TOC
analyzer and the UniMag closed pipe flow meter.
The Company is actively pursuing expansion through the acquisition of companies
or products lines in related areas. While this has the potential to add to the
Company's sales and income, growth through acquisition carries certain risks.
For example, for the Company's recent acquisition of Suprex to be successful, in
the short term the Company must achieve reasonable sales levels of Suprex SFE
products while at the same time integrating the Suprex operations into the
Company's operations in Lincoln, Nebraska. In the longer term the Company must
successfully integrate its existing SFE products with those acquired from
Suprex, and build a profitable SFE business. While management believes these
goals can be accomplished, success is not assured.
In the past several years, the management believes that American Sigma, Inc. has
made significant investments in new product development and sales and marketing
activities. In the U.S., this has created a serious challenge to the Company's
leading market position in wastewater samplers and its strong position in open
channel flow meters. The recent acquisition of American Sigma, Inc. by the
Danaher Corporation has provided additional financial and marketing resources to
this competitor. Consolidation is an on-going trend in both the environmental
products market and the analytical instrument market. As a result, the Company
is facing significantly larger competitors who have the financial and
organizational resources to compete aggressively in a world-wide market.
Approximately 65 percent of the Company's sales are from environmental
products. This is a regulation-driven business which is strongly influenced
by both the perceived attitude and actions of governmental entities regarding
the promulgation and the enforcement of environmental regulations. The
market effects of the regulatory climate are outside of the Company's
control, and in any given time period, may be either a positive or negative
factor in the Company's performance. For example, in fiscal 1996 a
significant percentage of the Company's decline in U.S. sales in the
environmental products area can be attributed to both the anti-environmental
posture of the Congress and the federal budget debate with the resulting
uncertainty over the funding of EPA programs and enforcement activities.
INFLATION
The impact of inflation on the costs of the Company and its ability to pass on
cost increases in the form of increased sale prices is dependent upon market
conditions and its competitive environment. Inflation in the domestic economy
has been relatively low for the past three years and has not had a significant
impact on the Company.
14
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 26, 1996 and July 28, 1995, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended July 26, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14.a.2. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Isco, Inc. and subsidiaries as of
July 26, 1996 and July 28, 1995, and the results of their operations and their
cash flows for each of the three years in the period ended July 26, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for the impairment of long lived assets in
fiscal 1996.
Deloitte & Touche LLP
Lincoln, Nebraska
October 9, 1996
15
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands, except per share data)
Year Ended
--------------------------
July 26 July 28 July 29
1996 1995 1994
------- ------- -------
Net sales $39,981 $41,784 $38,706
Cost of sales 17,790 17,178 15,735
------- ------- -------
22,191 24,606 22,971
------- ------- -------
Expenses:
Selling, general, and administrative 15,779 16,430 14,616
Research and engineering 4,775 4,468 4,595
Restructuring charges (Note K) 1,752 -- --
------- ------- -------
22,306 20,898 19,211
------- ------- -------
Operating income(loss) (115) 3,708 3,760
------- ------- -------
Non-operating income:
Investment income 1,088 938 697
Other 374 499 616
------- ------- -------
1,462 1,437 1,313
------- ------- -------
Earnings before income taxes 1,347 5,145 5,073
Income taxes (Note G) 360 1,571 1,594
------- ------- -------
Net earnings $ 987 $ 3,574 $ 3,479
------- ------- -------
------- ------- -------
Net earnings per share $.18 $.67 $.63
------- ------- -------
------- ------- -------
Weighted average number of shares
outstanding 5,353 5,370 5,485
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
16
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
July 26 July 28
1996 1995
------- -------
Assets
Current assets:
Cash and cash equivalents $ 4,420 $ 4,063
Short-term investments (Note B) 2,749 5,883
Accounts receivable, trade, net of
allowance for doubtful accounts
of $72,027 and $73,859 7,131 6,949
Inventories (Note C) 5,343 6,812
Refundable income taxes (Note G) 26 472
Deferred income taxes (Note G) 776 558
Other current assets 969 555
------- -------
Total current assets 21,414 25,292
Property, plant, and equipment (Note D) 7,075 8,337
Long-term investments (Note B) 16,035 10,487
Other assets (Note E) 2,180 1,650
------- -------
Total assets $46,704 $45,766
------- -------
------- -------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 862 $ 547
Accrued expenses (Note F) 2,943 2,197
Income taxes payable (Note G) 172 19
------- -------
Total current liabilities 3,977 2,763
------- -------
Deferred income taxes (Note G) 725 1,001
Shareholders' equity (Note I):
Preferred stock, $.10 par value, authorized
5,000,000 shares; issued none
Common stock, $.10 par value, authorized
15,000,000 shares; issued 5,978,538 shares 598 598
Additional paid-in capital 36,838 36,838
Retained earnings 6,428 6,511
Net unrealized holding gain(loss) on
available-for-sale securities (198) (281)
------- -------
43,666 43,666
Less treasury stock, at cost, 626,607 shares 1,664 1,664
------- -------
Total shareholders' equity 42,002 42,002
------- -------
Total liabilities and shareholders' equity $46,704 $45,766
------- -------
------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
17
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
Net
unrealized
holding
gain(loss)
Common stock Additional on available- Treasury stock
------------------- paid-in Retained for-sale -----------------
shares amount capital earnings securities shares amount
--------- ------ --------- -------- ---------- -------- -------
Balance, July 30, 1993 5,198,729 $520 $26,973 $11,536 $ -- 427,615 $ (437)
Net earnings -- -- -- 3,479 -- -- --
Cash dividends ($0.19 per share) -- -- -- (1,061) -- -- --
15% stock dividend 779,809 78 9,865 (9,943) -- 64,142 --
Purchase of stock -- -- -- -- -- 108,850 (974)
Net unrealized holding gain(loss)
on available-for-sale
securities -- -- -- -- (291) -- --
--------- ------ --------- -------- ---------- -------- -------
Balance, July 29, 1994 5,978,538 598 36,838 4,011 (291) 600,607 (1,411)
Net earnings -- -- -- 3,574 -- -- --
Cash dividends ($0.20 per share) -- -- -- (1,074) -- -- --
Purchase of stock -- -- -- -- -- 26,000 (253)
Net change in net unrealized
holding gain(loss) on
available-for-sale securities -- -- -- -- 10 -- --
--------- ------ --------- -------- ---------- -------- -------
Balance, July 28, 1995 5,978,538 598 36,838 6,511 (281) 626,607 (1,664)
Net earnings -- -- -- 987 -- -- --
Cash dividends ($0.20 per share) -- -- -- (1,070) -- --
Net change in net unrealized
holding gain(loss) on
available-for-sale securities -- -- -- -- 83 -- --
--------- ------ --------- -------- ---------- -------- -------
Balance, July 26, 1996 5,978,538 $598 $36,838 $ 6,428 $(198) 626,607 $(1,664)
--------- ------ --------- -------- ---------- -------- -------
--------- ------ --------- -------- ---------- -------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
18
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(columnar amounts in thousands)
Year Ended
---------------------------
July 26 July 28 July 29
1996 1995 1994
-------- ------- -------
Cash flows from operating activities:
Net earnings $ 987 $ 3,574 $ 3,479
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,931 2,102 1,945
Deferred income taxes (543) -- (242)
(Gain)loss on sale of investments (6) (7) 159
Gain on sale of property, plant, and
equipment (193) (147) (121)
Provision for doubtful accounts 81 20 31
Loss on impairment of assets 500 -- --
Change in operating assets and liabilities:
Accounts receivable, trade-
(increase) decrease (262) (864) (469)
Inventories-(increase) decrease 1,469 (1,538) (152)
Refundable income taxes-(increase) decrease 446 (472) 837
Other current assets-(increase) decrease (414) (128) 153
Accounts payable-increase (decrease) 316 (65) 277
Accrued expenses-increase (decrease) 746 (144) 229
Income taxes payable-increase (decrease) 152 (138) 157
Other 114 12 (16)
-------- ------- -------
Total adjustments 4,337 (1,369) 2,788
-------- ------- -------
Net cash provided by operating activities 5,324 2,205 6,267
-------- ------- -------
Cash flows from investing activities:
Proceeds from sale of available-for-sale
securities 91 11 4,838
Proceeds from maturity of available-for-
sale securities 105 4 --
Proceeds from maturity of held-to-maturity
securities 6,261 6,079 8,484
Proceeds from sale of property, plant, and
equipment 225 178 158
Purchase of available-for-sale securities (8,371) (290) (3,106)
Purchase of held-to-maturity securities (476) (5,184) (11,273)
Purchase of property, plant, and equipment (940) (1,125) (750)
Investment in Geomation, Inc. -- -- (500)
Disbursement for issuance of note receivable (500) -- --
Other (292) (171) (88)
-------- ------- -------
Net cash used in investing activities (3,897) (498) $(2,237)
-------- ------- -------
19
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(columnar amounts in thousands)
Year Ended
-----------------------------
July 26 July 28 July 29
1996 1995 1994
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (1,070) (1,074) (1,061)
Purchase of stock -- (253) (974)
------- ------- -------
Net cash used in financing activities (1,070) (1,327) (2,035)
------- ------- -------
Cash and cash equivalents:
Net increase (decrease) 357 380 1,995
Balance at beginning of year 4,063 3,683 1,688
------- -------- -------
Balance at end of year $ 4,420 $ 4,063 $ 3,683
------- -------- -------
------- -------- -------
See Note L for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated financial
statements.
20
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended July 26, 1996, July 28, 1995 and July 29, 1994
(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) designs,
manufactures, and markets worldwide two types of products: water quality
monitoring products and laboratory-scale separation instruments.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated. Investments in
which the Company exercises significant influence over operating and financial
policies are accounted for using the equity method.
For fiscal reporting purposes, the Company operates under a 52/53 week year,
ending on the last Friday of July.
Use of Estimates--The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Financial Instruments--The Company's financial instruments, including cash,
receivables, notes receivable, and payables, are a reasonable estimate of fair
value based on the maturity dates and terms of such instruments. Fair values of
investments which are based on quoted market values are disclosed in Note B.
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 enterprise has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost; debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings; debt and equity securities not classified as either held-to-
maturity or trading are classified as available-for-sales securities and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of shareholders' equity. The Company held
no trading securities during the periods reported and generally does not trade
securities. Sales of available-for-sale securities are recognized using the
first-in, first-out method.
Inventories--Inventories are valued at the lower of cost or market, principally
on the last-in, first-out (LIFO) basis.
21
Long-Lived Assets--During fiscal 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 (SFAS No. 121) entitled
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 established accounting standards for the
recognition and measurement of the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The provisions of this statement require
that long-lived assets and certain intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In such cases, the expected future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
are estimated and an impairment loss 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 along-lived asset or goodwill be impaired, an impairment loss
is recognized for the difference between the carrying value of the asset and its
estimated fair value. As discussed in Note K, the adoption of this statement
resulted in a pre-tax charge of $500,000.
Property, Plant, and Equipment--Property, plant, and equipment are stated at
historical costs. Depreciation is provided using the straight-line and
declining balance methods over estimated useful asset lives of 10 to 35 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
Other Assets--Intangible assets are amortized on a straight-line basis over
estimated useful lives of 5 to 20 years.
Revenue Recognition--Sales of products and services are recorded based on
shipment of products or performance of services. Revenue from extended warranty
contracts is deferred and recognized on a pro rata basis over the life of the
contracts.
Foreign Currency Translation--The functional currency of the wholly owned Swiss
subsidiary is the United States Dollar. The foreign currency translation gain
or loss has not been material.
Employee Benefits Plan--The Beneficial Employee Trust of Isco (BETI), a
voluntary employees' beneficiary association, is funded by Company and employee
contributions. Certain employee benefits, including the weekly disability and
medical protection plan and group insurance premiums, are paid by the BETI.
Research and Engineering Costs--Research and engineering costs are expensed as
incurred.
Income Taxes--The Company and its foreign sales corporation subsidiary file
consolidated federal and state tax returns. Income taxes are recorded using the
liability method which recognizes the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.
Net Earnings Per Share--Net earnings per share are based on the weighted average
number of common and common equivalent shares outstanding adjusted for the 15%
stock dividend of December 1, 1993. Dilutive common stock equivalents consist
of shares issuable upon exercise of stock options. Fully diluted net earnings
per share are not presented because they are not materially different from
primary net earnings per share.
22
Reclassifications--Certain reclassifications have been made to the prior years'
financial statements to conform to the current year's presentation.
Note B. Investments.
As of July 26, 1996:
- -------------------------------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
--------- ---------- ---------- ------- --------
Short-term investments:
Held-to-maturity
securities:
State and municipal
securities $ 761 $ 2 $ -- $ 763 $ 761
Available-for-sale
securities:
State and municipal
securities 1,977 11 -- 1,988 1,988
--------- ---------- ---------- ------- --------
Total short-term
investments 2,738 13 -- 2,751 2,749
--------- ---------- ---------- ------- --------
Long-term investments:
Held-to-maturity
securities:
State and municipal
securities 750 3 -- 753 750
Available-for-sale
securities:
State and municipal
securities 10,379 26 -- 10,405 10,405
Mutual funds 4,970 -- 350 4,620 4,620
Mortgage-backed
securities 28 -- 4 24 24
Preferred stock 236 -- -- 236 236
--------- ---------- ---------- ------- --------
Total long-term
investments 16,363 29 354 16,038 16,035
--------- ---------- ---------- ------- --------
$19,101 $42 $354 $18,789 $18,784
--------- ---------- ---------- ------- --------
--------- ---------- ---------- ------- --------
- -------------------------------------------------------------------------------
23
As of July 28, 1995:
- -------------------------------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
--------- ---------- ---------- ------- --------
Short-term investments:
Held-to-maturity
securities:
State and municipal
securities $ 5,883 $-- $ 14 $ 5,869 $ 5,883
--------- ---------- ---------- ------- --------
Long-term investments:
Held-to-maturity
securities:
State and municipal
securities 5,976 28 -- 6,004 5,976
Available-for-sale
securities:
Mutual funds 4,805 -- 454 4,351 4,351
Mortgage-backed
securities 28 -- 1 27 27
Preferred stock 127 6 -- 133 133
--------- ---------- ---------- ------- --------
Total long-term
investments 10,936 34 455 10,515 10,487
--------- ---------- ---------- ------- --------
$16,819 $34 $469 $16,384 $16,370
--------- ---------- ---------- ------- --------
--------- ---------- ---------- ------- --------
- -------------------------------------------------------------------------------
The contractual maturities on the held-to-maturity securities range from less
than one year to five years. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Proceeds from sales of available-for-sale securities during fiscal years 1996
and 1995 were $91,000 and $11,000, respectively. Gross gains of $6,000 and
$11,000, and gross losses of $-0- and $4,000 were recognized in fiscal 1996 and
1995, respectively.
In connection with the adoption of "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities", the
Company reclassified approximately $6,716,000 of securities from held-to-
maturity to available-for-sale during fiscal 1996.
Note C. Inventories.
- --------------------------------------------------------
1996 1995
- --------------------------------------------------------
Raw materials $2,049 $2,843
Work-in-process 1,935 2,554
Finished goods 1,359 1,415
------ ------
$5,343 $6,812
------ ------
------ ------
- --------------------------------------------------------
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,275,000 and $952,000 higher than reported on the
LIFO basis at July 26, 1996 and July 28, 1995, respectively.
24
Note D. Property, Plant, and Equipment.
- -----------------------------------------------------------
1996 1995
- -----------------------------------------------------------
Land $ 762 $ 757
Buildings and improvements 8,364 8,320
Machinery and equipment 13,086 12,607
Construction-in-progress 128 104
------- -------
22,340 21,788
Less accumulated depreciation 15,265 13,451
------- -------
$ 7,075 $ 8,337
------- -------
------- -------
- -----------------------------------------------------------
Note E. Other Assets.
- -----------------------------------------------------------
1996 1995
- -----------------------------------------------------------
Investment in Geomation, Inc. $ 387 $ 501
Note Receivable - Geomation, Inc. 500 --
Cash value of life insurance 933 868
Intangibles, net of accumulated
amortization of $556,854 and $426,096 360 281
------- -------
$2,180 $1,650
------- -------
------- -------
- -----------------------------------------------------------
In September of 1993, the Company acquired, for $500,000, approximately 18
percent of the outstanding stock of Geomation, Inc., a manufacturer of data
collection, management, and control systems used in the environmental and
geotechnical industries. The Company's investment has been recorded using
the equity method of accounting, because the Company exercises significant
influence over the operating and financial policies of Geomation, Inc. The
resulting goodwill of approximately $371,000 is being amortized over a period
of 20 years. The amortization of goodwill and the Company's share of
Geomation's earnings (loss) were approximately $19,000 and ($95,000),
respectively for fiscal 1996, and $19,000 and $6,000, respectively for fiscal
1995. During the fiscal year the Company and Geomation, Inc. agreed to delay
the acquisition of Geomation, Inc. for one year until the first quarter of
fiscal 1998. At the time of the agreement the Company loaned Geomation, Inc.
$500,000 at 8.25 percent interest. The loan and interest is payable either on
the effective date of the acquisition of Geomation, Inc. by Isco, Inc. or on
September 30, 1997, should Isco, Inc. elect not to acquire Geomation, Inc.
Note F. Accrued Expenses.
- ----------------------------------------------------------
1996 1995
- ----------------------------------------------------------
Salaries, wages, and commissions $ 829 $ 850
Profit sharing contribution 97 383
Vacation/personal time 519 598
Property, payroll, and sales tax 200 154
Restructuring charges 1,119 --
Other 179 212
------- -------
$2,943 $2,197
------- -------
------- -------
- -----------------------------------------------------------
25
Note G. Income Taxes.
Income tax expense consists of:
- ---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------
Federal:
Current $618 $1,346 $1,572
Deferred (468) -- (210)
State:
Current 276 216 256
Deferred (75) -- (32)
Foreign:
Current 9 9 8
----- ------ ------
$360 $1,571 $1,594
----- ------ ------
----- ------ ------
- ---------------------------------------------------------------
The provision for income taxes is reconciled with the amount of income taxes
computed at the federal statutory rate as follows:
- --------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------
Computed "expected"
federal tax expense $ 458 $1,749 $1,725
State income taxes,
net of federal tax benefit 71 177 169
Foreign income taxes 9 9 8
Research and development credits (7) (2) (71)
Exempt foreign sales
corporation income (70) (70) (68)
Tax-exempt income (292) (239) (209)
Prior year federal & state income
tax adjustments 166 19 7
Other 25 (72) 33
----- ------ ------
$ 360 $1,571 $1,594
----- ------ ------
----- ------ ------
- ---------------------------------------------------------------
26
The July 26, 1996 and July 28, 1995 components of deferred income tax assets
and liabilities resulting from temporary differences between financial and tax
reporting are as follows:
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Deferred assets:
Uniform capitalization of inventory costs $ 381 $ 439 $ 349
Securities valuations 119 168 175
Vacation/personal time 139 157 147
Write-down of inventory -- -- 72
Restructuring charges 334 -- --
Write-down of property 189 -- --
Capital loss carry forward 38 41 55
Reserve for doubtful accounts 27 28 23
Deferred warranty income 15 16 15
Other 18 21 18
------ ----- -----
Total deferred assets 1,260 870 854
------ ----- -----
Deferred liabilities:
Depreciation 908 1,017 1,114
Uniform capitalization of inventory costs 43 64 85
Prepaid expenses 138 163 32
BETI contribution 74 55 44
Other 46 14 15
Total deferred liabilities 1,209 1,313 1,290
------ ----- -----
Net deferred liabilities(assets) $ (51) $ 443 $ 436
------ ----- -----
------ ----- -----
- -------------------------------------------------------------------------------
At July 26, 1996, the Company had a net capital loss carry forward of
approximately $101,000 which expires in fiscal year 2000.
Note H. Short-term Borrowing.
At July 26, 1996, the Company had available a $3,000,000 unsecured line of
credit which expires December 31, 1996. The Company had no outstanding
borrowings against its line of credit during the fiscal years ended July 26,
1996 and July 28, 1995.
Note I. Stock Option Plans.
In July 1985, the Company adopted the 1985 Stock option Plan (the "Plan"),
which authorized the future issuance of up to 174,570 shares to officers and
key employees. During the fiscal year 1995, 7,695 shares, representing the
options never granted under the matured plan, lapsed. All remaining options
under a prior plan adopted in 1981 expired in 1994. Under both plans,
options had 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 ten years from the date of grant. Generally, options
become exercisable in ratable annual installments over the option term.
27
Stock option activity under the Plan was as follows:
- -------------------------------------------------------------------------------
Incentive Stock Options
-------------------------------
Shares Option Price
-------- --------------
Outstanding at July 30, 1993 126,443 $ 9.78 - 13.04
Granted 40,000 10.00
Exercised -- --
Canceled (3,968) 9.78
-------
Outstanding at July 29, 1994 162,475 10.00 - 13.04
Granted 4,400 10.13
Exercised -- --
Canceled (3,680) 13.04
-------
Outstanding at July 28, 1995 163,195 10.00 - 13.04
Granted -- --
Exercised -- --
Canceled (10,005) 13.04
Outstanding at July 26, 1996 153,190 10.00 - 13.04
-------
-------
- -------------------------------------------------------------------------------
At July 26, 1996, 41,580 shares were exercisable at prices ranging $10.00 -
$13.04
Note J. Retirement Plan.
The Company has a defined contribution retirement plan covering its United
States-based employees satisfying 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
$97,000, $383,000, and $378,000 for the fiscal years 1996, 1995, and 1994,
respectively.
A 401(k) salary reduction feature is incorporated into the retirement plan.
Under the terms of the plan, an employee may reduce his or her salary by up to
12%. The Company will match the reduction, up to 10%, with a 20% matching
contribution. The combined amount is then contributed to the plan on behalf of
the employee. During fiscal years 1996, 1995, and 1994, the Company made
matching contributions under the 401(k) salary reduction feature of
approximately $148,000, $140,000, and $133,000, respectively.
Note K. Restructuring Charges.
Operating expenses for the year ended July 26, 1996, include a pre-tax charge of
$1,752,000 for the restructuring costs associated with the merger of the
Company's two divisions and are comprised of the following:
1996
------
Workforce reduction costs $1,165
Write down of facility 500
Other restructuring costs 87
------
$1,752
------
------
The restructuring resulted in the elimination of approximately 40 positions.
The Company provided severance payments and outplacement services for the
28
terminated employees with costs of approximately $877,000 and $212,000,
respectively. Substantially all of the restructuring charges will be paid in
fiscal 1997.
As a result of the restructuring, one of its operating facilities will be sold.
As required by SFAS No. 121 the Company wrote down the facility to its estimated
fair value.
Note L. Supplemental Cash Flow Information.
During fiscal years 1996, 1995, and 1994, the Company made income tax payments
of approximately $305,000, $2,184,000, and $842,000, respectively.
Note M. Segment Reporting.
The Company designs, manufactures, and markets two types of technical
instruments. Water quality monitoring instruments include wastewater samplers
and flow measuring devices used by industry and government to monitor compliance
with water quality regulations. Separation instruments are used by research,
testing, analytical, and process laboratories to perform life science research;
to support the development and production of high quality food, chemical, and
pharmaceutical products; and environmental compliance testing.
Identifiable assets are assets used in the operations of each segment.
Corporate assets consist, primarily, of cash, investments, refundable income
taxes, deferred income taxes, other current assets, and other assets.
Segment information
- -------------------------------------------------------------------------------
Water
quality
monitoring Separation
1996 instruments instruments Consolidated
- ------------------------------ ----------- ----------- ------------
Net sales $27,050 $12,931 $39,981
------- -------- -------
Operating income (loss) $ 1,393 $(1,508) $ (115)
------- -------
Investment income 1,088
Other 374
-------
Earnings before income taxes $ 1,347
-------
Depreciation and amortization $ 1,141 $ 790 $ 1,931
------- -------- -------
Capital expenditures $ 443 $ 497 $ 940
------- -------- -------
Identifiable assets $11,552 $ 9,768 $21,320
------- -------- -------
Corporate assets $25,384
-------
Total assets $46,704
-------
-------
- ------------------------------------------------------------------------
29
Segment information (continued)
- -------------------------------------------------------------------------------
Water
quality
monitoring Separation
1995 instruments instruments Consolidated
- ------------------------------ ----------- ----------- ------------
Net sales $28,739 $13,045 $41,784
------- -------- -------
Operating income (loss) $ 4,601 $ (893) $ 3,708
------- --------
Investment income 938
Other 499
-------
Earnings before income taxes $ 5,145
------- -------- -------
Depreciation and amortization $ 1,202 $ 900 $ 2,102
------- -------- -------
Capital expenditures $ 471 $ 654 $ 1,125
------- -------- -------
Identifiable assets $12,769 $ 9,389 $22,158
------- -------- -------
Corporate assets $23,608
-------
Total assets $45,766
-------
-------
- -------------------------------------------------------------------------------
Water
quality
monitoring Separation
1994 instruments instruments Consolidated
- ------------------------------ ----------- ----------- ------------
Net sales $26,280 $12,426 $38,706
------- ------- -------
Operating income $ 3,581 $ 179 $ 3,760
------- -------
Investment income 697
Other 616
-------
Earnings before income taxes $ 5,073
-------
Depreciation and amortization $ 1,069 $ 876 $ 1,945
------- -------- -------
Capital expenditures $ 421 $ 329 $ 750
------- -------- -------
Identifiable assets $12,274 $ 7,633 $19,907
------- -------- -------
Corporate assets $24,059
-------
Total assets $43,966
-------
-------
- -------------------------------------------------------------------------------
Note N. International sales.
- --------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------
Europe $ 5,075 $4,327 $3,436
Asia 3,122 2,822 2,172
North America 1,238 1,120 1,115
Other 1,228 1,103 1,332
------- ------ ------
$10,663 $9,372 $8,055
------- ------ ------
------- ------ ------
- --------------------------------------------------------------
Note O. Subsequent event.
On August 21, 1996, the Company acquired certain assets and assumed certain
liabilities of Suprex Corporation (Suprex). Suprex was the Company's leading
competitor in the SFE market. For its year ended December 31, 1995, Suprex had
revenues of $4,279,000 and a net loss of $802,000.
The transaction will be accounted for as a purchase. The assets acquired
consist of certain accounts receivable, inventories, equipment and certain
30
intangible assets which include all customer lists, copyrights, trademarks,
trade names, and patents of Suprex. The $2,850,000 of funding required to
complete the transaction was financed through cash equivalents and proceeds
from the sale of long-term available-for-sale securities.
31
Statements of Earnings by Quarter. (unaudited)
(Columnar amounts in thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- ----------------- ---------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------- ------ ------ ------ ------ ------- ------
Net sales $9,752 $10,264 $9,940 $10,431 $9,781 $11,451 $10,509 $9,638
Cost of sales 4,307 3,893 4,467 4,014 4,320 5,020 4,697 4,251
------ ------- ------ ------ ------ ------ ------- ------
5,445 6,371 5,473 6,417 5,461 6,431 5,812 5,387
------ ------- ------ ------ ------ ------ ------- ------
Expenses:
Selling, general and
administrative 4,024 3,828 3,856 4,208 3,978 4,492 3,920 3,902
Research and engineering 1,117 1,125 1,180 1,169 1,130 1,098 1,349 1,076
Restructuring charges -- -- -- -- -- -- 1,752 --
------ ------- ------ ------ ------ ------ ------- ------
5,141 4,953 5,036 5,377 5,108 5,590 7,021 4,978
------ ------- ------ ------ ------ ------ ------- ------
Operating income(loss) 304 1,418 437 1,040 353 841 (1,209) 409
Non-operating income 364 336 368 366 486 441 244 294
------ ------- ------ ------ ------ ------ ------- ------
Earnings(loss) before
income taxes 668 1,754 805 1,406 839 1,282 (965) 703
Income taxes(benefit) 190 605 185 419 251 426 (266) 121
------ ------- ------ ------ ------ ------ ------- ------
Net earnings(loss) $ 478 $ 1,149 $ 620 $ 987 $ 588 $ 856 $ (699) $ 582
------ ------- ------ ------ ------ ------ ------- ------
------ ------- ------ ------ ------ ------ ------- ------
Net earnings(loss)
per share $.09 $.21 $.12 $.18 $.11 $.16 $(.13) $.11
------ ------- ------ ------ ------ ------ ------- ------
------ ------- ------ ------ ------ ------ ------- ------
Weighted average shares
outstanding 5,356 5,378 5,352 5,378 5,352 5,370 5,354 5,355
------ ------- ------ ------ ------ ------ ------- ------
Quarterly per share amounts may not add to annual total due to rounding.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
32
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 12, 1996, 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 12, 1996, 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 12, 1996, 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.
page
a. The following documents are filed as a part of this report: number
1. Financial Statements:
Independent Auditors' Report 15
Consolidated Statements of Earnings for fiscal years
ended July 26, 1996, July 28, 1995, and July 29, 1994 16
Consolidated Balance Sheets at July 26, 1996 and July 28, 1995 17
Consolidated Statements of Shareholders' Equity
for fiscal years ended July 26, 1996, July 28, 1995,
and July 29, 1994 18
Consolidated Statements of Cash Flows for fiscal years
ended July 26, 1996, July 28, 1995, and July 29, 1994 19
Notes to Consolidated Financial Statements 21
Financial statements of the Registrant's subsidiaries are
omitted because the Registrant is, primarily, an operating
company and the subsidiaries are wholly-owned.
2. Schedules:
Valuation and Qualifying Accounts - Schedule II 36
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.
33
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(continued)
page
number
b. Reports on Form 8-K filed for the three months ended July 26, 1996:
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) -
(11) Computation of Net Earnings Per Share 36
(21) Registrant owns 100 percent of the outstanding capital
stock of Isco Instruments (Europe) AG, a Swiss corporation. -
Registrant owns 100 percent of the outstanding capital
stock of Isco, Ltd.,a Barbados corporation,(incorporated
August 3, 1992). -
(23) Independent Auditors' Consent 37
(27) Financial Data Schedule 38
(99) Plan Year 1996 Financial Statements of the Isco, Inc.
Retirement Plu$ Plan 39
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ISCO, INC.
By: /s/Robert W. Allington By: /s/Philip M. Wittig
______________________________ _______________________________
Robert W. Allington, Philip M. Wittig, Treasurer,
Chief Executive Officer, Chief Financial Officer,
and Director and Director
Date: October 23, 1996 Date: October 23, 1996
By: /s/Douglas M. Grant By: /s/Vicki L. Benne
______________________________ _______________________________
Douglas M. Grant, President, Vicki L. Benne, Controller
Chief Operating Officer,
and Director
Date: October 23, 1996 Date: October 23, 1996
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:
______________________________ _______________________________
Dale L. Young, Secretary James L. Linderholm,
and Director Director
Date: October 23, 1996 Date: October , 1996
By: By: /s/Harris Wagenseil
______________________________ _______________________________
Robert B. Harris, Harris Wagenseil,
Director Director
Date: October , 1996 Date: October 23, 1996
35
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
(Amounts in thousands)
Balance
Balance at Charged to at
beginning cost and Amounts end of
of period expenses written-off period
--------- ---------- ----------- -------
Allowance for doubtful accounts:
Year ended July 26, 1996 $74 $81 $83 $72
Year ended July 28, 1995 62 20 8 74
Year ended July 29, 1994 57 31 26 62
36