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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 25, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
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 26, 1997, 5,672,092 shares of Common Stock of Isco, Inc.,
were outstanding and the aggregate market value of such Common Stock held by
nonaffiliates was approximately $23,952,000.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held December 11,
1997 - 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 products worldwide which are used by industry and government to
monitor compliance with water quality regulations and are used in a variety
of research and testing laboratories and by industry to monitor product
quality.
The Company's founder, Robert W. Allington, has been the controlling
shareholder, chairman of the board, and 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 July 1996, after operating for many years with two divisions, the Company
merged the divisions into one operating unit. The merger included the
consolidation of the management of the functional activities of the Company.
During fiscal year 1997, the Company acquired substantially all of the assets
and assumed selected liabilities of Suprex Corporation, Pittsburgh,
Pennsylvania. The Company integrated all of the operational activities into
its Lincoln, Nebraska, operations during the fiscal year. Suprex was a
significant producer of supercritical fluid extraction (SFE) products with a
major focus in the food industry. Leading food producers are incorporating
the SFE technology into their production processes in order to ensure that
high quality food is produced. Combining the Suprex and Isco SFE product
lines has strengthened the Company's market position in SFE.
RECENT DEVELOPMENTS
Subsequent to the close of fiscal year 1997, the Company acquired the
remaining equity of Geomation, Inc., Golden, Colorado. Geomation designs,
manufactures, and markets measurement and control systems for the
geotechnical and environmental markets. More than 70 percent of its sales
are in dam monitoring applications. Geomation's technology and expertise in
field data collection and transmission are capabilities which are
increasingly being required by Isco's wastewater and flow meter customers.
Geomation will continue its operations in Golden, Colorado as a subsidiary of
Isco.
PRODUCTS AND APPLICATIONS
The contribution made by the Company's core products to its net sales for
fiscal 1997, 1996, and 1995, respectively, is as follows: wastewater
samplers 34, 35, and 34 percent; open channel flow meters 20, 19, and
20 percent; and liquid chromatography 12, 14, and 12 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 record the
2
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,
syringe pumps, and closed pipe flow meters. SFE is a safe, cost-effective,
environmentally friendly, and time saving technique used to separate selected
chemical compounds (target analytes) from complex sample matrices. The
Company's food, agri-products, 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'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
accuracy at high pressures 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
$20,000 for water quality monitoring instruments and $300 to $20,000 for
separation instruments. The price for a complete SFE system can exceed
$75,000.
MARKETING AND SALES
During fiscal 1997, the Company's products were sold to approximately 11,000
domestic accounts. These accounts included a wide variety of commercial and
industrial enterprises, municipalities in all 50 states, and governmental
organizations.
In the United States, independent manufacturers' representative organizations
handle the solicitation of orders and direct sales of water quality
monitoring products. Domestic selling activities for chemical separation
instruments are conducted by direct company sales representatives assigned to
specific products and located in major domestic market areas for those
products. The manufacturers' representatives and company sales
representatives are supported
3
with promotional programs, advertising, applications specialists, applications
bulletins, technical literature, and applications seminars.
The Company's international sales constituted 26, 27, and 22 percent of the
Company's sales during fiscal 1997, 1996, and 1995, respectively. 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. The staff of Isco
Instruments (Europe) AG, a wholly owned subsidiary, manages and promotes the
sale of the Company's environmental products through Isco's independent
dealers in Europe and the Middle East. The independent dealers in the other
countries are managed by sales management currently residing in Lincoln. The
Company has an applications laboratory and a sales manager in the United
Kingdom to support its separation instrument sales effort in Europe and the
Middle East.
CUSTOMERS
The Company has a broad customer base. Currently no single customer,
including any OEM customer, accounts for more than three percent of its sales.
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 analyzers. 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., owned by the Danaher Corporation. According to various sources,
the Company believes it has approximately 40 percent of the domestic
wastewater sampler market, with American Sigma, Inc., having approximately 30
percent. Other domestic competitors are small and offer little significant
competition.
4
Significant competitors in Europe include: Buhler-Montec, recently
acquired by Servomex plc; and Endress + Hauser Instruments, of Switzerland.
There are numerous suppliers in the domestic open channel flow meter market.
Based upon market information 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 20 to
25 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: Buhler-Montec,
recently acquired by Servomex plc; 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.
With the acquisition of Suprex, the consolidated Isco/Suprex product line
positioned the Company as the SFE equipment market leader with approximately
40 percent market share. Management estimates that its competitors,
Hewlett-Packard Company, Applied Separations, Inc., and Leco Corporation each
have a market share of less than 20 percent.
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 1997, 1996, and 1995, the Company
spent approximately $4,526,000 or 11 percent of sales, $4,775,000 or
12 percent of sales, and $4,468,000 or 11 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 50 United States patents, 47 of which are
owned by Isco, and 3 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 by the inventor on a royalty-free basis.
The Company currently has 29 patent applications pending at the United States
Patent Office.
5
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 26, 1997, the Company's order backlog was $3,626,000, of which
approximately 85 percent is scheduled for delivery prior to July 31, 1998,
the close of the current fiscal year. A year earlier, on September 27, 1996,
the order backlog was $3,283,000.
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 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 26, 1997, the Company had, worldwide, 423 employees of whom 213
were engaged in production, 64 in research and engineering, 95 in marketing
and sales, and 51 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.
6
These facilities currently house the corporate, executive and administrative
offices along with its sales, research, engineering, manufacturing, and
maintenance activities. A 56,000 square foot expansion of the Superior Street
facility is currently underway. The expansion and renovation of this facility
along with the complete consolidation of operations are expected to be completed
in fiscal 1999. When the consolidation is complete, steps will be taken for the
disposition of the Westgate property.
The sales management function of the Swiss subsidiary is conducted from the
residence of the manager. The Company's European SFE applications laboratory
is located in space provided by the Company's dealer in Wales.
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 1997, 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 26, 1997 -- 5,672,092 shares outstanding and
approximately 349 shareholders of record.
Market: Over-the-counter (NASDAQ/NMS). Symbol: ISKO
Stock price: The high and low bid prices of the common stock and the cash
dividends paid for each quarter during the last two fiscal years are shown
below:
COMMON STOCK PRICE RANGE
------------------------------------ CASH DIVIDENDS
1997 1996 PER SHARE
----------------- ---------------- --------------
HIGH LOW HIGH LOW 1997 1996
---- --- ---- --- ---- ----
First quarter $10.250 $9.625 $12.250 $10.125 $.05 $.05
Second quarter 9.250 8.500 10.875 8.000 .05 .05
Third quarter 9.000 7.750 9.750 8.000 .05 .05
Fourth quarter 9.000 7.750 13.000 9.000 .05 .05
- ------------------------------------------------------------------------------
Dividends: On August 21, 1997, the Board of Directors declared a quarterly
cash dividend of $.05 per share, payable October 1, 1997 to shareholders of
record on September 19, 1997.
7
ITEM 6. SELECTED FINANCIAL DATA.
- -------------------------------
Amounts in thousands except per share data.
FISCAL YEAR
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
For the fiscal year:
Net sales $40,733 $39,981 $41,784 $38,706 $37,644
Gross margin 22,760 22,191 24,606 22,971 22,490
Operating income(loss)** 12 (115) 3,708 3,760 3,255
Non-operating income 1,565 1,462 1,437 1,313 1,183
Income taxes 251 360 1,571 1,594 1,244
Net earnings 1,326 987 3,574 3,479 3,435
At fiscal year-end:
Current assets 28,958 21,414 25,292 25,946 23,686
Working capital 25,255 17,437 22,529 22,836 21,239
Total assets 46,708 46,704 45,766 43,966 42,225
Long-term debt 0 0 0 0 0
Shareholders' equity 42,480 42,002 42,002 39,745 38,592
Average shares
outstanding* 5,356 5,353 5,370 5,485 5,488
Per share data:
Net earnings per share* $.25 $.18 $.67 $.63 $.63
Cash dividends per
share (declared)* $.20 $.20 $.20 $.19 $.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 a 15 percent stock dividend distributed on December 9, 1993.
** Fiscal 1996 includes restructuring charges of $1,752,000 associated with the
consolidation of the divisions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS.
- -------------
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAIN TREND ANALYSIS AND OTHER FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-
LOOKING STATEMENTS THROUGHOUT THIS DOCUMENT AS A RESULT OF THE FACTORS SET FORTH
BELOW IN THE SECTION ENTITLED "FACTORS EFFECTING FUTURE RESULTS" AND ELSEWHERE
IN THIS DOCUMENT.
8
SALES ANALYSIS AND REVIEW
1997 to 1996 Comparison
Fiscal 1997 sales of $40,733,000 were two percent above fiscal 1996 sales of
$39,981,000. Compared with the previous year, sales of the Company's core
products (wastewater samplers, open channel flow meters, and liquid
chromatography products) were one percent higher. Sales of the other products
such as supercritical fluid extraction (SFE) products, syringe pumps, and total
organic carbon (TOC) analyzer products were six percent higher.
Domestic sales of the core products increased six percent over fiscal 1996 while
international sales of those products declined 12 percent. Domestic sales of
the other products declined six percent in fiscal 1997 while international sales
of the other products increased 25 percent.
Net orders of $42,130,000 were received during fiscal 1997, an increase of
nearly nine percent compared with fiscal 1996. International orders, primarily
from Europe, were up 9.5 percent and domestic orders were 8.2 percent above the
prior year. The July 25, 1997 order backlog was $3,828,000, up 50 percent from
the beginning of the fiscal year. Initiatives that increased available sales
management resources along with the investment in a higher level of applications
support for environmental products contributed significantly to the growth of
domestic and European orders received. Similar efforts are now being directed
to the Asian Pacific Rim market and to the other product groups, including
liquid chromatography.
1996 to 1995 Comparison
Fiscal 1996 sales of $39,981,000 were four percent below fiscal 1995 sales of
$41,784,000. Compared with the previous year, sales of the Company's core
products declined five percent, while sales of the other products declined
two percent.
Fiscal 1996 domestic sales of the core products declined 12 percent when
compared with 1995, while international sales of these products increased
26 percent. For the comparable periods, domestic sales of the other products
increased one percent while international sales of these products declined
nine percent.
Net orders of $38,818,000 were received during fiscal 1996, a decline of nearly
seven percent compared with fiscal 1995. The July 26,1996 order backlog was
$2,546,000, down 23 percent from the beginning of the fiscal year.
OPERATING INCOME ANALYSIS AND REVIEW
1997 to 1996 Comparison
Operating income for fiscal 1997 was $12,000 compared with an operating loss of
$115,000 for fiscal 1996 which included a one-time restructuring charge of
$1,752,000. The gross margin, as a percent of sales, improved slightly from
55.5 percent for fiscal 1996 to 55.9 percent for fiscal 1997. As a result of the
July 1996 restructuring, indirect salaries and wages along with benefit expenses
were reduced. Depreciation expense declined for the year due to certain
facility improvements and several major pieces of equipment reaching
9
the end of their depreciable lives. Overall, for fiscal 1997, indirect
manufacturing expenses were reduced 13 percent.
Compared with fiscal 1996, aggregate operating expenses for fiscal 1997
increased $442,000. That increase includes $930,000 of transition and
amortization expenses related to the Suprex acquisition completed during the
year.
The majority of the growth in the selling expense portion of the selling,
general and administrative (SG&A) expense category was the result of
increased salaries and wages for additional staff to support new sales
initiatives and provide a higher level of applications support for
environmental products; exhibition, travel, marketing, and communication
expenses; and commissions and dealer management expenses. The majority of
the growth in general and administrative expenses was the result of increased
consulting fees for business process improvement, the selection of enterprise
resource planning (ERP) software, improved manufacturing processes, and more
efficient building layout; company wide computer training; communication
expense, and depreciation of the upgraded computer hardware.
The decline in engineering expenses, for fiscal 1997, was the result of
decreased salaries and wages along with lower benefit expenses, and the
completion in fiscal 1996 of an out-sourced development project. These
savings were partially off-set by the increased consulting fees for training
in computer-aided design (CAD) and consultation for product styling.
1996 to 1995 Comparison
The operating loss for fiscal 1996 was nearly $115,000 compared with
operating income of $3,708,000 for fiscal 1995. The gross margin, as a
percent of sales, declined from 58.9 percent in fiscal 1995 to 55.5 percent
in fiscal 1996. Indirect manufacturing expenses, for fiscal 1996 declined
five percent from the previous year.
Compared with fiscal 1995, aggregate operating expenses for fiscal 1996
increased $1,408,000. That increase included a one-time charge of $1,752,000
related to the restructuring of the Company during July 1996.
For fiscal 1996, the selling expense portion of the SG&A expense category
declined with a majority of the decline coming from reduced expenditures for
the management of rep/dealer organization, materials and supplies, and
miscellaneous marketing programs. With respect to the general and
administrative expenses, reductions in the Company's profit sharing
contribution and professional fees were partially offset by increased
salaries and wages and increased credit and collection expenses. The
increase in engineering expenses was the result of increases in expenditures
for subcontracted services, salaries and wages, and materials and supplies.
10
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.
Year-to-Year
Increase (Decrease)
Year Ended -------------------
-------------------------- 1997 1996
Jul 25 Jul 26 Jul 28 vs. vs.
1997 1996 1995 1996 1995
------ ------ ------ ---- ----
Net sales 100.0 100.0 100.0 1.9 (4.3)
Cost of sales 44.1 44.5 41.1 1.0 3.6
------ ------ ------
55.9 55.5 58.9 2.6 (9.8)
------ ------ ------
Expenses:
Selling, general, and
administrative 44.8 39.5 39.3 15.5 (4.0)
Research and engineering 11.1 11.9 10.7 (5.2) 6.9
Restructuring charges -- 4.4 -- -- --
------ ------ ------
55.9 55.8 50.0 2.0 6.7
------ ------ ------
Operating income (loss) -- (.3) 8.9 -- --
Non-operating income 3.8 3.7 3.4 6.9 1.7
------ ------ ------
Earnings before income taxes 3.8 3.4 12.3 17.0 (73.8)
Income taxes .6 .9 3.8 (30.3) (77.1)
------ ------ ------
Net earnings 3.3 2.5 8.5 34.3 (72.4)
====== ====== ======
1997 to 1996 Comparison
The Company's fiscal year 1997 effective income tax rate was 15.9 percent
compared with 26.7 percent for the previous year. The decline in the current
year's effective income tax rate was the result of minimal taxable income and a
large amount of tax-exempt income. The fiscal year 1996 effective income tax
rate includes the repayment of non-qualifying tax benefits (see following
paragraph).
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 effective
income tax rate was the result of lower taxable income relative to increased
tax-exempt income. The effective income tax rate was also affected by the
Company's decision to cancel its incentive tax contract with the State of
Nebraska which required the repayment of approximately $89,000 of non-qualifying
tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to be strong financially with no debt obligations. At
July 25, 1997, working capital was $25,255,000 with a current ratio of 7.8:1.
At July 25, 1997, the Company had in place, with its commercial bank, an unused,
unsecured $3 million line of credit.
11
With respect to cash flows, operating activities of the Company used $263,000 of
cash during fiscal 1997 compared with fiscal 1996 when the Company's operating
activities provided $5,324,000 of cash. Inventories grew over fiscal 1996 by
$1,899,000 as a result of management's efforts to respond to the increased rate
of incoming orders. Increased sales during the last part of the fourth quarter
resulted in an increase in accounts receivable of $1,147,000.
The Company will have significant cash needs in fiscal 1998 as it completes the
expansion and renovation of the Superior Street facility along with installing
significantly more efficient production machinery. The expansion is expected to
require $10 million to $11.25 million through the second quarter of fiscal 1999
when the renovation is completed. The acquisition and installation of the ERP
system is expected to require approximately $1.7 million. Additional cash needs
will arise out of the recent acquisition of Geomation, Inc. and other
opportunities which have recently presented themselves. Depending upon the
timing of specific cash requirements, the Company may need to use its bank line
of credit.
RECENT DEVELOPMENTS
On September 17, 1997, the Company acquired the remaining equity of Geomation,
Inc. The acquisition required approximately $929,000 in cash and the issuance of
318,853 shares of the Company's common stock. The transaction also included an
earn-out provision which, depending upon the performance of Geomation through
July 1998, may require the payment of up to approximately $250,000 of additional
cash and the issuance of additional shares of the Company's common stock with a
market value of up to approximately $750,000. Depending upon the performance of
Geomation and the amortization of intangibles resulting from the acquisition,
management expects the Company will experience some dilution of earnings during
the next several years.
FACTORS AFFECTING FUTURE RESULTS
Factors which management believes may affect the future financial performance of
the Company include but are not limited to: the successful implementation of
manufacturing and business processes which will reduce costs and improve
efficiency; the investment in engineering and marketing activities which lead to
improved sales growth; the successful integration of acquisitions into the
Company's operations; dealing with the external regulatory influences on the
Company's primary markets; and the effect on the competitive environment
resulting in the consolidation of companies within the instrumentation industry.
During fiscal 1997, the Company invested in initiatives which, when fully
implemented, are expected to improve the effectiveness and efficiency of its
business and manufacturing processes. The investment in these initiatives will
continue during fiscal 1998, with the benefits of successful implementation to
be realized fully in the fiscal years beginning in 1999.
The Company will continue to invest approximately 10 percent of sales in product
development. Management will direct these efforts to those projects which it
believes will contribute significantly to profitable sales growth. Management
must also develop the marketing strategies which will focus energy and resources
in those areas which will assist in growing sales profitably and thereby
diluting the fixed cost structure of the Company.
12
The Company continues to actively pursue the acquisition of companies and
product lines which will compliment its existing product lines. The recent
acquisition of Geomation, Inc. provides the Company with access to field data
collection and transmission technology and expertise. It is management's
expectation that this technology can be adapted to meet the needs of the
Company's sampler and flow meter customers. Management expects the adaptation
to be completed in fiscal 1999.
Approximately 65 percent of the Company's sales are to the environmental
market. This is a regulation driven market which is strongly influenced by
both the perceived attitude and actions of the various governmental agencies
in the promulgation and the enforcement of environmental regulations. The
effects of the regulatory climate on the market are outside the Company's
ability to control and, for any given period, may be either a positive or
negative factor on the Company's performance.
As in many industries, consolidation of companies within the Company's market is
an on-going trend. As a result, the Company is dealing with the effects of
larger and well financed competitors who also have the organizational resources
to compete aggressively in the global market place.
INFLATION
The effect of inflation on the costs of the Company and its ability to pass on
cost increases in the form of increased selling 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.
13
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 25, 1997 and July 26, 1996, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended July 25, 1997. 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 25, 1997 and July 26, 1996, and the results of their operations and their
cash flows for each of the three years in the period ended July 25, 1997 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
September 26, 1997
14
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands, except per share data)
Year Ended
--------------------------------
July 25 July 26 July 28
1997 1996 1995
------- ------- -------
Net sales $40,733 $39,981 $41,784
Cost of sales 17,973 17,790 17,178
------- ------- -------
22,760 22,191 24,606
------- ------- -------
Expenses:
Selling, general, and administrative 18,222 15,779 16,430
Research and engineering 4,526 4,775 4,468
Restructuring charges (Note K) -- 1,752 --
------- ------- -------
22,748 22,306 20,898
------- ------- -------
Operating income(loss) 12 (115) 3,708
------- ------- -------
Non-operating income:
Investment income 930 1,088 938
Other 635 374 499
------- ------- -------
1,565 1,462 1,437
------- ------- -------
Earnings before income taxes 1,577 1,347 5,145
Income taxes (Note G) 251 360 1,571
------- ------- -------
Net earnings $ 1,326 $ 987 $ 3,574
======== ======= ========
Net earnings per share $.25 $.18 $.67
==== ==== ====
Weighted average number of shares outstanding 5,356 5,353 5,370
======== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
15
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)
July 25 July 26
1997 1996
Assets ----------- --------
Current assets:
Cash and cash equivalents $ 1,810 $ 4,420
Short-term investments (Note B) 8,813 2,749
Accounts receivable, trade, net of
allowance for doubtful accounts
of $82,320 and $72,027 8,456 7,131
Inventories (Note C) 8,005 5,343
Refundable income taxes 69 26
Deferred income taxes (Note G) 481 776
Other current assets 1,324 969
------- -------
Total current assets 28,958 21,414
Property, plant, and equipment (Note D) 7,144 7,075
Long-term investments (Note B) 6,602 16,035
Other assets (Note E) 4,004 2,180
------- -------
Total assets $46,708 $46,704
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,325 $ 862
Accrued expenses (Note F) 2,321 2,943
Income taxes payable 57 172
------- -------
Total current liabilities 3,703 3,977
------- -------
Deferred income taxes (Note G) 525 725
Commitments and contingencies (Note P)
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 36,846 36,838
Retained earnings 6,683 6,428
Net unrealized gain(loss) on
available-for-sale securities 14 (198)
------- -------
44,141 43,666
Less treasury stock, at cost, 625,299
and 626,607 shares 1,661 1,664
------- -------
Total shareholders' equity 42,480 42,002
------- -------
Total liabilities and shareholders' equity $46,708 $46,704
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
16
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
NET
UNREALIZED
GAIN (LOSS)
COMMON STOCK ADDITIONAL ON AVAILABLE- TREASURY STOCK
--------------------- PAID-IN RETAINED FOR-SALE --------------------
SHARES AMOUNT CAPITAL EARNINGS SECURITIES SHARES AMOUNT
------ ------ ---------- -------- ------------- ------ ------
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
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
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)
Net earnings -- -- -- 1,326 -- -- --
Issuance of Stock -- -- 8 -- -- (1,308) 3
Cash dividends ($0.20 per share) -- -- -- (1,071) -- -- --
Net change in net unrealized
gain (loss) on available-
for-sale securities -- -- -- -- 212 -- --
--------- ---- ------- ------ ----- ------- -------
Balance, July 25, 1997 5,978,538 $598 $36,846 $6,683 $ 14 625,299 $(1,661)
========= ==== ======= ====== ===== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
17
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(columnar amounts in thousands)
YEAR ENDED
----------------------------------
JULY 25 JULY 26 JULY 28
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net earnings $ 1,326 $ 987 $ 3,574
Adjustments to reconcile net earnings to
net cash flows from
operating activities:
Depreciation and amortization 2,234 1,931 2,102
Deferred income taxes (32) (543) --
(Gain) loss on sale of investments 86 (6) (7)
Gain on sale of property, plant, and
equipment (268) (193) (147)
Provision for doubtful accounts 126 81 20
Loss on impairment of assets -- 500 --
Change in operating assets and liabilities:
Accounts receivable, trade-(increase) (1,147) (262) (864)
Inventories-(increase) decrease (1,899) 1,469 (1,538)
Refundable income taxes-(increase) decrease (42) 446 (472)
Other current assets-(increase) decrease 207 (414) (128)
Accounts payable-increase (decrease) 87 316 (65)
Accrued expenses-increase (decrease) (733) 746 (144)
Income taxes payable-increase (decrease) (115) 152 (138)
Other (93) 114 12
------- ------- -------
Total adjustments (1,589) 4,337 (1,369)
------- ------- -------
Cash flows provided by (used for)
operating activities (263) 5,324 2,205
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of available-for-sale
securities 3,328 91 11
Proceeds from maturity of available-for-
sale securities -- 105 4
Proceeds from maturity of held-to-maturity
securities 770 6,261 6,079
Proceeds from sale of property, plant, and
equipment 340 225 178
Purchase of available-for-sale securities (556) (8,371) (290)
Purchase of held-to-maturity securities -- (476) (5,184)
Purchase of property, plant, and equipment (1,394) (940) (1,125)
Disbursement for issuance of note receivable (305) (500) --
Purchase of Suprex assets (2,701) -- --
Other (758) (292) (171)
------- ------- -------
Cash flows used for investing activities (1,276) (3,897) (498)
------- ------- -------
18
ISCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(columnar amounts in thousands)
YEAR ENDED
----------------------------------
JULY 25 JULY 26 JULY 28
1997 1996 1995
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (1,071) (1,070) (1,074)
Purchase of stock -- -- (253)
------- ------- -------
Cash flows used for financing activities (1,071) (1,070) (1,327)
------- ------- -------
Cash and cash equivalents:
Net increase (decrease) (2,610) 357 380
Balance at beginning of year 4,420 4,063 3,683
------- ------- -------
Balance at end of year $ 1,810 $ 4,420 $ 4,063
======= ======= =======
See Note L for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated financial
statements.
19
ISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended July 25, 1997, July 26, 1996 and July 28, 1995
(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 products worldwide which are used by industry and
government to monitor compliance with water quality regulations and are used in
a variety of research and testing laboratories and by industry to monitor
product quality.
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated. Investments in
which the Company exercises significant influence over operating and financial
policies are accounted for using the equity method.
For fiscal reporting purposes, the Company operates under a 52/53 week year,
ending on the last Friday of July.
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
periods. Actual results could differ from those estimates.
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, net of tax, in a separate component of shareholders' equity. The
Company held no trading securities during the periods reported and generally
does not trade securities. Sales of available-for-sale securities are
recognized using the first-in, first-out method.
Inventories--Inventories are valued at the lower of cost or market, principally
on the last-in, first-out (LIFO) basis.
20
Long-Lived Assets--During fiscal 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 (SFAS No. 121) "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". 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 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. As discussed in Note K, the adoption of this statement
resulted in a pre-tax charge of $500,000 during fiscal 1996.
Property, Plant, and Equipment--Property, plant, and equipment are stated at
historical costs. Depreciation is provided using the straight-line and
declining balance methods over estimated useful asset lives of 10 to 35 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
Other Assets--Intangible assets are amortized on a straight-line basis over
estimated useful lives of 3 to 20 years.
Revenue Recognition--Sales of products and services are recorded based on
shipment of products or performance of services. Revenue from extended warranty
contracts is deferred and recognized on a pro rata basis over the life of the
contracts.
Foreign Currency Translation--The 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.
21
Net Earnings Per Share--Net earnings per share are based on the weighted average
number of common and common equivalent shares outstanding. 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.
Reclassifications--Certain reclassifications have been made to the prior years'
financial statements to conform to the current year's presentation.
Accounting Pronouncements: Statement of Financial Accounting Standards No. 128
"Earnings Per Share", Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income", and Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and Related
Information", have been issued by the Financial Accounting Standard Board. The
Company does not expect the adoption of these statements to be material to the
consolidated financial statements. Basic earnings per share will be equivalent
to primary earnings per share for the years ended July 25, 1997, July 26, 1996,
and July 28, 1995.
Note B. Investments.
As of July 25, 1997:
- -------------------------------------------------------------------------------------------------------
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ------ --------
Short-term investments:
Held-to-maturity
securities:
State and municipal
securities $ 500 $ 1 $ -- $ 501 $ 500
Available-for-sale
securities:
Mutual funds 4,268 -- (64) 4,204 4,204
State and municipal
securities 4,092 17 -- 4,109 4,109
------- --- ---- ------- -------
Total short-term
investments 8,860 18 (64) 8,814 8,813
------- --- ---- ------- -------
Long-term investments:
Held-to-maturity
securities:
State and municipal
securities 250 -- (1) 249 250
Available-for-sale
securities:
State and municipal
securities 6,026 43 -- 6,069 6,069
Preferred stock 258 25 -- 283 283
------- --- ---- ------- -------
Total long-term
investments 6,534 68 (1) 6,601 6,602
------- --- ---- ------- -------
$15,394 $86 $(65) $15,415 $15,415
======= === ==== ======= =======
22
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
======= === ==== ======= =======
The contractual maturities of securities range from less than one year to
fifteen years. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of available-for-sale securities during fiscal years 1997,
1996, and 1995 were $3,328,000, $91,000, and $11,000, respectively. Gross gains
of $0, $6,000, and $11,000 and gross losses of $86,000, $0, and $4,000 were
recognized in fiscal 1997, 1996, and 1995, respectively.
23
Note C. Inventories.
1997 1996
---- ----
Raw materials $3,389 $2,049
Work-in-process 2,755 1,935
Finished goods 1,861 1,359
------ ------
$8,005 $5,343
====== ======
Had inventories been valued on the first-in, first-out (FIFO) basis, they would
have been approximately $1,344,000 and $1,275,000 higher than reported on the
LIFO basis at July 25, 1997 and July 26, 1996, respectively.
Note D. Property, Plant, and Equipment.
1997 1996
---- ----
Land $ 762 $ 762
Buildings and improvements 8,368 8,364
Machinery and equipment 14,767 13,086
Construction-in-progress 469 128
------- -------
24,366 22,340
Less accumulated depreciation 17,222 15,265
------- -------
$ 7,144 $ 7,075
======= =======
Note E. Other Assets.
1997 1996
---- ----
Investment in Geomation, Inc. $ 480 $ 387
Note Receivable - Geomation, Inc. -- 500
Note Receivable - AMJ, Inc. 241 --
Cash value of life insurance 996 933
Intangibles, net of accumulated
amortization of $1,174,000 and $557,000 2,247 360
Other 40 --
------ ------
$4,004 $2,180
====== ======
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
(losses) were approximately $19,000 and $112,000, respectively for fiscal 1997,
and $19,000 and ($95,000), respectively for fiscal 1996. The Company acquired
the remaining outstanding common stock of Geomation on September 17, 1997, as
discussed in Note O. The Company's acquisition of Suprex, Inc. is discussed in
Note N.
24
Note F. Accrued Expenses.
______________________________________________________________________________
1997 1996
_______________________
Salaries, wages, and commissions $1,063 $ 829
Profit sharing contribution 112 97
Vacation/personal time 569 519
Property, payroll, and sales tax 343 200
Restructuring charges 6 1,119
Other 228 179
------ ------
$2,321 $2,943
====== ======
______________________________________________________________________________
Note G. Income Taxes.
Income tax expense consists of:
______________________________________________________________________________
1997 1996 1995
---- ---- ----
Federal:
Current $215 $ 618 $1,346
Deferred (58) (468) --
State:
Current 58 276 216
Deferred 26 (75) --
Foreign:
Current 10 9 9
---- ---- ----
$251 $ 360 $1,571
==== ===== ======
The provision for income taxes is reconciled with the amount of income taxes
computed at the federal statutory rate as follows:
1997 1996 1995
---- ---- ----
Computed "expected" federal tax expense $ 536 $ 458 $1,749
Alternative minimum tax 181 -- --
State income taxes,
net of federal tax benefit 72 71 177
Foreign income taxes 10 9 9
Exempt foreign sales
corporation income (111) (70) (70)
Tax-exempt income (265) (292) (239)
Prior year's federal & state income
tax adjustments (139) 166 19
Other (33) 18 (74)
---- ---- ----
$ 251 $ 360 $1,571
====== ====== ======
25
The July 25, 1997 and July 26, 1996 components of deferred income tax assets
and liabilities resulting from temporary differences between financial and
tax reporting are as follows:
______________________________________________________________________________
1997 1996
------- -------
Deferred assets:
Uniform capitalization of inventory costs $ 455 $ 338
Securities valuations -- 119
Vacation/personal time 158 139
Restructuring charges 2 334
Write-down of property 189 189
Capital loss carry forward 51 38
AMT credit carry forward 181 --
Reserve for doubtful accounts 31 27
Suprex intangibles 121 --
Deferred warranty income 16 15
Organization expenses 25 --
Other 53 18
------ ------
Total deferred assets 1,282 1,217
------ ------
Deferred liabilities:
Depreciation 872 908
Prepaid expenses 264 138
BETI contribution 92 74
Securities valuations 8 --
Other 90 46
------ ------
Total deferred liabilities 1,326 1,166
------ ------
Net deferred liabilities (assets) $ 44 $ (51)
====== ======
______________________________________________________________________________
At July 25, 1997, the Company had a net capital loss carry forward of
approximately $135,000 of which $50,000 expires in fiscal year 2000 and $85,000
expires in fiscal year 2002.
Note H. Short-term Borrowing.
At July 25, 1997, the Company had available a $3,000,000 unsecured line of
credit which expires December 31, 1997. The Company had no outstanding
borrowings against its line of credit during the fiscal years ended July 25,
1997 and July 26, 1996.
Note I. Stock Option Plans.
Isco had three stock option plans in effect at July 25, 1997: the 1985
Incentive Stock Option Plan (1985 Plan), the 1996 Stock Option Plan (1996 Plan),
and the 1996 Outside Directors' Stock Option Plan (1996 Directors' Plan). Under
each of these plans, options may be granted only during the 10 years following
the inception of the plan.
In July 1985, the Company adopted the 1985 Plan, which authorized the future
issuance of up to 174,570 shares to officers and key employees. During fiscal
1997, the Company adopted the 1996 Plan, which authorized the future issuance of
up to 250,000 shares to officers, key employees, and designated individuals.
Under both plans, qualified options are to be granted at not less than 100
percent of the fair market value of the common stock when granted. The options
26
are exercisable over a period not greater than 10 years from the date of grant.
Generally, options become exercisable in ratable annual installments over the
option term. The 1996 Plan also authorized the issuance of non-qualified
options which may be granted at not less than 80 percent of the fair market
value of the common stock when granted.
During fiscal 1997, the Company adopted the Directors' Deferred Compensation
Plan, which authorized the future issuance of up to 100,000 shares to non-
employee directors of the Company. The options are exercisable over a period
not greater than ten years from the date of grant. The options are exercisable
at the date of grant.
Stock option activity under the Plans is as follows:
__________________________________________________________________________________________________________________________________
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
------- ------------ ------ ------------ ------ ------------
Outstanding at July 29, 1994 162,475 $12.29 -- $ -- -- $ --
Granted 4,400 10.13 -- -- -- --
Exercised -- -- -- -- -- --
Canceled (3,680) 13.04 -- -- -- --
-------
Outstanding at July 28, 1995 163,195 12.22 -- -- -- --
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Canceled (10,005) 13.04 -- -- -- --
-------
Outstanding at July 26, 1996 153,190 12.16 -- -- -- --
Granted -- -- 10,000 8.13 4,000 9.63
Exercised -- -- -- -- -- --
Canceled (18,745) 13.04 -- -- -- --
------- ------ ------ ----- ----- -----
Outstanding at July 25, 1997 134,445 $12.04 10,000 $8.13 4,000 $9.63
======= ====== ====== ===== ===== =====
_________________________________________________________________________________________________________________________________
At July 25, 1997, 57,678 shares were exercisable at a weighted average option
price of $11.79.
No compensation cost has been recorded relative to the employee option plans.
The proforma effect on fiscal 1997 net earnings and earnings per share of
accounting for stock-based compensation using the fair value method required by
statement of Financial Accounting Standards No. 123 "Accounting for
27
Stock Based Compensation" is approximately $30,000 and $.01, respectively. The
fair value for options granted under the 1996 Plan was estimated at the date of
grant using the binomial option pricing model with the following assumptions:
dividend yield of 2.5 percent, expected volatility of 30 percent; risk free
interest rate of seven percent; and expected life of seven years.
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
$112,000, $97,000, and $383,000 for the fiscal years 1997, 1996, and 1995,
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 1997, 1996, and 1995, the Company made
matching contributions under the 401(k) salary reduction feature of
approximately $138,000, $148,000, and $140,000, 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 consolidation 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
terminated employees with costs of approximately $877,000 and $212,000,
respectively. Substantially all of the restructuring charges were paid in
fiscal 1997.
As a result of the restructuring, one of its operating facilities will be sold.
As required by SFAS No. 121, the value of the facility was reduced to its
estimated fair value.
Note L. Supplemental Cash Flow Information.
During fiscal years 1997, 1996, and 1995, the Company made income tax payments
of approximately $435,000, $305,000, and $2,184,000, respectively.
28
Note M. International sales.
______________________________________________________________________________
1997 1996 1995
--------- --------- ------
Europe $ 5,180 $ 5,075 $4,327
Asia 3,017 3,122 2,822
North America 1,126 1,238 1,120
Other 1,059 1,228 1,103
--------- --------- ------
$10,382 $10,663 $9,372
========= ========= ======
Note N. Acquisitions.
On August 21, 1996, the Company acquired substantially all of the selected
assets and assumed selected liabilities of Suprex Corporation (Suprex), a
corporation located in Pittsburgh, Pennsylvania. The transaction was accounted
for as a purchase. The assets acquired consist of certain accounts receivable,
inventories, equipment and certain intangible assets which included customer
lists, trade names, engineering drawings, and goodwill of Suprex.
The purchase price was comprised of the following consideration:
_________________________________________________
Amount paid to seller:
Cash paid at close $2,600
Additional paid at settlement 101
Liabilities assumed:
Current liabilities 499
------
Total consideration $3,200
======
_________________________________________________
_________________________________________________
The purchase price allocation is summarized as follows:
_________________________________________________
Current assets:
Accounts receivable $ 305
Inventory 762
Property and equipment 219
Other asset(1):
Customer lists/trade names 807
Engineering drawings 304
Goodwill 803
------
$3,200
======
_________________________________________________
(1) The life of these intangibles ranges from 3 to 8 years.
29
The following unaudited pro forma financial information sets forth the results
of operations of Isco, Inc. as if the acquisition of Suprex had occurred on July
29, 1995:
Pro forma financial information (unaudited)
______________________________________________________________________________
Twelve Months ended
-------------------
7/25/97 7/26/96
------- -------
Net sales $40,733 $43,669
Net earnings (loss) 1,326 (63)
Net earnings (loss) per share $.25 $(.01)
Weighted average number of shares outstanding 5,356 5,353
______________________________________________________________________________
Note O. Subsequent Event.
On September 17, 1997, the company acquired the remaining approximately 82
percent of Geomation, Inc., Golden, Colorado. The acquisition required
approximately $929,000 in cash and the issuance of 318,853 shares of the
Company's common stock. The transaction also included an earn-out provision,
which depending upon the performance of Geomation through July 1998, may
require the payment of up to approximately $250,000 of additional cash and
the issuance of additional shares of the Company's common stock with a market
value of up to approximately $750,000. The transaction will be accounted for
as a purchase.
Note P. Commitments and contingencies.
Commitments--As of September 26, 1997, the Company has commitments totaling
approximately $3.3 million relating to building expansion.
Other--In the normal course of business, the Company is involved in various
legal actions. Management is of the opinion that none of these legal actions
will materially affect the financial position of the Company.
30
Statements of Earnings by Quarter. (unaudited)
(Columnar amounts in thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- ---------------- --------------- -----------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ----- ------- -------
Net sales $9,224 $9,752 $9,846 $9,940 10,282 $9,781 $11,381 $10,509
Cost of sales 4,156 4,307 4,448 4,467 4,228 4,320 5,141 4,697
------ ------ ------ ------ ------ ----- ------- -------
5,068 5,445 5,398 5,473 6,054 5,461 6,240 5,812
------ ------ ------ ------ ------ ----- ------- -------
Expenses:
Selling, general and
administrative 4,317 4,024 4,417 3,856 4,729 3,978 4,759 3,920
Research and engineering 1,091 1,117 1,103 1,180 1,086 1,130 1,246 1,349
Restructuring charges -- -- -- -- -- -- -- 1,752
------ ------ ------ ------ ------ ----- ------- -------
5,408 5,141 5,520 5,036 5,815 5,108 6,005 7,021
------ ------ ------ ------ ------ ----- ------- -------
Operating income (loss) (340) 304 (122) 437 239 353 235 (1,209)
Non-operating income 367 364 410 368 315 486 473 244
------ ------ ------ ------ ------ ----- ------- -------
Earnings (loss) before
income taxes 27 668 288 805 554 839 708 (965)
Income taxes (benefit) (61) 190 69 185 91 251 152 (266)
------ ------ ------ ------ ------ ----- ------- -------
Net earnings (loss) $ 88 $ 478 $ 219 $ 620 $ 463 $ 588 $ 556 (699)
====== ====== ====== ====== ====== ====== ====== =======
Net earnings (loss)
per share $.02 $.09 $.04 $.12 $.09 $.11 $.10 $(.13)
====== ====== ====== ====== ====== ====== ====== =======
Weighted average shares
outstanding 5,354 5,356 5,356 5,352 5,357 5,352 5,359 5,354
------ ------ ------ ------ ------ ----- ------- -------
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.
31
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 11, 1997, 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 11, 1997, 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 11, 1997, 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 14
Consolidated Statements of Earnings for fiscal years
ended July 25, 1997, July 26, 1996, and July 28, 1995 15
Consolidated Balance Sheets at July 25, 1997
and July 26, 1996 16
Consolidated Statements of Shareholders' Equity
for fiscal years ended July 25, 1997, July 26, 1996,
and July 28, 1995 17
Consolidated Statements of Cash Flows for fiscal years
ended July 25, 1997, July 26, 1996, and July 28, 1995 18
Notes to Consolidated Financial Statements 20
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 35
32
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(continued)
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 25, 1997:
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) -
(11) Computation of Net Earnings Per Share 35
(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). 36
(23) Independent Auditors' Consent 36
(27) Financial Data Schedule 37
(99) Plan Year 1997 Financial Statements of the Isco, Inc.
Retirement Plu$ Plan 38
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ISCO, INC.
By: /s/ Robert W. Allington By: /s/ Philip M. Wittig
------------------------- -------------------------
Robert W. Allington, Philip M. Wittig
Chief Executive Officer, Treasurer, Chief Financial
and Director Officer, and Director
Date: October 21, 1997 Date: October 21, 1997
By: /s/ Douglas M. Grant By: /s/ Vicki L. Benne
------------------------- -------------------------
Douglas M. Grant, Vicki L. Benne, Controller
President, Chief Operating
Officer, and Director
Date: October 21, 1997 Date: October 21, 1997
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 James L. Linderholm,
and Director Director
Date: October 21, 1997 Date: October 21, 1997
By: /s/ James L. Carrier By:
------------------------- -------------------------
James L. Carrier, John J. Brasch
Director Director
Date: October 21, 1997 Date:
34
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
(Amounts in thousands)
Balance at Charged to Balance
beginning cost and Amounts at end of
of period expenses written-off of period
---------- ----------- ----------- ---------
Allowance for
doubtful accounts:
Year ended July 25, 1997 $72 $126 $116 $82
Year ended July 26, 1996 74 81 83 72
Year ended July 28, 1995 62 20 8 74
______________________________________________________________________________
35