SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-1 of the Exchange Act). Yes  o  No  ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 23, 2003.

 

 

 

ISCO, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
	Item 3.	Legal Proceedings
	Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

 

2

 

ISCO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

(Amounts in thousands, except per share data)

 

		Three months ended						Nine months ended
		Apr 25 2003			Apr 26 2002			Apr 25 2003			Apr 26 2002
Net sales		$	15,057		$	14,139		$	44,813		$	44,105
Cost of sales		7,358			6,865			21,048			21,272
		7,699			7,274			23,765			22,833
Operating expenses:
Selling, general and administrative (Note 8)		5,975			5,568			18,512			16,472
Research and engineering		1,602			1,460			4,837			4,073
		7,577			7,028			23,349			20,545
Income from operations		122			246			416			2,288
Other income (expense):
Investment income		108			171			440			524
Interest expense		(52		)	(65		)	(179		)	(215		)
Other, net		50			158			136			79
		106			264			397			388
Income before income taxes		228			510			813			2,676
Provision for income taxes		6			203			170			978
Net income		$	222		$	307		$	643		$	1,698
Basic earnings per share		$	0.04		$	0.05		$	0.11		$	0.30
Diluted earnings per share		$	0.04		$	0.05		$	0.11		$	0.29
Cash dividends per share		$	0.06		$	0.05		$	0.18		$	0.10
Weighted average number of shares outstanding-basic		5,704			5,667			5,686			5,663
Additional shares assuming exercise of common stock equivalents and dilutive stock options		139			262			158			233
Weighted average number of shares outstanding-diluted		5,843			5,929			5,844			5,896

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

ISCO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Columnar amounts in thousands)

 

		Apr 25 2003			Jul 26 2002
Assets
Current assets:
Cash and cash equivalents		$	1,687		$	633
Short-term investments		4,237			5,646
Accounts receivable - trade, net of allowance for doubtful accounts of $130,000 and $144,000		9,640			9,901
Inventories (Note 3)		9,925			9,046
Refundable income taxes		204			—
Deferred income taxes		1,224			1,345
Other current assets		1,323			1,136
Total current assets		28,240			27,707
Property and equipment, net of accumulated depreciation of $17,681,000 and $16,091,000		14,172			14,535
Long-term investments		7,114			9,334
Other assets (Note 4)		4,382			4,302
Total assets		$	53,908		$	55,878
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	1,358		$	1,303
Accrued expenses		3,316			4,057
Income taxes payable		—			176
Short-term borrowing		2,035			1,909
Current portion of long-term debt		785			1,131
Total current liabilities		7,494			8,576
Deferred income taxes		373			720
Long-term debt, less current portion		547			1,006
Commitments and contingencies
Shareholders’ equity
Preferred stock, $.10 par value, authorized 5,000,000 shares; issued none		—			—
Common stock, $.10 par value, authorized 15,000,000 shares; issued and outstanding 5,724,338 and 5,672,346		572			567
Additional paid-in capital		38,687			38,371
Retained earnings		6,220			6,602
Accumulated other comprehensive income (Note 5)		15			36
Total shareholders’ equity		45,494			45,576
Total liabilities and shareholders’ equity		$	53,908		$	55,878

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

ISCO, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Columnar amounts in thousands)

 

		Nine Months Ended
		Apr 25 2003			Apr 26 2002
Cash flows from operating activities:
Net income		$	643		$	1,698
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		1,875			1,828
Stock-based compensation		100			321
Deferred income taxes		(210		)	293
Gain on sale of property and equipment		(310		)	(154		)
Provision for doubtful accounts		23			22
Undistributed (income) losses of AFTCO		18			(39		)
Change in operating assets and liabilities:
Accounts receivable-trade		302			(94		)
Inventories		(730		)	(195		)
Refundable income taxes		(204		)	460
Other current assets		(165		)	(48		)
Accounts payable		314			683
Accrued expenses		(770		)	195
Income taxes payable		(176		)	178
Other		(392		)	(134		)
Total adjustments		(325		)	3,316
Cash flows from operating activities		318			5,014
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		7,350			700
Proceeds from maturity of held-to-maturity securities		2,630			9,750
Purchase of held-to-maturity securities		(497		)	(4,654		)
Purchase of available-for-sale securities		(5,934		)	(10,606		)
Proceeds from sale of property and equipment		422			331
Purchase of property and equipment		(1,504		)	(1,420		)
Other		(50		)	185
Cash flows from investing activities		2,417			(5,714		)
Cash flows from financing activities:
Cash dividends paid		(1,025		)	(566		)
Net change in short-term borrowings		(30		)	137
Repayment of long-term debt		(848		)	(790		)
Issuance of common stock and exercise of stock options		222			75
Cash flows from financing activities		(1,681		)	(1,144		)
Cash and cash equivalents:
Net increase (decrease)		1,054			(1,844		)
Balance at beginning of year		633			2,675
Balance at end of period		$	1,687		$	831

 

See Note 7 for supplemental cash flow information.

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

ISCO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

April 25, 2003

 

(Unaudited)

(Columnar amounts in thousands, except per share data)

 

Note 1:  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments necessary for a fair presentation of the financial position of the Company and the results of operations and cash flows for the interim periods presented herein.  All such adjustments are of a normal recurring nature.  Results of operations and cash flows for the current unaudited interim period are not necessarily indicative of the results that may be expected for the entire fiscal year. Inter–company transactions and accounts have been eliminated.

 

While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Annual Report on

Form 10-K for the year ended July 26, 2002.

 

Note 2:  The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on July 27, 2002. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives shall not be amortized and shall be tested for impairment on an annual basis.  There was no impairment that resulted from adoption of this standard.  The Company discontinued the amortization of equity method goodwill relating to the AFTCO joint venture upon adoption of this standard.  Goodwill and other identifiable intangible assets with indefinite lives are not amortized and are tested annually for impairment. Impairment occurs when the fair value of the asset is less than its carrying amount.  Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. Impairment occurs when the fair value of the asset is less than its carrying amount. If impaired, the intangible asset is written down to its fair value.  The after tax impact of adopting this standard in fiscal 2002 would have been to increase fiscal 2002 earnings for the three and nine months ended April 26, 2002 by approximately $19,000 and $57,000, respectively. Basic and diluted earnings per share would have increased by $0.0 and $0.1 per share for the three and nine months, respectively.

 

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company is evaluating whether to adopt the fair value based method of accounting for stock-based compensation, and the alternative methods of transition for such a change. If the Company were to elect to change to the fair value based method using the retroactive restatement alternative under SFAS No. 148, the Company estimates the additional compensation expense associated with stock-based compensation would reduce earnings by approximately $0.05per share for fiscal 2003. Actual results may differ.

 

6

 

Note 3:  Inventories are valued at the lower of cost or market, principally on the last–in, first–out (LIFO) basis.  The composition of inventories was as follows:

 

		Apr 25, 2003			July 26, 2002
Raw Materials		$	3,306		$	3,076
Work-in-process		3,222			3,173
Finished goods		3,397			2,797
		$	9,925		$	9,046

 

Had inventories been valued on the first–in, first–out (FIFO) basis, they would have been approximately $2,230,000 and $2,307,000 higher than reported on the LIFO basis at April 25, 2003 and July 26, 2002, respectively.

 

Note 4:  Other assets were comprised of the following as of April 25, 2003 and July 26, 2002:

 

		Apr 25, 2003			Jul 26, 2002
Intangibles, net of accumulated amortization of $769,000 and $672,000		$	917		$	1,014
Investment in AFTCO		544			563
Cash value of life insurance		1,387			1,335
Notes receivable - related party		1,050			1,000
Other		484			390
		$	4,382		$	4,302

 

The Company expects amortization expense on intangibles, all of which are subject to amortization, to be approximately $130,000 for fiscal year 2003 and approximately $113,000 for each of the five succeeding years.

 

7

 

Note 5:  Comprehensive income, for the three month and nine month periods ended April 25, 2003 and April 26, 2002, was as follows:

 

		Three months ended						Nine months ended
		Apr 25 2003			Apr 26 2002			Apr 25 2003			Apr 26 2002
Net income		$	222		$	307		$	643		$	1,698
Other comprehensive income (loss), net of income tax (tax benefit):
Foreign currency translation adjustment		32			7			(2		)	(9		)
Unrealized holding gains (losses) on available-for-sale securities		(9		)	(3		)	(19		)	(13		)
Comprehensive income		$	245		$	311		$	622		$	1,676

 

Note 6:  As permitted by SFAS 123, the Company accounts for its stock-based compensation on the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  For those options granted to employees as fixed award stock options and non-employee directors’ stock options, no stock-based employee compensation expense related to the Company’s stock option plans is reflected in net income, as all options granted as fixed awards or to non-employee directors had an exercise price equal to market value of the underlying common stock on the date of grant.  Pro forma information regarding net income and earnings per share is required by SFAS No. 148.  This information is presented as if the Company had accounted for all stock-based awards under the fair value method:

 

 

		Three months ended						Nine months ended
		Apr 25 2003			Apr 26 2002			Apr 25 2003			Apr 26 2002
Net income, as reported		$	222		$	307		$	643		$	1,698
Less: Stock-based compensation determined under the fair value based method, net of income tax (tax benefit):		(91		)	(25		)	(272		)	(74		)
Add: Stock-based employee compensation expense included in reported net income, net of income tax (tax benefit):		(11		)	67			42			257
Pro forma net income		$	120		$	349		$	413		$	1,881
Earnings per share:
Basic-As Reported		$	0.04		$	0.05		$	0.11		$	0.30
Basic-Pro forma		$	0.02		$	0.06		$	0.07		$	0.33
Diluted-As Reported		$	0.04		$	0.05		$	0.11		$	0.29
Diluted-Pro forma		$	0.02		$	0.06		$	0.07		$	0.32

 

8

 

Note 7:  Supplemental Cash Flow Information

 

The Company made income tax payments of $759,000 and $23,000 during the nine-month periods ended April 25, 2003 and April 26, 2002, respectively.

 

The Company made interest payments of $179,000 and $215,000 during the nine-month periods ended April 25, 2003 and April 26, 2002, respectively.

 

Note 8:  Involuntary Terminations

 

In January 2003, the Company’s Board of Directors eliminated two corporate officer positions: Vice President of Sales and Marketing and Vice President of Corporate Development.  In April 2003, an additional reorganization activity occurred resulting in the elimination of approximately 14 operating staff positions.  In connection with the involuntary terminations, severance and related costs of approximately $0.2 million and $0.4 million were recorded during the three-month and nine-month periods ended April 25, 2003, respectively.  These costs are included in selling, general and administrative expenses and accrued expenses in the condensed consolidated financial statements.  The severance costs will be paid within a year from the termination date, with the majority being paid by the end of fiscal year 2003.

 

Note 9:  Legal Proceedings

 

The Company continues its activities related to its SWIFT column products and to the filed lawsuits by and against Cornell Research Foundation, Inc.  The final hearing related to the scope of the Company’s license was held in early April and post hearing and reply briefs were filed in May.  A decision on the scope of Isco’s license is expected in June.  All other legal actions remain in their preliminary stages. The Company intends to pursue these matters vigorously and believes that it will prevail whether through court action or through any court-ordered or party-agreed-to arbitration.  Details on these lawsuits can be found in Isco’s annual report on Form 10-K for fiscal year 2002 under Part I, Item 3, Legal Proceedings.

 

The Company began selling the new SWIFT columns late in the fourth quarter of fiscal 2002.  At this time, the revenues from SWIFT columns are not material to the overall revenues of the Company.  The Company continues to invest in infrastructure to build and expand this business.  Details on the Company’s investments in this area can be found in Isco’s annual report on Form 10-K for fiscal year 2002 under the section entitled “Factors Affecting Future Results” in Part I, Item 2, Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

Note 10:  New Accounting Pronouncements

 

In November 2002, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others (FIN 45).  The initial recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002.  The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002.  There was no significant impact on the Company’s consolidated financial statements as a result of adopting FIN 45.

 

9

 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Actual results could differ materially from those projected in the forward-looking statements within this document.

 

Results of Operations

 

The following table sets forth, for the three-month and nine-month periods indicated, the percentages which certain components of the Condensed Consolidated Statements of Operations bear to net sales and the percentage of change of such components (based on actual dollars) compared with the same periods of the prior year.

 

		Three months ended						Nine months ended
		Apr 25 2003		Apr 26 2002		Change		Apr 25 2003		Apr 26 2002		Change
Net sales		100.0		100.0		6.5		100.0		100.0		1.6
Cost of sales		48.9		48.6		7.2		47.0		48.2		(1.1	)
		51.1		51.4		5.8		53.0		51.8		4.1
Operating expenses:
Selling, general, & administrative		39.7		39.4		7.3		41.3		37.4		12.4
Research & engineering		10.6		10.3		9.7		10.8		9.2		18.8
		50.3		49.7		7.8		52.1		46.6		13.6
Income from operations		0.8		1.7		(50.4	)	0.9		5.2		(81.8	)
Other income (expense):
Investment income		0.7		1.2		(36.8	)	1.0		1.2		(16.0	)
Interest expense		(0.3	)	(0.5	)	(20.0	)	(0.4	)	(0.5	)	(16.7	)
Other, net		0.3		1.2		(68.4	)	0.3		0.2		72.2
		0.7		1.9		(59.8	)	0.9		0.9		2.3
Income before income taxes		1.5		3.6		(55.3	)	1.8		6.1		(69.6	)
Provision for income taxes		0.0		1.4		(97.0	)	0.4		2.2		(82.6	)
Net income		1.5		2.2		(27.7	)	1.4		3.9		(62.1	)

 

Net Sales Analysis and Review

 

Our sales for the three-month and nine-month periods ended April 25, 2003 were $15.1 million and $44.8 million, respectively.  For the periods under review, our sales were 6 percent and 2 percent higher than for the respective periods of last year. Sales of core products (wastewater samplers, flow meters, and liquid chromatography products) of $11.3 million for the quarter and $34.3 million for the nine-month period, were up 4 percent and 3 percent, respectively, as compared to the same periods of last year.  In each of the periods, liquid chromatography and sampler products provided increased sales over the prior year, offset by a reduction in sales of flow meters.  Sales of our non-core products (process monitoring, supercritical fluid extraction (SFE) and syringe pump products) of $2.8 million for the quarter and $7.9 million for the nine-month period were up 24 percent and down 3 percent, respectively, compared to the same periods of last year. The quarterly improvement was due to the timing of shipments between quarters.         For the nine-month period, the strong increase in sales of syringe pumps was offset by declines in SFE and process monitoring product sales.

 

10

 

U.S. sales for the three months and nine months were up 2 percent in each period.  U.S. sales of our core products for the same periods increased 3 percent and 2 percent, respectively, over the comparable periods of fiscal 2002.  Samplers and liquid chromatography products posted increases offset by a decrease in flow meter sales for both the three-month and nine-month periods.  U.S. sales of our non-core products were up 10 percent and 4 percent, respectively, as compared to the same period of last year.  SFE and syringe pump sales increased for the quarter, while process monitoring sales were down.  For the nine-month period, sales of syringe pumps accounted for the increase offset by declines in process monitoring and SFE product sales.

 

International sales for the three months were up 17 percent over the prior year while sales for the nine-month period were at the same level as the previous year.  Sales of our core products for the same periods were up 8 percent and 6 percent, respectively, over last year. The increase for the three month period was driven by increased sales of liquid chromatography products while the increase in the nine-month sales was driven by increased sales of samplers.  International sales of our non-core products for the three months and nine months increased by 35 percent and decreased by 7 percent, respectively.  Sales of process monitoring and SFE products drove the increased sales for the three-month period while the decline for the nine-month period was driven by decreases in sales of SFE and syringe pump products.

 

During the three months and nine months, we received net orders of $14.8 million and $43.9 million, respectively. Net orders received were up 3 percent and up 2 percent compared to the same periods last year.  The order backlog at April 25, 2003 was $4.4 million, down approximately 17 percent from the beginning of the fiscal year.

 

Net Income Analysis and Review

 

We generated net income of $222,000 and $643,000, respectively, for the three months and nine months ended April 25, 2003 compared with net income of $307,000 and $1,698,000, respectively, for the same periods last year.

 

Our net income for the third quarter and nine months of fiscal 2003 was down approximately $0.1 million and $1.1 million, respectively from the prior year.  Our income from operations for the third quarter and nine months of fiscal 2003 was down approximately $0.1 and $1.9 million, respectively, compared with the same periods of fiscal 2002.  The primary factor in both of these declines was due to increased operating expenses in both dollars and as a percentage of sales.  For the quarter, the primary source of increased revenues were our international sales, which carry lower margins and resulted in a slight decline in the gross margin as a percentage of sales compared to the prior year.  Positive shifts in the mix of our product lines resulted in gross margins, as a percentage of sales, of 53.0 percent for the nine-month period compared with 51.8 percent for the same period last year and provided additional gross margin dollars of $0.6 million.

 

The increase in operating expenses was driven by increases in both sales, general and administrative (SG&A) expenses and engineering expenses.  The majority of the increase was in SG&A, which increased by approximately $0.4 million and $2.0 million for the quarter and nine-month periods, respectively, over the prior year.  The three and nine-month results were impacted by severance costs associated with organizational restructuring of approximately $0.2 million and $0.4 million, respectively.  Note 8 to the consolidated financial statements contains details on the recent restructuring.  In addition, our expenses, including legal fees, related to SWIFT increased by approximately $0.3 million and $1.0 million of the three-month and nine-month periods, respectively.  The remainder of the SG&A increase, for the nine-month period, was due to the increased expenditure levels associated with our commitment to build the marketing and sales infrastructure to capitalize on market and technology opportunities in process monitoring and the drug discovery applications of liquid chromatography as well as increases in general wages, increased benefit costs, and the replacement of an international dealer.  Our commitment to build the marketing and sales infrastructure to capitalize on market and technology opportunities in process monitoring, columns and drug discovery applications of liquid chromatography and SWIFT are discussed in detail in our annual report on Form 10-K under the section titled “Factors Affecting Future Results.”  Engineering expenses increased for the quarter and nine months by $0.1 and $0.8 million, respectively, primarily from higher levels of outsourced product development activities.

 

11

 

Other income decreased by $158,000 and increased by $9,000, for the three-month and nine-month periods ended April 25, 2003, respectively, as compared to the same periods of the previous year.  The decline for the quarter was due to significantly lower operating results from AFTCO, Isco’s joint venture and from reduced investment returns.  While our average investment balances were higher in the current year, lower yield rates resulted in a decrease in investment income for the three-month and nine-month periods as compared with last year.  Interest expense also decreased slightly for the three month and nine month comparison due to our continued ability to reduce our outstanding fixed debt.

 

Our effective income tax rate for the three months and nine months ended April 25, 2003 was 2.3 percent and 20.9 percent, respectively. For the same periods last year our effective income tax rates were 39.8 percent and 36.5 percent, respectively.The largest impacts on the effective tax rate changes from the prior comparative periods were a result of exchange rate changes on foreign net operating loss carryforwards and the minimal absolute dollar amount of net income for the quarter and nine months ended April 25, 2003.

 

Financial Condition and Liquidity

 

Our overall cash and investments decreased to $13.0 million at April 25, 2003 from $15.6 million at the end of fiscal year 2002, a decrease of $2.6 million.  Operating activities generated $0.3 million of cash during the first nine months of fiscal 2003 compared with generating $5.0 million during the same period last year.  The decline in net income for the nine-month period accounted for approximately $1.1 million of the $4.7 million decline, with the adjustments for depreciation and amortization and other non operating assets and liabilities declining slightly.  The change in operating assets and liabilities resulted in a net reduction of approximately $2.7 million in operating cash flow, primarily driven by changes in the level of accounts payable and accrued balances and increases in income tax payments.  During fiscal 2002, we received the benefits of U.S. net operating loss carry forwards to offset that year’s income tax liabilities.  These benefits were fully utilized in fiscal 2002.

 

We invested the cash generated from maturities of investments of $10.0 million into long-term and short-term investments of $6.4 million.  We utilized the remaining cash available from investment maturities to purchase a net of $1.1 million in equipment, used cash of $0.9 million for the repayment of long and short term bank obligations and used $1.0 million for dividends.  Our net cash and cash equivalents position increased by $1.1 million for the first nine months of fiscal 2003 compared to a net decrease of $1.8 million in the first nine months of fiscal 2002.

 

At April 25, 2003, we had working capital of $20.7 million and a current ratio of 3.8:1.  At period-end, our total long-term debt was $1.3 million with $0.8 million payable within the next year.  In addition, we had lines of credit with various banks totaling $7.0 million of which approximately $4.8 million was available for future business needs.

 

12

 

New Accounting Pronouncements

 

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company is evaluating whether to adopt the fair value based method of accounting for stock-based compensation, and the alternative methods of transition for such a change. If the Company were to elect to change to the fair value based method using the retroactive restatement alternative under SFAS No. 148, the Company estimates the additional compensation expense associated with stock-based compensation would reduce earnings by approximately $0.05 per share for fiscal 2003. Actual results may differ.

 

In November 2002, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others (FIN 45).  The initial recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002.  The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002.  There was no significant impact on the Company’s consolidated financial statements as a result of adopting FIN 45.

 

Critical Accounting Policies

 

Accounts Receivable

Accounts receivable consist primarily of amounts due to us from normal business activities.  We maintain an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on a combination of past collection history, aging of outstanding accounts receivables, and specific risks identified in the portfolio.

 

Inventories

Inventories consist of purchased materials, raw materials, in-process subassemblies, and finished goods.  Inventory obsolescence cost has not historically been material and as a result we do not carry a reserve for obsolescence for the majority of our inventory.  We review our inventory balances to determine if inventories can be sold at amounts equal to or greater than their carrying amounts.  The review includes identification of slow-moving inventories, obsolete inventories, and discontinued products or lines of products.  The identification process includes a review of historical performance of the inventory and current operational plans for the inventory.  If our actual results differ from our expectations with respect to the inventory sales at amounts equal to or greater than their carrying amounts, we would be required to adjust our inventory balances accordingly.  We use the link-chain method for valuing the majority of our inventory on a LIFO basis.  Our pre-tax earnings were $77,000 higher for the nine months ended April 25, 2003 than if the inventories were carried on a FIFO basis.

 

Revenue Recognition

Revenues are recorded when products are shipped to customers or, in instances where service is performed to customer requirements, upon the successful completion of such service.  We are generally not contractually obligated to accept returns, except for defective products.  Sales are shown net of returns and discounts.

 

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Stock-Based Compensation

We have elected to account for fixed award stock options and nonemployee directors’ options under the provisions of APB No. 25 Accounting for Stock Issued to Employees.  As such, no compensation cost has been recorded in the financial statements relative to these options.  We utilize the Black-Scholes option pricing model to estimate the fair value of these options for disclosure purposes.

 

We account for performance based awards granted under our employee stock option plans in accordance with the provisions of APB 25.  Options granted under the performance based awards are subject to variable accounting treatment until the number of options that will vest is known.  Options not vested at the end of each performance year are cancelled.  Compensation expense is recorded based on the difference between the closing market price at the date the shares vest and the exercise price as determined at the date the shares were granted.

 

Deferred stock units granted to nonemployee directors are accounted for in accordance with Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation.  Accordingly, director’s deferred stock units are recorded as compensation expense at estimated fair value on the date the units are earned by the director.

 

Joint Venture

We account for our investment in the AFTCO joint venture using the equity method of accounting.

 

Factors Affecting Future Results

 

The first nine months of fiscal 2003 have been just as challenging as anticipated in our annual report on Form 10-K for fiscal 2002.  We were expecting challenges related to growth in the areas of net sales, net income, and cash flow.  The third quarter results were consistent with the first part of the fiscal year related to growth in all three areas.  Net sales growth in the area of water quality continues to be adversely affected by global economic and political conditions.  In addition, the reduced sales growth rate of liquid chromatography products focused on drug discovery applications that began late in the second quarter continued throughout the third quarter due to continued pressure upon pharmaceutical firms to reduce spending and increase profits.  At this time, we anticipate that all these negative conditions will continue into the last quarter of the current fiscal year and into next fiscal year.

 

Our net income continues to be negatively impacted by lower than expected net sales growth coupled with our commitment to incur expenses related to building and maintaining marketing and sales infrastructure to capitalize on market and technology opportunities in process monitoring, SWIFT media and instruments, and drug discovery applications of liquid chromatography.  We believe our continued commitment to these investments can deliver long-term value for our shareholders, as opposed to reducing our commitment to strive for a year-over-year increase in net income.

 

Our cash flows continue to be impacted by a lower net sales growth rate and reduced operating income along with the negative impact from our return to remitting income taxes.  Cash flows in the prior two fiscal years benefited from the utilization of net operating losses carry forwards.  While we are committed to improving our working capital management, we do not believe these improvements will offset the effect of the above items.

 

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Market Risk

 

Interest rate risk and currency exchange risks are the primary market risks to which we are exposed.  We do not use derivative financial or commodity instruments.  Our other financial instruments include cash and cash equivalents, accounts and notes receivable, accounts and notes payable and long-term debt.  Our cash and cash equivalents, accounts and notes receivable, and accounts and notes payable balances are generally short-term in nature and do not expose our company to material market risk.  At April 25, 2003, we had approximately $1.3 million of fixed rate debt.  In addition, we had $7.0 million of variable rate credit facilities, of which approximately $2.0 million was outstanding under these credit facilities.  We do not believe that changes in interest rates on the debt and credit facilities would have a material effect on our results of operations, given our current obligations under these debt and credit facilities.

 

Related to currency exchange, international sales of our United States based operations are denominated in U.S. dollars and international sales of our German subsidiary are denominated in Euros.  The currency exchange risk at the current level of activity is not material to our operating results or financial position.  Our market risk resulting from the translation of the profit and loss of STIP and from our permanent investment in our foreign subsidiaries is not material.

 

There have been no material changes during the first nine months of fiscal 2003 with respect to the Company’s contractual obligations.  Details of the Company’s contractual obligations can be found in the Management’s Discussion and Analysis of Results of Operations and Financial Condition section of the Company’s fiscal 2002 Annual Report on Form 10-K.

 

Inflation

 

Inflation has not had, and is not expected to have, a material impact upon the Company’s operations.  The effect of inflation on our costs and our ability to pass on cost increases in the form of increased prices is dependent upon market conditions and the competitive environment.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this item is included in the section entitled “Market Risk” in Part I, Item 2, Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

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Item 4.  CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer.  Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported with the time periods specified in Securities and Exchange Commission rules and forms.

 

(b) Changes in Internal Control.

There are no significant changes in the Company’s internal controls or, to the Company’s knowledge, in other factors that could significantly affect such internal controls subsequent to the date of the Company’s evaluation of its internal controls.

 

PART II - OTHER INFORMATION

 

Item 3.  Legal Proceedings

 

The Company continues its activities related to its SWIFT column products and to the filed lawsuits by and against Cornell Research Foundation, Inc.  The final hearing related to the scope of the Company’s license was held in early April and post hearing and reply briefs were filed in May.  A decision on the scope of Isco’s license is expected in June.  All other legal actions remain in their preliminary stages. The Company intends to pursue these matters vigorously and believes that it will prevail whether through court action or through any court-ordered or party-agreed-to arbitration.  Details on these lawsuits can be found in Isco’s annual report on Form 10-K for fiscal year 2002 under Part I, Item 3, Legal Proceedings.

 

The Company began selling the new SWIFT columns late in the fourth quarter of fiscal 2002.  At this time, the revenues from SWIFT columns are not material to the overall revenues of the Company.  The Company continues to invest in infrastructure to build and expand this business.  Details on the Company’s investments in this area can be found in Isco’s annual report on Form 10-K for fiscal year 2002 under the section entitled “Factors Affecting Future Results” in Part I, Item 2, Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

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Item 6.      Exhibits and Reports on Form 8-K

 

(a)	Exhibits;
Exhibit 99.1			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K:  The Company furnished a Current Report on Form 8-K dated June 5, 2003, announcing earnings for the quarter ended April 25, 2003 and attaching a press release related thereto

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	ISCO, INC.
Date:  June 4, 2003	BY	/s/  Robert W. Allington
			Robert W. Allington
			Chairman and Chief Executive Officer

 

 

Date:  June 4, 2003	BY	/s/  Vicki L. Benne
			Vicki L. Benne
			Chief Financial Officer and Treasurer

 

 

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CERTIFICATIONS

 

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Public Law Number107-204), the Chief Executive Officer of the Company certifies that:

 

1)                                      I have reviewed the report;

 

2)                                      Based upon my knowledge, this report does not contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3)                                      Based upon my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the period presented in this report;

 

4)                                      The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)                                     evaluated the effectiveness of the Company’s disclosure controls and procedures within 90 days prior to the filing date of this report (the “Evaluation Date”);

 

c)                                      presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5)                                      The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company board of directors (or persons performing equivalent functions):

 

a)                                      all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize, and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

 

6)                                      The Company’s other certifying officers have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

By: /s/ Robert W. Allington
Robert W. Allington		Date:  June 5, 2003
Chief Executive Officer

 

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Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Public Law Number107-204), the Chief Financial Officer of the Company certifies that:

 

1)                                      I have reviewed the report;

 

2)                                      Based upon my knowledge, this report does not contain any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3)                                      Based upon my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the period presented in this report;

 

4)                                      The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)                                     evaluated the effectiveness of the Company’s disclosure controls and procedures within 90 days prior to the filing date of this report (the “Evaluation Date”);

 

c)                                      presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5)                                      The Company’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company board of directors (or persons performing equivalent functions):

 

a)                                      all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize, and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

 

6)                                      The Company’s other certifying officers have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

By: /s/ Vicki L. Benne
Vicki L. Benne		Date:  June 5, 2003
Chief Financial Officer & Treasurer

 

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