UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

Commission file number   0-14429

 

Isco, Inc.

(Exact name of registrant as specified in its charter)

 

 

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  Noo

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 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 February 20, 2004.

 

Common Stock, $0.10 par value		5,736,338
Class		Number of Shares

 

 

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 4.	Submission of Matter to a Vote of Security Holders
	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						Six months ended
		Jan 23 2004			Jan 24 2003			Jan 23 2004			Jan 24 2003
Net sales		$	17,426		$	14,262		$	34,540		$	29,756
Cost of sales		7,733			6,745			16,393			13,690
		9,693			7,517			18,147			16,066
Operating expenses:
Selling, general and administrative		5,780			6,134			11,967			12,537
Research and engineering		1,740			1,570			3,355			3,235
		7,520			7,704			15,322			15,772
Income (loss) from operations		2,173			(187		)	2,825			294
Other income (expense):
Investment income		143			163			320			332
Interest expense		(37		)	(68		)	(80		)	(127		)
Other, net		36			33			101			86
		142			128			341			291
Income (loss) before income taxes		2,315			(59		)	3,166			585
Provision for (benefit from) income taxes		784			(49		)	1,024			164
Net income (loss)		$	1,531		$	(10	)	$	2,142		$	421
Basic earnings (loss) per share		$	0.27		$	—		$	0.37		$	0.07
Diluted earnings (loss) per share		$	0.26		$	—		$	0.36		$	0.07
Cash dividends per share		$	0.06		$	0.06		$	0.12		$	0.12
Weighted average number of shares outstanding-basic		5,732			5,673			5,730			5,673
Additional shares assuming exercise of common stock equivalents and dilutive stock options		183			—			170			218
Weighted average number of shares outstanding-diluted		5,915			5,673			5,900			5,891

 

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)

 

		Jan 23 2004			Jul 25 2003
Assets
Current assets:
Cash and cash equivalents		$	1,600		$	5,383
Short-term investments		1,820			4,629
Accounts receivable - trade, net of allowance for doubtful accounts of $129,000 and $121,000		10,012			10,590
Inventories (Notes 2 and 3)		8,702			9,489
Refundable income taxes		—			303
Deferred income taxes		870			812
Other current assets		543			417
Total current assets		23,547			31,623
Property and equipment, net of accumulated depreciation of $18,844,000 and $17,656,000		13,020			13,768
Long-term investments		15,530			4,717
Other assets (Note 4)		4,350			4,327
Total assets		$	56,447		$	54,435
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	1,545		$	1,222
Accrued expenses		3,527			3,698
Income taxes payable		414			—
Short-term borrowing		2,203			2,113
Current portion of long-term debt		32			503
Total current liabilities		7,721			7,536
Deferred income taxes		660			532
Long-term debt, less current portion		637			584
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 5,733,338 and 5,727,838		573			573
Additional paid-in capital		38,932			38,765
Retained earnings		7,963			6,509
Accumulated other comprehensive loss (Note 5)		(39		)	(64		)
Total shareholders’ equity		47,429			45,783
Total liabilities and shareholders’ equity		$	56,447		$	54,435

 

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)

 

		Six Months Ended
		Jan 23 2004			Jan 24 2003
Cash flows from operating activities:
Net income		$	2,142		$	421
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		1,147			1,246
Stock-based compensation		145			95
Deferred income taxes		48			70
Loss on asset impairment		153			—
Gain on sale of property and equipment		(227		)	(247		)
Provision for doubtful accounts		29			1
Undistributed (income) losses of AFTCO		10			(4		)
Change in operating assets and liabilities:
Accounts receivable-trade		662			1,051
Inventories		961			(540		)
Refundable income taxes		303			(545		)
Other current assets		(121		)	(170		)
Accounts payable		286			(341		)
Accrued expenses		(206		)	160
Income taxes payable		414			(176		)
Other		(105		)	(116		)
Total adjustments		3,499			484
Cash flows from operating activities		5,641			905
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		5,550			4,550
Proceeds from maturity of held-to-maturity securities		—			2,630
Purchase of held-to-maturity securities		—			(497		)
Purchase of available-for-sale securities		(13,493		)	(4,326		)
Proceeds from sale of property and equipment		349			331
Purchase of property and equipment		(604		)	(1,107		)
Other		6			(24		)
Cash flows from investing activities		(8,192		)	1,557
Cash flows from financing activities:
Cash dividends paid		(688		)	(682		)
Net change in short-term borrowings		(92		)	(108		)
Repayment of long-term debt		(475		)	(543		)
Issuance of common stock and exercise of stock options		23			20
Cash flows from financing activities		(1,232		)	(1,313		)
Cash and cash equivalents:
Net increase (decrease)		(3,783		)	1,149
Balance at beginning of year		5,383			633
Balance at end of period		$	1,600		$	1,782

 

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

 

January 23, 2004

 

(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 25, 2003.

 

Note 2:  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:

 

 

Had inventories been valued on the first-in, first-out (FIFO) basis, they would have been approximately $2,319,000 and $2,303,000 higher than reported on the LIFO basis at January 23, 2004 and July 25, 2003, respectively.

 

Note 3:  During the six month period ended January 23, 2004, the Company established a $605,000 reserve against inventory associated with the supercritical fluid extraction (SFE) product line to reflect a lower of cost or market adjustment.  The reserve was reflected as a charge to cost of sales in the first half of fiscal 2004.  The reserve reflects information obtained which indicates the current value of the inventory will not be recoverable.  During the second quarter of fiscal 2004 the Company communicated to its distribution channel its intent to divest this product line within the next fiscal quarter either via a sale of assets or a shutdown of operations.

 

In addition to the inventory reserve, the Company recognized an impairment of $153,000 related to property and equipment associated with the SFE product line.  This charge was included in selling, general, and administrative expenses for the six month period ended January 23, 2004.

 

6

 

Note 4:  Other assets were comprised of the following as of January 23, 2004 and July 25, 2003:

 

 

Note 5:  Comprehensive income (loss), for the three month and six month periods ended January 23, 2004 and January 24, 2003, was as follows:

 

		Three months ended						Six months ended
		Jan 23 2004			Jan 24 2003			Jan 23 2004			Jan 24 2003
Net income (loss)		$	1,531		$	(10	)	$	2,142		$	421
Other comprehensive income (loss), net of income tax (tax benefit):
Foreign currency translation adjustment		6			(39		)	(14		)	(34		)
Unrealized holding gains (losses) on available-for-sale securities		28			(9		)	39			(10		)
Comprehensive income (loss)		$	1,565		$	(58	)	$	2,167		$	377

 

7

 

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						Six months ended
		Jan 23 2004			Jan 24 2003			Jan 23 2004			Jan 24 2003
Net income (los), as reported		$	1,531		$	(10	)	$	2,142		$	421
Less: Stock-based compensation determined under the fair value based method, net of income tax (tax benefit):		(76		)	(42		)	(145		)	(129		)
Add: Stock-based employee compensation expense included in reported net income, net of income tax (tax benefit):		72			46			145			95
Pro forma net income (loss)		$	1,527		$	(6	)	$	2,142		$	387
Earnings per share:
Basic-As Reported		$	0.27		$	—		$	0.37		$	0.07
Basic-Pro forma		$	0.27		$	—		$	0.37		$	0.07
Diluted-As Reported		$	0.26		$	—		$	0.36		$	0.07
Diluted-Pro forma		$	0.26		$	—		$	0.36		$	0.07

 

Note 7:  Supplemental Cash Flow Information

 

The Company made income tax payments of $259,000 and $789,000 during the six-month periods ended January 23, 2004 and January 24, 2003, respectively.

 

The Company made interest payments of $80,000 and $127,000 during the six-month periods ended January 23, 2004 and January 24, 2003, respectively.

 

Note 8:  New Accounting Pronouncements

 

In January and December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (FIN 46) and No. 46, revised (FIN 46R), “Consolidation of Variable Interest Entities”. These statements, which address the accounting for entities commonly known as special-purpose or off-balance-sheet, require consolidation of certain interests or arrangements by virtue of holding a controlling financial interest in such entities. Certain provisions of FIN 46R related to interests in special purpose entities were applicable for the period ended December 31, 2003. The Company must apply FIN 46R to its interests subject to the interpretation as of the first annual period ending after March 15, 2004. Adoption of this new method of accounting for variable interest entities did not and is not expected to have a material impact on the Company‘s consolidated financial position, results of operations or cash flows.

 

8

 

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 six-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						Six months ended
		Jan 23 2004		Jan 24 2003		Change		Jan 23 2004		Jan 24 2003		Change
Net sales		100.0		100.0		22.2		100.0		100.0		16.1
Cost of sales		44.4		47.3		14.6		47.5		46.0		19.7
		55.6		52.7		28.9		52.5		54.0		13.0
Operating expenses:
Selling, general, & administrative		33.1		43.0		(5.8	)	34.6		42.1		(4.5	)
Research & engineering		10.0		11.0		10.8		9.7		10.9		3.7
		43.1		54.0		(2.4	)	44.3		53.0		(2.9	)
Income (loss) from operations		12.5		(1.3	)	—		8.2		1.0		860.9
Other income (expense):
Investment income		0.8		1.1		(12.3	)	0.9		1.1		(3.6	)
Interest expense		(0.2	)	(0.5	)	(45.6	)	(0.2	)	(0.4	)	(37.0	)
Other, net		0.2		0.3		9.1		0.3		0.3		17.4
		0.8		0.9		10.9		1.0		1.0		17.2
Income (loss) before income taxes		13.3		(0.4	)	—		9.2		2.0		441.2
Provision for (benefit from) income taxes		4.5		(0.3	)	—		3.0		0.6		524.4
Net income (loss)		8.8		(0.1	)	—		6.2		1.4		408.8

 

Net Sales Analysis and Review

 

Sales for the three-month period were $17.4 million which was $3.2 million or 22 percent higher than the prior year period and sales for the six-month period were $34.5 million which was $4.8 million or 16 percent higher than the prior year.  The six-month improvement included the benefit of $2.0 million in shipments from our higher than normal year-end backlog.

 

Core products sales (wastewater samplers, flow meters, and liquid chromatography products) of $13.1 million for the quarter and $26.8 million for the six-month period, were up 19 and 17 percent, respectively, as compared to the same periods of last year.

 

9

 

The quarterly improvement was driven by increased U.S. sales of liquid chromatography products while the year-over-year improvement was due to increased global sales of both liquid chromatography and flow meter products.  We believe a portion of the strong liquid chromatography sales growth is due to released spending that was delayed by pharmaceutical companies in the later half of the previous fiscal year.

 

Sales of our non-core products (process monitoring, supercritical fluid extraction (SFE) and syringe pumps products) and services of $4.3 million for the quarter and $7.7 million for the six-month period were up 32 percent and 13 percent, respectively, compared to the same periods of last year.  While all product lines with the exception of syringe pumps contributed to the growth, sales of process monitoring products drove the majority of the growth.  The improvement in sales of process monitoring products was the result of both improved economic conditions and the acceptance of newly introduced products.

 

U.S. sales for the three months and six months were up 16 percent and 6 percent, respectively.  U.S. sales of our core products for the quarter and six-month periods increased 17 and 7 percent, respectively, over the comparable periods of fiscal 2003.  Sales of liquid chromatography products drove both the three and six month improvements. U.S. sales of our non-core products and services for the three-month period increased by 13 percent and decreased by 3 percent for the six-month comparison.  Increases in process monitoring product sales and services accounted for the increase in the quarter, while the decrease for the six-month period was due to lower sales of syringe pumps offsetting the increase in sales of services.

 

International sales for the three months and six months increased 36 percent and 45 percent, respectively.  Sales of our core products for the same periods were up 27 percent and 57 percent, respectively, over last year.  All core products contributed fairly equally to sales increases for the quarter while liquid chromatography and flow meter product sales drove the six month improvement.  International sales of our non-core products and services for the three months and six months increased by 48 and 29 percent, respectively, in each period.  For the three-month period process monitoring and SFE products drove the increase while for the six-month period process monitoring drove the increase.

 

During the three months and six months, we received net orders of $17.1million and $32.5 million, respectively. Net orders received were up 22 percent and 12 percent compared to the same periods last year.  The order backlog at January 23, 2004 was $5.7 million, down approximately 26 percent from the beginning of the fiscal year.

 

Net Income Analysis and Review

 

Our net income for the second quarter and six months of fiscal 2004 was $1.5 million and $2.1 million, respectively, up approximately $1.5 million and $1.7 million, respectively from the prior year.  The improvement for both periods reported was due to increased income from operations. We generated income from operations of $2.2 million and $2.8 million, respectively, for the three months and six months ended January 24, 2003.  For the same periods last year, we incurred an operating loss of $0.2 million for the quarter and operating income of $0.3 million for the six-month period.

 

The improvement in income from operations was primarily driven by the additional gross margin dollars generated by increased sales.  Reduced selling, general and administrative (SG&A) expenses also contributed to the improvement Offsetting these improvements was the negative gross margin impact of a $0.6 million write down of inventory associated with the divestiture of our supercritical fluid extraction (SFE) product line which was recorded primarily in the first quarter of fiscal 2004.

 

Gross margins, as a percentage of sales, were 55.6 and 52.5 percent for the three and six month periods, respectively, compared with 52.7 and 54.0 percent for the same periods last year, and provided additional gross margin dollars of $2.2 million and $2.1 million, respectively.  Excluding the impact of the inventory write down, our gross margin for the six month period would have been 54.6%.  Positive shifts in the sales mix in both product and geographic areas and benefits from cost improvements drove the quarter and year-over-year improvements.

 

10

 

Operating expenses decreased by approximately $0.2 million for the quarter and $0.4 million for the six month period. The improvement was driven by reductions in SG&A expenses offset by an increase in engineering expense.  SG&A decreased by approximately $0.4 million and $0.6 million for the quarter and six month periods, respectively, over the prior year.  The quarter and year-to-date improvement included the benefit of one-time costs of $0.4 million in the prior year associated with the elimination of two officer positions and legal fees associated with SWIFT.  The three and six month results included the benefits of cost reductions from the operational improvements and the reduction in force which occurred in the later part of fiscal 2003.  These cost reductions helped to offset the increase in expense associated with increased profitability such as profit sharing and variable compensation programs and the $0.2 million impact from the write off of SFE property and equipment.  Engineering expenses increased for the quarter and six months by $0.2 and $0.1 million, respectively, due to our planned increased investment in SWIFT.

 

Other income increased by $14,000 and $50,000, for the three-month and six-month periods ended January 23, 2004, respectively, as compared to the same periods of the previous year.  This change resulted principally from lower interest expense due to the reduction in our outstanding fixed debt.

 

Our effective income tax rate for the three months and six months ended January 23, 2004 was 33.9 percent and 32.3 percent, respectively.  For the same periods last year our effective income tax rates were 83.1 percent and 28.0 percent, respectively.  The 83.1 percent effective rate for the second quarter of the prior year was due to the minimal absolute dollar amount of the pre-tax loss.  The low effective tax rates for both year’s quarterly results and the current year’s year-to-date result were associated with the benefit of reduced tax liabilities associated with foreign sourced income.

 

Financial Condition and Liquidity

 

Our overall cash and investments increased to $19.0 million at January 23, 2004 from $14.7 million at the end of fiscal year 2003, an increase of $4.3 million.  Operating activities generated $5.6 million of cash during the first half of fiscal 2004 compared with generating $0.9 million during the same period last year.  The major factor in the increase was the change in operating assets and liabilities that resulted in a net increase of approximately $2.9 million in operating cash flow, primarily driven by reductions in inventory and increases in taxes and accounts payable.

 

We invested the cash available at the beginning of the year, provided from operations and generated from maturities of investments of $5.6 million, into long-term and short-term investments of $13.5 million.  We utilized the remaining cash available to purchase a net of $0.3 million in equipment, used cash of $0.5 million for the repayment of long and short term bank obligations and used $0.7 million for dividends.  Our net cash and cash equivalents position decreased by $3.8 million for the first half of fiscal 2004 compared to a net increase of $1.1 million in the first half of fiscal 2003 due to the timing of purchasing and maturities of investments.

 

At January 23, 2004, we had working capital of $15.8 million and a current ratio of 3.0:1.  At period-end, our total long-term debt was $0.7 million with $32,000 payable within the next year.  In addition, we had lines of credit with various banks totaling $7.0 million of which approximately $4.5 million was available for future business needs.

 

New Accounting Pronouncements

 

In January and December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (FIN 46) and No. 46, revised (FIN 46R), “Consolidation of Variable Interest Entities”. These statements, which address the accounting for entities commonly known as special-purpose or off-balance-sheet, require consolidation of certain interests or arrangements by virtue of holding a controlling financial interest in such entities. Certain provisions of FIN 46R related to interests in special purpose entities were applicable for the period ended December 31, 2003. The Company must apply FIN 46R to its interests subject to the interpretation as of the first annual period ending after March 15, 2004. Adoption of this new method of accounting for variable interest entities did not and is not expected to have a material impact on the Company‘s consolidated financial position, results of operations or cash flows.

 

11

 

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.

 

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.

 

Stock-Based Compensation

We have elected to account for fixed award stock options and non-employee 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 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 non-employee directors are accounted for in accordance with Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation.”  Accordingly, directors 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.

 

12

 

Factors Affecting Future Results

 

As we stated in our fiscal 2003 Form 10-K, we made the decision to divest the supercritical fluid extraction (SFE) product line and expected to complete the divestiture within fiscal 2004.  During the first and second quarter of fiscal 2004 we continued to actively review various alternatives. Based on the alternatives evaluated, we recorded non-cash charges of approximately $0.8 million associated with inventory and property during the first half of fiscal 2004.  During the second quarter of fiscal 2004 we communicated to our distribution channels our intent to divest this product line within the next fiscal quarter either via a sale of assets or a shutdown of operations.While we do not expect any material negative operational charge to impact our future performance based on either outcome although this decision will result in ceasing to accepting orders after March 2004 from our current customers.

 

Related to our operational performance, we are very pleased with our continued improved performance in both sales and operational income on a quarter over quarter basis and for the six-month period compared to the prior year.  While we expect to report sales and earnings above our fiscal 2003 level we remain cautious about our ability to sustain the first six-month performance for the remainder of the year.  Our operational expenses are expected to increase somewhat, and we are guarded about our ability to repeat the recent strong quarterly sales performance due to the influence on our sales of the continued pace of the global economic recovery.

 

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, investments, accounts and notes receivable, accounts and notes payable and long-term debt.  Our cash and cash equivalents, investments, 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 January 23, 2004, we had approximately $0.7 million of fixed rate debt.  In addition, we had $7.0 million of variable rate credit facilities, of which approximately $2.5 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.  We are exposed to the impact of interest rate and market price changes on our investments portfolio.  Due to the nature of these investments being held in high grade corporate or government bonds, we believe our overall exposure to market risk is low.

 

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 six months of fiscal 2004 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 2003 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.

 

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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.

 

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 were no significant changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 4.                 Submission of Matters to a Vote of Security Holders

 

The 2003 Annual Meeting of Stockholders was held on December 11, 2003.  The three persons named below were elected as proposed in the proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, to serve as directors until the Company’s Annual Meeting of Stockholders in 2005.  There were 5,727,838 shares of the Company’s common stock entitled to vote at the Annual Meeting of Stockholders.  The voting regarding each nominee was as follows:

 

Nominee		Votes
		In Favor		Withheld
Robert W. Allington		5,235,588		46,385
James L. Linderholm		5,236,546		45,427
Dale L. Young		5,202,513		79,460

 

There were no other matters voted upon at the Annual Meeting.

 

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Item 6.                 Exhibits and Reports on Form 8-K

 

(a)                                        Exhibits:

 

(31.1)      Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by Robert W. Allington, Chief Executive Officer

 

(31.2)      Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by Vicki L. Benne, Chief Financial Officer

 

(32.1)      Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by Robert W. Allington, Chief Executive Officer

 

(32.2)      Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by Vicki L. Benne, Chief Financial Officer

 

(b)                                       Reports on Form 8-K:  The Company furnished a Current Report on Form 8-K dated March 4, 2004, announcing earnings for the quarter ended January 23, 2004 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:  March 5, 2004	BY	/s/ Robert W. Allington
			Robert W. Allington
			Chairman and Chief Executive Officer
Date:  March 5, 2004	BY	/s/ Vicki L. Benne
			Vicki L. Benne
			Chief Financial Officer and Treasurer

 

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