-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RPNIsfE2XSx1Uk3dDCrV2mycQSraxmStwwB/u4x9dr1MxPLmEGRmQwOEAHD+r4oJ G7ICPFhFjJrrca+WqHFIdA== 0001047469-97-001436.txt : 19971024 0001047469-97-001436.hdr.sgml : 19971024 ACCESSION NUMBER: 0001047469-97-001436 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970725 FILED AS OF DATE: 19971023 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISCO INC CENTRAL INDEX KEY: 0000773730 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 470461807 STATE OF INCORPORATION: NE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14429 FILM NUMBER: 97699457 BUSINESS ADDRESS: STREET 1: 4700 SUPERIOR ST CITY: LINCOLN STATE: NE ZIP: 68504 BUSINESS PHONE: 4024640231 MAIL ADDRESS: STREET 1: 4700 SUPERIOR ST CITY: LINCOLN STATE: NE ZIP: 68504 10-K 1 10-K 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 EX-11 2 EX-11 COMPUTATION OF NET EARNINGS COMPUTATION OF NET EARNINGS PER SHARE - EXHIBIT 11 (Amount in thousands, except share and per share data) Year Ended -------------------------------------- July 25 July 26 July 28 1997 1996 1995 --------- --------- --------- Primary: Average number of shares of common stock outstanding 5,351,991 5,351,931 5,369,216 Additional shares assuming exercise of dilutive stock options 4,390 721 973 --------- --------- --------- Total 5,356,381 5,352,652 5,370,189 ========= ========= ========= Net earnings $1,326 $987 $3,574 ========= ========= ========= Per share amount $0.25 $0.18 $0.67 ========= ========= ========= Fully Diluted: Average number of shares of common stock outstanding 5,351,991 5,351,931 5,369,216 Additional shares assuming exercise of dilutive stock options 4,470 1,734 3,728 --------- --------- --------- Total 5,356,461 5,353,665 5,372,944 ========= ========= ========= Net earnings $1,326 $987 $3,574 ========= ========= ========= Per share amount $0.25 $0.18 $0.67 ========= ========= ========= 36 EX-23 3 EX-23 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Numbers 33-4190, 33-41201, 333-00421 and 333-16637 of Isco, Inc. and subsidiaries on Form S-8 of our report dated September 26, 1997 (which report expresses an unqualified opinion and includes an explanatory paragraph referring to Isco, Inc.'s change in its method of accounting for impairment of long-lived assets in fiscal 1996,) appearing in the Annual Report on Form 10-K of Isco, Inc. and subsidiaries for the year ended July 25, 1997. Deloitte & Touche LLP Lincoln, Nebraska October 17, 1997 37 EX-27 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF EARNINGS FOR JULY 25, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-25-1997 JUL-27-1996 JUL-25-1997 1,810 8,813 8,538 82 8,005 28,958 24,366 17,222 46,708 3,703 0 0 0 598 41,882 46,708 40,733 40,733 17,973 17,973 0 0 0 1,577 251 1,326 0 0 0 1,326 .25 .25
EX-99 5 RETIREMENT PLUS PLAN ISCO, INC. RETIREMENT PLU$ PLAN Financial Statements And Supplemental Schedules For The Years Ended July 31, 1997 and 1996 And Independent Auditors' Report 38 ISCO, INC. RETIREMENT PLU$ PLAN FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES AND INDEPENDENT AUDITORS' REPORT TABLE OF CONTENTS Page FINANCIAL STATEMENTS: Independent Auditors' Report 40 Statements of Net Assets Available for Benefits 41 Statements of Changes in Net Assets Available for Benefits 42 Notes to Financial Statements 43 SUPPLEMENTAL SCHEDULES: Item 27a - Schedule of Assets Held for Investment Purposes - July 31, 1997 51 Item 27d - Schedule of Reportable Transactions - Year Ended July 31, 1997 52 Schedules not filed herein are omitted because of the absence of the conditions under which they are required. 39 INDEPENDENT AUDITORS' REPORT Plan Committee Isco, Inc. Retirement Plu$ Plan Lincoln, Nebraska We have audited the accompanying statements of net assets available for benefits of the Isco, Inc. Retirement Plu$ Plan as of July 31, 1997 and 1996 and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on the financial statements 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 also 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 financial statements present fairly, in all material respects, the net assets available for benefits of the Isco, Inc. Retirement Plu$ Plan as of July 31, 1997 and 1996, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of (1) assets held for investment purposes as of July 31, 1997, and (2) reportable transactions for the year ended July 31, 1997, are presented for the purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental information by fund in the statements of net assets available for benefits and the statements of changes in net assets available for benefits is presented for the purpose of additional analysis rather than to present the net assets available for benefits and changes in net assets available for benefits of the individual funds. The supplemental schedules and supplemental information by fund is the responsibility of the Plan's management. Such supplemental schedules and supplemental information by fund have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole. Deloitte & Touche LLP Lincoln, Nebraska September 26, 1997 40 ISCO, INC. RETIREMENT PLU$ PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS (amounts in thousands)
July 31, 1997 July 31, 1996 --------------------------------------------------------------------------------- Supplemental Information Supplemental Information by Fund by Fund ------------------------ ------------------------ Employer Participant Employer Participant Directed Directed Total Directed Directed Total -------- ----------- ----- -------- ----------- ----- Investments, at fair value as determined by quoted market prices (Note C): Money market funds $204 $ 1,666 $ 1,870 $271 $ 1,687 $ 1,958 Mutual funds -- 17,612 17,612 -- 12,706 12,706 Bank collective funds -- 303 303 -- -- -- Isco, Inc. common stock fund -- 503 503 -- 643 643 Investments, at estimated fair value: Other investments 41 -- 41 88 -- 88 ----- ------ ------- ---- -------- ------- 245 20,084 20,329 359 15,036 15,395 Participant loans -- 489 489 -- 513 513 ----- ------ ------- ---- -------- ------- Total investments 245 20,573 20,818 359 15,549 15,908 Employer contributions receivable -- 112 112 -- 97 97 Accrued income 1 -- 1 1 -- 1 ----- ------ ------- ---- -------- ------- Net assets available for benefits $246 $20,685 $20,931 $360 $15,646 $16,006 ===== ======= ======= ==== ======= =======
The accompanying notes are an integral part of the financial statements 41 ISCO, INC. RETIREMENT PLU$ PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS (amounts in thousands)
July 31, 1997 July 31, 1996 --------------------------------------------------------------------------------- Supplemental Information Supplemental Information by Fund by Fund ------------------------ ------------------------ Employer Participant Employer Participant Directed Directed Total Directed Directed Total -------- ----------- ----- -------- ----------- ----- Investment income (Note C and G): Dividends, interest, and other income $ 34 $ 1,329 $ 1,363 $ 34 $ 1,168 $ 1,202 Net realized and unrealized appreciation (depreciation) in fair value of investments (21) 4,153 4,132 (4) (520) (524) ----- ------ ------- ---- -------- ------- Net investment income 13 5,482 5,495 30 648 678 ----- ------ ------- ---- -------- ------- Contributions: Employer annual profit sharing -- 112 112 -- 97 97 Employer 401(k) matching -- 138 138 -- 148 148 Participant -- 729 729 -- 774 774 ----- ------ ------- ---- -------- ------- -- 979 979 -- 1,019 1,019 ----- ------ ------- ---- -------- ------- Total additions 13 6,461 6,474 30 1,667 1,697 Benefits paid (26) (1,523) (1,549) (19) (975) (994) Transfers (101) 101 -- -- -- -- ----- ------ ------- ---- -------- ------- Increase (decrease) in net assets available for benefits (114) 5,039 4,925 11 692 703 Net assets available for benefits: Beginning of year 360 15,646 16,006 349 14,954 15,303 End of year $246 $20,685 $20,931 $360 $15,646 $16,006 ===== ======= ======= ==== ======= =======
The accompanying notes are an integral part of the financial statements 42 ISCO, INC. RETIREMENT PLU$ PLAN NOTES TO FINANCIAL STATEMENTS Years ended July 31, 1997 and 1996 (Columnar amounts in thousands, except share data) A. DESCRIPTION OF PLAN General--The following brief description of the Isco, Inc. Retirement Plu$ Plan (the Plan) is provided for general information purposes only. Participants should refer to the Plan document for more complete information. The Plan was established, effective August 1, 1972, to provide retirement benefits for the employees of Isco, Inc. (the Company). The Plan was last amended effective August 1, 1995. Effective August 1, 1987, a 401(k) salary reduction option was incorporated into the Plan. Employees are eligible for participation after they have completed one year of service and are at least 21 years of age. A year of service is defined as the accumulation of 1,000 hours of credited service during a one-year period beginning on the employment date. Participant contributions, employer 401(k) matching contributions, and employer annual profit sharing contributions, are invested at American Century Investments under the direction of the plan participants. Contributions--Contributions to the Plan are provided from the following sources: Employer Annual Profit Sharing Contribution (Participant Directed)--The Employer is required to contribute an amount equal to the lesser of 7% of the current net profit of the Company or the maximum amount allowed by the Internal Revenue Code. The contributed amount received by each participant is based on their percentage of total eligible compensation. Participant Contributions (Participant Directed)--Plan participants may elect to reduce their compensation by a maximum of 12%, subject to IRS limitations. The Employer then contributes the amount of reduction in compensation to the Plan on behalf of each participant. Employer 401(k) Matching Contribution (Participant Directed)--The Employer is required to match 20% of the contribution made on behalf of each participant electing salary reductions up to a maximum of 10% of the participant's eligible compensation. Participant Accounts--Each participant's account is credited with the participant's contribution, the Company's matching contribution and the allocated portion of: the Company's annual contribution and the forfeited portion of terminated participants' non-vested accounts. Any 401(k) forfeitures are allocated, based on a participant's contributions to the 401(k) plan during the year. The Company's annual contribution and forfeitures are allocated to each participant's account based on the percentage of the participant's eligible compensation for the plan year to the total compensation of all eligible participants for the plan year. Earnings are credited directly to each investment option in which the participant had an investment on the record date of the dividend or interest distribution. Use of Estimates--The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of net assets 43 available for benefits and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets available for benefits during the reporting period. Actual results could differ from those estimates. Vesting--Participant contributions (i.e. employee salary reduction amounts) and participant rollover contributions are immediately fully vested and nonforfeitable. Employer profit sharing contributions and the Employer 401(k) matching contributions vest 20% upon completion of three years of credited service, increasing 20% per year until fully vested upon completion of seven years of credited service. Payment of Benefits--On termination of service due to death, disability or retirement, a participant with a vested balance greater than $3,500 may elect to receive either a lump sum equal to the participant's vested interest in his or her account, or monthly installments. A participant with a vested balance less than $3,500 is entitled to receive a lump sum payment equal to the participant's vested account balance. Plan participants are eligible for normal retirement at age 65 but may elect to retire at a later date. Upon attainment of 65 years of age, death, or determination of disability, a participant becomes 100% vested regardless of the number of credited years of service completed. Plan Expenses--As an additional benefit to the participants, the Employer, without reimbursement, pays for all costs, except for loan origination and loan maintenance fees, required to administer the Plan. These costs are not reflected in the financial statements. Employer Directed--Employer directed funds are invested in the Restricted Fund, which is managed by the employer. Assets in the Restricted Fund at July 31, 1997 include: Balcor Pension Investors II and III, Benham Stable Value Government Fund, and Chase Manhattan Bank Pooled Investment. Transfers from the Restricted Fund to the Unrestricted Fund are directed by the Plan Committee. Investment Options: Participant Directed--Participant directed contributions may be invested in one or more of thirteen funds. A brief summary description of each investment option follows: Benham Stable Value Government Fund--A fund which seeks to provide current income while maintaining a stable share price. It is managed by SEI Trust Co. In 1996, the name of this fund was Bankers Trust Stable Value Government Trust Fund. Benham Premium Bond Fund--A fund which seeks a high level of income from a portfolio of longer-term bonds and other debt obligations. The fund pays a reduced management fee. In 1996, the name of this fund was Twentieth Century Premium Managed Bond Fund. American Century Balanced Fund--A fund which seeks capital growth and current income by investing in equity securities with prospects for growth and in investment grade bonds and other fixed income securities. In 1996, the name of this fund was Twentieth Century Balanced Investors Fund. 44 Twentieth Century Select Fund--A fund comprised primarily of income-producing equity securities of larger companies possessing potential for appreciation. In 1996, the name of this fund was Twentieth Century Select Investors Fund. Twentieth Century Ultra Fund--A fund comprised primarily of equity securities of medium and smaller companies with the potential for appreciation. In 1996, the name of this fund was Twentieth Century Ultra Investors Fund. Twentieth Century International Growth Fund--A fund which seeks capital growth by investing primarily in an internationally diversified portfolio of common stocks. In 1996, the name of this fund was Twentieth Century International Equity Fund. Barclays Equity Index Fund--A fund invested primarily in stocks of a broad array of established U.S. Companies. It invests to match the performance of the S&P 500 Index by investing in most of the same companies. Assets in the fund consist of Barclays U.S. Tactical Asset Allocation Fund J. American Century Strategic Allocation: Conservative--A fund seeking to provide regular income through its emphasis on bonds and money market securities combined with the potential for moderate long-term return as the result of its stake in equity securities. American Century Strategic Allocation: Moderate--A fund emphasizing in equity securities but maintaining a sizable stake in bonds and money market securities. American Century Strategic Allocation: Aggressive--A fund emphasizing in equity securities, but maintaining a portion of its assets in bonds and money market securities. American Century Value Fund--A fund investing primarily in equity securities of well established companies with intermediate to large market capitalizations that are believed by fund management to be undervalued at the time of purchase. Twentieth Century Vista Fund--A fund investing primarily in medium sized and smaller companies with above average prospects for appreciation. Isco, Inc. Common Stock Fund--A fund invested primarily in Isco, Inc. common stock. Isco, Inc. is a party-in-interest and sponsor of the Plan. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting--The financial statements of the Plan are prepared under the accrued method of accounting. Investment Valuation and Income Recognition--Investments are stated at fair value. Fair value of marketable securities is determined by reference to the closing quoted price by the exchange on which the security is listed or the closing net asset value as reported by the mutual fund. Participant loans are stated at their outstanding principal balance. The amounts shown, in Note C, for securities that do not have a quoted market price represent fair value estimated by an independent third party. 45 Investment transactions are recognized on a settlement date basis. The net realized and unrealized appreciation (depreciation) of investments is recognized in the statements of changes in net assets available for benefits. The fair value at the beginning of the plan year, or the purchased cost if acquired during the year, is used in determining realized and unrealized gains and losses on the sale of each investment. Payment of Benefits--The Plan's policy is to record benefit payments upon distribution to the participants. Benefits payable to retired and terminated participants were $35,614 and $830,202 at July 31, 1997 and 1996, respectively. Contributions--Employer profit sharing contributions are computed as of the end of the Employer's fiscal year and are recorded by the Plan in the corresponding period, but allocated to participants' accounts in the plan quarter in which the profit sharing contribution is made to the Plan. Participant contributions are recorded in the period in which the bi-weekly payroll deductions are made. The Employer 401(k) matching contributions are also recorded in the period that the payroll deductions are made. 46 C. INVESTMENTS The following schedules present the fair values of investments. July 31, 1997 ______________________________________________________________________________ Number of Shares/ Fair Units Value ---------- --------- Investments at fair value as determined by quoted market price: Money Market: Benham Stable Value Government Fund 1,819,342 $ 1,819 Chase Manahattan Bank Pooled Investment 50,767 51 Mutual Funds: Twentieth Century International Growth Fund 144,894 1,459 Twentieth Century Ultra Fund 134,306 4,874 Twentieth Century Select Fund 129,518 6,550 American Century Balanced Fund 135,438 2,693 Benham Premium Bond Fund 69,283 703 American Century Value Fund 73,929 580 Twentieth Century Vista Fund 25,255 372 American Century Strategic Allocation: Conservative 9,340 52 American Century Strategic Allocation: Moderate 34,308 204 American Century Strategic Allocation: Aggressive 19,795 125 Other Investments: Isco, Inc. Common Stock Fund 61,910 503 Bank Collective Funds: Barclays Equity Index Fund 13,590 303 Investments at estimated fair value: Balcor Pension Investors II 101 14 Balcor Pension Investors III 202 27 ------- Total Investments at Fair Value $20,329 ======= 47 July 31, 1996 ______________________________________________________________________________ Number of Shares/ Fair Units Value --------- ----- Investments at fair value as determined by quoted market price: Money Market: Benham Stable Value Government Fund 1,945,541 $ 1,946 Chase Manhattan Bank Pooled Investment 12,036 12 Mutual Funds: Twentieth Century International Growth Fund 129,942 1,034 Twentieth Century Ultra Fund 118,544 3,066 Twentieth Century Select Fund 139,150 5,066 American Century Balanced Fund 155,797 2,649 Benham Premium Bond Fund 91,224 891 Other Investments: Isco, Inc. Common Stock Fund 66,354 643 Investments at estimated fair value: Balcor Pension Investors II 101 43 Balcor Pension Investors III 202 45 ------- Total Investments at Fair Value $15,395 ======= ______________________________________________________________________________ During the years ended July 31, 1997 and 1996, the Plan's investments appreciated(depreciated) by $4,131,854 and $(523,908) respectively, as follows: Net Realized and Unrealized Appreciation (Depreciation) in Fair Value ______________________________________________________________________________ Year Ended July 31, ------------------- 1997 1996 ---- ---- Investments at fair value as determined by quoted market price: Mutual Funds: Twentieth Century International Growth Fund $ 308 $ 61 Twentieth Century Ultra Fund 1,348 (42) Twentieth Century Select Fund 1,922 (406) American Century Balanced Fund 399 (70) Benham Premium Bond Fund 28 (8) American Century Value Fund 81 -- Twentieth Century Vista Fund 78 -- American Century Strategic Allocation: Conservative 4 -- American Century Strategic Allocation: Moderate 17 -- American Century Strategic Allocation: Aggressive 17 -- Bank Collective Funds: Barclays Equity Index Fund 50 -- Other Investments: Isco, Inc. Common Stock Fund (99) (55) Investments at estimated fair value: Other (21) (4) ------ ----- $4,132 $(524) ====== ===== 48 D. PLAN TERMINATION Although the Company has not expressed any intent to terminate the Plan, it may do so at any time by giving 30 days notice to the Plan Committee, the Plan Administrator, and the Trustee. In the event of such termination, Plan assets would be valued and participants' accounts would be adjusted to reflect the allocation of net gains and losses of the underlying investments. At that time, participants' accounts would become fully vested and nonforfeitable. E. FEDERAL INCOME TAX STATUS The Plan has received a determination letter from the Internal Revenue Service dated September 7, 1995, which states that the Plan, as amended June 17, 1994, meets the requirements of Section 401(a) of the Internal Revenue Code and is, therefore, exempt from Federal income tax under Section 501(a) of the Code. The Plan administrator believes that the Plan is in compliance with current regulations. Therefore, no provision for income taxes is provided in the financial statements of the Plan. Plan income, participant pretax contributions, and employer contributions represent taxable income to the participating employees at the time of distribution. F. FUND INFORMATION Participant contributions, benefit payments, and dividends, interest and other income by fund are as follows for the years ended July 31, 1997 and 1996. ______________________________________________________________________________ 1997 1996 ---- ---- Participant contributions: Benham Stable Value Government Fund $ 53 $ 68 Twentieth Century International Growth Fund 80 87 Twentieth Century Ultra Fund 218 235 Twentieth Century Select Fund 181 206 American Century Balanced Fund 102 106 American Century Value Fund 9 -- Twentieth Century Vista Fund 7 -- American Century Strategic Allocation: Conservative 1 -- American Century Strategic Allocation: Moderate 2 -- American Century Strategic Allocation: Aggressive 2 -- Barclays Equity Index Fund 5 -- Isco, Inc. Common Stock Fund 41 42 Benham Premium Bond Fund 28 30 ---- ---- Total $ 729 $ 774 ====== ===== 49 F. FUND INFORMATION (continued) 1997 1996 ---- ---- Benefits paid: Benham Stable Value Government Fund $ 68 $ 128 Twentieth Century International Growth Fund 141 53 Twentieth Century Ultra Fund 372 247 Twentieth Century Select Fund 331 237 American Century Balanced Fund 318 243 Benham Premium Bond Fund 144 21 Isco, Inc. Common Stock Fund 68 19 Participant loans 81 27 ---- ---- Total $1,523 $ 975 ====== ====== Dividends, interest, and other income: Benham Stable Value Government Fund $ 93 $ 86 Twentieth Century International Growth Fund 123 1 Twentieth Century Ultra Fund 187 145 Twentieth Century Select Fund 542 600 American Century Balanced Fund 276 226 Benham Premium Bond Fund 49 55 American Century Value Fund 2 -- American Century Strategic Allocation: Conservative 1 -- American Century Strategic Allocation: Moderate 2 -- Isco, Inc. Common Stock Fund 13 13 Participant loans 41 42 ---- ---- Total $1,329 $1,168 ====== ====== ______________________________________________________________________________ 50 ISCO, INC. RETIREMENT PLU$ PLAN PN 001 EIN #47-0461807 (amounts in thousands, except per share/unit data) ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES July 31, 1997 _________________________________________________________________________________________________________________________________
Column B Column C Column D Column E - -------- -------- -------- -------- Description of investment including collateral, rate of interest, maturity date, Current Identity of issue, borrower, lessor or similar party par or maturity value Cost Value - --------------------------------------------------- ------------------------ ----------- --------- Money Market: - ------------- *Benham Stable Value Government Fund 1,819,342 shares $1,819 $ 1,819 *Chase Manhattan Bank Pooled Investment 50,767 shares 51 51 Mutual Funds: - ------------- *Twentieth Century Select Fund 129,518 shares 5,139 6,550 *American Century Balanced Fund 135,438 shares 2,181 2,693 *Benham Premium Bond Fund 69,283 shares 691 703 *Twentieth Century Ultra Fund 134,306 shares 3,315 4,874 *Twentieth Century International Growth Fund 144,894 shares 1,114 1,459 *Twentieth Century Vista Fund 25,255 shares 294 372 *American Century Value Fund 73,929 shares 501 580 *American Century Strategic Allocation: Conservative 9,340 shares 48 52 *American Century Strategic Allocation: Moderate 34,308 shares 187 204 *American Century Strategic Allocation: Aggressive 19,795 shares 107 125 Bank Collective Funds: - ---------------------- Barclays Equity Index Fund 13,590 Units 257 303 Other Investments: - ------------------ *Isco, Inc. Common Stock Fund 61,910 shares 503 *Participant loans Interest rates ranging from 7.25% to 10.25% maturing August 1997 through June 2002 -- 489 Balcor Pension Investors II 101 units 61 14 Balcor Pension Investors III 202 units 60 27 ------ *Party-in-interest $20,818 =======
51 ISCO, INC. RETIREMENT PLU$ PLAN PN 001 EIN #47-0461807 (amounts in thousands, except number of transactions data) ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS SERIES OF TRANSACTIONS FOR THE YEAR ENDED JULY 31, 1997
Column A Column B Column C Column D Column E Column F - ------------------ -------------------- ------------ ------------- -------------- --------- Total Dollar Identity of Number of Value of Total Dollar Party Involved Description of Asset Transactions Purchases Value of Sales Net Gain - ------------------ -------------------- ------------ ------------- -------------- -------- *Twentieth Century Select Fund 90 $1,712 $ -- $ -- *Twentieth Century Select Fund 68 -- 2,150 106 *American Century Balanced Fund 64 498 -- -- *American Century Balanced Fund 53 -- 853 97 *Twentieth Century Ultra Fund 99 1,757 -- -- *Twentieth Century Ultra Fund 62 -- 1,297 165 *Benham Stable Value Government Fund 107 2,093 -- -- *Benham Stable Value Government Fund 51 -- 2,220 -- *Party-in-interest
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