UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

Commission File No 0-14429

 

Isco, Inc.
(Exact name of Registrant as specified in its charter)

 

 

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 ý    No o

 

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.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 

Yes o   No ý

 

As of September 26, 2003, 5,727,838 shares of Common Stock of Isco, Inc., were outstanding and the aggregate market value of such Common Stock held by non-affiliates was approximately $26,542,797.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders to be held December 11, 2003, which will be filed with the Securities and Exchange Commission not later than 120 days after July 25, 2003.

 

 

PART I

Item 1. Business.

 

General

 

Isco, Inc. was founded in 1959.  We design, manufacture, and market products worldwide.  The majority of our revenue comes from sales of products used by industry and government to monitor compliance with water quality regulations, laboratories involved in drug discovery and development, and by laboratories involved in various types of research.

 

Robert W. Allington, the founder of Isco, Inc., has been the controlling shareholder, chairman of the board, and chief executive officer since inception.  Dr. Allington was president until October 6, 1995.  Douglas M. Grant has been our president and chief operating officer since October 6, 1995.

 

Our principal offices are located at 4700 Superior Street, Lincoln, Nebraska 68504-1398.  Our telephone number is (402) 464-0231.  As used herein, “Isco”, “we” or “our” refers to Isco, Inc., and its subsidiaries.  “Isco-Lincoln” refers to the operational activities and operations conducted by Isco, Inc. primarily in Lincoln, Nebraska excluding any activities focused on directing the subsidiaries and partnership.

 

STIP-Isco GmbH (STIP) is a wholly owned subsidiary located in Groß-Umstadt, Germany.  STIP designs, produces, and markets a broad line of process monitoring and control instrumentation designed specifically for municipal and industrial wastewater treatment applications.  These process monitoring products assist our wastewater treatment customers in reducing operating costs and in reliably managing the wastewater treatment process. Sales management and distribution of STIP process monitoring products in North and South America are managed by Isco-Lincoln.

 

Isco, Inc. is a 50 percent partner in Advanced Flow Technologies Partnership, Ltd. (AFTCO), a limited partnership, located in Lakeland, Florida.  This partnership was formed during fiscal year 1998.  AFTCO designs, produces, and markets electromagnetic flow meters.  Isco, Inc. is AFTCO’s distribution channel into the wastewater treatment market.

 

Products and Applications

 

Product lines of wastewater samplers, flow meters (including closed pipe flow meters), and liquid chromatography are Isco’s largest or core product lines.  These lines together represented 77 percent of Isco’s total net sales for the fiscal years of 2003, 2002, and 2001.  The contribution made by each of these core product lines to net sales for fiscal 2003, 2002, and 2001, respectively, was as follows: wastewater samplers 32, 32 and 38 percent; flow meters 20, 21, and 19 percent; and liquid chromatography products 25, 24 and 20 percent.

 

Isco’s water quality customers use wastewater samplers to collect water samples from surface waters and sewers for subsequent analysis in the laboratory to monitor compliance with environmental regulations.  These samplers can range from simple collection devices to complex multi-input data loggers that perform conditional operations to collect samples, store data, and notify users of alarm conditions through telemetry.  Intricate sampling devices that collect samples for volatile organic compound (VOC) analysis have also been developed to assist our customers in the pulp and paper industry and other sectors with application specific monitoring requirements.

 

Our open channel flow meters are used by our water quality customers to measure and record the flow rate of water in unpressurized pipes and open channels.  These flow meters can be linked with wastewater samplers to collect water samples based on flow rate.  The combined use of these two products is well suited to conduct storm water runoff studies in compliance with various governmental regulations.  Cities use our flow logging systems and sophisticated Flowlink™ software to store flow, rainfall, and other sample data for later retrieval, analysis, and reporting, as well as to analyze the state of their sewer systems.  Our UNIMAG^® electromagnetic flow meters are used by many of our sampler and open channel flow meter customers for closed pipe applications.  We believe these flow meters are a reliable and cost-effective alternative to existing electromagnetic and other closed pipe flow meters.

 

2

 

Isco’s liquid chromatography (LC) customers include pharmaceutical company laboratories involved in drug discovery and development, and other laboratories that support the development of chemical compounds composed of relatively small molecules as well as those that study disease and basic life functions.  Customers in these laboratories use our pumps to deliver solvent through columns packed with special media to separate a sample into its component molecules.  They then use our detectors to identify and quantify the component molecules.  Our fraction collectors are used to collect the separated compounds as they flow from the column. Our single sample and multi-sample sequential and parallel organic purification CombiFlashÔ systems along with RediSep^TM disposable columns are used in the drug discovery process to sample, separate, detect, and collect purified fractions.  Our SWIFT^® monolithic columns for chromatographic separations were introduced late in fiscal 2002.  We believe these columns have technological advantages over existing media and column technology, and are hopeful that these columns and related hardware will contribute to sales and profits in future years.  Other references to SWIFT^® can be found under Item 3. Legal Proceedings and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The remainder of our net sales, approximately 23 percent in fiscal 2003, came from product sales of other product lines, service, and freight billings.  The other product lines include: process monitoring, supercritical fluid extraction (SFE), and syringe pumps.   After a review of our strategic direction and focus we have decided to divest the SFE product line.  Additional comments in this disposition are provided within the section “Factors Affecting Future Results” under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Wastewater treatment customers use our process monitoring products to continuously monitor and control the treatment process to ensure that it is proceeding efficiently within established parameters.  Our on-line process monitors measure broad load parameters or detect the presence and concentration of a variety of compounds.  Knowledge of these measurements allows the plant operator to control operating costs and ensures the quality of discharged effluent.

 

Our syringe pumps are used for specialized applications in the petroleum, chemical and pharmaceutical industries, and for pumping supercritical fluids where high accuracy at high pressures is required.

 

The U.S. prices of individual products within our core product lines range from $1,500 to $10,000 for wastewater sampler and flow meter products and $1,500 to $50,000 for LC products.

 

Marketing and Sales

 

In the United States, independent manufacturers’ representatives sell products within our wastewater sampler, flow meter, and process monitoring product lines.  Domestic sales of products within our LC, SFE, and syringe pump lines are made by direct sales people assigned to specific product lines and located in the prime domestic market areas.  The manufacturers’ representatives and our direct sales people are supported with promotional programs, advertising, applications specialists, applications bulletins, technical literature, training, and applications seminars.

 

International sales constituted 27, 27, and 26 percent of our net sales during fiscal 2003, 2002, and 2001, respectively.  Isco’s international sales are made primarily by independent dealers operating in various countries around the world. International dealers receive sales management and local marketing support from regional sales and marketing managers that reside in Lincoln, Nebraska; Belgium, Germany, and the Philippines.  To aid international sales, many of our products are offered in multiple language versions.  Since both Isco-Lincoln and STIP-Isco sell in their respective functional currencies, we are not significantly impacted by direct foreign currency fluctuations.

 

Customers

 

Isco has a broad customer base. Currently no single customer, including any OEM customer, accounts for more than three percent of our net sales.

 

3

 

Product Warranty

 

The majority of our products have a one-year warranty against defective materials and workmanship.  Our warranty claims have not been material in the past and are not expected to be material in the future.  We provide direct after-market factory service for most products in the United States and Germany with independent dealers providing this type of support in most all other countries.  We also provide on-site services in the United States and Germany for process monitoring products along with on-site services in the United States for automated LC and SFE systems.  Customers within the United States may purchase an extended warranty for a selected product at the time they purchase a new instrument or while the instrument is still under warranty.

 

Competition

 

We believe we have a strong, competitive position in the markets for wastewater samplers, open channel flow meters, and SFE.  We maintain a competitive niche position in the LC market. The factors that contribute to our competitive position include: a reputation for high quality and service, technically advanced products that provide cost-effective operation and unique features, an active research and development program that allows us to maintain technical leadership, a strong position in key markets, efficient production capabilities, and excellent distribution capabilities.

 

Isco has several competitors in the wastewater sampler market.  In the United States, the major competitor is the Danaher Corporation.  We estimate that we have approximately 55 percent of the domestic wastewater sampler market with the Danaher Corporation having approximately 40 percent.  Other domestic competitors are small and offer little competition.  Significant competitors in Europe include the Danaher Corporation and the Endress + Hauser Group.

 

There are numerous suppliers in the United States open channel flow meter market.  Based upon market information we believe to be accurate, Isco’s major competitors are Marsh-McBirney, Inc., ADS, Siemens Milltronics Process Instruments, Inc., owned by Siemens, and the Danaher Corporation.  Significant competitors in Europe include the Danaher Corporation, the Endress + Hauser Group, Marsh-McBirney, Inc., and Siemens Milltronics Process Instruments, Inc.  Major competitors in the closed pipe flow meter market include ABB, Krohne, and the Endress + Hauser Group.

 

With respect to LC, we believe we are the major producer of fraction collectors.  In the traditional markets of fraction collectors and low pressure liquid chromatography equipment, our major competitors are Amershem Biosciences UK Ltd., and Gilson Medical Electronics, Inc.  In the drug discovery market, the major competitors are  Biotage, Inc., a division of the Dyax Corporation and Argonaut Technologies, Inc.  Our primary competitor in the column market is Amershem Biosciences UK Ltd.

 

There are a number of suppliers for the process monitoring markets with market share varying from country to country.  While limited information is available, we believe that the primary global competitors are the Danaher Corporation, WTW, LAR Analytik & Umwelt Messtechnik GmbH, and the Endress + Hauser Group.

 

In the SFE equipment market we are the market leader with approximately 20 percent of the world market share.  Management estimates that its competitors, Applied Separations, Inc. and Leco Corporation, each have a market share of less than 20 percent, with the remaining market served by specialty engineering firms.

 

With respect to syringe pumps, market share is difficult to estimate due to the various niche markets we service.  In the United States, our major competitor is Quizix, Inc.  We believe that we hold a dominant position relative to Quizix, Inc. in all but one niche market.

 

4

 

Research and Engineering

 

Isco commits significant resources to ongoing research and engineering activities.  A significant amount of our research and engineering activities are focused on new product development targeted to increase our market share of existing product lines.  Activities focused in the areas of SWIFT^® media and our process monitoring product line increased in fiscal 2003.  Funding for SWIFT^® media and related hardware will increase in fiscal 2004 due to the timing of development activities.  Over the long-term we will explore present and related markets that could utilize new products developed from our expanding technology base.  For fiscal years 2003, 2002, and 2001, we spent approximately $6.4 million or 11 percent of sales, $5.6 million or 9 percent of sales, and, $5.3 million or 9 percent of sales, respectively, on research and engineering.

 

Patents and Licenses

 

We believe we derive a competitive advantage from our patents and have a policy of obtaining patents wherever commercially feasible.  We also vigorously assert and defend our patents.  Isco, Inc.’s products are covered by 89 United States patents, 85 of which are owned by Isco, Inc. and four under which we are the exclusive licensee.  There are also numerous corresponding patents issued by other countries.  Isco, Inc. owned patents have been assigned to us by the inventors on a royalty-free basis.  We currently have 10 patent applications pending at the United States Patent and Trademark Office.

 

Regulation

 

Management believes Isco is in compliance with current environmental regulations.  Therefore, no unfavorable impact on competition or earnings is expected.  We have no government contracts that are subject to renegotiation of profits upon contract completion.  Although our products are not subject to significant government regulation, the markets for many of our products are regulation driven.

 

Backlog

 

On September 26, 2003, Isco’s order backlog was $5.7 million, the majority of which is scheduled for delivery prior to July 30, 2004, the close of fiscal 2004.  A year earlier, on September 27, 2002, the order backlog was $5.0 million.

 

Manufacturing and Sources of Supply

 

Isco-Lincoln’s manufacturing operations are vertically integrated.  We fabricate most of the metal and plastic components used in our products and obtain the required raw materials from several sources. Production planning is handled by a computerized production control system that ensures raw materials and sub-component parts are received on time for final assembly.  Since we are not reliant upon outside suppliers for these types of components, we are generally able to produce them at a lower cost and maintain a consistently high level of quality.

 

Products manufactured by Isco-Lincoln use a variety of purchased mechanical, electrical, and electronic components. Most of these components are available from several sources.  Currently, we are not experiencing any shortage of raw materials or components.

 

STIP’s manufacturing operations consist mainly of final assembly and testing, with most other processes outsourced. Currently, we have not experienced any shortages.  Production planning is handled by a computerized production control system that ensures raw materials and sub-component parts are received on time for final assembly.

 

Employees

 

On September 26, 2003, we had 421 employees.  There were 183 employees engaged in production, 71 in research and engineering, 127 in marketing and sales, and 40 in administration.  None of our employees are represented by a labor union.  We have never experienced a work stoppage.

 

5

 

Item 2. Properties.

 

Our principal offices located in Lincoln, Nebraska houses our corporate, executive, and administrative offices along with sales, research, engineering, manufacturing, and maintenance activities. The total square footage at this location is approximately 168,000 square feet and is located on approximately 30 acres.  All land and buildings are owned and unencumbered.

 

STIP leases 1,564 square meters in a building located in Groß-Umstadt, Germany.  The facility houses the engineering, manufacturing, sales, and administrative activities of STIP.  The lease term is an annual renewal with a 1-year advance non-renewal clause.  The current lease expires December 31, 2004.

 

 

Item 3. Legal Proceedings.

 

On August 8, 2003, we reached a settlement with Cornell Research foundation, Inc. (“Cornell”) related to Isco’s patent license agreement.  We retained an exclusive patent license agreement as limited by the earlier decision reached by an arbitration panel regarding fields of use and column sizes.  In addition, we have obtained a non-exclusive patent license agreement which covers additional fields of use and column sizes for liquid chromatography use.  As a result of this settlement, all parties have agreed to drop all legal actions.  We consider these licensing arrangements advantageous to Isco.

 

In January 2001 we received $425,000 as a result of the settlement of pending litigation regarding the Company’s abandoned enterprise resource planning (ERP) system.

 

 

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

 

During the fourth quarter of fiscal 2003, 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, 2003 – 5,727,838 shares outstanding and approximately 247 shareholders of record.

 

Market:  NASDAQ/NMS.  Symbol: ISKO

 

Stock price: The high and low trade prices of the common stock and the cash dividends declared in each quarter during the last two fiscal years are shown below:

 

		Common Stock Price Range												Cash Dividends Per Share
		2003						2002
		High			Low			High			Low			2003			2002
First quarter		$	9.10		$	7.75		$	7.96		$	6.75		$	0.06		$	—
Second quarter		9.49			7.49			10.30			7.70			0.06			0.05
Third quarter		9.25			7.06			10.50			9.07			0.06			0.05
Fourth quarter		9.22			7.07			10.45			8.75			0.06			0.05

 

6

 

Item 6. Selected Financial Data.

 

Amounts in thousands except per share data.

 

		Fiscal Year
		2003			2002			2001(1)			2000(2)			1999(3)
For the fiscal year:
Net sales		$	60,881		$	59,199		$	56,846		$	55,183		$	51,911
Gross margin		32,484			30,897			29,893			29,018			26,941
Income (loss) from operations		1,497			2,793			3,853			(1,589		)	(1,663		)
Other income (expense)		342			427			249			514			725
Provision for income taxes (benefit)		564			786			1,285			(123		)	(303		)
Net income (loss)		1,275			2,434			2,817			(952		)	(635		)
At fiscal year-end:
Current assets		$	31,623		$	27,707		$	25,494		$	25,168		$	23,906
Working capital		24,087			19,131			18,664			18,411			16,023
Total assets		54,435			55,878			53,264			50,442			53,325
Long-term debt, less current portion		584			1,006			2,056			3,164			3,996
Shareholders’ equity		45,783			45,576			43,589			40,521			41,446
Average shares outstanding (basic)		5,696			5,665			5,647			5,644			5,645
Average shares outstanding (diluted)		5,863			5,888			5,802