<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED JANUARY 25, 1997
Commission File Number 0-21838
INDUSTRIAL SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1481281
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Oakdale Road, Oakdale, PA 15071
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 412-788-4353
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share (Title of Class)
Indicate by check mark whether the 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
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. [ X ]
As of April 17, 1997, there were 3,375,087 shares of Common Stock, par value
$.01 per share of the Registrant outstanding. The aggregate market value of
such shares, other than shares held by persons who may be deemed affiliates of
the Registrant, was $14,594,401 based on the closing sales price reported on
Nasdaq National Market for April 17, 1997.
Documents Incorporated by Reference.
Portions of the 1996 Annual Report to Shareholders are incorporated by reference
into Part II and Part IV hereof.
Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders are
incorporated by reference into Part III hereof.
Portions of the Registrants Registration Statement No. 33-63182 on Form S-1 are
incorporated by reference into Part IV hereof.
<PAGE>
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART 1
1. Business...................................................... 1
2. Properties.................................................... 5
3. Legal Proceedings............................................. 5
4. Submission of Matters to a Vote of Security Holders........... 5
4A. Executive Officers of the Registrant.......................... 5
PART II
-------
5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 6
6. Selected Financial Data....................................... 6
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 6
8. Financial Statements and Supplementary Data................... 6
9. Changes in and Disagreements on Accounting and Financial
Disclosure.................................................... 6
PART III
--------
10. Directors and Executive Officers of the Registrant............ 7
11. Executive Compensation........................................ 7
12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 7
13. Certain Relationships and Related Transactions................ 7
PART IV
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14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 8
<PAGE>
PART I.
ITEM 1. BUSINESS
Overview
Industrial Scientific Corporation designs, manufactures, markets, and services
portable instruments for detecting, measuring and monitoring a wide variety of
gases, including toxic and combustible gases and oxygen, to protect and preserve
human life. The Company's portable gas monitoring instruments are used by
individuals for safety and industrial hygiene purposes in many different
industries, often in confined spaces posing risks of asphyxiation, poisoning and
explosion. Each portable instrument detects, measures and monitors gases singly
or in combination, including oxygen, carbon monoxide, hydrogen sulfide,
chlorine, nitrogen dioxide, sulfur dioxide and flammable hydrocarbons such as
methane (natural gas), hexane and propane. The Company also manufactures and
markets various instrument accessories such as sampling pumps, external warning
devices and battery chargers.
Industrial Scientific Corporation was incorporated in Pennsylvania in 1985. Its
principal offices are located at 1001 Oakdale Road, Oakdale, Pennsylvania,
15071. Its telephone number is 412-788-4353.
Portable Gas Monitoring Instruments
The Company manufactures portable gas monitoring instruments ranging from
single-gas to four-gas portable monitors. All but two of the Company's
instruments continuously monitor, rather than spot-check, gases during their
period of use. Audible and visual alarms are included in each instrument and
are activated if gases reach specified limits. All of the Company's instruments
are portable, weighing from 6 to 26 ounces, and can be carried in a belt-mounted
leather case. The Company's instruments are designed for ruggedness and shock
resistance. In addition, the instruments are designed to eliminate erratic
readings and false alarms from radio frequency interference ("RFI"). All of the
instruments are designed to function for at least an entire 10-hour shift
without battery recharging or replacement. Generally, single-gas toxic or
oxygen monitors use alkaline batteries which last from 1,300 to 2,400 hours.
Combustible gas monitors, which require higher power, generally have
rechargeable battery packs. Multiple-gas monitors also generally use
rechargeable battery packs since combustible gas sensors are commonly included
in these monitors. Accurate measurement of gas concentrations is a basic
requirement of gas monitors. The Company's products combine sensors with
proprietary circuitry designed by the Company for accurate and consistent
performance across a broad range of temperatures and humidities.
1
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The Company also sells replacement sensors, other replacement parts and a full
line of accessories for its portable gas monitoring instruments. These
accessories include sampling pumps and probes (for remote monitoring prior to
entry), battery chargers, carrying cases, calibration kits and gases and
external alarm devices. Sales of portable gas monitoring instruments,
accessories, replacement parts and service accounted for 97% of the Company's
net sales for fiscal years 1994, 1995, and 1996.
Other Products
In addition to its portable gas monitoring instruments and accessories, the
Company manufactures and sells Lifeline(R) air filtration and monitoring
products which filter compressed air and monitor carbon monoxide levels;
conveyor belt fire detection systems for unmanned areas in coal mines; water
deluge systems triggered by heat sensors; and carbon monitoring systems for
enclosed areas such as coal preparation storage areas, parking garages and motor
pools. Sales of these products accounted for 3% of the Company's net sales for
fiscal years 1994, 1995, and 1996.
Recent Acquisitions
In February 1996, the Company invested $267,000 in Industrial Scientific Arabia
Limited, a joint venture with a Saudi Arabian partner. This investment is
accounted for using the equity method.
In October 1996, the Company acquired all of the gas monitoring systems products
manufactured by McNeill International. The acquisition was accounted for as a
purchase and, accordingly, the purchase price has been allocated to the
respective assets acquired based on their estimated fair market values as of the
date of the acquisition. The acquisition resulted in intangible assets of
$310,000 consisting principally of drawings, kits and software.
Marketing, Sales and Distribution
The Company's products are primarily sold through a network of independent
distributors. The Company has 23 regional sales managers located throughout the
United States, Canada, Europe, the Middle East, and Pacific Rim to support these
distributors. At its corporate headquarters, the Company has 22 sales and
customer service representatives who support distribution and 19 employees
dedicated to prompt product service and repair. The Company's sales and
marketing efforts include advertising, product management, training, customer
service and sales functions.
The Company continues to concentrate on international sales growth and expects
that foreign sales will continue to contribute significantly to the Company's
revenues. International sales accounted for approximately 12%, 13%, and 20% of
net sales for fiscal years 1994, 1995, and 1996, respectively. The Company has
a Managing Director located in Sydney, Australia, three regional sales managers
located in Canada, a regional sales manager in the Netherlands, ten full time
employees working at its Industrial Scientific Arabia, Ltd. joint venture in the
Middle East, and an International sales manager and a Sales coordinator located
at corporate headquarters who support foreign distribution and concentrate on
international sales growth.
2
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The Company's five largest distributors accounted for approximately 54%, 56%,
and 48% of net sales for fiscal years 1994, 1995, and 1996, respectively. Of
these five, Vallen Safety Supply Company, which comprised approximately 21% of
sales in fiscal 1996, is based in Houston, Texas and specializes in the
distribution of safety products.
The Company advertises extensively in trade journals and provides extensive
training materials, including videotapes, on the use and maintenance of its
products. The Company's representatives call on customers directly and with
distributor representatives. Additionally, the Company exhibits at most major
trade shows in the United States and Canada which emphasize safety, industrial
hygiene and environmental issues.
Research, Development and Engineering
The Company conducts research, development and engineering for existing and new
products at its primary facility near Pittsburgh, Pennsylvania and at its
Cheswick, Pennsylvania Monitor Group site. The Company spent approximately $2.0
million, $2.4 million, and $3.0 million for research and development in fiscal
years 1994, 1995, and 1996, respectively, representing 6.2%, 7.0%, and 8.3% of
net sales in such fiscal years.
In 1996, the Company introduced the MDU420, the first instrument utilizing an
internally developed and patented infared sensor for 0 - 100% methane by volume.
The MDU420 provides full scale monitoring with a single instrument.
In March 1997, the Company announced that it had signed a letter of intent to
sell Monitor Group, the division responsible for the commercial development of
the MG2100. The sale is expected to be completed in the first quarter 1997.
Raw Materials and Supplies
With the exception of toxic gas and oxygen sensors, the materials and supplies
used to produce the Company's products are generally available from several
suppliers. Since 1988, the Company has purchased all of its toxic gas and
oxygen sensors from a single supplier. The Company believes that its
relationship with this supplier is good and has not experienced any difficulties
in obtaining sensors or any other materials and supplies needed to produce its
products.
Competition
The market for gas detection and monitoring instruments is highly competitive.
The Company is in competition with many small and large enterprises. Some of
the Company's competitors are subsidiaries or divisions of larger corporations
that have substantially greater financial resources than the Company. The
Company believes that the principal competitive factors in all markets for its
products are the performance and reliability of products and service, product
size, technical features and price.
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Patents, Trademarks and Licenses
The Company relies primarily upon trade secret laws and confidentiality
agreements with its employees, suppliers and other third parties to protect the
Company's proprietary technology and other information. Although the Company
does not deem patents to be critical to its ability to compete, when in its best
interests, the Company seeks patent protection for certain of its products.
Regulatory Matters
The Company's products are subject to regulation by, among other governmental
entities, the federal Mine Safety and Health Administration and, to a lesser
extent, corresponding foreign agencies. In order to ensure that products
distributed for use in the mining industry in the United States are safe and
effective, MSHA regulates the introduction, manufacture, servicing, labeling,
distribution of and record-keeping for such products.
In manufacturing its products, the Company must comply with applicable safety
regulations and is subject to various record-keeping requirements and to
inspections. Certain of these agencies conduct periodic inspections of the
Company's facilities. The Company has satisfactorily passed each of its
inspections and believes that its manufacturing, documentation and quality
control procedures meet the requirements of these regulations. If any of these
regulatory agencies were to determine that the Company's products were not
manufactured in accordance with applicable regulations, they would have the
authority, in addition to less drastic remedies, to order the Company to cease
distributing its products to the affected group of customers.
Environmental Matters
The Company is subject to various environmental laws and regulations pertaining
to the storage and handling of materials, the management and disposal of solid
wastes and emissions or discharges from its operations. The Company believes
that its current operations are in material compliance with all currently
applicable environmental laws and regulations. There are no current legal
proceedings or expenditures for environmental compliance which would at present
have an expected material adverse effect on the Company.
Employees
As of April 4, 1997, the Company had 211 employees.
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ITEM 2. PROPERTIES
The Company owns a 52,000 square foot corporate headquarters and manufacturing
facility in Oakdale, Pennsylvania near Pittsburgh. Manufacturing and related
support departments occupy approximately 26,000 square feet in this facility,
with the remaining 26,000 square feet devoted to research and development,
engineering, sales and administration. The Company also owns a 25,000 square
foot manufacturing, service and distribution facility approximately 1/8th of a
mile from its corporate headquarters, in which metalworking, service and repair,
warehousing and shipping and receiving operations are located.
The Company leases a facility in Cheswick, Pa. where its portable Mass
Spectrometry operations are located. Manufacturing and research and development
departments occupy approximately 3,200 square feet.
ITEM 3. LEGAL PROCEEDINGS
There are currently no outstanding or pending material legal proceedings with
respect to the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of Fiscal year 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and areas of responsibility of the executive officers
of the Registrant as of January 25, 1997, are listed below:
Kent D. McElhattan, age 48, has been a Director, President and Chief Executive
Officer of the Company since January, 1985. Prior to 1985, he was Vice
President and General Manager of the Industrial Safety Division of National Mine
Service Company, the predecessor to the Company.
James P. Hart, age 42, has been Vice President and Chief Financial Officer since
August 1994. Between 1985 and August 1994 he was Treasurer and Corporate
Controller. Prior to 1985, he was Controller of the Industrial Safety Division
of National Mine Service Company, the predecessor to the Company.
Garth F. Miller, age 40, has been Vice President of Sales and Service since
August 1994. Between 1985 and August 1994 he was Manager of Sales and Manager
of Engineering. Prior to 1985, he was Sales Engineer of the Industrial Safety
Division of National Mine Service Company, the predecessor to the Company.
5
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Part II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth on page 21 of the 1996 Annual
Report to Shareholders under the caption "Market for the Company's Common Stock"
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth on page 3 of the Company's
1996 Annual Report to Shareholders under the caption "Selected Financial Data"
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on pages 8 through 9 of the
Company's 1996 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements, the notes thereto and the
report of the independent accountants are set forth on pages 10 through 20 of
the Company's 1996 Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
6
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors is contained under the caption "Elections Of
Directors" of the Registrant's definitive Proxy Statement for the Annual Meeting
of shareholders on June 11, 1997 (the Proxy Statement) and is incorporated
herein by reference.
The information regarding executive officers is set forth in Part 1, Item 4A
under "Executive Officers of the Registrant." Item 405 of Regulation S-K calls
for disclosure of any known late filings or failure by an insider to file a
report required by Section 16 of the Exchange Act. The information with respect
to this item is contained under caption "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption "Executive
Compensation" of the Proxy Statement and is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is contained under the caption
"Beneficial Ownership Of Equity Securities" of the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain
Relationships And Related Transactions" of the Proxy Statement and is
incorporated herein by reference.
7
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements: The following consolidated financial statements
of the registrant are filed pursuant to Item 8 of this form 10-K and are
incorporated herein by reference to the page numbers indicated below in the 1996
Annual Report to Shareholders which accompanies this report.
<TABLE>
<CAPTION>
Description Page No.
- ----------- --------
<S> <C>
Consolidated Statement of Income - Fiscal Years Ended
January 25, 1997, January 27, 1996, and January 28, 1995 10
Consolidated Statement of Changes in Shareholders' Equity - Fiscal Years
Ended January 25, 1997, January 27, 1996, and January 28, 1995 10
Consolidated Balance Sheet - January 25, 1997, and January 27, 1996 11
Consolidated Statement of Cash Flows - Fiscal Years Ended
January 25, 1997, January 27, 1996, and January 28, 1995 12
Notes to Consolidated Financial Statements 13
Report of Independent Accountants 20
</TABLE>
2. Financial Statement Schedules: Financial statement schedules have been
omitted for the reason that the information is not required or is otherwise
given in the consolidated financial statements and notes thereto.
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C> <C>
3.01 Amended and Restated Articles of Incorporated herein by reference in
Incorporation of Industrial Scientific Exhibit 3.01 to Registration
Corporation Statement No. 33-63182 on Form S-1.
3.02 By-laws of the Company Incorporated herein by reference is
Exhibit 3.02 to the Form S-1.
</TABLE>
8
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<TABLE>
<CAPTION>
<S> <C> <C>
4.01 Form of Stock Certificate Incorporated herein by reference is
Exhibit 4.01 to the Form S-1.
10.01 * Employment Agreement, dated January Incorporated herein by reference is
25, 1985, between the Company and Exhibit 10.01 to the Form S-1.
Kent D. McElhattan
10.02 * Employment Agreement, dated January Incorporated herein by reference is
25, 1985, between the Company and Exhibit 10.02 to the Form S-1.
James P. Hart
10.03 * 1993 Stock Option Plan Incorporated herein by reference is
Exhibit 10.03 to the Form S-1.
10.04 PEDFA Loan Documents dated as of Incorporated herein by reference is
February 1, 1993, relating to the Exhibit 10.04 to the Form S-1.
$4,200,000 PEDFA bond financing
10.05 Documents relating to the $2,000,000 Incorporated herein by reference is
PIDA financing Exhibit 10.05 to the Form S-1.
10.06 License Agreement relating to toxic Incorporated herein by reference is
gas sensor technology dated as of Exhibit 10.06 to the Form S-1.
November 19, 1991
10.07 Distribution Agreement between the Incorporated herein by reference is
Company and Vallen Safety Supply as Exhibit 10.07 to the Form S-1.
amended as of November 17, 1989
10.08 Resolutions of the Board of Directors Incorporated herein by reference is
from a meeting held on August 10, Exhibit 10.08 to the 1995 Form 10-K.
1988, as amended on March 10, 1993
and June 8, 1994, setting forth the terms
of the President's Incentive Plan
10.09 Unanimous Consent of the Board of Incorporated herein by reference is
Directors dated April 14, 1992, as Exhibit 10.09 to the 1995 Form 10-K.
amended on January 27, 1995, setting
forth the terms of the Key Managers'
Performance Incentive Plan
</TABLE>
* - Indicates management contract or compensatory plan, contract or
arrangement.
9
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<TABLE>
<CAPTION>
<S> <C> <C>
10.10 * Employment Agreement, dated January Incorporated herein by reference is
25, 1985, between the Company and Exhibit 10.10 to the 1995 Form 10-K.
Garth F. Miller
13.01 1996 Annual Report to Shareholders Filed herewith.
21.01 List of Subsidiaries of the Company Incorporated herein by reference is
Exhibit 21.01 to the Form S-1.
23.01 Consent of Independent Certified Filed herewith.
Public Accountants
27.01 Financial Data Schedule Filed herewith.
</TABLE>
b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the fiscal year ended January 25, 1997.
* - Indicates management contract or compensatory plan, contract or
arrangement.
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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.
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
April 23, 1997 /s/ Kent D. McElhattan
_____________________________________________
Kent D. McElhattan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kenton E. McElhattan Director and April 23, 1997
- --------------------------- Chairman of the Board
Kenton E. McElhattan
/s/ Kent D. McElhattan President, Chief April 23, 1997
- ---------------------------- Executive Officer, Director
Kent D. McElhattan
/s/ James P. Hart Vice President and April 23, 1997
- ------------------------- Chief Financial Officer
James P. Hart
/s/ Herbert F. Gerhard Director April 23, 1997
- -------------------------
Herbert F. Gerhard
/s/ Donald J. McGraw Director April 23, 1997
- -------------------------
Donald J. McGraw
/s/ James D. Morton Director April 23, 1997
- ----------------------------
James D. Morton
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Sequential Page Number or Reference
- -------------- -----------------------------------
<S> <C> <C>
3.01 Amended and Restated Articles of Incorporated herein by reference in
Incorporation of Industrial Scientific Exhibit 3.01 to Registration
Corporation Statement No. 33-63182 on Form S-1.
3.02 By-laws of the Company Incorporated herein by reference is
Exhibit 3.02 to the Form S-1.
4.01 Form of Stock Certificate Incorporated herein by reference is
Exhibit 4.01 to the Form S-1.
10.01 * Employment Agreement, dated January Incorporated herein by reference is
25, 1985, between the Company and Exhibit 10.01 to the Form S-1.
Kent D. McElhattan
10.02 * Employment Agreement, dated January Incorporated herein by reference is
25, 1985, between the Company and Exhibit 10.02 to the Form S-1.
James P. Hart
10.03 * 1993 Stock Option Plan Incorporated herein by reference is
Exhibit 10.03 to the Form S-1.
10.04 PEDFA Loan Documents dated as of Incorporated herein by reference is
February 1, 1993, relating to the Exhibit 10.04 to the Form S-1.
$4,200,000 PEDFA bond financing
10.05 Documents relating to the $2,000,000 Incorporated herein by reference is
PIDA financing Exhibit 10.05 to the Form S-1.
10.06 License Agreement relating to toxic Incorporated herein by reference is
gas sensor technology dated as of Exhibit 10.06 to the Form S-1.
November 19, 1991
10.07 Distribution Agreement between the Incorporated herein by reference is
Company and Vallen Safety Supply as Exhibit 10.07 to the Form S-1.
amended as of November 17, 1989
</TABLE>
* - Indicates management contract or compensatory plan, contract or
arrangement.
12
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Sequential Page Number or Reference
- -------------- -----------------------------------
<S> <C> <C>
10.08 Resolutions of the Board of Directors Incorporated herein by reference is
from a meeting held on August 10, Exhibit 10.08 to the 1995 Form 10-K.
1988, as amended on March 10, 1993
and June 8, 1994, setting forth the terms
of the President's Incentive Plan
10.09 Unanimous Consent of the Board of Incorporated herein by reference is
Directors dated April 14, 1992, as Exhibit 10.09 to the 1995 Form 10-K.
amended on January 27, 1995, setting
forth the terms of the Key Managers'
Performance Incentive Plan
10.10 * Employment Agreement, dated January Incorporated herein by reference is
25, 1985, between the Company and Exhibit 10.10 to the 1995 Form 10-K.
Garth F. Miller
13.01 1996 Annual Report to Shareholders Filed herewith.
21.01 List of Subsidiaries of the Company Incorporated herein by reference is
Exhibit 21.01 to the Form S-1.
23.01 Consent of Independent Certified Filed herewith.
Public Accountants
27.01 Financial Data Schedule Filed herewith.
</TABLE>
* - Indicates management contract or compensatory plan, contract or
arrangement.
13
<PAGE>
EXHIBIT 13.01
1996 Annual Report to Shareholders
Industrial Scientific Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Financial Data
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Fiscal Year 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
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Amounts in thousands except per share data
--------------------------------------------------------------------------------------------------------------------------
NET SALES $20,012 $24,059 $30,891 $31,421 $34,133 $36,648
--------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 10,221 12,257 16,791 17,020 18,191 19,815
--------------------------------------------------------------------------------------------------------------------------
NET INCOME 2,190 2,594 4,449 4,227 4,067 3,725
--------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE .73 .86 1.38 1.25 1.20 1.10
--------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 6,831 9,424 19,276 23,504 27,571 31,117
--------------------------------------------------------------------------------------------------------------------------
LONG TERM OBLIGATIONS 5,928 6,000 5,617 5,073 4,512 4,143
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 16,111 18,906 28,897 32,213 35,479 39,218
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPH OF NET SALES APPEARS HERE]
[GRAPH OF GROSS PROFIT APPEARS HERE]
[GRAPH OF NET INCOME APPEARS HERE]
[GRAPH OF SHAREHOLDERS' EQUITY APPEARS HERE]
Each of the foregoing graphs depicts in bar chart format the referenced line
items (in millions of dollars) for fiscal years 1991 thru 1996.
- --------------------------------------------------------------------------------
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net Sales
Net sales for fiscal year 1996, ended January 25, 1997, were $36.6 million
and were $2.5 million or 7.4% higher than net sales of $34.1 million for fiscal
year 1995, ended January 27, 1996. Increased international sales resulting from
increased marketing efforts, particularly in the Middle East, were the primary
reason for this increase. Increased sales of replacement parts and repair
services resulting from increased promotion of these offerings also contributed
to the overall increase.
Gross Profit
Gross profit increased $1.6 million or 8.9% to $19.8 million for fiscal
1996 compared to $18.2 million for 1995. Gross profit as a percent of net sales
increased to 54.1% in 1996 compared to 53.3% in 1995. Increased manufacturing
efficiency resulting from investments in labor saving capital equipment was the
principal cause of this increase. Increased competition continues to put
downward pressure on prices. The Company intends to continue to invest in new
product development and cost saving capital equipment to maintain adequate
profit margins.
Operating Expenses
Selling expenses increased $934,000 or 14.1% to $7.6 million in 1996
compared to $6.6 million in 1995, due to higher costs incurred in introducing
the Company's products outside North America, principally in Saudi Arabia and
Australia, and continuing to establish an international distribution and
service network.
Research, development and engineering expense totaled $4.0 million in 1996
compared to $3.0 million in 1995, an increase of $1.0 million or 40.9%.
Increased expense incurred in the ongoing commercial development of the MG2100
portable mass spectrometer is the principal cause of this increase, while new
product development for gas monitoring instruments also contributed. In March
1997, the Company announced that it had signed a letter of intent to sell
Monitor Group, the division responsible for the commercial development of the
MG2100. The sale is expected to be completed in the first quarter 1997. The sale
of this division should reduce research, development and engineering expense for
1997.
Administrative expense increased $190,000 or 6.4% to $3.1 million in 1996
compared to $3.0 million in 1995. Increased profit sharing expense relating to
greater participation by employees is the principal cause.
Other Income and Expense
The Company incurred a loss on its investment in Industrial Scientific
Arabia, Ltd., resulting from start up expenses, and slower than anticipated
growth in service revenue.
Interest income decreased to $777,000 in 1996 compared to $837,000 in 1995.
A greater portion of investments were in tax free instruments which yield a
higher after tax return, but a generally lower coupon rate.
Interest expense decreased due to reduced principal balances resulting
from principal payments during the year.
Provision for Income Taxes
The Company's effective tax rate for 1996 was 33.5% compared to 33.8% for
1995. Increased tax free interest income, partially offset by a reduction in the
utilization of the research and experimentation credit, account for this
decline. The principal difference between the effective tax rate and the federal
statutory rate of 34% was the effect of state income taxes, offset by the
research and experimentation credit, non-taxable interest income, and foreign
sales tax credits.
RESULTS OF OPERATIONS
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net Sales
Net sales for fiscal year 1995, ended January 27, 1996, were $34.1 million
and were $2.7 million or 8.6% higher than net sales of $31.4 million for fiscal
year 1994, ended January 28, 1995. Increased marketing efforts resulting from
the additional field sales staff added in North America at the beginning of FY
1995, increased sales efforts internationally, and the contribution of new
products such as GasBadge,(TM) were the primary reasons for the increase. Sales
of instruments and accessories, spare parts, and repair services all increased
during the year.
Gross Profit
Gross profit increased $1.2 million or 6.9% to $18.2 million for fiscal
1995 compared to $17.0 million for 1994. Gross profit as a percent of net sales
declined to 53.3% in 1995 compared to 54.2% in 1994. Selective price discounting
in competitive situations and increased manufacturing costs were the principal
causes of this modest decline.
- --------------------------------------------------------------------------------
8
<PAGE>
Operating Expenses
Selling expenses increased $1.4 million or 27.9% to $6.6 million in 1995
compared to $5.2 million in 1994, due to increased costs relating to the
additional field sales staff hired during the first quarter of 1995, and higher
travel and promotional costs incurred in introducing the Company's products
outside North America and establishing an international distribution and service
network.
Research, development and engineering expense totaled $2.8 million in 1995
compared to $2.2 million in 1994, an increase of $624,000 or 28.1%. Expenses
incurred in the ongoing commercial development of the MG2100 portable mass
spectrometer, and intensified new product development for gas monitoring
instruments were the principal reasons for the increase.
Administrative expense decreased $164,000 or 4.9% to $3.2 million in 1995
compared to $3.3 million in 1994. A decrease in the Company's discretionary
contribution to the employee profit sharing plan, partially offset by increased
amortization expense relating to the intangible assets purchased as part of the
Monitor Group acquisition, principally account for this decrease.
Other Income and Expense
Interest income increased to $837,000 in 1995 compared to $557,000 in 1994,
due to generally higher short-term interest rates, and a higher average invested
cash balance.
Interest expense decreased slightly as reduced principal balances were
partially offset by higher variable interest rates.
Provision for Income Taxes
The Company's effective tax rate for 1995 was 33.8% compared to 36.0% for
1994. Increased research and experimentation credits and increased tax free
interest income account for this decline. The principal difference between the
effective tax rate and the federal statutory rate of 34% was the effect of state
income taxes, offset by the research and experimentation credit, non-taxable
interest income, and foreign sales tax credits.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
January 25, 1997 January 27, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets $28,064,000 $23,764,000
Current Liabilities 3,866,000 3,187,000
----------- -----------
Working Capital $24,198,000 $20,577,000
=========== ===========
- ------------------------------------------------------------------------------------------------
</TABLE>
The Company's working capital position was $24.2 million at January 25,
1997, compared to $20.6 million at January 27, 1996, an increase of $3.5
million. Cash flow from operations totaled $6.3 million in 1996 compared to $3.6
million in 1995. Capital investments totaled $1.2 million in 1996 and included
the acquisition of the Systems Division of McNeill International and the
formation of Industrial Scientific Arabia, Ltd. The remaining portion of the
capital investments were used to acquire production tooling related to new
products and computer hardware and software to support the Company's growing
operations.
The acquisition of Monitor Group for $2.5 million was completed during the
second quarter 1995. In March 1997, the Company announced its intention to sell
Monitor Group and signed a letter of intent with L.B. Foster Company for such
sale.
The Company's cash flow and current capital structure provide adequate
flexibility for the growth of its operations and the funding of capital spending
programs.
ACCOUNTING RULE CHANGES
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." The standard is effective for fiscal 1997. SFAS No.
128 specifies the computation, presentation and disclosure requirements for
earnings per share. The Company does not believe that the effect of this
statement will be material to the financial statements.
- --------------------------------------------------------------------------------
9
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
<TABLE>
<CAPTION>
Consolidated Statement of Income
- -------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended January 25, 1997 January 27, 1996 January 28, 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 11) $36,647,770 $34,133,275 $31,420,629
Cost of goods sold 16,832,999 15,941,791 14,401,004
----------- ----------- -----------
Gross profit 19,814,771 18,191,484 17,019,625
----------- ----------- -----------
Operating expenses:
Selling 7,578,677 6,644,381 5,193,052
Research, development and engineering 4,006,508 3,043,702 2,218,686
Administrative 3,142,418 2,952,134 3,316,455
----------- ----------- -----------
14,727,603 12,640,217 10,728,193
----------- ----------- -----------
Operating profit 5,087,168 5,551,267 6,291,432
Interest income 777,256 836,832 557,065
Interest expense (190,312) (247,428) (249,122)
Other (expense) income (69,150) 908 5,355
----------- ----------- -----------
Income before income taxes 5,604,962 6,141,579 6,604,730
Provision for income taxes (Note 9) 1,880,000 2,075,000 2,378,000
----------- ----------- -----------
Net income $ 3,724,962 $ 4,066,579 $ 4,226,730
=========== =========== ===========
Net income per common share $ 1.10 $ 1.20 $ 1.25
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 3,375,319 3,383,645 3,390,197
=========== =========== ===========
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statement of Changes in Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock
---------------------------------------------
Issued In Treasury Additional Total
--------------------------------------------- Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 29, 1994 3,375,000 $ 33,750 - - $5,469,879 $13,772,640 $ 19,276,269
Net income-1994 - - - - - 4,226,730 4,226,730
Exercise of stock
options-1994
(Note 13) 87 1 - - 1,391 - 1,392
--------- ---------- --------- --------- ---------- ----------- ------------
Balance at
January 28, 1995 3,375,087 33,751 - - 5,471,270 17,999,370 23,504,391
Net income-1995 - - - - - 4,066,579 4,066,579
--------- ---------- --------- --------- ---------- ----------- ------------
Balance at
January 27, 1996 3,375,087 33,751 - - 5,471,270 22,065,949 27,570,970
Purchase of treasury
stock-1996
(Note 13) - - 11,800 (178,663) - - (178,663)
Net income-1996 - - - - - 3,724,963 3,724,963
--------- ---------- --------- --------- ---------- ----------- ------------
Balance at
January 25, 1997 3,375,087 $ 33,751 11,800 $(178,663) $5,471,270 $25,790,912 $ 31,117,270
========= ========== ========= ========= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
10
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
January 25, 1997 January 27, 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS Current assets:
Cash and cash equivalents $ 6,879,111 $ 7,335,292
Short-term investments (Notes 4 and 15) 12,379,680 7,815,736
------------ -----------
19,258,791 15,151,028
Accounts receivable, less allowance of $55,000 in 1996
and $15,000 in 1995 4,791,000 4,394,799
Inventories (Note 5) 3,159,519 3,503,814
Prepaid expenses and other assets 334,795 311,401
Deferred income taxes (Note 9) 519,903 252,546
Assets held by trustee -- 150,000
------------ -----------
Total current assets 28,064,008 23,763,588
------------ -----------
Long-term investments (Notes 4 and 15) 1,070,849 928,610
Property, plant and equipment, at cost:
Building and improvements 7,421,444 7,421,444
Machinery and equipment 4,251,821 3,926,608
Computers, furniture and fixtures 1,922,898 1,594,897
------------ -----------
13,596,163 12,942,949
Less accumulated depreciation and amortization 6,217,653 4,744,963
------------ -----------
7,378,510 8,197,986
Land 390,000 390,000
------------ -----------
7,768,510 8,587,986
Other assets (Notes 3 and 6) 2,314,773 2,199,272
------------ -----------
Total assets $ 39,218,140 $35,479,456
============ ===========
---------------------------------------------------------------------------------------------------------------------------
LIABILITIES Current liabilities:
AND Accounts payable $ 908,931 $ 991,935
SHAREHOLDERS' Accrued expenses:
EQUITY Payroll and related items 702,008 564,657
Compensated absences 294,789 146,118
Warranty expenses 583,350 298,789
Other accrued expenses 950,583 268,217
Income taxes payable 57,003 303,892
Current portion of term debt (Note 7) 369,739 613,071
------------ -----------
Total current liabilities 3,866,403 3,186,679
Term debt (Note 7) 4,142,593 4,512,332
Deferred income taxes (Note 9) 91,874 209,475
------------ -----------
Total liabilities 8,100,870 7,908,486
Commitments and contingencies (Notes 7 and 8)
Shareholders' equity:
Preferred stock, without par value;
authorized 1,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
15,000,000 shares; 3,375,087 shares issued at
January 25, 1997 and January 27, 1996 33,751 33,751
Additional paid-in capital 5,471,270 5,471,270
Retained earnings 25,790,912 22,065,949
------------ -----------
Treasury stock (11,800 shares), at cost (Note 13) (178,663) --
------------ -----------
Total shareholders' equity 31,117,270 27,570,970
------------ -----------
Total liabilities and shareholders' equity $39,218,140 $35,479,456
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended January 25, 1997 January 27, 1996 January 28, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,724,963 $ 4,066,579 $ 4,226,730
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,000,440 1,523,096 1,245,566
Deferred income taxes (384,958) (42,771) (5,202)
Loss on equity investment 69,150 -- --
Changes in operating assets and liabilities:
(Increase) decrease in accounts and note receivable (396,201) (1,179,569) 571,146
(Increase) decrease in prepaid expenses and other assets (23,394) 76,681 (215,748)
Decrease (increase) in inventories 344,295 (817,213) 9,960
Increase (decrease) in accounts payables and accrued expenses 1,169,945 (379,320) (249,964)
(Decrease) increase in income taxes payable (246,889) 288,232 (231,409)
------------ ------------ -----------
Net cash provided by operating activities 6,257,351 3,535,715 5,351,079
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (653,214) (1,097,664) (1,087,817)
Acquisition of business (310,000) (2,500,000) --
Increase in equity investment (235,150) -- --
Proceeds from maturities of investments 7,801,000 15,295,000 3,500,000
Purchase of investments (12,674,434) (15,229,061) (7,790,953)
------------ ------------ -----------
Net cash used in investing activities (6,071,798) (3,531,725) (5,378,770)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (178,663) -- --
Proceeds from exercise of stock options -- -- 1,392
Principal payments on debt (613,071) (636,894) (387,827)
------------ ------------ -----------
Net cash used in financing activities (791,734) (636,894) (386,435)
------------ ------------ -----------
Net decrease in cash and cash equivalents (606,181) (632,904) (414,126)
Cash and cash equivalents at beginning of year 7,485,292 8,118,196 8,532,322
------------ ------------ -----------
Cash and cash equivalents at end of year
(including $150,000 and $343,578 of cash held by
trustee at January 27, 1996 and January 28, 1995) $ 6,879,111 $ 7,485,292 $ 8,118,196
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 191,493 $ 247,428 $ 249,122
Taxes 2,511,889 1,829,768 2,445,295
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
12
<PAGE>
Notes to Consolidated financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION:
Industrial Scientific Corporation (the Company) designs, manufactures and sells
gas monitoring instruments, systems and other related products.
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Industrial Scientific Devices, Inc., a Foreign
Sales Corporation (FSC), Industrial Scientific Pty., and Industrial Scientific
of Delaware, Inc., an investment holding corporation. All material intercompany
accounts and transactions have been eliminated. The Company accounts for its
investment in Industrial Scientific Arabia Limited using the equity method of
accounting.
Fiscal Year:
The Company's fiscal year ends on the last Saturday of January.
Fiscal year 1996 had 52 weeks and ended on January 25, 1997.
Fiscal year 1995 had 52 weeks and ended on January 27, 1996.
Fiscal year 1994 had 52 weeks and ended on January 28, 1995.
Use of Estimates:
The preparation of 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. The Company maintains cash and cash
equivalents with various financial institutions in excess of the amount insured
by the Federal Deposit Insurance Corporation. Management believes the credit
risk related to these cash and cash equivalents is minimal.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out (LIFO) basis.
Property, Plant and Equipment:
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. The cost of maintenance and repairs is charged to
income as incurred. Renewals and betterments of a nature considered to
significantly extend the useful lives of the assets are capitalized. When
property is retired or otherwise disposed of, the asset and accumulated
depreciation are removed from the accounts and the resulting profit or loss is
reflected in income.
Other Assets:
Other assets include patents, drawings, kits, trade names and the excess of
purchase price over net tangible assets of business acquired. The Company's
policy is to amortize these intangibles on a straight-line basis for periods
ranging from 3 to 17 years. The carrying value of intangibles is evaluated
periodically in relation to operating performance and future undiscounted cash
flows of the underlying business. Adjustments are made if the sum of expected
future net cash flows is less than book value (refer to Note 6).
Product Warranty:
The Company provides a reserve for estimated future warranty expenses on sales
of manufactured products on the basis of prior experience.
Deferred Income Taxes:
Deferred income taxes are recorded using the liability method. Under this
method, deferred tax liabilities and assets are provided for the differences
between the financial statement and the tax basis of assets and liabilities
using enacted tax rates in effect for the years in which the differences are
expected to reverse.
Net Income Per Common Share:
Net income per common share is computed by dividing net income by the weighted
average number of common shares outstanding and common stock equivalents which
would result from the exercise of stock options.
- --------------------------------------------------------------------------------
13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
Revenue Recognition:
The Company recognizes revenue from product sales upon shipment to the customer.
Revenues from repairs and servicing of instruments are recognized when performed
and returned to the customer. The Company records revenue from maintenance
contracts as earned over the term of the contract.
Research and Development Costs:
Research and development costs are expensed as incurred and approximated
$3,062,000 in fiscal 1996, $2,376,000 in fiscal 1995 and $1,962,000 in fiscal
1994.
Reclassifications:
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
- --------------------------------------------------------------------------------
3. ACQUISITIONS AND DISPOSITIONS:
In February 1996, the Company invested $267,000 for a 49% interest in Industrial
Scientific Arabia, Ltd. This investment is accounted for using the equity method
of accounting.
In October 1996, the Company acquired McNeill International's Systems Division.
The acquisition was accounted for as a purchase and, accordingly, the purchase
price has been allocated to the respective assets acquired based on their
estimated fair market values as of the date of the acquisition. The acquisition
resulted in intangible assets of $310,000 consisting principally of drawings,
kits and software. These assets are being amortized on a straight-line basis
over their estimated useful lives of five years. Operating results of this
acquisition have been included in the Consolidated Statement of Income from the
date of the acquisition forward. Pro forma results of the Company, assuming the
acquisition had been made at the beginning of the year would not be materially
different from the results reported.
In June 1995, the Company acquired all of the assets of Monitor Group for $2.5
million in cash. The acquisition was accounted for as a purchase and resulted in
goodwill of $1,000,000 and other intangible assets of $1,400,000 principally
consisting of patents, trade names, software, and drawings. In January 1997, the
Board of Directors adopted a resolution to dispose of the Monitor Group. As of
January 25, 1997, the net book value of the Monitor Group assets amount to
approximately $2,100,000. On March 10, 1997, the Company signed a letter of
intent to sell Monitor Group.
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES:
Investments in debt securities were as follows:
<TABLE>
<CAPTION>
January 25, 1997
-----------------------------------------------------------------
Gross Unrealized Holding
------------------------
Amortized Cost Gains Losses Fair Value
-------------- -------------------------- ------------
<S> <C> <C> <C> <C>
Less than one year:
State and political subdivisions $10,375,554 $151,634 $ (3,750) $10,523,438
Corporate 2,004,126 944 - 2,005,070
----------- -------- ---------- -----------
$12,379,680 $152,578 $ (3,750) $12,528,508
=========== ======== ========== ===========
One to two years:
State and political subdivisions $ 1,070,849 $ 71,993 - $ 1,142,842
=========== ======== ========== ===========
<CAPTION>
January 27, 1996
------------------------------------------------------------------
Gross Unrealized Holding
------------------------
Amortized Cost Gains Losses Fair Value
-------------- --------------------------- ------------
<S> <C> <C> <C> <C>
Less than one year:
State and political subdivisions $ 6,816,244 $ 33,372 $ (19,272) $ 6,830,344
Corporate 999,492 18,374 - 1,017,866
------------ --------- --------- ------------
$ 7,815,736 $ 51,746 $ (19,272) $ 7,848,210
============ ========= ========= ============
One to two years:
State and political subdivisions $ 928,610 $ 12,427 - $ 941,037
============ ========= ========= ============
</TABLE>
The Company's investments are in investment grade debt securities that it has
both the intent and ability to hold to maturity and are carried at amortized
cost. Realized and unrealized gains and losses are determined using the specific
identification method.
- --------------------------------------------------------------------------------
14
<PAGE>
5. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
January 25, 1997 January 27, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
At standard costs, which approximate first-in, first-out cost:
Raw materials $2,691,313 $2,952,288
Work in process 382,616 366,968
Finished goods 244,608 314,662
---------- ----------
3,318,537 3,633,918
Less LIFO reserve 159,018 130,104
---------- ----------
Inventories at LIFO value $3,159,519 $3,503,814
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
6. OTHER ASSETS:
Other assets consisted of the following:
<TABLE>
<CAPTION>
January 25, 1997 January 27, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Patents and trade names $1,050,000 $1,050,000
Goodwill 1,000,000 1,000,000
Other 826,000 350,000
---------- ----------
2,876,000 2,400,000
Less accumulated amortization 561,227 200,728
---------- ----------
$2,314,773 $2,199,272
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
7. TERM DEBT:
Term debt consisted of:
<TABLE>
<CAPTION>
January 25, 1997 January 27, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1991 Pennsylvania Economic Development Financing
Authority (PEDFA) bonds, variable interest rate (interest
rate at January 25, 1997 is 3.65%), principal payable in
semi-annual installments of $150,000 through February
1997 and $100,000 thereafter through February 2011. (A) $2,900,000 $3,300,000
Pennsylvania Industrial Development Authority (PIDA)
mortgage note, payable in monthly installments of
$11,951, including interest at 3%, through April 2006. 1,175,230 1,281,654
PIDA mortgage note, payable in monthly installments of
$3,806, including interest at 3%, through April 2002. 221,417 259,906
PIDA mortgage note, payable in monthly installments of
$2,109, including interest at 3%, through July 2006. 208,210 226,990
Capitalized lease obligations, for computer equipment,
payable in monthly installments with effective interest rates
ranging from 9.8% to 11.90%. - 48,310
Other 7,475 8,543
---------- ----------
4,512,332 5,125,403
Less current portion (369,739) (613,071)
---------- ----------
$4,142,593 $4,512,332
========== ==========
</TABLE>
(A) Under the PEDFA debt agreements, tax-exempt bonds are issued which can be
tendered at face value at any time at the option of the holder. The bonds can be
remarketed at the time of such tender The Company is required to maintain a
letter of credit covering the principal and accrued interest on bonds
outstanding. The letter of credit fee is approximately 1/2%. The letter of
credit expires February 2001 and is subject to renewal at that time If future
legislation were to cause the debt to be taxable to the holder, or if the letter
of credit were not renewed, the Company would be required to redeem the bonds.
- --------------------------------------------------------------------------------
15
<PAGE>
7. TERM DEBT: (continued)
The aggregate principal amount of the term debt maturing in each of the next
five fiscal years 1997 through 2001, inclusive, is $370,000, $375,000, $380,000,
$385,000 and $391,000, respectively.
The Company's manufacturing and office facilities collateralize the various debt
agreements. The Company is required to meet certain financial covenants in
connection with the above obligations, including those related to current ratio,
ratio of total liabilities to tangible net worth, minimum tangible net worth and
net income. At January 25, 1997, the Company was in compliance with all such
covenants.
- --------------------------------------------------------------------------------
8. OPERATING LEASES:
The Company leases certain vehicles under operating leases. The minimum rentals
under these agreements for succeeding fiscal years are:
<TABLE>
<CAPTION>
<S> <C>
1997 $114,007
1998 56,764
1999 7,115
--------
Total $177,886
========
</TABLE>
The rental expense for these leases and other leases with terms of less than one
year was approximately $305,000, $230,000 and $90,000 in fiscal years 1996, 1995
and 1994, respectively.
- --------------------------------------------------------------------------------
9. INCOME TAXES:
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,878,000 $1,768,000 $1,898,000
State 387,000 350,000 485,000
---------- ---------- ----------
2,265,000 2,118,000 2,383,000
Deferred:
Federal (327,000) (31,000) -
State (58,000) (12,000) (5,000)
---------- ---------- ----------
(385,000) (43,000) (5,000)
---------- ---------- ----------
Total $1,880,000 $2,075,000 $2,378,000
========== ========== ==========
</TABLE>
A reconciliation of income taxes at the federal statutory rate to the Company's
income tax expense follows:
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal
statutory rate $1,906,000 34.0% $2,088,000 34.0% $2,246,000 34.0%
State income taxes,
net of federal income
tax benefit 215,000 3.8 227,000 3.7 319,000 4.8
FSC benefit (32,500) (.6) (21,000) (.4) (70,000) (1.0)
Research and
experimentation
tax credit (100,600) (1.8) (145,000) (2.4) (34,000) (.5)
Non-taxable interest (152,000) (2.7) (106,000) (1.7) (83,000) (1.3)
Other 44,100 .8 32,000 .6 - -
---------- ----- ---------- ----- ---------- -----
$1,880,000 33.5% $2,075,000 33.8% $2,378,000 36.0%
========== ===== ========== ===== ========== =====
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
9. INCOME TAXES: (continued)
The components of net deferred tax assets and liabilities consisted of:
<TABLE>
<CAPTION>
January 25, 1997 January 27, 1996
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Warranty reserve $221,440 $113,420
Vacation accrual 88,589 43,911
Capitalized inventory costs 88,353 89,527
Other 121,521 5,688
--------- ---------
519,903 252,546
Deferred tax liabilities:
Depreciation and amortization (91,874) (209,475)
--------- ---------
Net deferred tax assets $428,029 $ 43,071
========= =========
</TABLE>
- --------------------------------------------------------------------------------
10. PROFIT-SHARING PLAN:
The Company has a 401(k) profit-sharing plan covering all employees. When
profitable, the Company has committed to match employee salary deferrals at 50%,
up to 6% of eligible employee compensation. In fiscal 1996, 1995 and 1994, the
Company also made additional discretionary contributions, increasing the total
Company match to $1.00 for every $1.00 of employee salary deferrals in 1996 and
1995 and $2.00 for every $1.00 of employee salary deferrals in 1994 (up to the
maximum allowable for tax purposes). Profit-sharing plan expense was comprised
of the following:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Employer matching contribution $213,000 $184,000 $168,000
Discretionary contribution 302,000 266,000 550,000
-------- -------- --------
Total $515,000 $450,000 $718,000
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
11. SIGNIFICANT CUSTOMERS, SUPPLIERS AND EXPORT SALES:
The Company sells its products through independent, strategically-located
distributors and a direct employee sales force mainly throughout the United
States, Canada, Australia and Saudi Arabia. Sales to one distributor represented
approximately 21% of net sales and 17% of accounts receivable in fiscal 1996.
Sales to two distributors represented approximately 26% and 11% of net sales and
29% and 10% of accounts receivable in fiscal 1995. Sales to one distributor
represented approximately 26% of net sales in fiscal 1994.
Export sales were approximately $7,236,000, $4,450,000 and $4,143,000 for fiscal
years 1996, 1995 and 1994, respectively. These sales were to customers
principally in Canada, Saudi Arabia and Australia. No one geographic region
represented more than 10% of total sales.
Although the Company manufactures its own combustible gas sensors, the Company
purchases all of its toxic gas and oxygen sensors from one supplier. Toxic gas
and oxygen sensors are available from several other sources; however, the
Company believes that the sensors produced by this supplier are most compatible
with the Company's overall product specifications. Failure of the supplier to
provide sufficient quantities of sensors on a timely basis could have a material
effect on the Company's operations.
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS:
During fiscal 1996, the Company had sales to their partner in Industrial
Scientific Arabia, Ltd. in the amount of $2,230,000, of which $132,330 is
included in accounts receivable at January 25, 1997.
- --------------------------------------------------------------------------------
13. PURCHASE OF COMMON STOCK:
In November 1996, the Board of Directors approved a plan to purchase up to
337,500 shares of the Company's common stock. During 1996, the Company purchased
11,800 shares of common stock on the open market for an aggregate price of
$178,663.
- --------------------------------------------------------------------------------
14. STOCK OPTION PLAN:
On May 12, 1993, the Board adopted and the shareholders approved the 1993 Stock
Option Plan and reserved 168,750 shares of common stock for issuance under the
plan. All options must be issued at current market prices at the time of grant.
The options vest over a 5 year period from the date of issuance and expire
after 10 years.
- --------------------------------------------------------------------------------
17
<PAGE>
14. STOCK OPTION PLAN (continued)
The Company has elected to account for stock-based employee compensation
arrangements under the provisions of Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," rather than Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation." If compensation cost had been determined based on the fair value
at the grant dates in accordance with SFAS No. 123, the effect on the Company's
net income and earnings per share would not have been material. Pertinent
information regarding options under the plan is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year:
Number 52,008 48,853 47,900
Weighted average exercise price $16.71 $16.51 $16.18
Granted:
Number 2,825 3,930 2,090
Weighted average exercise price $17.56 $19.98 $25.47
Exercised:
Number - - 87
Expired or forfeited:
Number 1,020 775 1,050
Weighted average exercise price $17.20 $18.23 $20.96
-------- -------- --------
Outstanding end of year:
Number 53,813 52,008 48,853
Weighted average exercise price $16.75 $16.71 $16.51
======== ======== ========
Exercisable:
Number 40,431 31,067 20,616
Weighted average exercise price $16.57 $16.49 $16.21
Shares reserved for future options 114,937 116,742 119,897
</TABLE>
- --------------------------------------------------------------------------------
The following tables summarize certain stock option information at January 25,
1997:
<TABLE>
<CAPTION>
Options outstanding: Weighted Average Weighted Average
Range of Exercise Price Number Remaining Life Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$15.00 - $22.50 51,948 6.76 $16.45
$22.51 - $28.25 1,865 7.05 25.13
------ ----- ------
53,813 6.77 $16.75
====== ===== ======
Options exercisable:
<CAPTION>
Weighted Average
Range of Exercise Price Number Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
$15.00 - $22.50 39,161 $16.31
$22.51 - $28.25 1,270 24.94
------ ------
40,431 $16.57
====== ======
</TABLE>
- --------------------------------------------------------------------------------
15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents:
The carrying amount approximates fair value because of the short maturity of
those instruments.
Short and long-term investments:
Fair values are based on quoted market prices.
Long-term debt:
Rates currently available for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt.
- --------------------------------------------------------------------------------
18
<PAGE>
15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:(continued)
<TABLE>
<CAPTION>
January 25, 1997 January 27, 1996
------------------------------ ------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $6,879,111 $6,879,111 $7,335,292 $7,335,292
Short-term investments 12,379,680 12,528,508 7,815,736 7,848,210
Long-term investments 1,070,849 1,142,842 928,610 941,037
Financial liabilities:
Long-term debt (4,512,333) (4,478,000) (5,125,403) (4,850,000)
</TABLE>
- --------------------------------------------------------------------------------
16. NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." The standard is effective for fiscal 1997. SFAS No. 128
specifies the computation, presentation and disclosure requirements for earnings
per share. Management does not believe that the effect of this statement will be
material to the financial statements.
- --------------------------------------------------------------------------------
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table sets forth certain items included in the Company's unaudited
consolidated financial statements for each quarter of fiscal 1996 and 1995.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1996:
Net sales $9,361 $9,072 $8,656 $9,559
Gross profit 5,075 4,760 4,886 5,094
Operating profit 1,571 1,058 1,524 934
Net income 1,120 795 1,064 746
Earnings per share .33 .24 .31 .22
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1995:
Net sales $8,858 $8,205 $8,625 $8,445
Gross profit 4,716 4,338 4,631 4,506
Operating profit 1,633 1,238 1,254 1,426
Net income 1,141 910 946 1,070
Earnings per share .34 .27 .28 .31
</TABLE>
In the fourth quarter of fiscal 1995, the Company reduced its accrual for its
employer match to the profit-sharing plan by approximately $240,000 net of
income taxes.
- --------------------------------------------------------------------------------
19
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders Industrial Scientific Corporation:
We have audited the accompanying consolidated balance sheet of Industrial
Scientific Corporation and subsidiaries as of January 25, 1997 and January 27,
1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended January 25, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Industrial
Scientific Corporation and subsidiaries as of January 25, 1997 and January 27,
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended January 25, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
March 7, 1997, except for Note 3 as to
which the date is March 10, 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
OFFICERS BOARD OF DIRECTORS SUBSIDIARIES
Kent D. McElhattan Kenton E. McElhattan Industrial Scientific Devices, Inc
President and Chief Executive Officer Chairman P.O. Box 12259
Industrial Scientific Corporation 6 - 7 Dronn, Gade
James P. Hart St. Thomas, USVI 00801
Vice President, Finance and Chief Kent D. McElhattan
Financial Officer President and Chief Executive Officer Industrial Scientific of Delaware, Inc.
Industrial Scientific Corporation 103 Springer Building
Garth F. Miller 3411 Silverside Road
Vice President, Sales and Service Herbert F. Gerhard Wilmington Delaware 19810
Former President and Chief
Jeffrey B. Morgan Executive Officer Industrial Scientific Arabia, Ltd.
Vice President, Manufacturing National Mine Service Company P.O. Box 8444
Riyadh 11482
Dr. Annie Q. Wang Dr. Donald J. McGraw Kingdom of Saudi Arabia
Vice President, Science and Medical Director
Technology Occupational and Environmental Industrial Scientific Pty.
Medicine 14 Arterial Road
Patricia L. Gerney Shadyside Hospital St. Ives, New South Wales 2075
Corporate Secretary Australia
James D. Morton, Esquire
Shareholder, Buchanan Ingersoll GENERAL COUNSEL
CORPORATE HEADQUARTERS Professional Corporation Buchanan Ingersoll Professional
Industrial Scientific Corporation Corporation
1001 Oakdale Road Pittsburgh, Pennsylvania
Oakdale, PA 15071-1500
(412) 788-4353 INDEPENDENT ACCOUNTANTS
1-800-DETECTS (338-3287) Coopers & Lybrand L.L.P.
Fax: (412) 788-8353 Pittsburgh, Pennsylvania
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
[PHOTO OF INDUSTRIAL SCIENTIFIC CORPORATE HEADQUARTERS APPEARS HERE]
Corporate headquarters near Pittsburgh, Pennsylvania, includes manufacturing,
research and training facilities.
Annual Meeting of Shareholders
The annual meeting of shareholders will be held at Industrial
Scientific Corporation, 1001 Oakdale Road, Oakdale, Pennsylvania, 10:00 a.m.,
June 11, 1997. (Hankey Farms Exit off Route 22/30 West, located between downtown
Pittsburgh and the International Airport.)
Market for the Company's Common Stock
The Company's common stock began public trading on June 30, 1993, and is
traded on the NASDAQ National Market System under the symbol ISCX. As of April
4, 1997, there were 1,455 beneficial holders of the Company's common stock.
The Company paid nominal cash dividends in fiscal year 1993 (see
Statement of Changes in Shareholders Equity, page 10) and does not intend to pay
cash dividends in the foreseeable future.
The following table sets forth, for the applicable quarters indicated,
the high and low closing sale prices for the common stock as reported on
NASDAQ/NMS.
<TABLE>
<CAPTION>
Year Ended Year Ended
January 27, 1996 January 25, 1997
-------------------------------------------------------------------
Quarter High Low High Low
<S> <C> <C> <C> <C>
First $23.75 $18.50 $18.25 $18.25
Second $21.50 $17.25 $19.00 $18.00
Third $21.75 $19.50 $13.50 $13.50
Fourth $21.75 $17.50 $16.75 $16.25
-------------------------------------------------------------------
</TABLE>
Form 10-K
Copies of the Industrial Scientific Corporation Annual Report on
Form 10-K as filed with the Securities and Exchange Commission will be sent
without charge upon request. Address requests to Patricia L. Gerney, Corporate
Secretary, Industrial Scientific Corporation, 1001 Oakdale Road, Oakdale, PA
15071-1500.
Transfer Agent and Registrar
Chemical Mellon Shareholder Services
85 Challenger Road
Ridgefield Park, New Jersey 07660
800-756-3353
- --------------------------------------------------------------------------------
21
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Industrial Scientific Corporation on Form S-8 (Registration No. 33-65532) of our
report dated March 7, 1997, except for note 3, as to which the date is March 10,
1997, on our audits of the consolidated financial statements of Industrial
Scientific Corporation and Subsidiaries as of January 25, 1997, and January 27,
1996, and for each of the three years in the period ended January 25, 1997,
which reports are incorporated by reference.
Coopers & Lybrand L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
April 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> JAN-25-1997
<CASH> 6,879,111
<SECURITIES> 12,379,680
<RECEIVABLES> 4,846,000
<ALLOWANCES> 55,000
<INVENTORY> 3,159,519
<CURRENT-ASSETS> 28,064,008
<PP&E> 13,596,163
<DEPRECIATION> 6,217,653
<TOTAL-ASSETS> 39,218,140
<CURRENT-LIABILITIES> 3,866,403
<BONDS> 2,900,000
0
0
<COMMON> 33,751
<OTHER-SE> 31,083,519
<TOTAL-LIABILITY-AND-EQUITY> 39,218,140
<SALES> 36,647,770
<TOTAL-REVENUES> 36,647,770
<CGS> 16,832,999
<TOTAL-COSTS> 31,560,602
<OTHER-EXPENSES> 69,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,312
<INCOME-PRETAX> 5,604,962
<INCOME-TAX> 1,880,000
<INCOME-CONTINUING> 3,724,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,724,962
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
