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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 31, 1998
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. [_]
As of April 16, 1998, there were 3,376,307 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 $20,396,208 based on the closing sales price reported on
Nasdaq National Market for April 16, 1998.
Documents Incorporated by Reference.
Portions of the 1997 Annual Report to Shareholders are incorporated by reference
into Part II and Part IV hereof.
Portions of the Proxy Statement for the 1997 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.
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PART I.
ITEM 1. BUSINESS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K, specifically those
contained in Item 1 "Business" and Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operation," and statements incorporated by
reference into this Form 10-K from the 1997 Annual Report to Shareholders, along
with statements in other reports filed with the Securities and Exchange
Commission, external documents and oral presentations, which are not historical
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent Industrial
Scientific Corporation's (the "Company") present expectations or beliefs
concerning future events. The Company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Results actually
achieved may differ materially from expected results included in these
statements. Those factors which specifically related to the Company's business
include the following: rapid technological change along with the need to
continually develop new products; risks of product liability claims;
competition; dependence on key employees; management of Company's growth;
dependence on certain customers; dependence on one key supplier for toxic and
oxygen sensors; proprietary rights and risks of third party claims of
infringement; government regulation and risks associated with international
business operations, including foreign currency fluctuations, tariffs, trade
barriers, foreign taxes, repatriation of earnings and the burden of complying
with foreign laws and regulations.
Overview
Industrial Scientific Corporation designs, manufactures, markets, and services
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 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
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.
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Gas Monitoring Instruments
The Company manufactures 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. 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.
The Company also sells replacement sensors, other replacement parts and a full
line of accessories for its 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 gas monitoring instruments, accessories, replacement parts
and service accounted for 97%, 97% and 98% of the Company's net sales for fiscal
years 1995, 1996, and 1997.
Other Products
In addition to its gas monitoring instruments and accessories, the Company
manufactures and sells Lifeline--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%, 3% and 2% of the Company's net sales for fiscal
years 1995, 1996, and 1997.
Recent Acquisitions
In 1997, the Company invested $350,000 in HEG Industrial Scientific Company
Limited to establish a joint venture in Harbin, China. This joint venture will
design, manufacture and sell gas monitoring products for the Chinese market.
This investment is accounted for using the equity method.
In February 1996, the Company invested $267,000 in Industrial Scientific Arabia
Limited, a joint venture with a Saudi Arabian partner. This joint venture
provides service and promotes the sale of the Company's products throughout the
middle east. This investment is accounted for using the equity method.
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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 27 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 24 sales and
customer service representatives who support distribution and 22 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 13%, 20%, and 21% of
net sales for fiscal years 1995, 1996, and 1997, 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, eighteen full
time employees working at its Industrial Scientific Arabia, Ltd. joint venture
in the Middle East, approximately fifteen employees working on the establishment
of a manufacturing and distribution facility at its HEG Industrial Scientific
Limited joint venture in Harbin, China, and an international sales manager and
two sales coordinators located at corporate headquarters who support foreign
distribution and concentrate on international sales growth.
The Company's five largest distributors accounted for approximately 56%, 48%,
and 51% of net sales for fiscal years 1995, 1996, and 1997, respectively. Of
these five, Vallen Safety Supply Company, which comprised approximately 21% and
26% of sales in fiscal 1996 and 1997, 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. The Company
spent approximately $2.4 million, $3.0 million, and $2.7 million for research
and development in fiscal years 1995, 1996, and 1997, respectively, representing
7.0%, 8.3%, and 6.7% of net sales in such fiscal years.
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In 1997, the Company introduced three new portable gas monitoring instruments
and several fixed systems. The T80 Single Gas Monitor has six interchangeable
'smart' sensors and is capable of 4,400 hours of continuous operation. The
ATX612 Multi-Gas Aspirated Monitor offers continuous monitoring of up to four
gases and datalogging for up to 110 hours of data storage and industrial hygiene
functions. The ATX620 Multi-Gas Utility Monitor has patented Infared Methane
detection for monitoring three levels of combustible gas, one toxic gas plus
oxygen, and datalogging for 60 hours of survey data.
In 1997, the Company sold Monitor Group, a developer of portable mass
spectrometers which had been acquired by the Company in June 1995.
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.
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.
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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 16, 1998, the Company had 215 employees.
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.
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 1997.
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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 31, 1998, are listed below:
Kent D. McElhattan, age 49, 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 43, 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 41, 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.
Part II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth on page 22 of the 1997 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
1997 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 1997 Annual Report to Shareholders and is incorporated herein by
reference.
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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 1997 Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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 10, 1998 (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.
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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 1997
Annual Report to Shareholders which accompanies this report.
<TABLE>
<CAPTION>
Description Page No.
- ---------------------------------------------------------------------------- --------
<S> <C>
Consolidated Statement of Income - Fiscal Years Ended
January 31, 1998, January 25, 1997, and January 27, 1996 10
Consolidated Statement of Changes in Shareholders' Equity - Fiscal Years
Ended January 31, 1998, January 25, 1997, and January 27, 1996 10
Consolidated Balance Sheet - January 31, 1998, and January 25, 1997 11
Consolidated Statement of Cash Flows - Fiscal Years Ended
January 31, 1998, January 25, 1997, and January 27, 1996 12
Notes to Consolidated Financial Statements 13
Report of Independent Accountants 21
</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.
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3. Exhibits:
<TABLE>
<CAPTION>
Exhibit No.
- ----------
<S> <C> <C>
3.01 Amended and Restated Filed herewith.
Articles of
Incorporation of
Corporation
Industrial Scientific
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, Incorporated herein by reference
dated January 25, 1985, is Exhibit 10.01 to the Form S-1.
between the Company and
Kent D. McElhattan
10.02 * Employment Agreement, Incorporated herein by
dated January reference is
25, 1985, between the Exhibit 10.02 to the
Company and 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 Incorporated herein by reference is
dated as of February 1, Exhibit 10.04 to the Form S-1.
1993, relating to the
$4,200,000 PEDFA bond
financing
10.05 Documents relating to the Incorporated herein by
$2,000,000 reference is
PIDA financing Exhibit 10.05 to the
Form S-1.
10.06 License Agreement Incorporated herein by
relating to toxic reference is Exhibit 10.06
gas sensor technology to the Form S-1.
dated as of
November 19, 1991
10.07 Distribution Agreement Incorporated herein by
between the reference is
Company and Vallen Safety Exhibit 10.07 to the
Supply as amended as Form S-1.
of November 17, 1989
</TABLE>
* - Indicates management contract or compensatory plan, contract or
arrangement.
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<TABLE>
<S> <C> <C>
10.08 Resolutions of the Board Incorporated herein by reference
of Directors from a is Exhibit 10.08 to the 1995 Form
meeting held on August 10, 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 Incorporated herein by reference
Board of Directors dated is Exhibit 10.09 to the 1995 Form
April 14, 1992, as 10-K.
amended on January 27,
1995, setting forth the
terms of the Key Managers'
Performance Incentive Plan
10.10* Employment Agreement, dated Incorporated herein by reference is
January 25, 1985, between Exhibit 10.10 to the 1995 Form 10-K.
the Company and Garth F.
Miller
13.01 1997 Annual Report to Filed herewith.
Shareholders
21.01 List of Subsidiaries of the Incorporated herein by reference is
Company Exhibit 21.01 to the Form S-1.
23.01 Consent of Independent Filed herewith.
Certified Public
Accountants
27.0 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 31, 1998.
* - 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 28, 1998 /s/ Kent D. McElhattan
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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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Kenton E. McElhattan Director and April 28, 1998
- --------------------------- Chairman of the Board
Kenton E. McElhattan
/s/ Kent D. McElhattan President, Chief April 28, 1998
- ---------------------------- Executive Officer,
Kent D. McElhattan Director
/s/ James P. Hart Vice President and April 28, 1998
- ------------------------- Chief Financial Officer
James P. Hart
/s/ Herbert F. Gerhard Director April 28, 1998
- -------------------------
Herbert F. Gerhard
/s/ Donald J. McGraw Director April 28, 1998
- -------------------------
Donald J. McGraw
/s/ James D. Morton Director April 28, 1998
- -----------------------------
James D. Morton
/s/ Thomas M. Thompson Director April 28, 1998
- ------------------------
Thomas M. Thompson
</TABLE>
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Exhibit 3.01
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
INDUSTRIAL SCIENTIFIC CORPORATION
1. Name. The name of the Corporation is Industrial Scientific
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Corporation.
2. Address of Registered Office. The address of the Corporation's
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registered office in the Commonwealth of Pennsylvania is 1001 Oakdale Road,
Oakdale, PA 15071.
3. Capital Stock. (a) Generally. The authorized capital stock of the
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Corporation shall be: 15,000,000 shares of Common Stock, par value of $.01 per
share, and 1,000,000 shares of Class A Preferred Stock without par value.
(b) Class A Preferred Stock. The Board of Directors is authorized,
-----------------------
at any time or from time to time, to divide any or all of the shares of Class A
Preferred Stock into one or more series, and in the resolution or resolutions
establishing the series to fix and determine the number of shares and the
designation of such series, so as to distinguish it from the shares of all other
series and classes, and to fix and determine the voting rights, preferences,
limitations, qualifications, privileges, options, conversion rights,
restrictions and other special or relative rights of the Class A Preferred Stock
or of such series, to the fullest extent now or hereafter permitted by the laws
of the Commonwealth of Pennsylvania, including, but not limited to, the
variations between different series in the following respects: (i) the
distinctive designation of such series and the number of shares which shall
constitute such series, which number may be increased or decreased (but not
below the number of shares thereof then outstanding) from time to time by the
Board of Directors; (ii) the annual dividend rate for such series, and the date
of dates from which dividends shall commence to accrue; (iii) the price or
prices at which, and the terms and conditions on which, the shares of such
series may be made redeemable; (iv) the purchase or sinking fund provisions, if
any, for the purchase of redemption of shares of such series; (v) the
preferential amount or amounts payable upon shares of such series in the event
of liquidation, dissolution, or winding up of the Corporation; (vi) the voting
rights, if any, of shares of such series; (vii) the terms and conditions, if
any, upon which shares of such series may be converted and the class or classes
or series of shares of the corporation or other securities into which such
shares may be converted; (viii) the relative seniority, priority or junior rank
of such series as to dividends or assets with respect to any other classes or
series of stock then or thereafter to be issues; and (ix) such other terms,
qualifications, privileges, limitations, options, restrictions, and special or
relative rights and preferences, if any, of shares of such series as the Board
of Directors may, at the time of such resolution or resolutions, lawfully fix or
determine under the laws of the Commonwealth of Pennsylvania. Unless otherwise
provided in a resolution or resolutions establishing any particular series of
Class A Preferred Stock, the aggregate number of authorized shares of Class A
Preferred Stock may be increased by an amendment to the Articles approved solely
by the holders of the Common Stock. The Common
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Stock shall be subject to the prior rights and preferences, if any, of any
series of Class A Preferred Stock outstanding according to the terms of such
series.
(c) No Cumulative Voting. Shareholders shall not be entitled to
--------------------
cumulative voting rights in the election of directors.
4. Action by Partial Consent. Any action required or permitted to be
-------------------------
taken at a meeting of the shareholders or of a class of shareholders may be
taken without a meeting upon the written consent of shareholders who would have
been entitled to cast the minimum number of votes that would be necessary to
authorize the action at a meeting at which all shareholders entitled to vote
thereon were present and voting. The consents shall be filed with the secretary
of the Corporation. Any such action shall become effective immediately upon its
authorization, or at such later time as shall be specified in the said written
consent, but prompt notice of the action shall be given to those shareholders
entitled to vote thereon who have not consented thereto.
5. Special Voting Requirements. Notwithstanding any other provision of
---------------------------
law or the Articles or Bylaws of the Corporation, and notwithstanding the fact
that a lesser percentage may be specified by law: (i) in addition to any other
vote that may be required by law, any fundamental transaction under 15 Pa. C.S.
Chapter 19 (or any successor provisions) shall require the approval of the Board
of Directors and the affirmative vote of at least two-thirds of the votes cast
by all shareholders entitled to vote thereon voting together as a single class;
and (ii) any amendment, alteration or repeal of these Articles, or the adoption
of any provision inconsistent with these Articles shall require the approval of
the Board of Directors and the affirmative vote of at least two-thirds of the
votes cast by all shareholders entitled to vote thereon voting together as a
single class; provided, however that in either case, only such shareholder vote
or votes as are required by law, if any, shall be required if the fundamental
transaction or the amendment, alteration, repeal or inconsistent provision is
approved by all of the Corporation's Continuing Directors. For purposes of these
Articles, the term "Continuing Directors" shall mean those directors who were
directors of the Corporation on the date that the Corporation became a
registered corporation under 15 Pa. C.S. Section 2502(1)(i)(A), and (i) any
director recommended or elected to succeed a Continuing Director by a majority
of the then-Continuing Directors, (ii) any director recommended or elected a
director by a majority of the then-Continuing Directors to fill a vacancy
created by an increase in the size of the Board of Directors, and (iii) any
director otherwise designated by the Continuing Directors to be a Continuing
Director.
6. Board of Directors.
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(a) Number. The Board of Directors of the Corporation shall consist
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of at least four (4) and not more than nine (9) directors, the exact number to
be fixed from time to time by resolution of the Board of Directors of the
Corporation. All of the directors shall be elected at each annual meeting of the
shareholders and shall hold office until the next annual meeting and until each
such director's successor has been selected and qualified or until such
director's earlier death, resignation or removal.
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(b) Vacancies. Vacancies on the Board of Directors, including
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vacancies resulting from an increase in the number of directors, may be filled
by a majority vote of the remaining members of the Board of Directors though
less than a quorum, or by a sole remaining director, and each person so selected
shall hold office until the next election of directors and until said director's
successor has been selected and qualified or until said director's earlier
death, resignation or removal.
7. Indemnification. (a) (i) The Corporation shall indemnify and hold
---------------
harmless to the full extent not prohibited by law, as the same exists or may
hereinafter be amended, interpreted or implemented (but, in the case of any
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than are permitted the Corporation to
provide prior to such amendment), each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in (as a witness or
otherwise) any threatened, pending or completed action, suit, or proceeding,
whether civil, criminal, administrative or investigative and whether or not by
or in the right of the Corporation or otherwise (hereinafter, a "proceeding"),
by reason of the fact that he or she, or a person of whom he or she is the heir,
executor, or administrator, is or was a director or officer of the Corporation
or is or was serving at the request of the Corporation as a director, officer or
trustee of another corporation or of a partnership, joint venture, trust or
other enterprise (including without limitation service with respect to employee
benefit plans), or where the basis of such proceeding is any alleged action or
failure to take any action by such person while acting in an official capacity
as a director or officer of the Corporation or in any other capacity on behalf
of the Corporation while such person is or was serving as a director or officer
of the Corporation, against all expenses, liability and loss, including but not
limited to attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement (whether with or without court
approval), actually incurred or paid by such person in connection therewith.
(ii) Notwithstanding the foregoing, except as provided in Article
7, Subpart (b) below, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation.
(iii) Subject to the limitation set forth above concerning
proceedings initiated by the person seeking indemnification, the right to
indemnification conferred in this Article 7 shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding (or part thereof) or in enforcing his or her
rights under this Article 7 in advance of the final disposition thereof promptly
after receipt by the Corporation of a request therefor stating in reasonable
detail the expenses incurred; provided, however, that to the extent required by
law, the payment of such expenses incurred by a director or officer of the
Corporation in advance of the final disposition of a proceeding shall be made
only upon receipt of an undertaking, by or on behalf of such person, to repay
all amounts so advanced if and to the extent it shall ultimately be determined
by a court that he or she is not entitled to be indemnified by the Corporation
under this Article 7 or otherwise.
-3-
<PAGE>
(iv) The right to indemnification and advancement of expenses
provided herein shall continue as to a person who has ceased to be a director or
officer of the Corporation or to serve in any of the other capacities described
herein, and shall inure to the benefit of the heirs, executors and
administrators of such person.
(b) If a claim for indemnification under Article 7, Subpart (a)
hereof is not paid in full by the Corporation within thirty (30) days after a
written claim therefor has been received by the Corporation, the claimant may,
at any time thereafter, bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part on the merits or
otherwise in establishing his or her right to indemnification or to the
advancement of expenses, the claimant shall be entitled to be paid also the
expense of prosecuting such claim.
(c) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of a final disposition conferred
in Article 7, Subpart (a) and the right to payment of expenses conferred in
Article 7, Subpart (b) shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses hereunder may be
entitled under any bylaw, agreement, vote of shareholders, vote of directors or
otherwise, both as to actions in his or her official capacity and as to actions
in any other capacity while holding that office, the Corporation having the
express authority to enter into such agreements or arrangements as the Board of
Directors deems appropriate for the indemnification of and advancement of
expenses to present or future directors and officers as well as employees,
representatives or agents of the Corporation in connection with their status
with or services to or on behalf of the Corporation or any other corporation,
partnership, joint venture, trust or other enterprise, including any employee
benefit plan, for which such person is serving at the request of the
Corporation.
(d) The Corporation may create a fund of any nature, which may, but
need not be, under the control of a trustee, or otherwise secure or insure in
any manner its indemnification obligations, including its obligation to advance
expenses, whether arising under or pursuant to this Article 7 or otherwise.
(e) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director or officer or representative of the
Corporation, or is or was serving at the request of the Corporation as a
representative of another corporation, partnership, joint venture, trust or
other enterprise, against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of his or her
status as such, whether or not the Corporation has the power to indemnify such
person against such liability under the laws of this or any other state.
(f) Neither the modification, amendment, alteration or repeal of this
Article 7 or any of its provisions or the adoption of any provision inconsistent
with this Article 7 or any of its provisions shall adversely affect the rights
of any person to indemnification and advancement of expenses existing at the
time of such modification, amendment, alteration or repeal or the adoption of
such inconsistent provision.
-4-
<PAGE>
8. Limitation of Director Liability. A director of the Corporation shall
--------------------------------
not be personally liable for monetary damages for any action taken, or any
failure to take any action unless the director has breached or failed to perform
the duties for his or her office under 15 Pa. C.S. Chapter 17, Subchapter B (or
any successor provisions) and such breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness; provided, however, that the
foregoing provision shall not eliminate or limit (i) the responsibility or
liability of a director pursuant to any criminal statute, or (ii) the liability
of a director for the payment of taxes pursuant to local, state or Federal law.
Any repeal, modification or adoption of any provision inconsistent with this
Article 9, shall be prospective only, and neither the repeal or modification of
this Article nor the adoption of any provision inconsistent with this Article
shall adversely affect any limitation on the personal liability of a director of
the Corporation existing at the time of such repeal or modification or the
adoption of such inconsistent provision.
-5-
<PAGE>
Exhibit 13.01
Innovation for Human Life
INDUSTRIAL SCIENTIFIC CORPORATION
1997 annual report (fiscal year ended January 31, 1998)
<PAGE>
2
[PHOTOS APPEAR HERE]
Industrial Scientific PRODUCT
APPLICATIONS
Expanding our horizons
At Industrial Scientific, we develop portable instruments and fixed-point
systems for detecting, measuring and monitoring a wide range of gases. Our
products are put to use in an endless variety of applications around the globe.
You'll find Industrial Scientific instruments in food processing plants, steel
mills, fuel storage tanks, utilities, petrochemical plants, telecommunications
switching systems--anywhere and everywhere there is a need to measure, monitor
and control. Over the past several years, the world has become Industrial
Scientific's marketplace. But in 1999, we will experience our first "out of this
world" application. That's when the NASA International Space Station will become
operational. We are extremely proud that NASA chose Industrial Scientific to
develop a custom designed instrument for the International Space Station.
Cover photograph taken from the Apollo 11 spacecraft, courtesy of NASA.
[PHOTOS APPEAR HERE]
<PAGE>
3
INDUSTRIAL SCIENTIFIC CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 1992 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------
NET SALES $24,059 $30,891 $31,421 $34,133 $36,648 $40,865
- ----------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 12,257 16,791 17,020 18,191 19,815 23,028
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME 2,594 4,449 4,227 4,067 3,725 6,002
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE, BASIC .86 1.38 1.25 1.20 1.10 1.80
NET INCOME PER SHARE, DILUTED .86 1.38 1.25 1.20 1.10 1.80
- ----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 9,424 19,276 23,504 27,571 31,117 35,592
- ----------------------------------------------------------------------------------------------------------------------
LONG TERM OBLIGATIONS 6,000 5,617 5,073 4,512 4,143 3,664
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 18,906 28,897 32,213 35,479 39,218 43,882
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPHS APPEAR HERE]
TABLE OF CONTENTS
<TABLE>
<S> <C>
APPLICATIONS.................................................................. 2
SELECTED FINANCIAL DATA....................................................... 3
LETTER TO SHAREHOLDERS........................................................ 4
NEW PRODUCTS AND TECHNOLOGY................................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS.......................................... 8
CONSOLIDATED FINANCIAL STATEMENTS.............................................10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................................13
REPORT OFINDEPENDENT ACCOUNTANTS..............................................21
THE MISSION...................................................................23
</TABLE>
<PAGE>
4
[PHOTO APPEARS HERE]
Kent D. McElhattan -- President and CEO
Dear Fellow Shareholder,
Record earnings and sales were achieved during fiscal 1997, a 53 week year.
Aggressive action was taken toward reaching our two most important strategic
growth objectives: 1) expand the products available from Industrial Scientific,
and, 2) expand worldwide sales and service presence.
For fiscal year 1997, net income increased 61% and totaled $6,002,000 ($1.80
per share) compared to $3,725,000 ($1.10 per share) for 1996. Net income for
1997 included a $377,000 non-recurring gain from the sale of Monitor Group.
Excluding this gain, net income from ongoing operations increased 51% over the
previous year.
Net sales for fiscal 1997 increased 12% to a record $40,865,000. We estimate
that Industrial Scientific's growth rate for 1997 was more than double the
growth in market demand (approximately 4 to 5%). We attribute this to the
premier market position and reputation Industrial Scientific products have
earned through relentless quality improvements, and to the development of new,
innovative products and services.
NEW PRODUCTS
Industrial Scientific launched more new products during 1997 than any previous
year. We believe the development of innovative products that deliver higher
performance and value to customers is the most critical element shaping the
future of Industrial Scientific. The degree to which we succeed financially in
the years ahead will be more influenced by new products than any other factor.
We are sharpening new product specification skills in order to identify and
quantify the highest potential development opportunities.
Leadership of new product development was strengthened through the election of
Annie Wang, Ph.D. to the new position of Vice President, Engineering and R&D
early in 1997. Staffing levels were increased and upgraded in all technical
departments. Rigorous adherence to scientific principles and a stimulating,
creative environment help Industrial Scientific to continue attracting the best
and brightest scientists and engineers.
We are committed to heighten the pace of product development. During 1997,
significant changes were made in our development methodology to improve timing,
testing and field performance. The ATX612 was the first product to benefit from
these changes and it has proven to be the most successful new product ever
launched by Industrial Scientific.
The following two pages of this Report provides summary highlights on the
major new products launched during 1997.
INTERNATIONAL EXPANSION
We continued aggressive expansion into other parts of the world where we can
make a contribution to the safety of industrial workers and protect capital
assets. Although costs required to generate sales overseas are significantly
higher in the early years, we are determined to become a worldwide corporation.
Participation in all international markets will give Industrial Scientific
strength and provide important paths for future growth.
In April 1997, we founded HEG Industrial Scientific
<PAGE>
5
Company, a joint venture in the People's Republic of China with the following
Mission: To develop, manufacture and sell solutions that preserve life and
property to our customers in China. HEG Industrial Scientific was unveiled at
the World Petroleum Expo in September 1997 in Beijing. All Chinese business
license, tax, and product certifications have now been granted and operations
are beginning in earnest. Industrial Scientific owns 50% of this company.
Industrial Scientific Arabia Ltd. (ISAL) completed its first profitable year
of operations. This company now employs 18 people and has recently moved into
larger facilities to house its growing need for warehousing and service space.
Industrial Scientific owns 49% of ISAL.
Several new sales representatives were added in Australia and space was
procured in the Sydney area. Recent promulgation of confined space legislation
in Australia helped to make this our fastest growing international sales region.
South America was targeted during 1997 as an under-served market needing
Industrial Scientific's products and services. Maria Velez de Berliner, a native
of Columbia, was recruited from the World Trade Center to lead sales activities
in South America. Emphasis thus far has been on contracting with the most
technically qualified distributors. Industrial Scientific distributors now cover
all of the Mercosur and Andean Pact countries.
MEASURE, MONITOR AND CONTROL
Through development of new products and increasing sales/service presence
throughout the world, Industrial Scientific has consistently grown faster than
overall demand for gas monitoring instruments. We intend to increase the pace of
growth as we develop innovative products that measure, monitor and control.
Fixed monitoring systems are now wholly integrated into the Company, providing
an excellent platform to expand product range and do more for customers.
Untapped market opportunities exist in gas monitoring and we are working hard to
develop products that address these needs.
James D. Morton is retiring from the Board of Directors after 13 years of
faithful service. His stimulating contributions and constant encouragement will
be missed.
We welcome Thomas M. Thompson, who was elected as Director on March 11, 1998.
Mr. Thompson chairs the Corporate Finance Section of Buchanan Ingersoll
Professional Corporation.
SUMMARY
Industrial Scientific is uniquely poised to succeed strongly in both the short
and long term future. We see an ever growing awakening around the world to the
lethal effects of uncontrolled gas exposure. Industrial Scientific is developing
reliable, innovative products today that reduce the risks posed by continued
industrialization and human progress.
Our culture is characterized by curiosity, openness, creativity and an intense
desire to fulfill our mission of "...preservation of life and property." The
collective expectation of all Industrial Scientific employees is that we can do
more and grow faster in the future. We are determined to deliver on this
potential.
Sincerely yours,
/s/ Kent D. McElhattan
Kent D. McElhattan
President and CEO
<PAGE>
6
Industrial Scientific NEW
PRODUCTS,
ATX612
INTRODUCED IN NOVEMBER 1997, THE ATX612 COMBINES THE FLEXIBILITY OF A MULTI-
GAS INSTRUMENT WITH THE CONVENIENCE OF AN INTERNAL SAMPLING PUMP. THE ATX612 CAN
SIMULTANEOUSLY DETECT UP TO FOUR DIFFERENT GASES, AND THE UNIT'S INTERNAL
SAMPLING PUMP WILL DRAW SAMPLES FROM AS FAR AWAY AS 100 FEET. THE ATX612 IS
IDEAL FOR CONFINED SPACE APPLICATIONS OR PORTABLE AREA MONITORING.
ATX620
INTRODUCED IN JANUARY 1998 SPECIFICALLY FOR ELECTRIC AND GAS UTILITIES, THE
ATX620 FEATURES INDUSTRIAL SCIENTIFIC'S PATENTED INFRARED SENSOR TECHNOLOGY.
USING THIS SENSOR, THE ATX620 ACTUALLY PERFORMS THE FUNCTIONS OF TWO SEPARATE
INSTRUMENTS: METHANE CAN BE DETECTED IN CONCENTRATIONS AS LOW AS 50 PARTS PER
MILLION (PPM), OR IN CONCENTRATIONS AS HIGH AS 100% OF VOLUME. THE RESULT IS A
COST-EFFECTIVE SOLUTION FOR BOTH APPLICATIONS.
CDU440
THE INFRARED-BASED CDU440 MONITOR PROVIDES CONTINUOUS DETECTION OF CARBON
DIOXIDE FROM LEVELS AS LOW AS 100 PPM TO AS HIGH AS 60,000 PPM. THE INSTRUMENT
IS IDEAL FOR USE IN BREWERIES, BOTTLING PLANTS, FOOD PROCESSING PLANTS AND THE
MINING INDUSTRY. THE CDU440 WAS INTRODUCED IN AUGUST 1997.
[PHOTOS APPEAR HERE]
<PAGE>
7
NEW
TECHNOLOGY.
The single most important factor that will determine our future revenue growth
is how well we conceive, develop and deliver new products. In fiscal year 1997,
over 80 percent of instrument sales were generated by products introduced within
the past four years.
T80
The T80 Single Gas monitor was developed as a premium personal gas instrument
that could be sold at a moderate price, without sacrificing convenience and ease
of use. The T80 delivers continuous monitoring of any one of six gases, allowing
it to be used in a wide variety of industrial settings. The instrument will
operate continuously for 4,400 hours on just a single 9-volt lithium battery.
The T80 was released in May 1997.
8000 Controller
Released in February 1997, the 8000 Controller can monitor up to 16 separate
transmitters simultaneously. And with more than 30 different sensors to choose
from, the 8000 Controller can easily be configured for almost any type of
process or industrial application. Designed to be easy to use, the 8000
Controller is completely programmable by simple keypad operation.
Fiber Optic Sensor
Developed by Industrial Scientific, this sensor represents ground-breaking
technology in the use of fiber optics for gas detection. Fiber optic sensors are
small, easy to use and less expensive to manufacture than electrochemical
sensors. The Ammonia Fiber Optic Sensor, which will begin beta site testing in
the first quarter 1998, is extraordinarily stable and can operate in areas where
there is continuous background concentrations of ammonia. Fiber optic technology
will be used to develop additional sensors for future Industrial Scientific
products.
[PHOTOS APPEAR HERE]
<PAGE>
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net Sales
Net sales for fiscal year 1997, ended January 31, 1998, were $40.9 million and
were $4.2 million or 11.5% higher than net sales of $36.6 million for fiscal
year 1996 ended January 25, 1997. Increased sales in North America resulted from
new products such as the ATX portable multi-gas and the T80 portable single-gas
instrument, fixed systems and new rental and repair services.
Gross Profit
Gross profit increased $3.2 million or 16.2% to $23.0 million for fiscal 1997
compared to $19.8 million for 1996. Gross profit as a percent of net sales
increased to 56.4% in 1997 compared to 54.1% in 1996. Increased manufacturing
efficiency resulting from investments in labor saving capital equipment and an
increase in sales of replacement parts which typically generate a higher gross
profit percentage account for the improved gross profit percentage.
Operating Expenses
Selling expense increased $1.5 million or 19.8% to $9.1 million in 1997
compared to $7.6 million in 1996. Start-up marketing costs relating to fixed
system products, which the Company acquired in October 1996, combined with
continuing efforts to establish a sales and service network outside North
America, are the primary causes of this increase.
Research, development and engineering expense totaled $3.1 million in 1997
compared to $4.0 million in 1996. The reduction in research, development and
engineering expense is the result of the sale of Monitor Group in the second
quarter 1997. In 1997, Monitor Group expenses were $28,000 compared to $1.4
million in 1996. Excluding Monitor Group, research, development and engineering
expense increased $447,000 or 17.1% to $3.0 million in fiscal 1997 compared to
$2.6 million in 1996. Increased new product development efforts relating to
fixed and portable gas monitoring instruments were the principal causes of this
increase.
Administrative expense increased 7.8% or $244,000 to $3.4 million in 1997
compared to $ 3.1 million in 1996, principally due to increased performance
based compensation related to 1997 results and increased profit sharing expense.
Other Income and Expense
Interest income totaled $1.0 million in 1997, an increase of $260,000 or 33.5%
over $777,000 in 1996. Increased invested cash due to profitable operations,
and higher interest rates relating to lengthening investment maturities,
primarily account for this increase.
Interest expense decreased to $163,000 in 1997 compared to $190,000 in 1996,
due to reduced outstanding debt caused by principal repayments made during the
period.
The Company earned $25,000 income from the net results of joint ventures, as
profitable operations in Saudi Arabia were partially offset by a loss relating
to start-up expenses incurred by HEG Industrial Scientific based in Harbin,
China.
In the second quarter 1997, the Company completed the previously announced
sale of Monitor Group, a developer of portable mass spectrometers which the
Company had acquired in 1995, resulting in a non-operating gain of $580,000.
Provision for Income Taxes
The Company's effective tax rate for 1997 was 33.2% compared to 33.5% for
1996. Increased utilization of the research and experimentation tax credit,
foreign sales tax credit 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 tax
credits and tax free interest income detailed above.
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, was 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.
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 and establishing 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 31.6%.
Increased expenses incurred in the ongoing commercial development of the MG2100
portable mass spectrometer was 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.
<PAGE>
9
Administrative expense increased $190,000 or 6.4% to $3.1 million in 1996
compared to $2.9 million in 1995. Increased profit sharing expense relating to
increased participation by employees was the principal cause. Other expense
items increased modestly.
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. This investment occurred during 1996.
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 interim period.
Provision for Income Taxes
The Company's effective tax rate for 1996 was 33.5% compared to 33.8% for
1995. Increased utilization of the research and experimentation credit, and
increased tax free interest income accounted 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.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
January 31, 1998 January 25, 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Current Assets $27,757,000 $28,064,000
Current Liabilities 4,459,000 3,866,000
----------- -----------
Working Capital $23,298,000 $24,198,000
=========== ===========
- -------------------------------------------------------------------------
</TABLE>
The Company's working capital position was $23.3 million at January 31, 1998,
compared to $24.2 million at January 25, 1997, a decrease of $900,000. Increases
in accounts receivable, inventory and other current assets were offset by a
decrease in cash and short-term investments caused by the Company investing in
longer term debt securities to increase interest income. Cash flow from
operations totaled $5.7 million in 1997 compared to $6.3 million in 1996.
Capital expenditures totaled $1.5 million in 1997, consisting principally of
automated production equipment, computer hardware and software and a
telecommunications system. During 1997, the Company invested an additional
$350,000 to establish HEG Industrial Scientific in Harbin, China. This 50% owned
joint venture will design, manufacture and sell gas monitoring products for the
Chinese market.
In the second quarter 1997, the Company completed the previously announced
sale of Monitor Group, a developer of portable mass spectrometers which the
Company had acquired in 1995. The proceeds from this sale totaled $2.5 million
and included a nonoperating gain of $580,000 ($377,000 net of tax).
During 1997, the Company continued the previously announced repurchase of
Industrial Scientific stock and acquired 60,600 shares at a cost of $1.1
million. In addition, the Company paid three quarterly dividends during 1997
totaling $405,000. Dividends were paid at a per share rate of $0.04.
The Company's cash flow and current capital structure provide adequate
flexibility for the growth of its operations, funding of capital spending
programs and future dividend payments, if any.
YEAR 2000
The Company has initiated a review to ensure that its' information systems can
properly handle data which include year 2000 dates. All of the Company's major
software systems have been certified by their manufacturer to be year 2000
compliant. The Company believes that no significant modifications or replacement
of these systems will be necessary. Management does not expect the cost of this
review or any resulting replacement or modification of information systems will
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
ACCOUNTING RULE CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in a full set of general-
purpose financial statements. This Statement, which is effective for financial
statements issued for fiscal years beginning after December 15, 1997, requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. This
Statement, which is effective for financial statements for periods beginning
after December 15, 1997, also established standards for related disclosures
about products and services, geographic areas and major customers.
Additionally in March 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which is effective
for fiscal years beginning after December 15, 1997. This Statement establishes
standards for displaying a standardized set of disclosures for public companies.
Management does not believe that these Statements will effect the financial
statements.
<PAGE>
10
INDUSTRIAL SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, 1998 January 25, 1997 January 27, 1996
53 weeks 52 weeks 52 weeks
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 11) $40,865,301 $36,647,770 $34,133,275
Cost of goods sold 17,836,845 16,832,999 15,941,791
----------- ----------- -----------
Gross profit 23,028,456 19,814,771 18,191,484
----------- ----------- -----------
Operating expenses:
Selling 9,076,925 7,578,677 6,644,381
Research, development and engineering 3,059,274 4,006,508 3,043,702
Administrative 3,386,092 3,142,418 2,952,134
----------- ----------- -----------
15,522,291 14,727,603 12,640,217
----------- ----------- -----------
Operating profit 7,506,165 5,087,168 5,551,267
Interest income 1,037,722 777,256 836,832
Interest expense (163,062) (190,312) (247,428)
Other income (expense) 25,000 (69,150) 908
Non-operating gain (Note 3) 579,659 -- --
----------- ----------- -----------
Income before income taxes 8,985,484 5,604,962 6,141,579
----------- ----------- -----------
Provision for income taxes (Note 9) 2,983,000 1,880,000 2,075,000
----------- ----------- -----------
Net income $ 6,002,484 $ 3,724,962 $ 4,066,579
=========== =========== ===========
Net income per basic common share:
Basic earnings per share $ 1.80 $ 1.10 $ 1.20
Weighted average shares--basic 3,333,666 3,373,632 3,375,087
Net income per diluted common share:
Diluted earnings per share $ 1.80 $ 1.10 $ 1.20
Weighted average shares--diluted 3,340,248 3,375,319 3,383,645
</TABLE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 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
Exercise of stock
options-1997
(Note 14) 1,220 12 - - 21,108 - 21,120
Purchase of treasury
stock-1997
(Note 13) - - 60,600 (1,144,099) - - (1,144,099)
Dividends paid - (405,067) (405,067)
Net income-1997 - - - - - 6,002,484 6,002,484
---------- ------- ------ ----------- ---------- ------------ ------------
Balance at
January 31, 1998 3,376,307 $33,763 72,400 $(1,322,762) $5,492,378 $ 31,388,329 $ 35,591,708
========== ======= ====== =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
11
INDUSTRIAL SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1998 January 25, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Current assets:
Cash and cash equivalents $ 3,243,595 $ 6,879,111
Short-term investments (Note 4) 13,368,499 12,379,680
----------- ------------
16,612,094 19,258,791
Accounts receivable, less allowance of $53,000 in 1997
and $55,000 in 1996 5,948,722 4,791,000
Inventories (Note 5) 3,887,287 3,159,519
Prepaid expenses and other assets 613,588 334,795
Prepaid income taxes 214,618
Deferred income taxes (Note 9) 480,801 519,903
----------- ------------
Total current assets 27,757,110 28,064,008
Long-term investments (Note 4) 7,309,181 1,070,849
Property, plant and equipment, at cost:
Building and improvements 7,421,444 7,421,444
Machinery and equipment 5,144,360 4,251,821
Computers, furniture and fixtures 2,359,164 1,922,898
----------- ------------
14,924,968 13,596,163
Less accumulated depreciation and amortization 7,590,863 6,217,653
----------- ------------
7,334,105 7,378,510
Land 390,000 390,000
----------- ------------
7,724,105 7,768,510
Other assets (Note 6 ) 1,091,358 2,314,773
----------- ------------
Total assets $43,881,754 $ 39,218,140
=========== ============
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND Current liabilities:
SHAREHOLDERS' Accounts payable $ 1,444,816 $ 908,931
EQUITY Accrued expenses:
Accrued payroll and related items 852,421 702,008
Compensated absences 360,000 294,789
Warranty expenses 661,685 583,350
Other accrued expenses 764,995 950,583
Income taxes payable -- 57,003
Current portion of term debt (Note 7) 374,869 369,739
----------- -----------
Total current liabilities 4,458,786 3,866,403
Term debt (Note 7) 3,663,805 4,142,593
Deferred income taxes (Note 9) 167,455 91,874
----------- -----------
Total liabilities 8,290,046 8,100,870
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; issued and outstanding
3,376,307 shares at January 31, 1998 and
3,375,087 shares at January 25, 1997 33,763 33,751
Additional paid-in capital 5,492,378 5,471,270
Retained earnings 31,388,329 25,790,912
Treasury stock (72,400 in 1997 and
11,800 in 1996, at cost) (Note 13) (1,322,762) (178,663)
----------- -----------
Total shareholders' equity 35,591,708 31,117,270
----------- -----------
Total liabilities and shareholders' equity $43,881,754 $39,218,140
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
12
INDUSTRIAL SCIENTIFIC CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, 1998 January 25, 1997 January 27, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,002,484 $ 3,724,962 $ 4,066,579
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,916,181 2,000,441 1,523,096
Deferred income taxes 114,683 (384,958) (42,771)
(Gain) loss on equity investment (25,000) 69,150 -
Gain on sale of Monitor Group (579,659) - -
Changes in operating assets and liabilities:
Decrease in accounts receivable (1,157,722) (396,201) (1,179,569)
(Increase) decrease in prepaid expenses and other assets (493,411) (23,394) 76,681
(Increase) decrease in inventories (727,768) 344,295 (817,213)
Increase (decrease) in accounts payables and accrued expenses 720,465 1,169,945 (379,320)
(Decrease) increase in income taxes payable (57,003) (246,889) 288,232
----------- ----------- -----------
Net cash provided by operating activities 5,713,250 6,257,351 3,535,715
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,464,968) (653,214) (1,097,664)
Acquisition of business -- (310,000) (2,500,000)
Increase in equity investment (385,083) (235,150) --
Proceeds from maturities of investments 12,379,680 7,801,000 15,295,000
Purchase of investments (20,013,182) (12,674,434) (15,229,061)
Purchase of officer's life insurance (281,583) -- --
Proceeds from sale of Monitor Group 2,500,000 -- --
Sale of inventory related to Monitor Group (81,926) -- --
----------- ----------- -----------
Net cash used in investing activities (7,347,062) (6,071,798) (3,531,725)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (1,144,099) (178,663) -
Proceeds from exercise of stock options 21,120 - -
Principal payments on debt (473,658) (613,071) (636,894)
Dividends paid (405,067) - -
----------- ----------- -----------
Net cash used in financing activities (2,001,704) (791,734) (636,894)
----------- ----------- -----------
Net decrease in cash and cash equivalents (3,635,516) (606,181) (632,904)
Cash and cash equivalents at beginning of year 6,879,111 7,485,292 8,118,196
----------- ----------- -----------
Cash and cash equivalents at end of year
(including $150,000 of cash held by
trustee at January 27, 1996) $ 3,243,595 $ 6,879,111 $ 7,485,292
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 153,939 $ 191,493 $ 247,428
Taxes 2,981,621 2,511,889 1,829,768
SUPPLEMENTAL NON-CASH INVESTING ACTIVITY:
Non-cash adjustment to
accrued liabilities
due to sale of Monitor Group $ 76,209 - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
13
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, Inc., 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, Ltd. (ISAL) and HEG
Industrial Scientific Limited (HEG-ISL) using the equity method of accounting.
Fiscal Year:
The Company's fiscal year ends on the last Saturday of January.
Fiscal year 1997 had 53 weeks and ended January 31, 1998.
Fiscal year 1996 had 52 weeks and ended on January 25, 1997.
Fiscal year 1995 had 52 weeks and ended on January 27, 1996.
Use of Estimates in the Preparation of Financial Statements:
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, trade names and the excess of purchase
price over net tangible assets of businesses 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. Other assets also include the cash surrender
value of life insurance policies.
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.
Earnings Per Share:
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share" issued in February 1997. This Statement requires the
disclosure of basic and diluted earnings per share and revises the method
required to calculate these amounts under previous standards. The adoption of
this standard did not materially impact previously reported earnings per share
amounts. Net income per basic common share is computed using the weighted
average number of common shares during each period. Net income per diluted
common share is computed using the weighted average number of common and common
equivalent shares outstanding during each period. Common equivalent shares are
not included in the per share calculations where their inclusion would be anti-
dilutive. Common equivalent shares consist of the common shares issuable upon
the exercise of stock options (using the treasury stock method).
<PAGE>
14
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
$2,738,000 in fiscal 1997, $3,062,000 in fiscal 1996, and $2,376,000 in fiscal
1995.
Advertising Costs:
The Company expenses the production costs of advertising as incurred.
Advertising expense approximated $788,000 in fiscal year 1997, $685,000 in
fiscal year 1996, and $800,000 in fiscal year 1995.
- --------------------------------------------------------------------------------
3. JOINT VENTURE ACQUISITIONS AND DISPOSITION
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 of principally drawings 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
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 February 1996, the Company invested $267,000 for a 49% interest in Industrial
Scientific Arabia, Ltd. This investment is also accounted for using the equity
method of accounting.
The Company completed the sale of its Monitor Group business unit to L.B. Foster
Company on May 7, 1997, for $2.5 million resulting in a gain of approximately
$580,000.
In 1997, the Company invested $350,000 for a 50% interest in HEG Industrial
Scientific Limited. This investment is accounted for using the equity method of
accounting.
- --------------------------------------------------------------------------------
4. INVESTMENT SECURITIES:
Investments in debt securities were as follows:
<TABLE>
<CAPTION>
January 31, 1998
--------------------------------------------------
Gross Unrealized Holding
------------------------
Amortized Cost Gains Losses Fair Value
-------------- ----- ------ ----------
<S> <C> <C> <C> <C>
Less than one year:
State and political subdivisions $11,540,727 $118,904 $(41,067) $11,618,564
Corporate 1,827,772 47,884 - 1,875,656
----------- -------- -------- -----------
$13,368,499 $166,788 $(41,067) $13,494,220
=========== ======== ======== ===========
One to four years:
State and political subdivisions $ 7,309,181 $480,621 - $ 7,789,802
=========== ======== ======== ===========
<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
=========== ======== ======== ===========
</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.
<PAGE>
15
5. INVENTORIES:
<TABLE>
<CAPTION>
Inventories consisted of: January 31, 1998 January 25, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
At standard costs, which approximate first-in, first-out cost:
Raw materials $3,314,010 $2,691,313
Work in process 423,124 382,616
Finished goods 300,413 244,608
---------- ----------
4,037,547 3,318,537
Less LIFO reserve 150,260 159,018
---------- ----------
Inventories at LIFO value $3,887,287 $3,159,519
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
6. OTHER ASSETS:
<TABLE>
<CAPTION>
Other assets consisted of the following: January 31, 1998 January 25, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Patents and trade names $ 310,000 $1,050,000
Goodwill - 1,000,000
Other 857,665 826,000
---------- ----------
1,167,665 2,876,000
Less accumulated amortization 76,307 561,227
---------- ----------
$1,091,358 $2,314,773
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
7. TERM DEBT:
<TABLE>
<CAPTION>
Term debt consisted of the following January 31, 1998 January 25, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1991 Pennsylvania Economic Development Financing Authority
(PEDFA) bonds, variable interest rate (interest rate at
January 31, 1998 is 3.70%), principal payable in semi-annual
installments of $100,000 through February 2011. (A) $2,600,000 $2,900,000
Pennsylvania Industrial Development Authority (PIDA) mortgage
note, payable in monthly installments of $11,951, including
interest at 3%, through April 2006. 1,065,571 1,175,230
PIDA mortgage note, payable in monthly installments of $3,806,
including interest at 3%, through April 2002. 178,656 221,417
PIDA mortgage note, payable in monthly installments of $2,109,
including interest at 3% through July 2006. 188,041 208,210
Other 6,406 7,475
---------- ----------
4,038,674 4,512,332
Less current portion (374,869) (369,739)
---------- ----------
$3,663,805 $4,142,593
========== ==========
</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.
The aggregate principal amount of the term debt maturing in each of the next
five fiscal years 1998 through 2002, inclusive, is $375,000, $380,000, $385,000,
$391,000 and $362,000, 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 31, 1998, the Company was in compliance with all such
covenants.
<PAGE>
16
8. OPERATING LEASES:
The Company leases certain vehicles under operating leases. The minimum rentals
under these agreements for succeeding fiscal years are:
1998 $150,822
1999 79,295
2000 1,320
--------
Total $231,437
========
The rental expense for these leases and other leases with terms of less than one
year was approximately $283,000, $305,000 and $230,000 fiscal years 1997, 1996
and 1995, respectively.
- --------------------------------------------------------------------------------
9. INCOME TAXES:
<TABLE>
<CAPTION>
The provision for income taxes consisted of: Fiscal Year
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Current:
Federal $2,475,000 $1,878,000 $1,768,000
State 394,000 387,000 350,000
---------- ---------- ----------
2,869,000 2,265,000 2,118,000
Deferred:
Federal 96,000 (327,000) (31,000)
State 18,000 (58,000) (12,000)
---------- ---------- ----------
114,000 (385,000) (43,000)
---------- ---------- ----------
Total $2,983,000 $1,880,000 $2,075,000
========== ========== ==========
</TABLE>
A reconciliation of income taxes at the federal statutory rate to the Company's
income tax expense follows:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal
statutory rate $3,055,000 34.0% $1,906,000 34.0% $2,088,000 34.0%
State income taxes,
net of federal income
tax benefit 272,000 3.0 215,000 3.8 227,000 3.7
FSC benefit (66,400) (.7) (32,500) (.6) (21,000) (.4)
Research and
experimentation
tax credit (142,800) (1.6) (100,600) (1.8) (145,000) (2.4)
Non-taxable interest (271,000) (3.0) (152,000) (2.7) (106,000) (1.7)
Other 136,200 1.5 44,100 .8 32,000 .6
---------- ---- ---------- ---- ---------- ----
$2,983,000 33.2% $1,880,000 33.5% $2,075,000 33.8%
========== ==== ========== ==== ========== ====
</TABLE>
The components of net deferred tax assets and liabilities consisted of:
<TABLE>
<CAPTION>
January 31, 1998 January 25, 1997
-----------------------------------------
<S> <C> <C>
Deferred tax assets:
Warranty reserve $ 251,176 $ 221,440
Vacation accrual 108,186 88,589
Capitalized inventory costs 101,403 88,353
Other 20,036 121,521
---------- ----------
480,801 519,903
Deferred tax liabilities:
Depreciation and amortization (167,455) (91,874)
---------- ----------
Net deferred tax assets $ 313,346 $ 428,029
========== ==========
</TABLE>
<PAGE>
17
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 1997, 1996, and 1995, the
Company also made additional discretionary contributions, increasing the total
Company match to $1.00 for every $1.00 of employee salary deferrals (up to the
maximum allowable for tax purposes ). Profit-sharing plan expense was comprised
of the following:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Employer matching contribution $214,000 $213,000 $184,000
Discretionary contribution 328,000 302,000 266,000
-------- -------- --------
Total $542,000 $515,000 $450,000
======== ======== ========
</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, Saudi Arabia and China. Sales to one distributor
represented approximately 26% and 21% of net sales and 26% and 17% of accounts
receivable in fiscal 1997 and 1996, respectively. Sales to two distributors
represented approximately 26% and 11% of net sales and 29% and 10% of accounts
receivable in fiscal 1995.
Export sales were approximately $8,366,000, $7,236,000 and $4,450,000 for fiscal
years 1997, 1996 and 1995, respectively. These sales were to customers
principally in Canada, Saudi Arabia, China and Australia. Sales to Canada
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 1997 and 1996, the Company had sales to their partner in ISAL in
the amount of $391,000 and $2,230,000 of which $199,542 and $132,330 is
included in accounts receivable at January 31, 1998 and January 25, 1997,
respectively. At January 31, 1998, the Company had an advance to ISAL in the
amount of $35,000.
During fiscal 1997, the Company had sales to their partner in HEG-ISL in the
amount of $233,000 of which $46,436 is included in accounts receivable at
January 31, 1998.
- --------------------------------------------------------------------------------
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 1997, the Company purchased
60,600 shares of common stock on the open market for an aggregate price of
$1,144,099. As of January 31, 1998, the Company has repurchased a total of
72,400 shares for an aggregate price of $1,322,762.
- --------------------------------------------------------------------------------
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.
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 SFAS No. 123,
"Accounting for Stock-Based Compensation." If compensation cost had been
determined based on the fair value at the grant dates according to SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $6,002,484 $3,724,962 $4,066,579
Pro forma 5,992,137 3,716,035 4,057,953
Basic earnings per common share:
As reported $ 1.80 $ 1.10 $ 1.20
Pro forma 1.80 1.10 1.20
Diluted earnings per common share:
As reported $ 1.80 $ 1.10 $ 1.20
Pro forma 1.80 1.10 1.20
</TABLE>
<PAGE>
18
14. STOCK OPTION PLAN: (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Weighted average risk-free interest rate 1.99% 2.05% 2.00%
Expected dividend yield 2.15% - -
Expected volatility 0.29% 0.29% 0.29%
Expected life (number of years) 7.5 7.5 7.5
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year:
Number 53,813 52,008 48,853
Weighted average exercise price $ 16.75 $ 16.71 $ 16.51
Granted:
Number 3,150 2,825 3,930
Weighted average exercise price $ 20.75 $ 17.56 $ 19.98
Exercised:
Number 1,220 - -
Expired or forfeited:
Number 3,575 1,020 775
Weighted average exercise price $ 18.62 $ 17.20 $ 18.23
------- ------- -------
Outstanding end of year:
Number 52,168 53,813 52,008
Weighted average exercise price $ 16.77 $ 16.75 $ 16.71
======= ======= =======
Exercisable:
Number 47,589 40,431 31,067
Weighted average exercise price $ 16.53 $ 16.57 $ 16.49
Shares reserved for future options 116,582 114,937 116,742
- -------------------------------------------------------------------------------------------
</TABLE>
The following tables summarize certain stock option information:
<TABLE>
<CAPTION>
Options outstanding: 1997 1996 1995
----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Range of Remaining Exercise Remaining Exercise Remaining Exercise
Exercise Price Number Life Price Number Life Price Number Life Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$15.00 - $22.50 50,718 5.96 $ 16.52 51,948 6.76 $ 16.45 50,043 7.61 $ 16.38
$22.51 - $28.25 1,450 5.98 25.28 1,865 7.05 25.13 1,965 8.02 25.29
------ ---- ------- ------ ---- -------- ------ ---- ----------
52,168 5.96 $ 16.77 53,813 6.77 $ 16.75 52,008 7.62 $ 16.71
====== ==== ======= ====== ==== ======== ====== ==== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable: 1997 1996 1995
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Range of Exercise Price Number Price Number Price Number Price
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$15.00 - $22.50 46,298 $ 16.29 39,161 $ 16.31 30,130 $ 16.22
$22.51 - $28.25 1,291 25.10 1,270 24.94 937 25.00
------ ------- ------ -------- ------ ----------
47,589 $ 16.53 40,431 $ 16.57 31,067 $ 16.49
====== ======= ====== ======== ====== ==========
</TABLE>
<PAGE>
19
15. EARNINGS PER SHARE
The details of basic and diluted earnings per common share are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net income $6,002,484 $3,724,962 $4,066,579
---------- ---------- ----------
Weighted average number of basic common
shares outstanding 3,333,666 3,373,632 3,375,087
---------- ---------- ----------
Basic earnings per common share $ 1.80 $ 1.10 $ 1.20
========== ========== ==========
Shares issuable upon exercise of dilutive
outstanding stock options 6,582 1,687 8,558
---------- ---------- ----------
Weighted average number of diluted common
shares outstanding 3,340,248 3,375,319 3,383,645
---------- ---------- ----------
Diluted earnings per common share $ 1.80 $ 1.10 $ 1.20
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
16. 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 due to 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 to the Bank for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
<TABLE>
<CAPTION>
January 31, 1998 January 25, 1997
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,243,595 $ 3,243,595 $ 6,879,111 $ 6,879,111
Short-term investments 13,368,499 13,494,220 12,379,680 12,528,508
Long-term investments 7,309,181 7,789,802 1,070,849 1,142,842
Financial liabilities:
Long-term debt (4,038,674) (4,015,000) (4,512,332) (4,478,000)
</TABLE>
- --------------------------------------------------------------------------------
17. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in a full set of general-
purpose financial statements. This Statement, which is effective for financial
statements issued for fiscal years beginning after December 15, 1997, requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. This
Statement, which is effective for financial statements for periods beginning
after December 15, 1997, also established standards for related disclosures
about products and services, geographic areas and major customers.
Additionally in March 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which is effective
for fiscal years beginning after December 15, 1997. This Statement establishes
standards for displaying a standardized set of disclosures for public companies.
Management does not believe that these Statements will effect the financial
statements.
<PAGE>
20
18. 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 1997 and 1996.
<TABLE>
<CAPTION>
First Second Third Fourth
Amounts in thousands except for per share amounts: Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1997:
Net sales $10,952 $9,261 $10,236 $10,416
Gross profit 6,189 5,002 5,735 6,102
Operating profit 1,944 1,458 1,921 2,183
Net income 1,381 1,467 1,439 1,715
Basic earnings per common share .41 .44 .43 .52
Diluted earnings per common share .41 .44 .43 .52
<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
Basic earnings per common share .33 .24 .31 .22
Diluted earnings per common share .33 .24 .31 .22
</TABLE>
<PAGE>
21
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Industrial Scientific Corporation:
We have audited the accompanying consolidated balance sheet of Industrial
Scientific Corporation and subsidiaries as of January 31, 1998 and January 25,
1997, 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 31, 1998. 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 31, 1998 and January 25,
1997 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended January 31, 1998, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
March 13, 1998
- --------------------------------------------------------------------------------
OFFICERS
Kent D. McElhattan
President and Chief Executive Officer
James P. Hart
Vice President, Finance and Chief
Financial Officer
Garth F. Miller
Vice President, Sales and Service
Jeffrey B. Morgan
Vice President, Manufacturing
Annie Q. Wang, Ph.D.
Vice President, Engineering and R&D
Todd R. Lindemuth, CPA
Controller
Patricia L. Gerney
Corporate Secretary
CORPORATE HEADQUARTERS
Industrial Scientific Corporation
1001 Oakdale Road
Oakdale, PA 15071-1500
(412) 788-4353
1-800-DETECTS (338-3287)
Fax: (412) 788-8353
BOARD OF DIRECTORS
Kenton E. McElhattan
Chairman
Industrial Scientific Corporation
Kent D. McElhattan
President and Chief Executive Officer
Industrial Scientific Corporation
Herbert F. Gerhard
Former President and Chief
Executive Officer
National Mine Service Company
Donald J. McGraw, M.D., M.P.H.
Executive Medical Director
UPMC Work Partners
James D. Morton
Shareholder, Buchanan Ingersoll
Professional Corporation
Thomas M. Thompson
Shareholder, Buchanan Ingersoll
Professional Corporation
GENERAL COUNSEL
Buchanan Ingersoll Professional Corporation
Pittsburgh, Pennsylvania
SUBSIDIARIES
Industrial Scientific Devices, Inc.
The Financial Services Centre
Bishop's Court Hill
St. Michael, Barbados
Industrial Scientific of Delaware, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Industrial Scientific Arabia, Ltd.
P.O. Box 8444
Riyadh 11482
Kingdom of Saudi Arabia
Industrial Scientific Pty.
Suite 17, Level 1, Bridgepoint
3 Brady Street
Mosman, New South Wales 2088
Australia
HEG Industrial Scientific Co. Ltd.
No. 18 Building
High-New Tech. Development
Harbin, Heilongjiang
People's Republic of China
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L. L. P.
Pittsburgh, Pennsylvania
<PAGE>
22
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 10, 1998. (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
7, 1998, there were 1,198 beneficial holders of the Company's common stock.
The Company paid no cash dividends in fiscal years 1995 and 1996. In
fiscal1997, the Company paid three quarterly dividends of $0.04 per share (see
Statement of Changes in Shareholders' Equity, page 10).
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 25, 1997 January 31, 1998
- ----------------------------------------------------------------
Quarter High Low High Low
<S> <C> <C> <C> <C>
First $18.25 $18.25 $17.75 $15.75
Second $19.00 $18.00 $21.00 $16.25
Third $13.50 $13.50 $21.75 $18.50
Fourth $16.75 $16.25 $23.00 $18.50
- ----------------------------------------------------------------
</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
Chase Mellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
800-756-3353
<PAGE>
23
Industrial Scientific our
MISSION
Is to design, manufacture and sell the highest quality products for the
preservation of life and property. And to provide the best customer service
available. That mission is accomplished, in large part, by creating the kind of
stimulating and creative environment that attracts the best and brightest
research, manufacturing and sales people. These talented employees, working in a
supportive, stimulating and flexible environment, will ensure the continued
profitable growth of your company.
[Photos apear here]
<PAGE>
INDUSTRIAL SCIENTIFIC
- --------------------- www.indsci.com . e-mail [email protected]
CORPORATION
ISO9001
CERTIFIED
GUARANTEED
FOR LIFE.
1001 Oakdale Road . Oakdale, PA 15071-1500 . 412-788-4353 . 1-800-DETECTS
(338-3287) . fax: 412-788-8353
<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 13, 1998 on our audits of the consolidated financial
statements of Industrial Scientific Corporation and Subsidiaries as of January
31, 1998, and January 25, 1997, and for each of the three years in the period
ended January 31, 1998, which reports are incorporated by reference.
Coopers & Lybrand L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
April 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> JAN-26-1997
<PERIOD-END> JAN-31-1998
<CASH> 3,243,595
<SECURITIES> 13,368,499
<RECEIVABLES> 6,001,722
<ALLOWANCES> 53,000
<INVENTORY> 3,887,287
<CURRENT-ASSETS> 27,757,110
<PP&E> 14,924,968
<DEPRECIATION> 7,590,863
<TOTAL-ASSETS> 43,881,754
<CURRENT-LIABILITIES> 4,458,786
<BONDS> 2,600,000
0
0
<COMMON> 33,763
<OTHER-SE> 35,557,945
<TOTAL-LIABILITY-AND-EQUITY> 43,881,754
<SALES> 40,865,301
<TOTAL-REVENUES> 40,865,301
<CGS> 17,836,845
<TOTAL-COSTS> 33,359,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,062
<INCOME-PRETAX> 8,985,484
<INCOME-TAX> 2,983,000
<INCOME-CONTINUING> 6,002,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,002,484
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
</TABLE>
