<PAGE>
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for use of the Commission only
(as permitted by Rule 14c-5(d)(2))
[ ] Definitive Information Materials
INDUSTRIAL SCIENTIFIC CORPORATION
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $.01
(2) Aggregate number of securities to which transaction applies: 842,727
(representing all of the outstanding shares of Common Stock not owned
by Kent D. McElhattan, Kenton E. McElhattan, Florence L. McElhattan,
certain members of their family or certain of their respective
affiliates).
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): $28.50 per
share cash price plus a maximum aggregate payment of $548,515 to
holders of outstanding options (other than Kent D. McElhattan and
Kenton E. McElhattan) to acquire Common Stock in consideration of the
cancellation of those options.
(4) Proposed maximum aggregate value of transaction: $24,566,235
(5) Total fee paid: $4,913.25. Fee paid by wire transfer on March 10, 1999.
[_]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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PRELIMINARY COPIES
INDUSTRIAL SCIENTIFIC CORPORATION
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INFORMATION STATEMENT
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INTRODUCTION
This Information Statement is furnished by the Board of Directors of
Industrial Scientific Corporation, a Pennsylvania corporation ("Industrial
Scientific" or the "Company"), to holders of the outstanding shares of common
stock, par value $.01 per share (the "Company Common Stock"), of the Company in
connection with an Agreement and Plan of Merger, dated as of February 23, 1999
(the "Merger Agreement"), by and between the Company and ISC Acquisition
Corporation, a Pennsylvania corporation ("Acquisition"). The Merger Agreement
provides for the merger (the "Merger") of Acquisition with and into the
Company, with the Company as the corporation surviving the Merger. Acquisition
was formed by Mr. Kenton E. McElhattan, Chairman of the Board of Directors of
the Company, Mr. Kent D. McElhattan, the President, Chief Executive Officer and
a director of the Company and Mrs. Florence L. McElhattan (collectively, the
"Majority Shareholders") in connection with the Merger.
The Majority Shareholders currently beneficially own approximately 74.2% of
the Company Common Stock, representing approximately 74.2%of the voting power
of the shareholders of the Company. The Majority Shareholders proposed the
Merger in order to purchase all of the Nonaffiliated Stock. For purposes of
this Information Statement, Nonaffiliated Stock refers to shares of Company
Common Stock not held by Acquisition, the Majority Shareholders or certain
members of their immediate family and certain family trusts (their
"Affiliates").
As a result of the Merger, each share of Nonaffiliated Stock (other than
shares owned by those shareholders who have validly perfected their dissenters
rights under Pennsylvania law) will be converted into the right to receive
$28.50 in cash, without interest (the "Merger Consideration"). The Merger
Consideration represents a 36% premium over the $20.92 average closing price
per share during the 30 trading days preceding February 23, 1999, which was the
last full trading day before the execution and public announcement of the
Merger Agreement. A special committee consisting of non-employee members of the
Board of Directors of the Company (the "Special Committee") negotiated the
Merger Consideration with the Majority Shareholders and their representatives.
The total consideration payable to the holders of Nonaffiliated Stock in the
Merger and to the holders of options to acquire Company Common Stock is
approximately $24.6 million. A copy of the Merger Agreement is attached to this
Information Statement as Exhibit A.
The Board of Directors of the Company, acting on the recommendation of the
Special Committee, has approved the Merger Agreement. The Special Committee and
the full Board of Directors of the Company believe that the terms and
provisions of the Merger Agreement and the Merger are fair to and in the best
interests of Industrial Scientific and holders of Nonaffiliated Stock.
This Information Statement is also furnished by the Board of Directors of
the Company in connection with an amendment to the Company's Articles of
Incorporation providing that Subchapter E, Control Transactions (hereinafter
referred to as "Subchapter E") of the Pennsylvania Business Corporation Law of
1988, as amended (the "BCL"), shall not be applicable to the Company (the
"Articles Amendment"). Subchapter E is one of a number of anti-takeover
provisions contained in the BCL which were enacted in the 1980s to afford
public corporations incorporated in Pennsylvania and their shareholders
protection against certain types of takeovers and acquisitions of control by
third parties.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
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The BCL permits Pennsylvania corporations to elect not to be governed by the
provisions of Subchapter E by amending their articles of incorporation to so
provide. The members of the Special Committee (in their capacity as directors
of the Company) and the full Board of Directors of the Company approved the
Articles Amendment to prevent Subchapter E from being applicable to the
acquisition of Company Common Stock by Acquisition as a result of capital
contributions of Company Common Stock by the Majority Shareholders and their
Affiliates in connection with the Merger.
Immediately following the execution of the Merger Agreement, the Majority
Shareholders executed and delivered to the Company a written consent in lieu of
a meeting of shareholders approving the Articles Amendment, the Merger
Agreement and the Merger and adopting the Merger Agreement and the Articles
Amendment. The Merger and the Articles Amendment will become effective no
earlier than 20 calendar days after this Information Statement is first sent or
given to shareholders of the Company. The effective date of the Merger and the
Articles Amendment will be on , 1999, or such other time as the Company
and the Majority Shareholders shall determine.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. PLEASE DO NOT SEND IN ANY OF YOUR SHARE CERTIFICATES AT THIS TIME.
This Information Statement is first being mailed to shareholders on or about
, 1999.
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TABLE OF CONTENTS
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Questions and Answers About The Merger and Articles Amendment............ 1
Summary.................................................................. 3
General.................................................................. 8
Special Factors Regarding the Merger..................................... 8
Closing................................................................ 8
Background of The Merger............................................... 8
The Majority Shareholders' Purpose and Reasons for The Merger.......... 13
Opinion of The Financial Advisor....................................... 14
Interests of Certain Persons in The Merger............................. 19
Certain Effects of The Merger.......................................... 19
Certain Federal Income Tax Consequences of The Merger.................. 20
Accounting Treatment................................................... 21
Financing of The Merger................................................ 21
Regulatory Matters..................................................... 22
Required Vote for Merger; Written Consent in Lieu of Meeting............. 23
The Merger Agreement..................................................... 24
Consideration to be Paid in The Merger................................. 24
The Exchange Fund; Payment for Shares of Common Stock.................. 24
Transfers of Company Common Stock...................................... 25
Treatment Of Options................................................... 25
Representations and Warranties......................................... 25
Certain Covenants and Agreements....................................... 26
Conditions to The Merger............................................... 26
Termination............................................................ 26
Indemnification and Insurance.......................................... 27
Amendment.............................................................. 27
No Liability for Breaches of Representations and Warranties............ 27
Applicable Law......................................................... 27
Estimated Fees and Expenses.............................................. 28
Dissenters Rights........................................................ 28
Special Factors Regarding Amendment of The Articles...................... 31
Summary of Subchapter E................................................ 31
Reasons for The Proposed Amendment to The Articles..................... 31
Interests of Certain Persons in The Articles Amendment................. 32
Required Vote for Articles Amendment; Written Consent in Lieu of
Meeting................................................................. 32
Market Price and Dividends............................................... 33
Common Stock Purchase Information...................................... 33
Quantitative and Qualitative Disclosure About Market Risk.............. 34
Subsequent Event: Fourth Quarter Results of Operations................... 34
Selected Consolidated Financial Data..................................... 35
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 36
Certain Information Regarding The Company................................ 42
Overview............................................................... 42
Gas Monitoring Instruments............................................. 42
Other Products......................................................... 42
Recent Acquisitions.................................................... 42
Marketing, Sale and Distribution....................................... 43
Research, Development and Engineering.................................. 43
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Raw Materials and Supplies............................................. 44
Competition............................................................ 44
Patents, Trademarks and Licenses....................................... 44
Regulatory Matters..................................................... 44
Environmental Matters.................................................. 44
Employees.............................................................. 45
Properties............................................................. 45
Legal Proceedings...................................................... 45
Certain Information Regarding Acquisition................................ 46
Management............................................................... 47
Directors and Executive Officers of The Company........................ 47
Directors and Executive Officers of Acquisition........................ 48
Principal Shareholders and Stock Ownership of Management................. 49
Independent Accountants.................................................. 50
Shareholder Proposals.................................................... 50
Available Information.................................................... 51
Index to Financial Statements............................................ F-1
Exhibit A Agreement and Plan of Merger................................... A-1
Exhibit B Opinion of Ladenburg Thalmann & Co. Inc........................ B-1
Exhibit C Part I, Chapter 15, Subchapter D of the Pennsylvania Business
Corporation Law of 1988, as amended............................... C-1
Exhibit D The Company's March 10, 1999, Earnings Release Describing its
Fourth Quarter Results of Operations.............................. D-1
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QUESTIONS AND ANSWERS ABOUT THE MERGER AND ARTICLES AMENDMENT
Q: WITH WHOM IS THE COMPANY MERGING?
A: The Company, Industrial Scientific, is merging with ISC Acquisition
Corporation, with the Company as the surviving corporation. ISC Acquisition
Corporation was formed by the three largest shareholders of Industrial
Scientific, Kenton E. McElhattan, Kent D. McElhattan and Florence L.
McElhattan. They are referred to as the "Majority Shareholders."
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Holders of Industrial Scientific's common stock (other than the shares owned
by the Majority Shareholders, their affiliates and ISC Acquisition
Corporation) will receive $28.50 in cash for each share they own, subject to
the right of the shareholders to dissent and seek appraisal of the fair
value of their shares under Pennsylvania law. A special committee consisting
of non-employee members of the Board of Directors of the Company negotiated
this price with the Majority Shareholders and their representatives.
Q: WILL THE SURVIVING COMPANY BE A PUBLIC COMPANY?
A: No. As a result of the merger, Industrial Scientific, as the corporation
surviving the merger, will be privately held. Upon consummation of the
merger, the Company's common stock will cease to be quoted on the NASDAQ
National Market and there will be no public market for the stock. In
addition, registration of the common stock will be terminated and the
Company will no longer be required to file periodic reports with the
Securities and Exchange Commission.
Q: WHY HAS THE BOARD OF DIRECTORS APPROVED THE MERGER AGREEMENT AND THE MERGER?
A: Your Board of Directors determined that, based upon the recommendation of
the special committee, the terms and provisions of the merger agreement
between the Company and ISC Acquisition Corporation, and the merger, are
fair to and in the best interests of Industrial Scientific and its
shareholders, not including the Majority Shareholders or their affiliates.
To review the background and reasons for the merger in greater detail, see
pages 8 to 14 of this Information Statement.
Q: WHAT RIGHTS DO I HAVE IF I OPPOSE THE MERGER?
A: If you wish, you may dissent and seek an appraisal of the fair market value
of your shares, but only if you comply with all Pennsylvania laws and
procedures explained on pages 28 to 30 of this Information Statement.
Q: SHOULD I SEND IN MY SHARE CERTIFICATES NOW?
A: No. We will send you written instructions for exchanging your share
certificates promptly after the closing of the Merger.
Q: WHAT ARE THE FEDERAL TAX CONSEQUENCES OF THE MERGER TO ME?
A: The merger generally will be taxable to you for U.S. federal income tax
purposes. To review the federal income tax consequences to shareholders in
greater detail, see pages 20 to 21 of this Information Statement.
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Q: WHY ARE THE COMPANY'S ARTICLES OF INCORPORATION BEING AMENDED?
A: To prevent an anti-takeover provision of Pennsylvania law that is intended
to protect against acquisitions of control by certain third parties from
being triggered by capital contributions of Industrial Scientific common
stock by the Majority Shareholders to ISC Acquisition Corporation in
connection with the merger.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the merger or would like additional copies
of this Information Statement, please contact James P. Hart, Vice President
of Finance, Industrial Scientific Corporation, 1001 Oakdale Road, Oakdale,
PA 15071, telephone number (412) 788-4353.
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SUMMARY
This Summary highlights selected information from this Information
Statement. This Summary may not contain all of the information that is
important to you. To understand the Merger fully, you should carefully read the
entire Information Statement and the attached Exhibits.
Throughout this Information Statement, the "Merger Agreement" refers to the
Agreement and Plan of Merger by and between ISC Acquisition Corporation and
Industrial Scientific Corporation dated as of February 23, 1999, and attached
hereto as Exhibit A, and "Merger" refers to the merger of ISC Acquisition
Corporation with and into Industrial Scientific Corporation with Industrial
Scientific Corporation as the surviving corporation. ISC Acquisition
Corporation is owned by Kenton E. McElhattan, Kent D. McElhattan and Florence
L. McElhattan, the three largest shareholders of Industrial Scientific
Corporation. For ease of reference, we sometimes refer in this document to ISC
Acquisition Corporation as "Acquisition," to Industrial Scientific Corporation
as "Company" (or the "Surviving Corporation" upon consummation of the Merger)
and to Kenton E. McElhattan, Kent D. McElhattan and Florence L. McElhattan
collectively as the "Majority Shareholders." We are using the term
"Nonaffiliated Stock" to mean all of the common stock of the Company, par value
$.01 per share ("Company Common Stock"), not owned by the Majority Shareholders
or by certain members of their immediate family or family trusts established on
their behalf (their "Affiliates"). "Options" refers to outstanding options to
acquire Company Common Stock issued under the Company's 1993 Stock Option Plan,
as amended and restated.
SPECIAL FACTORS REGARDING THE MERGER
Purpose, Background and Effects of the Merger
The Majority Shareholders' purpose for the Merger is to acquire all of the
remaining Company Common Stock not already owned by them or their Affiliates
while affording holders of Nonaffiliated Stock the ability to dispose of their
shares at a premium above recent market prices. The Merger will cause the
Company to be privately owned, which the Majority Shareholders believe will
advance the Company's long-term strategy, and will be beneficial from a
competitive and cost standpoint and from the standpoint of employee relations.
The Majority Shareholders sought to structure the transaction as a merger
because it would enable them to obtain financing on the best terms possible and
reduce transaction costs. Upon the consummation of the Merger, the Company's
stock will cease to be publicly traded and holders of Nonaffiliated Stock
(other than those who dissent from the Merger and seek appraisal of their
shares in accordance with Pennsylvania law (the "Dissenting Shareholders"))
will receive $28.50 per share in cash. Following the Merger, all of the capital
stock of the Company, as the Surviving Corporation, will be owned by the
Majority Shareholders and their Affiliates. See "SPECIAL FACTORS REGARDING THE
MERGER--Background Of The Merger" and "--The Majority Shareholders' Purpose And
Reasons For The Merger."
Approval by the Board of Directors
In November 1998, the Majority Shareholders indicated to the Board of
Directors of the Company (the "Board of Directors") that they were interested
in acquiring all of the Company Common Stock not currently owned by them or
their Affiliates. To address actual and potential conflicts of interest
resulting from two of the Majority Shareholders being members of the Board of
Directors (Kenton E. McElhattan and Kent D. McElhattan), the Board of Directors
formed a special committee of the Board of Directors (the "Special Committee")
to review the Majority Shareholders' proposal and make a recommendation to the
Board of Directors, and, if necessary, to negotiate the terms of any such
transaction with the Majority Shareholders. The Special Committee consists of
Herbert F. Gerhard, Donald J. McGraw and Thomas M. Thompson. No member of the
Special Committee is an employee or former employee of the Company or an
affiliate of any of the Majority Shareholders.
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In December 1998, the Majority Shareholders offered to acquire all of the
Nonaffiliated Stock at a purchase price of $23.50 per share. Through
negotiations, the Special Committee and the Majority Shareholders agreed on the
final purchase price of $28.50 per share (the "Merger Consideration").
The Board of Directors, acting on the recommendation of the Special
Committee, has approved the Merger and the Merger Agreement. The Board of
Directors believes that the Merger and the terms and provisions of the Merger
Agreement (including the $28.50 per share purchase price) are fair to and in
the best interests of the Company and the holders of Nonaffiliated Stock. See
"SPECIAL FACTORS REGARDING THE MERGER--Background Of The Merger," "--The
Majority Shareholders' Purpose And Reasons For The Merger," and "--Opinion Of
The Financial Advisor."
Ladenburg Thalmann Fairness Opinion
At the February 23, 1999, meeting of the Special Committee, Ladenburg
Thalmann & Co. Inc., financial advisor to the Special Committee ("Ladenburg
Thalmann"), delivered its oral opinion (which was subsequently confirmed by a
written opinion dated February 23, 1999) that, as of such date, based upon and
subject to the various considerations and assumptions stated in its opinion,
the $28.50 per share consideration payable to the holders of Nonaffiliated
Stock pursuant to the Merger is fair to such shareholders from a financial
point of view. The Ladenburg Thalmann opinion is attached to the Information
Statement as Exhibit B. Please read this opinion carefully. See "SPECIAL
FACTORS REGARDING THE MERGER--Opinion Of The Financial Advisor."
Interests of Certain Persons in the Merger
Acquisition was formed by the Majority Shareholders for the purpose of
acquiring the Company in the Merger. The Majority Shareholders beneficially own
approximately 74.2% of the Company. Following the Merger, the Majority
Shareholders and their Affiliates will own 100% of the common stock of the
Surviving Corporation, par value $.01 per share (the "Surviving Corporation
Common Stock"). Such ownership will result from the conversion, upon the
consummation of the Merger, of the shares of the outstanding common stock of
Acquisition, par value $.01 per share (the "Acquisition Common Stock") into
shares of Surviving Corporation Common Stock.
All of the officers and directors of the Company own Company Common Stock or
hold Options. To that extent, their interest in the Merger is the same as that
of the holders of Nonaffiliated Stock. However, some of the officers and
directors have relationships or interests in the Merger that are different from
the interest of the holders of Nonaffiliated Stock or which may present actual
or potential conflicts of interest. For a description of these interests, see
page 19 of this Information Statement. The Special Committee and the Board of
Directors were aware of and considered such interests in recommending and
approving the Merger. See "SPECIAL FACTORS REGARDING THE MERGER--Interests Of
Certain Persons In The Merger."
The Parties
The Company. Industrial Scientific 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.
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Industrial Scientific was incorporated in Pennsylvania in 1984. Its
principal offices are located at 1001 Oakdale Road, Oakdale, Pennsylvania
15071. Its telephone number is (412) 788-4353. See "CERTAIN INFORMATION
REGARDING THE COMPANY" and "AVAILABLE INFORMATION."
Acquisition. Acquisition was organized on February 22, 1999, by the Majority
Shareholders to acquire all of the Company Common Stock pursuant to the Merger
Agreement. Acquisition has not conducted any unrelated activities since its
organization. All of the outstanding capital stock of Acquisition is owned by
the Majority Shareholders. Immediately prior to the consummation of the Merger,
the Majority Shareholders and their Affiliates will contribute all of the
Company Common Stock owned by them to Acquisition in exchange for shares of
capital stock of Acquisition. See "CERTAIN INFORMATION REGARDING ACQUISITION."
Acquisition's principal officers are located at 1001 Oakdale Road, Oakdale,
Pennsylvania 15071. Its telephone number is (412) 788-4353. See "CERTAIN
INFORMATION REGARDING ACQUISITION."
Required Vote for Merger; Written Consent in Lieu of Meeting
Under the Pennsylvania Business Corporation Law of 1988, as amended (the
"BCL") and the Company's amended and restated articles of incorporation (the
"Articles") and bylaws (the "By-laws"), the affirmative vote of a majority of
the votes cast by all shareholders entitled to vote is required to approve and
adopt the Merger Agreement and Merger. On February 23, 1999, immediately
following the execution of the Merger Agreement, the Majority Shareholders, who
then held of record, in the aggregate, 2,288,600 shares of Company Common
Stock, representing a majority of the votes entitled to be cast at a meeting to
consider the Merger Agreement and the Merger, executed and delivered to the
Company a written consent in lieu of a meeting of shareholders approving the
Merger Agreement and the Merger and adopting the Merger Agreement (the
"Consent"). On February 23, 1999, there were issued and outstanding 3,280,137
shares of Company Common Stock. The Merger will become effective no earlier
than 20 calendar days after this Information Statement is first sent or given
to shareholders of the Company. See "REQUIRED VOTE FOR MERGER; WRITTEN CONSENT
IN LIEU OF MEETING."
Dissenters Rights
Under Subchapter D of Chapter 15 of the BCL, holders of Company Common Stock
who strictly comply with the applicable requirements of the BCL may dissent
from the Merger and seek payment in cash from the Company of the fair value of
their Company Common Stock. See "DISSENTERS RIGHTS" and the applicable
provisions of the BCL attached as Exhibit C hereto.
Federal Income Tax Consequences
Shareholders will be taxed on their allocation of the Merger Consideration
to the extent that the amount they receive exceeds their tax basis in their
Company Common Stock. Because determining the tax consequences of the Merger
can be complicated, shareholders should consult their tax advisors in order to
understand fully how the Merger will affect them. See "SPECIAL FACTORS
REGARDING THE MERGER--Certain Federal Income Tax Consequences Of The Merger."
Accounting Treatment
The cost of repurchasing the Company Common Stock will be accounted for as a
treasury stock transaction within the context of generally accepted accounting
principles. This means that the historical cost basis of the Company's assets
and liabilities will be carried forward to the Surviving Corporation, with the
aggregate cost of such repurchase being accounted for as a charge to
shareholders' equity. The cost of repurchasing and canceling Options will be
accounted for as compensation expense. See "SPECIAL FACTORS REGARDING THE
MERGER--Accounting Treatment."
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Financing of the Merger
At the closing of the Merger, Acquisition expects to pay an aggregate
purchase price of $24.6 million to the holders of Nonaffiliated Stock and to
the holders of Options (other than Options held by Kent D. McElhattan and
Kenton E. McElhattan, which Options shall be assumed by the Surviving
Corporation). The parties anticipate that Acquisition will require
approximately $400,000 to pay expenses and costs relating to the Merger. It is
a condition to the Company's obligation to consummate the Merger that
Acquisition has sufficient funds available to it for the foregoing purposes. On
March 4, 1999, Acquisition delivered to the Company a commitment letter from
PNC Bank, National Association, subject to certain specified conditions, for a
revolving credit and term loan facility aggregating up to $27 million in order
to fund such payments.
Regulatory Matters
The Company does not believe that any material federal or state regulatory
approvals, filings or notices are required by the Company in connection with
the Merger other than (i) such approvals, filings or notices required pursuant
to federal and state securities laws and (ii) the filing of the articles of
merger with the Department of State of the Commonwealth of Pennsylvania (the
"Articles of Merger"). See "SPECIAL FACTORS REGARDING THE MERGER--Regulatory
Matters."
THE MERGER AGREEMENT
The Merger Consideration
When the Merger is completed, the holders of Nonaffiliated Stock will be
entitled to receive $28.50 per share in cash for their shares of Company Common
Stock, without interest. See "THE MERGER AGREEMENT--Consideration To Be Paid In
The Merger."
Conditions to the Merger
The consummation of the Merger is contingent upon the satisfaction of
certain conditions, including, but not limited to (i) the absence of litigation
which prohibits the consummation of the Merger or materially challenges the
transactions contemplated therein, (ii) the performance by the Company and
Acquisition in material respects of all undertakings and agreements required by
the Merger Agreement, (iii) the Company not paying any dividends or making any
other distributions with respect to Company Common Stock and (iv) the absence
of any adverse material change in the business of the Company. See "THE MERGER
AGREEMENT--Conditions To The Merger."
Termination of the Merger Agreement
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time (as defined below) by the mutual written consent of
the Special Committee and Acquisition, and by either party if the Merger has
not been consummated prior to June 30, 1999, or if the Special Committee
withdraws or modifies its approval of the Merger. See "THE MERGER AGREEMENT--
Termination."
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SPECIAL FACTORS REGARDING THE ARTICLES AMENDMENT
Purpose and Effects of the Articles Amendment
The general purpose of the amendment of the Company's Articles (the
"Articles Amendment") is to make Subchapter E of the BCL inapplicable to the
Company and therefore ensure that the provisions of Subchapter E do not apply
to the acquisition of Company Common Stock by Acquisition as a result of
capital contributions of such stock to Acquisition by the Majority Shareholders
and their Affiliates in connection with the Merger.
Subchapter E essentially provides that, subject to certain exceptions, if a
person or group acquires voting power over 20% or more of the voting shares of
capital stock of a public company, the shareholders are entitled to notice of
such event and may demand that the acquiring person or group pay "fair value
for their shares." While Subchapter E may have afforded the Company and its
shareholders protection against an unwanted and unfair takeover by a hostile
third party, the Board of Directors believes that the provisions of Subchapter
E should not apply to the Majority Shareholders' and their Affiliates'
contributions of Company Common Stock to Acquisition in connection with the
Merger. Moreover, holders of Nonaffiliated Stock who oppose the Merger may
dissent and seek an appraisal of the fair market value of their Company Common
Stock pursuant to the dissenters rights provisions of the BCL. See "DISSENTERS
RIGHTS."
The Articles Amendment will make Subchapter E inapplicable to the Company
and will permit the contemplated capital contributions by the Majority
Shareholders and their Affiliates of Company Common Stock to Acquisition
without triggering the protections of Subchapter E.
Interests of Certain Persons in the Articles Amendment
Acquisition was formed by the Majority Shareholders for the purpose of
acquiring the Company in the Merger. The Majority Shareholders and their
Affiliates beneficially own approximately 74.2% of the Company Common Stock and
intend to contribute such shares to Acquisition prior to the Merger. Following
the Merger, the Majority Shareholders and their Affiliates will own 100% of the
Surviving Corporation Common Stock. The purpose of the Articles Amendment is to
make Subchapter E of the BCL inapplicable to the contemplated capital
contributions of the Majority Shareholders and their Affiliates to Acquisition
in connection with the Merger.
Required Vote for Articles Amendment; Written Consent in Lieu of Meeting
Under the BCL and the Company's Articles and By-laws, the affirmative vote
of a majority of the votes cast by all shareholders entitled to vote is
required to approve the Articles Amendment. On February 23, 1999, immediately
following the execution of the Merger Agreement, the Majority Shareholders, who
then held of record, in the aggregate, 2,288,600 shares of Company Common
Stock, representing a majority of the votes entitled to be cast at a meeting to
consider the Articles Amendment, executed and delivered to the Company a
written consent in lieu of a meeting of shareholders approving the Articles
Amendment (the "Consent"). On February 23, 1999, there were issued and
outstanding 3,280,137 shares of Company Common Stock. The Articles Amendment
will become effective no earlier than 20 calendar days after this Information
Statement is first sent or given to shareholders of the Company and prior to
the Effective Time of the Merger. See "REQUIRED VOTE FOR ARTICLES AMENDMENT;
WRITTEN CONSENT IN LIEU OF MEETING."
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GENERAL
This Information Statement is being delivered in connection with the Merger
of Acquisition with and into the Company pursuant to the Merger Agreement and
in connection with an amendment to the Articles to make Subchapter E of the BCL
inapplicable to the contribution of Company Common Stock by the Majority
Shareholders and their Affiliates to Acquisition in connection with the Merger.
As a result of the Merger, the Company will be the Surviving Corporation and
each share of Nonaffiliated Stock (other than the shares held by Dissenting
Shareholders) will be converted into the right to receive the Merger
Consideration, and the equity interest and rights and obligations of all pre-
Merger shareholders with respect to such shares will be terminated.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MERGER AND RELATED TRANSACTIONS DESCRIBED
HEREIN, OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ACQUISITION OR THE MAJORITY SHAREHOLDERS.
SPECIAL FACTORS REGARDING THE MERGER
Closing
The consummation of the Merger and the transactions contemplated thereby
shall constitute the "Closing." Unless otherwise mutually agreed to by the
Company and Acquisition, the Closing shall take place at the offices of
Buchanan Ingersoll Professional Corporation, 301 Grant Street, Pittsburgh,
Pennsylvania 15219 on [day], which shall constitute the "Closing Date." The
effective time of the Merger shall be the close of business on the Closing Date
(the "Effective Time").
Background of the Merger
For several years the Board of Directors and Company's management have had
concerns that the stock price of Company Common Stock did not reflect the value
of the Company and that the market for Company Common Stock was not as active
or liquid as they desired. Management and the Board of Directors have also
questioned whether the Company derived any material benefit from being a public
company. During 1996, management held discussions with financial advisors and
other professionals to consider steps that could be taken to address these
concerns. During these discussions various alternatives were discussed
including some form of "going private" transaction. The Board of Directors did
not pursue exploring a going private transaction at that time because it was
believed that such a transaction might restrict the Company's flexibility. The
Board of Directors and management also believed that they should explore
certain other available alternatives to enhance shareholder value before
seriously considering a going private transaction.
In November 1996, shortly following these discussions, management
recommended and the Board of Directors approved a Company stock repurchase
program pursuant to which the Company was authorized to repurchase up to 10% of
the outstanding shares of Company Common Stock. Management also began to
seriously consider strategic acquisition opportunities.
Notwithstanding these efforts to enhance shareholder value, management and
the Board of Directors continued to believe that the Company was not being
adequately valued by the public markets. In June 1997, the Board of Directors
authorized a cash dividend to the holders of Company Common Stock of $.04 per
share. The Company has paid a quarterly dividend since the second quarter of
fiscal year 1997 and increased the dividend to $.05 per share for the first
quarter of fiscal 1998. In September 1998, individual members of the Majority
Shareholders held discussions with certain senior managers of the Company on
ways to enhance liquidity and shareholder value in the
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Company, including the possibility of the Majority Shareholders acquiring 100%
of the Company. In October 1998, individual members of the Majority
Shareholders, certain senior managers of the Company and the Company's legal
counsel discussed the feasibility of taking the Company private in a leveraged
buy-out or a reverse stock split. No specific proposal was put forth by the
Majority Shareholders until the meeting of the Board of Directors on November
3, 1998 (the "November Meeting").
At the November Meeting, Kenton E. McElhattan and Kent D. McElhattan advised
the Board of Directors that they intended to make a proposal to purchase all of
the shares of Company Common Stock not already owned by them or their
Affiliates. Since both Kenton E. McElhattan and Kent D. McElhattan are members
of the Board of Directors and Kent D. McElhattan is an employee of the Company,
the Board of Directors elected the Special Committee and authorized and
empowered the Special Committee to receive and to review any proposals made by
the Majority Shareholders and make a recommendation to the full Board of
Directors, and, if necessary, negotiate the terms of any transaction with the
Majority Shareholders. The Special Committee consists of directors Herbert F.
Gerhard, Donald J. McGraw and Thomas M. Thompson, none of whom is employed by
the Company or affiliated with the Majority Shareholders.
The Board of Directors further authorized the Special Committee to retain
the services of legal counsel and a financial advisor to assist the Special
Committee in its deliberations.
On December 3, 1998, after the Special Committee had retained the
Pittsburgh, Pennsylvania, law firm of Thorp Reed & Armstrong, LLP as its legal
counsel, the Majority Shareholders delivered a letter to the Special Committee.
In it, the Majority Shareholders proposed a merger between the Company and a
new company they planned to form to facilitate a merger ("Newco"). Under their
proposal, the Majority Shareholders would capitalize Newco with shares of
Company Common Stock owned by them and their Affiliates. Newco would then merge
with and into the Company, and the Company would remain after the merger as the
surviving corporation. The Majority Shareholders' proposal also provided that
the holders of Nonaffiliated Stock would receive $23.50 per share in cash for
each share of Company Common Stock they owned, subject to their right to
dissent under the BCL. The proposal further provided that, after the merger,
the shares of Company Common Stock held by Newco would be canceled, and each
share of Newco common stock would be converted into one share of common stock
of the Company, as the surviving corporation. As a result, the Majority
Shareholders and their Affiliates would own 100% of the Company. The Majority
Shareholders also proposed that the Company deregister its Company Common Stock
under the Securities Exchange Act of 1934 (the "Exchange Act") prior to
entering into a merger agreement so as to permit the consummation of the
transaction without the need to comply with certain securities law filing and
disclosure requirements.
The Majority Shareholders invited the Special Committee to meet with them
and their legal counsel to negotiate a definitive merger agreement.
The Special Committee contacted and solicited proposals from nine firms with
respect to financial advisory services. On December 7, 1998, after conducting
interviews with five candidates, the Special Committee retained New York-based
Ladenburg Thalmann as its financial advisor. In the selection process, the
Special Committee had indicated that the financial advisors would be judged on
the basis of the quality of their written material, their reputation and
prominence, and their experience in advising board committees similar to the
Special Committee. In selecting Ladenburg Thalmann, the Special Committee based
its choice on the above-mentioned factors as well as (i) the Special
Committee's high level of comfort with the representatives of Ladenburg
Thalmann who would be assigned to work with them, (ii) the sensitivity of such
representatives to the need to obtain both a fair price and impartial and
lawful procedure, and (iii) Ladenburg Thalmann's fee structure. Upon the
Special Committee's engagement of Ladenburg Thalmann as its financial advisor,
Ladenburg Thalmann began its due diligence review of the Company.
On January 21, 1999, the Special Committee and its legal and financial
advisors met to review a presentation by Ladenburg Thalmann concerning the
$23.50 offer. Ladenburg Thalmann's representatives participated in the meeting
by telephone. At the January 21 meeting, Ladenburg Thalmann's representatives
described their due diligence review of the Company, which included a visit to
the Company's headquarters in
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December 1998 and extensive meetings with the Company's executive officers,
particularly the Chief Financial Officer of the Company, James P. Hart.
Ladenburg Thalmann's representatives explained that they had reviewed publicly
available information regarding the Company as well as internally prepared
financial information, and had also considered both current operating
performance and management's projections of future performance. Ladenburg
Thalmann's representatives also explained the types of analyses that they had
performed; these analyses included (i) a market multiples analysis based upon
valuations of comparable publicly-traded companies; (ii) a discounted cash flow
analysis; (iii) an acquisition multiples analysis based upon recent acquisition
transactions involving similar companies; and (iv) a takeover premium analysis.
Ladenburg Thalmann's representatives noted that the trading price of the
Company's shares was a less significant factor in its analyses than other
measures of performance because of the Company's small public float and the
typically low trading volume of the Company Common Stock. The Ladenburg
Thalmann representatives advised the Special Committee that, based upon their
due diligence review and analyses, the $23.50 offer was not adequate.
After further discussions among the members of the Special Committee and
Ladenburg Thalmann representatives, it was concluded that a counteroffer of
$32.00 per share should be communicated to the Majority Shareholders, based
upon the view expressed by Ladenburg Thalmann representatives that such a price
was supported by the analyses they had performed, although a somewhat lower
price might likely be found to be within the range of a fair price, from a
financial point of view. It was further concluded that the counteroffer,
together with a description of Ladenburg Thalmann's analyses, should be
presented by Ladenburg Thalmann upon the direction of the Special Committee at
a meeting where the Ladenburg Thalmann representatives, the members of the
Special Committee, the Majority Shareholders' spokespersons and respective
legal counsel could all be physically present. The Special Committee's legal
counsel was asked to arrange such a meeting at the earliest possible date. On
January 22, 1999, the Special Committee's counsel confirmed that the
contemplated meeting would be held in Pittsburgh on January 27, 1999.
On January 27, 1999, the Special Committee and its legal and financial
advisors met with the Majority Shareholders and their legal counsel. At the
January 27 meeting, Ladenburg Thalmann's representatives reviewed generally the
studies and analyses they had undertaken and stated, based on their due
diligence review and financial analyses with respect to the Company, that the
Special Committee proposed that the Company agree to pay merger consideration
of $32.00 per share. The Majority Shareholders were invited to ask questions of
Ladenburg Thalmann's representatives as to how the firm arrived at the
proposal. The Majority Shareholders generally reserved questions pending
receipt of written materials from Ladenburg Thalmann, but expressed the view
that the price requested was unrealistically high. After discussion, the
Majority Shareholders and their legal counsel left the meeting for a private
conversation. When they returned, the Majority Shareholders' legal counsel
urged Ladenburg Thalmann's representatives to send supporting materials as soon
as possible for the Majority Shareholders' review so that the Majority
Shareholders could respond more formally to the merger consideration proposal.
The meeting adjourned, and it was agreed that the Special Committee's legal
counsel would contact the Majority Shareholders' legal counsel to arrange for
prompt delivery of additional information provided by Ladenburg Thalmann and to
try to determine how to proceed with the discussions.
On January 29, 1999, Ladenburg Thalmann provided the Majority Shareholders
with written materials relating to the Special Committee's proposal, as
requested at the January 27 meeting. On January 31, 1999, the Majority
Shareholders engaged Parker/Hunter Incorporated ("Parker/Hunter") to act as
their financial advisor and assist in the negotiations with the Special
Committee.
On February 4, 1999, representatives of Parker/Hunter and Ladenburg Thalmann
met in New York City to discuss the current status of, and issues related to,
the negotiations between the Majority Shareholders and the Special Committee.
On February 9, 1999, representatives of Parker/Hunter and Ladenburg Thalmann
discussed by telephone their respective approaches to issues relating to the
merger consideration proposals and certain issues relating to the valuation of
the Company. Representatives of Parker/Hunter and Ladenburg Thalmann
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met again on February 12, 1999, in New York City to determine if there was a
basis on which they could recommend to their respective clients that
discussions should continue. Following this meeting, Ladenburg Thalmann and
Parker/Hunter held several discussions by telephone, and also met or held
telephone discussions separately with their respective clients, regarding the
continuation of negotiations.
On February 16, 1999, Parker/Hunter's representatives informed Ladenburg
Thalmann that the Majority Shareholders were willing to proceed with an offer
to acquire the Nonaffiliated Stock for $27.00 per share (the "$27.00 Offer"),
with all other terms substantially similar to the original $23.50 offer. The
Special Committee met on February 17, 1999, to discuss the new proposal with
their financial and legal advisors. Ladenburg Thalmann's representatives
reported by telephone that they had had a number of conversations with
Parker/Hunter prior to the making of the proposal and that, in addition to the
price per share, they had discussed the process and timing of completing the
transaction. Ladenburg Thalmann told the Special Committee that Parker/Hunter
indicated that its representatives had, in advising the Majority Shareholders,
considered a number of factors, including (i) that $27.00 approximated the
highest trading price in recent years for the shares of the Company, (ii)
competitive pressures facing the Company, (iii) the fact that the Company's
business is concentrated in one industry, (iv) the Company's limited success in
expanding into European markets, and (v) the limited trading market for the
Company's Common Stock. Ladenburg Thalmann's representatives stated to the
Special Committee that their financial analyses supported a higher price per
share. The Special Committee discussed the $27.00 Offer and agreed, based on
their financial advisors' analysis, that such offer was inadequate. The Special
Committee also agreed that the financial advisors should continue their
discussion as to price and that Ladenburg Thalmann should attempt to establish
a price of $28.50 per share, which Ladenburg Thalmann had indicated would be in
the range of fairness, while the legal advisors should concentrate on
negotiating the terms of a merger agreement.
On February 19, 1999, Ladenburg Thalmann's representatives informed
Parker/Hunter that the $27.00 Offer was inadequate, and that the Special
Committee would be willing to approve a price of $28.50 per share.
Parker/Hunter advised Ladenburg Thalmann they would confer with the Majority
Shareholders, but that the Majority Shareholders would require that a
definitive form of merger agreement be fully negotiated as part of any final
agreement on the terms of the merger. The representatives of Ladenburg Thalmann
and Parker/Hunter continued their discussions over the next several days. At
the same time, legal advisors for the Majority Shareholders, the Special
Committee and the Company discussed and negotiated certain terms of the
proposed agreement and plan of merger.
On the morning of February 23, 1999, the Special Committee met with its
legal and financial advisors to discuss the status of the merger consideration
proposals and the proposed agreement and plan of merger. The Special
Committee's legal counsel reviewed the principal terms of the agreement and
plan of merger with the Special Committee and noted that there did not appear
to be any major issues that would prevent the agreement from being finalized.
Ladenburg Thalmann's representatives described their conversations with
representatives of Parker/Hunter. The Special Committee authorized Ladenburg
Thalmann to inform the Majority Shareholders and their advisors that the
Special Committee was prepared to consider formally proposing a price of $28.50
per share (the "$28.50 Counter-Offer"). Throughout the day, the legal advisors
continued to finalize the terms of the agreement and plan of merger.
On the evening of February 23, 1999, the Special Committee met with its
counsel to review the terms of the $28.50 Counter-Offer and to review a
presentation by Ladenburg Thalmann relating to the fairness, from a financial
point of view, of the consideration proposed in the $28.50 Counter-Offer to the
holders of Nonaffiliated Stock. At this meeting, Ladenburg Thalmann's
representatives delivered the firm's verbal opinion, subsequently confirmed in
writing, that, based upon and subject to certain considerations, assumptions,
conditions and qualifications, the consideration of $28.50 per share was fair,
from a financial point of view, to the holders of Nonaffiliated Stock. At the
same meeting, the Special Committee unanimously (i) approved the terms of the
Merger Agreement and the transactions contemplated thereby as they relate to
the holders of Nonaffiliated Stock; (ii) determined that the Merger is fair to
and in the best interest of the holders of Nonaffiliated Stock; and (iii)
recommended that the Board of Directors approve and authorize the Merger
Agreement and the transactions contemplated thereby.
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At a special meeting of the Board of Directors held immediately following
the Special Committee's determination, at which meeting all directors were
present (in person or by telephone), the Board of Directors received the
recommendation of the Special Committee. Ladenburg Thalmann then presented an
analysis of the factors that it considered and rendered its oral opinion,
subsequently confirmed in writing, that as of such date the consideration of
$28.50 per share was fair, from a financial point of view, to the holders of
Nonaffiliated Stock. This opinion is attached hereto as Exhibit B. See "SPECIAL
FACTORS REGARDING THE MERGER."
Legal counsel for the Company reviewed the terms of the proposed merger
agreement and the proposed amendment to the Articles of the Company electing to
opt-out of Subchapter E of the BCL. Legal counsel for the Company also
reiterated to the members of the Board of Directors their fiduciary duties to
the Company and to the holders of Nonaffiliated Stock.
Kenton E. McElhattan and Kent D. McElhattan then excused themselves from the
meeting and Messrs. Gerhard and Thompson and Dr. McGraw unanimously approved
the Merger Agreement and Articles Amendment and directed that the Merger
Agreement and Articles Amendment be submitted to a vote of the shareholders of
the Company entitled to vote thereon. Kenton E. McElhattan and Kent D.
McElhattan then returned to the meeting and all of the members of the Board of
Directors unanimously approved the Merger Agreement and Articles Amendment and
directed that the Merger Agreement and Articles Amendment be submitted to a
vote of the shareholders of the Company entitled to vote thereon.
On February 24, 1999, the Company issued a press release disclosing that the
Company had signed a definitive merger agreement pursuant to which the Majority
Shareholders would acquire the Nonaffiliated Stock at a per share price of
$28.50 in cash.
Special Committee
In reaching its determination that the terms and provisions of the Merger
Agreement are fair to and in the best interest of the holders of Nonaffiliated
Stock and to approve and recommend that the Board of Directors approve the
Merger Agreement, the Special Committee considered the following factors, each
of which, in the opinion of the Special Committee, supported such
determination:
(1) Comparison of Market Prices. A comparison of the historical market
prices of Company Common Stock with the per share price offered by the
Majority Shareholders. The $28.50 per share price represents a 36% premium
over the $20.92 average closing price per share for the 30 trading days
before the Majority Shareholders first publicly announced their intention
to purchase the shares of Company Common Stock they do not already own.
(2) Fairness Opinion. The opinion of Ladenburg Thalmann addressed to the
Special Committee and dated February 23, 1999, that the $28.50 per share to
be received by the holders of Nonaffiliated Stock in connection with the
Merger is fair to such shareholders from a financial point of view, as of
that date.
(3) Small Public Float. The Special Committee also considered the fact
that the public float for the Company Common Stock consists of only
approximately 25.8% of the outstanding shares of Company Common Stock.
(4) Majority Shareholders' Control of the Company. The Special Committee
also considered the fact that the Majority Shareholders beneficially own
approximately 74.2% of the Company Common Stock, representing approximately
74.2% of the voting power of the Company. The Special Committee therefore
considered the fact that the Majority Shareholders have sufficient stock
ownership and voting power to control a disposition of the Company. The
Special Committee and Ladenburg Thalmann were not authorized to, and did
not, solicit third party indications of interest for the auction of the
Company.
The Special Committee also considered the Majority Shareholders'
statement that they do not wish to sell their stock in the Company, and
their stated commitment to a strategy for the Company that is inconsistent
with a future sale of the Company.
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(5) Availability of Dissenters Rights. The Special Committee also
considered the fact that dissenters rights of appraisal will be available
to the holders of the Nonaffiliated Stock under Pennsylvania law. See
"DISSENTERS RIGHTS."
The Board of Directors
In reaching the determinations referred to above, the Board of Directors
considered the following factors, each of which, in the view of the Board of
Directors, supported such determinations: (i) the conclusions and
recommendations of the Special Committee; (ii) the considerations referred to
above as having been taken into account by the Special Committee, including the
receipt by the Special Committee of the opinion of Ladenburg Thalmann addressed
to the Special Committee that, as of the date of such opinion, based upon and
subject to various considerations and assumptions stated therein, the $28.50
per share to be received by the holders of Nonaffiliated Stock in the Merger is
fair to such holders from a financial point of view, and the related analysis
orally presented to the Board of Directors by Ladenburg Thalmann; and (iii) the
fact that the price per share to be paid in the Merger and the terms and
conditions of the Merger Agreement were the result of arm's-length negotiations
between the Special Committee and the Majority Shareholders and their
respective advisors.
The members of the Board of Directors, including the members of the Special
Committee, evaluated the Merger in the light of their knowledge of the
business, financial condition and prospects of the Company, and the advice of
their financial and legal advisors. In view of the number and variety of
factors that the Special Committee and the Board of Directors considered in
connection with their evaluation of the Merger, neither the Special Committee
nor the Board of Directors found it practicable to assign relative weights to
the foregoing factors, and, accordingly, neither the Special Committee nor the
Board of Directors did so.
The Board of Directors believes that the Merger is procedurally fair
because, among other things: (i) the Special Committee consists of non-employee
directors appointed to represent the interests of the shareholders other than
the Majority Shareholders and their Affiliates; (ii) the Special Committee
retained and was advised by independent legal counsel; (iii) the Special
Committee retained an independent financial advisor to assist in the evaluation
of the proposed transaction and received such assistance from the financial
advisor; and (iv) the $28.50 per share price and the other terms and conditions
of the Merger Agreement, including the ultimate determination that the Company
would not commence the deregistration of Company Common Stock prior to the
mailing of this Information Statement, resulted from active arm's-length
bargaining between the Special Committee and its representatives and the
Majority Shareholders and their representatives.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST
INTEREST OF THE COMPANY AND THE HOLDERS OF NONAFFILIATED STOCK AND, UPON THE
RECOMMENDATIONS OF THE SPECIAL COMMITTEE, UNANIMOUSLY APPROVED THE MERGER
AGREEMENT.
THE MAJORITY SHAREHOLDERS' PURPOSE AND REASONS FOR THE MERGER
The Majority Shareholders' purpose for engaging in the transactions
contemplated by the Merger Agreement is to acquire 100% ownership of the
Company and to afford the holders of the Nonaffiliated Stock an opportunity to
dispose of their shares at a premium over recent market prices.
The Majority Shareholders believe that the Company will be better able to
concentrate on fulfilling its mission and long-term goals free from the
constraint of public ownership, which often places undue emphasis on short-
term, quarter-by-quarter results. In particular, the Majority Shareholders
believe that privately held status will enhance the Company's ability to
continue to dedicate itself to maintaining the highest possible quality
standards in the development, testing, manufacture and sale of the Company's
life-preserving products. Private status is consistent with the Majority
Shareholders' commitment to a strategy of internal product development for the
Company, which makes unnecessary the use of publicly traded stock as
acquisition currency.
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In addition, the Majority Shareholders believe that the Company's public
status has placed the Company at a competitive disadvantage. As a public
company, the Company has been required to make public disclosure of information
about all facets of its operations, which can be used in a manner adverse to
the Company by its suppliers, customers and competitors. The Company's
competitors, which are either privately held or are part of larger entities
which do not disclose particulars about division operations, do not face this
problem.
Public ownership has also created difficulties for the Company with regard
to employee compensation. Frequently, the price of the Company Common Stock,
which has been an element of employee compensation, has fluctuated for reasons
unrelated to the Company's performance, which has reduced the incentive value
of stock compensation and has hurt employee morale. The Majority Shareholders
believe that the motivation and rewarding of the Company's employees can be
better accomplished by means not involving publicly traded Company Common
Stock.
Finally, the Majority Shareholders believe the Company will be able to
achieve savings in legal, printing and accounting costs by being freed of
public reporting obligations.
The Majority Shareholders have not pursued a liquidation of the Company or a
sale of the Company to a third party because the Majority Shareholders wish to
continue to operate the business of the Company on an on-going basis. The
Majority Shareholders want to acquire the entire equity interest in the Company
and do not desire to sell the shares that they owned to a third party.
The acquisition of the entire equity interest in the Company was structured
as a cash merger in order to accomplish the acquisition of all the remaining
shares of Company Common Stock in a single step, without the necessity of
financing separate purchases of shares in a tender offer or in open market
purchases while, at the same time, not materially disrupting the Company's
operations.
The Majority Shareholders have concluded that the Merger, the Merger
Consideration and the terms and conditions of the Merger Agreement are fair to
the Company and the holders of the Nonaffiliated Stock based upon the following
factors: (i) the conclusions and recommendations of the Special Committee and
the Board of Directors; (ii) the unanimous approval and recommendation of the
Merger Agreement and the Merger by the Special Committee, which consists solely
of non-employee directors of the Company who are not affiliates of any of the
Majority Shareholders; (iii) the Merger Consideration and the other terms and
conditions of the Merger Agreement, which were the result of arm's-length good
faith negotiations between the Special Committee and its representatives and
the Majority Shareholders and their representatives; and (iv) a fairness
opinion issued by the financial advisor to the Special Committee to the effect
that, as of the date of such opinion, based upon and subject to various
considerations and assumptions stated therein, the $28.50 per share to be
received in the Merger is fair to the holders of Nonaffiliated Stock from a
financial point of view.
OPINION OF THE FINANCIAL ADVISOR
Ladenburg Thalmann has acted as financial advisor to the Special Committee
in connection with the Merger. As part of its services, Ladenburg Thalmann
rendered to the Special Committee an opinion dated February 23, 1999 (the
"Ladenburg Opinion") as to the fairness, from a financial point of view, of the
consideration to be received by the holders of Nonaffiliated Stock in
connection with the Merger.
On February 23, 1999, Ladenburg Thalmann orally presented its opinion to the
Board of Directors that, as of such date, the Merger Consideration was fair,
from a financial point of view, to the holders of Nonaffiliated Stock.
Ladenburg Thalmann has no obligation to update the Ladenburg Opinion to any
date subsequent to February 23, 1999.
THE FULL TEXT OF THE LADENBURG OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS EXHIBIT B TO THIS
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INFORMATION STATEMENT. SHAREHOLDERS ARE URGED TO READ THE LADENBURG OPINION
CAREFULLY AND IN ITS ENTIRETY.
The Ladenburg Opinion was prepared at the request of and for the information
of the Special Committee. No limitations were imposed by the Company on the
scope of the investigation or the procedures to be followed by Ladenburg
Thalmann in rendering the Ladenburg Opinion. In connection with its engagement,
the Ladenburg Opinion is directed only to the fairness, from a financial point
of view, of the Merger Consideration to be paid to the holders of Nonaffiliated
Stock. The summary of the Ladenburg Opinion set forth in this Information
Statement is qualified in its entirety by reference to the full text of the
Ladenburg Opinion. The Ladenburg Opinion does not address the relative merits
of the Merger or any other transactions or business strategies discussed by the
Board of Directors as alternatives to the Merger or the decision of the Board
of Directors to proceed with, or the effects of, the Merger. Ladenburg Thalmann
was not authorized to, and did not, solicit, third party indications of
interest in acquiring all or part of the Company, and Ladenburg Thalmann was
not asked to consider, and the Opinion does not address, the consideration the
Company or its shareholders might receive from another third-party purchaser,
the relative merits of the Merger as compared to any alternative business
strategies that might exist for the Company or the effect of any other
transaction in which the Company might engage.
In conducting its analysis, Ladenburg Thalmann reviewed and considered such
information as it deemed necessary or appropriate for the purposes of stating
its opinion including (i) drafts, in the forms furnished to Ladenburg Thalmann
by representatives of the Company, of the Merger Agreement; (ii) certain
business and financial information relating to the Company, as provided by the
Company, including the financial condition and results of operations of the
Company and its historical financial performance; (iii) certain public filings
made by the Company with the Securities and Exchange Commission; and (iv) to
the extent publicly available, certain market trading data and historical
trading performance for securities of the Company. In addition, Ladenburg
Thalmann conducted such other analyses and examinations and reviewed and
considered such other financial, economic and market data as it deemed
appropriate in arriving at the Ladenburg Opinion. Ladenburg Thalmann also met
with members of senior management of the Company to discuss, among other
things, the historical and prospective industry environment, financial
conditions and operating results for the Company and reasons for the Merger.
Ladenburg Thalmann noted that two of the Majority Shareholders are members of
the Board of Directors and senior management of the Company and as such may be
deemed to have a conflict of interest in these matters.
Overview of Analysis
Ladenburg Thalmann used both qualitative and quantitative analyses and
valuation methods in connection with rendering the Ladenburg Opinion. The
following paragraphs summarize the significant analyses performed by Ladenburg
Thalmann in rendering the Ladenburg Opinion, and when taken together, provide
the basis for the Ladenburg Opinion.
Qualitative Considerations
In addition to the quantitative analyses discussed below, Ladenburg Thalmann
considered a number of qualitative factors related to the Merger. Ladenburg
Thalmann did not apply valuation weightings to any of these qualitative
factors. Among the positive qualitative factors relating to the Merger,
Ladenburg Thalmann noted the following:
1. The proposed Merger Consideration of $28.50 per share represents a
premium of approximately 36% over the average share price of Company
Common Stock for the 30 trading days preceding the date of the Ladenburg
Opinion.
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2. The Company's business projections show a decline in operating margins
for fiscal year 2000 and limited growth in revenues and earnings
thereafter due to increased competition and trends toward compliance
products with lower margins.
3. The Company has experienced a decline in the average selling price for
its products.
4. The Company believes that it represents approximately 20% to 25% of the
gas instrumentation market, which management believes has limited
potential future growth.
5. The Company has considerable exposure to its largest customer, which
constitutes approximately 25% of total revenues.
6. The Company has had limited success entering new product and geographic
markets.
7. The Company was unsuccessful in its only attempt to grow through
acquisition and represented to Ladenburg Thalmann and the Special
Committee that the Company is committed to a strategy of internal growth
that is inconsistent with the sale of the Company.
8. Fiscal 1998 financial performance was significantly enhanced by one
contract, which the Company has represented to be non-recurring
business.
9. There exists limited trading liquidity in the Company's shares in that
only approximately 25.8% of the Company Common Stock is held in the
public float and outside of the Majority Shareholders' direct or
indirect control.
Among the negative qualitative factors relating to the Merger, Ladenburg
Thalmann noted the following:
1. The all-cash purchase eliminates shareholders' ability to participate in
the Company's future growth potential.
2. The Company's market leadership in gas instrumentation products is an
excellent platform to expand into ancillary compliance product markets.
3. An increasing portion of the Company's recent historical and projected
future growth has been derived from service sector revenue which have
affected operating margins.
4. The Company is well positioned to use its balance sheet to pursue growth
opportunities, including the acquisition and/or merger with other
companies (although the Company has represented to Ladenburg Thalmann
and the Special Committee that the Company is committed to a strategy of
internal growth that is inconsistent with the sale or merger of the
Company).
Quantitative Analyses
In developing its opinion, Ladenburg Thalmann calculated a range of values
for the Company using four separate valuation approaches: (i) a Market
Multiples Analysis based upon comparable publicly traded-companies; (ii) an
Acquisition Multiples Analysis based upon acquisitions of comparable companies
since 1996; (iii) a Discounted Cash Flow Analysis; and (iv) a Takeover Premium
Analysis. Ladenburg Thalmann also considered the historical trading price and
volume of the Company Common Stock in developing its opinion.
Market Multiples Analysis. The Market Multiples Analysis determines an
implied public market value by evaluating the public valuations of comparable
companies competing in similar industries using available public information.
In choosing comparable companies for the Company, Ladenburg Thalmann examined
six
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companies in the instrumentation manufacturing industry (including the Company)
including Invivo Corp., Metrika Systems, Mine Safety Appliances, Scientific
Technologies, Inc. and TSI Inc.
The multiples used for the Market Multiples Analysis are derived by dividing
the public valuations of comparable companies by certain measures of operating
performance such as earnings before interest, taxes, depreciation and
amortization ("EBITDA"), earnings before interest and taxes ("EBIT"), net
income, and projected earnings per share ("EPS") as developed by certain
research analysts. EBITDA and EBIT multiples are based on total enterprise
value divided by each financial measure, respectively. Total enterprise value
is defined as the market value of common stock, plus total debt, less cash and
cash equivalents. Total enterprise value is essentially the value of a company
assuming an un-leveraged capital structure. The net income and EPS multiples
are derived by dividing the market value of the common stock in aggregate or
per share, as appropriate, by net income or projected EPS.
Ladenburg Thalmann used these multiples to calculate a range of public
market values for the Company to develop an implied market multiples valuation.
For each valuation, Ladenburg Thalmann multiplied the entity's respective
values by the appropriate median multiples to arrive at equity value. Based on
this analysis, the range of implied per share equity value for the Company was
$20.27 to $29.97.
Acquisition Multiples Analysis. The Acquisition Multiples Analysis applies a
similar methodology as the Market Multiples Analysis, but relies upon multiples
derived from merger and acquisition transactions involving target companies
similar to the Company in its operations or similar to the Company in relative
size and ownership structure. For purposes of this analysis, Ladenburg Thalmann
analyzed comparable mergers and acquisitions with total aggregate consideration
between $5 million and $150 million completed between January 1, 1996, and
December 31, 1998.
For all of the comparable merger and acquisition transactions, Ladenburg
Thalmann derived median multiples using various financial measures, including
revenue, EBITDA, EBIT and net income multiples. For each of the transactions
considered, purchase price equals the amount paid for the target's equity, and
total enterprise value equals purchase price, plus the target's outstanding
interest-bearing debt, less cash and cash equivalents purchased.
As with the Market Multiples Analysis, Ladenburg Thalmann calculated an
acquisition multiples valuation for the Company by using median acquisition
multiples to develop a valuation range. Equity valuations for the Company based
on EBITDA and EBIT are calculated by multiplying its revenues, EBITDA and EBIT
by the respective multiples, then subtracting total debt and adding cash and
cash equivalents, if any. For valuations based on net income, Ladenburg
Thalmann multiplied the entity's net income by the net income median multiple
to arrive at equity value. Based on this analysis, the range of implied per
share equity values for the Company was $22.30 to $30.71.
Discounted Cash Flow Analysis. The Discounted Cash Flow Analysis ("DCF
Analysis") derives enterprise values based on the present value of a company's
un-leveraged free cash flow over a five-year period, plus the present value of
a company's total enterprise value in five years (the "Terminal Value"). The
un-leveraged free cash flows that Ladenburg Thalmann used for purposes of
completing the DCF Analysis were derived from projections for the Company
provided to Ladenburg Thalmann by management of the Company. For purposes of
this analysis, un-leveraged free cash flow equals after-tax EBIT, plus
depreciation, less capital expenditures, plus any decreases or minus any
increases in working capital. A company's un-leveraged free cash flow provides
a measure of how much cash it produces, irrespective of how it finances its
operations (i.e., before interest income and expense).
Ladenburg Thalmann developed the discount rate used to calculate the present
value of the Company's future net cash flows and Terminal Value by estimating
the Company's weighted average cost of capital ("WACC"). To estimate the
Company's WACC, Ladenburg Thalmann considered the Company's ability to access
debt and the borrowing terms the Company could reasonably be expected to pay on
that debt given,
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among other things, the Company's historical and projected operating
performance and existing capital structure. Ladenburg Thalmann then considered
the returns an equity investor would reasonably require on an equity investment
in a company with a similar market capitalization and historical and projected
operating performance as the Company.
Ladenburg Thalmann calculated the Terminal Value of the Company by applying
a range of multiples based on the Market Multiples Analysis to the Company's
EBITDA in the fifth year, the resulting value of which was then discounted to
present value. By adding the present value of (i) the Company's free cash flows
over the next five years and (ii) the Terminal Value, Ladenburg Thalmann
arrived at a total equity value for the Company. Based on this analysis, the
range of implied per share equity values for the Company was $25.47 to $29.30.
Takeover Premium Analysis. The Takeover Premium Analysis examines recent
premiums paid in the acquisition of public companies for transactions valued
between $5 million and $150 million and excluded transactions involving
financial services companies and real estate investment trusts. Premiums are
defined, in percentage terms, as the excess (or shortfall) of the per share
purchase price relative to the target's stock price prior to the announcement
of the transaction. The percentage premiums were applied by Ladenburg Thalmann
to the Company's average stock price for the 30 days immediately preceding
Ladenburg Thalmann's presentation to the Board of Directors concerning the
proposed merger to derive a range of per share equity values for the Company.
Based on this analysis, the range of implied per share equity values for the
Company was $26.36 to $28.62.
LIMITATIONS OF ANALYSES
Although each of the analyses employed by Ladenburg Thalmann in rendering
the Ladenburg Opinion is summarized above, the above summary does not purport
to be a complete description of Ladenburg Thalmann's analyses and contains
those aspects of Ladenburg Thalmann's analyses deemed most relevant. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Furthermore, in arriving at its opinion, Ladenburg
Thalmann did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevancy of each analysis and factor. Accordingly, Ladenburg Thalmann
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and of the factors considered, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying the Ladenburg Opinion.
In conducting its analysis, Ladenburg Thalmann has assumed and relied upon
the accuracy and completeness of all financial and other material furnished to
it by the Company including the industry in which the Company operates and the
competition in that industry. Ladenburg Thalmann has relied upon counsel to the
Special Committee and counsel to the Company in all legal matters regarding the
Merger, including the process undertaken by the Special Committee in connection
with its consideration of the Merger. Ladenburg Thalmann has not attempted to
independently verify the information provided to it by the Company. Ladenburg
Thalmann has not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the
Company. Ladenburg Thalmann was not requested to and did not analyze or give
any effect to the impact of any federal, state or local income taxes to the
Company's shareholders arising out of the Merger. Although Ladenburg Thalmann
evaluated the consideration to be received by the holders of Nonaffiliated
Stock, Ladenburg Thalmann was not requested to, and did not, participate in the
negotiation of the Merger Agreement. In its analyses Ladenburg Thalmann made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, based on, among
other things, information provided to it by the Company, many of which matters
are beyond the control of the Company. Any estimates and/or projections
contained in its analyses are not necessarily indicative of actual values or
actual results, as applicable, which may be significantly more or less
favorable than as set forth
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therein. The actual future performance of the Company may vary substantially
from such projections. Ladenburg Thalmann's opinions are necessarily based upon
information available to it, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
The Special Committee selected Ladenburg Thalmann as its financial advisor
because Ladenburg Thalmann is an established investment banking firm with
experience in transactions similar to the Merger. Ladenburg Thalmann, as part
of its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate or other purposes.
Ladenburg Thalmann has been retained by the Special Committee to render
financial advisory services to the Special Committee in connection with the
Merger and received a fee for such services upon delivery of the Ladenburg
Opinion. Ladenburg Thalmann will also receive indemnification against certain
liabilities for the services rendered pursuant to this engagement. In the
ordinary course of business, Ladenburg Thalmann actively trades securities for
its own account and for the accounts of its customers and, accordingly, may at
any time hold a long or short position in the equity securities of the Company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Special Committee and the approval
of the Board of Directors with respect to the Merger, shareholders should be
aware that certain members of the Board of Directors and the Company's
management have interests in connection with the Merger (including those
described below) that differ from those of the holders of Nonaffiliated Stock.
The Special Committee and the Board of Directors were aware of these potential
or actual conflicts of interest and considered them along with other matters
described in this section under "--Background Of The Merger."
Acquisition was formed by the Majority Shareholders for the purpose of
acquiring the Company in the Merger. The Majority Shareholders and their
Affiliates own 100% of Acquisition. Following the effectiveness of the Merger,
on a fully diluted basis, the Majority Shareholders and their Affiliates will
own 100% of the Surviving Corporation Common Stock. Such ownership will result
from the conversion, upon the consummation of the Merger, of the shares of the
Acquisition Common Stock into shares of Surviving Corporation Common Stock.
Thomas M. Thompson, a member of the Special Committee, is a shareholder in
the law firm of Buchanan Ingersoll Professional Corporation. Buchanan Ingersoll
serves as counsel to the Company.
All of the Company's officers and directors own Company Common Stock or hold
Options. The Merger Agreement provides that all outstanding Options (other than
those held by the Majority Shareholders), whether or not vested, will be
terminated, and the Option holders will be entitled to receive a cash payment
equal to the excess of $28.50 over the applicable Option exercise price for
each share of Company Common Stock subject to Options. See "THE MERGER
AGREEMENT--Treatment Of Options." If all of the outstanding Options are cashed
out at the Effective Time, it is anticipated that the following directors or
executive officers will receive the following cash payments for their Options:
James P. Hart, $24,625; Garth F. Miller, $24,563; Herbert F. Gerhard, $12,500;
Donald J. McGraw, $12,500; and Thomas M. Thompson, $6,250.
The Options held by Kenton E. McElhattan and Kent D. McElhattan will be
assumed by the Surviving Corporation.
The Merger Agreement provides that the Surviving Corporation will, from and
after the Effective Time, indemnify the present and former officers and
directors of the Company to the same extent and upon the terms and conditions
provided in the Company's Articles and By-laws. The Merger Agreement also
provides that the Surviving Corporation will maintain its existing policies of
officers' and directors' liability insurance for a period of six years after
the Effective Time, subject to certain limitations. See "THE MERGER AGREEMENT--
Indemnification and Insurance."
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Certain Effects of the Merger
Following the Merger, the Majority Shareholders and their Affiliates will
own 100% of the Surviving Corporation Common Stock. The Majority Shareholders
will be the sole beneficiaries of any future earnings and growth of the
Surviving Corporation (until shares of capital stock, if any, are issued to
other shareholders) and will have the ability to benefit from any divestitures,
strategic acquisitions or other corporate opportunities that may be pursued by
the Surviving Corporation in the future. Upon the consummation of the Merger,
the holders of Nonaffiliated Stock will cease to have any ownership interests
in the Company or rights as shareholders. The holders of Nonaffiliated Stock
will no longer benefit from any increases in the value of the Company or any
payment of dividends on the Company Common Stock and will no longer bear the
risk of any decreases in value of the Company.
As a result of the Merger, the Surviving Corporation will be privately held
and there will be no public market for its common stock. Upon consummation of
the Merger, the Company Common Stock will cease to be listed on NASDAQ National
Market ("NASDAQ"). In addition, registration of the Company Common Stock under
the Exchange Act will be terminated following the mailing of this Information
Statement, and, accordingly, the Company will no longer be required to file
periodic reports with the Commission. In particular, the Company will not file
an Annual Report on Form 10-K for the fiscal year ended January 30, 1999.
Certain Federal Income Tax Consequences of the Merger
The following is a summary of certain federal income tax consequences of the
Merger to shareholders who receive the Merger Consideration for their shares of
Company Common Stock pursuant to the Merger. This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
(including Proposed Regulations and Temporary Regulations) promulgated
thereunder, official pronouncements and judicial decisions, all as in effect on
the date hereof and all of which are subject to change, possibly with
retroactive effect. This summary does not purport to discuss all tax
consequences of the Merger to all shareholders. In particular, the summary does
not discuss the tax consequences of the Merger to any shareholder that is an
insurance company, tax-exempt organization, financial institution, foreign
person or broker-dealer or who has acquired his, her or its shares upon the
exercise of options or otherwise as compensation.
The receipt of cash by a shareholder of the Company in exchange for shares
of Company Common Stock pursuant to the Merger will be a taxable transaction
for federal income tax purposes and may also be a taxable transaction under
applicable state, local, foreign or other tax laws. In general, a shareholder
will recognize a gain or loss equal to the difference, if any, between the
amount of cash received for his, her or its stock in the Merger and the
shareholder's adjusted tax basis in such stock. A shareholder's adjusted basis
in the shares of Company Common Stock generally will equal the shareholder's
purchase price for such shares of Company Common Stock. For Federal income tax
purposes, such gain or loss will be a capital gain or loss if the shares are a
capital asset in the hands of the shareholder, and will be treated as long-term
capital gain or loss if the shares have been held for a twelve month period. A
shareholder will recognize such gain or loss as of the Effective Time.
The Company or the Exchange Agent (as defined below) will be required to
withhold 31% of the gross proceeds payable to a shareholder or other payee in
the Merger unless the shareholder or payee provides, in a properly completed
substitute Form W-9 included with the letter of transmittal which will be
mailed to the holders of Nonaffiliated Stock promptly after the Effective Time
(the "Letter of Transmittal") (see "THE MERGER AGREEMENT--The Exchange Fund;
Payment for Shares of Common Stock"), his, her or its taxpayer identification
number and certifies under penalties of perjury that such number is correct and
that the shareholder is not subject to backup withholding, unless an exemption
applies under applicable law and regulations. Therefore, unless such an
exemption exists and is demonstrated in a manner satisfactory to the Company or
the Exchange Agent, in accordance with the instructions that will accompany the
substitute Form
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W-9, each shareholder should complete and sign the substitute Form W-9 that
will be made available to the shareholder with the Letter of Transmittal, so as
to provide the information and certification necessary to avoid backup
withholding.
EACH SHAREHOLDER SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR WITH RESPECT
TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN HIS, HER OR ITS
INDIVIDUAL CIRCUMSTANCES AND WITH RESPECT TO THE STATE, LOCAL OR OTHER INCOME
TAX CONSEQUENCES OF THE MERGER. FURTHER, ANY SHAREHOLDER WHO IS A CITIZEN OF A
COUNTRY OTHER THAN THE UNITED STATES SHOULD CONSULT HIS, HER OR ITS OWN TAX
ADVISOR WITH RESPECT TO THE TAX TREATMENT IN SUCH COUNTRY OF THE MERGER AND
WITH RESPECT TO THE QUESTION OF WHETHER THE TAX CONSEQUENCES DESCRIBED ABOVE
MAY BE ALTERED BY REASON OF THE PROVISIONS OF THE INTERNAL REVENUE CODE
APPLICABLE TO FOREIGN PERSONS OR THE PROVISIONS OF ANY TAX TREATY APPLICABLE TO
SUCH SHAREHOLDER.
ACCOUNTING TREATMENT
The cost of repurchasing the Company Common Stock will be accounted for as a
treasury stock transaction within the context of generally accepted accounting
principles. This means that the historical cost basis of the Company's assets
and liabilities will be carried forward to the Surviving Corporation rather
than using a new basis of accounting to account for the assets and liabilities
of the Surviving Corporation. Consequently, the aggregate cost of repurchasing
the Company Common Stock will be accounted for as a charge to shareholders'
equity.
The cost of repurchasing and canceling outstanding Options will be accounted
for as compensation expense. This means that the excess of the aggregate Merger
Consideration over the aggregate exercise price of outstanding Options will be
accounted for as a charge to operations.
FINANCING OF THE MERGER
The total amount of funds required by Acquisition to pay the aggregate
Merger Consideration due to the holders of Nonaffiliated Stock and Options at
the closing of the Merger, assuming the Options of all executive officers of
the Company are cashed out in the Merger and there are no Dissenting
Shareholders, is expected to be approximately $24.6 million. In addition,
Acquisition will require approximately $400,000 to pay other expenses and costs
relating to the transactions.
On March 4, 1999, Acquisition delivered to the Company a commitment letter
from PNC Bank, National Association ("PNC") (the "Commitment Letter"). Pursuant
to the Commitment Letter, but subject to the conditions set forth therein, (i)
PNC has agreed to provide a revolving credit and term loan facility aggregating
up to $27 million (collectively, the "Acquisition Facilities") for the purpose
of providing the financing for the Merger. The proceeds of the Acquisition
Facilities will be used (i) to pay the Merger Consideration, (ii) to pay
expenses of the Merger, and (iii) for general corporate purposes, including the
repurchase of employee-owned stock options. PNC's obligations under the
Commitment Letter are subject to (i) the negotiation and execution of a
definitive credit agreement in respect of the Acquisition Facilities (the
"Credit Agreement") and related documents that are satisfactory in form and
substance to PNC and Acquisition, (ii) the absence of any material adverse
change in the condition (financial or otherwise), business, assets, properties,
prospects, operations, performance or current capital structure of Acquisition,
the Company, or any of the direct or indirect subsidiaries of the Company from
that described to PNC in the information previously delivered to PNC, and (iii)
verification that the Company has at least $17 million in cash.
The Commitment Letter contemplates that the definitive Credit Agreement will
contain terms and conditions which are customary in transactions of this type,
including, without limitation, the following:
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Borrower
The initial borrower under the Acquisition Facilities will be Acquisition.
Upon the consummation of the Merger, the Surviving Corporation will become the
obligor under the Credit Agreement. Immediately following the Merger, the
Company will replace and assume all of the obligations and liabilities of the
Surviving Corporation under the Credit Agreement. The obligor under the Credit
Agreement at any particular time is referred to as the "Borrower."
Interest Rate
Amount outstanding under the Acquisition Facilities will bear interest at a
fixed rate (the "Fixed Rate") or floating rate (the "Floating Rate"), at the
option of the Borrower. The Floating Rate will, at the election of the
Borrower, be either: (i) the London interbank offered rate (adjusted for debt
ratio) ("LIBOR"), or (ii) the Alternate Base Rate. The "Alternate Base Rate" is
defined as the greater of (x) PNC's prime commercial lending rate as publicly
announced from time to time, or (y) 0.50% plus the federal funds rate (as
published by the Federal Reserve Bank of New York). The Fixed Rate is equal to
PNC's cost of funds plus 50 basis points. As of March 1, 1999, the Fixed Rate
was 6.22%.
Term
Borrowings under the term loan portion of the Acquisition Facilities will
equal $17 million and will mature 90 days following the consummation of the
Merger. Borrowings under the revolving credit facility portion of the
Acquisition Facilities will be amortized, and commitments with respect to
drawings under the Acquisition Facilities will be correspondingly reduced, over
the five-year term of the revolving credit portion of the Acquisition
Facilities in accordance with an agreed schedule.
Security
The revolving credit portion of the Acquisition Facilities is unsecured. The
Borrower must agree not to grant any other creditor a blanket lien on the
Borrower's assets during the term of the Credit Agreement. The term loan
portion of the Acquisition Facilities will be secured by cash to the extent the
term loan remains outstanding at the Effective Time of the Merger. The Borrower
must also agree not to grant any other creditor a blanket lien on the
Borrower's assets.
Conditions
The obligations of PNC under the Credit Agreement to provide the initial
advances pursuant to the Acquisition Facilities will be subject to usual and
customary conditions for credit facilities of that size, type and purpose,
including, without limitation, the following: (i) no material adverse change in
the financial condition, operations, business or prospects of the Borrower or
the Guarantors, individually or taken as a whole; (ii) delivery by the Borrower
and the Company of such financial statements and other information as PNC shall
require, all of which shall be in all respects reasonably satisfactory to PNC;
(iii) no material undisclosed liabilities (contingent or otherwise) including,
without limitation, pension liabilities, post-retirement healthcare benefits
and litigation; (iv) absence of material litigation; and (v) consummation of
the Merger in a manner satisfactory to PNC and its counsel.
Covenants and Events of Default
The Credit Agreement will contain affirmative and negative covenants and
events of default, in each case which are customary for credit facilities of
that size, type and purpose. Such affirmative and negative covenants will,
among other matters, limit the Borrower's ability to dispose of assets or incur
additional indebtedness and require it to satisfy certain ongoing financial
requirements. Such events of default will include, among other matters, a
change in control (as defined in the Credit Agreement) of the Company following
the Merger.
REGULATORY MATTERS
The Company does not believe that any material federal or state regulatory
approvals, filings or notices are required by the Company in connection with
the Merger other than (i) such approvals, filings or notices required pursuant
to federal and state securities laws and (ii) the filing of the Articles of
Merger.
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REQUIRED VOTE FOR MERGER; WRITTEN CONSENT IN LIEU OF MEETING
Under the BCL and the Company's Articles and By-laws, the affirmative vote
of a majority of the votes cast by all shareholders entitled to vote is
required to approve and adopt the Merger Agreement and approve the Merger.
Pursuant to Section 1766 of the BCL and the Company's Articles, any action
required or permitted to be taken at any meeting of shareholders of the Company
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. On February 23, 1999,
immediately following execution of the Merger Agreement, the Majority
Shareholders, which then held of record, in the aggregate, 2,288,600 shares of
Company Common Stock, representing a majority of the votes entitled to be cast
at a meeting to consider the Merger Agreement and the Merger, executed and
delivered to the Company the Consent approving the Merger Agreement and the
Merger and adopting the Merger Agreement. On February 23, 1999, there were
issued and outstanding 3,280,137 shares of Company Common Stock. The Merger
will become effective no earlier than 20 calendar days after this Information
Statement is first sent or given to shareholders of the Company.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions thereof,
and shareholders are urged to read the Merger Agreement which is attached
hereto as Exhibit A.
Consideration to be Paid in the Merger
At the Effective Time, by virtue of the Merger and without any action on the
part of Acquisition, the Company, or the holders of any shares of Company
Common Stock:
(i) each share of Nonaffiliated Stock, including shares subject to Options,
which is issued and outstanding prior to the Effective Time (other than the
shares held by Dissenting Shareholders) shall be converted into and become a
right to receive the Merger Consideration, and, when so converted, shall
automatically be canceled and retired and shall cease to exist. Any certificate
representing shares of Nonaffiliated Stock that has been so converted shall,
after the Effective Time, cease to have any rights with respect thereto, except
the right to receive the Merger Consideration allocable to the shares
represented by such certificate upon the surrender of such certificate;
(ii) any shares of Company Common Stock held immediately prior to the
Effective Time by the Company or any majority-owned subsidiary of the Company,
and which constitute treasury stock in the hands of the holders thereof, or
which are held by Acquisition, shall be canceled, retired and cease to exist,
and no consideration shall be delivered in exchange therefor, and each holder
of a certificate representing any such shares shall cease to have any rights
with respect thereto; and
(iii) each share of Acquisition Common Stock which is issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
share of Surviving Corporation Common Stock.
Dissenting Shareholders who strictly comply with the provisions of the BCL
regarding statutory dissenters rights have the right to seek a determination of
the fair value of their shares of Company Common Stock and such payment in cash
therefor in lieu of the Merger Consideration. See "DISSENTERS RIGHTS" and the
applicable provisions of the BCL attached hereto as Exhibit C.
The Exchange Fund; Payment for Shares of Common Stock
On or before the Closing Date, Acquisition will enter into an agreement with
a bank or trust company selected by Acquisition and reasonably acceptable to
the Company (the "Exchange Agent"). At or prior to the Effective Time,
Acquisition will deposit or cause to be deposited with or for the account of
the Exchange Agent, in trust for the benefit of the holders of Nonaffiliated
Stock an amount in cash equal to the aggregate Merger Consideration (such
amount being hereinafter referred to as the "Exchange Fund").
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each record holder of shares of Nonaffiliated Stock
immediately prior to the Effective Time the Letter of Transmittal containing
instructions for surrendering certificates formerly representing shares of
Company Common Stock (the "Certificates") in exchange for the Merger
Consideration. No shareholder should surrender any Certificates until the
shareholder receives the Letter of Transmittal and other materials for such
surrender. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with a Letter of Transmittal, duly executed, and such other
customary documents as may be required pursuant to the instructions, the holder
of such Certificate shall be entitled to receive in exchange therefor the
Merger Consideration for each share of Company Common Stock formerly
represented by such Certificate, less any required withholding of taxes, and
the Certificate so surrendered will be canceled. The Merger Consideration will
be delivered by the Exchange Agent as promptly as practicable following the
surrender of the Certificate and delivery of the Letter of Transmittal and any
other related transmittal documents. Cash payments may be made by check unless
otherwise required by a depository institution in connection with the book-
entry delivery of securities.
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If payment of the Merger Consideration is to be made to a person other than
the person in whose name the Certificate surrendered is registered, it will be
a condition of payment that the Certificate so surrendered will be properly
endorsed or otherwise be in proper form for transfer and that the Exchange
Agent receives evidence that any applicable transfer or other taxes have been
paid.
SHAREHOLDERS SHOULD NOT SEND THEIR CERTIFICATES NOW AND SHOULD SEND THEM
ONLY PURSUANT TO INSTRUCTIONS SET FORTH IN THE LETTERS OF TRANSMITTAL TO BE
MAILED TO SHAREHOLDERS AS SOON AS PRACTICABLE AFTER THE EFFECTIVE TIME. IN ALL
CASES, THE MERGER CONSIDERATION WILL BE PROVIDED ONLY IN ACCORDANCE WITH THE
PROCEDURES SET FORTH IN THIS INFORMATION STATEMENT AND SUCH LETTERS OF
TRANSMITTAL.
Six months after the Effective Time, the Exchange Agent will return to the
Surviving Corporation any portion of the Exchange Fund which remains
undistributed to the holders of Nonaffiliated Stock (including the proceeds of
any investments thereof), and any holders of Nonaffiliated Stock who have not
theretofore complied with the above-described procedures to receive payment of
the Merger Consideration may look only to the Surviving Corporation and only as
general creditors thereof for payment of their claim for Merger Consideration.
Transfers of Company Common Stock
At the Effective Time, the stock transfer books of the Company will be
closed, and there will be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company. If, after the
Effective Time, Certificates are presented to the Exchange Agent or the
Surviving Corporation, they will be canceled and exchanged for the Merger
Consideration as provided above and pursuant to the terms of the Merger
Agreement.
Treatment of Options
Pursuant to the Merger Agreement, at the Effective Time, each outstanding
Option to acquire Company Common Stock (other than those held by the Majority
Shareholders), whether or not vested, will be canceled and the 1993 Stock
Option Plan, as amended and restated, will be adopted by the Surviving
Corporation. In consideration of such cancellation, the Surviving Corporation
shall pay to the holder of each such canceled Option, (i) the excess, if any,
of the Merger Consideration over the applicable exercise price per share of
such Option multiplied by (ii) the number of shares of Company Common Stock
issuable upon the exercise of the Option, subject to any required withholding
of taxes (the "Option Consideration"). At the Effective Time, all Options,
other than those held by the Majority Shareholders, will be converted into, and
will thereafter only represent the right to receive, the Option Consideration.
At the Effective Time, all Options held by the Majority Shareholders will
automatically become options to acquire an equal number of shares of Surviving
Corporation Common Stock at an aggregate exercise price equal to the aggregate
exercise price of the Options, and no payment will be made with respect
thereto.
Representations and Warranties
The Merger Agreement provides for various representations and warranties
with respect to Acquisition (which representations and warranties are subject,
in certain cases, to specified exceptions, and, generally, apply to facts and
circumstances existing at the date of the Merger Agreement), including
representations pertaining to the due organization of Acquisition and due
authorization, execution, delivery and enforceability of the Merger Agreement.
In addition, the Merger Agreement provides for various representations and
warranties with respect to the Company (which representations and warranties
are subject, in certain cases, to specified exceptions, and
25
<PAGE>
generally apply to facts and circumstances existing at the date of the Merger
Agreement), including representations pertaining to: (i) the due organization
of the Company and due authorization, execution, delivery and enforceability of
the Merger Agreement, (ii) the approval by the Board of Directors of the Merger
Agreement and the Merger, and (iii) the capitalization of the Company.
Certain Covenants and Agreements
The Company has agreed not to pay any dividends or make any other
distributions to its shareholders prior to the Effective Time. The Company and
Acquisition have agreed that, prior to the Effective Time, they will not issue
press releases or otherwise make any public statements in connection with the
Merger or the Merger Agreement without the other party's prior consent. The
Company and Acquisition have made further agreements with respect to the
sharing of costs and expenses incurred in connection with the Merger, the
indemnification of the directors and officers, liability insurance for the
directors and officers, their obligations to provide notice in the event of a
breach of their representations and warranties or of a material failure to
comply with any requirement of the Merger Agreement, and the preparation and
filing of this Information Statement and the Schedule 13E-3.
The Merger Agreement provides that, prior to the Effective Time, the Company
shall not, and it shall not authorize or permit any of its subsidiaries or any
officer, director, employee, agent or representative, to solicit, initiate or
encourage the submission of (i) any proposal for a merger or business
combination involving the Company or any of its subsidiaries, a proposal or
offer to acquire any equity interest or voting securities of the Company or any
of its subsidiaries, or a proposal or offer to acquire a substantial portion of
the Company's assets (together, an "Acquisition Proposal"), (ii) enter into any
agreement with respect to any Acquisition Proposal or (iii) participate in any
discussions or negotiations relating to any Acquisition Proposal. However, the
Company is not obligated to take or refrain from taking any action with respect
to an Acquisition Proposal if the Board of Directors, after consultation with
its counsel, determines in good faith that to take or refrain from taking any
such action would result in a violation of its fiduciary duties.
Conditions to the Merger
The respective obligations of the Company, on the one hand, and Acquisition
and the Majority Shareholders, on the other hand, to consummate the Merger are
contingent upon the satisfaction prior to the Effective Time, or the waiver
thereof by the Company or Acquisition in the case of items (c), (d) and (e), of
each of the following conditions: (a) there shall be in effect no preliminary
or permanent injunction, temporary restraining order or other decree of a court
or any federal, state or local government entity, and no action, suit or
proceeding by any such entity shall have been instituted or threatened, which
prohibits the consummation of the Merger or materially challenges the
transactions contemplated therein; (b) other than the Articles of Merger, all
consents, approvals and authorizations of and filings with governmental
entities in connection with the Merger shall have been obtained or effected or
filed; (c) the representations and warranties made by the Company and
Acquisition shall be true and correct in all material respects; (d) the Company
and Acquisition shall have complied in all material respects with the
undertakings and agreements required by the Merger Agreement to be performed or
complied with by them; and (e) there shall have been no material adverse change
in the business, assets, liabilities, results of operations or financial
condition of the Company and its subsidiaries, taken as a whole, since December
31, 1997.
Termination
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time by the written mutual consent of Acquisition and
the Special Committee, or by either Acquisition or the Special Committee if (i)
the Merger has not been consummated on or prior to June 30, 1999; provided,
however, that the right to terminate the Merger Agreement shall not be
available to any party whose failure to fulfill any obligations under the
Merger Agreement has been the cause of, or resulted in, the failure of the
Merger to occur on or prior to such date; or (ii) the Special Committee shall
have withdrawn, modified or
26
<PAGE>
changed in any manner adverse to Acquisition its approval of the Merger
Agreement or the Merger after having concluded in good faith after consultation
with independent legal counsel that there is a reasonable probability that the
failure to take such action would result in a violation of its fiduciary
obligations under applicable law.
In the event the Merger Agreement is terminated, the Merger Agreement shall
become null and void, and no liability shall attach to either the Company or
Acquisition; provided, however, that a party will not be relieved of any
liability or obligation which results from a willful breach of the Merger
Agreement.
Indemnification and Insurance
The Merger Agreement provides that the articles of incorporation and bylaws
of the Surviving Corporation shall contain provisions with respect to
indemnification and limitation of liability of directors and officers set forth
in the Company's Articles and By-laws on the date of the Merger Agreement, and
that the provisions will not be amended, repealed or otherwise modified for a
period of six years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who on or prior to the Effective
Time were directors or officers of the Company.
The Merger Agreement also provides that the Surviving Corporation shall
maintain in effect for six years from the Effective Time policies of directors'
and officers' liability insurance containing terms and conditions which are not
less advantageous to the insured than any such policies of the Company in
effect on the date of the Merger Agreement, with respect to matters occurring
prior to the Effective Time, to the extent available, and having the maximum
available coverage under any such policy. Nonetheless, in no event shall the
Surviving Corporation be required to pay annual premiums in excess of that
which is commercially reasonable to maintain or procure such insurance
coverage, and in the event the Surviving Corporation is unable to obtain the
required insurance, the Surviving Corporation will obtain a policy with the
greatest coverage at a cost which is commercially reasonable.
Amendment
The Merger Agreement provides that it may not be amended except by action of
the Board of Directors of each of the parties thereto. After the adoption of
the Merger Agreement by the Company's shareholders, no further amendment may be
made without the approval of the Company's shareholders.
No Liability for Breaches of Representations and Warranties
The Merger Agreement provides that the respective representations and
warranties of the Company and Acquisition contained in the Merger Agreement
will expire with, and will be terminated and extinguished at, the Effective
Time. Neither the Company nor Acquisition will be under any monetary or other
liability with respect to any breach of a representation and warranty contained
in the Merger Agreement or other certificates and documents delivered pursuant
to the Merger Agreement. The sole consequence of any such breach will be
limited to the failure to satisfy a condition to effect the Merger and the
termination right, both as described above.
Applicable Law
The Merger Agreement is governed by the laws of the Commonwealth of
Pennsylvania, without giving effect to the choice of law provisions thereof.
27
<PAGE>
ESTIMATED FEES AND EXPENSES
If the Merger is not consummated, and except as otherwise provided herein,
all fees and expenses incurred in connection with the Merger will be paid by
the party incurring such fees and expenses, except that the Company will pay
for all costs and expenses relating to the printing and mailing of this
Information Statement. If the Merger is consummated, all fees and expenses
incurred in connection with the Merger will be the obligations of the Surviving
Corporation.
Estimated fees and expenses to be incurred by the Company or Acquisition in
connection with the Merger are as follows:
<TABLE>
<S> <C>
Financing Fees..................................................... $ 10,000
Financial Advisors Fees............................................ 550,000
SEC Filing Fees.................................................... 4,913
Legal Fees and Expenses............................................ 330,000
Accounting Fees.................................................... 45,000
Printing and Mailing Expenses...................................... 25,000
Exchange Agent Fees................................................ 10,000
Total....................................................... $974,913
</TABLE>
DISSENTERS RIGHTS
Shareholders of the Company are entitled to dissenters rights under Part I,
Chapter 15, Subchapter D of the BCL ("Subchapter D") as to shares of Company
Common Stock owned by them. Set forth below is a summary description of
Subchapter D, which is reprinted in its entirety as Exhibit C to this
Information Statement. All references in Subchapter D and in this summary to a
"shareholder" are to the record holder of the Company Common Stock as to which
appraisal rights are asserted. A person having a beneficial interest in shares
of Company Common Stock that are held of record in the name of another person,
such as a broker or nominee, must act promptly to cause the record holder to
follow the steps summarized below properly and in a timely manner to perfect
whatever dissenters rights the beneficial owner may have.
THE FULL TEXT OF SUBCHAPTER D OF THE BCL, RELATING TO DISSENTERS RIGHTS, IS
ATTACHED HERETO AS EXHIBIT C. THIS SUMMARY AND EXHIBIT C SHOULD BE REVIEWED
CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY DISSENTERS RIGHTS OR
WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE TO COMPLY STRICTLY
WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN WILL RESULT IN THE LOSS OF
DISSENTERS RIGHTS.
This Information Statement constitutes notice to shareholders of dissenters
rights pursuant to Subchapter D, Section 1575. In accordance with Subchapter D,
any shareholder entitled to dissenters rights may, within 30 days after the
date of mailing of this Information Statement, demand in writing from the
Company the payment of the fair value of such shareholder's Company Common
Stock. Such demand must reasonably inform the Company of the identity of the
shareholder and that the shareholder intends thereby to demand the payment of
the fair value of such shareholder's Company Common Stock. A shareholder who
elects to exercise dissenters rights must mail or deliver such shareholder's
written demand to the Vice President of Finance of the Company at 1001 Oakdale
Road, Oakdale, Pennsylvania 15071.
A demand for payment must be executed by or for the shareholder of record,
fully and correctly, as such shareholder's name appears on the certificate or
certificates representing his, her or its shares of Company Common Stock. If
the shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, such demand must be executed by the fiduciary. If the
shares are owned of record by more than one
28
<PAGE>
person, as in a joint tenancy or tenancy in common, such demand must be
executed by all joint owners. An authorized agent, including an agent for two
or more joint owners, may execute the demand for appraisal for a shareholder of
record; however, the agent must identify the record owner and expressly
disclose the fact that, in exercising the demand, such person is acting as
agent for the record owner.
A record owner, such as a broker, who holds Company Common Stock as a
nominee for others, may exercise dissenters rights with respect to shares held
for all or less than all beneficial owners of Company Common Stock as to which
such person is the record owner. In such case, the written demand must set
forth the number of shares of Company Common Stock covered by such demand.
Where the number of shares of Common Stock is not expressly stated, the demand
will be presumed to cover all shares of Company Common Stock outstanding in the
name of such record owner. Beneficial owners who are not record owners and who
intend to exercise dissenters rights should instruct the record owner to comply
strictly with the statutory requirements with respect to the exercise of
dissenters rights.
Within 60 days after the Effective Time, either the Company, as the
surviving corporation in the Merger, or any shareholder who has complied with
the required conditions of Subchapter D, if any demands for payment remain
unsettled, the Company may file in court an application for relief requesting
that the fair value of the shares be determined by the Court. If the Company
fails to file an application for relief within the 60-day period, any dissenter
who made a demand and who has not already settled his, her or its claim with
the Company may file an application in the name of the Company at any time
within 30 days after the expiration of the 60-day period. If a dissenter does
not file an application within the 30-day period, each dissenter entitled to
file an application shall be paid the Merger Consideration and no more, and may
bring an action to recover any amount not previously remitted. If an
application is timely filed, after a hearing on such application, the court
will determine which shareholders are entitled to dissenters rights and will
appraise the shares of Company Common Stock formerly owned by such
shareholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest from the Effective Time to be paid upon
the amount determined to be the fair value. In determining such fair value, the
court is to take into account all relevant factors. Accordingly, such
determination could be based upon consideration other than or in addition to
the market value of the shares of Company Common Stock, including, among other
things, asset values of the shares of Company Common Stock. The value
determined in any valuation proceeding could be more than, the same as or less
than the Merger Consideration. The cost of the valuation proceeding may be
determined by the court and taxed against the parties as the court deems
equitable in the circumstances. Upon application of a dissenting shareholder,
the court may order that all or a portion of the expenses incurred by any
dissenting shareholder in connection with the appraisal proceeding, including
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of Company Common
Stock entitled to appraisal.
From and after the Effective Time, no shareholder who has duly demanded
payment in compliance with Subchapter D will be entitled to vote for any
purpose the shares of Company Common Stock subject to such demand or to receive
payment of dividends or other distributions on such shares of Company Common
Stock, except for dividends or distributions payable to shareholders of record
at a date prior to the Effective Time.
If no application for relief is filed by the Company with the court within
60 days after the Effective Time, or by a shareholder within 30 days after the
expiration of the 60-day period, shareholders' rights to payment shall cease,
and all shareholders who had previously demanded payment shall thereafter be
entitled to receive the Merger Consideration in cash upon surrender of the
certificates that formerly represented their Company Common Stock. The Company
has no obligation to file such an application, and has no present intention to
do so; thus, any shareholder who desires such an application to be filed is
advised to file it on a timely basis. However, no application timely filed in
the court demanding payment shall be dismissed as to any shareholder without
the approval of the court, and such approval may be conditioned upon such terms
as the court deems just.
29
<PAGE>
A shareholder who elects to exercise appraisal rights pursuant to Subchapter
D should mail or deliver a written demand to: Industrial Scientific
Corporation, 1001 Oakdale Road, Oakdale, Pennsylvania 15071, Attention: James
P. Hart, Vice President of Finance.
Pursuant to the Merger Agreement, the Company has agreed to give Acquisition
prompt notice of any demands for payment received by it, withdrawals of such
demands, and any other instruments served pursuant to the BCL and received by
the Company and relating thereto. Acquisition shall direct all negotiations and
proceedings with respect to demands for payment under the BCL. The Company
shall not, except with the prior written consent of Acquisition, make any
payment with respect to any demands, or offer to settle, or settle, any such
demands.
FAILURE TO COMPLY STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN
SUBCHAPTER D WILL RESULT IN THE LOSS OF A SHAREHOLDER'S STATUTORY DISSENTERS
RIGHTS. CONSEQUENTLY, ANY SHAREHOLDER WISHING TO EXERCISE DISSENTERS RIGHTS IS
URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
30
<PAGE>
SPECIAL FACTORS REGARDING AMENDMENT OF THE ARTICLES
On February 23, 1999, following the approval of the Merger Agreement, the
Special Committee and the full Board of Directors approved the Articles
Amendment providing that Subchapter E of the BCL shall not be applicable to the
Company. Subchapter E, which is summarized below, is one of a number of so-
called anti-takeover laws which Pennsylvania enacted during the 1980s to afford
corporations incorporated in Pennsylvania and their shareholders protection
against certain types of takeovers and acquisitions of control by third
parties. However, Subchapter E permits Pennsylvania corporations to elect not
to be governed by its provisions by amending their articles of incorporation to
so provide. The Articles Amendment was adopted so that Subchapter E would not
be applicable to acquisition of Company Common Stock resulting from capital
contributions of such stock to Acquisition by the Majority Shareholders and
their Affiliates in connection with the Merger.
Summary of Subchapter E
Subchapter E (15 Pa. C.S. (S)(S) 25412548) essentially provides that,
subject to certain exceptions, if a person or entity or a group of persons or
entities acting together (hereinafter called a "controlling person or group")
acquires voting power over voting shares of a publicly traded Pennsylvania
corporation, such as the Company, that would entitle the controlling person or
group to cast at least 20% of the votes that all shareholders of the
corporation would be entitled to cast in an election of directors of the
corporation (the acquisition of such voting power being hereinafter referred to
as a "control transaction"), then: (i) prompt notice of such control
transaction must be given to the other holders of voting shares of the
corporation; and (ii) any such holders who object to the control transaction
and comply with specified procedures may demand that the controlling person or
group purchase such objecting holders' voting shares for "fair value."
The minimum value that such objecting shareholders are entitled to receive
under Subchapter E is the highest price paid per share by the controlling
person or group within the 90-day period ending on the date of the control
transaction. If objecting holders believe the fair value of their voting shares
is higher than this minimum amount, they are entitled to have the fair value of
their voting shares determined by an appraiser appointed by the court. Any
appraiser so appointed is required to determine the fair value of each voting
share as of the date of the control transaction, taking into account all
relevant factors, including an increment representing a proportion of any value
payable for acquisition of control of the corporation. The appraisal costs are
borne by the controlling person or group, and the appraised fair value, plus
interest, is then paid to those holders who demanded the appraisal in return
for their voting shares.
Reasons for the Proposed Amendment to the Articles
Subchapter E essentially provides that, subject to certain exceptions, if a
person or group acquires voting power over 20% or more of the voting shares of
capital stock of a Pennsylvania public company, the shareholders are entitled
to notice of such event and may demand that the acquiring person or group pay
"fair value for their shares." While Subchapter E may have afforded the Company
and its shareholders protection against an unwanted and unfair takeover by a
hostile third party, the Board of Directors believes that the provisions of
Subchapter E should not apply to the Majority Shareholders' and their
Affiliates' contribution of Company Common Stock to Acquisition in connection
with the Merger.
Unlike a number of other anti-takeover laws adopted by Pennsylvania and
other states, Subchapter E does not exempt from its provisions control
transactions which have been approved prior to their consummation by the
disinterested directors of a corporation. The Company believes that the
application of Subchapter E to Company Common Stock to be acquired by
Acquisition from the Majority Shareholders and their Affiliates in connection
with the Merger is inappropriate given that such a transfer does not result in
a change of control and is not the type of transaction that Subchapter E was
intended to address. Moreover, holders of Nonaffiliated Stock who oppose the
Merger may dissent and seek appraisal of the fair market value of their Company
Common Stock pursuant to the dissenters rights provisions of the BCL. See
"DISSENTERS RIGHTS." The
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<PAGE>
Majority Shareholders and the Affiliates have not acquired any shares of
Company Common Stock in transactions which would establish a minimum "fair
value" under Subchapter E.
For the above reasons, the Board of Directors believes that the Articles
Amendment is in the best interests of the Company and its shareholders.
Interests of Certain Persons in the Articles Amendment
In considering the approval of the Special Committee and the Board of
Directors with respect to the Articles Amendment, shareholders should be aware
that certain members of the Board of Directors and the Company's management
have interests in connection with the Articles Amendment (including the
interest described below) that differ from those of the holders of
Nonaffiliated Stock. The Special Committee and the Board of Directors were
aware of these potential or actual conflicts of interest and considered them
along with other matters described in this section under "--Reasons for the
Proposed Amendment to the Articles."
Acquisition was formed by the Majority Shareholders for the purpose of
acquiring the Company in the Merger. The Majority Shareholders and their
Affiliates own 100% of Acquisition. Following the effectiveness of the Merger,
on a fully diluted basis, the Majority Shareholders and their Affiliates will
own 100% of the Surviving Corporation Common Stock. Such ownership will result
from the conversion, upon the consummation of the Merger, of the shares of the
Acquisition Common Stock into shares of Surviving Corporation Common Stock.
Required Vote for Articles Amendment; Written Consent in Lieu of Meeting
Under the BCL and the Company's Articles and By-laws, the affirmative vote
of a majority of the votes cast by all shareholders entitled to vote is
required to approve and adopt the Articles Amendment.
Pursuant to Section 1766 of the BCL and the Company's Articles, any action
required or permitted to be taken at any meeting of shareholders of the Company
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 therein were present and voting. On February 23, 1999,
immediately following the execution of the Merger Agreement, the Majority
Shareholders, who then held of record, in the aggregate, 2,288,600 shares of
Company Common Stock, representing a majority of the votes entitled to be cast
at a meeting to consider the Articles Amendment, executed and delivered to the
Company the Consent approving and adopting the Articles Amendment. On February
23, 1999, there were issued and outstanding 3,280,137 shares of Company Common
Stock.
32
<PAGE>
MARKET PRICE AND DIVIDENDS
The Company Common Stock is quoted and traded on NASDAQ under the symbol
"ISCX." The shares of Company Common Stock are held by 155 shareholders of
record. The table below sets forth, for the quarters indicated, the high and
low sale prices of the Company Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Common Stock
-----------------
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
Year ended January 29, 2000
First Quarter (through March )............. 27 1/2 20 --
Year ended January 30, 1999
First Quarter................................. 27 20 1/2 $.05
Second Quarter................................ 26 23 1/2 .05
Third Quarter................................. 26 3/4 21 1/2 .05
Fourth Quarter................................ 25 21 1/2 .05
Year ended January 31, 1998
First Quarter................................. 17 3/4 15 3/4 --
Second Quarter................................ 21 16 1/4 .04
Third Quarter................................. 21 3/4 18 1/2 .04
Fourth Quarter................................ 23 18 1/2 .04
</TABLE>
On February 23, 1999, the last full trading day prior to the public
announcement of the Merger Agreement, the high and low sale prices reported for
shares of Company Common Stock on NASDAQ were $20 1/2 and $20 3/8,
respectively, and the last reported sale price was $20 1/2. On , the last
full trading day prior to the date of the mailing of this Information
Statement, the high and low sale prices reported for shares of Company Common
Stock on NASDAQ were and , respectively, and the last reported sale
price was . The Merger Agreement prohibits the Company from paying dividends
or any other distribution with respect to Company Common Stock.
Common Stock Purchase Information
From November 1998 through March 10, 1999, none of the Company, the Majority
Shareholders or any director, executive officer or controlling person of the
Company, or Acquisition has effected any purchases or sales of Company Common
Stock.
Since January 28, 1996, none of the Majority Shareholders or Acquisition has
purchased any Company Common Stock, except that Kent D. McElhattan purchased
(i) an aggregate of 2,714 shares between July 1996 and February 1999 pursuant
to the Company's Profit Sharing Plan at prices ranging from $15 to $27 1/8; and
(ii) exercised an option to purchase 1,000 shares of Company Common Stock on
January 30, 1998, at an exercise price of $16.00 per share. During that same
time period, the Company has not made any purchases of Company Common Stock
except that:
(i) During the fourth quarter of fiscal year 1996, the Company purchased
11,800 shares of Company Common Stock at a range of prices paid per share of
$15 1/8 to $15 1/2 and an average purchase price of $15.14; and
(ii) During the first quarter of fiscal year 1997, the Company purchased
5,700 shares of Company Common Stock at a range of prices paid per share of $15
7/8 to $16 3/8 and an average purchase price of $16.25; and
(iii) During the second quarter of fiscal year 1997, the Company purchased
32,400 shares of Company Common Stock at a range of prices paid per share of
$16 5/8 to $19 7/8 and an average purchase price of $18.69; and
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<PAGE>
(iv) During the third quarter of fiscal year 1997, the Company purchased
11,500 shares of Company Common Stock at a range of prices paid per share of
$18 5/8 to $19 7/8 and an average purchase price of $19.68; and
(v) During the fourth quarter of fiscal year 1997, the Company purchased
11,600 shares of Company Common Stock at a range of prices paid per share of
$18 5/8 to $22 1/8 and an average purchase price of $20.06; and
(vi) During the first quarter of fiscal year 1998, the Company purchased
7,100 shares of Company Common Stock at a range of prices paid per share of $21
1/8 to $24 1/8 and an average purchase price of $23.13; and
(vii) During the second quarter of fiscal year 1998, the Company purchased
5,700 shares of Company Common Stock at a range of prices paid per share of $23
5/8 to $25 1/8 and an average purchase price of $24.30; and
(viii) During the third quarter of fiscal year 1998, the Company purchased
13,100 shares of Company Common Stock at a range of prices paid per share of
$21 5/8 to $25 3/8 and an average purchase price of $22.53.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company currently does not invest excess funds in derivative financial
instruments or other market risk sensitive instruments for the purpose of
managing its foreign currency exchange rate risk or for any other purpose.
SUBSEQUENT EVENT: FOURTH QUARTER RESULTS OF OPERATIONS
On March 10, 1999, the Company issued a press release describing its results
of operations for the quarter and year ended January 30, 1999 (the "Fourth
Quarter Earnings Release"). A copy of the Fourth Quarter Earnings Release is
attached hereto as Exhibit D. The financial information set forth in the Fourth
Quarter Earnings Release is derived from unaudited financial statements of the
Company which include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the information for the periods shown. This information should be read in
conjunction with the Condensed Consolidated Financial Statements and related
notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION" contained elsewhere in this Information
Statement.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected unaudited consolidated financial
data for the Company and its subsidiaries (i) as of and for the nine months
ended October 31, 1998, and November 1, 1997, and (ii) audited consolidated
financial data as of and for each of the five fiscal years in the period ended
January 31, 1998. No separate financial information is provided for Acquisition
since Acquisition is a special purpose entity formed in connection with the
Merger and has no independent operations. No pro forma data giving effect to
the Merger have been provided because the Company does not believe such
information is material to shareholders in evaluating the proposed Merger and
the Merger Agreement.
The financial information for the Company as of and for each of the five
fiscal years in the period ended January 31, 1998, has been derived from
audited consolidated financial statements of the Company. The financial
information as of and for the nine months ended October 31, 1998, and November
1, 1997, has been derived from unaudited consolidated financial statements of
the Company and, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein. Operating results for such unaudited interim
periods should not be considered indicative of results to be expected for the
entire period.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, accompanying
notes and other financial information, included herein.
The Company's fiscal year ends on the last Saturday of January and is
denoted by reference to the preceding calendar year. The twelve months ended
January 31, 1998, is termed "fiscal year 1997."
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Fiscal Years Ended
----------------------- -----------------------------------------------------------
October 31, November 1, January 31, January 25, January 27, January 28, January 29,
1998 1997 1998 1997 1996 1995 1994
(in thousands, except share data) ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales............... $33,103 $30,449 $40,865 $36,648 $34,133 $31,421 $30,891
Cost of Goods Sold...... 13,796 13,523 17,837 16,833 15,942 14,401 14,101
Operating Expenses...... 12,507 11,602 15,522 14,728 12,640 10,728 9,627
Operating Profit........ 6,800 5,324 7,506 5,087 5,551 6,291 7,164
Net Income.............. 4,946 4,287 6,002 3,725 4,067 4,227 4,449
Per Common Share
Data(1):
Basic Net Income per
common share........... $ 1.50 $ 1.28 $ 1.80 $ 1.10 $ 1.20 $ 1.25 $ 1.38
Basic weighted average
number of common and
common
equivalents outstand-
ing.................... 3,295 3,343 3,333 3,374 3,375 3,375 3,219
Diluted Net Income per
common share........... $ 1.49 $ 1.28 $ 1.80 $ 1.10 $ 1.20 $ 1.25 $ 1.38
Diluted weighted average
number of common and
common equivalents
outstanding............ 3,309 3,349 3,340 3,375 3,387 3,390 3,227
Cash dividends
declared............... $ 0.15 $ 0.08 $ 0.12 -- -- -- --
Balance Sheet Data:
Total Assets............ $47,672 $42,789 $43,882 $39,218 $35,479 $32,213 $28,897
Long term debt.......... 3,813 4,185 4,039 4,512 5,125 5,762 6,150
Shareholders' equity.... $39,470 $34,229 $35,592 $31,117 $27,571 $23,504 $19,276
Book value per share.... $ 11.98 $ 10.22 $ 10.67 $ 9.22 $ 8.17 $ 6.96 $ 5.99
</TABLE>
- --------
(1) Effective with the fiscal year ended January 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). Accordingly, net income per common share and shares used
in computing earnings per share for the nine months ended November 1, 1997,
and each of the five years in the period ended January 25, 1997, have been
restated to conform with the requirements of SFAS No. 128.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto for the
periods ended October 31, 1998, and November 1, 1997, and with the Company's
audited consolidated financial statements as of January 31, 1998, and January
25, 1997, and for each of the three fiscal years in the period ended January
31, 1998. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
that involve substantial risk and uncertainties. When used in this section, the
words "anticipate," "believe," "estimate," "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, without limitation, rapid technological change in the
industry along with the need to continually develop new products; risks of
product liability claims; competition; dependence on key employees; management
of the Company's growth; dependence on certain customers; dependence on one key
supplier for toxic and oxygen sensors; and risks associated with international
business operations. A more complete discussion of these factors is set forth
in the Company's Form 10-K for fiscal year 1997.
Results of Operations
Nine Months Ended October 31, 1998, Compared to Nine Months Ended November 1,
1997
Net Sales
Net sales for the nine months ended October 31, 1998, totaled $33.1 million,
an increase of $2.7 million or 8.7% compared to net sales of $30.4 million for
the nine months ended November 1, 1997. Sales of the newly introduced ATX
series of portable multi-gas instruments and the T-80 portable single gas
instrument, combined with a large order for TMX412 multi-gas instruments,
principally account for this increase.
Gross Profit
Gross profit increased $2.4 million or 14.1% to $19.3 million for the nine
months ended October 31, 1998, compared to $16.9 million for the nine months
ended November 1, 1997. Gross profit as a percent of net sales also increased
to 58.3% for the nine months ended October 31, 1998, compared to 55.6% for the
prior period. This increase in gross profit is principally due to an increased
portion of sales to end users which generally results in a higher gross profit
percentage. Increased sales of replacement parts and rental services also
contributed to the increased gross profit percentage.
Operating Expenses
Operating expenses increased $905,000, or 7.8% to $12.5 million for the nine
months ended October 31, 1998, compared to $11.6 million for the comparable
1997 period. Selling expenses increased $701,000 or 10.4% due to increased
commission and other volume-related expenses and increased marketing costs
associated with fixed system products. Research, development and engineering
expense increased $146,000 or 6.4% due to increased new product development
efforts in both portable and fixed systems product lines.
Administrative expense increased 2.2% or $58,000, virtually unchanged for
the comparable nine month period.
Other Income and Expense
Interest income increased $48,000 or 6.5% for the nine-months ended October
31, 1998, due to higher investment amounts resulting from positive cash flow.
Interest expense decreased $10,000 to $116,000 due to lower outstanding debt
balances resulting from continuing principal payments. Other income consists of
the
36
<PAGE>
Company's portion of results from two joint ventures in which the Company
participates. Industrial Scientific Arabia Ltd., based in Saudi Arabia, was
modestly profitable for the nine months ended October 31, 1998 but these
results were partially offset by losses from HEG Industrial Scientific based in
Harbin, China. Losses from HEG Industrial Scientific are primarily due to
start-up expenses and slower than anticipated sales growth.
The effective tax rate for the nine months ended October 31, 1998, was
34.0%, down slightly compared to the effective rate of 34.5% for the nine
months ended November 1, 1997.
Net income for the nine months ended October 31, 1998, totaled $4.9 million
or $1.50 per share, an increase of 17.2% over net income of $4.3 million or
$1.28 per share for the nine months ended November 1, 1997.
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.
37
<PAGE>
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.
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.
38
<PAGE>
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
Cash flow from operations totaled $5.7 million for the nine months ended
October 31, 1998, compared to $3.7 million for the comparable 1997 period.
Increased operating income less cash needed to support increased operating
assets and liabilities principally account for this increase.
Capital expenditures totaled $1.5 million for the nine months ended October
31, 1998, compared to $1.3 million for the comparable 1997 period. Capital
expenditures in 1998 primarily consisted of manufacturing equipment, inventory
storage and retrieval systems and computers and related software. In October
1997, the Company invested $241,000 in exchange for 50% interest HEG Industrial
Scientific, based in Harbin, China. In June 1997, the Company completed the
previously announced sale of Monitor Group for $2.5 million in cash that
resulted in a gain of $580,000. During the nine months ended October 31, 1998,
the Company used $605,000 to repurchase shares of its stock under the
previously announced stock repurchase plan and paid dividends totaling
$507,000.
Working capital totaled $19.0 million as of October 31, 1998, compared to
$23.3 million as of January 27, 1997, a decrease of $4.3 million, primarily
resulting from lengthening maturities of the Company's investments to increase
interest income which increased long-term investments and decreased working
capital. The Company believes that its cash flow and capital structure provide
adequate flexibility to support the growth of operations and funding capital
spending programs.
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 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).
39
<PAGE>
During 1997, the Company continued the previously announced repurchase of
Company Common 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.
Impact of the Year 2000 Issue
The Year 2000 issue exists because many computer systems and applications
use two digit rather than four digit date fields to designate an applicable
year. As a result, the systems and applications may not properly recognize the
year 2000 or process data which include it, potentially causing data
miscalculations or inaccuracies or operational malfunctions or failures.
The Company has developed a plan to evaluate its internal computer systems
and products in light of the Year 2000 problem. The plan includes inventory,
evaluation and completion of any appropriate remediation.
The Company has substantially completed an inventory and evaluation of all
critical computer systems and corresponding software applications. Based upon
written documentation, certifications from vendors and manufacturers,
information available at vendor websites and the results of Company testing,
the Company believes that its business critical computer systems will not
experience significant Year 2000 problems.
The Company's products with time-of-date ("TOD") clocks in their design have
been tested for successful Year 2000 operation. Products that do not have TOD
clocks have no potential Year 2000 operational issues and therefore have not
been tested. The Company believes that it will have no material exposure to
contingencies related to the Year 2000 issue for the products that it has sold.
The Company has contacted its key vendors regarding their Year 2000
compliance efforts. Although the Company has received some information from its
vendors regarding their Year 2000 compliance efforts, there can be no assurance
that the Company will not experience disruptions in its ability to conduct
business because of Year 2000 problems experienced by the Company's vendors.
The Company does not have meaningful information concerning the Year 2000
status of its customers.
The Company does not expect to incur substantial costs with respect to its
Year 2000 compliance efforts and the Company has not deferred other information
technology projects as a result of the Year 2000 problem. The cost of internal
efforts by Company's personnel are not separately accounted for.
As part of the Company's Year 2000 plan, the Company is evaluating scenarios
that may occur as a result of the century change and is in the process of
developing a contingency plan to address potential Year 2000-related
occurrences.
The above information is based on the Company's current best estimates.
Given the complexity of Year 2000 issues and risks, actual results may vary
materially from those anticipated and discussed above. Specific factors that
might cause such differences include, among others, the availability and cost
of personnel trained in this area, the ability to locate and correct all
affected computer systems, applications and products and the timing and success
of remedial efforts of the Company's third party suppliers, customers and
business partners.
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
40
<PAGE>
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.
41
<PAGE>
CERTAIN INFORMATION REGARDING THE COMPANY
Overview
Industrial Scientific Corporation designs, manufactures, markets, and
services portable instruments and fixed-point systems for detecting, measuring
and monitoring a wide variety of gases, including toxic and combustible gases
and oxygen, to protect and preserve life and property. The Company's products
are used for safety and industrial hygiene purposes in many different
industries, often in confined spaces posing risks of asphyxiation, poisoning
and explosion. Industrial Scientific products detect, measure and monitor 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 accessories such as sampling pumps, external warning devices
and battery chargers.
Industrial Scientific Corporation was incorporated in Pennsylvania in 1984.
Its principal offices are located at 1001 Oakdale Road, Oakdale, Pennsylvania,
15071. Its telephone number is (412) 788-4353.
Gas Monitoring Instruments
The Company manufactures portable instruments to monitor from one to four
different gases and fixed point systems to permanantly monitor a particular
area or facility. Most of the Company's products continuously monitor, rather
than spot-check, gases during their period of use. Audible and visual alarms
are activated if gases reach specified limits. The Company's products are
designed for ruggedness and shock resistance. In addition, they are designed to
eliminate erratic readings and false alarms from radio frequency interference
("RFI"). All of the portable instruments are designed to function for at least
an entire 10-hour shift without battery recharging or replacement. Generally,
single-gas toxic or oxygen portable monitors use alkaline batteries which last
from 1,300 to 2,400 hours. Combustible portable 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. Fixed-point systems generally draw power
from the facility main electrical source. Accurate measurement of gas
concentrations is a basic requirement of gas monitoring products. 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 products, accessories, replacement parts and
service accounted for 98%, 99% and 99% of the Company's net sales for fiscal
years 1996, 1997, and 1998.
Other Products
In addition to its gas monitoring products 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; and water deluge systems
triggered by heat sensors. Sales of these products accounted for 2%, 1% and 1%
of the Company's net sales for fiscal years 1996, 1997, and 1998.
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.
42
<PAGE>
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.
In October 1996, the Company acquired all of the gas monitoring systems
products manufactured by McNeil 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 30 regional sales and product 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
25 sales and customer service representatives who support distribution and 21
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 20%, 21%
and 21% of net sales for fiscal years 1996, 1997, and 1998, 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,
20 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 48%, 51%
and 45% of net sales for fiscal years 1996, 1997, and 1998, respectively. Of
these five, Vallen Safety Supply Company, which comprised approximately 26% and
25% of sales in fiscal 1997 and 1998, 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 $3.0 million, $2.7 million, $2.8 million for research and
development in fiscal years 1996, 1997, and 1998, respectively, representing
8.3%, 6.7% and 6.3% of net sales in such periods.
In 1998 the Company introduced the WorksAlone II line of gas detection
transmitters for use in fixed point monitoring systems, and the TX418 portable
gas monitor which is capable of monitoring three different toxic gases plus
Oxygen. The TX418 was developed by the Company for use on the International
Space Station, under contract with Krug Life Sciences, a NASA subcontractor.
43
<PAGE>
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.
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.
44
<PAGE>
Employees
As of March 1, 1999, the Company had 227 employees.
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.
Legal Proceedings
There are currently no outstanding or pending material legal proceedings
with respect to the Company or its business.
45
<PAGE>
CERTAIN INFORMATION REGARDING ACQUISITION
Acquisition was organized February 22, 1999 by the Majority Shareholders to
acquire all the outstanding shares of Company Common Stock pursuant to the
Merger Agreement and has not conducted any unrelated activities since its
organization. All of the outstanding capital stock of Acquisition is owned by
the Majority Shareholders and their Affiliates. Immediately prior to the
consummation of the Merger, the Majority Shareholders and their Affiliates will
contribute all of the Company Common Stock owned by them to Acquisition in
exchange for shares of capital stock of Acquisition.
Kent D. McElhattan and Kenton E. McElhattan are the sole officers and
directors of Acquisition and will become the sole directors of the Surviving
Corporation as a result of the Merger.
The principal offices of Acquisition are located at 1001 Oakdale Road,
Oakdale, PA 15071 and its telephone number is (412) 788-4353.
46
<PAGE>
MANAGEMENT
Directors and Executive Officers of the Company
Set forth below are the name and business address of each director,
executive officer and controlling person of the Company, the present principal
occupation or employment of each such person and the name, principal business
and address of the corporation or other organization in which such occupation
or employment of each such person is conducted, and the material occupations,
positions, offices and employment and the name, principal business and address
of any corporation or other organization in which any material occupation,
position, office or employment of each such person was held during the last
five years. Each person listed below is a citizen of the United States. Unless
otherwise indicated below, the business address of each director and executive
officer is 1001 Oakdale Road, Oakdale, PA 15071. The names, ages, positions and
areas of responsibility of the executive officers of the Company as of February
23, 1999, are listed below.
<TABLE>
<CAPTION>
Name Business Address and Principal Occupations
---- ------------------------------------------
<C> <S>
Kenton E. McElhattan........... Mr. McElhattan, age 76, has been a Director and
Chairman of the Board of the Company since January
1985. Prior to 1985, he was the Chief Executive Officer
of National Mine Service Company, the predecessor to
the Company.
Kent D. McElhattan............. Mr. McElhattan, age 50, 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.
James P. Hart.................. Mr. Hart, age 44, 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.
Garth F. Miller................ Mr. 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.
Herbert F. Gerhard............. Mr. Gerhard, age 68, has been a Director of the Company
since 1985. He retired in May 1995 as President and
Chief Executive Officer of National Mine Service
Company. He had served in this position since 1985.
Thomas M. Thompson............. Mr. Thompson, age 56, has been a Director of the
Company since March 1998. Mr. Thompson has been a
shareholder in the law firm of Buchanan Ingersoll
Professional Corporation since 1980.
Donald J. McGraw, M.D., M.P.H.. Dr. McGraw, age 55, has been a Director of the Company
since 1995. Dr. McGraw currently serves as Executive
Medical Director, UPMC Work Partners in Pittsburgh, PA.
He is also Associate Professor of Occupational and
Environmental Medicine, and Clinical Instructor,
Internal Medicine at the University of Pittsburgh
School of Medicine and Public Health, and a member of
the Attending Staff. Dr. McGraw serves as a director
for numerous medical and health-related organizations.
</TABLE>
47
<PAGE>
Kenton E. McElhattan is the father of Kent D. McElhattan. No other family
relationships exist among any executive officers or directors of the Company.
Directors and Executive Officers of Acquisition
Kenton E. McElhattan and Kent D. McElhattan are the initial directors and
executive officers of Acquisition. Information regarding Kenton E. McElhattan
and Kent D. McElhattan is set forth above in this section under the subheading
"Directors and Executive Officers of the Company."
48
<PAGE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information, as of March 10, 1999, concerning
the ownership of Company Common Stock, including shares of Company Common Stock
as to which a right to acquire beneficial ownership exists within the meaning
of Rule 13d-3(d)(1) of the Exchange Act of: (i) each shareholder known to the
Company to be the beneficial owner of more than 5% of Company Common Stock;
(ii) each director; (iii) all executive officers of the Company; (iv) all
directors and executive officers as a group; and (v) any pension, profit
sharing or similar plan of the Company. Because the Majority Shareholders are
deemed to be a group within the meaning of Rule 13d-3, each could be deemed
beneficially to own all of the equity securities of the group. Accordingly,
each of Kenton E. McElhattan, Florence L. McElhattan and Kent D. McElhattan
could be deemed to own 74.2% of Company Common Stock.
Number of Shares of Company Common
Stock Beneficially Owned
As of March 10, 1999
<TABLE>
<CAPTION>
Number of Shares Percent of Outstanding
Beneficially Owned Company Common Stock Owned(1)
------------------ -----------------------------
<S> <C> <C>
Kenton E. McElhattan(2)...... 2,434,280 74.2%
Florence L. McElhattan(3).... 2,434,280 74.2%
Kent D. McElhattan(4)........ 2,434,280 74.2%
James P. Hart(5)............. 4,607 --
Garth F. Miller(6)........... 3,633 --
Herbert F. Gerhard(7)........ 1,500 --
Donald J. McGraw(8).......... 3,150 --
Thomas M. Thompson(9)........ 2,000 --
All Directors and executive
officers as a group
(8 persons)................. 2,449,170 74.7%
The Industrial Scientific
Profit Sharing Plan......... 8,334 --
</TABLE>
- --------
(1) Percentages of less than one percent are omitted.
(2) Includes 750,000 shares held by Kenton E. McElhattan's wife, Florence L.
McElhattan, 1,014,320 shares beneficially held by his son, Kent D.
McElhattan, and 14,400 shares held in the Industrial Scientific Corporation
Foundation, as to which beneficial ownership is disclaimed. Also includes
1,000 shares which would be outstanding upon the exercise of immediately
exercisable Options.
(3) Includes 668,960 shares beneficially owned by Florence McElhattan's
husband, Kenton E. McElhattan, and 1,014,320 shares beneficially held by
her son, Kent D. McElhattan, as to which beneficial ownership is
disclaimed.
(4) Includes 1,434,360 shares deemed to be beneficially owned by his parents,
Kenton E. McElhattan and Florence L. McElhattan, 2,000 shares owned by Kent
D. McElhattan's wife, 113,780 shares held by various family trusts as to
which Kent D. McElhattan serves as trustee and 14,400 shares held in the
Industrial Scientific Corporation Foundation, all as to which Kent D.
McElhattan disclaims beneficial ownership. Also includes 1,940 shares which
would be outstanding upon the exercise of immediately exercisable Options.
(5) Includes 450 shares owned by spouse as to which beneficial ownership is
disclaimed. Also includes 1,970 shares which would be outstanding upon the
exercise of immediately exercisable Options.
(6) Includes 1,200 shares owned by spouse as to which beneficial ownership is
disclaimed. Also includes 1,965 shares which would be outstanding upon the
exercise of immediately exercisable Options.
(7) Includes 500 shares owned by spouse as to which beneficial ownership is
disclaimed. Also includes 1,000 shares which would be outstanding upon the
exercise of immediately exercisable Options.
49
<PAGE>
(8) Includes 1,000 shares which would be outstanding upon the exercise of
immediately exercisable Options.
(9) Includes 1,000 shares which would be outstanding upon the exercise of
immediately exercisable Options.
INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP has served as the Company's
independent accountants since fiscal 1985. The consolidated financial
statements of the Company as of January 31, 1998, and January 25, 1997, and for
each of the three fiscal years in the period ended January 31, 1998, have been
audited by PricewaterhouseCoopers LLP, independent accountants, as stated in
their report appearing therein.
SHAREHOLDER PROPOSALS
If the Merger is consummated, there will be no public shareholders of the
Company and no public participation in any future meetings of shareholders of
the Company. However, if the Merger is not consummated, the Company's public
shareholders will continue to be entitled to attend and participate in the
Company's shareholder meetings. Pursuant to Rule 14a-8 promulgated by the SEC,
any shareholder of the Company who wishes to present a proposal at the next
Annual Meeting of shareholders of the Company (in the event the Merger is not
consummated), and who wishes to have such proposal included in the Company's
proxy statement for that meeting must deliver a copy of such proposal to the
Company at 1001 Oakdale Road, Oakdale, PA 15071, Attention: Corporate Secretary
within a reasonable time before the Company delivers its proxy statement to
shareholders for that meeting in order for such proposal to be considered by
the Board of Directors for inclusion in the proxy statement.
In order for a shareholder to bring other business before a shareholder
meeting, timely notice must be received by the Company within a reasonable time
before the Company delivers its proxy statement to shareholders for that
shareholder meeting. Such notice must include a description of the proposed
business, the reasons therefor, and other specific matters. These requirements
are separate from and in addition to the requirements a shareholder must meet
to have a proposal considered for inclusion in the Company's proxy statement.
In each case, the notice must be given to the Secretary of the Company at the
address listed above. Any shareholder desiring a copy of the Company's By-laws
will be furnished one without charge upon written request to the Secretary.
50
<PAGE>
AVAILABLE INFORMATION
Because the Merger is a "going private" transaction, Acquisition, the
Majority Shareholders and the Company have filed a Rule 13e-3 Transaction
Statement on Schedule 13E-3 under the Exchange Act with respect to the Merger.
The Schedule 13E-3 and the Company's reports, proxy statements and other
information previously filed with the Commission contain additional information
about the Company. A copy of the written report presented by Ladenburg Thalmann
to the Special Committee, including Ladenburg Thalmann's opinion as to the
fairness of the consideration to be received in the Merger, was filed as an
exhibit to such Schedule 13E-3. Copies of the Schedule 13E-3 are available for
inspection and copying at the principal executive offices of the Company during
regular business hours by any interested shareholder of the Company, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail by written request directed to Secretary,
Industrial Scientific Corporation, 1001 Oakdale Road, Oakdale, PA 15071,
telephone (412) 788-4353.
The Company has been subject to the informational requirements of the
Exchange Act since June 1993, and, in accordance therewith, filed reports,
proxy statements and other information with the Commission. Such reports and
other information may be inspected and copied or obtained by mail upon payment
of the Commission's prescribed rates at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W. Room 1024, Washington,
D.C. 20549 and at the following regional offices of the Commission: New York
Regional Office, 7 World Trade Center, New York, New York 10048, and Chicago
Regional Office, 500 West Madison Avenue, 14th Floor, Chicago, Illinois 60661.
Certain reports, proxy statements and other information filed by the Company
may also be obtained at the Commission's World Wide Web site, located at
http://www.sec.gov. The Company has also filed reports and other information
with NASDAQ. Such reports and other information may be inspected at the offices
of NASDAQ, 1735 K Street, N.W., Washington, DC, 20006.
The Company intends to deregister the Company Common Stock following the
mailing of this Information Statement.
This Information Statement includes information required to be disclosed
pursuant to Rule 14c-2 under the Exchange Act.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements........................................ F-2
Consolidated Balance Sheet Fiscal 1998 and 1997.......................... F-2
Consolidated Statements of Income Fiscal 1998, 1997 and 1996............. F-3
Consolidated Statements of Cash Flows Fiscal 1998, 1997 and 1996......... F-4
Consolidated Statement of Changes in Shareholders' Equity................ F-5
Notes to Consolidated Financial Statements............................... F-6
Independent Auditors' Report............................................. F-17
Unaudited Financial Statements........................................... F-18
Condensed Consolidated Balance Sheet (Unaudited)--October 31, 1998 and
November 1, 1997........................................................ F-18
Condensed Consolidated Statements of Income for the Nine Months Ended
October 31, 1997 and November 1, 1997 (Unaudited)....................... F-19
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
October 31, 1998 and November 1, 1997 (Unaudited)....................... F-20
Notes to Condensed Consolidated Financial Statements (Unaudited)......... F-21
</TABLE>
F-1
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
January 31, January 25,
1998 1997
----------- -----------
<S> <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 SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $1,444,816 $908,931
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.
F-2
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
January 31, 1998 January 25, 1997 January 27, 1996
Fiscal Year Ended 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>
F-3
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
January 31, January 25, January 27,
Fiscal Year Ended 1998 1997 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.
F-4
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
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 (Not e13)... -- -- 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.
F-5
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
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
F-6
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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).
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.
F-7
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-8
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
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:
Other assets consisted of the following:
<TABLE>
<CAPTION>
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:
Term debt consisted of the following
<TABLE>
<CAPTION>
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
F-9
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. TERM DEBT: (CONTINUED)
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.
8. OPERATING LEASES:
The Company leases certain vehicles under operating leases. The minimum
rentals under these agreements for succeeding fiscal years are:
<TABLE>
<S> <C>
1998................................................................ $150,822
1999................................................................ 79,295
2000................................................................ 1,320
--------
Total............................................................. $231,437
========
</TABLE>
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:
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
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>
F-10
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES: (CONTINUED)
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>
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>
F-11
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
F-12
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. STOCK OPTION PLAN: (CONTINUED)
<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>
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
<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>
F-13
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. STOCK OPTION PLAN: (CONTINUED)
The following tables summarize certain stock option information:
Options outstanding:
<TABLE>
<CAPTION>
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>
Options exercisable:
<TABLE>
<CAPTION>
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>
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.
F-14
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
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 Fair
Amount Fair Value Amount 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.
F-15
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Amounts in thousands except for per share amounts:
<TABLE>
<CAPTION>
First Second Third Fourth
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>
F-16
<PAGE>
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
F-17
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(Unaudited) **
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 3,614 $ 3,244
Short-term investments............................... 8,512 13,368
------- -------
12,126 16,612
Accounts receivable, net............................. 5,458 5,949
Inventories.......................................... 4,919 3,887
Prepaid expenses and other assets.................... 713 828
Deferred income taxes................................ 515 481
------- -------
Total current assets................................ 23,731 27,757
Long-term investments.................................. 14,315 7,309
Long-term receivable................................... 84 --
Property, plant, and equipment, at cost................ 16,382 14,925
Less accumulated depreciation and amortization......... 8,700 7,591
------- -------
7,682 7,334
Land................................................... 390 390
Intangible assets, net................................. 191 233
Other assets........................................... 1,279 858
------- -------
Total assets........................................ $47,672 $43,881
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,045 $ 1,445
Accrued payroll and related items.................... 1,289 1,977
Accrued warranty expenses............................ 666 662
Income taxes payable................................. 320 --
Current portion of term debt......................... 375 375
------- -------
Total current liabilities........................... 4,695 4,459
Term debt.............................................. 3,438 3,663
Deferred income taxes.................................. 69 167
------- -------
Total liabilities................................... 8,202 8,289
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 3,379,037 shares and
3,376,307 at 10/31/98 and at 1/31/98................ 34 34
Additional paid-in capital........................... 5,536 5,492
Retained earnings.................................... 36,739 31,793
Dividends paid....................................... (912) (405)
Treasury stock, 98,600 shares at 10/31/98 and 72,400
shares at 1/31/98, at cost.......................... (1,927) (1,322)
------- -------
Total shareholders' equity.......................... 39,470 35,592
------- -------
Total liabilities and shareholders' equity.......... $47,672 $43,881
======= =======
</TABLE>
- --------
** Summarized from audited January 31, 1998 balance sheet.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-18
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited, in thousands except share data)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
------------------------------ ----------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales............... $ 10,437 $ 10,236 $ 33,103 $ 30,449
Cost of goods sold...... 4,218 4,501 13,796 13,523
------------- ------------- ------------ ------------
Gross profit.......... 6,219 5,735 19,307 16,926
Operating expenses:
Selling............... 2,379 2,216 7,433 6,732
Research, development
and engineering...... 853 798 2,433 2,287
Administrative........ 841 800 2,641 2,583
------------- ------------- ------------ ------------
Total operating
expenses........... 4,073 3,814 12,507 11,602
------------- ------------- ------------ ------------
Operating profit...... 2,146 1,921 6,800 5,324
Interest income......... 266 280 792 744
Interest expense........ (36) (41) (116) (126)
Other income............ 45 -- 15 20
Gain on sale of Monitor
Group.................. -- -- -- 580
------------- ------------- ------------ ------------
Income before income
taxes.................. 2,421 2,160 7,491 6,542
Provision for income
taxes.................. 862 721 2,545 2,255
------------- ------------- ------------ ------------
Net income.......... $ 1,559 $ 1,439 $ 4,946 $ 4,287
============= ============= ============ ============
Net income per basic
common share:
Basic earnings per
share................ $ 0.47 $ 0.43 $ 1.50 $ 1.28
Weighted average
shares--basic........ 3,283 3,321 3,295 3,343
Net income per diluted
common share:
Diluted earnings per
share................ $ 0.47 $ 0.43 $ 1.49 $ 1.28
Weighted average
shares--diluted...... 3,297 3,330 3,309 3,349
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-19
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the nine months ended
----------------------------
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 4,946 $ 4,287
Depreciation, amortization and other non-cash
items......................................... 1,151 1,107
Gain on sale of Monitor Group.................. -- (580)
Changes in operating assets and liabilities.... (406) (1,106)
------------ ------------
Net cash provided by operating activities.... 5,691 3,708
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (1,457) (1,347)
Increase in equity investment.................. (15) (241)
Proceeds from maturities of investments........ 9,428 9,358
Purchase of investments........................ (11,578) (15,708)
Purchase of officer's life insurance........... (406) (307)
Proceeds from sale of Monitor Group............ -- 2,500
------------ ------------
Net cash used in investing activities........ (4,028) (5,745)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock..................... (605) (906)
Proceeds from exercise of stock options........ 44 --
Principal payments on debt..................... (225) (327)
Dividends paid................................. (507) (270)
------------ ------------
Net cash used in financing activities............ (1,293) (1,503)
Net increase/(decrease) in cash and cash
equivalents..................................... 370 (3,540)
Cash and cash equivalents at beginning of
period.......................................... 3,244 6,879
------------ ------------
Cash and cash equivalents at end of period....... $ 3,614 $ 3,339
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-20
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Management's Discussion and Analysis of results of Operations and Financial
Condition which follows these notes contains additional information on the
results of operations and the financial position of the Company. These
comments should be read in conjunction with the notes.
(2) In the opinion of management, all adjustments, (consisting only of normal
and recurring adjustments), necessary for a fair presentation of the
results of the operations of these interim periods have been included.
(3) The Company's investments are in investment grade debt securities that it
has the positive intent and ability to hold to maturity and are carried at
amortized cost. These investments in debt securities exceeded market value
by approximately $83,000 and $79,000 at October 31, 1998 and November 1,
1997, respectively.
(4) Inventories consisted of:
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(in thousands)
<S> <C> <C>
At standard costs, which approximate first-in,
first-out cost:
Raw materials..................................... $3,898 $3,314
Work in process................................... 671 423
Finished goods.................................... 500 300
------ ------
5,069 4,037
Less LIFO reserves................................ 150 150
------ ------
Inventories at LIFO value......................... $4,919 $3,887
====== ======
</TABLE>
(5) The effective tax rate of 34.0% for the nine month period ended October 31,
1998 is based upon an estimate of the effective rate for the year ended
January 31, 1999. The principal difference between the effective tax rate
and the federal statutory rate is the effect of foreign sales corporation
benefits, research and experimentation credits, and non-taxable interest
income benefits, offset by the effect of state and local income taxes.
(6) 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.
F-21
<PAGE>
EXHIBITS TO INFORMATION STATEMENT
<TABLE>
<CAPTION>
Exhibit A Agreement and Plan of Merger
<C> <S>
Exhibit B Opinion of Ladenburg Thalmann & Co. Inc.
Exhibit C Part 1, Chapter 15, Subchapter D of Pennsylvania Business
Corporation Law of 1988, as amended
Exhibit D The Company's March 10, 1999, Earnings Release describing its Fourth
Quarter Results of Operations
</TABLE>
<PAGE>
EXHIBIT A
Agreement and Plan of Merger
By and Between
ISC Acquisition Corporation
and
Industrial Scientific Corporation
Dated as of February 23, 1999
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of February 23, 1999 (the "Agreement")
between ISC Acquisition Corporation, a Pennsylvania corporation
("Acquisition"), and Industrial Scientific Corporation, a Pennsylvania
corporation ("Industrial Scientific").
WHEREAS, the Board of Directors of Acquisition and the Board of Directors of
Industrial Scientific upon the recommendation of its special committee of
disinterested members (the "Special Committee") have unanimously approved, and
deem advisable and in the best interests of their shareholders, the merger of
Acquisition with and into Industrial Scientific in accordance with Title 15,
Pennsylvania Consolidated Statutes (the "PBCL") and in accordance with the
terms, and subject to the conditions of, this Agreement (the "Merger");
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
The Merger
Section 1.01. The Merger. At the Effective Time (as hereinafter defined),
upon the terms and subject to the conditions set forth in this Agreement and in
accordance with the PBCL, Acquisition shall be merged with and into Industrial
Scientific, the separate existence of Acquisition shall cease, and Industrial
Scientific shall continue as the surviving corporation (the "Surviving
Corporation"). The Merger shall have the effects as provided by the PBCL and
other applicable law.
Section 1.02. Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article 5, the parties
shall file in the Department of State of the Commonwealth of Pennsylvania
articles of merger (the "Articles of Merger") executed in accordance with the
relevant provisions of the PBCL and shall make all other filings or recordings
required under the PBCL. The Merger shall become effective at such time as the
Articles of Merger are duly filed in the Department of State of the
Commonwealth of Pennsylvania, or at such other time as is permissible in
accordance with the PBCL and as Acquisition and Industrial Scientific shall
agree and as specified in the Articles of Merger (the time the Merger becomes
effective being the "Effective Time").
Section 1.03. Closing. The closing of the Merger (the "Closing") will take
place at the offices of Buchanan Ingersoll Professional Corporation, One Oxford
Centre, Pittsburgh, Pennsylvania at 10:00 a.m. (Pittsburgh time) on the date of
the satisfaction of the conditions provided in Article 5, or at such other time
and place as Acquisition and Industrial Scientific shall agree (the "Closing
Date").
Section 1.04. Certificate of Incorporation; By-Laws; Officers and
Directors. Pursuant to the Merger: (a) the Articles of Incorporation and By-
laws of Industrial Scientific as in effect immediately prior to the Effective
Time shall be the Articles of Incorporation and By-laws of the Surviving
Corporation following the Merger; provided that the number "four (4)" and "nine
(9)" in Article 6(a) of the Articles of Incorporation shall be changed to "two
(2)" and "seven (7)" respectively, until thereafter changed or amended as
provided therein and in accordance with applicable law; (b) Kenton E.
McElhattan and Kent D. McElhattan shall be the directors of the Surviving
Corporation following the Merger and until the earlier of their death,
resignation or removal or until their respective successors are duly elected or
appointed and qualified; and (c) the officers of Industrial Scientific
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation until the earlier of their death, resignation or removal or until
their respective successors are duly elected or appointed and qualified.
Section 1.05. Effect on Common Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of Acquisition, Industrial
Scientific or the holders of any shares of Common Stock, par value $.01 per
share, of Industrial Scientific (the "Industrial Scientific Common Stock"):
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<PAGE>
(a) Common Stock of Acquisition. Each share of Common Stock, par value
$.01 per share, of Acquisition (the "Acquisition Common Stock"), which is
issued and outstanding immediately prior to the Effective Time, shall be
converted into and become one share of Common Stock, par value $.01 per
share, of the Surviving Corporation.
(b) Common Stock of Industrial Scientific. Subject to Sections 1.05 (c),
1.05(d) and 1.06, each share of Industrial Scientific Common Stock which is
issued and outstanding immediately prior to the Effective Time shall be
converted into and become a right to receive $28.50 in cash (the "Merger
Consideration") and, when so converted, shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such shares of Industrial Scientific Common Stock shall,
to the extent such certificate represents such shares, cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration allocable to the shares represented by such certificate upon
surrender of such certificate in accordance with Section 1.08.
(c) Cancellation of Treasury Stock. Any shares of Industrial Scientific
Common Stock that are owned immediately prior to the Effective Time by
Industrial Scientific or any Subsidiary of Industrial Scientific (as
hereinafter defined) which constitute treasury stock in the hands of the
holder thereof, shall be canceled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor, and each holder
of a certificate representing any such shares shall cease to have any
rights with respect thereto. The term "Subsidiary" means any corporation,
joint venture, partnership, limited liability company or other entity of
which Industrial Scientific, directly or indirectly, owns or controls
capital stock (or other equity interests) representing more than fifty
percent of the general voting power under ordinary circumstance of such
entity.
(d) Industrial Scientific Common Stock Held by Acquisition. Any shares
of Industrial Scientific Common Stock that are owned immediately prior to
the Effective Time by Acquisition shall be canceled and retired and shall
cease to exist, and no consideration shall be delivered in exchange
therefor, and each holder of a certificate representing any such shares
shall cease to have any rights with respect thereto. Acquisition hereby
irrevocably waives any and all rights it may have pursuant to the terms of
this Agreement or under the PBCL (including, without limitation, any rights
to which it may be entitled under Part II, Chapter 15, Subchapter D of the
PBCL) or otherwise to receive pursuant to the Merger cash or any other
consideration for the shares of Industrial Scientific Common Stock owned or
held by it at the Effective Time.
Section 1.06. Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Industrial Scientific Common Stock outstanding
immediately prior to the Effective Time and held by a holder (if any) who has
perfected his rights to dissent from the Merger in accordance with Part I,
Chapter 15, Subchapter D of the PBCL ("Dissenting Shares") shall be canceled
and retired and shall not be converted into a right to receive the Merger
Consideration, unless such holder fails to perfect or withdraws or otherwise
loses such holder's right to dissent, if any. Such shareholders shall be
entitled to receive payment of the appraised value of such Dissenting Shares in
accordance with the provisions of the PBCL. If, after the Effective Time, such
holder fails to perfect or withdraws or loses any such right to dissent, each
such share of such holder shall be treated as a share that had been converted
as of the Effective Time into the right to receive the Merger Consideration,
without interest, in accordance with Section 1.05(b).
Section 1.07. Treatment of Options.
(a) Pursuant to the Merger, at the Effective Time, each outstanding
option to purchase shares of Industrial Scientific Common Stock (an
"Industrial Scientific Stock Option"), other than those held by Kenton E.
McElhattan and Kent D. McElhattan, whether or not vested, will be
terminated and, in exchange for such Industrial Scientific Stock Option,
the holder will be entitled to receive, for each share of Industrial
Scientific Common Stock subject to such Industrial Scientific Stock Option,
a cash payment equal to the excess, if any, of the Merger Consideration
over the applicable exercise price.
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<PAGE>
(b) Prior to the Effective Time, Industrial Scientific shall use its
best efforts to (i) obtain any consents from holders of the options and
(ii) make any amendments to the terms of the Industrial Scientific Stock
Option Plan and any options granted thereunder that, in case of either (i)
or (ii), are necessary or appropriate to give effect to the transactions
contemplated by this Section 1.07. Notwithstanding any other provisions of
this Section 1.07, payment in respect of any options may be withheld until
necessary consents are obtained.
Section 1.08. Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Industrial Scientific
shall appoint a bank or trust company to act as exchange agent (the
"Exchange Agent") for the payment of the Merger Consideration. As of the
Effective Time, Industrial Scientific shall have deposited with the
Exchange Agent, for the benefit of the holders of shares of Industrial
Scientific Common Stock, for exchange in accordance with this Section 1.08,
the aggregate amount of cash payable pursuant to Section 1.05(b) hereof in
exchange for outstanding shares of Industrial Scientific Common Stock (the
"Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective Time, the Exchange
Agent shall mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented outstanding
shares of Industrial Scientific Common Stock whose shares were converted
into the right to receive cash pursuant to Section 1.05(b) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the certificates representing such shares of
Industrial Scientific Common Stock shall pass, only upon delivery of the
certificates representing such shares of Industrial Scientific Common Stock
to the Exchange Agent and shall be in such form and have such other
provisions as the Exchange Agent may reasonably specify), and instructions
for use in effecting the surrender of the certificates representing such
shares of Industrial Scientific Common Stock, in exchange for the Merger
Consideration. Upon surrender to the Exchange Agent of a certificate or
certificates representing shares of Industrial Scientific Common Stock and
acceptance thereof by the Exchange Agent, the holder thereof shall be
entitled to the amount of cash into which the number of shares of
Industrial Scientific Common Stock previously represented by such
certificate or certificates surrendered shall have been converted pursuant
to this Agreement. The Exchange Agent shall accept such certificates upon
compliance with such reasonable terms and conditions as the Exchange Agent
may impose to effect an orderly exchange thereof in accordance with normal
exchange practices. After the Effective Time, there shall be no further
transfer on the records of Industrial Scientific or its transfer agent of
certificates representing shares of Industrial Scientific Common Stock and
if such certificates are presented to Industrial Scientific for transfer,
they shall be canceled against delivery of the Merger Consideration
allocable to the shares of Industrial Scientific Common Stock represented
by such certificate or certificates. If any Merger Consideration is to be
remitted to a name other than that in which the certificate for the
Industrial Scientific Common Stock surrendered for exchange is registered,
it shall be a condition of such exchange that the certificate so
surrendered shall be properly endorsed, with signature guaranteed, or
otherwise in proper form for transfer and that the person requesting such
exchange shall pay to Industrial Scientific, or its transfer agent, any
transfer or other taxes required by reason of the payment of the Merger
Consideration to a name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of Industrial
Scientific or its transfer agent that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 1.08 each
certificate for shares of Industrial Scientific Common Stock shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration allocable to the
shares represented by such certificate as contemplated by Section 1.05(b).
No interest will be paid or will accrue on any amount payable as Merger
Consideration. Subject to completion of the documentation referred to
above, the Merger Consideration shall be paid at the Effective Time to
holders of Industrial Scientific Common Stock.
(c) No Further Ownership Rights in Industrial Scientific Stock. The
Merger Consideration paid upon the surrender for exchange of certificates
representing shares of Industrial Scientific Common
A-4
<PAGE>
Stock in accordance with the terms of this Section 1.08 shall be deemed to
have been paid in full satisfaction of all rights pertaining to the shares
of Industrial Scientific Common Stock represented by such certificates.
(d) Termination of Exchange Fund. Any portion of the Exchange Fund
(including any interest and other income received by the Exchange Agent in
respect of all such funds) which remains undistributed to the holders of
the certificates representing shares of Industrial Scientific Common Stock
for six months after the Effective Time shall be delivered to the Surviving
Corporation, upon demand, and any holders of shares of Industrial
Scientific Common Stock prior to the Merger who have not theretofore
complied with this Section 1.08 shall thereafter look only to the Surviving
Corporation and only as general creditors thereof for payment of their
claim for Merger Consideration to which such holders may be entitled.
(e) No Liability. No party to this Agreement shall be liable to any
Person (as hereinafter defined) in respect of any amount from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. The term "Person" means any individual,
corporation, partnership, trust or unincorporated organization or a
government or any agency or political subdivision thereof.
(f) Lost Certificates. In the event any certificate or certificates
representing shares of Industrial Scientific Common Stock shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by
the Person claiming such certificate or certificates to be lost, stolen or
destroyed, the Exchange Agent will issue in exchange for such lost, stolen
or destroyed certificate the Merger Consideration deliverable in respect
thereof as determined in accordance with this Section 1.08; provided that
the Person to whom the Merger Consideration is paid shall, as a condition
precedent to the payment thereof, indemnify the Surviving Corporation in an
amount reasonably satisfactory to it against any claim that may be made
against the Surviving Corporation with respect to the certificate claimed
to have been lost, stolen or destroyed.
(g) Withholding Rights. The Surviving Corporation and the Exchange Agent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Common Stock
such amounts as the Surviving Corporation or the Exchange Agent is required
to deduct and withhold with respect to the making of such payment under the
United States Internal Revenue Code of 1986, as amended (the "Code"), or
any provision of state, local or foreign tax law. To the extent that
amounts are so withheld by the Surviving Corporation or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to the holder of the shares of Common Stock in respect
of which such deduction and withholding was made by the Surviving
Corporation or the Exchange Agent.
Section 1.09. Legal Requirements for Merger.
(a) Acquisition will take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on Acquisition
with respect to the Merger and will promptly cooperate with and furnish
information to Industrial Scientific in connection with any such
requirements imposed upon Industrial Scientific in connection with the
Merger.
(b) Industrial Scientific will take all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on it with
respect to the Merger and will promptly cooperate with and furnish
information to Acquisition in connection with the Merger.
Section 1.10. Additional Agreements and Provisions. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its best
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the
A-5
<PAGE>
Effective Time (as hereinafter defined) any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either Industrial Scientific or Acquisition, the
proper officers and directors of each corporation that is a party to this
Agreement shall take all such necessary action. The parties hereto agree to use
their respective best efforts to challenge any action brought against any of
the parties hereto seeking a temporary restraining order or preliminary or
permanent injunctive relief which would prohibit, or materially interfere with,
the consummation of the transactions contemplated by this Agreement.
ARTICLE II
Representations and Warranties of Industrial Scientific
Industrial Scientific represents and warrants to Acquisition as follows:
Section 2.01. Organization of Industrial Scientific and its
Subsidiaries. Industrial Scientific and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has all the requisite corporate
power and authority to carry on its business as now being conducted and to own,
lease, use and operate the properties owned and used by it. Industrial
Scientific and each of its Subsidiaries is qualified and in good standing to do
business in each jurisdiction in which the nature of its business requires it
to be so qualified, except to the extent the failure to be so qualified has not
had, and would not reasonably be expected to have, a Material Adverse Effect.
The term "Material Adverse Effect" means a material adverse effect on the
business, assets, liabilities, results of operations or financial condition of
Industrial Scientific and its Subsidiaries, taken as a whole.
Section 2.02. Capitalization of Industrial Scientific; Ownership. The
authorized capital stock of Industrial Scientific consists of 15,000,000 shares
of Industrial Scientific Common Stock, of which no more than 3,379,037 shares
are issued and outstanding as of the date hereof, and 1,000,000 shares of
Preferred Stock, without par value, of which no shares are issued and
outstanding as of the date hereof. All of the issued and outstanding shares of
capital stock of Industrial Scientific are duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights. Except for
outstanding Industrial Scientific Stock Options to purchase an aggregate of no
more than 52,118 shares of Industrial Scientific Common Stock, there are no
outstanding options, warrants or other rights of any kind to acquire (including
preemptive rights) any additional shares of capital stock of Industrial
Scientific or securities convertible into or exchangeable for, or which
otherwise confer on the holder thereof any right to acquire, any such
additional shares, nor is Industrial Scientific committed to issue any such
option, warrant, right or security. Following the Merger, Industrial Scientific
will have no obligation to issue, transfer or sell any shares of its capital
stock or other securities of Industrial Scientific pursuant to any employee
benefit plan or otherwise.
Section 2.03. Subsidiaries of Industrial Scientific. The only direct or
indirect Subsidiaries of Industrial Scientific are as follows: Industrial
Scientific Devices, Inc.; Industrial Scientific of Delaware, Inc.; Industrial
Scientific Arabia, Ltd.; Industrial Scientific Pty.; HEG Industrial Scientific
Co. Ltd.; and Industrial Scientific PTE Ltd. All outstanding shares of capital
stock or other equity interests of each Subsidiary are owned by Industrial
Scientific (except for Industrial Scientific Arabia, Ltd., 49% of whose shares
are owned by Industrial Scientific, and HEG Industrial Scientific Co. Ltd., 50%
of whose shares are owned by Industrial Scientific) free and clear of any and
all liens, claims, security interests or options, except for restrictions on
transfer under federal and state securities laws. All shares of capital stock
of each Subsidiary which is a corporation have been validly issued and are
fully paid and non-assessable. There are no outstanding options, warrants or
other rights of any kind to acquire (including preemptive rights) any
additional equity interests of any Subsidiary or securities convertible into or
exchangeable for, or which otherwise confer on the holder thereof any right to
acquire, any additional equity interests of any Subsidiary, nor is any
Subsidiary committed to issue any such option, warrant, right or security.
Other than the Subsidiaries referred to in the first sentence of this Section
2.03, Industrial Scientific does not own, directly or indirectly, any equity
interest in any other corporation, joint venture, partnership, limited
liability company or other entity.
A-6
<PAGE>
Section 2.04. Authorization. Industrial Scientific has all requisite
corporate power and authority to enter into this Agreement and, subject to any
necessary approval of the Merger by the shareholders of Industrial Scientific,
to carry out its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action on the part of Industrial Scientific (other
than the approval of this Agreement and the transactions contemplated hereby by
the shareholders of Industrial Scientific). The Board of Directors of
Industrial Scientific has unanimously adopted resolutions approving this
Agreement and the Merger, and has determined that the terms of the Merger are
fair to, and in the best interests of, Industrial Scientific's shareholders
other than Kenton E. McElhattan, Florence L. McElhattan, Kent D. McElhattan and
Acquisition (the "Public Shareholders"). This Agreement has been duly executed
and delivered by Industrial Scientific and, assuming the due authorization,
execution and delivery hereof by Acquisition, constitutes the valid and binding
obligation of Industrial Scientific, enforceable against Industrial Scientific
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally or by general equitable principles.
Section 2.05. Fairness Opinion and Approval by the Special Committee. On or
prior to the date hereof, the Special Committee (i) approved the terms of this
Agreement and the transactions contemplated hereby as they relate to the Public
Shareholders, including without limitation the Merger, (ii) determined that the
Merger is fair to and in the best interest of the Public Shareholders and (iii)
recommended that the Board of Directors of Industrial Scientific approve and
authorize this Agreement and such transactions. The Special Committee has
received an opinion of Ladenburg Thalmann & Co. Inc. to the effect that the
consideration to be received by the Public Shareholders in the Merger is fair
to such shareholders from a financial point of view as of the date hereof.
Section 2.06. Brokers and Finders. Other than Ladenburg Thalmann & Co. Inc.,
neither Industrial Scientific nor any Subsidiary has employed any broker,
finder, advisor or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's
or similar fee or commission in connection therewith or upon the consummation
thereof. Any such fees due to Ladenburg Thalmann & Co. Inc. shall be paid by
Industrial Scientific.
Section 2.07. SEC Documents; Undisclosed Liabilities. Industrial Scientific
has filed all required reports, schedules, forms, statements and other
documents with the Securities and Exchange Commission (the "SEC") since January
1, 1997 (the "SEC Documents"). As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC Documents.
Except to the extent that information contained in any SEC Document has been
revised or superseded by a later filed SEC Document, none of the SEC Documents
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Industrial Scientific included in the
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, in the
case of unaudited statements, as permitted by applicable instructions or
regulations of the SEC relating to the preparation of quarterly reports on
Form10-Q) applied on a consistent basis during the period involved (except as
may be indicated in the notes thereto) and fairly present the financial
position of Industrial Scientific as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
Section 2.08. Absence of Certain Changes or Events. Except as disclosed in
the SEC Documents filed and publicly available prior to the date of this
Agreement, since the date of the most recent audited financial statements
included in the filed SEC Documents, Industrial Scientific has conducted its
business only in the ordinary course, and there has not been any material
change in Industrial Scientific or its business. Since
A-7
<PAGE>
January 1, 1997, Industrial Scientific has not engaged in discussions with any
party other than Acquisition with respect to any material transaction or
transaction that would be deemed a change of control of Industrial Scientific
or such other entity, including, without limitation, the sale of the capital
stock of Industrial Scientific, the merger of Industrial Scientific with
another entity or the acquisition by Industrial Scientific of another entity.
Section 2.09. Information Statement. None of the information to be supplied
by Industrial Scientific for inclusion in the Information Statement on Schedule
14C to be distributed to the Shareholders of Industrial Scientific in
connection with the Merger (the "Information Statement") will, at the time of
the mailing of the Information Statement and any amendments or supplements
thereto, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Information Statement will, as of its effective date,
comply as to form in all material respects with all applicable laws, including
the provisions of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder.
ARTICLE III
Representations and Warranties of Acquisition
Section 3.01. Organization and Authority of Acquisition. Acquisition is a
corporation duly incorporated, validly existing and in good standing under the
laws of the Commonwealth of Pennsylvania.
Section 3.02. Authorization. Acquisition has all corporate power and
authority to enter into this Agreement and to perform its obligations hereunder
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all requisite corporate action
on the part of Acquisition. This Agreement has been duly executed and delivered
by Acquisition and, assuming the due authorization, execution and delivery
hereof by Industrial Scientific, constitutes the valid and binding obligation
of Acquisition, enforceable against Acquisition in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or similar laws affecting creditors' rights
generally or by general equitable principles.
Section 3.03. Brokers and Intermediaries. Other than Parker/Hunter, Inc.,
Acquisition has not employed any broker, finder, advisor or intermediary in
connection with the transactions contemplated by this Agreement which would be
entitled to a broker's, finder's, or similar fee or commission in connection
therewith or upon the consummation thereof. Any such fees due to Parker/Hunter,
Inc. shall be the liability of Acquisition.
Section 3.04. Financing. Acquisition has received indications from a lending
institution that such institution will be prepared to extend the financing
necessary to consummate the Merger.
Section 3.05. Information Statement. None of the information to be supplied
by Acquisition or its shareholders for inclusion in the Information Statement
will, at the time of the mailing of the Information Statement and any
amendments or supplements thereto, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
ARTICLE IV
Certain Covenants and Agreements
Section 4.01. Announcement. Neither Industrial Scientific nor Acquisition
shall issue any press release or otherwise make any public statement with
respect to this Agreement and the transactions contemplated
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<PAGE>
hereby without the prior consent of the other (which consent shall not be
unreasonably withheld), except as may be required by applicable law or stock
exchange regulation. Notwithstanding anything in this Section 4.01 to the
contrary, Acquisition and Industrial Scientific will, to the extent
practicable, consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any such press release or other public
statements with respect to this Agreement and the transactions contemplated
hereby whether or not required by law.
Section 4.02. No Solicitation. From the date of this Agreement to the
Effective Time, Industrial Scientific covenants and agrees that Industrial
Scientific shall not, nor shall it authorize or permit any of its Subsidiaries
or any officer, director, employee, investment banker, attorney or other
adviser or representative of Industrial Scientific or any of its Subsidiaries
("Industrial Scientific Representatives") to, (i) solicit, initiate, or
encourage the submission of, any Acquisition Proposal, (ii) enter into any
agreement with respect to any Acquisition Proposal or (iii) participate in any
discussions or negotiations regarding, or furnish to any Person any information
for the purpose of facilitating the making of, or take any other action to
facilitate any inquiries or the making of, any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal. Without
limiting the foregoing, it is understood that any violation, of which
Industrial Scientific or any of its Subsidiaries had knowledge at the time of
such violation, of the restrictions set forth in the immediately preceding
sentence by any officer, director, employee, investment banker, attorney,
employee, or other adviser or representative of Industrial Scientific or any of
its Subsidiaries, whether or not such Person is purporting to act on behalf of
Industrial Scientific or any of its Subsidiaries or otherwise, shall be deemed
to be a breach of this Section 4.02 by Industrial Scientific. Industrial
Scientific shall promptly advise Acquisition of any Acquisition Proposal and
any inquiries with respect to any Acquisition Proposal. For purposes of this
Agreement, "Acquisition Proposal" means any proposal for a merger or other
business combination involving Industrial Scientific or any of its Subsidiaries
or any proposal or offer to acquire in any manner, directly or indirectly, an
equity interest in Industrial Scientific or any of its Subsidiaries, any voting
securities of Industrial Scientific or any of its Subsidiaries or a substantial
portion of the assets of Industrial Scientific. Notwithstanding the foregoing,
Industrial Scientific, its Subsidiaries and Industrial Scientific
Representatives shall not be obligated to take or refrain from taking any
action pursuant to this Section 4.02 if the Board of Directors of Industrial
Scientific, after consultation with independent legal counsel, determines in
good faith that to take or refrain from taking any such action would result in
a violation of its fiduciary obligations.
Section 4.03. Notification of Certain Matters. Industrial Scientific shall
give prompt notice to Acquisition, and Acquisition shall give prompt notice to
Industrial Scientific, of (a) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time and (b)
any material failure of Industrial Scientific, or Acquisition, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 4.03 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 4.04. Directors' And Officers' Indemnification.
(a) The Articles of Incorporation and the By-laws of the Surviving
Corporation shall contain the provisions with respect to indemnification
and limitation of liability of directors and officers set forth in
Industrial Scientific's Articles of Incorporation and By-laws on the date
of this Agreement, which provisions shall not be amended, repealed or
otherwise modified for a period of six years from the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who
on or prior to the Effective Time were directors or officers of Industrial
Scientific, unless such modification is required by law.
(b) The Surviving Corporation shall maintain in effect for six years
from the Effective Time policies of directors' and officers' liability
insurance containing terms and conditions which are not less advantageous
to the insured than any such policies of Industrial Scientific currently in
effect on the date of
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<PAGE>
this Agreement (the "Industrial Scientific Insurance Policies"), with
respect to matters occurring prior to the Effective Time, to the extent
available, and having the maximum available coverage under any such
Industrial Scientific Insurance Policies; provided, that in no event shall
the Surviving Corporation be required to pay annual premiums for insurance
under this Section 4.04(b) in excess of that which is commercially
reasonable; and provided further, however, that if the annual premiums for
such insurance coverage exceed that which is commercially reasonable, the
Surviving Corporation shall be obligated to obtain a policy with the
greatest coverage at a cost which is commercially reasonable.
Section 4.05. Information Statement and Schedule 13E-3. Industrial
Scientific shall file with the SEC as soon as is reasonably practicable after
the date hereof the Information Statement and shall use all reasonable efforts
to respond to comments from the SEC and to cause the Information Statement to
be mailed to Industrial Scientific's shareholders at the earliest practicable
time. The information provided and to be provided by Industrial Scientific and
Acquisition for use in the Information Statement shall be true and correct in
all material respects without omission of any material fact which is required
to make such information not false or misleading as of the date thereof and in
light of the circumstances under which given or made. Industrial Scientific
will not mail the Information Statement to Industrial Scientific's shareholders
unless it is satisfactory in content to the Special Committee and Acquisition,
in the exercise of their reasonable judgment. As soon as practicable after the
date of this Agreement, Acquisition, its shareholders and Industrial Scientific
shall file with the SEC a Rule 13E-3 Transaction Statement on Schedule 13E-3
("Schedule 13E-3"), with respect to the Merger. Each of the parties hereto
agrees to use its reasonable best efforts to cooperate and to provide each
other with such information as any of such parties may reasonably request in
connection with the preparation of the Schedule 13E-3. Each party hereto agrees
promptly to supplement, update and correct any information provided by it for
use in the Information Statement and Schedule 13E-3 if and to the extent that
such information is or shall have become incomplete, false or misleading.
Section 4.06. Dividends. Prior to the Effective Time, Industrial Scientific
shall not pay any dividends or make any other distributions with respect to the
outstanding shares of Industrial Scientific Common Stock.
ARTICLE V
Conditions Precedent
Section 5.01. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing Date of each of the
following conditions (any of which may be waived by the parties hereto in
writing, in whole or in part, to the extent permitted by applicable law):
(a) No Injunction or Proceeding. No preliminary or permanent injunction,
temporary restraining order or other decree of a court, legislature or
other agency or instrumentality of federal, state or local government (a
"Governmental Entity") shall be in effect, no statute, rule or regulation
shall have been enacted by a Governmental Entity and no action, suit or
proceeding by any Governmental Entity shall have been instituted or
threatened, which prohibits the consummation of the Merger or materially
challenges the transactions contemplated hereby.
(b) Consents. Other than filing the Articles of Merger, all consents,
approvals and authorizations of and filings with Governmental Entities
required for the consummation of the transactions contemplated hereby,
shall have been obtained or effected or filed.
(c) Approval of Holders of Industrial Scientific Common Stock. This
Agreement and the Merger shall have been adopted by the affirmative vote or
written consent of a majority of the shares of Industrial Scientific Common
Stock outstanding.
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<PAGE>
Section 5.02. Conditions to the Obligation of Industrial Scientific to
Effect the Merger. The obligation of Industrial Scientific to effect the Merger
is further subject to the satisfaction or waiver of each of the following
conditions prior to or at the Closing Date:
(a) Representations and Warranties. The representations and warranties
of Acquisition contained in this Agreement shall be true and correct in all
material respects at and as of the Effective Time as though made at and as
of the Effective Time, except to the extent that any such representation or
warranty is made as of a specified date, in which case such representation
and warranty shall have been true and correct in all material respects as
of such date.
(b) Agreements. Acquisition shall have performed and complied in all
material respects with all its undertakings and agreements required by this
Agreement to be performed or complied with by it prior to or at the Closing
Date.
(c) Opinion of Financial Advisor. The opinion of Ladenburg Thalmann &
Co. Inc. referred to in Section 2.05 shall have been confirmed in writing
and such written opinion shall not have been withdrawn or revoked.
(d) Opinion of Counsel for Acquisition. Industrial Scientific shall have
been furnished with an opinion satisfactory to it of Reed Smith Shaw &
McClay LLP, counsel for Acquisition, dated the date of the Closing and
addressed to Industrial Scientific, to the effect that:
(i) Acquisition is a corporation duly incorporated, validly existing
and in good standing under the laws of the Commonwealth of
Pennsylvania;
(ii) The execution, delivery and performance of the Agreement by
Acquisition and the consummation of the Merger have been duly
authorized and approved by all requisite action of Acquisition's Board
of Directors; the Agreement and the Merger have been duly approved by
the shareholders of Acquisition; and the Agreement has been duly
executed and delivered by Acquisition and is a legally valid and
binding obligation of Acquisition enforceable against Acquisition in
accordance with its terms; and
(iii) Upon filing of Articles of Merger with respect to the Merger
in the Department of State of Pennsylvania in accordance with (S)1927
of the PBCL, the Merger shall become effective under the PBCL.
(e) Availability of Funds. Acquisition shall have funds available to it
at the Closing sufficient to pay the Merger Consideration.
Section 5.03. Conditions to the Obligation of Acquisition to Effect the
Merger. The obligation of Acquisition to effect the Merger is further subject
to the satisfaction or waiver of each of the following conditions prior to or
at the Closing Date:
(a) Representations and Warranties. The representations and warranties
of Industrial Scientific contained in this Agreement shall be true and
correct in all material respects at and as of the Effective Time as though
made at and as of the Effective Time, except to the extent that any such
representation or warranty is made as of a specified date, in which case
such representation or warranty shall have been true and correct in all
material respects as of such date.
(b) Agreements. Industrial Scientific shall have performed and complied
in all material respects with all of its undertakings and agreements
required by this Agreement to be performed or complied with by it prior to
or at the Closing Date.
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<PAGE>
(c) No Material Adverse Change. Except as set forth in the Industrial
Scientific SEC Reports filed on or prior to the date of this Agreement,
since December 31, 1997 there shall have been no material adverse change in
the business, assets, liabilities, results of operations or financial
condition of Industrial Scientific and its Subsidiaries, taken as a whole.
(d) Opinion of Counsel for Industrial Scientific. Acquisition shall have
been furnished with an opinion satisfactory to it of Buchanan Ingersoll
Professional Corporation, counsel for Industrial Scientific, dated the date
of the Closing and addressed to Acquisition, to the effect that:
(i) Industrial Scientific is a corporation duly incorporated,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania;
(ii) Industrial Scientific's capital stock consists of the numbers
of authorized, issued and outstanding shares of capital stock set forth
in Section 2.02;
(iii) Except for outstanding Industrial Scientific Stock Options to
purchase an aggregate of not more than 52,118 shares of Industrial
Scientific Common Stock, there are no outstanding options, warrants or
other rights of any kind to acquire (including preemptive rights) any
additional shares of capital stock of Industrial Scientific or
securities convertible into or exchangeable for, or which otherwise
confer on the holder thereof any right to acquire, any such additional
shares, nor is Industrial Scientific committed to issue any such
option, warrant, right or security;
(iv) The execution, delivery and performance of the Agreement by
Industrial Scientific, and the consummation of the Merger, have each
been duly authorized and approved by all requisite action of Industrial
Scientific's Board of Directors; the Agreement and the Merger have been
duly approved by the shareholders of Industrial Scientific; and the
Agreement has been duly executed and delivered by Industrial Scientific
and is a legally valid and binding obligation of Industrial Scientific
enforceable against Industrial Scientific in accordance with its terms;
and
(v) Upon filing of Articles of Merger with respect to the Merger in
the Department of State of Pennsylvania in accordance with (S)1927 of
the PBCL, the Merger shall become effective under the PBCL.
ARTICLE VI
Termination, Amendment and Waiver
Section 6.01. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after shareholder approval thereof:
(a) by the mutual written consent of Acquisition, by action of its Board
of Directors, and the Special Committee on behalf of Industrial Scientific;
(b) by either Acquisition, by action of its Board of Directors, or the
Special Committee on behalf of Industrial Scientific, if:
(i) the Merger has not been consummated on or prior to June 30,
1999; provided, however, that the right to terminate this Agreement
under this Section 6.01(b)(i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Merger to occur on or
prior to such date; or
(ii) the Special Committee shall have withdrawn, or modified or
changed in any manner adverse to Acquisition its approval of this
Agreement or the Merger after having concluded in good faith after
A-12
<PAGE>
consultation with independent legal counsel that there is a reasonable
probability that the failure to take such action would result in a
violation of its fiduciary obligations under applicable law.
Section 6.02. Effect of Termination. In the event of the termination of this
Agreement as provided in Section 6.01, written notice thereof shall forthwith
be given by the terminating party or parties to the other party or parties
specifying the provision hereof pursuant to which such termination is made, and
this Agreement shall forthwith become null and void, and there shall be no
liability on the part of Acquisition or Industrial Scientific (except as set
forth in this Section 6.02 and Section 7.02 hereof, each which shall survive
any termination of this Agreement); provided that nothing herein shall relieve
any party from any liability or obligation with respect to any willful breach
of this Agreement.
Section 6.03. Amendment. This Agreement may be amended in writing by the
parties hereto; provided, however, that after adoption of this Agreement and
the Merger by the shareholders of Industrial Scientific no such amendment may
be made without the further approval of the shareholders of Industrial
Scientific except to the extent permitted by the PBCL. Notwithstanding the
foregoing, any amendment of this Agreement on behalf of Industrial Scientific
shall be subject to the approval of the Board of Directors of Industrial
Scientific upon the recommendation of the Special Committee.
Section 6.04. Waiver. At any time prior to the Effective Time, whether
before or after the approval of holders of Industrial Scientific Common Stock
referred to in Section 5.01(c) hereof, Acquisition, by action taken by its
Board of Directors, or Industrial Scientific, by action taken by its Board of
Directors upon the recommendation of the Special Committee, may (i) extend the
time for the performance of any of the obligations or other acts of any other
party hereto or (ii) waive compliance with any of the agreements of any other
party or with any conditions to its own obligations. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party by a duly
authorized officer.
ARTICLE VII
Miscellaneous
Section 7.01. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time and all such
representations and warranties will be extinguished on consummation of the
Merger and neither Acquisition, Industrial Scientific, any Subsidiary, nor any
officer, director or employee or stockholder shall be under any liability
whatsoever with respect to any such representation or warranty after such time.
This Section 7.01 shall not limit any covenant or agreement of the parties
which by its terms contemplates performance after the Effective Time.
Section 7.02. Expenses. Except as contemplated by this Agreement, all costs
and expenses incurred in connection with the Agreement and the consummation of
the transactions contemplated hereby shall be the obligation of the party
incurring such expenses. All costs and expenses incurred by Acquisition in
connection with the Agreement and the consummation of the transactions
contemplated hereby shall, after the Effective Time, be obligations of the
Surviving Corporation.
Section 7.03. Applicable Law. The rights and duties of Acquisition and
Industrial Scientific under this Agreement shall be governed by the law,
excluding conflicts of law rules, of the Commonwealth of Pennsylvania.
Section 7.04. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given or made as follows:
(a) if sent by registered or certified mail in the United States return receipt
requested, upon receipt; (b) if sent by reputable overnight air courier, two
business days
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<PAGE>
after being so sent; (c) if sent by telecopy transmission, with a copy mailed
on the same day in the manner provided in clauses (a) or (b) above, when
transmitted and receipt is confirmed by telephone; or (d) if otherwise actually
personally delivered, when delivered and shall be sent or delivered as follows:
If to Industrial Scientific, to:
James P. Hart
Vice President, Finance and Chief Financial Officer
Industrial Scientific Corporation
1001 Oakdale Road
Oakdale, PA 15071-1500
Fax: (412) 788-8353
with a copy to:
James J. Barnes, Esq.
Buchanan Ingersoll Professional Corporation
One Oxford Centre
301 Grant Street
Pittsburgh, PA 15219-1410
Fax (412) 562-1041
and
Joseph D. Shuman, Esq.
Thorp Reed & Armstrong
One Riverfront Center
20 Stanwix Street
Pittsburgh, PA 15222-4895
Fax (412) 394-2555
If to Acquisition, to:
Kent D. McElhattan
President
c/o Industrial Scientific Corporation
1001 Oakdale Road
Oakdale, PA 15071-1500
Fax: (412) 788-8353
with a copy to:
Robert K. Morris, Esq.
Reed Smith Shaw & McClay LLP
435 Sixth Avenue
Pittsburgh, PA 15219
Fax (412) 288-3063
Such names and addresses may be changed by such notice.
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<PAGE>
Section 7.05. Entire Agreement. This Agreement (including the documents and
instruments referred to herein) contains the entire understanding of the
parties hereto with respect to the subject matter contained herein, supersedes
and cancels all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, respecting such subject
matter.
Section 7.06. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
Section 7.07. Headings; References. The article, section and paragraph
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. All
references herein to "Articles" or "Sections" shall be deemed to be references
to Articles or Sections hereof unless otherwise indicated.
Section 7.08. Counterparts. This Agreement may be executed in one or more
counterparts, each counterpart shall be deemed to be an original but all of
which shall be considered one and the same agreement.
Section 7.09. No Third Party Beneficiaries. Except as provided in Sections
1.07, 1.08 and 4.04, nothing in this Agreement, express or implied, is
intended to confer upon any Person not a party to this Agreement any rights or
remedies under or by reason of this Agreement.
Section 7.10. Severability; Enforcement. Any term or provision of this
Agreement that is invalid or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
unenforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provisions shall be interpreted to be only so broad as is
enforceable.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
INDUSTRIAL SCIENTIFIC CORPORATION
By: /s/ Kent D. McElhattan
----------------------------
Name: Kent D. McElhattan
Title: President
ISC ACQUISITION CORPORATION
By: /s/ Kent D. McElhattan
----------------------------
Name: Kent D. McElhattan
Title: President
A-15
<PAGE>
ENDORSEMENT
The undersigned, Kenton E. McElhattan, Florence L. McElhattan and Kent D.
McElhattan, hereby represent, warrant, covenant and agree as follows:
(a) The undersigned are the holders of record of the number of shares of
Industrial Scientific Common Stock listed below:
<TABLE>
<S> <C>
Kenton E. McElhattan 668,960
Florence L. McElhattan 750,000
Kent D. McElhattan 869,640
</TABLE>
(b) The undersigned will, on the date hereof, execute and deliver an Action
by Written Consent of Shareholders of Industrial Scientific Corporation: (i)
approving the Agreement and the Merger; (ii) approving an amendment to the
Articles of Incorporation of Industrial Scientific Corporation providing that
Title 15 of Pennsylvania Consolidated Statutes, Chapter 25 (Registered
Corporations) Subchapter E (Control Transactions), 15 Pa.C.S.A. (S)(S)2541-
2548, shall not be applicable to Industrial Scientific.
(c) The undersigned will, promptly after effectiveness of the amendment to
the Articles of Incorporation of Industrial Scientific Corporation referred to
in paragraph (b) above, contribute to the capital of Acquisition the shares of
Industrial Scientific Common Stock referred to in paragraph (a) above.
/s/ Kenton E. McElhattan
---------------------------------
Kenton E. McElhattan
/s/ Florence L. McElhattan
---------------------------------
Florence L. McElhattan
/s/ Kent D. McElhattan
---------------------------------
Kent D. McElhattan
A-16
<PAGE>
EXHIBIT B
Opinion of Ladenburg Thalmann & Co. Inc.
February 23, 1999
The Special Committee of the Board of Directors
Industrial Scientific Corporation
1001 Oakdale Road
Oakdale, Pennsylvania 15071
Gentlemen:
You have engaged us pursuant to an engagement letter, dated December 7, 1998
(the "Engagement Letter") between the Special Committee of the Board of
Directors (the "Committee") of Industrial Scientific Corporation (the
"Company"), the Company and Ladenburg Thalmann & Co. Inc. ("Ladenburg"). You
have requested our opinion (the "Opinion") as to whether or not the
consideration to be received by the shareholders of the Company (other than the
Majority Shareholders and their Affiliates, as those terms are defined below)
in connection with the purchase by merger of the common stock, par value $.01
per share, of the Company ("Company Common Stock") by ISC Acquisition Corp.
("Acquisition Corp."), a corporation wholly-owned by Kenton E. McElhattan, Kent
D. McElhattan, and Florence L. McElhattan (the "Majority Shareholders") is
fair, from a financial point of view, to the shareholders of the Company other
than Acquisition Corp., the Majority Shareholders and certain members of their
immediate families and certain family trusts (the "Affiliates").
The Merger Agreement dated as of February 23, 1999, provides, among other
things, that Acquisition Corp. will merge with and into the Company, with all
holders of the Company Common Stock other than the Majority Shareholders, the
Affiliates and Acquisition Corp. receiving $28.50 per share in cash (the
"Consideration") for their shares of Nonaffiliated Stock. For purposes of this
Opinion, "Nonaffiliated Stock" refers to shares of Company Common Stock not
held by the Majority Shareholders, the Affiliates or Acquisition Corp.
In arriving at our Opinion, we reviewed and considered such information as
we deemed necessary or appropriate for the purposes of stating our opinion
including (i) drafts, in the forms furnished to us by representatives of the
Company, of the Merger Agreement; (ii) certain business and financial
information relating to the Company, provided by the Company, including the
financial condition and results of operations of the Company, the historical
financial performance, and certain projected financial information provided by
the Company; (iii) certain public filings made by the Company with the
Securities and Exchange Commission; and (iv) to the extent publicly available,
certain market trading data and historical trading performance of securities of
the Company. In addition, we conducted such other analyses and examinations and
reviewed and considered such other financial, economic and market data as we
deemed appropriate in arriving at our Opinion. We also met with members of
senior management of the Company to discuss, among other things, the historical
and prospective industry environment, financial conditions and operating
results for the Company and the reasons for the proposed transaction (the
"Transaction"). We note that two of the Majority Shareholders are members of
the Company's Board of Directors and senior management of the Company and as
such may be deemed to have a conflict of interest in these matters.
In conducting our analysis, we have assumed and relied upon the accuracy and
completeness of all financial and other material furnished to us by the
Company, including the industry in which the Company
<PAGE>
operates and the competition in that industry. We have relied upon counsel to
the Special Committee of the Board of Directors and counsel to the Company as
to all legal matters regarding the Transaction including the process undertaken
by the Special Committee in connection with its consideration of the
Transaction. We have not attempted to independently verify the information
provided to us by the Company. We have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Company. We were not authorized to, and did not, solicit
third party indications of interest in acquiring all of part of the Company,
and we were not asked to consider, and our Opinion does not address, the
consideration the Company or its shareholders might receive from another third-
party purchaser, the relative merits of the Transaction as compared to any
alternative business strategies that might exist for the Company or the effect
of any other transaction in which the Company might engage. We were not
requested to and did not analyze or give any effect to the impact of any
federal, state or local income taxes to the Company's shareholders arising out
of the Transaction. Although we evaluated the consideration to be received by
the shareholders of the Company, we were not requested to, and did not,
participate in the negotiation of the Merger Agreement. In our analyses we made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, based on, among
other things, information provided to us by the Company, many of which are
beyond the control of the Company. Any estimates and/or projections contained
on our analyses are not necessarily indicative of actual values or actual
results, as applicable, which may be significantly more or less favorable than
as set forth therein. The actual future performance on the Company may vary
substantially from such projections. Our opinions are necessarily based upon
information available to us, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
In conducting our investigation and analyses and in arriving at our Opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including: (i) a market multiples analysis based upon historical revenues,
operating earnings, net income and capitalization of the Company and certain
other publicly held companies in businesses we believe to be comparable to the
Company's; (ii) acquisition multiples that have historically been paid for
other companies in businesses we believe to be comparable to the Company's;
(iii) a takeover premium analysis examining the premiums paid in the purchase
of common stock for companies of comparable size to the Company; (iv) the
current financial and market position and results of operations of the Company;
and (v) a discounted cash flow analysis.
We have assumed, with the consent of the Company, that this transaction will
comply with all applicable United States federal, state and local laws and will
not result in the breach or cancellation of any contracts material to the
Company.
As part of our investment banking services, we are regularly engaged in the
valuation of business and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate or other purposes. We
have been retained by the Company to provide this opinion and have received
fees and indemnification against certain liabilities for the services rendered
pursuant to this engagement.
In the ordinary course of business, we actively trade securities for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in the debt or equity securities of the Company.
It is understood that this letter is for the information of the Special
Committee to the Board of Directors of the Company in connection with the
proposed Transaction, does not constitute a recommendation to any director as
to how such director should vote on the proposed Transaction and is not to be
quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other document or filing, nor shall
this letter be used for any other purpose, without our prior written consent,
except that the opinion may be summarized in, or reproduced in full as part of,
a disclosure document prepared in connection with or otherwise describing the
Transaction.
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<PAGE>
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration is fair, from a financial point of view, to the
holders of Nonaffiliated Stock.
Very truly yours,
LADENBURG THALMANN & CO. INC.
-3-
<PAGE>
EXHIBIT C
Part I, Chapter 15, Subchapter D
of the
Pennsylvania Business Corporation Law of 1988, as amended
(S) 1571 APPLICATION AND EFFECT OF SUBCHAPTER.--(a) General rule.--Except
as otherwise provided in subsection (b), any shareholder of a business
corporation shall have the right to dissent from, and to obtain payment of the
fair value of his shares in the event of, any corporate action, or to
otherwise obtain fair value for his shares, where this part expressly provides
that a shareholder shall have the rights and remedies provided in this
subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 193 1(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--(1) Except as otherwise provided in paragraph (2), the
holders of the shares of any class or series of shares that, at the record
date fixed to determine the shareholders entitled to notice of and to vote at
the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c)
or 1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders; shall not have the
right to obtain payment of the fair value of any such shares under
this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles, the
plan or the terms of the transaction entitle all shareholders of
the class to vote thereon and require for the adoption of the plan
or the effectuation of the transaction the affirmative vote of a
majority of the votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares, property
or assets of another corporation by the issuance of shares, obligations or
otherwise, with or without assuming the liabilities of the other corporation
and with or without the intervention of another corporation or other person,
shall not be entitled to the rights and remedies of dissenting shareholders
provided in this subchapter regardless of the fact, if it be the case, that
the acquisition was
<PAGE>
accomplished by the issuance of voting shares of the corporation to be
outstanding immediately after the acquisition sufficient to elect a majority or
more of the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholder to dissenters rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the shareholders
have a right to dissent and obtain payment of the fair value of their shares by
complying with the terms of this subchapter, and
(2) A copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure). (Last amended by Act 198,
L. '90, eff. 12-19-90.)
(S) 1572 DEFINITIONS.--The following words and phrases when used in this
subchapter shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation for
the purposes of this subchapter. The successor corporation in a division shall
have sole responsibility for payments to dissenters and other liabilities under
this subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects, taking into account all
relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors, including the average
rate currently paid by the corporation on its principal bank loans. ( Last
amended by Act 198, L. '90, eff. 12-19-90.)
(S) 1573 RECORD AND BENEFICIAL HOLDERS AND OWNERS.--(a) Record holders of
shares.--A record holder of shares of a business corporation may assert
dissenters rights as to fewer than all of the shares registered in his name
only if he dissents with respect to all the shares of the same class or series
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf he dissents. In that event, his rights shall
be determined as if the shares as to which he has dissented and his other
shares were registered in the names of different shareholders.
<PAGE>
(b) Beneficial owners of shares.--A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner,
whether or not the shares so owned by him are registered in his name. (Last
amended by Act 169, L. '92, eff. 2-16-93.)
1574 NOTICE OF INTENTION TO DISSENT.--If the proposed corporate action is
submitted to a vote at a meeting of shareholders of a business corporation, any
person who wishes to dissent and obtain payment of the fair value of his shares
must file with the corporation, prior to the vote, a written notice of
intention to demand that he be paid the fair value for his shares if the
proposed action is effectuated, must effect no change in the beneficial
ownership of his shares from the date of such filing continuously through the
effective date of the proposed action and must refrain from voting his shares
in approval of such action. A dissenter who fails in any respect shall not
acquire any right to payment of the fair value of his shares under this
subchapter. Neither a proxy nor a vote against the proposed corporate action
shall constitute the written notice required by this section.
(S) 1575 NOTICE TO DEMAND PAYMENT.--(a) General rule.--If the proposed
corporate action is approved by the required vote at a meeting of shareholders
of a business corporation, the corporation shall mail a further notice to all
dissenters who gave due notice of intention to demand payment of the fair value
of their shares and who refrained from voting in favor of the proposed action.
If the proposed corporate action is to be taken without a vote of shareholders,
the corporation shall send to all shareholders who are entitled to dissent and
demand payment of the fair value of their shares a notice of the adoption of
the plan or other corporate action. In either case, the notice shall:
(1) State where and when a demand for payment must be sent and certificates
for certificated shares must be deposited in order to obtain payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.
(S) 1576 FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC.--(a) Effect
of failure of shareholder to act.--A shareholder who fails to timely demand
payment, or fails (in the case of certificated shares) to timely deposit
certificates, as required by a notice pursuant to section 1575 (relating to
notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restriction under the terms of section
1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of shareholder until those rights are modified by effectuation of the
proposed corporate action. (Last amended by Act 198, L. '90, eff. 12-19-90.)
<PAGE>
(S) 1577 RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES.--(a) Failure to
effectuate corporate action.--Within 60 days after the date set for demanding
payment and depositing certificates, if the business corporation has not
effectuated the proposed corporate action, it shall return any certificates
that have been deposited and release uncertificated shares from any transfer
restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment.--When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance
under this section will be made. The remittance or notice shall be accompanied
by:
(1) The closing balance sheet and statement of income of the issuer of the
shares held or owned by the dissenter for a fiscal year ending not more than 16
months before the date of remittance or notice together with the latest
available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or supplemental
payment, as the case may be, accompanied by a copy of this subchapter.
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter had
after making demand for payment of their fair value. (Last amended by Act 198,
L. '90, eff. 12-19-90.)
(S) 1578 ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES.--(a) General rule.--
If the business corporation gives notice of its estimate of the fair value of
the shares, without remitting such amount, or remits payment of its estimate of
the fair value of a dissenter's shares as permitted by section 1577(c)
(relating to payment of fair value of shares) and the dissenter believes that
the amount stated or remitted is less than the fair value of his shares, he may
send to the corporation his own estimate of the fair value of the shares, which
shall be deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the
corporation. (Last amended by Act 198, L. '90, eff. 12-19-90.)
(S) 1579 VALUATION PROCEEDINGS GENERALLY.--(a) General Rule.--Within 60 days
after the latest of:
(1) Effectuation of the proposed corporate action;
<PAGE>
(2) Timely receipt of any demands for payment under section 1575 (relating
to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating to
estimate by dissenter of fair value of shares);
If any demands for payment remain unsettled, the business corporation may
file in court an application for relief requesting that the fair value of the
shares be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa. C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found
to exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the corporation
fails to file an application as provided in subsection (a), any dissenter who
made a demand and who has not already settled his claim against the corporation
may do so in the name of the corporation at any time within 30 days after the
expiration of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid the corporation's estimate of the fair value of the shares and no more,
and may bring an action to recover any amount not previously remitted.
(S) 1580 COSTS AND EXPENSES OF VALUATION PROCEEDINGS.--(a) General rule.--
The costs and expenses of any proceeding under section 1579 (relating to
valuation proceedings generally), including the reasonable compensation and
expenses of the appraiser appointed by the court, shall be determined by the
court and assessed against the business corporation except that any part of the
costs and expenses may be apportioned and assessed as the court deems
appropriate against all or some of the dissenters who are parties and whose
action in demanding supplemental payment under section 1578 (relating to
estimate by dissenter of fair value of shares) the court finds to be dilatory,
obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective
parties may be as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in
respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of
the amounts awarded to the dissenters who were benefited.
<PAGE>
EXHIBIT D
The Company's March 10, 1999, Earnings Release Describing its Fourth
Quarter Results of Operations
NEWS RELEASE
Date:March 10, 1999
Release:Immediate
Contact:James P. Hart, Vice President Finance
Chief Financial Officer (412-490-1843)
INDUSTRIAL SCIENTIFIC CORPORATION ANNOUNCES FISCAL 1998 RESULTS
PITTSBURGH, PA--Industrial Scientific Corporation (NASDAQ/NMS symbol: ISCX)
today reported results for fiscal year 1998 and the fourth quarter ended
January 30, 1999.
For fiscal year 1998 net sales were $44,632,000 compared to $40,865,000 for
fiscal 1997, an increase of $3.8 million or 9.2%. Net income for 1998 totaled
$7,012,000 ($2.13 per share) compared to $6,002,000 ($1.80 per share) for
1997, an increase of 16.8%. Net income for fiscal 1997 included a $377,000
non-recurring gain from the sale of Monitor Group. Net income excluding this
gain increased 24.7%.
For the fourth quarter 1998, net sales totaled $11,529,000 compared to net
sales for the fourth quarter 1997 of $10,416,000, an increase of 10.7%. Net
income for the fourth quarter 1998 totaled $2,066,000 ($0.63 per share)
compared to $1,715,000 ($0.52 per share) for the fourth quarter 1997, an
increase of 20.5%. Fourth quarter 1998 included net sales of $382,00 and net
income of $236,000 relating to the conclusion of a supply contract which
included a trade-in allowance. Under this supply contract, Industrial
Scientific invoiced shipments during the first three quarters of fiscal 1998
at a discounted price, based on contractual requirements that the customer
would return as many competitor units as purchased. The contract stipulated
that any shortfall in the number of returned units would be invoiced by
Industrial Scientific in January 1999. Excluding this adjusting invoice, net
sales increased 7.0% and net income increased 6.7% in the fourth quarter 1998
compared to the fourth quarter 1997.
Headquartered in Oakdale, Pennsylvania, Industrial Scientific Corporation
designs, manufactures and sells gas monitoring instruments and other technical
products for the preservation of life and property. As previously announced,
the Company has entered into a merger agreement with ISC Acquisition
Corporation a newly formed entity wholly owned by the Company's majority
shareholders. As a result of this merger, all shares not owned by the Majority
Shareholders or certain of their affiliates will be purchased for $28.50 per
share.
Details concerning this transaction will be contained in an information
statement to be mailed to Company shareholders.
D-1
<PAGE>
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Twelve months
ended ended
----------------- -----------------
01/30/99 01/31/98 01/30/99 01/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................. $11,529 $10,416 $44,632 $40,865
Gross profit............................... 6,729 6,102 26,035 23,028
Operating profit........................... 2,855 2,183 9,655 7,506
Net income................................. 2,066 1,715 7,012 6,002
Net income per basic common share:
Basic earnings per share................. $ 0.63 $ 0.52 $ 2.13 $ 1.80
Weighted average shares--basic........... 3,277 3,305 3,290 3,334
Net income per diluted common share:
Diluted earnings per share............... $ 0.63 $ 0.52 $ 2.12 $ 1.80
Weighted average shares--diluted......... 3,290 3,315 3,304 3,340
</TABLE>
D-2
