ITEM 1. BUSINESS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K, specifically those contained in Item 1 "Business" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation," and statements incorporated by reference into this Form 10-K from the 1997 Annual Report to Shareholders, along with statements in other reports filed with the Securities and Exchange Commission, external documents and oral presentations, which are not historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent Industrial Scientific Corporation's (the "Company") present expectations or beliefs concerning future events. The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Results actually achieved may differ materially from expected results included in these statements. Those factors which specifically related to the Company's business include the following: rapid technological change along with the need to continually develop new products; risks of product liability claims; competition; dependence on key employees; management of Company's growth; dependence on certain customers; dependence on one key supplier for toxic and oxygen sensors; proprietary rights and risks of third party claims of infringement; government regulation and risks associated with international business operations, including foreign currency fluctuations, tariffs, trade barriers, foreign taxes, repatriation of earnings and the burden of complying with foreign laws and regulations.
Overview
Industrial Scientific Corporation designs, manufactures, markets, and services instruments for detecting, measuring and monitoring a wide variety of gases, including toxic and combustible gases and oxygen, to protect and preserve human life. The Company's gas monitoring instruments are used by individuals for safety and industrial hygiene purposes in many different industries, often in confined spaces posing risks of asphyxiation, poisoning and explosion. Each instrument detects, measures and monitors gases singly or in combination, including oxygen, carbon monoxide, hydrogen sulfide, chlorine, nitrogen dioxide, sulfur dioxide and flammable hydrocarbons such as methane (natural gas), hexane and propane. The Company also manufactures and markets various instrument accessories such as sampling pumps, external warning devices and battery chargers.
Industrial Scientific Corporation was incorporated in Pennsylvania in 1985. Its principal offices are located at 1001 Oakdale Road, Oakdale, Pennsylvania, 15071. Its telephone number is 412-788-4353.
Gas Monitoring Instruments
The Company manufactures gas monitoring instruments ranging from single-gas to four-gas portable monitors. All but two of the Company's instruments continuously monitor, rather than spot-check, gases during their period of use. Audible and visual alarms are included in each instrument and are activated if gases reach specified limits. The Company's instruments are designed for ruggedness and shock resistance. In addition, the instruments are designed to eliminate erratic readings and false alarms from radio frequency interference ("RFI"). All of the instruments are designed to function for at least an entire 10-hour shift without battery recharging or replacement. Generally, single-gas toxic or oxygen monitors use alkaline batteries which last from 1,300 to 2,400 hours. Combustible gas monitors, which require higher power, generally have rechargeable battery packs. Multiple-gas monitors also generally use rechargeable battery packs since combustible gas sensors are commonly included in these monitors. Accurate measurement of gas concentrations is a basic requirement of gas monitors. The Company's products combine sensors with proprietary circuitry designed by the Company for accurate and consistent performance across a broad range of temperatures and humidities.
The Company also sells replacement sensors, other replacement parts and a full line of accessories for its gas monitoring instruments. These accessories include sampling pumps and probes (for remote monitoring prior to entry), battery chargers, carrying cases, calibration kits and gases and external alarm devices. Sales of gas monitoring instruments, accessories, replacement parts and service accounted for 97%, 97% and 98% of the Company's net sales for fiscal years 1995, 1996, and 1997.
Other Products
In addition to its gas monitoring instruments and accessories, the Company manufactures and sells Lifeline--air filtration and monitoring products which filter compressed air and monitor carbon monoxide levels; conveyor belt fire detection systems for unmanned areas in coal mines; water deluge systems triggered by heat sensors; and carbon monitoring systems for enclosed areas such as coal preparation storage areas, parking garages and motor pools. Sales of these products accounted for 3%, 3% and 2% of the Company's net sales for fiscal years 1995, 1996, and 1997.
Recent Acquisitions
In 1997, the Company invested $350,000 in HEG Industrial Scientific Company Limited to establish a joint venture in Harbin, China. This joint venture will design, manufacture and sell gas monitoring products for the Chinese market. This investment is accounted for using the equity method.
In February 1996, the Company invested $267,000 in Industrial Scientific Arabia Limited, a joint venture with a Saudi Arabian partner. This joint venture provides service and promotes the sale of the Company's products throughout the middle east. This investment is accounted for using the equity method.
In October 1996, the Company acquired all of the gas monitoring systems products manufactured by McNeill International. The acquisition was accounted for as a purchase and, accordingly, the purchase price has been allocated to the respective assets acquired based on their estimated fair market values as of the date of the acquisition. The acquisition resulted in intangible assets of $310,000 consisting principally of drawings, kits and software.
Marketing, Sales and Distribution
The Company's products are primarily sold through a network of independent distributors. The Company has 27 regional sales managers located throughout the United States, Canada, Europe, the Middle East, and Pacific Rim to support these distributors. At its corporate headquarters, the Company has 24 sales and customer service representatives who support distribution and 22 employees dedicated to prompt product service and repair. The Company's sales and marketing efforts include advertising, product management, training, customer service and sales functions.
The Company continues to concentrate on international sales growth and expects that foreign sales will continue to contribute significantly to the Company's revenues. International sales accounted for approximately 13%, 20%, and 21% of net sales for fiscal years 1995, 1996, and 1997, respectively. The Company has a Managing Director located in Sydney, Australia, three regional sales managers located in Canada, a regional sales manager in the Netherlands, eighteen full time employees working at its Industrial Scientific Arabia, Ltd. joint venture in the Middle East, approximately fifteen employees working on the establishment of a manufacturing and distribution facility at its HEG Industrial Scientific Limited joint venture in Harbin, China, and an international sales manager and two sales coordinators located at corporate headquarters who support foreign distribution and concentrate on international sales growth.
The Company's five largest distributors accounted for approximately 56%, 48%, and 51% of net sales for fiscal years 1995, 1996, and 1997, respectively. Of these five, Vallen Safety Supply Company, which comprised approximately 21% and 26% of sales in fiscal 1996 and 1997, is based in Houston, Texas and specializes in the distribution of safety products.
The Company advertises extensively in trade journals and provides extensive training materials, including videotapes, on the use and maintenance of its products. The Company's representatives call on customers directly and with distributor representatives. Additionally, the Company exhibits at most major trade shows in the United States and Canada which emphasize safety, industrial hygiene and environmental issues.
Research, Development and Engineering
The Company conducts research, development and engineering for existing and new products at its primary facility near Pittsburgh, Pennsylvania. The Company spent approximately $2.4 million, $3.0 million, and $2.7 million for research and development in fiscal years 1995, 1996, and 1997, respectively, representing 7.0%, 8.3%, and 6.7% of net sales in such fiscal years.
In 1997, the Company introduced three new portable gas monitoring instruments and several fixed systems. The T80 Single Gas Monitor has six interchangeable 'smart' sensors and is capable of 4,400 hours of continuous operation. The ATX612 Multi-Gas Aspirated Monitor offers continuous monitoring of up to four gases and datalogging for up to 110 hours of data storage and industrial hygiene functions. The ATX620 Multi-Gas Utility Monitor has patented Infared Methane detection for monitoring three levels of combustible gas, one toxic gas plus oxygen, and datalogging for 60 hours of survey data.
In 1997, the Company sold Monitor Group, a developer of portable mass spectrometers which had been acquired by the Company in June 1995.
Raw Materials and Supplies
With the exception of toxic gas and oxygen sensors, the materials and supplies used to produce the Company's products are generally available from several suppliers. Since 1988, the Company has purchased all of its toxic gas and oxygen sensors from a single supplier. The Company believes that its relationship with this supplier is good and has not experienced any difficulties in obtaining sensors or any other materials and supplies needed to produce its products.
Competition
The market for gas detection and monitoring instruments is highly competitive. The Company is in competition with many small and large enterprises. Some of the Company's competitors are subsidiaries or divisions of larger corporations that have substantially greater financial resources than the Company. The Company believes that the principal competitive factors in all markets for its products are the performance and reliability of products and service, product size, technical features and price.
Patents, Trademarks and Licenses
The Company relies primarily upon trade secret laws and confidentiality agreements with its employees, suppliers and other third parties to protect the Company's proprietary technology and other information. Although the Company does not deem patents to be critical to its ability to compete, when in its best interests, the Company seeks patent protection for certain of its products.
Regulatory Matters
The Company's products are subject to regulation by, among other governmental entities, the federal Mine Safety and Health Administration and, to a lesser extent, corresponding foreign agencies. In order to ensure that products distributed for use in the mining industry in the United States are safe and effective, MSHA regulates the introduction, manufacture, servicing, labeling, distribution of and record-keeping for such products.
In manufacturing its products, the Company must comply with applicable safety regulations and is subject to various record-keeping requirements and to inspections. Certain of these agencies conduct periodic inspections of the Company's facilities. The Company has satisfactorily passed each of its inspections and believes that its manufacturing, documentation and quality control procedures meet the requirements of these regulations. If any of these regulatory agencies were to determine that the Company's products were not manufactured in accordance with applicable regulations, they would have the authority, in addition to less drastic remedies, to order the Company to cease distributing its products to the affected group of customers.
Environmental Matters
The Company is subject to various environmental laws and regulations pertaining to the storage and handling of materials, the management and disposal of solid wastes and emissions or discharges from its operations. The Company believes that its current operations are in material compliance with all currently applicable environmental laws and regulations. There are no current legal proceedings or expenditures for environmental compliance which would at present have an expected material adverse effect on the Company.
Employees
As of April 16, 1998, the Company had 215 employees.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns a 52,000 square foot corporate headquarters and manufacturing facility in Oakdale, Pennsylvania near Pittsburgh. Manufacturing and related support departments occupy approximately 26,000 square feet in this facility, with the remaining 26,000 square feet devoted to research and development, engineering, sales and administration. The Company also owns a 25,000 square foot manufacturing, service and distribution facility approximately 1/8th of a mile from its corporate headquarters, in which metalworking, service and repair, warehousing and shipping and receiving operations are located.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are currently no outstanding or pending material legal proceedings with respect to the Company or its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of Fiscal year 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and areas of responsibility of the executive officers of the Registrant as of January 31, 1998, are listed below:
Kent D. McElhattan, age 49, has been a Director, President and Chief Executive Officer of the Company since January, 1985. Prior to 1985, he was Vice President and General Manager of the Industrial Safety Division of National Mine Service Company, the predecessor to the Company.
James P. Hart, age 43, has been Vice President and Chief Financial Officer since August 1994. Between 1985 and August 1994 he was Treasurer and Corporate Controller. Prior to 1985, he was Controller of the Industrial Safety Division of National Mine Service Company, the predecessor to the Company.
Garth F. Miller, age 41, has been Vice President of Sales and Service since August 1994. Between 1985 and August 1994 he was Manager of Sales and Manager of Engineering. Prior to 1985, he was Sales Engineer of the Industrial Safety Division of National Mine Service Company, the predecessor to the Company.
Part II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth on page 22 of the 1997 Annual Report to Shareholders under the caption "Market for the Company's Common Stock" and is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth on page 3 of the Company's 1997 Annual Report to Shareholders under the caption "Selected Financial Data" and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on pages 8 through 9 of the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements, the notes thereto and the report of the independent accountants are set forth on pages 10 through 20 of the Company's 1997 Annual Report and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors is contained under the caption "Elections Of Directors" of the Registrant's definitive Proxy Statement for the Annual Meeting of shareholders on June 10, 1998 (the Proxy Statement) and is incorporated herein by reference.
The information regarding executive officers is set forth in Part 1, Item 4A under "Executive Officers of the Registrant." Item 405 of Regulation S-K calls for disclosure of any known late filings or failure by an insider to file a report required by Section 16 of the Exchange Act. The information with respect to this item is contained under caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption "Executive Compensation" of the Proxy Statement and is incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the caption "Beneficial Ownership Of Equity Securities" of the Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain Relationships And Related Transactions" of the Proxy Statement and is incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: The following consolidated financial statements of the registrant are filed pursuant to Item 8 of this form 10-K and are incorporated herein by reference to the page numbers indicated below in the 1997 Annual Report to Shareholders which accompanies this report.
2. Financial Statement Schedules: Financial statement schedules have been omitted for the reason that the information is not required or is otherwise given in the consolidated financial statements and notes thereto.
3. Exhibits:
* - Indicates management contract or compensatory plan, contract or arrangement.
b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the fiscal year ended January 31, 1998.
* - Indicates management contract or compensatory plan, contract or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL SCIENTIFIC CORPORATION AND SUBSIDIARIES
April 28, 1998 /s/ Kent D. McElhattan ------------------------------------- Kent D. McElhattan President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.