___________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9800
INCSTAR CORPORATION
(Exact name of Registrant as specified in its charter)
Minnesota 41-1254731
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1990 Industrial Boulevard
Stillwater, Minnesota 55082
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 439-9710
N/A
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the Registrant (1) has filed reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days, Yes (X) No( ).
The number of shares of the Registrant's Common Stock (par value $.01)
outstanding on May 8, 1995 was 16,362,477.
<PAGE>
___________________________________________________________________________
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1995 April 1, 1994
<S> <C> <C>
Net sales $ 11,117,000 $ 10,657,000
Cost of goods sold 5,987,000 5,621,000
Gross profit 5,130,000 5,036,000
Operating expenses:
Selling, general and administrative 2,960,000 3,100,000
Research and development 914,000 1,705,000
Total operating expenses 3,874,000 4,805,000
Operating income 1,256,000 231,000
Interest expense (87,000) (99,000)
Other income (expense) (6,000) 3,000
INCOME BEFORE INCOME TAXES 1,163,000 135,000
Provision for income taxes 364,000 31,000
NET INCOME $ 799,000 $ 104,000
INCOME PER SHARE:
Net income per share $ 0.05 $ 0.01
Weighted average shares and 16,379,928 16,419,250
equivalents
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 221,000 $ 153,000
Restricted cash 251,000 251,000
Accounts receivable, net of allowance
for doubtful accounts of $95,000 and 7,055,000 6,759,000
$113,000, respectively
Other receivables 15,000 119,000
Inventories 12,036,000 12,368,000
Other current assets 471,000 562,000
TOTAL CURRENT ASSETS 20,049,000 20,212,000
PROPERTY AND EQUIPMENT:
Land and land improvements 1,573,000 1,573,000
Buildings and improvements 13,160,000 13,103,000
Equipment and furniture 17,083,000 16,924,000
Construction in progress --- 114,000
31,816,000 31,714,000
Less allowance for depreciation and (16,968,000) (16,482,000)
amortization
14,848,000 15,232,000
INTANGIBLE ASSETS 1,563,000 1,744,000
OTHER ASSETS 1,003,000 966,000
$ 37,463,000 $ 38,154,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 254,000 $ 278,000
Accounts payable and cash overdraft 1,896,000 2,262,000
Accrued compensation 1,348,000 1,418,000
Accrued expenses 1,860,000 2,286,000
Income taxes payable 340,000 95,000
TOTAL CURRENT LIABILITIES 5,698,000 6,339,000
LONG-TERM DEBT 3,080,000 4,143,000
OTHER NON-CURRENT LIABILITIES 3,854,000 3,783,000
SHAREHOLDERS' EQUITY:
Undesignated stock, authorized - - - - - -
5,000,000 shares
Common stock, par value $.01,
authorized 25,000,000 shares;
issued and outstanding 164,000 163,000
16,362,477 and 16,322,521 shares,
respectively
Additional paid-in capital 17,828,000 17,676,000
Foreign currency translation (128,000) (118,000)
adjustment
Retained earnings 6,967,000 6,168,000
TOTAL SHAREHOLDERS' EQUITY 24,831,000 23,889,000
$ 37,463,000 $ 38,154,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31, April 1,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 799,000 $ 104,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 721,000 871,000
Provision for retirement plan 68,000 133,000
Changes in operating assets and liabilities:
Accounts receivable (296,000) (281,000)
Other receivables 104,000 (6,000)
Inventories 332,000 55,000
Other current assets 94,000 (3,000)
Accounts payable (56,000) 64,000
Accrued compensation (70,000) (114,000)
Accrued expenses (426,000) (86,000)
Income tax payable 338,000 17,000
Other, net (10,000) (2,000)
Net cash provided by operating activities 1,598,000 752,000
INVESTING ACTIVITIES:
Payments for distribution rights --- (150,000)
Additions to property and equipment, net (154,000) (280,000)
Increase in other assets (39,000) (53,000)
Net cash used in investing activities (193,000) (483,000)
FINANCING ACTIVITIES:
Net borrowings under lines of credit --- 55,000
Net decrease in cash overdraft (310,000) (490,000)
Payments on long-term debt (1,087,000) (69,000)
Issuance of common stock to employees 60,000 119,000
Net cash used in financing activities (1,337,000) (385,000)
Net increase (decrease) in cash and cash
equivalents 68,000 (116,000)
Cash and cash equivalents at beginning of 153,000 225,000
period
Cash and cash equivalents at end of $ 221,000 $ 109,000
period
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated balance sheet as of March 31, 1995 and the related
consolidated statements of income and cash flows for the quarters ended
March 31, 1995 and April 1, 1994 are unaudited; in the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted only
of normal recurring items. Certain amounts for periods prior to the quarter
ended March 31, 1995 have been reclassified to conform with the current
classifications. The consolidated financial statements and notes should be
read in conjunction with the consolidated financial statements and notes
included in the Company's 1994 Form 10K.
NOTE 2 _ INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
Raw materials $ 2,365,000 $ 2,242,000
Work in progress 8,763,000 8,521,000
Finished goods 908,000 1,605,000
$12,036,000 $12,368,000
</TABLE>
NOTE 3 _ INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
Patents $ 717,000 $ 717,000
Trademarks 17,000 17,000
Goodwill 619,000 619,000
Intellectual property and purchased 648,000 648,000
technology
Product distribution rights 2,700,000 2,700,000
4,701,000 4,701,000
Less accumulated amortization (3,138,000) (2,957,000)
$ 1,563,000 $ 1,744,000
</TABLE>
<PAGE>
NOTE 4 _ UNUSUAL ITEMS
In the fourth quarter of 1994, the Company recorded a $750,000 charge
related to the write down of excess inventories and a $2,450,000 unusual
charge related to the termination of certain distribution and supply
agreements ($540,000) as well as severance and other costs related to
senior management changes ($1,910,000). Amounts remaining to be paid,
pursuant to this charge, exclusive of amounts included in Note 6, Executive
Retirement Plan, are included in the following balance sheet
classifications:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
Accrued expenses $ 599,000 $ 613,000
Other non-current liabilities 643,000 798,000
</TABLE>
The non-current portion due at March 31, 1995 is expected to be paid in
1996 ($355,000) and 1997 ($288,000).
In the second quarter of 1994, the Company discontinued its
fluorescence polarization immunoassay instrument development program
("FPIA") and incurred a one-time pre-tax charge of $3,300,000. The
majority of this charge related to the write off of tangible and intangible
assets ($1,560,000), costs incurred to terminate contracts with outside
vendors and consultants ($797,000), as well as severance and related costs
for terminated employees ($943,000). Amounts remaining to be paid at March
31, 1995 and December 31, 1994 pursuant to this charge, exclusive of
amounts included in Note 6, Executive Retirement Plan, are $234,000 and
$298,000, respectively, and are included in Accrued expenses.
NOTE 5 _ LONG-TERM DEBT, LEASE AND ROYALTY COMMITMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
Revolving line of credit from bank, interest
at prime plus .25% $ --- $ ---
Revolving line of credit from affiliate,
interest at LIBOR plus 100 basis points --- ---
Long-term note from affiliate due December
1996, interest at LIBOR plus 125 basis 3,000,000 4,020,000
points
Capitalized lease obligations, interest at
3.4% to 8.0%, due through 1996 323,000 390,000
Other 11,000 11,000
3,334,000 4,421,000
Less current portion (254,000) (278,000)
Total long-term debt $ 3,080,000 $ 4,143,000
</TABLE>
The revolving line of credit from affiliate provided for maximum
borrowings of $4,000,000 through April 29, 1995. This credit line has been
renegotiated for another one-year term with maximum borrowings of
$4,500,000 expiring in April, 1996.
<PAGE>
The Company is obligated to make royalty payments under several
distribution and licensing agreements. The majority of these agreements
call for payments based on a percentage of sales and contain no minimum
royalty clause. Royalty expense under these agreements was $309,000 for
the quarter ended March 31, 1995 and $336,000 for the quarter ended April
1, 1994.
NOTE 6 _ EXECUTIVE RETIREMENT PLAN
The Company has individual retirement agreements with the executive
officers which are intended to provide continued compensation to such
officers or their respective beneficiaries upon retirement from the
Company. The benefits and terms under these arrangements vary depending
upon the officer's position within the Company. In connection with this
plan, included in Other long term liabilities at March 31, 1995 and
December 31, 1994 is $2,963,000 and $2,895,000, respectively, representing
the present value of the future liability. The Company intends to fund
this obligation through the purchase of life insurance contracts on the
individual executives. Included in Other assets is $943,000 and $905,000,
respectively, representing the cash surrender value of these policies.
NOTE 7 _ INCOME TAXES
Upon the exercise of certain officer stock options during the year
ended December 31, 1990, the Company was entitled to a compensation
deduction allowable for income tax purposes. No compensation expense was
required for financial reporting purposes because the option price on the
original grant date equaled the then fair market value of the shares. Upon
realization of the benefit relating to the compensation deduction for tax
purposes, the benefit is credited to additional paid in capital. For the
quarter ended March 31, 1995, the Company recognized a credit of $93,000 to
Additional paid in capital relating to these stock options.
<PAGE>
NOTE 8 _ RELATED PARTY TRANSACTIONS
As part of the ongoing operations of the Company, various transactions
were entered into with its affiliates, Sorin Biomedica S.p.A. ("Sorin") and
its subsidiaries and Fiat Finance U.S.A., Inc. The following tables
summarize these transactions and related balances.
<TABLE>
<CAPTION>
Sorin Fiat Finance U.S.A.,Inc.
Quarter Ended Quarter Ended
March April March April
31,1995 1,1994 31,1995 1,1994
<S> <C> <C> <C> <C>
Product sales $2,024,000 $1,762,000 $ - - - $ - - -
Product purchases 290,000 417,000 - - - - - -
Royalty expense 42,000 48,000 - - - - - -
Interest expense - - - - - - 79,000 84,000
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31, March 31, December 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Assets
Trade accounts $ 1,645,000 $1,743,000 $ - - - $ - - -
receivable
Other receivables 3,000 5,000 - - - - - -
Liabilities
Accounts payable $ 302,000 $ 389,000 $ - - - $ - - -
Short term debt - - - - - - - - - - - -
Accrued royalty 42,000 47,000 - - - - - -
Accrued interest - - - - - - 67,000 3,500
Long-term debt - - - - - - 3,000,000 4,020,000
</TABLE>
NOTE 9 _ SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Quarter Ended
March 31, April 1,
1995 1994
Supplemental disclosures of cash flow
information:
<S> <C> <C>
Cash paid during the period for:
Interest $ 24,000 $ 32,000
Income taxes, net 26,000 7,000
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the quarter ended March 31, 1995 increased 4% to $11,117,000
from $10,657,000 for the same quarter a year earlier. This increase can be
attributed mainly to increases in the Company's autoimmunity, infectious
disease and bone & mineral market segments. In the autoimmunity market the
TheratestTM product line, acquired in 1994, contributed to this increase
in sales. In addition, sales have been favorably impacted by the Company's
TRAb product, which is a test used in detecting Graves' disease. The
Company's infectious disease product line is being favorably impacted by
sales of a second generation test for Epstein Barr Virus in the
international market place. The Company is currently seeking FDA approval
for marketing these tests in the U.S. In the bone and mineral market
segment the Company's Vitamin D kits continue to capture greater market
share in both the domestic and international marketplace.
Sales continue to be negatively impacted in the Company's thyroid and
therapeutic drug monitoring lines resulting from a shift in this market
toward non-isotopic automated testing. This has impacted the domestic
market at a faster rate than the international market and the Company
anticipates this shift to continue. Domestic sales increased 1% to
$5,567,000, and international sales increased 8% to $5,550,000. The
Company's strategic focus in the research and development area is on non-
RIA, automated diagnostic products.
Gross margins for the first quarter of 1995 were 46% of sales compared
to 47% of sales for the same period in the prior year. This decline is
primarily due to lower production volumes during the latter part of 1994
contributing to higher unit costs. The Company expects gross margins to
remain at or near this level for the remainder of 1995, however, gross
margins are highly dependent on production volumes due to the high fixed-
cost nature of the Company's products.
Selling, general and administrative ("SG&A") expenses declined from
$3,100,000, or 29% of sales, in the first quarter of 1994 to $2,960,000, or
27% of sales, in the first quarter of 1995. This decline is attributable
to cost saving measures taken by the Company during 1994. The Company
anticipates SG&A spending to increase slightly during the remainder of 1995
due to advertising and other costs associated with new product
introductions.
Research and development expenditures decreased 46% to $914,000 in the
first quarter of 1995 from $1,705,000 for the same period in the prior year
and decreased as a percentage of sales to 8% compared to 16% in the prior
year. This decrease is mainly attributable to the discontinuation of the
FPIA technology in 1994 as discussed in Note 4 above. The Company intends
to maintain research and development expenditures at levels consistent with
historical spending, exclusive of FPIA. On March 30, 1995, the Company
entered into an agreement with Fujisawa Pharmaceutical Co. Ltd.
("Fujisawa") of Osaka, Japan to complete the development of a Phase II
FK506 ELISA based diagnostic kit. FK506 is an immunosuppressant drug used
in the prevention of organ transplant rejection. Upon completing
development, the Company will manufacture, sell and distribute the FK506
diagnostic kit on a worldwide basis.
Interest expense decreased to $87,000 compared to $99,000 for the same
period in the prior year. This decrease is attributable to lower average
debt levels.
Income tax expense for the quarter was $364,000, or 31% of income
before taxes compared with $31,000, or 23% of income before taxes in the
first quarter of 1994. The increase in the effective rate is due to fewer
available tax credits to offset income tax expense for financial reporting
purposes. See discussion at Note 7, Income Taxes. The Company anticipates
this effective rate to continue for the remainder of 1995.
<PAGE>
Liquidity and Capital Resources
The Company's operating cash flow increased in the first quarter of
1995 to $1,598,000 from $752,000 in the first quarter of 1994. Free cash
flow (operating cash flow less investment activities) increased to
$1,405,000 from $269,000 in the comparable period of the prior year. This
increase is primarily due to increased operating income in the first
quarter of 1995. The Company utilized this cash to reduce its outstanding
debt by $1.1 million in the first quarter of 1995. Net working capital
increased in this year's first quarter to $14,351,000 at March 31, 1995
from $13,873,000 at December 31, 1994.
At March 31, 1995, the Company's primary sources of liquidity were a
$1 million revolving bank credit line secured by Company assets and a $4
million unsecured credit line with Fiat Finance U.S.A., Inc. At March 31,
1995, the Company had no outstanding borrowings under these credit lines.
The Company believes that its operating cash flow and existing credit lines
will provide ample sources of liquidity for all planned capital
expenditures and research and development activities. Capital spending for
1995 is anticipated to be approximately $1.7 million.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Net Income per Common Share
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended March 31, 1995.
SIGNATURES
Pursuant to the requirements 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.
INCSTAR CORPORATION
(Registrant)
Date: 5/12/95 /s/John. J. Booth
John J. Booth
President (Principal Executive Officer)
Date: 5/12/95 /s/Thomas P. Maun
Thomas P. Maun
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
INCSTAR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Quarter Ended
March 31, April 1,
1995 1994
<S> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Average shares outstanding 16,362,485 16,322,081
Dilutive stock options and warrants -
based on the treasury stock method 17,443 97,169
16,379,928 16,419,250
Net income $ 799,000 $ 104,000
Net income per share $ 0.05 $ 0.01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET FOR THE PERIOD ENDED MARCH 31, 1995 AND THE
RELATED STATEMENTS OF INCOME, CASH FLOWS AND RETAINED EARNINGS FOR THE PERIOD
ENDED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 472,000
<SECURITIES> 0
<RECEIVABLES> 7,150,000
<ALLOWANCES> 95,000
<INVENTORY> 12,036,000
<CURRENT-ASSETS> 20,049,000
<PP&E> 31,816,000
<DEPRECIATION> 16,968,000
<TOTAL-ASSETS> 37,463,000
<CURRENT-LIABILITIES> 5,698,000
<BONDS> 0
<COMMON> 164,000
0
0
<OTHER-SE> 24,667,000
<TOTAL-LIABILITY-AND-EQUITY> 37,463,000
<SALES> 11,117,000
<TOTAL-REVENUES> 11,117,000
<CGS> 5,987,000
<TOTAL-COSTS> 5,987,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 87,000
<INCOME-PRETAX> 1,163,000
<INCOME-TAX> 364,000
<INCOME-CONTINUING> 799,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 799,000
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
