__________________________________________________________________________
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 29, 1996
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 1, 1996 was 16,501,457.
__________________________________________________________________________
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 29, March 31,
1996 1995
<S> <C> <C>
Net sales $ 11,455,000 $ 11,117,000
Cost of goods sold 5,539,000 5,987,000
Gross profit 5,916,000 5,130,000
Operating expenses:
Selling, general and administrative 3,295,000 2,960,000
Research and development 1,060,000 914,000
Total operating expenses 4,355,000 3,874,000
Operating income 1,561,000 1,256,000
Interest expense (7,000) (87,000)
Other expense (24,000) (6,000)
INCOME BEFORE INCOME TAXES 1,530,000 1,163,000
Provision for income taxes 372,000 364,000
NET INCOME $ 1,158,000 $ 799,000
INCOME PER SHARE:
Net income per share $ 0.07 $ 0.05
Weighted average shares and equivalents 16,633,365 16,379,928
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 29, December 31,
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,601,000 $ 460,000
Restricted cash 250,000 251,000
Accounts receivable, net of allowance for
doubtful accounts of $104,000 and 7,559,000 7,575,000
$107,000, respectively
Other receivables 4,000 24,000
Inventories 13,705,000 13,445,000
Other current assets 484,000 294,000
TOTAL CURRENT ASSETS 23,603,000 22,049,000
PROPERTY AND EQUIPMENT:
Land and land improvements 1,573,000 1,573,000
Buildings and improvements 13,258,000 13,252,000
Equipment and furniture 18,440,000 18,170,000
Construction in progress 68,000 6,000
33,339,000 33,001,000
Less allowance for depreciation and (18,798,000) (18,387,000)
amortization
14,541,000 14,614,000
INTANGIBLE ASSETS 1,056,000 1,105,000
OTHER ASSETS 1,041,000 993,000
$ 40,241,000 $ 38,761,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 40,000 $ 76,000
Accounts payable and cash overdraft 2,131,000 1,914,000
Accrued compensation 1,201,000 1,972,000
Accrued expenses 3,358,000 2,928,000
Income taxes payable 575,000 212,000
TOTAL CURRENT LIABILITIES 7,305,000 7,102,000
LONG-TERM DEBT 3,000 3,000
OTHER NON-CURRENT LIABILITIES 3,154,000 3,272,000
SHAREHOLDERS' EQUITY:
Undesignated stock, authorized 5,000,000 shares - - - - - -
Common stock, par value $.01, authorized
25,000,000 shares; issued and outstanding 165,000 164,000
16,453,350 and 16,363,477 shares, respectively
Additional paid-in capital 18,179,000 17,940,000
Foreign currency translation adjustment (154,000) (151,000)
Retained earnings 11,589,000 10,431,000
TOTAL SHAREHOLDERS' EQUITY 29,779,000 28,384,000
$ 40,241,000 $ 38,761,000
</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 29, March 31,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,158,000 $ 799,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 716,000 721,000
Payment for unusual items (186,000) ---
Provision for retirement plans 73,000 68,000
Provision for deferred taxes (114,000) ---
Changes in operating assets and liabilities:
Accounts receivable 16,000 (296,000)
Other receivables 20,000 104,000
Inventories (260,000) 332,000
Other current assets (149,000) 94,000
Accounts payable 217,000 (56,000)
Accrued compensation (771,000) (70,000)
Accrued expenses 497,000 (426,000)
Income tax payable 424,000 338,000
Other, net (3,000) (10,000)
Net cash provided by operating activities 1,638,000 1,598,000
INVESTING ACTIVITIES:
Additions to property and equipment, net (456,000) (154,000)
Payments for intellectual property and (135,000) ---
purchased technology
Increase in other assets (50,000) (39,000)
Net cash used in investing activities (641,000) (193,000)
FINANCING ACTIVITIES:
Net decrease in cash overdraft --- (310,000)
Decrease in restricted cash 1,000 ---
Payments on long-term debt (36,000) (1,087,000)
Issuance of common stock 179,000 60,000
Net cash provided by (used in) financing activities 144,000 (1,337,000)
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,141,000 68,000
Cash and cash equivalents at beginning of period 460,000 153,000
Cash and cash equivalents at end of period $ 1,601,000 $ 221,000
</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 29, 1996 and the related
consolidated statements of income and cash flows for the quarter ended
March 29, 1996 and March 31, 1995 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. The consolidated financial statements and notes
should be read in conjunction with the consolidated financial statements
and notes included in the Company's 1995 Form 10K.
NOTE 2 _ INVENTORIES
<TABLE>
Inventories consist of the following:
<CAPTION>
March 29, December 31,
1996 1995
<S> <C> <C>
Raw materials $ 2,279,000 $ 2,281,000
Work in progress 9,418,000 9,421,000
Finished goods 2,008,000 1,743,000
$13,705,000 $13,445,000
</TABLE>
NOTE 3 _ INTANGIBLE ASSETS
<TABLE>
Intangible assets consist of the following:
<CAPTION>
March 29, December 31,
1996 1995
<S> <C> <C>
Patents $ 717,000 $ 717,000
Trademarks 17,000 17,000
Goodwill 619,000 619,000
Intellectual property and purchased technology 869,000 734,000
Product distribution rights 2,700,000 2,700,000
4,922,000 4,787,000
Less accumulated amortization (3,866,000) (3,682,000)
$ 1,056,000 $ 1,105,000
</TABLE>
NOTE 4_ UNUSUAL ITEMS AND INVENTORY VALUATION ADJUSTMENTS
In December, 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). The amount remaining to be paid at March 29, 1996, exclusive
of amounts included in Note 6, Executive Retirement Plans, is $422,000 and
is included in Accrued expenses.
NOTE 5 _ LONG-TERM DEBT, LEASE AND ROYALTY COMMITMENTS
<TABLE>
Long-term debt consists of the following:
<CAPTION>
March 29, December 31,
1996 1995
<S> <C> <C>
Capitalized lease obligations, 8.0%, due $ 36,000 $ 72,000
through 1996
Other 7,000 7,000
43,000 79,000
Less current portion (40,000) (76,000)
Total long-term debt $ 3,000 $ 3,000
</TABLE>
The Company has a revolving line of credit from a bank which provides
for maximum borrowings of $1,000,000 through January 31, 1997 at the prime
interest rate or LIBOR plus 2.50% and is secured by accounts receivable.
In addition, the Company has a $4,500,000 revolving line of credit with
Fiat Finance U.S.A., Inc. which expires on April 29, 1996. It is
anticipated that this credit line will continue to be renewed at one year
terms.
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 $497,000 for
the quarter ended March 29, 1996 and $309,000 for the quarter ended March
31, 1995.
NOTE 6 _ EXECUTIVE RETIREMENT PLANS
The Company has individual retirement agreements with certain
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 these
plans, included in Other non-current liabilities at March 29, 1996 and
December 31, 1995 are $3,192,000 and $3,136,000, respectively, representing
the present value of the future liability. Also, included in Accrued
expenses at March 29, 1996 and December 31, 1995 are $48,000 and $31,000,
respectively, representing the current portion of this liability. The
Company intends to fund this obligation through the purchase of life
insurance contracts on the individual executives. Included in Other assets
at March 29, 1996 and December 31, 1995 are $984,000 and $934,000,
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. The
Company recognized credits of $61,000 and $93,000, respectively, to
Additional paid in capital relating to these stock options for the quarters
ended March 29, 1996 and March 31 ,1995.
NOTE 8 _ RELATED PARTY TRANSACTIONS
<TABLE>
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.
<CAPTION>
Sorin Fiat Finance U.S.A., Inc.
Quarter Ended Quarter Ended
March 29, March 31, March 29, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Product sales $1,947,000 $2,024,000 $ - - - $ - - -
Product purchases 279,000 290,000 - - - - - -
Royalty expense 203,000 42,000 - - - - - -
Interest expense - - - - - - 6,000 79,000
<CAPTION>
March 29, December 31, March 29, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Assets
Trade accounts $1,758,000 $1,965,000 $ - - - $ - - -
receivable
Other receivables 5,000 6,000 - - - - - -
Liabilities
Accounts payable $ 490,000 $ 675,000 $ - - - $ - - -
Accrued royalty 203,000 480,000 - - - - - -
Accrued interest - - - - - - - - - 4,000
</TABLE>
NOTE 9 _ SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Quarter Ended
March 29, March 31,
1996 1995
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,000 $ 24,000
Income taxes, net 56,000 26,000
</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 29, 1996 increased 3% to $11,455,000
from $11,117,000 for the same period a year earlier. Contributing to the
increase were sales from the Company's hepatitis assays, as discussed
below, as well as increases in the Company's autoimmune Elisa products,
second generation tests for Epstein Barr Virus and sales of the Company's
new vitamin D assay. Sales continue to be negatively impacted by declines
in the Company's oncology and endocrinology market segments due to the
continued shift in the diagnostic industry from isotopic, manual testing to
non-isotopic, automated and semi-automated testing. As these trends are
expected to continue, the Company continues to focus development efforts on
automated and semi-automated tests which are non-isotopic.
Domestic sales increased 11% to $6,162,000 for the quarter ended March
29, 1996 from $5,567,000 for the same period in the prior year. The
Company continues to experience an increase in demand for one of its
hepatitis assays due to a competitor's kit becoming unavailable to the
market in June 1995. This opportunity resulted in approximately $1.2
million in sales during the first quarter of 1996. The competitor
reentered the market place in late February, which will result in a decline
of these product sales from their current levels. In addition, the Company
realized growth in its Theratest trademark product line. The Company's new
vitamin D assay, which was launched in late 1995, also contributed to sales
growth. However, as discussed above, offsetting these increases were
continuing declines in the Company's RIA oncology and routine endocrinology
product offerings.
International sales decreased 5% to $5,293,000 for the quarter ended
March 29, 1996 from $5,550,000 for the same period in the prior year.
International revenues continue to be favorably impacted in the infectious
disease segment by sales of the Company's second generation tests for
Epstein Barr Virus. Sales were negatively impacted, however, in the serum
protein segment resulting mainly from declines in demand for the Company's
bulk antisera products as well as declines in the routine endocrinology
segment as this market continues to shift away from manual, RIA testing as
discussed above.
Gross margins for the first quarter of 1996 improved to 51.6% of sales
compared to 46.1% of sales for the same period in the prior year. This
improvement is due in part to a change in the mix of sales, discussed
above, compared to the same period a year earlier as well as efficiencies
derived from the recent restructuring of operations. Notwithstanding this
improvement, the Company's margins continue to be highly sensitive to
product mix and volume changes.
Selling, general and administrative expenses increased to $3,295,000,
or 29% of sales, in the first quarter of 1996 from $2,960,000, or 27% of
sales, in the first quarter of 1995. These expenses, as a percentage of
sales, are expected to remain relatively consistent throughout 1996.
Contributing to this increase were increased travel, promotions and other
expenses related to the introduction of new products and training
associated with the introduction of the Shared Values Process operating
system at the Company.
Research and development expenditures increased 16% to $1,060,000 in
the first quarter of 1996 from $914,000 for the same period in the prior
year and increased as a percentage of sales to 9% compared to 8% in the
prior year. This increase is mainly due to increased emphasis on new
product development, including the establishment of scientific advisory
panels for the Company's autoimmune and bone and mineral metabolism
segments. These panels are intended to enhance and strengthen the
Company's ties with the scientific community.
Interest expense decreased to $7,000 compared to $87,000 for the same
period in the prior year. This decrease is attributable to lower average
debt levels.
Income tax expense for the quarter was $372,000, or 24% of income
before taxes, compared with income tax expense of $364,000, or 31% of
income before taxes, in the first quarter of 1995. The decline in the
effective tax rate is due to the recognition of certain deferred tax
assets. The Company expects the effective tax rate to remain at
approximately 24% during the remainder of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating cash flow in the first quarter of 1996 was
$1,638,000 and $1,598,000 for the same period in the prior year. Free cash
flow (operating cash flow less investment activities) decreased to $997,000
in the first quarter from $1,405,000 in the comparable period of the prior
year. This decrease is attributable to increased capital spending
associated with instrumentation, manufacturing improvements and computer
upgrades. Net working capital increased in this year's first quarter to
$16,298,000 at March 29, 1996 from $14,947,000 at December 31, 1995.
At March 29, 1996, the Company's primary sources of liquidity are a $1
million revolving bank credit line secured by Company assets and a $4.5
million unsecured credit line with Fiat Finance U.S.A., Inc. At March 29,
1996, 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
the remainder of 1996 is anticipated to be approximately $2,300,000,
primarily for manufacturing improvements and laboratory equipment.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of INCSTAR Corporation, as
amended to date [incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (File No. 33-
84498)].
3.2 Bylaws of INCSTAR Corporation, as amended to date [incorporated
by reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form S-8 (File No. 33-84498)].
4.1 Specimen Certificate representing the Registrant's Common Stock
[incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-3 (File No. 33-37805)].
4.2 Note Purchase Agreement, dated December 27, 1991 between the
Registrant and Fiat Finance, U.S.A. Inc. [incorporated by
reference to Exhibit 4.2 to the Registrant's Report on Form 10-K
for the year ended December 31, 1991 (File No. 1-9800)]
4.3 Form of Warrant Certificate issued by the Registrant in favor of
Bioengineering International B.V. (now BioFin Holding
International B.V.) [incorporated by reference to Exhibit 10.11 of
the Registrant's Registration Statement on Form S-4 (File No. 33-
30785)].
4.4 Form of Purchase Rights Agreement between Bioengineering
International B.V. (now BioFin Holding International B.V.) and the
Registrant [incorporated by reference to Exhibit 10.12 of the
Registrant's Registration Statement on Form S-4 (File No. 33-
30785)].
11 Computation of Net Income per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended March 29, 1996.
<PAGE>
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: 5/12/96 /S/John J. Booth
President (Principal Executive Officer)
Date: 5/12/96 /S/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 29, 1996 March 31, 1995
<S> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Average shares outstanding 16,413,689 16,362,485
Dilutive stock options and warrants -
based on the treasury stock method 219,676 17,443
16,633,365 16,379,928
Net income $ 1,158,000 $ 799,000
Net income per share $ 0.07 $ 0.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet for the period ended March 29, 1996 and the
related statements of income, cash flows and retained earnings for the
period ended March 29, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-29-1996
<CASH> 1,601,000
<SECURITIES> 0
<RECEIVABLES> 7,663,000
<ALLOWANCES> 104,000
<INVENTORY> 13,705,000
<CURRENT-ASSETS> 23,603,000
<PP&E> 33,339,000
<DEPRECIATION> 18,798,000
<TOTAL-ASSETS> 40,241,000
<CURRENT-LIABILITIES> 7,305,000
<BONDS> 0
<COMMON> 165,000
0
0
<OTHER-SE> 29,614,000
<TOTAL-LIABILITY-AND-EQUITY> 40,241,000
<SALES> 11,455,000
<TOTAL-REVENUES> 11,455,000
<CGS> 5,539,000
<TOTAL-COSTS> 5,539,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,000
<INTEREST-EXPENSE> 7,000
<INCOME-PRETAX> 1,530,000
<INCOME-TAX> 372,000
<INCOME-CONTINUING> 1,158,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,158,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
