_____________________________________________________________________________
FORM 10-K/A
(AMENDMENT Number 1)
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-9800
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
INCSTAR CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1254731
(State of Incorporation) (I.R.S. Employer Identification No.)
1990 Industrial Boulevard
Stillwater, Minnesota 55082
(Address of principal executive offices) (Zip Code)
(612) 439-9710
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Common Stock, $.01 Par Value
Per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days, Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K, [ X ].
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of May 16, 1997 was approximately $65,461,000
The number of shares of the Registrant's Common Stock outstanding on May 16,
1997 was 16,505,457.
<PAGE>
The undersigned registrant hereby amends the following parts of its Annual
Report on Form 10-K for the calendar year ended December 31, 1996.
AMENDMENT NUMBER 1
PART II: ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS IS HEREBY AMENDED IN ITS ENTIRETY AS FOLLOWS:
RESULTS OF OPERATION
Sales in 1996 were $44,304,000, a 3 percent decrease from $45,760,000 in
1995. 1995 and 1996 results included sales from a single test that resulted
from a competitor's product becoming unavailable to the market from June 1995
until March 1996. In the absence of this development, 1995 and 1996 total sales
would have remained relatively unchanged. 1995 sales were 8 percent above 1994
sales of $42,503,000. This increase was due primarily to sales from the
Company's hepatitis assays, as previously discussed, combined with sales from
new products introduced during 1995 and the latter part of 1994 in the Company's
autoimmune disease, bone and mineral metabolism and infectious disease market
segments. Increased sales were partially offset 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.
Domestic sales decreased 8% from $23,832,000 to $22,017,000. As
discussed above, through February 1996, the Company experienced an increase in
demand for one of its hepatitis assays due to a competitor's kit becoming
unavailable to the market in June 1995. Since the competitor's re-entry during
the first quarter of 1996, the Company has experienced a decline of these
product sales from their levels during the second half of 1995. This
opportunity resulted in approximately $2.2 million and $2.9 million in sales
during 1996 and 1995, respectively. In addition, domestic sales have continued
to be negatively impacted by declines in the Company's oncology and
endocrinology market segments, as discussed above. Partially offsetting these
declines were continued increases in the autoimmune disease market segment,
increases in the Company's serum protein market segment and increases in the
Company's Vitamin D assays, which are part of the bone and mineral metabolism
market segment. 1995 sales increased 12% from $21,282,000 in 1994 due primarily
to the increase in sales from the hepatitis assay described above, as well as
increases in the autoimmunity segment offset with declines in the endocrinology
and oncology market segments.
1996 international sales increased 2% to $22,287,000 compared with 1995
sales of $21,928,000. 1995 sales increased 3% from 1994 sales of $21,221,000.
Sales were favorably impacted in 1996 and 1995 due primarily to the introduction
of second generation Epstein Barr Virus diagnostic kits during 1995. Sales were
negatively impacted in both years due to the continued declines in the routine
endocrinology and transplantation segments.
Gross margins were 51 percent of sales in 1996 compared with 49 percent
of sales in 1995 and 46 percent in 1994. The decline in 1994 margins is
attributable to the $750,000 charge for excess inventories as discussed in Note
2 of the Company's consolidated financial statements contained elsewhere herein.
Exclusive of the inventory write down, gross margins were 48 percent of sales in
1994. Gross margins have improved during the last two years due to improved
product mix as well as efficiencies derived from an operational restructuring.
Notwithstanding this improvement, the Company's margins continue to be highly
sensitive to product mix and volume changes.
The Company's ratio of selling, general and administrative expenses to
sales was 30 percent in 1996, 28 percent in 1995 and 30 percent in 1994. These
expenses, as a percentage of sales, are expected to remain relatively consistent
with 1996.
Research and development expenses were $4,163,000 in 1996, compared with
$3,748,000 in 1995 and $5,069,000 in 1994. The increase in 1996 is primarily 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 strengthen the Company's ties
with the scientific community. The decrease in 1995 spending compared with 1994
levels is attributable to the discontinuance during 1994 of the Fluorescence
Polarization Immunoassay ("FPIA") development project as discussed in Note 2 of
the Company's consolidated financial statements contained elsewhere herein.
Exclusive of FPIA, these expenses represent 9 percent, 8 percent and 9 percent
of sales in 1996, 1995 and 1994, respectively. Research and development
expenses are projected to increase slightly due to the Company's increased
emphasis on new development activities and increased scientific panel activity.
Interest income net of expense was $96,000 in 1996 compared with interest
expense of $348,000 in 1995 and $365,000 in 1994. The interest income was
attributable to the elimination of all long term debt during 1995 and higher
average cash balances in 1996. 1995 expense includes interest on certain tax
obligations.
Income tax expense was 24 percent of income before taxes or $1,299,000,
compared with 27 percent or $1,571,000 in 1995 and $193,000 in 1994. The
decline in the effective tax rate is due to the recognition of certain deferred
tax assets during 1996. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers its projected future taxable income and tax planning
strategies in making this assessment. The tax expense in 1994 related primarily
to book reserves and liabilities not deductible for tax purposes until paid.
The effective rate is expected to remain relatively consistent with 1996.
Net income in 1996 was $4,112,000, or 25 cents per share, compared with a
net income of $4,263,000, or 26 cents per share, in 1995 and net loss of
$4,505,000, or 28 cents per share, in 1994. The 1994 loss results primarily from
three specific charges. A $750,000 charge was recorded for estimated obsolete
inventory. The Company annually reviews its inventory levels and calculates a
reserve for obsolescence. During 1994, an additional reserve was deemed
appropriate due to rising inventory levels in the Company's serum protein
product line in excess of expected future sales. A $2,450,000 charge was
recorded for the termination of certain distribution and supply agreements as
well as severance and other costs related to senior management changes. In
addition, during 1994 the Company discontinued the development of its
Fluorescence Polarization Immunoassay development project, resulting in a
$3,300,000 charge. 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).
LIQUIDITY AND CAPITAL RESOURCES
INCSTAR's free cash flow (operating cash flow less investment activities)
was $905,000 in 1996, compared to $5,190,000 in 1995 and $3,118,000 in 1994.
This decrease is attributable to increased capital spending associated with
instrumentation, manufacturing improvements and computer upgrades as well as
spending associated with the purchase of intellectual property and purchased
technology. The Company's ratio of total debt to total capital was 16 percent
in 1994.
Working capital increased to $19,189,000 at year-end 1996, from
$14,947,000 at the end of 1995, resulting from increased cash levels and higher
inventory balances combined with lower accrued compensation due to timing of
payroll disbursements.
Capital expenditures for 1996 were $2,645,000, compared with $1,557,000
in 1995 and $923,000 in 1994. For 1997, capital expenditures are expected to be
approximately $3.8 million, primarily for a new enterprise resource planning
system, manufacturing improvements and instrumentation.
The Company's primary sources of liquidity are a $1 million revolving
bank credit line secured by Company assets and a $4.0 million unsecured credit
line with Fiat Finance N.A., Inc. (Fiat). At year-end, the Company had no
outstanding borrowings under these credit lines. The Company anticipates that
the generation of free cash flow and the resources available within the Fiat
Group will provide sufficient sources of liquidity for planned capital and
research and development expenditures.
<PAGE>
AMENDMENT NUMBER 2
PART II ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMETARY DATA - THE FINANCIAL
STATEMENT INFORMATION AS LISTED IN PART IV, ITEM 14 (A)(1) AND (A)(2) OF THE
ORIGINAL 10-K FILING IS HEREBY AMENDED IN ITS ENTIRETY AS FOLLOWS:
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1996 1995 1994
Net sales $44,304,000 $45,760,000 $42,503,000
Cost of goods sold 21,599,000 23,271,000 22,039,000
Inventory valuation adjustment -- -- 750,000
Gross profit 22,705,000 22,489,000 19,714,000
Operating expenses:
Selling, general and
administrative 13,206,000 12,592,000 12,853,000
Research and development 4,163,000 3,748,000 5,069,000
Unusual items -- -- 5,750,000
Total operating expenses 17,369,000 16,340,000 23,672,000
Operating income (loss) 5,336,000 6,149,000 (3,958,000)
Interest income (expense), net 96,000 (348,000) (365,000)
Investment and other income (expense) (21,000) 33,000 11,000
INCOME (LOSS) BEFORE INCOME TAXES 5,411,000 5,834,000 (4,312,000)
Provision for income taxes 1,299,000 1,571,000 193,000
NET INCOME (LOSS) $ 4,112,000 $ 4,263,000 $(4,505,000)
INCOME (LOSS) PER SHARE:
Net income (loss) per share $ 0.25 $ 0.26 $ (0.28)
Weighted average shares and
equivalents 16,661,367 16,491,501 16,322,301
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,554,000 $ 460,000
Restricted cash 250,000 251,000
Accounts receivable, net of allowance for
doubtful accounts of $190,000 and
$107,000, respectively 7,573,000 7,575,000
Other receivables 413,000 24,000
Inventories 14,302,000 13,445,000
Other current assets 629,000 294,000
TOTAL CURRENT ASSETS 24,721,000 22,049,000
PROPERTY AND EQUIPMENT:
Land and land improvements 1,573,000 1,573,000
Buildings and improvements 13,531,000 13,252,000
Equipment and furniture 19,993,000 18,170,000
Construction in progress 41,000 6,000
35,138,000 33,001,000
Less allowance for depreciation and
amortization (20,032,000) (18,387,000)
15,106,000 14,614,000
INTANGIBLE ASSETS, NET 791,000 1,105,000
OTHER ASSETS 1,340,000 993,000
$41,958,000 $38,761,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,000 $ 76,000
Accounts payable 1,819,000 1,914,000
Accrued compensation 898,000 1,972,000
Accrued expenses 2,448,000 2,928,000
Income taxes payable 364,000 212,000
TOTAL CURRENT LIABILITIES 5,532,000 7,102,000
LONG-TERM DEBT --- 3,000
OTHER NON-CURRENT LIABILITIES 3,285,000 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
16,505,457 and 16,363,477 shares,
respectively 165,000 164,000
Additional paid-in capital 18,531,000 17,940,000
Foreign currency translation adjustment (98,000) (151,000)
Retained earnings 14,543,000 10,431,000
TOTAL SHAREHOLDERS' EQUITY 33,141,000 28,384,000
$41,958,000 $38,761,000
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,112,000 $ 4,263,000 $(4,505,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Provision for deferred income taxes (555,000) -- --
Provision (payments) for unusual items and
inventory valuation adjustment (590,000) (1,060,000) 5,371,000
Provision for retirement plans 261,000 272,000 529,000
Depreciation and amortization 2,882,000 2,910,000 3,395,000
Changes in operating assets and liabilities:
Accounts receivable 2,000 (816,000) 39,000
Other receivables (389,000) 95,000 (29,000)
Inventories (857,000) (1,077,000) 194,000
Other current assets (77,000) 212,000 (21,000)
Accounts payable (95,000) 254,000 (229,000)
Accrued compensation (1,074,000) 554,000 (108,000)
Accrued expenses (105,000) 975,000 90,000
Income taxes payable 481,000 320,000 (56,000)
Other, net 53,000 (33,000) 35,000
Net cash provided by operating activities 4,049,000 6,869,000 4,705,000
INVESTING ACTIVITIES:
Additions to property and equipment, net (2,645,000) (1,557,000) (923,000)
Payments for product distribution rights -- -- (599,000)
Payments for intellectual property and (407,000) (86,000) --
purchased technology
Increase in other assets (92,000) (36,000) (65,000)
Net cash used in investing activities (3,144,000) (1,679,000) (1,587,000)
FINANCING ACTIVITIES:
Net repayments under lines of credit -- -- (422,000)
Net decrease in cash overdraft -- (602,000) (512,000)
(Increase) decrease in restricted cash 1,000 -- (11,000)
Payments on long-term debt (76,000) (4,342,000) (2,364,000)
Issuance of common stock to employees 264,000 61,000 119,000
Net cash provided by (used in) financing
activities 189,000 (4,883,000) (3,190,000)
Net increase (decrease) in cash and cash
equivalents 1,094,000 307,000 (72,000)
Cash and cash equivalents at beginning of
year 460,000 153,000 225,000
Cash and cash equivalents at end of year $ 1,554,000 $ 460,000 $ 153,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Common Stock Additional Currency
Number of Paid-In Translation Retained
Shares Amount Capital Adjustment Earnings
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 16,281,057 $ 163,000 $ 17,557,000 $ (153,000) $ 10,673,000
Common stock issued under
employee stock purchase plan
and upon exercise of stock
options 41,464 _ 119,000 _ _
Translation adjustments _ _ _ 35,000 _
Net loss _ _ _ _ (4,505,000)
Balance at December 31, 1994 16,322,521 $ 163,000 $ 17,676,000 $ (118,000) $ 6,168,000
Common stock issued under
employee stock purchase plan
and upon exercise of stock
options 40,956 1,000 61,000 _ _
Translation adjustments _ _ _ (33,000) _
Compensation expense on
executive stock options _ _ 203,000 _ _
Net income _ _ _ _ 4,263,000
Balance at December 31, 1995 16,363,477 $ 164,000 $ 17,940,000 $ (151,000) $ 10,431,000
Common stock issued under
employee stock purchase plan
and upon exercise of stock
options, net of tax effect 97,873 1,000 199,000 _ _
Issuance of shares to BFHI 44,107 _ 64,000 _ _
Translation adjustments _ _ _ 53,000 _
Compensation expense on
executive stock options _ _ 328,000 _ _
Net income _ _ _ _ 4,112,000
Balance at December 31, 1996 16,505,457 $ 165,000 $ 18,531,000 $ (98,000) $ 14,543,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
INCSTAR CORPORATION
QUARTERLY RESULTS (UNAUDITED):
(in thousands, except per share data)
Net Gross
Sales Profit
Year Ended Year Ended
December 31, December 31,
Quarter 1996 1995 Quarter 1996 1995
First $ 11,455 $ 11,117 First $ 5,916 $ 5,130
Second 11,355 11,041 Second 5,679 5,319
Third 10,604 11,664 Third 5,479 5,873
Fourth 10,890 11,938 Fourth 5,631 6,167
Net Income Net Income Per Share
Year Ended Year Ended
December 31, December 31,
Quarter 1996 1995 Quarter 1996 1995
First $ 1,158 $ 799 First $ 0.07 $ 0.05
Second 1,119 827 Second 0.07 0.05
Third 986 1,092 Third 0.06 0.07
Fourth 849 1,545 Fourth 0.05 0.09
<PAGE>
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1_SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
INCSTAR Corporation (the "Company") is a medical immunodiagnostics
company focused on the development, production and worldwide marketing of
reagents, particularly for bone/mineral metabolism, endocrinology, infectious
and autoimmune diseases. The Company predominantly markets these products in
North America, Europe and Asia.
Since December 1989, the Company has been majority-owned by BioFin Holding
International B.V. ("BFHI"), a subsidiary of Sorin Biomedica Diagnostics S.p.A.
("Sorin") which is an Italian affiliate of Fiat, Inc.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of INCSTAR Corporation and its wholly-owned subsidiaries, Atlantic Antibodies,
Inc., INCSTAR Ltd. and Immuno Nuclear Export Ltd. All material inter-company
accounts and transactions have been eliminated in consolidation. Certain
amounts for periods prior to the year ended December 31, 1996 have been
reclassified to conform with the current classifications.
CASH EQUIVALENTS
Cash equivalents consist primarily of investments in money market accounts
with current maturities.
RESTRICTED CASH
Through December 31, 1995 the Company maintained a self insured workers
compensation insurance plan. Pursuant to the plan, the Company holds a
certificate of deposit with current maturity as a compensating balance with a
bank. These funds are restricted to assure future credit availability for the
potential self insured aggregate limits under the plan. The funds are required
to be on deposit with a bank under Minnesota state regulations and are expected
to be released in the fourth quarter of 1997. As of January 1, 1996, the
Company is no longer self insured.
INVENTORIES
Inventories are valued at the lower of average cost, which approximates
the first-in, first-out (FIFO) method, or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are carried at amounts that approximate
estimated fair value.
PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, is
reported at cost less accumulated depreciation and amortization. Maintenance and
repairs are charged to expense as incurred. The Company computes depreciation
and amortization using the straight-line method based on estimated useful lives
of three to seven years for equipment and furniture and seven to thirty years
for buildings and improvements.
INTANGIBLE ASSETS
Intangible assets includes patents, trademarks, intellectual property and
purchased technology, goodwill and product distribution rights. Patents and
trademarks are amortized using the straight-line method over a five-year period.
Goodwill, which represents the cost in excess of the fair value of net assets
acquired, is amortized using the straight-line method over a ten-year period.
Intellectual property and purchased technology is amortized using the straight
line method over the properties estimated useful lives which range from seven to
ten years. Product distribution rights are amortized using the straight line
method over the life of the agreement or the estimated product life, whichever
is shorter. The carrying value of intangible assets is regularly reviewed by
the Company, and a loss is recognized when the net realizable value falls below
the unamortized cost.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 109. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock and common stock equivalents,
consisting of stock options and warrants, outstanding during the period. For
all periods presented, fully diluted and primary income or loss per share are
the same. For 1994, the effects of stock options and warrants were excluded
from the computation of weighted average shares outstanding because their
effects were antidilutive.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign operations are translated at rates of
exchange in effect at period end. Statement of operations amounts are translated
at the average rate of exchange for the period. Gains and losses resulting from
translation are accumulated in a separate component of shareholders' equity.
Foreign currency transaction gains and losses, which are not material, are
included in the consolidated statements of operations.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 (APB No.
25), Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. The Company has adopted the
disclosure requirements under SFAS No. 123, Accounting and Disclosure of Stock-
Based Compensation.
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2_ UNUSUAL ITEMS AND INVENTORY VALUATION ADJUSTMENTS
The Company annually reviews its inventory levels and calculates an
estimate for obsolete inventory. During 1994, the Company reviewed future sales
projections compared with inventory levels on hand in its serum protein product
line. It was deemed appropriate to write down this inventory by $750,000 in
response to rising inventory levels. Consequently in December, 1994 the Company
recorded a $750,000 charge related to the write down of excess inventories.
In addition, the Company recorded 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 December 31, 1996, exclusive of amounts
included in noncurrent liabilities (Note 9, Executive Retirement Plans) is
$10,000, which is included in accrued expenses in the accompanying consolidated
balance sheet.
In May, 1994 the Company discontinued the development of certain purchased
technology acquired in 1992 from Robert Dowben Associates, a diagnostic research
company, 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). None of these amounts remain to be paid on December 31,
1996.
NOTE 3 - INVENTORIES
Inventories consist of the following:
December 31,
1996 1995
Raw materials $ 2,458,000 $ 2,281,000
Work in progress 9,515,000 9,421,000
Finished goods 2,329,000 1,743,000
$ 14,302,000 $ 13,445,000
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
1996 1995
Patents $ 717,000 $ 717,000
Trademarks 17,000 17,000
Goodwill 619,000 619,000
Intellectual property and purchased
technology 1,141,000 734,000
Product distribution rights 2,700,000 2,700,000
5,194,000 4,787,000
Less accumulated amortization (4,403,000) (3,682,000)
$ 791,000 $ 1,105,000
NOTE 5 - LINE OF CREDIT, LEASE AND ROYALTY COMMITMENTS
Long-term debt consists of the following:
December 31,
1996 1995
Capitalized lease obligations, 8.0%, due
through 1996 --- 72,000
Other 3,000 7,000
3,000 79,000
Less current portion (3,000) (76,000)
Total long-term debt $ --- $ 3,000
The Company has a revolving line of credit from a bank which provides for
maximum borrowings of $1,000,000 through January 31, 1997, is secured by
accounts receivable, and has an interest rate based on the prime interest rate
or LIBOR plus 2.50%. In addition, the Company has a $4,000,000 revolving line
of credit with Fiat Finance N.A., Inc. which expires on October 1, 1997.
At December 31, 1996 and 1995, property and equipment includes capital
lease costs of $288,000 and $842,000, respectively, and accumulated amortization
of $288,000 and $773,000, respectively. Lease amortization included in
depreciation was $40,000 for the year ended December 31, 1996 and $158,000 for
the year ended December 31, 1995.
The Company leases certain manufacturing and other equipment in connection
with its normal operations. Rent expense under these operating leases was
$226,000, $295,000 and $238,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Future minimum lease payments for all noncancelable
operating leases having a remaining term in excess of one year are as follows:
1997_$173,000; 1998_$116,000; 1999_$44,000; 2000_$5,000.
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 $1,563,000 in 1996,
$1,715,000 in 1995 and $1,099,000 in 1994.
NOTE 6 - RELATED PARTY TRANSACTIONS
<TABLE>
As part of the ongoing operations of the Company, various transactions
were entered into during 1996, 1995 and 1994 with its affiliates, Sorin, an
affiliate of the Fiat group, and Fiat Finance N.A., Inc. The following tables
summarize transactions and related balances:
<CAPTION>
Operating Sorin Fiat Finance N.A., Inc.
Statement Data: Year Ended December 31,
1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Product sales $ 7,965,000 $ 7,625,000 $ 6,903,000 $ --- $ --- $ ---
Product purchases 2,272,000 1,807,000 1,248,000 --- --- ---
Royalty expense 432,000 582,000 176,000 --- --- ---
Interest expense --- --- --- 6,000 170,000 312,000
<CAPTION>
Balance Sheet Data: Sorin
December 31,
1996 1995
<S> <C> <C>
Assets
Trade receivables $2,442,000 $ 1,965,000
Other receivables 59,000 6,000
Liabilities
Accounts payable $ 353,000 $ 675,000
Accrued royalty 798,000 480,000
</TABLE>
NOTE 7_INCOME TAXES
The provision for income taxes is summarized as follows:
Year Ended December 31, Federal State Foreign Total
1996
Current $ 1,644,000 $ 212,000 $ (2,000) $ 1,854,000
Deferred (491,000) (64,000) - - - (555,000)
Provision for Income Taxes $ 1,153,000 $ 148,000 $ (2,000) $ 1,299,000
1995
Current $ 1,505,000 $ 89,000 $(23,000) $ 1,571,000
Deferred - - - - - - - - - - - -
Provision for Income Taxes $ 1,505,000 $ 89,000 $(23,000) $ 1,571,000
1994
Current $ 123,000 $ 34,000 $ 36,000 $ 193,000
Deferred - - - - - - - - - - - -
Provision for Income Taxes $ 123,000 $ 34,000 $ 36,000 $ 193,000
The provision for income taxes differs from the statutory federal tax rate
of 34% applied to income (loss) before income taxes as follows:
Year Ended December 31,
1996 1995 1994
Federal tax calculated at the
statutory rate $ 1,840,000 $1,984,000 $(1,466,000)
Change in the valuation allowance for
deferred taxes (914,000) (532,000) 1,872,000
Exempt income attributable to foreign
sales (266,000) (333,000) (288,000)
State taxes, net of federal benefit 98,000 59,000 22,000
Compensation expense on executive
stock options 328,000 203,000 - - -
Other, net 213,000 190,000 53,000
Provision for income taxes $ 1,299,000 $ 1,571,000 $ 193,000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
December 31, December 31,
1996 1995
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 56,000 $ 29,000
Accrued vacation pay 33,000 27,000
Inventories, reserves and additional costs
inventoried for tax purposes 637,000 728,000
Patents, due to different book and tax
lives 24,000 27,000
Retirement plans 1,117,000 1,066,000
Tax credits 60,000 492,000
Accrual not currently deductible 265,000 ---
Severance and related costs not currently
deductible --- 189,000
Other 35,000 26,000
Gross deferred tax assets 2,227,000 2,584,000
Valuation allowance (1,639,000) (2,553,000)
Net deferred tax asset $ 588,000 $ 31,000
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation and capitalized
interest $ 44,000 $ 41,000
Other 4,000 5,000
Deferred tax liability $ 48,000 $ 46,000
Total net deferred tax asset (liability) $ 540,000 $ ( 15,000)
The valuation allowance for deferred tax assets as of December 31, 1996
and 1995 was $1,639,000 and $2,553,000, respectively. The net change in the
valuation allowance for the year ended December 31, 1996 was a decrease of
$914,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers its projected future taxable income and tax planning strategies in
making this assessment.
NOTE 8_EMPLOYEE SAVINGS RETIREMENT AND VALUE SHARING PLAN
The Company adopted a Salary Savings Plan under Section 401(k) of the
Internal Revenue Code, effective November 1, 1985. Participants make pre-tax
contributions of up to 15% of their wages subject to an annual limit of $9,500.
The Company is required to match 50% of that portion of the participant's pre-
tax contribution which does not exceed 6% of the participant's compensation. The
Company contributed $270,000 for the year ended December 31, 1996, $262,000 for
the year ended December 31, 1995, and $273,000 for the year ended December 31,
1994.
In 1994 the Company changed its profit sharing plan to a non-contributory
value sharing plan. Cash payments to all eligible employees are based on the
improvement in economic value as well as a targeted performance factor for
economic value added. The Company incurred $0 expense for the year ended
December 31, 1996, $984,000 expense for the year ended December 31, 1995 and $0
for the year ended December 31, 1994.
NOTE 9_EXECUTIVE RETIREMENT PLANS
The Company has individual retirement agreements with certain current and
prior executive officers which are intended to provide continued compensation to
such individuals or their respective beneficiaries upon the later of their
retirement from the Company after attainment of sixty years of age (fifty-five
years of age for one plan participant) or attainment of sixty years of age
(fifty-five years of age for one plan participant) following termination of
employment, or upon death during the term of employment (the "triggering
events"). Subject to vesting requirements, the retirement agreements provide
for the payment to these individuals or their respective beneficiaries, of
annual benefits for a period of fifteen years following the occurrence of a
triggering event. The amount of annual benefits is adjusted annually to reflect
changes in the cost of living. The annual benefit amounts vest at the rate of
10% per year.
Additionally, the Company maintains an executive income continuation plan
for the benefit of executive officers not covered under the agreements discussed
above. The plan provides payments for fifteen years to such officers or their
respective beneficiaries upon the later of an officer's retirement from the
Company after attainment of sixty years of age or attainment of sixty years of
age following termination of employment, or upon death during the term of
employment. The annual retirement payment is the product of an annual benefit
rate set by the Board of Directors ($3,333 for 1996) multiplied by the number of
years of employment, up to a maximum of fifteen years, and as adjusted to
reflect the cost of living changes during the payment period. An officer's
rights under the plan are fully vested after ten years of employment or upon
change in the controlling interest of the Company.
The company accounts for all retirement agreements under APB 12, wherein
the present value of the future benefits are accrued over the working lives of
the individuals utilizing a 7% discount factor.
In connection with the individual agreements and the income continuation
plan, both of the above plans included in other noncurrent liabilities at
December 31, 1996 and 1995 is $3,285,000 and $3,136,000, respectively,
representing the present value of the future benefits.liabili Also, included in
accrued expenses at December 31, 1996 and December 31, 1995 is $145,000 and
$31,000, respectively, representing the current portion of this liability. The
Company intends to fund this obligation through life insurance contracts on the
individual executives. Included in Other assets at December 31, 1996 and 1995
is $1,020,000 and $934,000, respectively, of cash surrender value in connection
with these policies.
NOTE 10_EMPLOYEE STOCK PURCHASE AND OPTION PLAN
Under the Company's stock option plans, officers, directors, consultants
and key employees may be granted options to purchase the Company's common stock
at no less than 100% of the market price on the date the option is granted.
Options generally become exercisable over two to four years and have terms of
five or ten years.
Option activity in the Company's various option plans is summarized as follows:
Options Outstanding
Weighted-
Shares Average
reserved Option
for grant Shares price
Balance December 31, 1993 337,168 842,175 $ 3.88
Exercised --- (1,500) 1.79
Canceled 136,000 (136,000) 4.05
Granted (119,000) 119,000 2.60
Balance December 31, 1994 354,168 823,675 $ 3.68
Exercised outside the plan (1,000) 1.44
Canceled 206,000 (206,000) 3.40
Canceled outside the plan (14,035) 1.85
Granted (103,000) 103,000 2.95
Balance December 31, 1995 457,168 705,640 $ 3.66
Exercised --- (48,000) 2.50
Canceled 30,000 (30,000) 3.30
Granted (42,000) 42,000 4.39
Balance December 31, 1996 445,168 669,640 $ 3.81
As of December 31, 1996 options for 538,140 shares were exercisable at
prices ranging from $1.44 to $8.25 per share.
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.44-$8.25 and 6.12
years, respectively.
The Company also had an Employee Stock Purchase Plan. This plan enabled
eligible employees to purchase the Company's Common Stock at the lower of 85% of
the fair market value on the first or the last day of each plan year. The number
of shares reserved for sale under this plan was 300,000, of which all shares
have been sold. The Company does not intend to issue more shares under this
plan.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company has adopted the disclosure-only provisions. Had
compensation cost for the Company's stock option grants and employee stock
purchase plan been determined consistent with SFAS 123, the Company's net income
and earnings per share would have been changed to the pro forma amounts
indicated below:
1996 1995
Net income (in 000s) As reported $ 4,112 $ 4,263
Pro forma 4,032 4,209
Earnings per share As reported $ 0.25 $ 0.26
Pro forma 0.24 0.26
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as compensation expense applicable to awards made
prior to 1995 are not considered.
The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using a Black-Scholes option-pricing model with the following weighted average
assumptions for 1996 and 1995: Dividend yield of 0%; expected weighted average
volatility of 63.7%; a weighted average risk free interest rate of 5.9% and an
expected holding period of 9.3 years. The weighted average values of the
options granted are $3.40 and $1.98 for 1996 and 1995, respectively.
NOTE 11_SUPPLEMENTARY CASH FLOW INFORMATION
Year Ended December 31,
1996 1995 1994
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 17,000 $ 192,000 $ 369,000
Income taxes, net 1,295,000 1,151,000 242,000
NOTE 12_GEOGRAPHIC SEGMENT DATA
Comparative geographical data for the Company's operations is summarized as
follows:
1996 1995 1994
Sales
United States $ 22,017,000 $ 23,832,000 $ 21,282,000
Italy 3,404,000 3,385,000 2,781,000
England 2,661,000 2,646,000 2,578,000
Germany 2,225,000 2,175,000 1,997,000
France 1,773,000 1,813,000 1,830,000
Belgium 1,160,000 1,246,000 1,082,000
Spain 822,000 822,000 823,000
Other Europe 1,779,000 1,431,000 1,387,000
Total Europe 13,824,000 13,518,000 12,478,000
Japan 3,578,000 3,838,000 4,106,000
Korea 811,000 678,000 501,000
Other Asia 633,000 432,000 683,000
Total Asia 5,022,000 4,948,000 5,290,000
Canada 1,575,000 1,844,000 1,852,000
Other Foreign 1,866,000 1,618,000 1,601,000
Total $ 44,304,000 $ 45,760,000 $ 42,503,000
Operating income
United States $ 2,305,000 $ 3,052,000 $ 877,000
Italy (214,000) (60,000) (72,000)
England (65,000) (92,000) (78,000)
Germany 459,000 421,000 275,000
France 443,000 394,000 287,000
Belgium 209,000 203,000 (1,000)
Spain 122,000 150,000 110,000
Other Europe 407,000 207,000 118,000
Total Europe 1,361,000 1,223,000 639,000
Japan 718,000 921,000 51,000
Korea 117,000 135,000 60,000
Other Asia 68,000 20,000 179,000
Total Asia 903,000 1,076,000 290,000
Canada 407,000 653,000 639,000
Other Foreign 360,000 145,000 97,000
Total 5,336,000 6,149,000 2,542,000
Unusual items --- --- (5,750,000)
Inventory valuation adjustment --- --- (750,000)
Other income(expenses), net 75,000 (315,000) (354,000)
Income (loss) before income taxes $ 5,411,000 $ 5,834,000 $ (4,312,000)
Total assets
United States $ 41,021,000 $ 38,059,000 $ 37,272,000
Europe 937,000 702,000 882,000
Total $ 41,958,000 $ 38,761,000 $ 38,154,000
NOTE 13_WARRANTS AND STOCK PURCHASE RIGHTS
The Company has issued to BFHI a warrant to purchase up to 730,720 shares
of Common Stock at the prevailing market price and has granted BFHI the right to
purchase additional Common Stock at a price identical to any new issuances.
These agreements enable BFHI to maintain a minimum 51% ownership in the Company.
NOTE 14_SUBSEQUENT EVENT
On January 24, 1997, the Company announced that it has signed a Memorandum
of Understanding ("the Memorandum") with American Standard Inc.("ASI"), a
subsidiary of American Standard Companies Inc., which contemplates acquisition
of the Company by a subsidiary of ASI. Pursuant to the Memorandum, each INCSTAR
common share would be converted into the right to receive $6.32 in cash, and
INCSTAR would become a wholly-owned subsidiary of ASI. Under the merger
proposal, INCSTAR would become part of a newly formed Medical Systems Group
within ASI.
The Memorandum of Understanding has been approved by a Special Committee of
independent INCSTAR directors and the boards of directors of INCSTAR and ASI.
The proposed merger is subject to negotiation and execution of mutually
satisfactory definitive documentation, receipt by the Special Committee and the
board of directors of INCSTAR of a fairness opinion, approval of the definitive
merger agreement by the Special Committee and the boards of directors of INCSTAR
and ASI, approval of the merger by the holders of a majority of the issued and
outstanding shares of INCSTAR common stock, and receipt of all required
regulatory approvals and material third party consents.
The Merger Agreement further provides for the payment by the Company to ASI
of a $2.5 million termination fee if the Company terminates the merger as
defined in the Agreement.
The Company also announced that BFHI, the majority shareholder of INCSTAR
and wholly owned subsidiary of Sorin, has entered into a Memorandum of
Understanding with ASI regarding the proposed sale of Sorin's European
Diagnostics Division to ASI. The Memorandum of Understanding between ASI and
INCSTAR contemplates that the simultaneous closing of the Sorin sale of its
European Diagnostics Division will be a condition to the proposed merger.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of INCSTAR Corporation:
We have audited the consolidated financial statements of INCSTAR
Corporation and subsidiaries as listed in the accompanying index in Item
14(a)(1) on page 24. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index in Item 14(a)(2) on page 24. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of INCSTAR
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material aspects, the information set forth
therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 24, 1997
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
INCSTAR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Charged
Balance at Charged to Balance at the
the to Costs Other Deductions_ End of
Beginning of & Accounts (Describe) Period
Period Expenses Describe
Allowance for doubtful
accounts receivable:
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996 $ 107,000 $ 118,000 $ - - $ 35,000 (A) $ 190,000
Year ended December 31,
1995 113,000 16,000 - - 22,000 (A) 107,000
Year ended December 31,
1994 195,000 23,000 - - 105,000 (A) 113,000
<FN>
(A) Uncollectible accounts written off, net of recoveries
</FN>
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K/A, amending the
registrant's Form 10-K for the fiscal year ended December 31, 1996, to be signed
on its behalf by the undersigned, thereunto duly authorized.
INCSTAR CORPORATION
Dated: May 19, 1997 By: /s/ John J.Booth
John J. Booth
President
