<PAGE> 1
________________________________________________________________________________
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 APRIL 4, 1997
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 16, 1997 was 16,505,457.
________________________________________________________________________________
<PAGE> 2
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- ---------------------
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------
April 4, 1997 March 29, 1996
------------- --------------
<S> <C> <C>
Net sales $ 10,838,000 $ 11,455,000
Cost of goods sold 5,616,000 5,539,000
------------- -------------
Gross profit 5,222,000 5,916,000
Operating expenses:
Selling, general and administrative 3,353,000 3,295,000
Research and development 986,000 1,060,000
------------- -------------
Total operating expenses 4,339,000 4,355,000
------------- -------------
Operating income 883,000 1,561,000
Interest income (expense), net 25,000 (7,000)
Investment and other income (expense) 29,000 (24,000)
------------- -------------
INCOME BEFORE INCOME TAXES 937,000 1,530,000
Provision for income taxes 216,000 372,000
------------- -------------
NET INCOME $ 721,000 $ 1,158,000
============= =============
INCOME PER SHARE:
Net income per share $ 0.04 $ 0.07
============= =============
Weighted average shares and equivalents 16,724,121 16,633,365
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 3
INCSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
April 4, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,385,000 $ 1,554,000
Restricted cash 250,000 250,000
Accounts receivable, net of allowance for
doubtful accounts of $171,000 and $190,000, respectively 7,823,000 7,573,000
Other receivables 467,000 413,000
Inventories 14,200,000 14,302,000
Other current assets 576,000 629,000
---------------- ----------------
TOTAL CURRENT ASSETS 25,701,000 24,721,000
PROPERTY AND EQUIPMENT:
Land and land improvements 1,578,000 1,573,000
Buildings and improvements 13,512,000 13,531,000
Equipment and furniture 19,873,000 19,993,000
Construction in progress 145,000 41,000
---------------- ----------------
35,108,000 35,138,000
Less allowance for depreciation and amortization (20,039,000) (20,032,000)
---------------- ----------------
15,069,000 15,106,000
INTANGIBLE ASSETS, NET 862,000 791,000
OTHER ASSETS 1,468,000 1,340,000
---------------- ----------------
$ 43,100,000 $ 41,958,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,000 $ 3,000
Accounts payable 1,994,000 1,819,000
Accrued compensation 1,016,000 898,000
Accrued expenses 2,284,000 2,448,000
Income taxes payable 660,000 364,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 5,957,000 5,532,000
OTHER NON-CURRENT LIABILITIES 3,301,000 3,285,000
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 shares 165,000 165,000
Additional paid-in capital 18,531,000 18,531,000
Foreign currency translation adjustment (118,000) (98,000)
Retained earnings 15,264,000 14,543,000
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 33,842,000 33,141,000
---------------- ----------------
$ 43,100,000 $ 41,958,000
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
INCSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
April 4, March 29,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 721,000 $1,158,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 603,000 716,000
Payment for unusual items (24,000) (186,000)
Provision for retirement plans 60,000 73,000
Provision for deferred income taxes (105,000) (114,000)
Changes in operating assets and liabilities:
Accounts receivable (250,000) 16,000
Other receivables (54,000) 20,000
Inventories 102,000 (260,000)
Other current assets 100,000 (149,000)
Accounts payable 175,000 217,000
Accrued compensation 118,000 (771,000)
Accrued expenses (184,000) 497,000
Income tax payable 296,000 424,000
Other, net (20,000) (3,000)
---------- ----------
Net cash provided by operating activities 1,538,000 1,638,000
---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment, net (506,000) (456,000)
Payments for intellectual property and purchased technology (129,000) (135,000)
Increase in other assets (72,000) (50,000)
---------- ----------
Net cash used in investing activities (707,000) (641,000)
---------- ----------
FINANCING ACTIVITIES:
Decrease in restricted cash --- 1,000
Payments on long-term debt --- (36,000)
Issuance of common stock --- 179,000
---------- ----------
Net cash provided by financing activities --- 144,000
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 831,000 1,141,000
Cash and cash equivalents at beginning of period 1,554,000 460,000
---------- ----------
Cash and cash equivalents at end of period $2,385,000 $1,601,000
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
INCSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The consolidated balance sheet as of April 4, 1997 and the related
consolidated statements of income and cash flows for the quarters ended April
4, 1997 and March 29, 1996 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 1996
Form 10K.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
April 4, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 2,366,000 $ 2,458,000
Work in progress 9,529,000 9,515,000
Finished goods 2,305,000 2,329,000
------------ ------------
$14,200,000 $14,302,000
============ ============
</TABLE>
NOTE 3 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
April 4, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Patents $ 717,000 $ 717,000
Trademarks 17,000 17,000
Goodwill 619,000 619,000
Intellectual property and purchased technology 1,270,000 1,141,000
Product distribution rights 2,700,000 2,700,000
------------- -------------
5,323,000 5,194,000
Less accumulated amortization (4,461,000) (4,403,000)
------------- -------------
$ 862,000 $ 791,000
============= =============
</TABLE>
5
<PAGE> 6
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 April 4, 1997, exclusive of amounts included
in Other non-current liabilities (Note 6, Executive Retirement Plans) is
$35,000, which is included in Accrued expenses in the accompanying consolidated
balance sheet.
NOTE 5 -- LINE OF CREDIT, LEASE AND ROYALTY COMMITMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 4, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Other $ 3,000 $ 3,000
----------- ------------
Less current portion 3,000 3,000
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 February 28, 1998, is secured by
accounts receivable, and has an interest rate based on the prime interest rate
or LIBOR plus 2.5%. In addition, the Company has a $4,000,000 revolving line
of credit with Fiat Finance N.A., Inc. which expires October 1, 1997.
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 $318,000 and $497,000 for
the quarters ended April 4, 1997 and March 29, 1996, respectively.
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 April 4, 1997 and December 31, 1996 are $3,301,000
and $3,285,000, respectively, representing the present value of the future
liability. Also, included in Accrued expenses at April 4, 1997 and December
31, 1996 are $189,000 and $145,000, 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 April 4, 1997 and December 31, 1996 are $1,093,000
and $1,020,000, respectively, representing the cash surrender value of these
policies.
6
<PAGE> 7
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 a credit of
$61,000 to Additional paid-in capital relating to these stock options for the
quarter ended March 29, 1996.
NOTE 8 -- RELATED PARTY TRANSACTIONS
As part of the ongoing operations of the Company, various transactions
were entered into with its affiliate, Sorin Biomedica Diagnostics S.p.A.
("Sorin"). The following tables summarize these transactions and related
balances:
<TABLE>
<CAPTION>
Sorin
-------------------------------
Quarter Ended
-------------------------------
April 4, March 29,
1997 1996
---------------- --------------
<S> <C> C>
Product sales $2,034,000 $1,947,000
Product purchases 573,000 279,000
Royalty expense 43,000 203,000
April 4, December 31,
1997 1996
---------------- --------------
Assets:
Trade accounts receivable $2,526,000 $2,442,000
Other receivables 22,000 59,000
Liabilities:
Accounts payable $ 652,000 $ 353,000
Accrued royalty 820,000 798,000
</TABLE>
NOTE 9 -- SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Quarter Ended
---------------------------
April 4, March 29,
1997 1996
------------ --------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ --- $ 6,000
Income taxes, net 23,000 56,000
</TABLE>
7
<PAGE> 8
NOTE 10 -- PENDING MERGER
On March 10, 1997, the company announced that it has signed a definitive
agreement with American Standard Inc., a wholly owned subsidiary of American
Standard Companies Inc. (NYSE: ASD), for the acquisition of INCSTAR in a
one-step cash merger pursuant to which holders of INCSTAR Common Stock would
receive $6.32 per share in cash. The parties had previously announced a
memorandum of understanding on January 24, 1997, regarding the merger. The
merger, which has been approved by a Special Committee of independent directors
and the board of directors of INCSTAR, requires approval by a majority
shareholder vote, satisfaction of customary closing conditions and receipt of
regulatory approvals. The merger is also subject to the completion by American
Standard of its agreement to acquire the European medical diagnostics business
of Sorin Biomedica S.p.A., which is the parent of BioFin Holding International,
B.V. (BFHI), the majority shareholder of INCSTAR. Included in the first
quarter results are $253,000 of expenses associated with this transaction.
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 this Agreement, which was filed as part of the Company's Form 10K
for the year ended December 31, 1996.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On March 10, 1997, the company announced that it has signed a definitive
agreement with American Standard Inc., a wholly owned subsidiary of American
Standard Companies Inc. (NYSE: ASD), for the acquisition of INCSTAR in a
one-step cash merger pursuant to which holders of INCSTAR Common Stock would
receive $6.32 per share in cash. The parties had previously announced a
memorandum of understanding on January 24, 1997, regarding the merger. The
merger, which has been approved by a Special Committee of independent directors
and the board of directors of INCSTAR, requires approval by a majority
shareholder vote, satisfaction of customary closing conditions and receipt of
regulatory approvals, including approval under the Hart-Scott-Rodino Act. The
merger is also subject to the completion by American Standard of its agreement
to acquire the European medical diagnostics business of Sorin Biomedica S.p.A.
Included in the first quarter results are $253,000 of expenses associated with
this transaction.
RESULTS OF OPERATIONS
Sales for the quarter ended April 4, 1997 decreased 5% from $11,455,000 to
$10,838,000 compared to the same period a year earlier. The primary reason for
the decline is reduced sales of one of the Company's hepatitis assays. The
Company experienced an increase in demand for this product during the first
quarter of 1996 due to a competitor's kit becoming unavailable to the market
from June 1995 until March 1996. Sales of the Company's hepatitis assay
totaled $1.2 million during the first quarter of 1996 compared to $150,000
during the first quarter of this year. Partially offsetting this decline was
growth in the Company's autoimmune, infectious disease and serum proteins
product lines. These increases more than offset the declines in the Company's
RIA oncology and routine endocrinology product lines 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 declined 16% to $5,174,000 for the quarter ending April 4,
1997 from $6,162,000 for the same period in the prior year, due primarily to
the decline in hepatitis assay sales discussed above. The Company experienced
favorable growth in certain product lines, which was partially offset by
declines in the Company's RIA oncology and routine endocrinology product
offerings.
International sales increased 7% to $5,664,000 for the quarter ended April
4, 1997 from $5,293,000 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. In
addition, sales were favorably impacted by increases in the Company's
autoimmune, bone and mineral and serum protein product lines. Sales were
negatively impacted by declines in the transplantation segment as this market
continue to shift away from manual, isotopic testing as discussed above.
Gross margins for the first quarter of 1997 were 48.2% of sales compared
to 51.6% of sales for the same period in the prior year. This decline 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 lower production volumes during the first
quarter of 1997 contributing to higher unit costs. The Company expects gross
margins to improve during the remainder of 1997, however, gross margins are
highly sensitive to product mix and volume changes due to the high fixed-cost
nature of the Company's products.
9
<PAGE> 10
Selling, general and administrative ("SG&A") expenses increased to
$3,353,000, or 30.9% of sales, for the first quarter of 1997 from $3,295,000,
or 28.8% of sales, for the same period in the prior year. This increase is
primarily due to costs of $253,000 related to the proposed merger with ASI,
discussed above. Exclusive of these amounts, SG&A expenses declined 6% from
the same period in the prior year.
Research and development ("R&D") expenditures decreased to $986,000, or
9.1% of sales, in the first quarter of 1997 from $1,060,000, or 9.3% of sales,
for the same period in the prior year. The Company expects R&D expenses as a
percentage of sales to increase slightly during the remainder of 1997.
Interest income net of expense was $25,000 for the first quarter of 1997
compared with $3,000 for the same period in the prior year, due to higher
average cash balances during the first quarter of 1997.
Income tax expense for the quarter was $216,000, or 23% of income before
taxes, compared with income tax expense of $372,000, or 24% of income before
taxes, in the first quarter of 1996. The Company expects the effective tax
rate to remain at approximately 23% during the remainder of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating cash flow in the first quarter of 1997 was
$1,538,000 and $1,638,000 for the same period in the prior year. Free cash
flow (operating cash flow less investment activities) decreased to $831,000 for
the quarter ended April 4, 1997 from $997,000 in the comparable period of the
prior year. This decrease is attributable to the decline in net income. Net
working capital increased to $19,744,000 at April 4, 1997 from $19,189,000 at
December 31, 1996, primarily due to the generation of cash.
At April 4, 1997, 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. At April 4, 1997, 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 1997 is
anticipated to be approximately $3.2 million, primarily for a new demand flow
technology system, instrumentation and manufacturing improvements.
10
<PAGE> 11
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
Form 8-K dated March 14, 1997 announcing the signing of a definitive
agreement with American Standard Companies, Inc., for the acquisition of
INCSTAR in a one-step cash merger pursuant to which holders of INCSTAR
Common Stock would receive $6.32 per share in cash.
11
<PAGE> 12
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: 5/16/97 /S/John J. Booth
------------------- ---------------------------------------
President (Principal Executive Officer)
Date: 5/16/97 /S/Thomas P. Maun
------------------- ---------------------------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE> 1
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
INCSTAR CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Quarter Ended
April 4, 1997 March 29, 1996
------------- --------------
<S> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Average shares outstanding 16,505,457 16,413,689
Dilutive stock options and warrants - based
on the treasury stock method 218,664 219,676
------------- --------------
16,724,121 16,633,365
============= ==============
Net income $ 721,000 $ 1,158,000
============= ==============
Net income per share $ 0.04 $ 0.07
============= ==============
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet for the period ended April 4, 1997 and the related
statements of income, cash flows and retained earnings for the period ended
April 4, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-04-1997
<CASH> 2,385,000
<SECURITIES> 0
<RECEIVABLES> 7,994,000
<ALLOWANCES> 171,000
<INVENTORY> 14,200,000
<CURRENT-ASSETS> 25,701,000
<PP&E> 35,108,000
<DEPRECIATION> 20,039,000
<TOTAL-ASSETS> 43,100,000
<CURRENT-LIABILITIES> 5,957,000
<BONDS> 0
165,000
0
<COMMON> 0
<OTHER-SE> 33,677,000
<TOTAL-LIABILITY-AND-EQUITY> 43,100,000
<SALES> 10,838,000
<TOTAL-REVENUES> 10,838,000
<CGS> 5,616,000
<TOTAL-COSTS> 5,616,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 937,000
<INCOME-TAX> 216,000
<INCOME-CONTINUING> 721,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 721,000
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
