SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Three Months Ended March 31, 1995
Commission File No. 0-12728
MEDAR, INC.
38700 Grand River Avenue
Farmington Hills, Michigan 48335
(313) 477-3900
STATE OF INCORPORATION: MICHIGAN E.I.N.: 38-2191935
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1995
----- -----------------------------
Common stock, no par value, stated
value $.20 per share 8,706,057 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES
March 31 December 31
1995 1994
(Unaudited)
ASSETS
CURRENT ASSETS - Note E
Cash $ 731,531 $ 586,227
Short-term investments 4,018,360
Accounts receivable, less allowance of
$281,000 at March 31, 1995 and $311,000
at December 31, 1994 12,632,202 11,938,278
Inventories - Note C 13,637,041 11,431,635
Costs and estimated earnings in excess of
billings on incomplete contracts - Note D 2,698,870 2,290,559
Other current assets 1,220,514 743,839
TOTAL CURRENT ASSETS 30,920,158 31,008,898
PROPERTY, PLANT AND EQUIPMENT - Note E
Land and land improvements 324,021 324,021
Building and building improvements 3,579,365 3,537,670
Production and engineering equipment 2,370,267 2,169,908
Furniture, fixtures and other 1,073,246 870,511
Computer equipment 2,864,197 2,623,608
10,211,096 9,525,718
Less accumulated depreciation 4,138,681 3,906,149
6,072,415 5,619,569
OTHER ASSETS
Capitalized computer software
development costs, net of amortization 6,096,695 5,701,274
Deferred income taxes 6,000 73,000
Other 1,301,116 1,119,808
7,403,811 6,894,082
$ 44,396,384 $ 43,522,549
<FN>
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS - Continued
MEDAR, INC. AND SUBSIDIARIES
March 31 December 31
1995 1994
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 146,126
Accounts payable $ 5,002,239 4,389,662
Employee compensation 944,448 1,106,882
Accrued and other liabilities 1,187,257 1,154,937
Current maturities of long-term debt - Note E 842,469 471,695
Deferred income taxes 280,000 280,000
TOTAL CURRENT LIABILITIES 8,256,413 7,549,302
LONG-TERM DEBT, less current maturities - Note E 1,878,121 1,971,942
COMMITMENTS AND CONTINGENCIES - Note H
STOCKHOLDERS' EQUITY - Note G
Common stock, without par value, stated value
$.20 per share; 10,000,000 shares authorized;
8,663,869 shares issued and outstanding
(8,630,469 shares at December 31, 1994) 1,732,774 1,726,094
Additional paid-in capital 29,190,819 29,101,516
Retained earnings 3,408,305 3,261,704
Accumulated translation adjustment (70,048) (88,009)
TOTAL STOCKHOLDERS' EQUITY 34,261,850 34,001,305
$ 44,396,384 $ 43,522,549
<FN>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES
Three Months ended March 31
1995 1994
(Unaudited)
Net sales $ 11,358,668 $ 9,249,638
Cost of sales 8,118,051 6,174,926
GROSS MARGIN 3,240,617 3,074,712
Costs and expenses:
Marketing 1,073,683 789,568
General and administrative 1,435,580 513,162
Research and development 476,246 468,205
2,985,509 1,770,935
EARNINGS FROM OPERATIONS 255,108 1,303,777
Interest:
Expense 69,478 126,396
Income (42,971)
26,507 126,396
EARNINGS BEFORE INCOME TAXES 228,601 1,177,381
Provision for income taxes - Note F 82,000 219,000
NET EARNINGS $ 146,601 $ 958,381
Net earnings per share $ .02 $ .12
Weighted average number of shares of
common stock outstanding 9,008,414 7,725,259
<FN>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES
Three Months ended March 31
1995 1994
(Unaudited)
OPERATING ACTIVITIES
Net earnings $ 146,601 $ 958,381
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 705,966 531,263
Provision for deferred income taxes 65,000 204,000
Changes in operating assets and liabilities (3,530,388) (578,140)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (2,612,821) 1,115,504
INVESTING ACTIVITIES
Sale of short-term investments 4,018,360
Purchase of property and equipment (680,514) (397,362)
Investment in capitalized software (831,337) (539,717)
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 2,506,509 (937,079)
FINANCING ACTIVITIES
Net increase (decrease) in borrowings under
line of credit (148,740) 9,175
Debt repayments on long-term debt and capital
lease obligations (128,561) (3,957,230)
Proceeds from long-term borrowings 398,250 4,290,000
Proceeds from exercise of stock options 127,765 74,040
NET CASH PROVIDED BY
FINANCING ACTIVITIES 248,714 415,985
Effect of exchange rate changes on cash 2,902 (272)
INCREASE IN CASH 145,304 594,138
Cash at beginning of period 586,227 499,593
CASH AT END OF PERIOD $ 731,531 $ 1,093,731
<FN>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MEDAR, INC. AND SUBSIDIARIES
MARCH 31, 1995
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 31, 1995 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1995. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Registrant Company and Subsidiaries' annual report on Form 10-K for the
year ended December 31, 1994.
Certain items in the 1994 financial statements have been reclassified to
conform with the corresponding 1995 presentation.
Note B - Acquisition of Integral Vision Ltd.
Effective January 1, 1995, the Company acquired 100% of the common stock and
preference shares of Integral Vision Ltd. (Integral) for 654,282 previously
unissued shares of Medar, Inc. common stock. Integral is a machine vision
company located in the United Kingdom, which develops and manufactures
solutions for OEM's and end-users. This transaction has been accounted for as
a pooling of interests and accordingly, the consolidated financial statements
for all periods presented have been restated to include the accounts of
Integral.
Combined and separate results of Medar and Integral for the three months ended
March 31, 1994 are as follows:
Medar Integral Combined
Net sales $8,614,072 $ 635,566 $9,249,638
Net income 927,014 31,367 958,381
Intercompany transactions and adjustments to conform financial statement
presentation were not material to the above numbers.
Note C - Inventories
Inventories are stated at the lower of first-in, first-out cost or market, and
the major classes of inventories at the dates indicated were as follows:
March 31 December 31
1995 1994
Raw materials $ 6,376,562 $ 4,997,585
Work-in-process 4,326,577 4,031,832
Finished goods 2,933,902 2,402,218
$13,637,041 $11,431,635
Note D - Costs and Estimated Earnings in Excess of Billings on Incomplete
Contracts
Revenues on long-term contracts are recognized using the percentage of
completion method based on the ratio of labor costs incurred to date on the
contract to estimated total labor costs for the contract. The effects of
changes to estimated total contract costs are recognized in the period
determined and losses, if any, are recognized fully when identified. Costs
incurred and earnings recognized in excess of amounts billed are classified
under current assets as costs and estimated earnings in excess of billings on
incomplete contracts. Long-term contracts include a relatively high percentage
of engineering costs and are generally less than one year in duration.
Activity on long-term contracts is summarized as follows:
March 31 December 31
1995 1994
Contract costs to date $ 4,181,640 $ 5,681,635
Estimated contract earnings 4,716,353 5,415,595
8,897,993 11,097,230
Less billings to date (6,199,123) (8,806,671)
Costs and estimated earnings in excess
of billings on incomplete contracts $ 2,698,870 $ 2,290,559
Note E - Long Term Debt and Other Financing Arrangements
The Company has a $5,000,000 line of credit with its bank. The advances bear
interest at the bank's prime rate or a negotiated rate (at the Company's
option, subject to the bank's approval). In connection with this note, the
Company has agreed, among other covenants, to maintain net worth, debt to
equity, and debt service coverage as defined, at specified levels. This line
is payable upon demand and there were no amounts outstanding on this line at
March 31, 1995.
Long-term debt at March 31, 1995 and December 31, 1994 consisted of the
following:
March 31 December 31
1995 1994
Term note payable to bank $2,062,500 $2,125,000
Other 658,090 318,637
2,720,590 2,443,637
Less current maturities 842,469 471,695
$1,878,121 $1,971,942
The term note payable to the bank is payable in quarterly installments of
$62,500 plus interest at 1/4% over the bank's prime rate (the bank's prime
rate was 9.00% and 8.50% at March 31, 1995 and December 31, 1994,
respectively), with the balance becoming due June 29, 1998. This note is
collateralized by the Medar office and production facility in Farmington
Hills, Michigan and equipment, inventory and accounts receivable at all North
American locations.
Maturities of long-term debt, excluding those payable within twelve months
from March 31, 1995 (which are stated as current maturities of long-term
debt), are $253,000 in 1996; $250,000 in 1997; and $1,375,000 in 1998.
Note F - Income Taxes
Significant components of the provision for income taxes for the three months
ended March 31 are as follows:
1995 1994
Current:
Foreign $ 5,000 $ 3,000
State 12,000 12,000
17,000 15,000
Deferred:
Federal 43,000 200,000
Foreign 22,000 4,000
65,000 204,000
$ 82,000 $219,000
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
March 31 December 31
1995 1994
Deferred tax liabilities:
Deductible software development costs, net of
amortization $1,960,000 $1,947,000
Tax over book depreciation 368,000 368,000
Percentage of completion 736,000 736,000
Total deferred tax liabilities 3,064,000 3,051,000
Deferred tax assets:
Net operating loss carryforwards 1,462,000 1,518,000
Credit carryforwards 828,000 823,000
Reverse for obsolescence 155,000 155,000
Other 345,000 348,000
Total deferred tax assets 2,790,000 2,844,000
Net deferred tax liabilities $ 274,000 $ 207,000
The reconciliation of income taxes computed at the U.S. federal statutory
rates to income tax expense for the three months ended March 31 is as follows:
1995 1994
Tax at U.S. statutory rates $ 78,000 $ 400,000
Utilization of net operating loss
carryforward (197,000)
Other nondeductible expenses 7,000 10,000
Other (15,000) (6,000)
State income taxes 12,000 12,000
$ 82,000 $ 219,000
Note G - Stock Options
At March 31, 1995, there were options to purchase 630,100 shares outstanding
ranging in price from $1.50 to $11.50.
Note H - Legal Proceedings
On April 8, 1994, Square D Company ("Square D") filed in the United States
District Court for the Eastern District of Michigan a lawsuit against the
Company alleging that certain of the Company's resistance welding control
products infringe two patents of Square D. On April 8, 1994, Square D filed a
second suit, in the United States District Court for the District of Delaware,
making similar allegations relating to three different patents of Square D.
The Delaware suit has subsequently been amended to add a fourth patent. The
complaints in both actions seek injunctive relief, damages, treble damages,
interest, costs, and attorney's fees. The Company believes that it has
defenses to the claims and intends to defend this litigation vigorously. This
litigation has and will continue to require the Company to incur substantial
costs and has and will require significant commitment of the time and
attention of management. There can be no assurance as to the outcome of this
or any litigation and adverse findings could subject the Company to liability
to Square D, require the Company to obtain licenses from Square D, or
otherwise affect the Company's ability to manufacture and sell the resistance
welding products involved.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales increased $2.1 million (22.8%) from $9.3 million to $11.4 million in
the first quarter of 1995. The increase was due to a higher volume of vision
product sales as the demand for the Company's optical inspection product line
continued. The quarter also contained an increase in vision sales from its
recently acquired subsidiary, Integral Vision Ltd.
Cost of sales increased from $6.2 million to $8.1 million and as a percentage
of net sales from 66.8% to 71.5%. The increased percentage is principally the
result of increased manufacturing costs not recovered through sales price
increases, costs incurred related to the introduction of new products and
changes in the mix of welding products.
Sales backlog for the Company at March 31, 1995 was $7.5 million, compared to
$7.4 million at March 31, 1994.
Marketing expense increased from $0.8 million to $1.1 million and as a
percentage of net sales from 8.5% to 9.5%. The increase was due to increased
personnel and promotional activity being devoted to support of higher sales
volume and the marketing of new products.
General and administrative expense increased from $0.5 million to $1.4 million
and as a percentage of net sales from 5.5% to 12.6%. The major reason for this
increase was the $0.7 million of legal fees incurred as part of the patent
litigation currently in process. These legal expenses will likely continue
until this litigation is closed.
Research and development expenses remained relatively unchanged at $0.5
million.
Net interest expense decreased as a percentage of net sales from 1.3% to 0.2%.
The decrease is the result of a portion of the proceeds from the stock
offering in May 1994 being used to pay off debt and the remainder being
invested.
The provision for income taxes decreased from $0.2 million to $0.1 million,
but the effective tax rate increased from 1994 to 1995. The increase in the
effective tax rate is the result of the utilization of net operating loss
carryforwards in 1994. There were no remaining net operating loss
carryforwards available for use in 1995 for financial reporting purposes.
Liquidity and Capital Resources
The Company has a $5,000,000 line of credit with its bank. The advances bear
interest at the bank's prime rate or a negotiated rate (at the Company's
option, subject to the bank's approval). This line is payable upon demand and
there were no amounts outstanding on this facility at March 31, 1995.
During the quarter ended March 31, 1995, the Company utilized cash generated
from operations, the increase in accounts payable and the sale of short-term
investments to fund the investment in property and equipment and capitalized
software as well as the increase in accounts receivable and inventory. The
accounts receivable increase was principally related to an increase in
invoicing activity during the quarter ended March 31, 1995. The increase in
inventory is primarily related to the increase in business activity in 1995.
The Company believes that current financial resources, together with cash
generated from operations, will be adequate to meet cash requirements through
1995. The 1995 acquisition of Integral is not expected to significantly impact
the Company's financial resources. The Company does not currently anticipate
capital expenditures in excess of $1.5 million for 1995.
PART II. OTHER INFORMATION
Items 1 and 5. Legal proceedings and other information
On April 8, 1994, Square D Company ("Square D") filed in the
United States District Court for the Eastern District of
Michigan a lawsuit against the Company alleging that certain
of the Company's resistance welding control products infringe
two patents of Square D. On April 8, 1994, Square D filed a
second suit, in the United States District Court for the
District of Delaware, making similar allegations relating to
three different patents of Square D. The Delaware suit has
subsequently been amended to add a fourth patent. The
complaints in both actions seek injunctive relief, damages,
treble damages, interest, costs, and attorney's fees. The
Company believes that it has defenses to the claims and
intends to defend this litigation vigorously. This litigation
has and will continue to require the Company to incur
substantial costs and has and will require significant
commitment of the time and attention of management. There can
be no assurance as to the outcome of this or any litigation
and adverse findings could subject the Company to liability
to Square D, require the Company to obtain licenses from
Square D, or otherwise affect the Company's ability to
manufacture and sell the resistance welding products
involved.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 11: Calculation of earnings per share
(b) A report on Form 8-K was filed dated March 2, 1995
covering the acquisition of Integral Vision Ltd. A Form
8-K/A was filed dated April 26, 1995 covering the same
acquisition.
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.
//CHARLES J. DRAKE// 05/12/95
Charles J. Drake
President & Chairman of the Board
Medar, Inc.
(Principal Executive Officer)
//GERALD R. SMITH// 05/12/95
Gerald R. Smith
Vice President of Finance & Operations
Medar, Inc.
(Principal Financial & Accounting Officer)