1
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 JUNE 30, 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 JULY 31, 1995
----- ----------------------------
Common stock, no par value, stated
value $.20 per share 8,712,731 shares
Page 1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES
JUNE 30 DECEMBER 31
1995 1994
------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS - Note E
Cash and cash equivalents $ 736,644 $ 586,227
Short-term investments 4,018,360
Accounts receivable, less allowance of
$293,000 at June 30, 1995 and $311,000
at December 31, 1994 12,154,048 11,938,278
Inventories - Note C 13,896,925 11,431,635
Costs and estimated earnings in excess of
billings on incomplete contracts - Note D 2,430,457 2,290,559
Other current assets 1,207,913 743,839
----------- ------------
TOTAL CURRENT ASSETS 30,425,987 31,008,898
PROPERTY, PLANT AND EQUIPMENT - Note E
Land and land improvements 324,021 324,021
Building and building improvements 3,627,149 3,537,670
Production and engineering equipment 2,497,459 2,169,908
Furniture, fixtures and other 1,289,649 870,511
Computer equipment 3,144,395 2,623,608
----------- ------------
10,882,673 9,525,718
Less accumulated depreciation 4,406,923 3,906,149
----------- ------------
6,475,750 5,619,569
OTHER ASSETS
Capitalized computer software
development costs, net of amortization 6,469,977 5,701,274
Deferred income taxes 1,091,000 73,000
Other 3,532,807 1,119,808
----------- ------------
11,093,784 6,894,082
----------- ------------
$47,995,521 $ 43,522,549
=========== ============
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS - CONTINUED
MEDAR, INC. AND SUBSIDIARIES
JUNE 30 DECEMBER 31
1995 1994
---------------------------------------------------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 180,476 $ 146,126
Accounts payable 3,857,912 4,389,662
Employee compensation 718,242 1,106,882
Accrued and other liabilities 1,007,344 1,154,937
Current maturities of long-term debt - Note E 807,337 471,695
Deferred income taxes 286,000 280,000
Patent litigation accrual-Note H 4,552,802
------------ ------------
TOTAL CURRENT LIABILITIES 11,410,113 7,549,302
LONG-TERM DEBT, less current maturities - Note E 4,385,529 1,971,942
STOCKHOLDERS' EQUITY - Note G
Common stock, without par value, stated
value $.20 per share; 15,000,000 shares
authorized; 8,706,057 shares issued and
outstanding (8,630,469 shares at
December 31, 1994) 1,741,211 1,726,094
Additional paid-in capital 29,427,143 29,101,516
Retained earnings 1,115,073 3,261,704
Accumulated translation adjustment (83,548) (88,009)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 32,199,879 34,001,305
------------ ------------
$ 47,995,521 $ 43,522,549
============ ============
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30
1995 1994
----------------------------------------------------------
(UNAUDITED)
Net sales $ 11,193,766 $ 10,665,897
Cost of sales 7,731,202 7,150,655
------------- ------------
GROSS MARGIN 3,462,564 3,515,242
Costs and expenses:
Marketing 1,215,097 930,782
General and administrative 670,262 627,576
Research and development 272,292 510,773
Patent litigation costs - Note H 4,625,000 75,000
------------- ------------
6,782,651 2,144,131
------------- ------------
EARNINGS (LOSS) FROM OPERATIONS (3,320,087) 1,371,111
Interest:
Expense 81,022 (8,888)
Income (13,877) (24,277)
------------- ------------
67,145 (33,165)
------------- ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,387,232) 1,404,276
Provision (credit) for income taxes - Note F (1,094,000) 289,000
------------- ------------
NET EARNINGS (LOSS) $ (2,293,232) $ 1,115,276
============= ============
Net earnings (loss) per share $ (.26) $ .13
============= ============
Weighted average number of shares of
common stock (and common stock equivalents in 1994)
outstanding 8,696,697 8,269,228
============= ============
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30
1995 1994
--------------------------------------------------------
(UNAUDITED)
Net sales $ 22,552,434 $ 19,915,535
Cost of sales 15,849,253 13,324,156
------------ ------------
GROSS MARGIN 6,703,181 6,591,379
Costs and expenses:
Marketing 2,288,780 1,722,858
General and administrative 1,392,842 1,140,738
Research and development 711,538 977,895
Patent litigation costs- Note H 5,375,000 75,000
------------ ------------
9,768,160 3,916,491
------------ ------------
EARNINGS (LOSS) FROM OPERATIONS (3,064,979) 2,674,888
Interest:
Expense 150,500 117,508
Income (56,848) (24,277)
------------ ------------
93,652 93,231
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,158,631) 2,581,657
Provision (credit) for income taxes - Note F (1,012,000) 508,000
------------ ------------
NET EARNINGS (LOSS) $ (2,146,631) $ 2,073,657
============ ============
Net earnings (loss) per share $ (.25) $ .26
============ ============
Weighted average number of shares of
common stock (and common stock equivalents in 1994)
outstanding 8,672,785 7,997,244
============ ============
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30
1995 1994
----------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net earnings (loss) $(2,146,631) $ 2,073,657
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,546,909 1,112,917
Provision for deferred income taxes (1,012,000) 486,000
Changes in operating assets and liabilities (4,934,910) (1,394,488)
Increase in patent litigation accrual 4,552,802
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,993,830) 2,278,086
INVESTING ACTIVITIES
Sale of short-term investments 4,018,360
Purchase of property and equipment (1,357,855) (769,313)
Investment in capitalized software (1,662,904) (1,305,656)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 997,601 (2,074,969)
FINANCING ACTIVITIES
Net increase (decrease) in borrowings under
line of credit 31,565 (1,288)
Debt repayments on long-term debt and capital
lease obligations (249,587) (12,439,901)
Proceeds from long-term borrowings 998,250 6,765,000
Proceeds from exercise of stock options 365,283 74,040
Net proceeds from sale of common stock 13,666,045
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,145,511 8,063,896
----------- -----------
Effect of exchange rate changes on cash 1,135 1,210
----------- -----------
INCREASE IN CASH 150,417 8,268,223
Cash at beginning of period 586,227 499,593
----------- -----------
CASH AT END OF PERIOD $ 736,644 $ 8,767,816
=========== ===========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MEDAR, INC. AND SUBSIDIARIES
JUNE 30, 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 June 30, 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 six months ended
June 30, 1994 are as follows:
MEDAR INTEGRAL COMBINED
---------- ------------ --------------
Net sales $ 18,409,381 $ 1,506,154 $ 19,915,535
Net income (loss) 2,112,007 (38,350) 2,073,657
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:
JUNE 30 DECEMBER 31
1995 1994
-----------------------------------------
Raw materials $ 5,175,348 $ 4,997,585
Work-in-process 5,974,695 4,031,832
Finished goods 2,746,882 2,402,218
-------------- ------------
$ 13,896,925 $ 11,431,635
============== ============
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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:
JUNE 30 DECEMBER 31
1995 1994
----------------------------------------------------
Contract costs to date $ 5,744,140 $ 5,681,635
Estimated contract earnings 5,938,801 5,415,595
------------- -------------
11,682,941 11,097,230
Less billings to date (9,252,484) (8,806,671)
------------- -------------
Costs and estimated earnings in excess
of billings on incomplete contracts $ 2,430,457 $ 2,290,559
============= =============
Note E - Long Term Debt and Other Financing Arrangements
Long-term debt at June 30, 1995 and December 31, 1994 consisted of the
following:
JUNE 30 DECEMBER 31
1995 1994
----------------------------------------------------
Term note payable to bank $ 2,000,000 $ 2,125,000
Revolving note payable to bank 600,000
Patent license payable 2,000,000
Other 592,866 318,637
------------- -------------
5,192,866 2,443,637
Less current maturities 807,337 471,695
------------ -------------
$ 4,385,529 $ 1,971,942
============= =============
The term note payable to the bank is payable in quarterly installments of
$62,500 plus interest at the bank's prime rate (the bank's prime rate was 9.00%
and 8.50% at June 30, 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.
The Company has a revolving note payable to its bank with a maximum balance of
$8,000,000. This note expires June 29, 1997 and has advances which bear
interest at the bank's prime rate or other rates made available under the terms
of the agreement.
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Note E - Long Term Debt and Other Financing Arrangements (continued):
Maturities of long-term debt, excluding those payable within twelve months from
June 30, 1995 (which are stated as current maturities of long-term debt), are
$300,000 in 1996; $1,000,000 in 1997; $1,537,000 in 1998; $175,000 in 1999; and
$1,374,000 thereafter.
Note F - Income Taxes
Significant components of the provision (credit) for income taxes for the six
months ended June 30 are as follows:
1995 1994
-------------- --------------
Current:
Foreign $ (2,000)
State 24,000
--------------
22,000
--------------
Deferred:
Federal $ (1,037,000) 495,000
Foreign 25,000 (9,000)
------------ --------------
(1,012,000) 486,000
------------ -------------
$ (1,012,000) $ 508,000
============ ==============
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:
JUNE 30 DECEMBER 31
1995 1994
------------- --------------
Deferred tax liabilities:
Deductible software development costs, net of
amortization $2,150,000 $1,947,000
Tax over book depreciation 365,000 368,000
Percentage of completion 736,000 736,000
---------- ----------
Total deferred tax liabilities 3,251,000 3,051,000
Deferred tax assets:
Net operating loss carryforwards 2,732,000 1,518,000
Credit carryforwards 863,000 823,000
Reserve for obsolescence 163,000 155,000
Other 298,000 348,000
---------- ----------
Total deferred tax assets 4,056,000 2,844,000
---------- ----------
Net deferred tax liabilities (assets) $ (805,000) $ 207,000
========== ==========
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Note F - Income Taxes (continued)
The reconciliation of income taxes computed at the U.S. federal statutory rates
to income tax expense for the six months ended June 30 is as follows:
1995 1994
-------------- -------------
Tax (credit) at U.S. statutory rates $ (1,074,000) $ 878,000
Utilization of net operating loss
carryforward (426,000)
Other nondeductible expenses 20,000 28,000
Other 42,000 4,000
State income taxes 24,000
------------ ------------
$ (1,012,000) $ 508,000
============ ============
Note G - Stock Options
At June 30, 1995, there were options to purchase 798,912 shares outstanding
ranging in price from $1.50 to $11.50. These options were not included in the
calculation of net loss per share, as the effect was antidilutive.
Note H - Settlement of Legal Proceedings
In July 1995, Medar, Inc. reached a settlement of its patent litigation which
was initiated by Square D Company in April of 1994 in the Federal District
Courts in Eastern District of Michigan and in Delaware. This resolution also
settles claims made by Medar against Square D. The terms of the settlement
made under the auspices of the Federal District Court in Delaware provide for a
cross license agreement on all single phase welding patents held by either
company and call for a single payment related to use of technology in prior
years as well as yearly payments for the use of technology in the future.
The single payment, which is expected to be paid in the third quarter of 1995,
has been recorded as an expense in the second quarter of 1995 and as a current
liability at June 30, 1995. The future payments have been reflected as a
noncash transaction which increased both long-term debt and other assets by
$2,000,000. This amount will be amortized over future periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1995 Compared to June 30, 1994
Net sales increased $0.5 million (4.9%) to $11.2 million from $10.7 million.
This increase was due to an increase in volume of vision sales as the higher
demand for the Company's vision products continued.
Cost of sales increased to $7.7 million from $7.2 million and as a percentage
of net sales to 69.1% from 67.0%. The increased percentage is primarily the
result of additional costs incurred related to the introduction of certain new
products and cost increases not recovered through sales price increases.
Sales backlog for the Company at June 30, 1995 was $16.8 million compared to
$4.3 million at June 30, 1994. Most of the increase is due to receipt of a
large order from one of the Company's major customers.
Marketing expense increased to $1.2 million from $0.9 million and as a
percentage of net sales to 10.9% from 8.7%. The increase was due to increased
personnel and promotional activity associated with new promotion programs and
product introductions.
General and administrative expense was relatively unchanged.
Research and development expense decreased to $0.3 million from $0.5 million
and as a percentage of net sales to 2.4% from 4.8% as a greater portion of
engineering time was spent on areas other than product development in 1995.
Patent litigation costs relate to costs of settlement of the Company's patent
litigation with Square D as well as the costs incurred to defend the case.
Net interest expense increased in 1995 from 1994 as 1994 was favorably impacted
by gains realized upon the sale of interest rate swaps.
The effective tax rate in 1995 increased over the rate used in 1994 due to the
utilization of net operating loss carryforwards in 1994.
Six Months Ended June 30, 1995 Compared to June 30, 1994
Net sales increased $2.6 million (13.2%) to $22.5 million from 19.9 million.
This increase was due to an increase in volume of vision sales as the higher
demand for the Company's vision products continued.
Cost of sales increased to $15.8 million from $13.3 million and as a percentage
of net sales to 70.3% from 66.9%. The increased percentage is principally the
result of increased manufacturing costs not recovered through sales price
increases, costs incurred related to the introduction of certain new products
and changes in the mix of welding products.
Marketing expense increased to $2.3 million from $1.7 million and as a
percentage of net sales to 10.1% from 8.7%. The increase was due to increased
personnel and promotional activity associated with new promotion programs and
product introductions.
General and administrative expense increased to $1.4 million from $1.1 million
and as a percentage of net sales to 6.2% from 5.7%. The increase was primarily
due to additional support needed for expansion of the Company's U.K. facility.
Page 11
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Patent litigation costs relate to costs of settlement of the Company's patent
litigation with Square D as well as the costs incurred to defend the case.
Net interest expense increased in 1995 from 1994 as 1994 was favorably impacted
by gains realized upon the sale of interest rate swaps.
The effective tax rate in 1995 increased over the rate used in 1994 due to the
utilization of net operating loss carryforwards in 1994.
Liquidity and Capital Resources
The Company has a revolving note payable to its bank with a maximum balance of
$8,000,000. This note expires June 29, 1997 and has advances which bear
interest at the bank's prime rate or a choice of other rates made available
under the terms of the agreement.
During the six months ended June 30, 1995, the Company utilized cash generated
from the sale of short-term investments and the proceeds from long-term
borrowings to fund investments in property and equipment and capitalized
software as well as the increase in inventory. 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 for which it would not be able to obtain appropriate
financing through the remainder of 1995.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1995, Medar, Inc. reached a settlement of its patent litigation which
was initiated by Square D Company in April of 1994 in the Federal District
Courts in Eastern District of Michigan and in Delaware. This resolution also
settles claims made by Medar against Square D. The terms of the settlement
made under the auspices of the Federal District Court in Delaware provide for a
cross license agreement on all single phase welding patents held by either
company and call for a single payment related to use of technology in prior
years as well as yearly payments for the use of technology in the future.
ITEM 2. RESULTS OF VOTES OF SECURITY HOLDERS
The annual meeting of the Company was held on May 31, 1995. The matters voted
upon were the election of directors, amendment to the Articles of
Incorporation, authorization of a Stock Option Plan and other business which
may come before the meeting (of which there was none). The results of the
votes were as follows:
For Withheld Non-Votes
------------- ------------- -------------
Max A. Coon 7,409,539 21,096 500
Charles J. Drake 7,410,739 19,896 500
Stephan Sharf 7,408,339 22,296 500
Vincent Shunsky 7,410,439 20,196 500
Gerald R. Smith 7,410,539 20,096 500
William B. Wallace 7,410,639 19,996 500
Stephen R. Zynda 7,409,439 21,196 500
Frederico de Magalhaes 7,410,639 19,996 500
For Against Absentensions Non-Votes
----------- ------------ ------------- ------------
Amendment to Articles
of Incorporation
increasing the
authorized common
stock of Medar, Inc. 6,752,666 124,643 174,426 379,400
Stock Option Plan
authorized to grant
500,000 shares of
common stock of
Medar, Inc. 5,335,117 342,708 336,749 1,416,561
Other business which
may come before the
meeting 6,051,952 679,070 699,613 500
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1: Revolving Credit and Loan Agreement dated August 10, 1995
by and between Medar, Inc., Automatic Inspection Devices,
Inc. and Integral Vision, Ltd. and NBD Bank.
Exhibit 10.2: Amendment No. 2 to Loan and Credit Agreement and Term Note
dated August 10, 1995 by and between Medar, Inc.,
Automatic Inspection Devices, Inc. and NBD Bank.
Exhibit 11: Calculation of earnings per share
(b) A Form 8-K/A was filed dated April 26, 1995 covering the
acquisition of Integral Vision Ltd. A Form 8-K was filed
dated July 28, 1995 covering the settlement of patent
litigation.
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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.
/s/ CHARLES J. DRAKE 08/10/95
- --------------------
Charles J. Drake
President & Chairman of the Board
Medar, Inc.
(Principal Executive Officer)
/s/ RICHARD R. CURRENT 08/10/95
- ----------------------
Richard R. Current
Vice President of Finance
Medar, Inc.
(Principal Financial & Accounting Officer)
Page 15
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Exhibit Index
Exhibit
Number Decription
- ------- ----------
10.1 Revolving Credit and Loan Agreement dated August 10,
1995 by and between Medar, Inc., Automatic Inspection Devices, Inc. and
Integral Vision, Ltd. and NBD Bank.
10.2 Amendment No. 2 to Loan and Credit Agreement and Term Note dated
August 10, 1995 by and between Medar, Inc., Automatic Inspection
Devices, Inc. and NBD Bank.
11 Calculation of earnings per share
27 Financial Data Schedule