1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NUMBER 1
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number
0-12728
MEDAR, INC.
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(Exact name of registrant as specified in its charter)
Michigan 38-2191935
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
38700 Grand River Ave., Farmington Hills, Michigan 48335
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(Address of principal executive offices) (Zip Code)
(248) 471-2660
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(Registrant's telephone number, including area code)
(not applicable)
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(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
The number of shares outstanding of the registrant's Common Stock, no par
value, stated value $.20 per share, as of April 30, 1998 was 9,024,901.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
MEDAR, INC. AND SUBSIDIARIES
MARCH 31 DECEMBER 31
1998 1997
----------------------------------------
(Unaudited)
(In thousands)
ASSETS
CURRENT ASSETS
Cash $ 778 $ 831
Accounts receivable, less allowance of $400 9,397 10,682
Inventories 10,890 14,227
Costs and estimated earnings in excess of billings on incomplete
contracts 1,540 2,568
Other current assets 922 881
----------------------------------
TOTAL CURRENT ASSETS 23,527 29,189
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 377 377
Building and building improvements 6,317 6,317
Production and engineering equipment 3,906 3,791
Furniture and fixtures 1,025 1,022
Vehicles 858 875
Computer equipment 5,030 5,241
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17,513 17,623
Less accumulated depreciation 8,466 8,021
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9,047 9,602
OTHER ASSETS
Capitalized computer software development costs, net of
amortization 5,363 10,796
Patents 2,064 2,127
Other 1,377 1,444
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8,804 14,367
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$ 41,378 $ 53,158
==================================
See accompanying notes.
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CONSOLIDATED BALANCE SHEETS - CONTINUED
MEDAR, INC. AND SUBSIDIARIES
MARCH 31 DECEMBER 31
1998 1997
-----------------------------------------
(Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,812 $ 4,472
Employee compensation 998 1,110
Accrued and other liabilities 666 714
Current maturities of long term debt 18,470 19,415
---------------------------------------
TOTAL CURRENT LIABILITIES 23,946 25,711
LONG-TERM DEBT, less current maturities 4,757 4,892
STOCKHOLDERS' EQUITY
Common stock, without par value, stated value $.20 per share;
15,000,000 shares authorized; 9,024,901 shares issued and
outstanding 1,805 1,805
Additional paid-in capital 31,187 31,187
Retained-earnings deficit (20,373) (10,444)
Accumulated translation adjustment 56 7
---------------------------------------
TOTAL STOCKHOLDERS' EQUITY 12,675 22,555
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$ 41,378 $ 53,158
=======================================
See accompanying notes.
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CONSOLIDATED STATEMENTS OF OPERATIONS
MEDAR, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31
1998 1997
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(Unaudited)
(In thousands, except per share data)
Net revenues $ 6,627 $ 10,211
Direct costs of sales - Note B 7,537 7,434
----------------------------------------------
Gross Margin (Loss) (910) 2,777
Other costs and expenses:
Marketing 977 1,032
General and administrative 806 618
Research, development, and engineering 1,033 616
Product Restructuring and Other Charges - Note B 5,571
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8,387 2,266
Interest:
Expense 646 497
Income (14) (12)
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632 485
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Net Earnings (Loss) $ (9,929) $ 26
==============================================
Basic and diluted earnings (loss) per share $ (1.10) $ 0
==============================================
Weighted average number of shares of common stock and common
stock equivalents, where applicable 9,025 8,893
==============================================
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
MEDAR, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31
1998 1997
--------------------------------------------
(Unaudited)
(In thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ (9,929) $ 26
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,578 1,465
Changes in operating assets and liabilities 3,454 1,598
Restructuring charges 6,973
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,076 3,089
INVESTING ACTIVITIES
Purchase of property and equipment (189) (28)
Investment in capitalized software and patents (909) (1,309)
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,098) (1,337)
FINANCING ACTIVITIES
Decrease in long term debt (1,080) (1,178)
Effect of exchange rate changes on cash 49 114
--------------------------------------------
INCREASE (DECREASE) IN CASH (53) 688
Cash at beginning of period 831 215
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CASH AT END OF PERIOD $ 778 $ 903
============================================
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MEDAR, INC. AND SUBSIDIARIES
March 31, 1998
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, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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,
1997.
Note B - Restructuring of Operations
Early in the second quarter of 1998, management completed an evaluation of
competitive conditions and product offerings in the vision and welding
divisions. A charge of $6,973,000 was recorded as of March 31,1998 to give
effect to the impairment of assets identified in this review. The charge
consisted of $5,268,000 related to capitalized software development costs,
$1,402,000 related to inventory (included in direct costs of sales) and $303,000
of other accruals.
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
1998 1997
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(In thousands)
Raw materials $ 4,736 $ 6,076
Work-in-process 2,018 1,654
Finished goods 4,136 6,497
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$ 10,890 $ 14,227
========================================
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. 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.
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Note D - Costs and Estimated Earnings in Excess of Billings on Incomplete
Contracts (cont) Activity on long-term contracts is summarized as follows:
MARCH 31 DECEMBER 31
1998 1997
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(In thousands)
Contract costs to date $ 6,022 $ 3,499
Estimated contract earnings 3,973 3,377
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9,995 6,876
Less billings to date (8,455) (4,308)
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Costs and estimated earnings in excess of billings on
incomplete contracts $ 1,540 $ 2,568
======================================
Note E - Long Term Debt and Other Financing Arrangements Long-term debt
consisted of the following:
MARCH 31 DECEMBER 31
1998 1997
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(In thousands)
Revolving note payable to bank $ 11,281 $ 12,258
Subordinated debentures, interest at 12.95%, (Net of unaccreted
value assigned to related warrents of $486,000) 6,514 6,490
Term notes payable to bank 3,548 3,660
Patent license to corporation, payable $300,000 yearly including
interest 1,715 1,715
Other 169 184
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23,227 24,307
Less current maturities 18,470 19,415
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$ 4,757 $ 4,892
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The revolving note payable to bank is due August 31, 1999, and provides for
advances of up to $12,000,000 (subsequently reduced to $10,000,000) based upon
levels of eligible accounts receivable and inventory. At March 31,1998,
$11,956,000 was available for advances and interest was at the bank's prime rate
plus 1/4%. Under the terms of a related agreement with the bank, the Company
agreed, among other covenants, to maintain net worth and the ratio of debt to
net worth, all as defined, at specified levels. Substantially all company assets
not previously pledged under term notes (see below), have been pledged as
collateral for this indebtedness.
The term notes to bank are payable as follows:
- - $62,500 quarterly plus interest at the bank's prime rate, plus 1/4%, due
June 29, 2002; collateralized by a first mortgage on the Company's Grand
River facility;
- - $14,111 monthly, plus interest at 7.7%, due October 31, 2000;
collateralized by a first mortgage on the Company's Crestview facility;
- - $2,189 monthly, plus interest at the bank's prime rate, plus 1/4%; due
March 20, 2002;
The subordinated debentures mature $700,000 on each June 30 in the years 2000 to
2004, with the balance due June 30, 2005. Interest on the debentures is payable
quarterly at 12.95%. Terms with respect to the maintenance of levels of net
worth and net worth ratios are the same as with the bank under the agreements
related to the revolving note. Substantially all company assets are secondarily
pledged as collateral for the debentures.
The debenture holders have warrants for the purchase of 1,400,000 shares of
Medar common stock at $6.86. These warrants expire June 30, 2005.
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Note E - Long Term Debt and Other Financing Arrangements (cont)
At March 31, 1998, the Company's equity did not meet the levels required in debt
agreements related to the Company's revolving bank loan and subordinated
debentures. Although the lenders waived this shortfall as of March 31, 1998, no
waivers for possible future violations were obtained. As the company does not
expect to attain the equity levels required in the loan agreements as of June
30,1998 and it expects it will have to approach the lenders for additional
waivers of forbearance at that time, the debt issues are classified as current
liabilities.
While there can be no assurance that the lenders will grant waivers for any
violations that might be incurred, management believes that the expenditure
reductions already initiated and other actions to raise cash through excess
asset sales as well as the possible recovery of sales levels later in the year
will be sufficient to convince the lenders that it will be prudent for them to
forbear any actions that they may be legally entitled to take under terms of the
agreements related to the Company's debt. Excess assets may include sale of one
or both of the Company's buildings which may be completed late in the third or
in the fourth quarter. See Note J for discussion of the subsequent sale of a
patent.
The patent license payable relates to future payments to a corporation for use
of certain patents. The payments are due in eight remaining installments and
have been discounted at 8%.
The fair values of these financial instruments approximates their carrying
amounts at March 31, 1998.
Maturties of long-term debt and capitalized lease obligations, excluding those
payable within twelve months from March 31, 1998 (which are stated as current
maturties of long-term debt) are $686,000 in 1999; $2,348,000 in 2000; $486,000
in 2001, $476,000 in 2002 and $761,000 thereafter.
Note F - Income Taxes
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
1998 1997
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(In thousands)
Deferred tax liabilities:
Deductible software development costs, net of amortization $ 1,951 $ 3,609
Tax over book depreciation 88 275
Percentage of completion 524 873
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Total deferred tax liabilities 2,563 4,757
Deferred tax assets:
Net operating loss carry forwards 8,022 7,592
Credit carry forwards 1,061 1,061
Reserve for warranty 68 68
Reserve for inventory 834 144
Other 193 181
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Total deferred tax assets 10,178 9,046
Valuation allowance for deferred tax assets 7,615 4,289
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Net deferred tax assets 2,563 4,757
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Net deferred tax liabilities $ -0- $ -0-
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Note F - Income Taxes (cont)
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:
1998 1997
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(In thousands)
Tax at U.S. statutory rates $ (3,376) $ 9
Change in valuation allowance 3,326
Utilization of net operating loss carry forward (9)
Other 50
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$ - $ -
=====================================
Note G - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31:
1998 1997
- ---------------------------------------------------------------------------------
Numerator:
Net loss for basic and diluted earnings
per share: $ (9,929) $ 26
*there was no effect of dilutive
securities
Denominator:
Denominator for basic earnings per share
- - weighted-average shares 9,025,000 8,852,000
Effect of dilutive securities:
Employee stock options 41,000
-------------------------------------
Denominator for diluted earnings per
share - adjusted weighted-average shares 9,025,000 8,893,000
Basic and diluted earnings (loss) per
share $ (1.10) $ 0.00
=================================================================================
For additional disclosures regarding stock options and warrants see Note H.
Warrants to purchase 1,400,000 shares of common stock and options to purchase
662,100 shares of common stock were outstanding during 1998 but were not
included in the computation of diluted earnings per share because the inclusion
of these options would have an antidilutive effect.
Note H - Stock Options and Warrants
At March 31, 1998, there were options outstanding to purchase 662,100 shares at
prices ranging from $1.75 to $9.25 per share and warrants outstanding to
purchase 1,400,000 shares at $6.86 per share.
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Note I - Segment Data
Quarter Ended March 31, 1998
Vision-based Resistance Welding
Inspection Systems Controls Consolidated
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(In thousands)
Net revenues $1,594 $5,033 $ 6,627
Amortization of software development cost 820 212 1,032
Research, development and engineering expense 828 205 1,033
Loss from operations (a) (7,950) (1,347) (9,297)
Net interest expense 632
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Earnings before income taxes $(9,929)
=========================================================================================================================
Quarter Ended March 31, 1997
Vision-based Resistance Welding
Inspection Systems Controls Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net sales $3,504 $6,707 $10,211
Amortization of software development cost 595 233 828
Research, development and engineering expense 329 287 616
Earnings (loss) from operations (698) 1,209 511
Net interest expense 485
- ------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 26
==============================================================================================================================
(a) loss from operations for the quarter ended March 31, 1998 includes
restructuring charges of $5,785 for Vision-based Inspection Systems and $1,188
for Resistance Welding Controls (see note B).
Note J - Subsequent Event
On May 6, 1998, the Company completed a sale of certain 3-D scanning technology
in the form of a patent for a cash payment of $1.5 million. The technology was
not used by the Company and its use is not included in future plans.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Product Restructuring Charges
During the first quarter of 1998 in response to the financial conditions that
arose due to heavy investments necessary to complete certain projects under
development and unexpected low levels of orders and sales, management terminated
15% of the Company's employees with combined salaries totaling 20% of total
compensation. As these terminations severely constrained resources available for
product support, it was quickly followed by an extensive review of product
offerings. This review determined that the Company would concentrate its efforts
going forward towards products for the inspection of DVD discs, products based
on VisionBlox technology and certain higher margin and better selling welding
products. Other products including those related to compact disc production and
certain other products that were selling poorly or at low margins or which were
no longer supportable in the software configurations in use were identified for
phase out or abandonment. These products had recorded software development costs
totaling $5.3 million which was charged off to operations. In addition, reserves
totaling $1.4 million to reduce the cost of inventory related to these products
to estimated realizable value were established. Finally, in connection with a
decision to offer for sale one of the Company's buildings, a reserve in the
amount of $300,000 to cover the costs to carry the building until the estimated
sale date was established.
The charges related to inventory ($1.4 million) were recorded as part of direct
cost of sales and the charges related to software development costs and the
building reserve (totaling $5.6 million) were reflected as product restructuring
and other charges with other costs and expenses in the consolidated statements
of operations in the first quarter of 1998.
Results of Operations
Three Months Ended March 31, 1998 Compared to March 31, 1997.
Net sales in the first quarter of 1998 decreased 35% to $6.6 million from $10.2
million. The decrease resulted from decreases of welding product revenues of
$1.7 million and optical inspection product revenues of $1.9 million. Welding
product sales decreased as fewer large automotive programs were scheduled in the
first quarter of 1998 as compared to the first quarter of 1997. Optical
inspection product revenues were down due to decreases in sales of CD inspection
products resulting from slow consumer acceptance of DVD products and lower sales
in Asia caused by economic conditions in that region.
Gross margin decreased to $(.9) million from $2.8 million and as a percentage of
net sales decreased to (14)% from 27%. The decrease was due to charges (see
discussion above) totaling $1.4 million related to inventory reserves as a
result of restructuring activities combined with decreases in sales of higher
margin optical inspection products as well as effects of fixed overhead costs
applied to lower total sales volume.
Sales backlog for the Company at March 31, 1998 was $4.8 million compared to
$5.5 million at March 31, 1997. The decrease is due to less orders received for
CD vision equipment.
Marketing expense remained at $1.0 million and increased as a percentage of net
sales to 14.7% from 10.1% due primarily to lower sales volumes and the costs
being essentially fixed.
General and administrative expense increased to $.8 million from $.6 million and
as a percentage of net sales to 12.2% from 6.1%, due primarily to lower sales
volumes and costs being essentially fixed.
Research and development expense increased to $1.0 million from $.6 million and
as a percentage of net sales to 15.6% from 6.0% due to lower sales volumes
combined with less capitalization of software development costs.
Net interest expense increased to $.6 million from $.5 million and as a
percentage of sales to 9.5% from 4.9%, due to lower sales volumes combined with
increased average debt and debt at higher interest rates.
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Liquidity and Capital Resources
At March 31, 1998 the Company had a revolving note payable to bank, due August
1999, subordinated debentures due 2000 through 2005 and various term notes some
of which mature in 2 to 4 years. Levels of advances under the revolving note are
based upon levels of acceptable accounts receivable and inventory. The revolving
note payable provided for advances up to $12,000,000 at March 31,1998. During
the second quarter this amount was reduced to $10,000,000. At March 31, 1998
$11,956,000 was available for advances of which $11,281,000 had been advanced.
The Company is prohibited from paying dividends under the terms of the credit
agreements.
The agreements related to the revolving note and the subordinated debentures
require that the Company maintain certain levels of tangible net worth as
defined and certain debt to equity ratios. The Company's tangible net worth at
March 31, 1998 did not meet the levels required in the debt agreements. Both the
bank and the subordinated debt holders have waived the shortfall as of March 31,
1998 however no waivers for possible future violations were obtained. If the
company is not successful in adding to tangible net worth, it will again be in
violation of its agreements and will require further waivers from the lenders
and there is no assurance that waivers will be granted. In addition, in the
event that waivers are not granted, it is not known what position the lenders
will take with respect to the loans outstanding, including further reducing
availability or declaring the loan to be immediately payable. The amount of
defined tangible net worth can be increased by net operating earnings or by
reducing the amount of capitalized software.
As discussed in Note J to the interim financial statements, on May 6, 1998, the
Company closed a transaction for the sale of a patent for a cash payment of $1.5
million. Management believes that this payment combined with other asset sales,
including one or both of the Companies buildings and additional expense
reductions, if necessary will either bring the Company into compliance with the
lender agreements or which will show sufficient progress towards compliance that
the lenders will issue additional waivers. There can be no assurance however
that management's plans will be successful or that the lenders will grant any
required waivers.
The Company generated $2.2 million of cash from operations in the first quarter
of 1998. This cash was used to fund $1.1 million of additions to property and
equipment and capitalized software and to pay down debt by $1.1 million. The
Company has no material commitments for the purchase of property and equipment
or software development costs. The amount of software development costs incurred
and capitalized in 1998 will be dependent on determinations throughout the year
of long and short term revenue opportunities in the various products the Company
continues to support in both the welding and the vision divisions. In no case
would it be expected that total capitalization of software costs would exceed
amortization.
The Company believes that its current financial resources together with any cash
generated from operations or asset sales are adequate to meet cash needs for the
next twelve months.
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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
________________________________________________________________________8/31/98
Charles J. Drake
CEO and Chairman of the Board
Medar, Inc.
(Principal Executive Officer)
/S/RICHARD R. CURRENT
________________________________________________________________________8/31/98
Richard R. Current
Executive Vice President, Finance & Operations
Medar, Inc.
(Principal Financial & Accounting Officer)
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INDEX TO EXHIBITS
Exhibit No. Description
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Ex-27 Financial Data Schedule