<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Quarterly period ended September 30,
1998.
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number 0-12728
MEDAR, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2191935
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
38700 Grand River Avenue,
Farmington Hills, Michigan 48335
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 471-2660
Former name, former address and former fiscal year, if changed since last
report: Not Applicable
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 the filing
requirements for the past 90 days. YES NO
--- ---
The number of shares outstanding of the registrant's Common Stock, no par value,
stated value $.20 per share, as of October 31, 1998 was 9,024,901.
<PAGE> 2
Part 1. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
Medar, Inc. and Subsidiaries
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
---------------------------------------------
(Unaudited)
(In thousands)
<S> <C> <C>
Assets
Current Assets
Cash $ 748 $ 831
Accounts receivable, less allowance of $400,000 9,435 10,682
Inventories 8,422 14,227
Costs and estimated earnings in excess of billings on 1,108 2,568
incomplete contracts
Other current assets 778 881
---------------------------------------------
Total Current Assets 20,491 29,189
Property, Plant and Equipment
Land and land improvements 377 377
Building and building improvements 6,317 6,317
Production and engineering equipment 3,911 3,791
Furniture and fixtures 1,023 1,022
Vehicles 423 875
Computer equipment 5,671 5,241
---------------------------------------------
17,722 17,623
Less accumulated depreciation 9,054 8,021
---------------------------------------------
8,668 9,602
Other Assets
Capitalized computer software development costs, net
of amortization 5,357 10,796
Patents, net of amortization 2,001 2,127
Other 1,230 1,444
---------------------------------------------
8,588 14,367
---------------------------------------------
$ 37,747 $ 53,158
=============================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
Consolidated Balance Sheets - Continued
Medar, Inc. and Subsidiaries
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------------------------
(Unaudited)
(In thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,651 $ 4,472
Employee compensation 1,005 1,110
Accrued and other liabilities 566 714
Current maturities of long term debt 17,078 19,415
-----------------------------------------------
Total Current Liabilities 21,300 25,711
Long-Term Debt, less current maturities 4,712 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 (21,328) (10,444)
Accumulated translation adjustment 71 7
-----------------------------------------------
Total Stockholders' Equity 11,735 22,555
-----------------------------------------------
$ 37,747 $ 53,158
===============================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
Consolidated Statements of Operations
Medar, Inc. and Subsidiaries
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1998 1997
---------------------------------------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C>
Net revenues $ 8,947 $ 10,970
Direct cost of sales 6,377 7,298
---------------------------------------------
2,570 3,672
Other costs and expenses:
Marketing 978 1,006
General and administrative 804 678
Research, development, and engineering 1,262 861
---------------------------------------------
3,044 2,545
Interest:
Expense 613 669
Income (31) (12)
---------------------------------------------
582 657
---------------------------------------------
Earnings (Loss) Before Income Tax (1,056) 470
Provision for income taxes 50
---------------------------------------------
Net Earnings (Loss) (1,056) 420
=============================================
Basic and diluted earnings (loss) per share $ (.12) $ .05
=============================================
Weighted average number of shares of common stock and
common stock equivalents, where applicable 9,024 9,123
=============================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
Consolidated Statements of Operations
Medar, Inc. and Subsidiaries
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------
1998 1997
-----------------------------------------------
(Unaudited)
(In thousands, except for per share data)
<S> <C> <C>
Net revenues $ 24,406 $ 32,167
Direct cost of sales 19,146 22,386
-----------------------------------------------
5,260 9,781
Costs and expenses:
Marketing 2,836 3,089
General and administrative 2,317 1,936
Research, development, and engineering 3,604 2,229
Product restructuring and Other Changes - Note B 5,571
-----------------------------------------------
14,328 7,254
Interest:
Expense 1,876 1,665
Income (60) (35)
-----------------------------------------------
1,816 1,630
-----------------------------------------------
Earnings (Loss) before Income Tax (10,884) 897
Provision for income taxes 50
-----------------------------------------------
Net Earnings (Loss) $ (10,884) $ 847
===============================================
Basic and diluted earnings (loss) per share $ (1.21) $ .09
===============================================
Weighted average number of shares of common stock and
common stock equivalents, where applicable 9,029 9,110
===============================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
Condensed Consolidated Statements of Cash Flows
Medar, Inc. and Subsidiaries
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
--------------------------------------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating Activities
Net earnings (loss) $ (10,884) $ 847
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,895 4,006
Changes in operating assets and liabilities 5,050 (2,248)
Restructuring charges 6,973
--------------------------------------------
Net Cash provided by Operating Activities 4,034 2,605
Investing Activities
Purchase of property and equipment (99) (455)
Investment in capitalized software and patents (1,565) (3,232)
--------------------------------------------
Net Cash used in Investing Activities (1,664) (3,687)
Financing Activities
Proceeds from issuance of subordinated debentures 6,444
Proceeds from issuance of stock warrants 602
Decrease in long term debt (2,517) (6,467)
Proceeds from issuance of common stock 750
Proceeds from exercise of stock options 103
--------------------------------------------
Net Cash provided (used) by Financing Activities (2,517) 1,432
--------------------------------------------
Effect of exchange rate changes on cash 64 (80)
--------------------------------------------
Increase (Decrease) in Cash (83) 270
Cash at beginning of period 831 215
--------------------------------------------
Cash at end of period $ 748 $ 485
============================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Medar, Inc. and Subsidiaries
September 30, 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 nine month period ended September 30,
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 - Comprehensive Income
During 1997, The Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company adopted Statement 130 as of
January 1, 1998. The adoption of this Statement had no impact on the Company's
net earnings (loss) or stockholders' equity. Statement 130 requires foreign
currency translation adjustments and unrealized gains or losses on investments
and certain derivative instruments, which prior to the adoption of Statement 130
were reported as a component of stockholders' equity, to be included in other
comprehensive income.
Total comprehensive income (loss) was ($1,029) and $725 for the three months
ended September 30, 1998 and 1997, respectively and ($10,820) and $340 for the
nine months ended September 30, 1998 and 1997, respectively.
Note D - 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:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
---------------------------------------
(In thousands)
<S> <C> <C>
Raw materials $ 4,420 $ 6,076
Work-in-process 1,244 1,654
Finished goods 2,758 6,497
---------------------------------------
$ 8,422 $ 14,227
=======================================
</TABLE>
7
<PAGE> 8
Note E - 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.
Activity on long-term contracts is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------------
(In thousands)
<S> <C> <C>
Contract costs to date $ 6,393 $ 3,499
Estimated contract earnings 3,524 3,377
--------------------------------------
9,917 6,876
Less billings to date (8,809) (4,308)
--------------------------------------
Costs and estimated earnings in excess of billings on
incomplete contracts $ 1,108 $ 2,568
======================================
</TABLE>
Note F - Long Term Debt and Other Financing Arrangements
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------------
(In thousands)
<S> <C> <C>
Revolving note payable to bank $ 10,000 $ 12,258
Subordinated debentures, interest at 12.95%, principal due 6,560 6,490
June 2000 through 2004
Term notes payable to bank 3,326 3,660
Patent license to corporation, payable $300,000 yearly 1,554 1,715
including interest
Other 350 184
--------------------------------------
21,790 24,307
Less current maturities 17,078 19,415
--------------------------------------
$ 4,712 $ 4,892
======================================
</TABLE>
The revolving note payable to bank is due August 31, 1999, and provides for
advances of up to $10,000,000 based upon levels of eligible accounts receivable
and inventory. At September 30, 1998, $10,000,000 was available for advances and
interest was at the bank's prime rate plus 1/4%. 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;
8
<PAGE> 9
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%. 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.
The agreements related to the revolving note and the subordinated debentures
require that the Company maintain certain levels of tangible net worth and
certain debt to equity ratios. At September 30, 1998, the Company did not meet
the required levels of net worth and debt to equity ratios in the agreements
related to the revolving note and subordinated debt. As such, the amounts due
under these notes have been classified as current. See further discussion of
this issue in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" elsewhere in this
document.
The patent license payable relates to future payments to a corporation for use
of certain patents. The payments are due in seven remaining installments and
have been discounted at 8%.
The fair values of these financial instruments approximates their carrying
amounts at September 30, 1998.
Maturities of long-term debt and capitalized lease obligations, excluding those
payable within twelve months form September 30, 1998 (which are stated as
current maturities of long-term debt) are $694,000 in 1999; $2,378,000 in 2000;
$549,000 in 2001, $554,000 in 2002, and $537,000, thereafter.
Note G - 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:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
--------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deductible software development costs, net of amortization $ 1,814 $ 3,609
Tax over book depreciation 95 275
Percentage of completion 377 873
--------------------------------------
Total deferred tax liabilities 2,286 4,757
Deferred tax assets: 8,000 7,592
Net operating loss carry forwards 1,061 1,061
Credit carry forwards 68 68
Reserve for warranty 816 144
Other 204 181
--------------------------------------
Total deferred tax assets 10,149 9,046
Valuation allowance for deferred tax assets 7,863 4,289
--------------------------------------
Net deferred tax assets 2,286 4,757
--------------------------------------
Net deferred tax liabilities $ -0- $ -0-
======================================
</TABLE>
9
<PAGE> 10
Note G - Income Taxes (cont)
The reconciliation of income taxes computed at the U.S. federal statutory rates
to income tax expense for the nine months ended September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
(In thousands)
<S> <C> <C>
Tax at U.S. statutory rates $ (3,700) $ 145
Change in valuation allowance 3,574
Utilization of net operating loss carry forward (17)
Other 126 (128)
-------------------------------------
$ - $ -
=====================================
</TABLE>
Note H - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1997 1998 1997
(In thousands except share and per share amounts)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) for basic and $ (1,056) $ 420 $ (10,884) $ 847
diluted earnings per share:
*there was no effect of dilutive
securities
Denominator:
Denominator for basic earnings
per share - weighted- 9,025 8,986 9,025 8,973
average shares
Effect of dilutive securities:
Employee stock options 137 137
--------------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted
weighted-average shares 9,025 9,123 9,025 9,110
Basic and diluted earnings (loss) $ (.12) $ .05 $ (1.21) $ .09
per share
=================================================================================
</TABLE>
For additional disclosures regarding stock options and warrants see Note I.
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 I - Stock Options and Warrants
At September 30, 1998, there were options outstanding to purchase 662,100 shares
of common stock 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.
10
<PAGE> 11
Note J - Segment Data
Quarter Ended September 30, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Optical Inspection Resistance Welding Consolidated
Systems Controls
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net revenues $ 2,528 $ 6,419 $ 8,947
Amortization of software development cost 171 65 236
Research, development, and engineering expense 838 424 1,262
Earnings (loss) from operations (1,318) 844 (474)
Net interest expense 582
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ (1,056)
===================================================================================================================
Quarter Ended September 30, 1997
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Optical Inspection Resistance Welding Consolidated
Systems Controls
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net revenues $ 4,448 $ 6,522 $ 10,970
Amortization of software development cost 594 233 827
Research, development, and engineering expense 526 335 861
Earnings (loss) from operations (254) 1,381 1,127
Net interest expense 657
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ 470
===================================================================================================================
</TABLE>
11
<PAGE> 12
Note J - Segment Data (cont)
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Optical Inspection Resistance Welding Consolidated
Systems Controls
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net revenues $ 7,686 $ 16,720 $ 24,406
Amortization of software development cost 1,172 342 1,514
Research, development, and engineering expense 2,512 1,092 3,604
Loss from operations (a) (8,801) (267) 9,068
Net interest expense 1,816
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ (10,884)
===================================================================================================================
Nine Months Ended September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Optical Inspection Resistance Welding Consolidated
Systems Controls
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net revenues $ 12,939 $ 19,228 $ 32,167
Amortization of software development cost 1,834 697 2,531
Research, development, and engineering expense 1,362 867 2,229
Earnings (loss) from operations (977) 3,504 2,527
Net interest expense 1,630
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes $ 897
===================================================================================================================
</TABLE>
(a) loss from operations for the nine months ended September 30, 1998 includes
restructuring charges of $5,785 for Vision-based Inspection Systems and
$1,188 for Resistance Welding Controls (see note B).
Note K - Impact of Year 2000
Software is included with nearly all of the Company's major products. Following
review, management has concluded that it will not have to incur any substantial
amount of warranty or upgrade costs to this software to comply with Year 2000
issues.
Certain of the Company's internal data processing software will need to be
updated or replaced in order to comply with Year 2000. The Company has acquired
the necessary software and completed much of the necessary training and related
conversion tasks. It is expected that conversion will be completed in the third
quarter of 1999 with minimal additional out-of-pocket cost. It is management's
opinion that following conversion to the new software, Year 2000 issues will not
pose significant operational problems to the Company.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Months Ended September 30, 1998 Compared to September 30, 1997.
Net sales in the third quarter of 1998 decreased 18.4% to $8.9 million from
$11.0 million in 1997. The decrease resulted from decreases of resistance
welding product revenues of $.1 million and optical inspection revenues of $2.0
million. Optical inspection product revenues were down as the third quarter of
1997 revenues included the sale of licenses related to certain excess technology
for $1.5 million that did not recur in 1998 and from decreases in sales of CD
and DVD inspection products following management's first quarter decision to
stop pursuit of the CD market (see nine month discussion below) and slow
consumer acceptance of DVD products.
Gross margin decreased as a percentage of net sales to 28.7% from 33.5% in the
third quarter of 1997. Welding product gross margins were down principally as a
result of the effects of product mix. Vision product margins decreased as a
result of sales of excess technology licenses during the third quarter of 1997
quarter for which there was no recorded cost. The reduction in amortization of
software development costs following the product restructuring charges in the
first quarter of 1998 (see nine month discussion below) contributed positively
to vision product margins.
The sales backlog for the Company at September 30, 1998 was $4.8 million
compared to $9.2 million at September 30, 1997. Welding product backlogs are
lower than comparable 1997 levels, however, they are expected to strengthen in
the fourth quarter of 1998 as the Company books orders on projects for which its
products have been specified by the end user. Vision product backlogs are low
because of the historical buying patterns of vision customers who generally
expect expedited delivery of products following placement of the order.
Marketing expense decreased less than $.1 million from $1.0 million and as a
percentage of net sales increased to 10.9% from 9.2%. The increase in expenses
expressed as a percentage of net sales came principally from the continuation of
fixed costs with the decline in sales.
General and Administrative expense increased to $.8 million from $.7 million and
as a percentage of net sales increased to 9.0% from 6.2% The dollar increase is
principally related to the costs associated with the implementation of the
Company's new financial and manufacturing software. The percentage increase
results principally from the fixed nature of many general and administrative
expenses with the decrease in the level of net sales in 1998.
Research, development, and engineering expense increased to $1.3 million from
$.9 million and as a percentage of net sales to 14.1% from 7.8% in 1997. This
increase resulted from less software development costs meeting the criteria for
capitalization in 1998 as compared to 1997 as the development of VisionBlox and
DVD products are substantially completed. Many of the personnel formerly
dedicated to these products are now assigned directly to customer projects.
Net interest expense decreased to $.6 million from $.7 million in the prior year
due to reduced levels of borrowing during the quarter and as a percentage of net
sales to 6.5% from 6.0% due to lower sales.
Results of Operations
Nine Months Ended September 30, 1998 Compared to September 30, 1997.
Net sales in the nine months ended September 30, 1998 decreased 24% to $24.4
million from $32.2 million in 1997. The decrease resulted from decreases of
resistance welding product revenues of $2.8 million and optical inspection
revenues of $5.2 million. Welding product sales decreased as fewer large
automotive programs were scheduled in the period as compared to the first nine
months of 1997. Optical inspection
13
<PAGE> 14
product revenues were down due to decreases in sales of CD and DVD inspection
products due to the management's first quarter decision to stop pursuit of the
CD market, slow consumer acceptance of DVD products, and lower sales in Asia
caused by economic conditions in the region.
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 toward 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 that 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 was
established in the amount of $.3 million to cover the costs to carry the
building until the estimated sale date.
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.
Gross margin in the nine-month period ended September 30, 1998 decreased as a
percentage of net sales to 21.6% from 30.4% in the comparable period 1997.
Welding product gross margins decreased as a result of lower levels of fixed
cost absorption during 1998 as the result of lower levels of production during
the period in response to lower order levels. Vision product margins decreased
as a result of lower levels of fixed cost absorption during the period. The
reduction in amortization of software development costs following the product
restructuring charges in the first quarter of 1998 contributed positively to
vision product margins.
Marketing expense decreased to $.3 million from $3.1 million and as a percentage
of net sales increased to 11.6% from 9.6%. The decrease in expenses expressed in
dollars came principally from reduction of expenditures related to CD products.
The increase in expenses expressed as a percentage of net sales came principally
from the continuation of fixed costs with the decline in sales.
General and Administrative expense increased to $2.3 million from $1.9 million
and as a percentage of net sales increased to 9.5% from 6.0%. The increase in
the dollars of expense results from certain classification changes from the
prior year, increases in legal expenses related to the final resolution of
several issues and legal activities related to the Companies product patents and
costs associated with implementation of the company's new financial and
manufacturing software. The percentage increase results from the classifications
and expense increases and from the fixed nature of many general and
administrative expenses with the decrease in the level of net sales in 1998.
Research, development, and engineering expense increased to $3.6 million from
$2.2 million and as a percentage of net sales to 14.8% from 6.9% in 1997. This
increase resulted from less software development expenses meeting the criteria
for capitalization in 1998 as compared to 1997 as the development of VisionBlox
and DVD products are substantially completed. Many of the personnel formerly
dedicated to these products are now assigned directly to customer projects.
Net interest expense increased to $1.8 million from $1.6 million in the prior
year and as a percentage of net sales to 7.4% from 5.1% due to lower sales
volumes combined with increased average debt and debt at higher interest rates.
14
<PAGE> 15
Liquidity and Capital Resources
At September 30, 1998 the Company had a revolving note payable to bank, with a
scheduled due date of August 1999, subordinated debentures with scheduled due
dates 2000 through 2005 and various term notes that generally mature in 2 to 4
years. Levels of advances under the revolving note are based on levels of
acceptable accounts receivable and inventory. The revolving note payable
provides for advances of up to $10,000,000. At June 30, 1998 $10,000,000 was
available for advances of which $10,000,000 had been advanced. The Company is
prohibited from paying dividends under terms of the credit agreement.
The agreements related to the revolving note and the subordinated debentures
require that the Company maintain certain levels of tangible net worth and
certain debt to equity ratios. The Company did not meet the required levels of
at December 31, 1997; however, the bank and subordinated note holders waived the
shortfall at that date. At March 31, 1998, the Company again did not meet the
levels of tangible net worth and debt to equity ratios required in the
agreements. In May 1998, the bank agreed to revise the agreement and installed
new equity and ratios floors. Although discussions have continued, the
subordinated note holders have not agreed to any revisions of their agreement.
At September 30, 1998, the Company did not meet the revised required levels of
net worth and debt to equity ratios in the bank agreement and continued not to
meet the levels required in the note holder's agreement.
Management is currently in negotiations with both the bank and the note holders
in an attempt to resolve these matters. With respect to the bank, management is
attempting to obtain an extension into early 1999 of the current agreement. It
is anticipated that the bank will be replaced with another lending institution
at that time. Although management believes it will be successful in negotiating
an agreement with the bank, there is no assurance that an acceptable agreement
can be achieved. Additionally, at the present time, management is holding active
discussions with several lending institutions with the intention of replacing
the bank as senior lender. There, however, can be no assurance that an agreement
will be reached that will provide the type or level of credit that the Company
needs to sustain its operations. With respect to the note holders, the
management has continued to hold discussions regarding the covenants and is
hopeful that a resolution can be achieved. Meanwhile the note holders have not
elected to exercise any of the options available to them under the terns of the
lending agreement and they have not informed management of their intention to do
so.
The Company generated $4.0 million of cash from operations in the nine months
ended September 30, 1998. The cash was used principally to fund additions to
capitalize software and to reduce bank debt. 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 over
the remainder of 1998 will be dependent on determinations throughout the year of
the long and short-term revenue opportunities for the Company's various
products.
Under the assumption that the current negotiations with the bank and the note
holders are successful and that an acceptable new long-term lending arrangement
is obtained, management believes that the resources together with any cash
generated from operations are adequate to meet cash needs for the next twelve
months.
Impact of Year 2000
Software is included with nearly all of the Company's major products. Following
review, management has concluded that it will not have to incur any substantial
amount of warranty or upgrade costs to this software to comply with Year 2000
issues.
Certain of the Company's internal data processing software will need to be
updated or replaced in order to comply with Year 2000. The Company has
acquired the necessary software and completed much of the necessary training
and related conversion tasks. It is expected that conversion will be completed
in the third quarter of 1999 with minimal additional out-of-pocket cost. It is
management's opinion that following conversion to the new software, Year 2000
issues will not pose significant operational problems to the Company.
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Part II. Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
registrant's Form 10-K for the year ended December 31, 1995, SEC file
0-12728, and incorporated herein by reference).
3.2 Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
registrant's Form 10-K for the year ended December 31, 1994, SEC file
0-12728, and incorporated herein by reference).
4.1 Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to the
registrants Form 8-K dated July 15, 1997, SEC file 0-12728, and
incorporated herein by reference).
4.2 Form of 12.95% Senior Subordinated Secured Note (filed as Exhibit 4.2
to the registrants Form 8-K dated July 15, 1997, SEC file 0-12728,
and incorporated herein by reference).
4.3 Form of Medar, Inc. Common Stock Purchase Warrant Certificate (filed
as Exhibit 4.3 to registrants Form 8-K dated July 15, 1997, SEC file
0-12728, and incorporated herein by reference).
10.1 Incentive Stock Option Plan of the Registrant as amended (filed as
Exhibit 10.4 to the registrant's Form S-1 Registration Statement
effective July 2, 1985, SEC File 2-98085, and incorporated herein by
reference).
10.2 Second Incentive Stock Option Plan (filed as Exhibit 10.2 to the
registrant's Form 10-K for the year ended December 31, 1992, SEC File
0-12728, and incorporated herein by reference).
10.3 Amendment to Medar, Inc. Incentive Stock Option Plan dated May 10,
1993 (filed as Exhibit 10.3 to the registrant's Form 10-K for the
year ended December 31, 1993, SEC File 0-12728, and incorporated
herein by reference).
10.4 Non-qualified Stock Option Plan (filed as Exhibit 10.3 to the
registrant's Form 10-K for the year ended December 31, 1992, SEC File
0-12728, and incorporated herein by reference).
10.5 Medar, Inc. Employee Stock Option Plan (filed as Exhibit 10.5 to the
registrant's Form 10-Q for the quarter ended September 30, 1995, SEC
file 0-12728, and incorporated herein by reference).
10.6 Form of Confidentiality and Non-Compete Agreement Between the
Registrant and its Employees (filed as Exhibit 10.4 to the
registrant's Form 10-K for the year ended December 31, 1992, SEC File
0-12728, and incorporated herein by reference).
10.7 Contract between Shanghai Electric Welding Machine Works, Medar, Inc.
and Lida U.S.A. dated August 30, 1993, related to joint venture
agreement (both the original Chinese version and the English
translation) (filed as Exhibit 10.7 to the registrant's Form 10-K for
the year ended December 31, 1993, SEC File 0-12728, and incorporated
herein by reference).
10.8 Asset Purchase Agreement between Medar, Inc. and Air Gage Company
dated February 28, 1994 (filed as Exhibit 10.8 to the registrant's
Form 10-K for the year ended December 31, 1993, SEC File 0-12728, and
incorporated herein by reference).
16
<PAGE> 17
10.9* License Agreement number 9303-004 between Medar, Inc. and
Allen-Bradley Company, Inc. dated April 12, 1993 (filed as Exhibit
10.9 to the registrant's Form 10-K for the year ended December 31,
1993, SEC File 0-12728, and incorporated herein by reference).
10.10* License Agreement number 9304-009 between Medar, Inc. and
Allen-Bradley Company, Inc. dated May 10, 1993 (filed as Exhibit
10.10 to the registrant's Form 10-K for the year ended December 31,
1993, SEC File 0-12728, and incorporated herein by reference).
10.11 Agreement by and between Medar, Inc. and ABB Robotics, Inc. dated
December 1992 regarding joint development to integrate a weld
controller into the S3 robot control (filed as Exhibit 10.11 to the
registrant's Form 10-K for the year ended December 31, 1993, SEC File
0-12728, and incorporated herein by reference).
10.12 Amended and Restated Mortgage and Security Agreement dated June 29,
1993 by and between Medar, Inc. and NBD Bank, N.A. (filed as Exhibit
4.5 to the registrant's Form 10-K for the year ended December 31,
1993, SEC File 0-12728, and incorporated herein by reference).
10.13 Mortgage dated October 31, 1995 by and between Medar, Inc. and NBD
Bank (filed as Exhibit 10.21 to the registrant's Form 10-Q for the
quarter ended September 30, 1995, SEC File 0-12728, and incorporated
herein by reference).
10.14 Installment Business Loan Note dated October 31, 1995, by and between
Medar, Inc. and NBD Bank (filed as Exhibit 10.22 to the registrant's
Form 10-Q for the quarter ended September 30, 1995, SEC File 0-12728,
and incorporated herein by reference).
10.15 Guarantee and Postponement of Claim dated August 10, 1995 between
Medar Canada, Ltd. and NBD Bank (filed as Exhibit 10.23 to the
registrant's Form 10-Q for the quarter ended September 30, 1995, SEC
File 0-12728, and incorporated herein by reference).
10.16* Patent License Agreement dated October 4, 1995 by and between Medar,
Inc. and Square D Company (filed as Exhibit 10.24 to the registrant's
Form 10-Q for the quarter ended September 30, 1995, SEC File 0-12728,
and incorporated herein by reference).
10.17 General Security Agreement dated March 29, 1996 by and between Medar,
Inc. and NBD Bank (filed as Exhibit 10.26 to the registrant's Form
10-Q for the quarter ended March 31, 1996, SEC file 0-12728, and
incorporated herein by reference).
10.18 General Security Agreement dated March 29, 1996 by and between
Integral Vision-AID, Inc. and NBD Bank (filed as Exhibit 10.27 to the
registrant's Form 10-Q for the quarter ended March 31, 1996, SEC file
0-12728, and incorporated herein by reference).
10.19 General Security Agreement dated May 1, 1996 by and between Medar
Canada Ltd. and NBD Bank (filed as Exhibit 10.28 to the registrant's
Form 10-Q for the quarter ended June 30,1996, SEC file 0-12728, and
incorporated herein by reference).
10.20 Amended and Restated Term Note dated July 15, 1997 by and between
Medar, Inc. and NBD bank (filed as Exhibit 10.37 to the registrant's
Form 10-Q for the quarter ended June 30, 1997, SEC file 0-12728, and
incorporated herein by reference).
10.21 Collateral Assignment of Property Rights and Security Agreement dated
July 15, 1997 by and between Medar, Inc. and NBD bank (filed as
Exhibit 10.38 to the registrant's Form 10-Q for the quarter ended
June 30, 1997, SEC file 0-12728, and incorporated herein by
reference).
17
<PAGE> 18
10.22 Stock Purchase Agreement between Maxco, Inc. and Medar, Inc. dated
July 23, 1997 (filed as Exhibit 10.39 to the registrant's Form 10-Q
for the quarter ended June 30, 1997, SEC file 0-12728, and
incorporated herein by reference).
10.23 Waiver of debt covenants from sub-debt holders (filed as Exhibit
10.41 to the registrant's Form 10-K for the year ended December 31,
1997, SEC file 0-12728, and incorporated herein by reference.
10.24** Amended and restated Revolving Credit and Loan Agreement dated July
31, 1998 by and between Medar, Inc. and Integral Vision Ltd. and NBD
Bank
(b) There were no reports on Form 8-K filed in the quarter ended
September 30, 1998.
* The Company has been granted confidential treatment with respect to
certain portions of this exhibit pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
** Previously filed
18
<PAGE> 19
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
________________________________________________________________________3/9/99
Charles J. Drake
President & Chairman of the Board
Medar, Inc.
(Principal Executive Officer)
/S/RICHARD R. CURRENT
________________________________________________________________________3/9/99
Richard R. Current
Executive Vice President & Chief Financial Officer
Medar, Inc.
(Principal Financial & Accounting Officer)
19
<PAGE> 20
Exhibits to Form 10Q
Medar, Inc.
Quarter Ended September 30, 1998
Exhibit Number Exhibit Index Description
- -------------- -------------------------
10.24* Amended and restated Revolving Credit and Loan
Agreement dated July 31, 1998 by and between Medar,
Inc. and Integral Vision Ltd. and NBD Bank.
27* Financial Data Schedule
* Previously filed
20
