1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________ to ________.
Commission file number: 000-28112
MOTORVAC TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
STATE OF DELAWARE 33-0522018
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1431 S. VILLAGE WAY
SANTA ANA, CALIFORNIA 92705
(Address of Principal Executive Offices)
(714) 558-4822
(Issuer's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Title Date Outstanding
Common Stock, $.01 par value March 31, 1999 4,464,918
Transitional Small Business Disclosure Format (check one);
Yes [ ] No [X]
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Part I. Financial Information
Item I. Financial Statements
MOTORVAC TECHNOLOGIES, INC.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,671,145 $ 1,632,605
Accounts Receivable, net of allowance for doubtful accounts
of $78,568 (March 31, 1999) and $84,662 (December 31, 1998) 2,452,626 866,357
Inventories, net of reserve of $103,491 (March 31, 1999)
and $63,099 (December 31, 1998) 2,125,586 1,667,333
Other Current Assets - (including deposits with vendors of $247,332 at
March 31, 1999, and $196,030 at December 31, 1998) 380,300 275,245
------------ ------------
Total Current Assets 6,629,657 4,441,540
PROPERTY AND EQUIPMENT, net 285,143 242,666
INTANGIBLE ASSETS, net of accumulated amortization of
$1,264,677 (March 31, 1999) and $1,185,155 (December 31, 1998) 559,766 639,288
OTHER ASSETS 17,227 17,227
------------ ------------
$ 7,491,793 $ 5,340,721
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Other Current Liabilities $ 2,161,929 $ 954,567
Short-term note payable to bank 650,000
------------ ------------
Total Current Liabilities 2,811,929 954,567
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 10,000,000 shares authorized;
4,464,918 issued and outstanding (March 31, 1999) and 4,453,918 ( Dec. 31, 1998) 44,649 44,539
Additional paid-in capital 16,478,678 16,467,788
Employee Stock Loans (79,592) (78,432)
Accumulated Deficit (11,763,871) (12,047,741)
------------ ------------
Total Stockholders' Equity 4,679,864 4,386,154
------------ ------------
$ 7,491,793 $ 5,340,721
============ ============
(See Accompanying Notes to Financial Statements)
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MOTORVAC TECHNOLOGIES, INC.
STATEMENTS OF INCOME
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1999 1998
----------- -----------
NET SALES $ 4,053,760 $ 3,083,615
COST OF SALES 2,609,430 1,720,211
----------- -----------
GROSS PROFIT 1,444,330 1,363,404
OPERATING EXPENSES 1,170,768 1,312,220
----------- -----------
OPERATING INCOME 273,562 51,184
INTEREST INCOME, NET (11,358) (16,246)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 284,920 67,430
PROVISION FOR INCOME TAXES 1,050 3,500
----------- -----------
NET INCOME $ 283,870 $ 63,930
=========== ===========
BASIC EARNINGS PER SHARE $ 0.06 $ 0.01
=========== ===========
WEIGHTED AVERAGE SHARES USED TO CALCULATE BASIC
EARNINGS PER SHARE 4,464,918 4,514,918
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.01
=========== ===========
WEIGHTED AVERAGE SHARES USED TO CALCULATE DILUTED
EARNINGS PER SHARE 4,473,869 4,514,918
=========== ===========
(See Accompanying Notes to Financial Statements)
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MOTORVAC TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 283,870 $ 63,930
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 112,599 104,677
Loss on disposal of fixed assets 50,000
Net change in operating assets and liabilities:
Accounts receivable (1,586,269) (358,897)
Inventories (458,253) 56,173
Other Current Assets (105,055) (86,011)
Accounts payable and other current liabilities 1,207,362 (69,219)
----------- -----------
Net cash used in operating activities (495,746) (289,347)
CASH FLOWS FROM INVESTING ACTIVITY -
Purchase of property and equipment (125,554) (41,413)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 11,000
Advances to employees for stock purchases (1,160) (17,930)
Proceeds from issuance of notes payable to bank 650,000 325,000
----------- -----------
Net cash provided by financing activities 659,840 307,070
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 38,540 (23,690)
CASH AND CASH EQUIVALENTS, beginning of period 1,632,605 1,665,120
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,671,145 $ 1,641,430
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 4,147 $ 7,319
=========== ===========
Income taxes paid $ 1,050 $ 3,350
=========== ===========
(See Accompanying Notes to Financial Statements)
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Notes to Unaudited Financial Statements
(for the Three-Month Period Ended March 31, 1999):
1. Basis of Presentation
The information set forth in these financial statements as of March 31,
1999 is unaudited and may be subject to normal year-end adjustments. In
the opinion of management, the unaudited financial statements reflect
all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of MotorVac
Technologies, Inc. (the "Company" or "MTI") for the period indicated.
Results of operations for the interim three-month period ended March 31,
1999 are not necessarily indicative of the results of operations for the
full fiscal year.
Certain information normally included in footnote disclosures to the
financial statements has been condensed or omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
2. Inventories
Inventories, which include materials, supplies, labor and manufacturing
overhead, are summarized as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Materials and supplies $ 1,240,798 $ 878,548
Work in process 45,731 45,731
Finished product 942,548 806,153
Reserve (103,491) (63,099)
----------- -----------
$ 2,125,586 $ 1,667,333
=========== ===========
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," applicable to entities with other comprehensive
income. This pronouncement is effective for the year beginning January
1, 1998. The Company had no items of other comprehensive income, as
defined, for the three-month period ended March 31, 1999.
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4. Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," which requires that the Company report certain information
about operating segments. This pronouncement was effective for the year
beginning January 1, 1998.
Approximately 71% and 79% of the Company's net sales were made to one
customer during the three months ended March 31, 1999 and 1998,
respectively.
The Company sells its products through distributors in the domestic
(defined as U.S. and Canada) and the international marketplace. The
Company sells three types of products (percentage of sales for the three
months ended March 31, 1999 and 1998 indicated): vehicle engine
decarbonizing machines (32% and 43%), detergent for use in the
decarbonizing machines (16% and 18%), and vehicle transmission flush
machines (48% and 37%); an additional 4% and 2% of sales is for machine
parts. The sales process is structured geographically between domestic
and international. All machine products are produced at, or distributed
from, the same plant. The Company's major customers typically purchase
all three product types. The Company uses information based on products
and geographic location; however, the business activities are managed as
a single segment. For the three months ended March 31, 1999 and 1998,
net sales by region were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
------------------ ------------------
North America $3,810,760 $2,308,615
South and Central America 53,007 70,542
Europe 22,883 95,914
Middle East and Africa 16,260 12,416
Asia 150,850 596,128
---------- ----------
$4,053,760 $3,083,615
========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
MotorVac Technologies, Inc. (the "Company") designs, develops,
assembles, markets and sells the MotorVac CarbonClean System for the diagnosis,
maintenance and repair of internal combustion engine fuel systems and the
TRANSTECH System for the replacement of automatic transmission fluid. The
Company's Automotive Solutions division markets and sells the Carbon Tune System
for the rapid cleaning of engine fuel systems, primarily for the automotive
after-market quick service industry. The Company markets and sells its fuel
system cleaning machines, transmission service machines and detergents through
various distribution channels, both in the United States and Canada ("Domestic")
under the trade names MotorVac, TRANSTECH and Carbon Tune, and outside the
United States and Canada ("International") under the trade name CarbonClean.
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The following discussion and analysis addresses the results of the
Company's operations for the three-month period ended March 31, 1999, as
compared to the Company's results of operations for the same period ended March
31, 1998.
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
the Company intends that such forward-looking statements be subject to the safe
harbors created thereby. The Company may experience significant fluctuations in
future operating results due to a number of factors, including, among other
things, the size and timing of customer orders, new or increased competition,
delays in new product enhancements and new product introductions, quality
control difficulties, changes in market demand, market acceptance of new
products, product returns, seasonality in product purchases by distributors and
end users, pricing trends in the automotive after-market industry in general and
in the specific markets in which the Company is active, as well as those
discussed in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission. Any of
these factors could cause operating results to vary significantly from prior
periods. Significant variability in orders during any period may have a material
adverse impact on the Company's cash flow or work flow, and any significant
decrease in orders could have a material adverse impact on the Company's results
of operations and financial condition. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as any indication of future
performance. Fluctuations in the Company's operating results could cause the
price of the Company's Common Stock to fluctuate substantially.
Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions, all of
which are difficult or impossible to predict accurately, and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1999 and 1998
Net Sales. Net sales for the three months ended March 31, 1999 increased
$970,145 (approximately 31%) to $4,053,760 from $3,083,615 for the three months
ended March 31, 1998. This sales increase was due primarily to higher domestic
sales of gas and TRANSTECH machines, and to sales from the Automotive Solutions
division, which had no revenues in 1998, partially offset by a decrease in
international sales.
For the three months ended March 31, 1999, Domestic sales were
approximately $3,321,000, International sales were approximately $243,000 and
Automotive Solutions sales were approximately $490,000. For the three months
ended March 31, 1998, Domestic sales were approximately $2,309,000,
International sales were approximately $775,000, and Automotive Solutions had no
sales. International sales declined due to a slowdown in certain international
economies, primarily in the Far East region.
Cost of Sales. Cost of sales for the three months ended March 31, 1999
increased by $889,219 (approximately 52%) to $2,609,430 from $1,720,211 for the
three months ended March 31, 1998. The primary reason for the increase was
increased costs related to the sales increases described above.
Gross Profit. Gross profit for the three months ended March 31, 1999
increased by $80,926 to $1,444,330 from $1,363,404 for the three months ended
March 31, 1998. Gross profit, as a percentage of sales, decreased 8.6% from
44.2% for the quarter ended March 31, 1998. Approximately 2.8 percentage points
of the decrease were due to an increase in sales of lower-margin products for
the quarter ended March 31,
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1999, compared to the quarter ended March 31, 1998. Approximately 2.3 percentage
points of the decline in gross margin were due to increased warranty costs.
Operating Expenses. Operating expenses decreased by $141,452
(approximately 11%) from $1,312,220 for the three months ended March 31, 1998,
to $1,170,768 for the three months ended March 31, 1999. The decrease in
expenses for the current quarter reflects cost reduction in several expense
areas, including liability insurance, bad debt expense, administrative salaries,
and various outside services.
Operating Income. As a result of the above, operating income for the
three months ended March 31, 1999 of $273,562 increased by $222,378 from
operating income of $51,184 for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the Three Months Ended March 31, 1999
The Company's cash balance at March 31, 1999 was $1,671,145. Cash of
$495,746 was used for operating activities for the three months ended March 31,
1999. Cash used for investing activities was $125,554 for purchases of fixed
assets. Cash flow generated from financing activities for the quarter was
$659,840, primarily reflecting advances on a note payable to a bank. The net
result was an increase in cash of $38,540 from the beginning of the quarter.
Working capital as of March 31, 1999, at $3,817,728, increased by $330,755 from
the beginning of the period.
The Company maintains a $1,500,000 revolving line of credit expiring
June 30, 1999, which bears interest, at the bank's prime rate. The line is
secured by a certificate of deposit of $1,500,000 expiring June 30, 1999; the
amount owing at March 31, 1999 was $650,000.
The Company presently expects that current cash resources and the
available capacity under the line of credit, together with cash generated from
operations, will be sufficient to meet its operating and capital requirements
for the next twelve months. There can be no assurances that additional capital
will be available to the Company on favorable terms or at all.
INFORMATION SYSTEMS AND THE YEAR 2000 ISSUE
The Company is preparing for the impact of the arrival of the Year 2000
on its business, as well as on the businesses of its customers, suppliers and
business partners. The "Year 2000 Issue" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. These problems are derived predominantly from the fact that many
software programs have historically categorized the "year" in a two-digit
format. The Year 2000 Issue creates potential risks for the Company with respect
to its business information system. The Company may also be exposed to risks
from third parties with whom the Company interacts who fail to adequately
address their own Year 2000 issues. The Company does not use any other
date-sensitive system in its business operation. None of the Company's products
incorporate date-sensitive devices.
The Company has made an assessment of the ability of its primary
information systems to properly utilize dates beyond year 1999. The results of
this review indicate these systems are Year 2000 Compliant, and that no material
system design or correction effort will be required.
The developer of the primary accounting and business software the
Company uses has stated that the subject system and software are Year 2000
Compliant. Notwithstanding this representation, the Company plans, by the end of
the Second Quarter of 1999, to run appropriate live-system testing to confirm
compliance. Diagnostic tests have already been performed on the key system
modules; the primary modules tested positive.
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Certain secondary modules which were deficient have been remedied with standard
software additions at modest cost. The Company has also tested its desktop
computer environment and related network structure. These tests have identified
certain routine upgrades which will achieve compliance, and the Company is
proceeding to implement the upgrades. Because the accounting software system is
so widely used, the Company, at this time, does not anticipate any significant
problems in being compliant with respect to its systems, nor will it require
significant expenditures to effect compliance.
There can be no assurance that the Company will be completely successful
in its efforts to address Year 2000 Issues.
The Company has contacted its major vendors and customers to assure that
their systems are Year 2000 compliant. These parties have responded that they
all intend to be Year 2000 Compliant. There is no assurance that any of these
parties will not have compliance problems. The Company has one customer that has
represented, and is expected to continue to represent, over 50% of its sales,
and has several key vendors whose source and supply may not be easily replaced.
A Year 2000 Compliance problem incurred by this customer or key vendors could
have a materially adverse effect on the Company's business.
The Company is using several software/systems third-party advisors who
are experienced in Y2K compliance issues. To perform remaining tests and add
hardware where necessary, the Company estimates expenditures will not exceed
$25,000.
The Company is evaluating the need for certain contingency plans to
address situations that may result if the Company or any of the third parties
upon which the Company is dependent is unable to achieve Year 2000 readiness.
The Company is also evaluating the need for increasing inventory levels of key
components of its manufactured products. Since the Company's Year 2000
compliance program is ongoing, its ultimate scope, as well as the consideration
of additional contingency plans, will continue to be evaluated as new
information becomes available.
STOCK REPURCHASE PROGRAM
On September 24, 1998, the Board of Directors announced approval of the
repurchase and cancellation of up to 451,492 shares of the Company's Common
Stock, which, at that time, constituted approximately 10% of the Company's
outstanding shares. New shares of Common Stock were reserved for issuance under
a stock compensation plan pursuant to which participating directors may elect to
receive shares of Common Stock of the Company in lieu of such directors' annual
retainer and meeting attendance fees, and for an employee stock purchase plan
for participating employees and officers of the Company. Stock purchases under
the repurchase program commenced October 2, 1998, and through December 31, 1998,
an aggregate of 61,000 shares of Common Stock have been repurchased for
aggregate consideration of $56,375. There were no stock purchases during the
quarter ended March 31, 1999.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Net proceeds from the Company's Initial Public Offering effective as of
April 25, 1996 (File No.: 333-1866-LA) totaled $5,153,474. Through March
31, 1999, such proceeds were used as follows:
Direct or indirect payments to
directors, officers, general
partners of the issuer or their
associates; to persons owning Direct or
10% or more of any class of Indirect
equity securities of the issuer Payment to
and to affiliates of the issuer. Others
(X if estimate) (X if estimate) Total
-------------------------------- ----------------- ----------
Repayment of
Indebtedness 123,572 850,000 973,572
Working Capital 1,672,329 1,672,329
Repayment of Interest
on Indebtedness 836,428 836,428
Investments:
- - Short Term CD's 1,500,000 1,500,000
- - Other Cash and
Cash Equivalents 171,145 171,145
----------
Total 5,153,474
==========
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The stockholders of the Company acted by written consent to increase the
number of shares authorized under the Company's 1998 Stock Incentive
Award Plan from 325,000 shares to 550,000 shares on March 11, 1999.
(b) The number of shares that voted in favor of the plan increase was
2,771,012.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement of Calculation of Basic and Diluted Net Income
Per Share.
27.1 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999.
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In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MOTORVAC TECHNOLOGIES, INC.,
a Delaware corporation
By: s/ Lee W. Melody
-------------------------------------
Lee W. Melody, President and
Chief Executive Officer
Date: May 10, 1999
By: s/ David P. Nelson
-------------------------------------
David P. Nelson
Chief Financial Officer
Date: May 10, 1999
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MOTORVAC TECHNOLOGIES, INC.
EXHIBIT INDEX
11.1 Statement of Calculation of Basic and Diluted Net Income Per Share.
27.1 Financial Data Schedule.