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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File No. 0-28102
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BONDED MOTORS, INC.
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(Name of small business issuer in its charter)
California 95-2698520
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7522 South Maie Avenue, Los Angeles, CA 90001
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(Address of principal executive offices) Zip Code
Issuer's telephone number: (213) 583-8631
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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 [_]
There were 3,002,940 shares of common stock outstanding at April 29, 1997.
BONDED MOTORS, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Balance Sheet as of March 31, 1997 3
Statements of Earnings for the three month periods
ended March 31, 1997, and 1996 4
Statements of Cash Flows for the three month periods
ended March 31, 1997 and 1996 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 9-11
Part II - Other Information
Item 6. Exhibits and Reports 12
Signature 13
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BONDED MOTORS, INC.
BALANCE SHEET
March 31, 1997
(Unaudited)
ASSETS
Current assets:
Cash $ 22,612
Trade accounts receivable
(less allowance for doubtful accounts of $62,027) 2,718,922
Inventories:
Parts 1,145,022
Work in process 444,193
Finished goods 4,126,984
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5,716,199
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Deferred tax assets 1,154,090
Prepaid expenses and other current assets 285,236
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Total current assets 9,897,059
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Property and equipment, at cost:
Machinery and equipment 1,540,497
Furniture and fixtures 345,114
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1,885,611
Less accumulated depreciation and amortization 1,164,468
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Net property and equipment 721,143
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$10,618,202
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,063,108
Accrued expenses 757,199
Income taxes payable 10,483
Current portion of long term debt to bank 1,200,000
Notes payable to related parties 100,000
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3,130,790
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Shareholders' equity (note D)
Preferred stock, no par value. Authorized 1,000,000 shares;
none issued and outstanding
Common stock, no par value. Authorized 10,000,000 shares;
issued and outstanding 3,002,940 shares 4,678,419
Retained earnings 3,008,993
Notes receivable from exercise of stock options (200,000)
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Total shareholders' equity 7,487,412
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$10,618,202
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See accompanying notes to financial statements
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BONDED MOTORS, INC
STATEMENTS OF EARNINGS
(Unaudited)
For the Three Months Ended
March 31
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1997 1996
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Net sales $5,075,773 $4,205,375
Cost of sales 3,689,416 3,297,046
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Gross profit 1,386,357 908,329
Selling, general and administrative expenses 864,587 599,433
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Earnings from operations 521,770 308,896
Other (expenses) income:
Interest (expense) income, net (8,216) (34,850)
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Earnings before income taxes 513,554 274,046
Income tax (expense) (85,034) (90,789)
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Net earnings $ 428,520 $ 183,257
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Earnings per common and common equivalent shares $ 0.14 $ 0.09
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Weighted average common and common equivalent shares outstanding 3,094,074 2,000,000
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See accompanying notes to financial statements
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BONDED MOTORS, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
1997 1996
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Cash flows from operating activities:
Net earnings $ 428,520 $ 183,257
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Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization 32,828 12,312
(Increase) decrease in assets:
Accounts receivable (817,302) (634,983)
Inventories (744,136) (280,869)
Deferred tax assets (90,702) (32,305)
Prepaid expenses (119,467) (393,696)
Increase (decrease) in liabilities:
Accounts payable (125,868) 768,006
accrued expenses 58,720 46,017
Income taxes payable 175,736 (226,906)
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Total adjustments (1,630,191) (742,424)
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Net cash provided (used) by operating activities (1,201,671) (559,167)
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Cash flows from investing activities:
Purchases of equipment (49,215) (104,421)
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Net cash used by investing activities (49,215) (104,421)
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Cash flows from financing activities:
Borrowing from bank 1,200,000 1,105,768
Repayment of borrowings from bank - (452,884)
Repayment of notes payable to related parties - (917,771)
Proceeds from long term bank loan - 920,000
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Net cash provided (used) by financing activities 1,200,000 655,113
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Net increase (decrease) in cash (50,886) (8,475)
Cash at beginning of period 73,498 113,737
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Cash at end of period $ 22,612 $ 105,262
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See accompanying notes to financial statements.
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BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE A) The Company and its Significant Accounting Policies:
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Bonded Motors (the Company), remanufactures automobile engines primarily for
domestic and Japanese imported cars and light trucks in the United States for
resale to automotive retailers, end users and installers.
Basis of Presentation
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The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to form 10-QSB. 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 journals)
considered necessary for a fair presentation have been included. Operating
results for the three month periods ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1996.
Revenue Recognition and Core Accounting
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Revenue is recognized upon shipment of product, net of a provision for core
returns. The Company's customers are encouraged to return their old,
rebuildable core as a credit against the identical engine purchased. The
Company identifies the returned core to the original customer invoice and
issues a credit memo equal to the core charge reflected on the original
invoice. These core returns, recorded as a reduction in net sales, were
$1,145,778 and $1,469,390 during the three months ended March 31, 1996 and 1997
respectively.
Cores returned from customers are recorded into inventory on the same basis as
the Company records purchases of cores from independent core suppliers, at the
lower of average cost or market (net realizable value). Customer core returns
provide approximately 60% of the Company's core requirements, and independent
core suppliers provide the remaining 40% of the Company's core requirements.
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Earnings per Share
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Net earnings per share is based on the weighted average number of shares of
common and common stock equivalents outstanding. Fully diluted net earnings
per share is not presented since the amounts either do not differ significantly
form the primary net earnings per share presented or are anti-dilutive.
(NOTE B) Long-Term Debt:
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During May 1996, the Company entered into a credit agreement (Agreement)
providing for a revolving line of credit for borrowings up to $3,000,000
through April 30, 1998. Borrowings under the agreement bear interest at the
lower of prime plus .25% or at LIBOR rate plus 2.0%.
The Agreement also provides for a five-year term loan facility of up to
$1,500,000. Borrowings under the term loan bear interest at the lower of prime
plus .375% or at Cost of Funds plus 2.0%.
Borrowings under both the line of credit and the term loan are secured by the
Company's assets. The Agreement includes various financial covenants, the more
significant of which are tangible net worth, debt coverage ratio, senior debt
to tangible net worth and current ratio. The Company was in compliance with
all such covenants as of March 31, 1997.
On March 31,1997, the Company had borrowed $1,200,000 under the revolving
credit facility.
On January 1, 1997, the Company entered into a credit agreement (Agreement)
providing an acquisition facility for borrowings up to $10,000,000 through
January 1, 1999. This facility is to be used only in the event the Company
enters into an acquisition in the automotive industry. Borrowings under the
credit agreement bear interest at prime or Cost of Funds plus 2.25% and are
secured by the assets of the Company and of the acquired company. The credit
agreement includes various financial covenants, the more significant of which
include tangible net worth, debt coverage ratio, senior debt to tangible net
worth and current ratio. At March 31, 1997, no amounts had been drawn down or
were outstanding under this facility, and the Company has not entered into any
acquisition agreement.
(NOTE C) Income Taxes:
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Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to
ongoing review and evaluation by management.
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(NOTE D) Stockholders' Equity and Stock Options:
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In April 1996, the Company completed an underwritten initial public offering
of 1,000,000 shares of its common stock, at a public offering price of $5.875
per share (the Offering). The net proceeds from the Offering of approximately
$4,436,151 were used in part to repay a portion of the Company's debt, and the
balance was used to fund working capital requirements.
In December 1995, the Company amended its Articles of Incorporation to
authorize 1,000,000 shares of preferred stock and increase the authorized
shares of common stock to 10,000,000 shares. In connection with this
amendment, the Company effected a 3,600-for-1 common stock split.
During March 1994, the Company granted, at estimated fair market value, stock
options to two of its officers for the purchase of an ownership interest in the
Company aggregating 10%. These stock options were exercised during December
1995 for an aggregate amount of $200,000. The payments for shares issued
pursuant to these stock options were made through the issuance of promissory
notes from these officers. The notes are secured by the underlying shares and
certain real property, bear interest at 8% and are due on or before December7,
2002.
The Company adopted a stock option plan in January 1996 which provides for the
issuance of options to employees, officers and directors of the Company to
purchase up to an aggregate of 400,000 shares of common stock. During, 1996,
the Company issued 250,000 options at option prices ranging between $5.50 to
$6.50, the fair value at date of grant, with vesting periods of between one and
three years and exercise dates of between one and five years from the date of
issuance of the option. None of these options were exercised as of March 31,
1997. In February 1997, the Company granted a stock option for 30,000 shares
at a price of $8.75, the fair market value as of the date of the grant, to one
of its officers.
The Company also adopted a directors' plan in January 1996 which provides for
the issuance of options to outside directors of the Company to purchase up to
an aggregate of 50,000 shares of common stock. During 1996, the Company
granted a stock option for 15,000 shares at a price of $6.50, the fair market
value as of the date of the grant, to outside directors. None of these options
were excercised as of March 31, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein.
RESULTS OF OPERATIONS:
Net sales for the three months ended March 31, 1997 increased $870,398 or 20.7%
over the three months ended March 31, 1996. For such three month periods the
increase was from $4,205,375 to $5,075,773. These increases are primarily
attributable to increased demand for the Company's engines from its traditional
customer base. In addition, the Company opened its distribution center in
Denver, Colorado in January, 1997 (its Auburn, Washington distribution center
was opened in December, 1994 , its Atlanta, Georgia distribution center was
opened in March, 1996, its Cincinatti, Ohio distribution center was opened in
August, 1996, and its Harrisburg, Pennslyvania distribution center was opened
in November, 1996).
Cost of goods sold for the three months ended March 31, 1997 increased $392,370
or 11.9% over the comparable year earlier period. For such three month periods
the increase was from $3,297,046 to $3,689,416. These increases are
attributable to additional costs during the recent periods in connection with
increased production. Cost of goods sold as a percentage of net sales
decreased to 72.7% in the recent three month periods from 78.4% a year earlier.
The decrease in costs for the three month periods was due primarily to more
efficient materials handling and to a greater absorption of direct labor and
related overhead expenses as a result of increased production.
Selling, general and administrative expenses for the three months ended
March 31, 1997 increased $265,154 or 44.2% over the comparable periods a year
earlier. These changes are primarily attributable to the addition of new sales
personnel, and to increased administrative expense in the three month periods.
Earnings from operations for the three months ended March 31, 1997 increased
$212,874 or 68.9% over the comparable periods a year earlier.
Interest expense for the three months ended March 31, 1997 decreased $26,634 or
76.4% over the comparable periods a year earlier. The decrease was primarily
attributable to debt reduction as a result of proceeds generated from the
Company's initial public stock offering in April, 1996. Details of the
offering may be found in the Company's Prospectus dated April 2, 1996.
Pre-tax income for the three months ended March 31, 1997 increased $239,508 or
87.4% for the three month periods from the year earlier. After tax earnings
increased $245,263 or 133.8% for the three month periods from a year earlier,
due to the items mentioned above.
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LIQUIDITY AND CAPITAL RESOURCES:
The Company's operations have been financed principally by borrowings under a
bank credit facility, proceeds from its initial public offering, and cash flows
from operations. At March 31, 1997, the Company's working capital was
$6,766,269.
Net cash used by operating activities during the three months ended March 31,
1997 of $1,201,671 was primarily to finance an increase in accounts receivable
and inventory, due to increased sales and due to the opening of one additional
distribution center during the period.
Net cash used by investing activities for the three month periods ended
March 31, 1997 of $49,215 was primarily for the purchase of new equipment.
Net cash provided by financing activities for the three month periods ended
March 31, 1997 of $1,200,000 related primarily to the Company's recent initial
public offering, less bank debt repayment. In the second quarter of 1996 the
Company obtained a new credit facility from its bank providing for a revolving
line of credit through April 30, 1998 for borrowings of up to $3,000,000.
Interest under the line of credit is due monthly at prime plus .25% (or at
LIBOR rate plus 2.00%, at the option of the Company). The credit facility also
provides for a five year term loan of up to $1,500,000 with principal payments
and interest Cost of Funds plus 2% fixed. The credit facility is secured by a
lien on substantially all of the assets of the Company. At March 31, 1997, the
Company had borrowed $1,200,000 under the revolving credit facility.
On January 1, 1997, the Company entered into a credit agreement (Agreement)
providing an acquisition facility for borrowings up to $10,000,000 through
January 1, 1999. This facility is to be used only in the event the Company
enters into an acquisition in the automotive industry. Borrowings under the
credit agreement bear interest at prime or Cost of Funds plus 2.25% and are
secured by the assets of the Company and of the acquired company. The credit
agreement includes various financial covenants, the more significant of which
include tangible net worth, debt coverage ratio, senior debt to tangible net
worth and current ratio. At March 31, 1997, no amounts had been drawn down or
were outstanding under this facility, and the Company has not entered into any
acquisition agreement.
The Company's accounts receivable as of March 31, 1997 was $2,718,922. This
represents an increase of $817,303 or 43.0% over accounts receivable on
December 31, 1996, and is due to increased sales.
The Company's inventory as of March 31, 1997 was $5,716,199 which represents
an increase of $744,135 or 15.0% over inventory as of December 31, 1996. The
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increase is primary attributable to the Company's opening of one new
distribution center in January, 1997. In addition, the Company maintains s
large inventory at its Los Angeles facility to support the new distribution
centers, and in anticipation of increased demand for the Company's products
in 1997.
The Company believes that internally generated funds, the available borrowings
under its existing credit facilities and the proceeds from its initial public
offering will provide sufficient liquidity and enable it to meet its current
and foreseeable working capital requirements.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrants caused this report to be signed on its behalf by the
undersigned, thereunder duly authorized.
Bonded Motors, Inc.
Dated: April 29, 1997 By: /S/PAUL SULLIVAN
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Paul Sullivan
Chief Financial Officer
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