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 JUNE 30, 1998
[ ] 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
- ------------------------------- ----------------
(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 3,065,040 shares of common stock outstanding at July 29, 1998.
BONDED MOTORS, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Balance Sheets as of June 30, 1998 3
Statements of Earnings for the three and six month periods
ended June 30, 1998, and 1997 4
Statements of Cash Flows for the six month periods
ended June 30, 1998, and 1997 5
Notes to Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 10-12
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holder 13
Item 6. Exhibits and Reports 13
Signature 14
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BONDED MOTORS, INC.
Balance Sheets
June 30, 1998
(Unaudited)
Assets
Current assets:
Cash $ 57,051
Trade accounts receivable (less allowance for
doubtful accounts of $145,646) 5,667,961
Inventories:
Parts 5,897,340
Work in process 904,170
Finished goods 1,657,197
----------
8,458,707
----------
Deferred tax assets 438,800
Prepaid expenses and other current assets 495,612
Prepaid income taxes 25,042
----------
Total current assets 15,143,173
----------
Property and equipment, at cost:
Machinery and equipment 3,030,895
Furniture and fixtures 449,486
----------
3,480,381
Less accumulated depreciation 1,438,542
----------
Net property and equipment 2,041,839
----------
Goodwill, less accumulated amortization of $18,539 193,340
Deferred tax assets 1,442,241
Other assets 140,597
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$18,961,190
==========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of notes payable to bank (note B) $ 385,128
Accounts payable 3,167,225
Accrued expenses 646,442
Accrued warranty obligations 564,000
----------
Total current liabilities 4,762,795
----------
Notes payable to bank, excluding current installments (note B) 278,831
Long-term debt (note B) 4,633,112
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
3,055,040 shares 4,972,069
Additional paid-in capital 99,000
Retained earnings 4,315,383
Notes receivable from exercise of stock options (100,000)
----------
Total shareholders' equity 9,286,452
----------
$ 18,961,190
==========
See accompanying notes to financial statements
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BONDED MOTORS, INC.
Statements of Earnings
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30 June 30
1998 1997 1998 1997
------------------------ ------------------------
Net sales $11,302,610 6,272,321 $19,810,652 11,348,094
Cost of sales 8,833,411 5,078,212 15,817,648 8,767,628
---------- ---------- ---------- ----------
Gross profit 2,469,199 1,194,109 3,993,004 2,580,466
Selling, general and administrative expenses 1,783,905 889,785 2,866,501 1,754,372
---------- ---------- ---------- ----------
Earnings from operations 685,294 304,324 1,126,503 826,094
Other (expense) income:
Interest expense (145,255) (34,242) (255,679) (46,535)
Interest income 2,086 4,083 4,171 8,160
Other - - (1,896) -
---------- ---------- ---------- ----------
Earnings before income taxes 542,125 274,165 873,099 787,719
Income tax (expense) (143,283) 8,695 (268,563) (76,339)
---------- ---------- ---------- ----------
Net earnings $ 398,842 282,860 $ 604,536 711,380
========== ========== =========== ==========
Basic earnings per share $ .13 .09 .20 .24
Diluted earnings per share .13 .09 .19 .23
========== ========== =========== ==========
Weighted average common shares outstanding 3,053,000 3,024,000 3,040,000 3,008,000
========== ========== =========== ==========
Weighted average common and common equivalent
shares outstanding 3,187,000 3,127,000 3,181,000 3,115,000
========== ========== =========== ==========
See accompanying notes to financial statements
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BONDED MOTORS, INC.
Statements of Cash Flow For the Six Months Ended June 30
(Unaudited)
1998 1997
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Cash flows from operating activities:
Net earnings $ 604,536 711,380
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Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 141,074 72,112
Stock option compensation expense 99,000 -
Loss on sale of property and equipment 1,896 -
(Increase) decrease in assets:
Accounts receivable (1,939,431) (1,947,449)
Inventories (1,181,746) (148,067)
Prepaid expenses and other assets (446,768) (145,583)
Deferred tax assets (192,145) (328,766)
Increase (decrease) in liabilities:
Accounts payable 1,494,995 535
Accrued expenses 218,834 58,890
Accrued warranty obligations 154,000 30,000
Income taxes payable 152,658 141,805
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Total adjustments (1,497,633) (2,266,523)
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Net cash used in operating activities (893,097) (1,555,143)
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Cash flows from investing activities:
Purchases of equipment (586,693) (198,728)
Proceeds from sale of equipment 500 -
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Net cash used in investing activities (586,193) (198,728)
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Cash flows from financing activities:
Net proceeds from exercise of stock options 98,750 165,000
Borrowings from bank 10,463,315 1,692,451
Repayments of notes payable to related parties (100,000) -
Repayments of bank borrowings (9,222,767) -
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Net cash provided by financing activities 1,239,298 1,857,451
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Net increase (decrease) in cash (239,992) 103,580
Cash at beginning of period 297,043 73,498
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Cash at end of period $ 57,051 177,078
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 255,679 46,535
Income taxes 308,050 263,300
========= =========
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:
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
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 six and three month periods ended June 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 financial
statements and footnotes thereto included in the Company's annual report on
Form 10-KSB for the year ended December 31, 1997.
Acquisition and Goodwill
The financial statements include the net assets of an automotive engine
remanufacturing firm (Wheeler Manufacturing of Macon, Georgia) purchased at
their fair market value on the acquisition date in August, 1997. This purchase
included manufacturing machinery and equipment, plant equipment, office
furniture, fixtures and equipment, automotive parts inventory and supplies,
and other items customarily used in the operation of a business. The excess
of acquisition costs over the fair value of net assets acquired is included in
and has been allocated to goodwill. Goodwill is amortized on a straight-line
basis over a ten year period. The fair value of the assets acquired were as
follows:
Inventories $137,676
Plant Machinery & Equipment $317,762
Goodwill $211,880
--------
Total Purchase Cost $667,318
========
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Revenue Recognition and Core Accounting
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
$5,318,434 and $3,160,226 during the six months ended June 30, 1998 and 1997
respectively, and $3,406,412 and $1,690,836 during the three months ended
June 30, 1998 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 50% of the Company's core requirements, and
independent core suppliers provide the remaining 50% of the Company's core
requirements.
Earnings per Share
The Financial Accounting Standards Board issued statement No.128, "Earnings
per Share" (SFAS No.128), in March 1997 and effective for fiscal years ending
after December 15, 1997. The Company adopted SFAS No.128 in 1997. This
statement requires the presentation of "Basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding,
excluding all common stock equivalents. A dual presentation of "Diluted"
earnings per share reflecting the dilutive effects of all common stock
equivalents is also required. Figures for 1997 have been restated for the
effects of the adoption of SFAS No. 128.
The weighted average common shares outstanding for six month periods ended
June 30, 1998 and 1997 were 3,040,000 and 3,008,000, respectively. For
purposes of diluted earnings per share, the incremental common equivalent
shares due to outstanding stock options and warrants during the six month
period ended June 30, 1998 and 1997 were 141,000 and 107,000, respectively.
No adjustments to net income were made for the purpose of computing diluted
earnings per share.
(NOTE B) Long-Term Debt:
In January 1998, the Company entered into an amended credit agreement
(Agreement) providing for a revolving line of credit for borrowings up to
$7,500,000 through May 1, 2000. Borrowings under the Agreement bear interest
at LIBOR (5.84% at December 31, 1997) plus 2.0% or at prime (8.50% at
December 31, 1997). Borrowings under the line of credit are secured by the
Company's assets. Total amounts outstanding under the revolving line of
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credit at June 30, 1998 were $4,633,112. The Company had available
borrowings under the line of credit of $2,866,888 at June 30, 1998.
The Agreement also provides for an acquisition facility for borrowings up to
$8,000,000 for a period of two years from the date of funding. This facility
is to be used for general corporate purposes and in the event the Company
enters into an acquisition in the automotive industry. Borrowings under the
credit agreement bear interest at prime plus 0.25% or LIBOR plus 2.25% or
cost of funds plus 2.25% and are secured by the assets of the Company and
of the acquired company. At June 30, 1998, $663,959 had been drawn down and
were outstanding under this facility. The Company had available borrowings
under this facility of $7,336,041 at June 30, 1998.
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 quick ratio. The Company was in compliance with all such
covenants as of June 30, 1998.
(NOTE C) Income Taxes:
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.
(NOTE D) Stockholders' Equity and Stock Options:
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.
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. In 1997, the
plan was amended to increase the number of shares of common stock that could
be purchased to an aggregate of 600,000 shares. In 1996, the Company issued
255,000 options with exercise prices ranging between $5.50 and $6.50, the
estimated fair market 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. In 1997, the Company issued 185,000 with
exercise prices ranging between $8.625 and $10.00, the estimated fair market
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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. During 1997, 34,600 options were exercised for total proceeds
of $194,900 and 7,500 options were canceled upon termination of employment by
one of the employees. In February 1998, the Company granted stock options
for 70,000 shares at a price of $9.50, the estimated fair market value as of
the date of the grant, to the officers. During 1998, 17,500 options were
exercised for total proceeds of $98,750 and 10,000 options were canceled
upon termination of employment by one of the employees.
Under the Company's 1996 Incentive Stock Plan, in June, 1998 the Company
granted stock options for 25,000 shares with an exercise price of $7.75, to
consultants for services rendered.
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. In 1996, 20,000 options were
issued with exercise prices of $6.50, the estimated fair market value at date
of grant. In 1997, 6,000 options were issued with exercise prices ranging
between $7.25 and $7.375, the estimated fair market value at date of grant.
During 1997, 10,000 options were canceled.
During 1996, the Company issued 100,000 warrants to purchase common stock to
the Company's underwriters on completion of the Company's initial public
offering. These warrants have exercise prices of $7.05 per share, the then
estimated fair market value, vesting over one year, with a five-year term.
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PART I - FINANCIAL INFORMATION
Item 2. 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 six months and three months ended June 30, 1998 increased
$8,462,558 or 74.6% and $5,030,289 or 80.2%, respectively, over the comparable
periods a year earlier. For such six month periods the increase was from
$11,348,094 to $19,810,652 and for such three month periods the increase was
from $6,272,321 to $11,302,610. These increases are attributable to internal
growth with the Company's traditional customer base, and the addition of
Genuine Parts/NAPA, for whom the Company is now the primary remanufactured
engine supplier. In March, 1998, the Company closed its Harrisburg,
Pennsylvania distribution center and transferred those goods to its new Albany,
New York distribution center. (its Macon, Georgia manufacturing plant was
Purchased in August, 1997, its Auburn, Washington distribution center was
opened in December, 1994 , its Cincinnati, Ohio distribution center was
opened in August, 1996, and its Denver, Colorado distribution center was
opened in January, 1997.)
Cost of goods sold for the six and three months ended June 30, 1998 increased
$7,050,020 or 80.4% and $3,755,199 or 73.9%, respectively, over the comparable
periods a year earlier. For such six month periods the increase was from
$8,767,628 to $15,817,648 and for such three month periods the increase was
from $5,078,212 to $8,833,411. 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 increased over the six month
periods from 77.3% to 79.8% and decreased over the three month periods from
81.0% to 78.2%. The Company believes that this increase in cost of goods sold
for the six months ended is primarily attributable to the labor and overhead
costs associated with the expansion of the Company's production capacity, as
well as expensed start-up costs associated with the new Macon, Georgia
manufacturing facility. The decrease in costs for the three months 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 six and three months
ended June 30, 1998 increased $1,112,129 or 63.4% and $894,120 or 100.5%,
respectively, over the comparable periods a year earlier. Selling, general
and administrative expenses as a percentage of sales decreased from 15.5%
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to 14.5% for the comparable six month periods and increased from 14.2% to 15.8%
for the comparable three month periods. The decrease in the six month periods
is primarily attributable to higher revenues. The increase in the three month
periods is primarily attributable to increase freight costs and to recognize
the fair market value of $99,000 for options granted to consultants as
compensation for services rendered.
Earnings from operations for the six and three months ended June 30, 1998
increased $300,409 or 36.4% and increased $380,970 or 125.2%, respectively,
over the comparable periods a year earlier.
Interest expense for the six month and three months ended June 30, 1998
increased $209,144 or 449.4% and increased $111,013 or 324.2%, respectively,
over the comparable periods a year earlier. The increase was primarily
attributable to borrowings for the six months ended June 30, 1998 due to a
build up of inventory and accounts receivable, which are attributable to
sales increases and due to the acquisition of Wheeler Manufacturing.
Pre-tax income for the six and three months ended June 30, 1998 increased
$85,380 or 10.8% for the six month periods and increased $267,960 or 97.7%
for the three month periods from the year earlier. After tax earnings
decreased $106,844 or 15.0% for the six month periods and increased
$115,982 or 41.0% for the three month periods from a year earlier, due to the
items mentioned above.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's operations have been financed principally by borrowings under a
bank credit facility and cash flows from operations. At June 30, 1998, the
Company's working capital was $10,380,378.
Net cash used by operating activities during the six months ended June 30,
1998 of $893,097 was primarily to finance an increase in accounts receivable
and inventory, due to increased sales during the period.
Net cash used by investing activities for the six month periods ended June 30,
1998 of $586,193 was primarily for the purchase of new equipment.
Net cash provided by financing activities for the six month periods ended
June 30, 1998 of $1,239,298 was primarily from recent borrowings from the
bank, and cash received upon the exercise of stock options.
In January 1998, the Company entered into an amended credit agreement
(Agreement) providing for a revolving line of credit for borrowings up to
$7,500,000 through May 1, 2000. Borrowings under the Agreement bear interest
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at LIBOR (5.84% at December 31, 1997) plus 2.0% or at prime (8.50% at
December 31, 1997). Borrowings under the line of credit are secured by the
Company's assets. Total amounts outstanding under the revolving line of
credit at June 30, 1998 were $4,633,112. The Company had available borrowings
under the line of credit of $2,866,888 at June 30, 1998.
The Agreement also provides for an acquisition facility for borrowings up to
$8,000,000 for a period of two years from the date of funding. This facility
is to be used for general corporate purposes and in the event the Company
enters into an acquisition in the automotive industry. Borrowings under the
credit agreement bear interest at prime plus 0.25% or LIBOR plus 2.25% or
cost of funds plus 2.25% and are secured by the assets of the Company and of
the acquired company. At June 30, 1998, $663,959 had been drawn down and were
outstanding under this facility. The Company had available borrowings under
this facility of $7,336,041 at June 30, 1998.
The Company's accounts receivable as of June 30, 1998 was $5,667,961. This
represents an increase of $1,939,431 or 52.0% over accounts receivable on
December 31, 1997, and is due to increased sales.
The Company's inventory as of June 30, 1998 was $8,458,707 which represents
an increase of $1,181,746 or 16.2% over inventory as of December 31, 1997.
The increase is primary attributable to the Company's increasing finished
goods inventory at all distribution centers. In addition, the Company
maintains a large inventory at its Los Angeles facility in anticipation of
increased demand for the Company's products in 1998.
In 1996 and prior years, quarterly inventory values were estimated based upon
historical values. At fiscal year ended December 31, 1996, a physical
inventory was taken and an adjustment of $447,977 to inventory valuations was
made. Because quarterly physical inventories were not taken throughout 1996,
no quarterly adjustments could be calculated.
Beginning the first quarter of 1997, physical inventories have been taken on
a quarterly basis, resulting in no significant inventory valuation adjustment
at year ended 1997. This procedure continues throughout 1998.
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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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of stockholders was held on April 27,
1998.
(b) The directors elected at the meeting were:
For Against Abstain
Aaron Landon 2,636,800 - 56,000
Richard Funk 2,636,600 - 56,200
Paul Sullivan 2,636,800 - 56,000
Buddy Mercer 2,636,800 - 56,000
Edward T. Bradford 2,634,100 - 58,700
Cornelius P. McCarthy III 2,634,300 - 58,500
John F. Creamer 2,634,100 - 58,700
(c) Other matters voted upon at the meeting and the results of those
voted were as follows:
For Against Abstain
Amendment to the 1996 1,726,331 483,545 4,720
Incentive Stock Plan to Increase
The Number of Shares of Common
Stock Issuable from 400,000 Shares
To 600,000 Shares
Ratification of Appointment of 2,690,015 700 2,085
Independent Auditors
The foregoing matters are described in detail in the Company's proxy
statement dated April 3, 1998 for the 1998 Annual Meeting of Stockholders.
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: July 29, 1998 By:/S/PAUL SULLIVAN
-----------------------------
Paul Sullivan
Chief Financial Officer
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