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 30,1999
- ----
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
BONDED MOTORS, INC.
-------------------
(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
- --------------------------------------- --------
(Address of principal executive offices) Zip Code
Issuer's telephone number: (323) 583-8631
--------------
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 3,067,140 shares of common stock outstanding at July 29, 1999.
BONDED MOTORS, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Condensed Balance Sheet as of June 30, 1999 3
Condensed Statements of Operations for the three and six month
periods ended June 30, 1999, and 1998 4
Condensed Statements of Cash Flows for the six month periods
ended June 30, 1999, and 1998 5
Notes to Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis or
Plan of Operation 10-12
Part II- Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports 13
Signature 14
-2-
BONDED MOTORS, INC.
Condensed Balance Sheet
June 30, 1999
(Unaudited)
Assets
Current assets:
Cash $ 342,631
Trade accounts receivable (less allowance for doubtful
accounts of $408,597) 3,423,289
Inventories:
Parts 2,229,699
Work in process 1,242,102
Finished goods 6,090,613
-------------
9,562,414
-------------
Deferred tax assets 715,478
Prepaid expenses and other current assets 381,947
Prepaid income taxes 13,216
-------------
Total current assets 14,438,975
-------------
Restricted investment, IDB (note B) 5,200,520
Property and equipment, at cost:
Machinery and equipment 3,730,200
Furniture and fixtures 648,377
--------------
4,378,577
Less accumulated depreciation 1,765,537
--------------
Net property and equipment 2,613,040
--------------
Goodwill, less accumulated amortization of $ 39,727 172,151
Cost of issuance, IDB (note B) 251,226
Deferred tax assets 1,672,897
-------------
$ 24,348,809
=============
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of notes payable to bank (note C) $ 447,248
Short-term debt (note C) 5,683,447
Accounts payable 3,479,103
Accrued expenses 596,530
Accrued warranty obligations 861,087
Current installments of capital lease obligations 9,160
-------------
Total current liabilities 11,076,575
-------------
Notes payable to bank, excluding current installments (note C) 715,608
IDB obligation (note B) 5,130,000
Capital lease obligations, excluding current installments 10,566
Shareholders' equity: (note E)
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
3,067,140 shares 5,040,719
Additional paid-in capital 104,000
Retained earnings 2,371,341
Notes receivable from exercise of stock options (100,000)
-------------
Total shareholders' equity 7,416,060
-------------
$ 24,348,809
=============
See accompanying notes to financial statements.
-3-
BONDED MOTORS, INC.
Condensed Statement of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30 June 30
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 9,628,485 11,302,610 $19,395,459 19,810,652
Cost of sales 7,627,690 8,833,411 16,172,773 15,817,648
----------- ----------- ----------- -----------
Gross profit 2,000,795 2,469,199 3,222,686 3,993,004
Selling, general and administrative expenses 1,495,017 1,783,905 2,963,783 2,866,501
----------- ----------- ----------- -----------
Earnings from operations 505,778 685,294 258,903 1,126,503
Other (expense) income:
Interest expense (171,080) (145,255) (335,776) (255,679)
Interest income 7,929 2,086 10,008 4,171
Other - - - (1,896)
----------- ---------- ----------- -----------
Earnings (loss) before income taxes 342,627 542,125 (66,865) 873,099
Income tax benefit (expense) (116,493) (143,283) 22,734 (268,563)
----------- ---------- ----------- -----------
Net earnings (loss) $ 226,134 398,842 $ (44,131) 604,536
=========== ========== =========== ===========
Basic earnings (loss) per share $ 0.07 0.13 $ (0.01) 0.20
Diluted earnings (loss) per share 0.07 0.13 (0.01) 0.19
=========== ========== =========== ===========
Weighted average common shares outstanding - basic 3,067,000 3,053,000 3,067,000 3,040,000
=========== ========== =========== ===========
Weighted average common and common equivalent
shares outstanding - diluted 3,067,000 3,187,000 3,067,000 3,181,000
=========== ========== =========== ===========
See accompanying notes to financial statements.
-4-
BONDED MOTORS, INC.
Condensed Statements of Cash Flows for the Six Months Ended June 30
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) $ (44,131) 604,536
----------- -----------
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 193,836 141,074
Expense on grant of options - 99,000
Loss on sale of property and equipment - 1,896
(Increase) decrease in assets:
Accounts receivable 495,210 (1,939,431)
Inventories 343,572 (1,181,746)
Prepaid expenses and other assets 69,664 (446,768)
Deferred tax assets (22,735) (192,145)
Prepaid income taxes 541,216 152,658
Increase (decrease) in liabilities:
Accounts payable 300,127 1,494,995
Accrued expenses 93,076 218,834
Accrued warranty obligations (162,137) 154,000
----------- -----------
Net cash provided by operating activities 1,807,698 (893,097)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (453,929) (586,693)
Proceeds from sale of equipment - 500
Restricted investment, IDB (5,200,520) -
----------- -----------
Net cash used in investing activities (5,654,449) (586,193)
----------- -----------
Cash flows from financing activities:
Proceeds from IDB issue 5,130,000 -
Cost of issuance, IDB (251,226) -
Net proceeds from exercise of stock options - 98,750
Borrowings from bank 11,426,704 10,463,315
Repayments of bank borrowings (12,288,260) (9,222,767)
Repayment of notes payable to related parties - (100,000)
Payment of capital lease obligations (6,081) -
----------- -----------
Net cash provided by financing activities 4,011,137 1,239,298
----------- -----------
Net increase (decrease) in cash 164,386 (239,992)
Cash at beginning of period 178,245 297,043
----------- -----------
Cash at end of period $ 342,631 57,051
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 335,776 255,679
Income taxes 3,700 308,050
=========== ===========
See accompanying notes to financial statements.
-5-
BONDED MOTORS, INC.
NOTES TO CONDENSED 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 adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six and three month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
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 to net sales, were
$6,728,863 and $5,318,434 during the six months ended June 30, 1999 and 1998
respectively, and $3,254,437 and $3,406,412 during the three months ended June
30, 1999 and 1998 respectively.
Cores returned from customers are recorded into inventory on the same basis as
the Company purchases cores from independent core suppliers. Customer core
returns provide approximately 70% of the Company's core requirements, and
independent core suppliers provide the remaining 30% of the Company's core
requirements.
Earnings per Share
The weighted average common shares outstanding for the six month periods ended
June 30, 1999 and 1998 were 3,067,000 and 3,040,000, respectively. For purposes
of diluted earnings per share, the incremental common equivalent shares due to
-6-
outstanding stock options and warrants during the six month period ended June
30, 1998 was 141,000. There were incremental common equivalent shares of 5,000
at June 30, 1999 due to outstanding stock options and warrants. These were
excluded from the diluted calculation in 1999 due to their antidilutive effect.
No adjustments to net income were made for the purpose of computing diluted
earnings (loss) per share.
(NOTE B) Restricted Investment, IDB:
During May, 1999 the Company received $5,130,000, representing the proceeds
from Industrial Development Revenue Bonds (the Bonds) which were issued on
behalf of the Company by the California Infrastructure and Economic Development
Bank. The proceeds can be used only for certain qualified types of expenditure,
such as the acquisition of the property adjacent to Bonded's existing Los
Angeles facility; new building construction on such adjacent property;
refurbishment of existing structures at the existing Los Angeles site and the
adjacent site; and purchases of manufacturing equipment, data processing
equipment, furniture, fixtures, and the like.
The Bonds are collateralized by a standby letter of credit for $5,205,896
issued by Comerica Bank which expires on May 1, 2004. Proceeds from the Bonds
are currenly restricted. The proceeds are available to the Company upon the
submission of invoices representing qualifying purchases.
The Bonds are due on May 1, 2024 and bear interest at a weekly variable rate
determined by comparison to the comparable bonds priced or traded under then
prevailing market conditions (3.45% on June 30, 1999). Interest is payable
monthly and principal payments will be due on a payment schedule to be
determined once the Company draws down funds from the trust account.
At June 30, 1999 the Company had not drawn down any amounts from the investment
account. However the Company has the ability to submit qualified invoices,
dated up to six months prior to the issuance of the Bonds, for funding.
The trust funds are invested in short term, highly liquid investments which
earn interest income. The Company must remit any net interest income, if any,
as a result of the interest earned on the investment fund and the interest paid
on the Bonds to U.S. Bank Trust National Association.
The Company incurred $248,631 of debt issue costs, which will be amortized over
the 25 year life of the bond.
(NOTE C) Long-Term Debt:
On April 1, 1999, the Company entered into an amended and restated credit
agreement (the Credit Agreement) providing for a revolving line of credit for
borrowings based on a formula equal to the lesser of either $10,000,000 or the
sum of (a) fifty-five (55%) of the aggregate outstanding principal balance of
eligible receivables; (b) the lesser of $5,000,000 or thirty-five (35%) of
eligible inventory; plus $2,500,000 which shall be subject to reduction to
$1,500,000 by June 30, 1999, $500,000 by September 30, 1999 and $0 by December
-7-
31, 1999 through May 1, 2000. Borrowings under the Agreement bear interest at
prime plus 0.5% or LIBOR plus 2.5% through September 29, 1999, at prime plus
0.25% or LIBOR plus 2.25% through December 30, 1999 and at prime or LIBOR plus
2% from December 31, 1999. 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, 1999 were $5,683,447. The Company had available borrowings
under the line of credit of $903,681 at June 30, 1999.
The Credit Agreement also provides for a term loan for borrowings up to
$1,500,000 for a period of five years from the date of funding. This facility
is to be used for general corporate purposes. New advances under the credit
agreement shall bear interest at prime plus 0.75% or LIBOR plus 2.75% through
September 29, 1999, at prime plus 0.5% or LIBOR plus 2.50% through December 30,
1999 and at prime plus 0.25% or LIBOR plus 2.25 % from December 31, 1999 and
are secured by the assets of the Company. At June 30, 1999, $1,162,856 had been
drawn down and was outstanding under this facility. The Company had available
borrowings under this facility of $337,144 at June 30, 1999.
The Credit Agreement includes various financial covenants, the more significant
of which are tangible net worth, debt coverage ratio, quick ratio and cash flow
coverage ratio. The Company was not in compliance with the tangible net worth,
quick ratio and cash flow coverage ratio covenants as of June 30, 1999. The
Company has obtained a waiver of the covenants at June 30, 1999.
(NOTE D) 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 E) Stockholders' Equity and Stock Options:
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 February 1998, the Company
granted stock options for 70,000 shares at an exercise price of $9.50, the fair
market value as of the date of the grant, to the officers. In July 1998, the
Company granted stock options for 4,000 shares at an exercise price of $9.625,
the fair market value as of the date of the grant, to employees. In March 1999,
the Company granted stock options for 70,000 shares at an exercise price of
$2.75, the fair market value as of the date of the grant, to management. During
1998, 29,600 options were exercised for total proceeds of $167,400 and 10,000
options were canceled upon termination of employment by one of employees.
During 1999, 162,000 options were canceled upon termination of employment by
employees. No options were exercised during the six months of 1999.
-8-
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. No options were issued or
exercised to outside directors since 1998.
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. No
warrants were issued or exercised since 1998.
-9-
PART I - FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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, 1999 decreased
$415,193 or 2.1% and 1,674,125 or 14.8%, respectively, over the comparable
periods a year earlier. For such six month periods the decrease was from
$19,810,652 to $19,395,459 and for such three month periods the decrease was
from $11,302,610 to $9,628,485. The decrease in sales was primarily the result
of decreased sales volume to existing national automobile chain store
customers.
Cost of goods sold for the six and three months ended June 30, 1999 increased
$355,125 or 2.2% and decreased $1,205,721 or 13.6%, respectively, over the
comparable periods a year earlier. For such six month periods the increase was
from $15,817,648 to $16,172,773 and for such three month periods the decrease
was from $8,833,411 to $7,627,690. The increase in cost of goods sold for the
six month periods was primarily attributable to manufacturing costs associated
with the expansion of the Company's production capacity, higher than historical
return rates, increased warranty costs per engine sold, increased warranty
experience rate, and increased inbound freight costs due primarily to the
return activity. The decrease in cost of goods for the three month periods was
attributable to decreased sales. Cost of goods sold as a percentage of net
sales increased over the six month periods from 79.8% to 83.4% and increased
over the three months periods from 78.2% to 79.2%.
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries and costs of additional outside
salespersons, professional services and freight. Selling, general and
administrative expenses for the six and three months ended June 30, 1999
increased $97,282 or 3.4% and decreased $288,888 or 16.2% over the comparable
periods a year earlier. Selling, general and administrative expenses as a
percentage of sales increased from 14.5% to 15.3% for the comparable six month
periods and decreased from 15.8% to 15.5% for comparable three periods. The
increase in selling, general and administrative expenses for the six month
periods was primarily attributable to the addition of new sales personnel and
increased outbound freight costs associated with return activity. The decrease
in selling, general and administrative expenses for the three month periods was
attributable to reduced freight cost during the recent periods in connection
with decreased level of sales and the recognition of $99,000 of expense in 1998
for options granted to consultants as compensation for services rendered for
the three months ended June 30, 1998.
-10-
Earnings from operations for the six and three months ended June 30, 1999
decreased $867,600 and decreased $179,516, respectively, over the comparable
period a year earlier.
Interest expense for the six and three months ended June 30, 1999 increased
$80,097 and $25,825, respectively, over the comparable period a year earlier.
The increase was primarily attributable to increased borrowings.
Pre-tax income for the six and three months ended June 30, 1999 decreased
$939,964 for the six month periods and decreased $199,498 for the three month
periods from the comparable quarter a year earlier. After tax earnings
decreased $648,667 for the six month periods and decreased $172,708 for three
month period 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, 1999, the
Company's working capital was $3,362,400.
Net cash provided by operating activities during the six months ended June 30,
1999 of $1,807,698 was primarily due to a decrease in accounts receivable and
inventory.
Net cash used in investing activities for the six months ended June 30, 1999 of
$5,654,449 was primarily to invest the proceeds from the issuance of the Bond
and to purchase new equipment during the period.
Net cash provided by financing activities for the six months ended June 30,
1999 of 4,011,137 was primarily from net borrowings from the bank and from the
issuance of the Bond during the period.
The Company's accounts receivable as of June 30, 1999 was $3,423,289. This
represents a decrease of $495,210 or 12.6% over accounts receivable on December
31, 1998, and is due to more prompt payment from customers.
The Company's inventory as of June 30, 1999 was $9,562,414 which represents a
decrease of $343,572 or 3.5% over inventory as of December 31, 1998. The
decrease is primarily attributable to the Company's planned reduction in
finished goods inventory.
The Company believes that internally generated funds and the available
borrowings under its existing credit facilities will provide sufficient
liquidity and enable it to meet its current and foreseeable working capital
requirements.
Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior
-11-
to the year 2000 in order to remain functional. The Company is assessing the
internal readiness of its computer systems for handling the year 2000. The
Company expects to implement successfully the systems programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that there will not
be delay in, or increased costs associated with the implementation of such
changes, and the inability to implement such changes could have an adverse
effect on future results of operations.
Review of the Company's hardware and software is ongoing. The Company has
retained the services of an outside consultant to examine, modify and/or update
all hardware and software. The Company has completed on site testing of all
systems in June, 1999, and found that mission critical systems continued to
function normally when the system's calendar was changed to January, 2000.
The Company has initiated communications with all of its key business partners
to determine their extent and plans for Year 2000 compliance. This process is
ongoing and is expected to continue throughout 1999.
Where needed, the Company will establish contingency plans based on the
Company's actual testing experience and assessment of outside risks. However,
to the extent outside support systems, such as suppliers, may not be Year 2000
compliant by the end of 1999, such noncompliance could result in circumstances
which could have a material adverse effect on the Company's business, financial
condition, and operating results.
-12-
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 May 10, 1999.
(b) The directors elected at the meeting were:
For Against Abstain
Aaron Landon 2,326,482 - 17,482
William Robinson 2,326,502 - 17,462
Cornelius P. McCarthy III 2,326,502 - 17,462
John F. Creamer 2,326,502 - 17,462
Robert L. Green 2,326,502 - 17,462
(c) Other matters voted upon at the meeting and the results of those voted
were as follows:
For Against Abstain
Ratification of Appointment of 2,339,664 3,700 600
Independent Auditors
The foregoing matters are described in detail in the Company's proxy statement
dated April 10, 1999 for the 1999 Annual Meeting of Stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
-13-
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, 1999 By:/S/PAUL SULLIVAN
Paul Sullivan
Chief Financial Officer
-14-