SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
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x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,1999
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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.
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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: (323) 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.
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Yes x No
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There were 3,067,140 shares of common stock outstanding at November 15, 1999.
BONDED MOTORS, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Condensed Balance Sheet as of September 30, 1999 3
Condensed Statements of Operations for the three and nine month
periods ended September 30, 1999, and 1998 4
Condensed Statements of Cash Flows for the nine month periods
ended September 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 6. Exhibits and Reports 13
Signature 14
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BONDED MOTORS, INC.
Condensed Balance Sheet
September 30, 1999
(Unaudited)
Assets
Current assets:
Cash $ 110,168
Trade accounts receivable (less allowance for doubtful
accounts of $502,029) 3,766,402
Inventories:
Parts 2,649,316
Work in process 1,398,171
Finished goods 6,275,832
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10,323,319
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Prepaid expenses and other current assets 320,631
Prepaid income taxes 13,216
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Total current assets 14,533,736
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Restricted investment, IDB (note B) 4,596,904
Property and equipment, at cost:
Machinery and equipment 3,779,282
Furniture and fixtures 650,076
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4,429,358
Less accumulated depreciation 1,859,886
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Net property and equipment 2,569,472
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Goodwill, less accumulated amortization of $ 45,024 166,855
Cost of issuance, IDB less accumulated amortization
of $ 3,315 (note B) 247,911
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$ 22,114,878
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Liabilities and Shareholders' Equity
Current liabilities:
Notes payable to bank (note C) $ 464,844
Short-term debt (note C) 7,025,793
Accounts payable 3,142,546
Accrued expenses 517,819
Accrued warranty obligations 961,813
Current installments of capital lease obligations 9,160
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Total current liabilities 12,121,975
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IDB obligation (note B) 5,130,000
Capital lease obligations, excluding current installments 7,749
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 deficit (189,565)
Notes receivable from exercise of stock options (100,000)
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Total shareholders' equity 4,855,154
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$ 22,114,878
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See accompanying notes to condensed financial statements.
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BONDED MOTORS, INC.
Condensed Statement of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30 September 30
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1999 1998 1999 1998
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Net sales $ 8,140,658 10,807,015 $27,536,117 30,617,667
Cost of sales 7,253,721 8,622,708 23,426,494 24,440,356
----------- ---------- ----------- -----------
Gross profit 886,937 2,184,307 4,109,623 6,177,311
Selling, general and administrative expenses 1,208,700 1,336,788 4,172,483 4,203,289
----------- ---------- ----------- -----------
Earnings (loss) from operations (321,763) 847,519 (62,860) 1,974,022
Other (expense) income:
Interest expense (206,071) (108,903) (541,847) (364,582)
Interest income 43,733 2,088 53,741 6,259
Other - - - (1,896)
----------- ---------- ----------- -----------
Earnings (loss) before income taxes (484,101) 740,704 (550,966) 1,613,803
Income tax benefit (expense) (2,076,805) (262,501) (2,054,071) (531,064)
----------- ---------- ----------- -----------
Net earnings (loss) $ (2,560,906) 478,203 $(2,605,037) 1,082,739
=========== ========== =========== ===========
Basic earnings (loss) per share $ (0.83) 0.16 $ (0.85) 0.35
Diluted earnings (loss) per share (0.83) 0.15 (0.85) 0.34
=========== ========== =========== ===========
Weighted average common shares outstanding - basic 3,067,000 3,062,000 3,067,000 3,052,000
=========== ========== =========== ===========
Weighted average common and common equivalent
shares outstanding - diluted 3,067,000 3,133,000 3,067,000 3,168,000
=========== ========== =========== ===========
See accompanying notes to condensed financial statements.
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BONDED MOTORS, INC.
Condensed Statements of Cash Flows for the Nine Months Ended September 30
(Unaudited)
1999 1998
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Cash flows from operating activities:
Net earnings (loss) $ (2,605,037) 1,082,739
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Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 296,796 217,930
Expense on grant of options - 99,000
Loss on sale of property and equipment - 1,896
(Increase) decrease in assets:
Accounts receivable 152,097 (1,429,632)
Inventories (417,333) (2,618,998)
Prepaid expenses and other assets 130,980 (316,038)
Deferred tax assets 2,365,640 (366,987)
Prepaid income taxes 541,216 415,227
Increase (decrease) in liabilities:
Accounts payable (36,430) 1,171,066
Accrued expenses 14,365 151,765
Accrued warranty obligations (61,411) 247,000
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Net cash provided by (used in) operating activities 380,883 (1,345,032)
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Cash flows from investing activities:
Purchases of equipment (504,710) (772,917)
Proceeds from sale of equipment - 500
Restricted investment, IDB (4,596,904) -
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Net cash used in investing activities (5,101,614) (772,417)
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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 - 157,000
Borrowings from bank 16,958,608 16,750,665
Repayments of bank borrowings (17,175,830) (14,872,270)
Repayment of notes payable to related parties - (100,000)
Payment of capital lease obligations (8,898) 31,153
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Net cash provided by financing activities 4,652,654 1,966,548
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Net decrease in cash (68,077) (150,901)
Cash at beginning of period 178,245 297,043
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Cash at end of period $ 110,168 146,142
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Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 541,847 364,582
Income taxes 3,700 482,824
=========== ===========
See accompanying notes to condensed financial statements.
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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 condensed 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 nine and three month periods ended September 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
$9,738,312 and $9,116,010 during the nine months ended September 30, 1999 and
1998 respectively, and $3,009,449 and $3,797,576 during the three months ended
September 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 (LOSS)PER SHARE
The weighted average common shares outstanding for the three and nine month
periods ended September 30, 1999 and 1998 were 3,067,000 and 3,062,000, and
3,067,000 and 3,052,000, respectively. For the three and nine month periods
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ended September 30, 1999 and 1998 approximately zero and 8,000, and 71,000 and
116,000, respectively of potentially dilutive common shares, were not included
in the calculation of diluted net loss per share as they are antidilutive.
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 currently 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 comparable bonds priced or traded under then
prevailing market conditions (3.45% on September 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 September 30, 1999 the Company had drawn down $ 554,788 for equipment
acquisition and $ 102,600 cost of issuance reimbursement from the investment
account.
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 are being 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 through May 1, 2000 based on a formula equal to the lesser of either
$10,000,000 or the sum of (a) fifty-five percent (55%) of the aggregate
outstanding principal balance of eligible receivables; (b) the lesser of
$5,000,000 or thirty-five percent (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 31, 1999. The reduction to $500,000 by
September 30, 1999 was not met, however, the bank agreed to allow the Company
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to continue to use the $1,500,000 overformula through October 29, 1999. The
above calculated revolving line of credit provided for a borrowing base of
$6,680,065 at September 30, 1999. On August 31, 1999, the Company amended the
Credit Agreement to provide for a revolving line of credit with an interest
rate of prime (8.25% on September 30, 1999) plus 1%. Borrowings under the line
of credit are secured by the Company's assets. Total amounts outstanding under
the revolving line of credit at September 30, 1999 were $7,025,793. The Company
had no available borrowings under the line of credit at September 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. On August 31, 1999, the Company
amended the Credit Agreement to provide for a term loan with an interest rate
of prime (8.25% on September 30, 1999) plus 1.25% and is secured by the assets
of the Company. At September 30, 1999, $ 464,844 had been drawn down and
was outstanding under this facility. The Company had available borrowings
under this facility of $1,035,156 at September 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,
debt coverage ratio, quick ratio and cash flow coverage ratio covenants as of
September 30, 1999. The Company has classified all amounts outstanding under
the Credit Agreement as a current liability due to the Company's non-compliance
with its debt covenants.
As stated in its announcement of October 14, 1999, the Company is working
diligently with its bank to remedy this situation. The Company has been working
closely with its major trade suppliers through Motor Equipment Manufacturers'
Association (MEMA) and Comerica Bank-California ("the Bank") in order to
formulate a plan for reduction of the Company's indebtedness to the Bank. The
proposed plan includes converting certain existing current accounts payable to
a long term note with principal repayments to begin after the first quarter,
2000. The proposed plan also calls for extended payment terms on new orders
placed with the Company's largest trade suppliers.
The additional cash flow expected to be generated as a result of this proposed
plan will be used to reduce the Company's indebtedness to Comerica
Bank-California, in exchange for which the Bank has been requested to forebear
from taking any action on these defaults. Details of the plan are still being
negotiated between the Company, the Bank, and MEMA.
(NOTE D) INCOME TAXES:
During the three months ended September 30, 1999, the Company recorded a
valuation allowance of $ 2,388,375 to reduce the Company's net deferred tax
asset to its estimated net realizable value.
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(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 employee. During
1999, 162,000 options were canceled upon termination of employment by
employees. No options were exercised during the nine months of 1999.
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 have been 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 have been issued or exercised since 1998.
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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
condensed financial statements and notes thereto appearing elsewhere herein.
RESULTS OF OPERATIONS:
Net sales for the nine months and three months ended September 30, 1999
decreased $3,081,550 or 10.1% and 2,666,357 or 24.7%, respectively, over the
comparable periods a year earlier. For such nine month periods the decrease was
from $30,617,667 to $27,536,117 and for such three month periods the decrease
was from $10,807,015 to $8,140,658. The decreases in sales were primarily the
result of decreased sales volume to a major national customer.
Cost of goods sold for the nine and three months ended September 30, 1999
decreased $1,013,862 or 4.1% and decreased $1,368,987 or 15.9%, respectively,
over the comparable periods a year earlier. For such nine month periods the
decrease was from $24,440,356 to $23,426,494 and for such three month periods
the decrease was from $8,622,708 to $7,253,721. The decreases in cost of goods
were attributable to decreased sales. Cost of goods sold as a percentage of net
sales increased over the nine month periods from 79.8% to 85.1% and increased
over the three months periods from 79.8% to 89.1%. The increases in cost of
goods sold as a percentage of net sales are attributable to the increased
warranty returns and costs per engine. Notwithstanding the decline in sales,
warranty expenses increased $166,590 and $1,863 for the nine and three month
periods ended September 30, 1999 over the comparable periods a year earlier.
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 nine and three months ended September 30, 1999
decreased $30,806 or 0.7% and decreased $128,088 or 9.6% over the comparable
periods a year earlier. Selling, general and administrative expenses as a
percentage of sales increased from 13.7% to 15.2% for the comparable nine month
periods and increased from 12.4% to 14.8% for comparable three month periods.
The decreases in selling, general and administrative expenses were primarily
attributable to reduced freight cost during the recent periods in connection
with the decreased level of sales.
Earnings from operations for the nine and three months ended September 30,
1998 were $1,974,022 and $847,519,respectively, and the loss from operations
for the nine and three months ended Sepetmber 30, 1999 were $(62,860) and
$(321,763).
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Interest expense for the nine and three months ended September 30, 1999
increased $177,265 and $97,168, respectively, over the comparable period a year
earlier. The increase was primarily attributable to increased borrowings.
During the three months ended September 30, 1999, the Company recorded a
valuation allowance of $2,388,375 to reduce the Company's net deferred tax
asset to its estimated net realizable value. After tax earnings for the nine
and three months ended September 30, 1998 were $1,082,739 and $478,203,
respectively, and after tax loss for the nine and three months ended September
30, 1999 were $2,605,037 and 2,560,906, respectively.
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 September 30, 1999, the
Company's working capital was $2,411,761.
Net cash provided by operating activities during the nine months ended
September 30, 1999 of $380,883 was primarily due to reduction in prepaid income
taxes.
Net cash used in investing activities for the nine months ended September 30,
1999 of $5,101,614 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 nine months ended September
30, 1999 of $4,652,654 was primarily from the issuance of the Bond during the
period.
The Company's accounts receivable as of September 30, 1999 was $3,766,402.
This represents a decrease of $ 152,097 or 3.9% over accounts receivable on
December 31, 1998, and is due to decreased sales.
The Company's inventory as of September 30, 1999 was $10,323,319 which
represents a increase of $417,333 or 4.2% over inventory as of December 31,
1998. The increase is primarily attributable to the Company's increasing
finished goods inventory at all distribution centers.
We are currently in violation of our working capital line of credit and are
working with the lender and our trade suppliers to develop a plan to provide
the Company with working capital to continue to fund the Company's operations.
See Note (C) to the condensed financial statements. If we are unable to reach
an agreement with the bank and or trade suppliers on a plan, we will be
required to seek additional financing alternatives. If we are unable to obtain
the necessary additional financing, our business, financial, and operating
results may be materially adversely affected.
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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
to the year 2000 in order to remain functional. The Company has assessed the
internal readiness of its computer systems for handling the year 2000 and has
sucessfully implemented the system programming changes necessary to address
year 2000 issues.
Review of the Company's hardware and software is complete. The Company 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.
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PART II - OTHER INFORMATION
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: November 15, 1999 By:/S/PAUL SULLIVAN
Paul Sullivan
Chief Financial Officer
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