<PAGE>
SUBJECT TO COMPLETION, DATED MAY 28, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by Bonded Motors, Inc. (the "Company") and 500,000 are being sold by
certain shareholders of the Company (the "Selling Shareholders"). See "Principal
and Selling Shareholders." The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholders. The Common Stock is traded on
the Nasdaq National Market under the symbol "BMTR." On May 28, 1998, the last
sale price of the Common Stock as reported by Nasdaq was $9.25 per share. See
"Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS," COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------------------------------------
Per Share......... $ $ $ $
- -------------------------------------------------------------------------------------------
Total (3)......... $ $ $ $
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $ , including the
Representatives' non-accountable expense allowance, payable by the Company.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to the Public, Underwriting Discounts and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters named herein, and subject to certain other
conditions. It is expected that delivery of the certificates representing such
shares will be made against payment therefor at the offices of Van Kasper &
Company in San Francisco, California on or about June , 1998.
VAN KASPER & COMPANY COMMONWEALTH ASSOCIATES
JUNE , 1998
<PAGE>
Front Cover, Map:
PRIOR TO 1996, BONDED MOTORS WAS CONSIDERED A REGIONAL SUPPLIER OF
REMANUFACTURED AUTOMOTIVE ENGINES, PRODUCING AND SELLING APPROXIMATELY 15,000
ENGINES PER YEAR. IN THE PAST THREE YEARS, DUE TO GEOGRAPHICAL EXPANSION OF ITS
MANUFACTURING AND DISTRIBUTION CHANNELS, DEMAND HAS INCREASED. AS OF APRIL 30,
1998, BONDED WAS PRODUCING AND SELLING AT AN APPROXIMATE ANNUALIZED RATE OF
50,000 ENGINES PER YEAR, WHICH IS STILL A SMALL FRACTION OF THE MARKET OF OVER
THREE MILLION ENGINES REMANUFACTURED AND SOLD ANNUALLY, ACCORDING TO THE
PRODUCTION ENGINE REMANUFACTURERS ASSOCIATION.
Front Cover, Engine:
BONDED MOTORS REMANUFACTURES APPROXIMATELY 1,500 ENGINE TYPES AND VARIATIONS.
THE COMPANY CURRENTLY STOCKS MORE THAN 6,000 ENGINES TO ASSURE TIMELY
AVAILABILITY OF ITS MOST POPULAR ENGINES.
Back Cover, Willie:
THE COMPANY HAS DEVELOPED AN INNOVATIVE EMPLOYEE INCENTIVE PROGRAM. BONDED
MOTORS RECENTLY RECEIVED ISO9002/QS9000 CERTIFICATION, WHICH IS A PREREQUISITE
TO BECOMING A SUPPLIER TO A MAJOR AUTOMOBILE MANUFACTURER.
Back Cover, Pep Boys:
MOST OF BONDED MOTORS'
ENGINES ARE SOLD TO MAJOR
AUTOMOTIVE RETAIL CHAINS SUCH
AS PEP BOYS, CHECKERS,
SCHUCKS, KRAGENS, PACCAR, AND
GENUINE PARTS/NAPA. THE
COMPANY'S REGIONAL
DISTRIBUTION STRATEGY ALLOWS
IT TO MORE EFFECTIVELY SERVE
NATIONAL CUSTOMERS.
Back Cover, Inventory:
TO INCREASE PRODUCTION, THE COMPANY IS UPGRADING ITS MANUFACTURING EQUIPMENT.
THIS AUTOMATED AND COMPUTERIZED ROTTLER BORING BAR, INSTALLED IN APRIL OF THIS
YEAR, CONTROLS SIZES MORE CLOSELY, WHILE INCREASING LABOR EFFICIENCY.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELECT GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Bonded Motors, Inc. is a leading nationwide engine remanufacturer serving
suppliers to the automotive aftermarket. The Company remanufactures and
distributes over 1,500 models and versions of replacement engines for domestic
and Japanese cars and light trucks. The Company's production facilities are in
Los Angeles and Macon, Georgia, and it has regional distribution centers in
California, Washington, Colorado, Ohio, Georgia and New York.
According to industry reports, the vehicle population in the United States
is older today than at any time during the past 50 years, with vehicles ten
years or older accounting for more than 45% of vehicles currently on the road.
With the improved quality and durability of automobile exteriors and the
increasing prices of new cars, there is a growing trend for consumers to replace
damaged or worn-out automobile engines with remanufactured engines. Industry
sources estimate that over three million engines are remanufactured in North
America annually, a $2.5 billion market.
Through 1997, the Company's principal customers were large retail automotive
parts store chains which sold primarily to automobile owners (the
"do-it-yourself" market). These customers of the Company included The Pep Boys,
CSK Automotive, Trak Auto and Paccar. In 1996 and 1997, sales to these four
national chain store customers constituted approximately 71% and 68% of the
Company's sales, respectively.
In March 1998, the Company became the primary supplier of remanufactured
automobile engines to Genuine Parts/NAPA, which is a major supplier to
professional installers (the "do-it-for-me" market). Genuine Parts/NAPA is the
largest member of the National Automotive Parts Association ("NAPA"), a trade
association formed to provide nationwide distribution of automotive parts. In
1997, Genuine Parts/ NAPA operated 750 company-owned auto parts stores located
in 43 states, as well as 62 distribution centers serving approximately 4,900
independently-owned NAPA auto parts stores nationwide. Genuine Parts/NAPA is the
Company's first major customer that supplies primarily to the "do-it-for-me"
market.
From 1994 through 1997, the Company's net sales increased from $10.5 million
to $24.1 million, a 32% compound annual growth rate. In the first quarter of
1998, net sales increased by 68% compared to the first quarter of 1997, even
though the Company sold to Genuine Parts/NAPA as its primary supplier only for
the last month of the quarter. Exclusive of sales to Genuine Parts/NAPA, net
sales for the quarter increased 42%. The Company has continued to make
significant sales to Genuine Parts/NAPA through April 1998.
During the five quarters ended March 31, 1998, the Company materially
increased its production of remanufactured engines in order to meet increased
demand. The Company experienced significant production difficulties during the
last three quarters of 1997, and production costs per engine increased $38 per
engine for the year. The Company has taken steps to address these issues,
believes that it has made significant improvements to its production processes,
and has seen production and warranty costs per engine decline by $55 from the
fourth quarter of 1997 to the first quarter of 1998. The improvement in
production costs are partially contained in inventory balances at March 31, 1998
and, accordingly, will not be fully realized in reported results of operations
until later periods.
To sustain its growth, the Company will need to significantly expand its
manufacturing capabilities in the near future. The net proceeds of the Offering
will, in effect, be used in substantial part to fund this expansion.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 1,500,000 shares
Common Stock offered by the Selling Shareholders..... 500,000 shares
Common Stock to be outstanding immediately after this
Offering........................................... 4,555,040 shares
Use of Proceeds...................................... To repay the indebtedness
outstanding under its revolving bank
credit agreement. The Company
currently intends to use the balance
of the net proceeds, together with
reborrowings under that credit
agreement, to fund the expansion of
the Company's manufacturing
capabilities and for general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........................ BMTR
</TABLE>
SUMMARY FINANCIAL AND OTHER DATA
(in thousands, except per share and other data)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ --------------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales......................................... $ 10,512 $ 13,621 $ 18,637 $ 24,076 $ 5,076 $ 8,508
Cost of sales..................................... 7,841 10,175 14,351 19,369 3,689 6,984
--------- --------- --------- --------- --------- ---------
Gross profit...................................... 2,671 3,446 4,286 4,707 1,387 1,524
Selling, general and administrative expenses...... 1,841 2,117 2,685 3,706 865 1,083
--------- --------- --------- --------- --------- ---------
Earnings from operations.......................... 830 1,329 1,601 1,001 522 441
Other expense net................................. (92) (15) -- (180) (8) (110)
--------- --------- --------- --------- --------- ---------
Earnings before income taxes...................... 738 1,314 1,601 821 514 331
Income tax benefit (expense)...................... 325 (152) (29) 326 (85) (125)
--------- --------- --------- --------- --------- ---------
Net earnings...................................... $ 1,063 $ 1,281 $ 1,572 $ 1,147 $ 429 $ 206
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Basic earnings per share.......................... $ 0.59 $ 0.70 $ 0.57 $ 0.38 $ 0.14 $ 0.07
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Diluted earnings per share........................ $ 0.55 $ 0.65 $ 0.56 $ 0.37 $ 0.14 $ 0.06
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding--Basic............................... 1,800 1,817 2,750 3,021 3,003 3,039
Weighted average common and common equivalent
shares outstanding--Diluted...................... 1,927 1,972 2,797 3,116 3,111 3,188
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ $ 11,230 18,329
Total assets........................................................................... 18,538 25,637
Total liabilities...................................................................... 9,832 4,381
Shareholders' equity................................................................... 8,706 21,256
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
---------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1997 1997 1997 1997 1997 1998
----------- --------- ----------- ----------- ----------- ----------- -----------
OTHER DATA:
Net sales (000's)................. $ 18,636 $ 24,076 $ 5,076 $ 6,272 $ 6,577 $ 6,152 $ 8,508
Net engine sales.................. 22,339 28,921 6,043 7,546 7,909 7,423 10,045
Gross profit margin............... 23.0% 19.6% 27.3% 19.0% 16.3% 17.2% 17.9%
Engine data:
Total produced.................. 25,746 30,446 6,432 6,625 8,750 8,639 10,320
Average produced per day (2).... 103 122 103 106 140 138 165
Average sold per day (2)........ 89 116 97 121 127 119 161
Cost of production (3):
Increase (decrease) from 1996
cost of production per
engine (4).................... Base $33 $22 $15 $45 $43 $(12 )
Percentage of 1996 cost of
production per engine......... 100 % 106% 104 % 103 % 108 % 107 % 98 %
</TABLE>
- ------------------------
(1) As adjusted to reflect the sale of 1,500,000 shares of Common Stock by the
Company in the Offering and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(2) Based on an average of 250 production and sales days per year.
(3) Includes warranty costs.
(4) The information presented represents the difference in each period presented
from the Base of 1996. For example, for the period ended March 31, 1998, the
table indicates both that production costs per engine were $12 less than the
1996 Base and that production costs per engine declined by $55 per engine
from the quarter ended December 31, 1997.
------------------------
UNLESS OTHERWISE INDICATED, THE SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS (I) DOES NOT INCLUDE 586,900 SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE PURSUANT TO OUTSTANDING OPTIONS AND WARRANTS, AND (II) ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
5
<PAGE>
RISK FACTORS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING STATEMENTS
REGARDING REVENUES, PER UNIT PRODUCTION AND OTHER COSTS, INCOME FOR TAX
PURPOSES, INDUSTRY TRENDS AND THEIR IMPACT ON THE COMPANY'S BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, ARE FORWARD LOOKING STATEMENTS. THESE
FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING BUT NOT
LIMITED TO THOSE SET FORTH BELOW. ALSO, THE FORWARD LOOKING STATEMENTS ARE BASED
UPON ASSUMPTIONS OF FUTURE EVENTS, WHICH MAY NOT PROVE TO BE ACCURATE. FOR THESE
AND OTHER REASONS, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR
IMPLIED IN THE FORWARD LOOKING STATEMENTS. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
ABILITY TO MANAGE GROWTH; QUALITY
As the Company experienced significant growth in the past two years, its
capabilities were strained, margins decreased and the quality of its products
was adversely affected. The Company has taken steps to address these issues,
including hiring Richard Funk as its President in November 1997, and believes it
has begun to see improvement in its per unit production costs. However, the
improvements are partially reflected in data for the first quarter of 1998 only,
and no assurance can be given that the quarterly data reflects a trend or, if it
does, that the trend will continue.
In order to sustain its growth, the Company will need to significantly
expand its manufacturing capabilities in the near future. The management of
future growth will present significant challenges, and no assurance can be given
that the Company will be able to manage its growth effectively. If the Company
does not do so, the quality of the Company's products (and resulting levels of
warranty expense), its ability to retain key customers and its business,
financial condition and results of operations could be materially adversely
affected.
If the Company is not able to timely expand its manufacturing capabilities,
its ability to attract new customers and retain its key customers could be
adversely affected, with a resulting material adverse effect on the Company. The
Company does not have any contracts or arrangements for necessary additional
manufacturing facilities, and no assurance can be given that it will be able to
lease or acquire such additional facilities on acceptable terms.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts and abilities of its Chairman and
Chief Executive Officer, Aaron Landon, its President, Richard Funk, its Chief
Operating Officer, Buddy Mercer, and its Chief Financial Officer, Paul Sullivan.
If the Company were to lose the services of any of these executives before a
qualified replacement could be found, its business could be materially adversely
affected. Messrs. Landon, Mercer and Sullivan have entered into employment
agreements with the Company ending on December 31, 1999. Mr. Funk has entered
into a two-year employment agreement with the Company, which expires on December
31, 1999. That agreement provides that either party may terminate the agreement
at any time without penalty. However, Mr. Funk has been granted options to
purchase 100,000 shares of the Common Stock at an exercise price of $8.63 (54%
of the number of options granted to employees in 1997), and these options vest
50% at the end of the first year of employment and 50% at the end of the second.
The Company has key person life insurance policies on the lives of Messrs.
Landon, Mercer and Sullivan in the amounts of $1,000,000 each, as to which the
Company is the sole beneficiary.
CONCENTRATION OF SALES AND RECEIVABLES
A significant percentage of the Company's sales has been concentrated among
a relatively small number of customers. In 1996 and 1997, 71% and 68% of the
Company's sales, respectively, were made to four customers. In the first quarter
of 1998, 75% of the Company's sales were made to four customers. Receivables
from these customers comprised 90% of the Company's accounts receivable balance
at
6
<PAGE>
March 31, 1998. The Company has not in the past had, and does not now have,
contracts with any of these customers. The loss of a significant customer or a
substantial decrease in sales to such a customer could have an adverse effect on
the Company's sales and operating results.
AVAILABILITY AND PRICING OF CORES
The Company remanufactures used engines (commonly referred to as "cores").
The Company obtains cores from various sources, principally core vendors and
trade-ins. The Company's ability to obtain cores of the type, quality and in the
quantities required is essential to its ability to meet demand and expand
production. Although core supply has been adequate in the past, there can be no
assurance that the Company will be able timely to obtain sufficient cores at
acceptable prices in the future.
COMPETITION
The Company competes with companies involved in the remanufacture and
distribution of engines and related parts for domestic and Japanese automobiles.
The automotive aftermarket industry is highly competitive and a number of
companies with which the Company competes are substantially larger and have
significantly greater resources than those of the Company. The primary bases for
competition in the automotive aftermarket are price, quality, reliability, rapid
response and breadth of product selection. There are a number of engine
remanufacturers which are authorized to sell remanufactured engines to
dealerships and to automobile manufacturers and which are substantially larger
than the Company. There can be no assurance that these companies will not enter
the segment of the engine remanufacturing market in which the Company competes.
GOVERNMENT REGULATION
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharge to waters
and the generation, handling, storage, transportation, treatment and disposal of
hazardous waste and other materials. The Company believes that its business,
operations and facilities have been and are being operated in material
compliance with applicable environmental, health and safety laws, many of which
provide for substantial fines and criminal sanctions for violations. However,
the operation of automotive parts manufacturing plants entails risks in these
areas, and there can be no assurance that the Company will not incur material
costs or liabilities in connection therewith. In addition, potentially
significant expenditures could be required in order to comply with evolving
environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future.
TAX MATTERS
Until December 31, 1997, the Company received State of California tax
credits for its hiring practices and its location within the Los Angeles
Revitalization Zone ("LARZ"), which substantially eliminated the Company's
California tax liability. The ability to earn these credits expired effective
December 31, 1997. Although legislation is being considered by the State to
re-establish the availability of these or similar credits, no such legislation
has been passed to date, and there can be no assurance that such legislation
will be passed into law.
YEAR 2000 ISSUE
The Company will commence, for all of its information systems, a year 2000
date conversion project to address necessary code changes, testing and
implementation and does not presently anticipate any material internal year 2000
issues or expenses from its own information systems, databases or programs. The
Company is in the process of developing a plan to assess the effect on the
Company that third parties who are not year 2000 compliant may have on the
operations of the Company.
7
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have 4,555,040 shares
of Common Stock outstanding, of which 3,621,980 shares will be freely tradeable
and the remaining 933,060 shares will be restricted securities within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Subject to the lock up agreements referred to below, the restricted securities
will be available for public resale following this Offering pursuant to Rule 144
under the Securities Act. In addition, as of March 31, 1998, there were
outstanding stock options and warrants to purchase 586,900 shares of Common
Stock. Of these shares, when and if issued, 100,400 shares will be freely
tradeable without restriction under the Securities Act, and the balance will be
saleable under Rule 144. Sales of Common Stock in the public market after this
Offering could adversely affect the market price of the Common Stock. Such sales
also might make it more difficult for the Company to sell equity securities in
the future at a time and price that it deems acceptable. The officers, directors
and holders of more than 1% of the outstanding Common Stock have agreed with the
Underwriters that they will not sell any of the shares owned by them for 120
days after the date of this Prospectus without the prior written consent of Van
Kasper & Company.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares
offered by it are estimated to be $12.5 million, based on an assumed public
offering price of $9.25 per share after deducting estimated underwriting
discounts and offering expenses. The Company will not receive any proceeds from
the sale of shares by the Selling Shareholders.
The Company anticipates using a portion of the net proceeds to repay the
indebtedness outstanding under its bank credit facilities. At March 31, 1998,
$5.5 million was outstanding under a revolving line of credit, bearing an
interest rate at the lower of the bank's prime lending rate or LIBOR plus 2.0%,
and $760,000 was outstanding under a specific advance facility, bearing an
interest rate of the lower of the bank's prime interest rate plus 0.25%, its
cost of funds plus 2.25%, or LIBOR plus 2.25%, as selected by the Company. These
borrowings were incurred primarily to finance increases in inventory and
accounts receivable associated with the Company's growth and to purchase
inventory, plant machinery and equipment located in Macon, Georgia. The Company
currently intends to reborrow under its bank credit facilities and to use the
balance of the net proceeds of the Offering to fund the expansion of the
Company's manufacturing facilities by one or a combination of leasing or
acquiring additional facilities near its Los Angeles manufacturing facility,
expanding its Macon, Georgia manufacturing facility or, possibly, acquiring
other engine remanufacturers and for general corporate purposes.
The Company is currently involved in discussions with a major automobile
manufacturer to provide remanufactured engines to it. If the Company receives a
significant contract, as to which no assurance can be given, it may require a
separate assembly line, which could be directly or indirectly funded from the
net proceeds of the Offering.
9
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been trading on the Nasdaq National Market under the
symbol "BMTR" since April 2, 1996. The following table sets forth for the
periods indicated the high and low closing bid prices of the Common Stock as
reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
Second Quarter......................................................... $ 8.63 $ 6.50
Third Quarter.......................................................... 8.13 6.38
Fourth Quarter......................................................... 11.00 6.50
1997
First Quarter.......................................................... $ 10.63 $ 7.75
Second Quarter......................................................... 10.50 6.25
Third Quarter.......................................................... 11.88 6.63
Fourth Quarter......................................................... 9.25 7.94
1998
First Quarter.......................................................... $ 11.44 $ 8.38
Second Quarter (through May 28, 1998).................................. 10.94 9.25
</TABLE>
On May 28, 1998, the last reported sale price of the Common Stock as
reported by Nasdaq was $9.25 per share.
The principal shareholder of the Company and related persons and entities
own 44.4% of the Company's Common Stock and, together with the other directors
of the Company, own 49.7% of the Common Stock. At March 31, 1998, the Company
had approximately 80 round lot shareholders of record. The Company believes,
based on information from the record holders, that it has approximately 863
beneficial owners. During the three, six and nine months ended March 31, 1998,
the average daily trading volume in the stock of the Company was 11,207, 13,754
and 14,635 shares, respectively. These factors may have caused the price of the
Common Stock to be more significantly influenced by factors unrelated to the
value of the Company than it would otherwise be and to be subject to price
fluctuations that might not occur were the stock more widely held and its
trading volume higher.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998, and as adjusted to give effect to the sale of the shares of Common
Stock offered by the Company hereby and the application of estimated net
proceeds therefrom, based on an assumed public offering price of $9.25 per
share. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and the financial
statements and notes thereto included herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current installments of note payable to bank........................................... $ 385 $ 385
--------- -------
--------- -------
Long-term debt and notes payable to bank (1)........................................... 5,826 375
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 shares authorized, no shares
outstanding...................................................................... -- --
Common Stock, no par value, 10,000,000 shares authorized, 3,040,040 shares
outstanding and 4,540,000 outstanding as adjusted (2)............................ 4,890 17,440
Retained earnings.................................................................. 3,916 3,916
Note receivable from exercise of stock options..................................... (100) (100)
--------- -------
Total shareholders' equity..................................................... 8,706 21,256
--------- -------
Total capitalization....................................................... $ 14,532 $ 21,631
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) A portion of the net proceeds will be used to repay the outstanding
indebtedness. See "Use of Proceeds."
(2) As adjusted shares outstanding does not include 586,900 shares reserved for
issuance upon exercise of outstanding stock options and warrants.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock, presently
intends to retain any earnings for use in its business and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future.
11
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The selected financial data presented below with respect to the statements
of earnings for the three years ended December 31, 1997, are derived from the
financial statements and notes thereto that have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, and included elsewhere
herein, and are qualified by reference to such financial statements and notes
related thereto. The balance sheet data at March 31, 1998 and the statement of
earnings data for the three months ended March 31, 1997 and 1998 are derived
from unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments the Company considers necessary for a fair presentation of the
financial position and results of operations at and for the three months ended
March 31, 1997 and 1998. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. The data provided should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations," financial statements, related notes and other financial
information included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales.......................................................... $ 13,621 $ 18,637 $ 24,076 $ 5,076 $ 8,508
Cost of sales...................................................... 10,175 14,351 19,369 3,689 6,984
--------- --------- --------- --------- ---------
Gross profit....................................................... 3,446 4,286 4,707 1,387 1,524
Selling, general and administrative expenses....................... 2,117 2,685 3,706 865 1,083
--------- --------- --------- --------- ---------
Earnings from operations........................................... 1,329 1,601 1,001 522 441
Other expense, net................................................. (15) -- (180) (8) (110)
--------- --------- --------- --------- ---------
Earnings before income taxes and extraordinary item................ 1,314 1,601 821 514 331
Income tax benefit (expense)....................................... (152) (29) 326 (85) (125)
--------- --------- --------- --------- ---------
Net earnings before extraordinary item............................. 1,162 1,572 1,147 429 206
Extraordinary item, net............................................ 119 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings....................................................... $ 1,281 $ 1,572 $ 1,147 $ 429 $ 206
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share:
Earnings before extraordinary item............................... $ 0.64 $ 0.57 $ 0.38 $ 0.14 $ 0.07
Extraordinary item............................................... 0.06 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings..................................................... $ 0.70 $ 0.57 $ 0.38 $ 0.14 $ 0.07
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share:
Earnings before extraordinary item............................... $ 0.59 $ 0.56 $ 0.37 $ 0.14 $ 0.06
Extraordinary item............................................... 0.06 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings..................................................... $ 0.65 $ 0.56 $ 0.37 $ 0.14 $ 0.06
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding--Basic.................. 1,817 2,750 3,021 3,003 3,039
Weighted average common and common equivalent shares
outstanding--Diluted............................................. 1,972 2,797 3,116 3,111 3,188
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................................. $ 11,230 $ 18,329
Total assets................................................................................. 18,538 25,637
Total liabilities............................................................................ 9,832 4,381
Shareholders' equity......................................................................... 8,706 21,256
</TABLE>
- ------------------------------
(1) As adjusted to reflect the sale by the Company of 1,500,000 shares of Common
Stock in this Offering and the application of the estimated net proceeds
therefrom.
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
------------------------ ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1997 1997 1997 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
OTHER DATA:
Net sales (000's).............. $ 18,636 $ 24,076 $ 5,076 $ 6,272 $ 6,577 $ 6,152 $ 8,508
Net engine sales............... 22,339 28,921 6,043 7,546 7,909 7,423 10,045
Gross profit margin............ 23.0% 19.6% 27.3% 19.0% 16.3% 17.2% 17.9%
Engine data:
Total produced............... 25,746 30,446 6,432 6,625 8,750 8,639 10,320
Average produced per
day (1).................... 103 122 103 106 140 138 165
Average sold per day (1)..... 89 116 97 121 127 119 161
Cost of production (2):
Increase (decrease) from 1996
cost of production per
engine (3)................. Base $33 $22 $15 $45 $43 $(12 )
Percentage of 1996 cost of
production per engine...... 100 % 106 % 104 % 103 % 108 % 107 % 98 %
</TABLE>
- ------------------------
(1) Based on an average of 250 production and sales days per year.
(2) Includes warranty costs.
(3) The information presented represents the difference in each period presented
from the Base of 1996. For example, for the period ended March 31, 1998, the
table indicates both that production costs per engine were $12 less than the
1996 Base and that production costs per engine declined by $55 per engine
from the quarter ended December 31, 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO. CERTAIN STATEMENTS
IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" SECTION ARE FORWARD LOOKING STATEMENTS. SEE THE FIRST PARAGRAPH
UNDER "RISK FACTORS" ABOVE.
OVERVIEW
The Company generates revenues through the sale of remanufactured engines to
the automotive aftermarket. Since the Company's inception in 1971, distribution
channels in the remanufactured engine industry have shifted from independent
garages, repair shops and traditional automobile parts stores to large
automotive parts chain stores. These automotive parts chain stores have emerged
to supply parts and services, including remanufactured engines, directly to
owners and increasingly to professional installers. A key element of the
Company's strategy has been to become a national supplier to these large
automotive chain stores.
Automotive parts chain stores now constitute a major portion of the
Company's total revenues. In 1995, 1996, 1997 and the three month period ended
March 31, 1998, sales to the Company's principal customers--The Pep Boys, CSK
Automotive, Paccar, Trak Auto and Genuine Parts/NAPA--constituted approximately
72%, 71%, 68% and 75%, respectively, of the Company's sales. From 1994 to 1997,
the Company's annual revenues increased from $10.5 million to $24.1 million.
In addition, in the three month period ended March 31, 1998, the Company
became the primary remanufactured engine supplier to Genuine Parts/NAPA, a
national distributor of automotive parts and engines. The addition of this
customer and continued business from its national chain store customers in the
three month period ended March 31, 1998, resulted in an increase in the
Company's revenues of 68%, to $8.5 million, compared to revenues in the
comparable period in 1997.
To continue its strategy of becoming a national supplier to its customers,
the Company has increased production and expanded its distribution capability by
opening regional distribution centers in the Northeast, Southeast, Midwest,
Mountain and Northwest regions of the country. In 1997, due to the successful
implementation of this national account strategy, and in order to meet the
increasing demand for its remanufactured engines, the Company rapidly increased
production and, in August 1997, acquired an additional manufacturing facility in
Macon, Georgia. To increase production in its Los Angeles manufacturing
facility, the Company hired additional personnel, increasing the number of new
employees hired from 55 in 1996 to 117 in 1997, and installed a roller-based
conveyor system, replacing its system of using carts to move engines through the
production process.
During this growth phase, the Company's gross profit as a percentage of net
sales declined from 23.0% in 1996 to 19.6% in 1997. The Company believes the
decline in gross profit margins was attributable in substantial part to plant
inefficiencies at its Los Angeles facility caused by the change in the
manufacturing process and the inexperience and training of new personnel. The
acquisition of the Macon, Georgia manufacturing facility in August 1997 also
absorbed some of management's time and further contributed to the decline in
profit margins.
To address the plant inefficiencies, the Company hired Richard Funk as its
President in November 1997. Mr. Funk had been a part-time consultant to the
Company for the previous four years and has 31 years of manufacturing experience
in the automotive engine remanufacturing industry. The Company believes it has
made significant improvements to its production process since hiring Mr. Funk.
Specifically, compared to the quarter ended September 30, 1997, per unit costs
of production and warranty costs improved slightly in the quarter ended December
31, 1997 and improved significantly in the quarter ended March 31, 1998. The
improvements in production costs are partially contained in inventory balances
at
14
<PAGE>
March 31, 1998 and, accordingly, will not be fully realized in reported results
of operations until later periods.
The improvements in quarterly cost of production for the three months ended
December 31, 1997 and March 31, 1998 are attributable in material part to
decreases in average parts and labor costs per engine offset in part by
increased indirect and warranty costs. The decrease in parts costs is partly the
result of a change in mix of product produced. The Company believes the increase
in warranty and indirect expense was primarily due to the increase of new
personnel throughout 1997, the rapid increase in production level, employee
adaptation to the conveyor system in 1997 and other new manufacturing processes
necessary to rapidly increase production, which affected quality. The Company
believes that as new employees continue to be trained and gain experience, and
personnel adapt to the conveyor system, warranty expense and indirect costs per
engine should stabilize or decline.
However, even if the Company continues to improve efficiency, the cost of
production can vary, potentially by a material amount, based on factors
partially outside the control of the Company, such as demand for particular
engine types, the amount and cost of parts requiring replacement and the degree
of remanufacturing necessary due to the condition of cores used in production.
Until December 31, 1997, the Company received State of California tax
credits for its hiring practices and its location within the Los Angeles
Revitalization Zone (LARZ). The Company earned these tax credits in excess of
the Company's California tax liability, and net deferred credits were reported
as a credit against total tax liabilities on the Company's income statement.
Although the credits may be carried forward through the year 2012 to offset
future California tax liabilities, the ability to earn these credits expired at
December 31, 1997.
In May 1998 the Company reached an agreement in principle to grant options
to purchase 25,000 shares of common stock at $7.75 per share to consultants as
compensation for services rendered. Compensation expense for the difference
between the grant price and the fair market value of the common stock plus the
fair market value of the options of $137,000 will be recognized as expense
during the quarter ended June 30, 1998.
RESULTS OF OPERATIONS
The following table presents the percentage each item shown bears to net
sales from operations.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 74.7 77.0 80.4 72.7 82.1
--------- --------- --------- --------- ---------
Gross profit................................................ 25.3 23.0 19.6 27.3 17.9
Selling, general and administrative expenses................ 15.5 14.4 15.4 17.0 12.7
--------- --------- --------- --------- ---------
Earnings from operations.................................... 9.8 8.6 4.2 10.3 5.2
Other expense net........................................... (0.1) -- (0.8) (0.2) (1.3)
--------- --------- --------- --------- ---------
Earnings before income taxes and extraordinary item......... 9.7 8.6 3.4 10.1 3.9
Income tax benefit (expense)................................ (1.2) (0.2) 1.4 (1.7) (1.5)
--------- --------- --------- --------- ---------
Net earnings before extraordinary item...................... 8.5 8.4 4.8 8.4 2.4
Extraordinary item, net..................................... 0.9 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings................................................ 9.4% 8.4% 4.8% 8.4% 2.4%
</TABLE>
15
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES. Net sales increased $3.4 million, or 67.6%, to $8.5 million for
the three months ended March 31, 1998 from $5.1 million for the same period in
1997. The increase was primarily the result of increased sales volume to
existing national automobile chain store customers and the addition of a new
customer for which the Company became the principal supplier of remanufactured
engines in March 1998. Approximately 44% of the $3.4 million increase in net
sales in the three months ended March 31, 1998 was attributable to this new
customer.
COST OF SALES. Cost of sales increased $3.3 million, or 89.3%, to $7.0
million for the three months ended March 31, 1998 from $3.7 million for the same
period in 1997. Cost of sales as a percentage of net sales increased to 82.1%
from 72.7% for the same period in 1997. The increase in cost of sales was
primarily attributable to overhead costs associated with the expansion of the
Company's production capacity and increased warranty costs per engine. Cost of
sales as a percentage of net sales was significantly higher in the three months
ended March 31, 1998 than in the three months ended March 31, 1997. The increase
is attributable in substantial part to a significantly higher average cost per
engine in inventory at December 31, 1997 compared to December 31, 1996.
Improvements in cost of parts and labor in production during the three months
ended March 31, 1998, offset in part by higher costs for overhead, resulted in a
lower average cost of engines in inventory at March 31, 1998 compared to March
31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 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
increased $218,000, or 25.2%, to $1.1 million for the three months ended March
31, 1998 from $865,000 for the same period in 1997. Selling, general and
administrative expenses as a percentage of sales decreased from 17.0% to 12.7%
for the same period in 1997. These changes were primarily attributable to higher
revenues in the current three month period, offset in part by increases in
distribution expenses.
OTHER EXPENSE. The increase in other expense for the three months ended
March 31, 1998 over the same period in 1997 was primarily attributable to an
increase in interest expense due to increased borrowing to finance increased
inventory and accounts receivable.
INCOME TAXES. Tax expense increased $40,000, or 47.3%, to $125,000 for the
three months ended March 31, 1998 from $85,000 for the same period in 1997. Tax
expense as a percentage of earnings before income taxes increased to 37.9% for
the three months ended March 31, 1998 from 16.6% for the same period in 1997. As
described above, during 1997 the Company earned LARZ tax credits in excess of
its state tax liability and, as a result, the excess state tax credits earned
partially offset the federal tax. During 1998 no LARZ tax credits have been
earned and, as a result, the income tax for the quarter reflects the Company's
effective Federal tax rate.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased $5.5 million, or 29.2%, to $24.1 million in
1997 from $18.6 million in 1996. The increase in net sales was attributable to
growth from existing customers. The Company believes that this internal growth
was attributable in part to establishment and growth of its regional
distribution centers, which increased the Company's visibility to its national
accounts. Sales to the Company's four largest customers increased 23.5%, to
$16.3 million, from $13.2 million in 1996. These four customers accounted for
approximately 68% and 71% of net sales in 1997 and 1996, respectively.
COST OF SALES. Cost of sales increased $5.0 million, or 35.0%, to $19.4
million in 1997 from $14.4 million from 1996. Cost of sales as a percentage of
net sales increased to 80.4% from 77.0% in 1996. The increase in cost of sales
was primarily attributable to the labor and overhead costs associated with the
expansion of the Company's production capacity, increased warranty expense and
expensed start-up costs associated with the new Macon, Georgia manufacturing
facility.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million, or 38.0%, to $3.7 million in
1997 from $2.7 million in 1996. As a percentage of sales, selling, general and
administrative expenses increased to 15.4% from 14.4% in 1996. The increase was
primarily attributable to the addition of new sales personnel and increased
administrative expenses incurred to support the growth of sales and production.
OTHER EXPENSE. The increased other expense in 1997 compared to 1996 was
attributable to an increase in interest expense due to increased borrowings to
finance increased inventory and accounts receivable.
INCOME TAXES. During 1996 and 1997 the Company earned LARZ tax credits in
excess of its California tax liability. The credits earned were reported as a
credit against total tax liabilities on the Company's income statement. Due to
the increased level of hiring during 1997, credits earned for the year were
$718,000 compared to $600,000 during 1996. This resulted in a net tax benefit of
$326,000 for the year ended December 31, 1997 compared to a tax expense of
$29,000 during 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales in 1996 increased $5.0 million, or 36.8%, to $18.6
million in 1996 from $13.6 million in 1995, primarily as a result of growth of
business from existing customers. Sales to the Company's then four principal
customers increased 34.7%, to $13.2 million, from $9.8 million in 1995. Sales to
all other customers increased 42.1% to $5.4 million from $3.8 million in 1995.
This increase was attributable to geographic expansion through the Company's
regional distribution centers.
COST OF SALES. Cost of sales increased $4.2 million, or 41.1%, to $14.4
million in 1996 from $10.2 million in 1995. Cost of sales as a percentage of net
sales increased to 77.0% from 74.7% in 1995. This increase in cost of sales was
primarily attributable to the labor and overhead costs associated with the
expansion of the Company's production capacity to supply its additional
distribution outlets. These increases in labor and overhead costs were partially
offset by a decrease in the average parts cost per engine during the year, due
to the mix of engines manufactured.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1996 increased 26.8%, to $2.7 million, from $2.1
million in 1995. This increase was primarily attributable to increased marketing
efforts and the establishment of three new regional distribution centers. As a
percentage of sales, selling, general and administrative expenses decreased in
1996 to 14.4% from 15.5% in 1995, due primarily to increased sales volume.
INCOME TAXES. The provision for income taxes in 1996 was $29,000 compared
to $152,000 in 1995. The decrease in provision for income taxes was due
primarily to the impact of earning $600,000 in LARZ tax credits in 1996, in
excess of the Company's California tax liability for the year, compared to
$315,000 in 1995.
EXTRAORDINARY ITEM. During 1995 the Company made an early settlement of its
obligations with certain creditors for amounts less than the original amounts
owed, resulting in a gain from forgiveness of debt, net of income tax effect, of
$119,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been financed principally through the initial
public offering proceeds, borrowing under its credit agreement the ("Credit
Agreement") with Comerica Bank (the "Bank") and cash flows from operations. At
March 31, 1998, the Company's working capital was $11.2 million.
During 1996 and 1997 and the three month period ended March 31, 1998 the
Company used cash for operating activities of $2.7 million, $2.7 million and
$1.9 million, respectively, primarily to increase
17
<PAGE>
accounts receivable and inventory related to growth in sales. Accounts
receivable as at December 31, 1997 increased 96.1% over accounts receivable at
December 31, 1996, primarily resulting from December 1997 sales, which increased
80.9% over December 1996 sales. Accounts receivable increased a further $2.8
million as of March 31, 1998 due to the significant growth in first quarter
sales. The Company's inventory at December 31, 1997 was $7.3 million, which
represented an increase of $2.3 million or 46.0% over its inventory at December
31, 1996.
In 1997 and the three months ended March 31, 1998, the Company used $1.4
million and $200,000 in investing activities, respectively, primarily to
purchase new equipment for its Los Angeles manufacturing facility and to
purchase inventory, plant machinery and equipment located in Macon, Georgia.
In January 1998, the Credit Agreement was amended to increase its revolving
credit facility from $4.0 million to $7.5 million. The credit facility is
secured by a lien on substantially all of the assets of the Company. This
facility has a maturity date of May 1, 2000, and provides for an interest rate
on borrowings at the lower of the Bank's prime lending rate or LIBOR plus 2.00%,
as selected by the Company. In addition, the Bank has provided the Company with
a specific advance facility of up to $8.0 million which is secured by a lien on
substantially all of the assets of the Company. This facility has a maturity
date of two years from funding and provides for an interest rate of the lower of
the Bank's prime interest rate plus 0.25%, or its cost of funds plus 2.25% or
LIBOR plus 2.25%, as selected by the Company. At March 31, 1998, the Company had
borrowed $5.5 million under the revolving credit facility and $760,000 under the
specific advance facility, and had borrowing availability of $2.0 million and
$7.2 million under such facilities, respectively.
In order to sustain its growth, the Company will need to significantly
expand its manufacturing capabilities in the near future. The Company
anticipates expanding its manufacturing capabilities by one or a combination of
leasing or acquiring additional facilities near its Los Angeles manufacturing
facility, expanding its Macon, Georgia manufacturing facility or, possibly,
acquiring other engine remanufacturers. The Company believes it has the capital
resources to fund an expansion to sustain its current rate of growth. The
Company does not have the capital resources to fund a more significant
expansion, but should if this Offering is completed.
The Company is currently involved in discussions with a major automobile
manufacturer to provide remanufactured engines to it. If the Company receives a
significant contract, as to which no assurance can be given, it may require a
separate assembly line, which could be directly or indirectly funded from the
net proceeds of the Offering. If a portion of the proceeds of the Offering is
used for a separate assembly line, the Company believes that the remaining
proceeds from the Offering, cash flows from operations and availability under
the Credit Agreement should be sufficient to enable the Company to meet its
working capital and expansion plan requirements for the next 12 months, after
which it may require additional capital resources.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board issued Statement No. 130, (Reporting
Comprehensive Income), Statement No. 131, (Disclosure about Segment of an
Enterprise and Related Information); and Statement No. 132, (Employers'
Disclosures about Pensions and other Post Retirement Benefits). These statements
are effective for fiscal years beginning after December 15, 1997. Management has
determined that the disclosure requirements from these statements will not
impact the financial statements of the Company.
INFLATION
The Company believes that inflation has not had a material effect on its net
sales or profitability in recent years.
18
<PAGE>
BUSINESS
Bonded Motors, Inc. is a leading nationwide engine remanufacturer serving
suppliers to the automotive aftermarket. The Company remanufactures and
distributes approximately 1,500 models and versions of replacement engines for
domestic and Japanese cars and light trucks. The Company has regional
distribution centers in California, Washington, Colorado, Ohio, Georgia and New
York.
Since the Company's inception in 1971, distribution channels in the
remanufactured engine industry have shifted from independent garages, repair
shops and traditional automobile parts stores to large automotive parts chain
stores. Automotive parts chain stores have emerged to supply parts and services,
including remanufactured engines, directly to owners and increasingly to
professional installers. A key element of the Company's strategy has been to
become a national supplier to these large automotive chain stores.
Through 1997, the Company's principal customers were large retail automotive
parts store chains which sold primarily direct to automobile owners (the
"do-it-yourself" segment of the aftermarket). These customers included The Pep
Boys, CSK Automotive, Trak Auto and Paccar. In 1996 and 1997, sales to the
Company's four principal national chain store customers constituted
approximately 71% and 68% of the Company's sales, respectively.
In March 1998, the Company became the primary supplier of remanufactured
automobile engines to Genuine Parts/NAPA, which is a major supplier to
professional installers (the "do-it-for-me" segment of the aftermarket). Genuine
Parts/NAPA is the largest member of the National Automotive Parts Association
("NAPA"), a trade association formed to provide nationwide distribution of
automotive parts. In 1997, Genuine Parts/NAPA operated 750 company-owned auto
parts stores located in 43 states, as well as 62 distribution centers serving
approximately 4,900 independently-owned NAPA auto parts stores nationwide.
Genuine Parts/NAPA is the Company's first major customer that primarily supplies
to the "do-it-for-me" market.
The Company believes that further expansion into the "do-it-for-me" market,
in addition to its continued growth within the "do-it-yourself" market, could be
a significant growth opportunity over the next several years. The Company's
strategy is to continue to increase sales to its national customer base and
support growth by expanding production capacity while maintaining its reputation
for high quality engines.
The Company's executive offices are located at 7522 S. Maie Avenue, Los
Angeles, California 90001, and its telephone number is (213) 583-8631.
INDUSTRY
According to industry reports, the vehicle population in the United States
is older today than at any time during the past 50 years, with vehicles ten
years or older accounting for more than 45% of vehicles now on the road in the
United States. With the improved quality and durability of automobile exteriors,
as well as the increasing prices of new cars, there is a growing trend for
consumers to replace automobile engines rather than to purchase new automobiles.
When an engine needs replacing, there are generally four alternatives
available to the owner: (i) purchase a new engine; (ii) purchase a used engine;
(iii) replace worn or broken engine parts ("rebuild"); or (iv) purchase a
remanufactured engine. The Company believes that a remanufactured engine offers
consumers significant benefits over the other alternatives, including a
significantly lower cost alternative to newly manufactured replacement engines
and typically higher quality, greater reliability and quicker availability than
used or rebuilt engines. The PRODUCTION ENGINE REMANUFACTURERS ASSOCIATION
estimates that over three million engines are remanufactured in North America
annually, a $2.5 billion market. The Company believes that demand for
remanufactured engines should continue to grow as the number and average age of
vehicles increases.
19
<PAGE>
STRATEGY
The Company's strategy is to continue to increase sales to its national
customer base and support growth by expanding production capacity while
maintaining its reputation for high quality engines. The principal elements of
this strategy include:
EXPAND PRESENT MANUFACTURING FACILITIES. The Company intends to expand its
manufacturing capacity by the end of 1998 by one or a combination of acquiring
or leasing additional facilities near its present Los Angeles manufacturing
facility, expanding its Macon, Georgia manufacturing facility or, possibly,
acquiring other engine remanufacturers.
EMPHASIZE HIGH QUALITY AND INNOVATION. The Company will continue to
emphasize high quality and innovation in its remanufacturing and distribution
process. In 1997, the Company received ISO 9002/QS 9000 certification, which is
a prerequisite to becoming a supplier to major automobile manufacturers.
INCREASE CUSTOMER BASE. In March 1998, the Company became the principal
supplier of remanufactured automobile engines to a major national supplier to
the professional installer or "do-it-for-me" aftermarket segment. The Company
intends to continue to emphasize selling to national and regional automotive
parts chain stores, which resell to both the "do-it-for-me" and the
"do-it-yourself" market segments. The Company is also in discussions to become a
supplier of remanufactured engines to a major automobile manufacturer.
OPERATIONS
In its remanufacturing operations, the Company obtains used engines,
commonly referred to as "cores." The Company encourages its customers to return
cores on a timely basis and charges its customers a core deposit in connection
with purchases of engines. The customer can satisfy this charge by returning a
usable core or making a cash payment equal to the amount of the core charge
deposit. If cores are not returned in a timely manner, the Company must procure
cores from independent core vendors. As the Company grows, its purchases from
core vendors will increase.
The process of remanufacturing an automotive engine involves a number of
steps. The engine cores, which are sorted by make and model and stored until
needed, are completely disassembled into component parts. All pistons, rings,
bearings, seals, lifters, soft plugs, oil galley plugs, timing chains, timing
gears and many other components are discarded. Other components that are to be
incorporated into the remanufactured product are thoroughly cleaned, checked for
cracks and wear and re-machined. The major engine components that are subject to
wear, such as the engine block, cylinder head, crankshaft and connecting rods,
are baked in an oven for approximately four hours and then blasted with steel
pellets to remove any remaining residue. These components are inspected, and all
wearing surfaces are re-machined. New pistons, rings and bearings are used to
restore original specifications, tolerances, proper fits and clearances. The
engine is then reassembled using new and remanufactured components.
Inspection and testing are conducted at various stages of the
remanufacturing process, and each finished engine is inspected and tested using
computerized equipment to measure compression, oil pressure and oil flow. The
Company stresses quality throughout its remanufacturing process and has
developed proprietary procedures and controls to test the quality of all of its
remanufactured engines.
The Company remanufactures a broad range of engines, currently over 1,500
different engine types and variations, in order to accommodate the numerous and
increasing varieties of vehicles in use. The Company's engines are
remanufactured for use in most domestic and Japanese automobiles and light
trucks. The Company has also remanufactured a limited number of engines
manufactured by European automakers.
20
<PAGE>
INCENTIVE BONUS PROGRAM
To provide an incentive to its non-officer employees, the Company has
adopted its YARDSTICK incentive bonus program, which emphasizes quality and
efficiency. Under the YARDSTICK program, the Company posts daily on an employee
bulletin board the previous day's unit production and other measures of
productivity. Employees are thereby able to gauge their performance and
understand how their contributions affect the Company's business. Participating
employees are entitled to receive bonuses based on a percentage of the Company's
profitability. All employees are entitled to participate at no cost to the
employee, provided that to participate employees must attend Company-sponsored
classes that teach employees how to read the YARDSTICK financial statement, how
the Company earns money, how earning money insures job security and how employee
efforts contribute to profits. Bonuses under the YARDSTICK program were paid
quarterly until March 1997, at which time the Company experienced inefficiencies
resulting from rapid expansion. The Company recently modified the plan to
provide for monthly bonuses. Bonuses were earned in April and paid in May 1998.
WARRANTIES
The Company provides limited warranties on its engines for up to 12,000
miles. It also offers three year/36,000 mile warranties at an additional cost.
The Company believes its warranty return rates have been below industry
standards. During 1997, the Company hired new personnel and experienced an
increase in warranty return rates. As the experience and training of the
Company's employees and its sales to customers who supply the professional
installer (or "do-it-for-me") market increases, the Company believes its
warranty expense should decrease. However, no assurance can be given that this
will occur.
MARKETING AND DISTRIBUTION
The Company's marketing activities have concentrated on sales to national
and regional automotive parts chain stores. The Company markets its products
principally through its senior officers and through the National Sales and
Service Alliance (NSSA), a national sales and marketing organization servicing
the automotive aftermarket. The Company historically has not engaged in
wide-scale advertising or other promotional activities. The Company's products
are marketed to its customers under the name "Bonded Motors." The Company
provides a telephonic customer support service for use by its customers.
The Company believes that the ability to meet its customers' needs on a
timely basis nationwide is an important competitive factor. In order to
facilitate this quick response, the Company maintains an inventory of its most
popular engine models and variations at its regional distribution centers in
California, Washington, Colorado, Ohio, Georgia and New York.
The Company's principal automotive parts chain store customers typically
stock from approximately four to thirty-five of the most popular engine
configurations and place special orders for other engines from among the
Company's selection of over 1,500 engine types and variations. Special orders
are usually remanufactured to order and shipped directly to the customer's
retail store. The Company's 75 most popular engine configurations constituted
50% of sales in 1997. The Company normally completes the remanufacturing process
for a special order engine, from receipt of order to shipment, in three business
days.
COMPETITION
The Company's segment of the automotive aftermarket industry, engine
remanufacturing, is highly competitive. The Company's competitors include a
number of relatively large, as well as smaller, regional and local engine
remanufacturers. The Company also competes with remanufacturers that are
authorized by certain automobile manufacturers to remanufacture their engines
for authorized distribution to the manufacturers' dealerships. Some of the
companies that sell to dealers have greater resources than those of the Company.
The Company believes that the primary competitive factors in its business are
price,
21
<PAGE>
quality, service, ability to deliver remanufactured engines swiftly, product
performance and selection of remanufactured engines offered.
EMPLOYEES
At March 31, 1998, the Company had approximately 390 full-time employees, of
whom 35 are salaried and the balance are employed on an hourly basis. None of
the Company's employees is a party to any collective bargaining agreement. The
Company has not experienced any work stoppages and considers its employee
relations to be satisfactory. All of the Company's non-officer employees are
eligible to participate in the Company's YARDSTICK incentive bonus program.
FACILITIES
The Company's principal production facility, which is leased from its
principal shareholder, is located in an unincorporated area of South-Central Los
Angeles. The lease terminates on January 31, 2015. The lease provides for a
monthly rental of $8,000 and monthly rent increases at five-year intervals based
on increases in the Consumer Price Index. The lease also provides for
indemnification of the lessor arising from claims caused by, among other things,
any hazardous substance, whether caused by the Company's use or a prior use of
the premises. The Company also leases facilities adjacent to its Los Angeles
manufacturing plant, its manufacturing facility in Macon, Georgia, and its
distribution centers in Washington, Colorado, Ohio and New York.
22
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Aaron Landon.................... 56 Chairman and Chief Executive Officer
Richard Funk.................... 61 President and Director
Paul Sullivan................... 54 Vice President of Finance and Administration, Chief
Financial Officer and Director
Buddy Mercer.................... 54 Vice President of Operations, Chief Operating Officer and
Director
Edward T. Bradford.............. 55 Director (1)
Cornelius P. McCarthy III....... 38 Director (1)(2)
John F. Creamer................. 67 Director (2)
</TABLE>
----------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
AARON LANDON, the founder of the Company, has served as its Chairman and
Chief Executive Officer since 1971 and as its President from 1971 until November
1997. Mr. Landon has over 25 years experience in the engine remanufacturing
business.
RICHARD FUNK has served as the Company's President since November 1997 and a
director since April 1996. From January 1993 until November 1997, Mr. Funk
served as a consultant to automobile engine remanufacturing companies. For over
20 years prior to 1993, Mr. Funk was the General Manager of Tam Engineering
Corp., a large automobile engine remanufacturer. He has over 30 years of
experience in the engine remanufacturing business.
PAUL SULLIVAN has served as the Company's Vice President of Finance and
Administration since February 1994 and as Chief Financial Officer since January
1994. Mr. Sullivan also served as the Company's Controller from March 1989 to
February 1994. He has over nine years experience in the engine remanufacturing
business.
BUDDY MERCER has served as the Vice President of Operations and Chief
Operating Officer of the Company since January 1994. Mr. Mercer served as the
Company's General Manager, responsible for overseeing operations and sales, from
January 1992 to January 1994. Mr. Mercer also served as the Company's Sales
Manager from 1982 to January 1992. He has over 15 years experience in the engine
remanufacturing industry.
EDWARD T. BRADFORD became a director of the Company in March 1997. Since
March 1984, he has been a principal of Bradford & Marzec, Inc., an investment
management firm in Los Angeles.
CORNELIUS P. MCCARTHY III has served as a director of the Company since
April 1996. Since December 1996, he has been a Senior Vice President of
Corporate Finance at Pennsylvania Merchant Group, an investment banking firm.
From December 1993 to December 1996, he was a Managing Director, Corporate
Finance of Laidlaw & Co., an investment banking firm. From December 1992 to
December 1993, Mr. McCarthy was President and proprietor of McCarthy & Company,
a financial consulting firm.
JOHN F. CREAMER became a director of the Company in September 1997. In 1978,
he founded, and he is President of, Distribution Marketing Services Inc., a
consulting firm that specializes in the automotive aftermarket industry,
including merger and acquisition activity and executive placement in that
industry. In 1994, Mr. Creamer was appointed President of the Automotive
Warehouse Distributors Association, and
23
<PAGE>
since 1986, has served as a member of the Board of Directors of Echlin
Corporation, a global manufacturer serving automobile manufacturers and the
automotive aftermarket.
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid in 1996
and 1997 to the Company's executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION
- ----------------------------------------------------------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C>
Aaron Landon, Chairman and Chief Executive Officer......... 1997 $ 177,000 -- --
1996 $ 156,000 -- --
Richard Funk, President.................................... 1997 $ 21,250(1) -- --
1996 N/A -- --
Paul Sullivan, Chief Financial Officer..................... 1997 $ 110,250 -- --
1996 $ 83,000 -- --
Buddy Mercer, Chief Operating Officer...................... 1997 $ 114,000 -- --
1996 $ 114,000 $ 30,000 --
</TABLE>
- ------------------------
(1) For the period from November 3, 1997 to December 31, 1997. Mr. Funk's
annualized salary is $170,000.
OPTION GRANTS IN 1997
The following table sets forth information relating to grants of stock
options to the Company's executive officers in 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL PERCENTAGE
OF COMMON STOCK OF OPTIONS GRANTED EXERCISE OR
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE
- --------------------------------------- ------------------ --------------------- --------------- --------------
<S> <C> <C> <C> <C>
Richard Funk........................... 100,000 54% $ 8.63 11/03/2002
Paul Sullivan.......................... 30,000 16% $ 8.75 02/11/2002
Buddy Mercer........................... 20,000 11% $ 10.00 06/26/2002
</TABLE>
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
The following table sets forth information relating to the value of all
options held by the Company's executive officers as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE- MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aaron Landon...................... -- -- 68,750 68,750 $ 168,438 $ 168,438
Richard Funk...................... -- -- -- 100,000 -- --
Paul Sullivan..................... 15,000 $ 54,375 -- 45,000 -- 45,000
Buddy Mercer...................... -- -- -- 20,000 -- --
</TABLE>
24
<PAGE>
COMPENSATION OF DIRECTORS
Pursuant to the Company's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"), the Company may grant to each director of the Company who is
not an employee of the Company options to purchase not less than 1,500 shares of
Common Stock annually, exercisable at the fair market value at the date of
grant. Each non-employee director of the Company is paid $750 for, and
reimbursed for his out-of-pocket expenses associated with, each meeting of the
Board of Directors and Board committees attended. All directors are eligible to
participate in the Company's 1996 Incentive Stock Plan, as amended (the "1996
Plan"). Employee directors receive no additional cash compensation for service
as directors. See "Incentive Stock Plans."
In December 1995, Paul Sullivan paid the exercise price of an option with a
note for $100,000, which bears interest at 8% per annum and is due in December
2002.
EMPLOYMENT AGREEMENTS
Aaron Landon, Buddy Mercer and Paul Sullivan have entered into employment
agreements with the Company that end on December 31, 1999. The term of each
employment agreement is three years, and the agreements provide for an annual
salary base of $210,000, $144,000 and $144,000 to Messrs. Landon, Mercer and
Sullivan, respectively. In November 1997, the Company entered into an employment
agreement with Richard Funk expiring in December 1999 and providing for an
annual base salary of $170,000. This agreement is terminable at any time without
penalty at the option of either party. Under these agreements, the Company has
the right to retain each employee as a consultant for a period of two years
after the end of his employment. The Company's Board of Directors also may grant
bonuses or increase the base salary payable to any executive. In addition to his
cash compensation, Mr. Landon receives an automobile allowance. Messrs. Landon,
Funk, Mercer and Sullivan each receive additional benefits, including those
generally provided to other employees of the Company.
In conformity with the Company's policy, all officers execute
confidentiality and non-disclosure agreements upon the commencement of
employment with the Company. The agreements generally provide that all
inventions or discoveries related to the Company's business and all confidential
information developed or made known during the term of employment are the
exclusive property of the Company and may not be used or disclosed to third
parties without prior approval of the Company.
INCENTIVE STOCK PLANS
The 1996 Plan provides for the issuance of options, stock awards and
restricted stock purchase offers to employees, officers and directors of, and
consultants to, the Company ("Eligible Participants") to purchase up to an
aggregate of 600,000 shares of Common Stock, subject to adjustment under certain
circumstances. Options granted under the 1996 Plan may be either "incentive
stock options" as defined by Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-statutory stock options. The 1996 Plan is
administered by the Compensation Committee of the Board of Directors.
25
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the record and,
to the knowledge of the Company, beneficial ownership of shares of Common Stock
as of April 30, 1998 and as adjusted to reflect the sale of the Common Stock
offered hereby for: (i) each director of the Company; (ii) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding
shares; and (iii) all directors and executive officers as a group. Except
pursuant to applicable community property laws or as otherwise indicated, each
shareholder has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1) BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES TO BE AFTER THE OFFERING(1)
------------------------- SOLD IN THE -------------------------
NAME AND ADDRESS SHARES PERCENTAGE OFFERING SHARES PERCENTAGE
- ------------------------------------------------ ---------- ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Aaron Landon(2)(3).............................. 1,418,520 44.4% 480,000 938,520 20.0%
Richard Funk.................................... -- -- -- -- --
Paul Sullivan(4)................................ 132,020 4.3 -- 132,020 2.9
Buddy Mercer.................................... 50,020 1.6 20,000 30,020 *
Edward T. Bradford.............................. -- -- -- -- --
Cornelius P. McCarthy III....................... -- -- -- -- --
John F. Creamer................................. 2,000 * -- 2,000 *
Kennedy Capital Management...................... 227,400 7.4 -- 227,400 5.0
10829 Olive Blvd.
St. Louis, MO 63141
Heartland Advisors.............................. 200,000 6.5 -- 200,000 4.4
790 N. Milwaukee Street
Milwaukee, WI 53202
All directors and executive officers as a group
(7 persons).................................... 1,602,560 49.7% 500,000 1,102,560 23.3%
</TABLE>
- ------------------------
* Represents less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days upon the exercise of an
option are treated as outstanding for purposes of determining beneficial
ownership and the percentage beneficially owned by such individual. The
address of all of the named individuals is c/o Bonded Motors, Inc., 7522 S.
Maie Avenue, Los Angeles, California 90001.
(2) Consists of 1,281,020 shares held by The Landon Family Trust, The Landon
Family Foundation, The Aaron P. Landon Annuity Trust and The Maude M. Landon
Annuity Trust, for which trusts Aaron Landon and Maude Landon, his wife, are
trustees or co-trustees.
(3) Includes 137,500 shares purchasable under currently exercisable options.
(4) Includes 30,000 shares purchasable under currently exercisable options.
26
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
no par value per share. As of April 30, 1998, there were 3,055,040 shares of
Common Stock issued and outstanding. Holders of Common Stock are entitled to one
vote for each share held of record on each matter submitted to a vote of
shareholders. Shareholders do not have the right to cumulate their votes on any
matter.
Subject to the prior rights of any series of preferred stock which may from
time to time be outstanding, holders of Common Stock are entitled to ratably
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation, dissolution, or
winding up of the Company, to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. The outstanding Common Stock is validly authorized and issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, no par value per share, none of which is outstanding. The preferred stock
may be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by
shareholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and on liquidation,
conversion rights, redemption rights, sinking funds provisions and other rights,
privileges and preferences. Although it presently has no intention to do so, the
Board of Directors, without shareholder approval, could issue Preferred Stock
with voting and conversion rights that could adversely affect the voting power
of the holders of Common Stock. This provision may be deemed to have a potential
anti-takeover effect and could delay or prevent a change of control of the
Company.
TRANSFER AGENT
U.S. Stock Transfer Corporation, Glendale, California is the transfer agent
and registrar for the Common Stock.
27
<PAGE>
UNDERWRITING
The Underwriters, acting through Van Kasper & Company and Commonwealth
Associates, as Representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement (the
"Underwriting Agreement"), to purchase, and the Company and the Selling
Shareholders have agreed to sell to them, severally, the number of shares of
Common Stock set forth opposite the name of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company.............................................................
Commonwealth Associates..........................................................
----------
Total........................................................................ 2,000,000
----------
----------
</TABLE>
The shares of Common Stock are being offered by the Underwriters named
herein, subject to their right to reject any order in whole or in part and to
certain other conditions. The Underwriters are committed to purchase all of the
shares of Common Stock offered hereby (other than those covered by the
Underwriters' over-allotment option described below) if any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the price to
public set forth on the outside front cover page of this Prospectus and to
certain dealers at that price less a concession of not more than $ per share.
The Underwriters may allow and these dealers may reallow a discount not in
excess of $ to certain other dealers. After the Offering, offering price and
other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, pursuant to which the
Underwriters have the right, exercisable no later than 45-days after the date of
this Prospectus, to purchase up to 300,000 additional shares of Common Stock at
the initial offering price, less the underwriting discount set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of the additional Common Stock that the number
of shares of Common Stock to be purchased by it shown in the table above bears
to the total number of shares set forth in that table.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, warrants to purchase up to 75,000
shares of Common Stock (5% of the number of shares issued in the Offering) (the
"Warrants"). The Warrants are exercisable, in whole or in part, at an exercise
price of 120% of the price to public at any time during the four-year period
beginning one year after the date of this Prospectus. The Warrants will be
restricted from transfer for a period of one year from the date of this
Prospectus, except for transfers to officers or partners of the Representatives
and members of the selling group. The Warrant Agreement pursuant to which the
Warrants will be issued will contain provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the Warrants should any one or more of certain specified events occur, including
the Company's declaration of stock dividend, a split or reverse split of the
Common Stock, reclassification of the Common Stock, the Company's distribution
of property to all holders of the Common Stock and the issuances to all such
holders of rights or warrants to purchase Common Stock at an exercise price less
than the then current market value. The Warrants grant to the holder thereof
certain rights of registration for the securities issuable upon exercise of the
Warrants under the Securities Act.
28
<PAGE>
At the closing of the Offering and, if applicable, the closing of the
purchase of shares of Common Stock pursuant to the over-allotment option, the
Company will also pay to the Representatives a non-accountable expense allowance
of 0.75% of the gross proceeds of the Common Stock sold by the Company at such
closing.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
Pursuant to the terms of certain lock-up agreements, the Company's directors
and officers, and its affiliates who own more than 1.0% of the outstanding
shares of Common Stock, have agreed with the Underwriters that, for a period of
120 days after the date of this Prospectus, they will not offer to sell or
otherwise sell, dispose of or grant any rights with respect to any shares of
Common Stock, now owned or hereafter acquired directly by them or with respect
to which they have the power of disposition, without the prior written consent
of Van Kasper & Company. The Company has also agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
any options or warrants to purchase Common Stock other than shares or options
issued under the Company's stock option plans, for a period of 120 days after
the date of this Prospectus, without the prior written consent of Van Kasper &
Company.
The Representatives have advised the Company that, pursuant to Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, certain
persons participating in the Offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A "syndicate covering transaction" is
the bid for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position created in connection with the Offering. The
Underwriters may also cover all or a portion of such short position by
exercising their over-allotment option. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company and the Selling Shareholders that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
CERTAIN LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Petillon & Hansen, Torrance, California. Certain legal
matters in connection with the sale of the shares offered hereby will be passed
upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles,
California.
EXPERTS
The financial statements of Bonded Motors, Inc. as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31, 1997
have been included herein and in the registration statement in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
29
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (together with all amendments and
exhibits thereto, the "Registration Statement") under the Securities Act, with
respect to the Common Stock. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the Rules and Regulations of the Commission. For further information with
respect to the Company, reference is made to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as such reports, proxy
statements and other information filed by the Company, may be inspected and
copied (at prescribed rates) at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the Commission's Regional Offices located at Northwestern Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of reports, proxy
statements and other information electronically filed with the Commission by the
Company may be inspected by accessing the Commission's World Wide Web site at
http://www.sec.gov.
30
<PAGE>
BONDED MOTORS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report............................................................................ F-2
Balance Sheets.......................................................................................... F-3
Statements of Earnings.................................................................................. F-4
Statements of Shareholders' Equity...................................................................... F-5
Statements of Cash Flows................................................................................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Bonded Motors, Inc.:
We have audited the accompanying balance sheets of Bonded Motors, Inc. as of
December 31, 1996 and 1997 and the related statements of earnings, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bonded Motors, Inc. as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 11, 1998
F-2
<PAGE>
BONDED MOTORS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................................. $ 73,498 297,043 200,431
Trade accounts receivable (less allowance for doubtful accounts of
$67,866 in 1996, $118,586 in 1997 and $128,019 in 1998) (note 3)...... 1,901,619 3,728,530 6,558,080
Inventories:
Parts (note 3)...................................................... 823,383 1,320,005 1,570,074
Work in process..................................................... 293,688 622,159 698,200
Finished goods (note 3)............................................. 3,854,993 5,334,797 5,548,822
------------ ------------ ------------
4,972,064 7,276,961 7,817,096
------------ ------------ ------------
Deferred tax assets (note 6).......................................... 421,414 459,853 393,144
Prepaid expenses and other current assets............................. 143,771 183,732 264,719
Prepaid income taxes (note 6)......................................... 287,004 177,700 2,689
------------ ------------ ------------
Total current assets............................................ 7,799,370 12,123,819 15,236,159
------------ ------------ ------------
Property and equipment, at cost:
Machinery and equipment............................................... 1,478,181 2,463,791 2,672,129
Furniture and fixtures................................................ 358,215 432,397 445,985
------------ ------------ ------------
1,836,396 2,896,188 3,118,114
Less accumulated depreciation......................................... 1,131,640 1,308,166 1,367,361
------------ ------------ ------------
Net property and equipment...................................... 704,756 1,588,022 1,750,753
------------ ------------ ------------
Goodwill, less accumulated amortization of $7,946 in 1997 and $13,244 in
1998 (note 9).......................................................... -- 203,934 198,636
Deferred tax assets (note 6)............................................ 520,223 1,229,043 1,352,683
Other assets............................................................ 5,551 5,709 --
------------ ------------ ------------
$ 9,029,900 15,150,527 18,538,231
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of notes payable to related parties (note 5)......... $ 100,000 100,000 --
Current installments of notes payable to bank (note 4).................. -- 385,128 385,128
Accounts payable........................................................ 1,218,004 1,672,230 2,574,737
Accrued expenses........................................................ 319,452 427,608 575,335
Accrued warranty obligations............................................ 350,000 410,000 471,000
------------ ------------ ------------
Total current liabilities....................................... 1,987,456 2,994,966 4,006,200
------------ ------------ ------------
Notes payable to bank, excluding current installments (note 4).......... -- 471,395 375,113
Long-term debt (note 4)................................................. -- 3,200,000 5,450,808
Commitments and contingencies (note 7)
Shareholders' equity (note 10):
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, 3,037,540 and 3,040,040 shares as of December
31, 1996, 1997 and March 31, 1998, respectively..................... 4,678,419 4,873,319 4,889,569
Retained earnings..................................................... 2,564,025 3,710,847 3,916,541
Notes receivable from exercise of stock options....................... (200,000) (100,000) (100,000)
------------ ------------ ------------
Total shareholders' equity...................................... 7,042,444 8,484,166 8,706,110
------------ ------------ ------------
$ 9,029,900 15,150,527 18,538,231
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
BONDED MOTORS, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- --------------------
1995 1996 1997 1997 1998
------------ ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 13,620,736 18,636,604 24,076,192 5,075,773 8,508,042
Cost of sales..................................... 10,174,434 14,351,214 19,368,877 3,689,416 6,984,237
------------ ----------- ----------- --------- ---------
Gross profit.............................. 3,446,302 4,285,390 4,707,315 1,386,357 1,523,805
Selling, general and administrative expenses...... 2,117,879 2,685,029 3,706,203 864,587 1,082,596
------------ ----------- ----------- --------- ---------
Earnings from operations.................. 1,328,423 1,600,361 1,001,112 521,770 441,209
Other (expense) income:
Interest expense.............................. (80,328) (68,657) (193,247) (12,293) (110,424)
Interest income............................... -- 68,650 16,971 4,077 2,085
Other......................................... 65,651 -- (3,520) -- (1,896)
------------ ----------- ----------- --------- ---------
Earnings before income taxes and
extraordinary item........................ 1,313,746 1,600,354 821,316 513,554 330,974
Income tax (benefit) expense...................... 152,000 28,671 (325,506) 85,034 125,280
------------ ----------- ----------- --------- ---------
Earnings before extraordinary item........ 1,161,746 1,571,683 1,146,822 428,520 205,694
Extraordinary item--gain from forgiveness of debt
net of income tax effect of $15,000.............. 119,000 -- -- -- --
------------ ----------- ----------- --------- ---------
Net earnings.............................. $ 1,280,746 1,571,683 1,146,822 428,520 205,694
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Basic earnings per share:
Earnings before extraordinary item............ $ .64 .57 .38 .14 .07
Extraordinary item............................ .06 -- -- -- --
------------ ----------- ----------- --------- ---------
Net earnings.............................. $ .70 .57 .38 .14 .07
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Diluted earnings per share:
Earnings before extraordinary item............ $ .59 .56 .37 .14 .06
Extraordinary item............................ .06 -- -- -- --
------------ ----------- ----------- --------- ---------
Net earnings.............................. $ .65 .56 .37 .14 .06
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Weighted average common shares
outstanding--Basic............................... 1,817,000 2,750,000 3,021,000 3,003,000 3,039,000
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Weighted average common and common equivalent
shares outstanding--Diluted...................... 1,972,000 2,797,000 3,116,000 3,111,000 3,188,000
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
BONDED MOTORS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
RETAINED FROM NET
COMMON STOCK EARNINGS EXERCISE SHAREHOLDERS'
------------------------ (ACCUMULATED OF STOCK EQUITY
SHARES AMOUNT DEFICIT) OPTIONS (DEFICIENCY)
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... 1,800,000 $ 12,500 (288,404) -- (275,904)
Issuance of common stock................... 200,000 200,000 -- -- 200,000
Notes receivable from exercise of stock
options................................... -- -- -- (200,000) (200,000)
Net earnings............................... -- -- 1,280,746 -- 1,280,746
---------- ------------ ------------ ------------ ------------
Balance at December 31, 1995............... 2,000,000 212,500 992,342 (200,000) 1,004,842
Public sale of common stock at $5.875 per
share, net of expenses.................... 1,000,000 4,436,151 -- -- 4,436,151
Issuance of common stock to employees...... 2,940 29,768 -- -- 29,768
Net earnings............................... -- -- 1,571,683 -- 1,571,683
---------- ------------ ------------ ------------ ------------
Balance at December 31, 1996............... 3,002,940 4,678,419 2,564,025 (200,000) 7,042,444
Exercise of stock options.................. 34,600 194,900 -- -- 194,900
Payment of notes receivable................ -- -- -- 100,000 100,000
Net earnings............................... -- -- 1,146,822 -- 1,146,822
---------- ------------ ------------ ------------ ------------
Balance at December 31, 1997............... 3,037,540 4,873,319 3,710,847 (100,000) 8,484,166
---------- ------------ ------------ ------------ ------------
Exercise of stock options.................. 2,500 16,250 -- -- 16,250
Net earnings............................... -- -- 205,694 -- 205,694
---------- ------------ ------------ ------------ ------------
Balance at March 31, 1998 (Unaudited)...... 3,040,040 $ 4,889,569 3,916,541 (100,000) 8,706,110
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
BONDED MOTORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................. $1,280,746 1,571,683 1,146,822 428,520 205,694
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization............... 50,700 107,297 184,526 32,828 64,597
Gain from forgiveness of debt............... (119,000) -- -- -- --
Loss on sale of property and equipment...... -- -- 3,520 -- 1,896
(Increase) decrease in assets:
Accounts receivable....................... (729,036) (323,436) (1,826,911) (817,302) (2,829,550)
Inventories............................... (465,748) (2,869,308) (2,167,221) (744,136) (540,135)
Prepaid expenses and other assets......... (164,726) 109,334 (40,118) (119,467) (75,278)
Deferred tax assets....................... (182,000) (422,637) (747,259) (90,702) (56,931)
Increase (decrease) in liabilities:
Accounts payable.......................... 106,723 (275,367) 454,226 (125,868) 902,507
Accrued expenses.......................... 54,170 (8,640) 108,156 43,720 147,727
Accrued warranty obligations.............. 60,000 60,000 60,000 15,000 61,000
Income taxes payable...................... 310,916 (609,939) 109,304 175,736 175,011
---------- ---------- ---------- ----------- -----------
Total adjustments....................... (1,078,001) (4,232,696) (3,861,777) (1,630,191) (2,149,156)
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) operating
activities............................ 202,745 (2,661,013) (2,714,955) (1,201,671) (1,943,462)
---------- ---------- ---------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment........................ (102,956) (647,607) (755,405) (49,215 (224,426)
Acquisition of assets......................... -- -- (667,318) -- --
Proceeds from sale of equipment............... -- -- 9,800 -- 500
---------- ---------- ---------- ----------- -----------
Net cash used in investing activities... (102,956) (647,607) (1,412,923) (49,215) (223,926)
Cash flows from financing activities:
Net proceeds from exercise of stock options... -- -- 194,900 -- 16,250
Net proceeds from sale of common stock........ -- 4,436,151 -- -- --
Borrowings from bank.......................... 250,000 1,820,000 5,730,000 1,200,000 3,654,652
Repayments of notes payable to related
parties..................................... (149,919) (917,770) -- -- (100,000)
Repayments of bank borrowings................. -- (2,070,000) (1,673,477) -- (1,500,126)
Repayment on notes receivable from exercise of
options..................................... -- -- 100,000 -- --
Repayment of amounts due to creditors under
deferral/reduction arrangement.............. (320,696) -- -- -- --
---------- ---------- ---------- ----------- -----------
Net cash (used in) provided by financing
activities............................ (220,615) 3,268,381 4,351,423 1,200,000 2,070,776
---------- ---------- ---------- ----------- -----------
Net increase (decrease) in cash......... (120,826) (40,239) 223,545 (50,886) (96,612)
Cash at beginning of year....................... 234,563 113,737 73,498 73,498 297,043
---------- ---------- ---------- ----------- -----------
Cash at end of year............................. $ 113,737 73,498 297,043 22,612 200,431
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest...................................... $ 83,015 74,476 159,368 12,293 110,424
Income taxes.................................. -- 1,073,000 278,998 -- 7,200
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY
Bonded Motors, Inc. (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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements contained
herein include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly and in accordance with generally accepted accounting
principles the financial position, results of operations and cash flows as of
and for the periods ended March 31, 1997 and 1998.
INVENTORIES
Inventories are stated at the lower of average cost or market (net
realizable value). Included in inventories were cores of $492,973, $1,190,801
and $1,778,179 at December 31, 1995, 1996 and 1997, respectively.
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 for a credit against the 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 $3,122,824, $5,024,263 and $6,729,801 during
the years ended December 31, 1995, 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 into
inventory, at the lower of average cost or market (net realizable value).
PRODUCT WARRANTY
The Company provides the ultimate customer with a warranty with each engine.
Warranty expense is accrued at the time of sale based upon actual claims
history.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired resulting from a business combination and is being
amortized on a straight-line basis over ten years.
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation of machinery and equipment by use of
the straight-line and declining-balance methods over the estimated useful lives
of the related assets, which range from 3 to 12 years. Amortization of leasehold
improvements is provided under the straight-line method over the term of the
lease, not to exceed the economic useful lives of the related assets.
F-7
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Research
and development costs aggregated approximately $124,000 and $66,000 during the
year ended December 31, 1995 and 1996, respectively. No research and development
costs were incurred in 1997.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net
operating cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell. Adoption of this statement did not
have a material impact on the Company's financial position, results of
operations or liquidity.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
"Comprehensive Income" (SFAS 130) on January 1, 1998. The Company has no items
of comprehensive income and as a result SFAS 130 has no impact on the Company's
financial reporting.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The realizability of deferred tax assets is
assessed throughout the year and a valuation allowance is established
accordingly.
EARNINGS PER SHARE
The Financial Accounting Standards Board issued statement No. 128, "Earnings
per Share" (SFAS No. 128), in March 1997, 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. Earnings per share amounts for all periods
presented have been restated for the effects of the adoption of SFAS No. 128.
The weighted average common shares outstanding during the years ended
December 31, 1995, 1996 and 1997 were 1,817,00, 2,750,000 and 3,021,000,
respectively. For purposes of Diluted earnings per share,
F-8
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the incremental common equivalent shares due to outstanding stock options and
warrants during the years ended December 31, 1995, 1996 and 1997 were 155,000,
47,000 and 95,000, respectively. No adjustments to net income were made for the
purpose of computing diluted earnings per share.
STOCK-BASED COMPENSATION
The Company has two option plans for which shares of common stock are
reserved for issuance to executives, key employees and directors. Effective
January 1, 1996 the Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, the Company is recognizing
compensation cost pursuant to the provisions of Accounting Principles Board
Opinion No. 25. Had compensation cost for the Company's two stock option plans
been determined based on the fair value at the grant date for awards in 1996 and
1997 consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amount as
indicated below:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Net earnings as reported.............................................................. $ 1,571,683 1,146,822
Pro forma net earnings................................................................ 952,151 453,567
Basic net earnings per share as reported.............................................. .57 .38
Pro forma basic net earnings per share................................................ .35 .15
Diluted net earnings per share as reported............................................ .56 .37
Pro forma diluted net earnings per share.............................................. .34 .15
------------ ------------
------------ ------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1997: dividend yield of 0%; expected
volatility of 35% and 34%, respectively; risk-free interest rate of between 6.0%
and 6.7%; and expected lives of five years.
The weighted average fair value of options granted during 1996 and 1997 is
and $2.48 and $3.62 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, inventories, accounts payable,
accrued expenses and notes payable to bank and related parties approximate fair
value because of the short maturity of these items.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These affect the reported amounts of assets, liabilities, revenues
and expenses and the amount of any contingent assets or liabilities disclosed in
the financial statements. Actual results could differ from the estimates made.
F-9
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) CORE CREDITS
The Company has a core exchange program, whereby customers are entitled to
receive a credit for any cores returned. A core provision is recorded against
accounts receivable for the credits expected to be issued with respect to sales
made during the year. This provision totaled $181,000 and $301,000 for the years
ended December 31, 1996 and 1997, respectively. In addition, the cost of those
cores expected to be returned are added to parts inventory at cost. This
adjustment totaled $108,000 and $180,000 at December 31, 1996 and 1997,
respectively.
(4) LONG-TERM DEBT AND NOTES PAYABLE TO BANK
LONG-TERM DEBT
In January 1998, the Company entered into an amended credit agreement (the
Credit Agreement) providing for a revolving line of credit for borrowings up to
$7,500,000 through May 1, 2000. Borrowings under the Credit Agreement bear
interest at LIBOR (5.84% at December 31, 1997) plus 2.0% or at the bank's prime
interest rate (8.50% at December 31, 1997) as selected by the Company.
Borrowings under the line of credit are secured by the Company's assets. Total
amounts outstanding under the revolving line of credit at December 31, 1997 were
$3,200,000 ($5,450,808 at March 31, 1998 (unaudited)). The Company had available
borrowings under the line of credit of $4,300,000 at December 31, 1997
($2,049,192 at March 31, 1998 (unaudited)).
The Credit 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 the bank's prime interest rate plus 0.25%
or LIBOR plus 2.25% or the bank's cost of funds plus 2.25%, as selected by the
Company, and are secured by the assets of the Company and of the acquired
company. At December 31, 1997, $856,523 ($760,241 at March 31, 1998 (unaudited))
had been drawn down and were outstanding under this facility. The Company had
available borrowings under this facility of $7,143,477 at December 31, 1997
($7,239,759 at March 31, 1998 (unaudited)).
The Credit 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 December 31, 1997.
F-10
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT AND NOTES PAYABLE TO BANK (CONTINUED)
NOTES PAYABLE TO BANK
The Company's notes payable to bank consisted of the following at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note payable to bank, payable in monthly installments of $3,188 plus
interest at prime plus .375%, maturing December 2, 1999............. $ -- 73,323
Note payable to bank, payable in monthly installments of $20,833 plus
interest at prime, maturing August 1, 2002.......................... -- 465,491
Note payable to bank, payable in monthly installments of $8,073 plus
interest at prime plus .37%, maturing August 1, 2002................ -- 317,709
---------- ----------
Total notes payable to bank......................................... -- 856,523
Less installments due within one year................................. -- 385,128
---------- ----------
Notes payable to bank, excluding current installments $ -- 471,395
---------- ----------
---------- ----------
</TABLE>
In January 1998, all the above term loans were consolidated under the
$8,000,000 acquisition facility under the Credit Agreement.
(5) RELATED PARTY TRANSACTIONS
Notes payable to related parties consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note payable to affiliate of shareholder, non-interest bearing,
unsecured and due on demand....................................... $ 100,000 100,000
---------- ----------
100,000 100,000
Less current maturities............................................. 100,000 100,000
---------- ----------
$ -- --
---------- ----------
---------- ----------
</TABLE>
Interest incurred on notes payable to related parties was $72,146 and
$17,251 during the year ended December 31, 1995 and 1996, respectively. No
interest was incurred in 1997.
In the normal course of business, the Company purchased cores from a
relative of the Chief Executive Officer and majority shareholder. Total
purchases were $94,000 and $462,000 in the years ended December 31, 1995 and
1996, respectively. No amounts were outstanding in relation to those purchases
by the Company at December 31, 1995 or 1996. No such purchases were made during
1997.
F-11
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
Income tax (benefit) expense is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 334,000 446,390 409,774
State.................................................................... -- 4,918 11,978
----------- ----------- -----------
334,000 451,308 421,752
----------- ----------- -----------
Deferred:
Federal.................................................................. 44,000 25,674 (109,959)
State.................................................................... (226,000) (448,311) (637,299)
----------- ----------- -----------
(182,000) (422,637) (747,258)
----------- ----------- -----------
$ 152,000 $ 28,671 $ (325,506)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Actual income tax (benefit) expense differs from those obtained by applying
the Federal income tax rate of 34% to earnings before income taxes and
extraordinary item as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income taxes........................................... $ 455,000 544,000 279,000
State income taxes, net of Federal income tax benefit...................... 82,000 98,000 89,000
State income tax credits earned............................................ (227,000) (600,000) (718,000)
Change in the valuation allowance for deferred tax assets.................. (315,000) -- --
Other...................................................................... 157,000 (13,329) 24,494
----------- ----------- -----------
$ 152,000 28,671 (325,506)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The primary components of temporary differences which give rise to deferred
tax assets and liabilities at December 31, 1996 and 1997 are:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
State tax credits.............................................. $ 716,267 1,387,850
Warranty provision............................................. 140,350 139,400
Sales returns allowance........................................ 114,201 160,893
Allowance for doubtful accounts................................ 27,214 40,319
Other.......................................................... 32,213 176,037
----------- -----------
Total gross deferred tax assets.............................. 1,030,245 1,904,499
----------- -----------
Deferred tax liabilities:........................................
Depreciation................................................... 15,910 23,807
Sales returns allowance........................................ 72,698 102,402
Other.......................................................... -- 89,394
----------- -----------
Total gross deferred tax liabilities......................... 88,608 215,603
----------- -----------
Net deferred tax assets...................................... $ 941,637 1,688,896
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, at December 31, 1997
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if the
Company's estimate of future taxable income is reduced.
At December 31, 1995, 1996 and 1997, the Company had California state tax
credit carryforwards of approximately $680,000, $716,000 and $1,388,000,
respectively, available to offset future taxable income, if any, through 2012.
Effective January 1, 1998, the California state credit program ceased.
(7) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities under a noncancelable operating lease
through 2015 from its major shareholder. The Company also leases other
facilities and certain equipment under noncancelable operating leases through
2000. Rental expense for the years ended December 31, 1995, 1996 and 1997 was
$135,474, $132,066 and $282,847, respectively, of which approximately $90,000,
$96,000 and $96,000 was incurred under the lease with the shareholder in 1995,
1996 and 1997, respectively.
Future minimum lease payments under these leases at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998.................................................... $ 315,000
1999.................................................... 258,000
2000.................................................... 136,000
2001.................................................... 96,000
2002.................................................... 96,000
Thereafter.............................................. 1,248,000
---------
$2,149,000
---------
---------
</TABLE>
ENVIRONMENTAL
The Company operates two wastewater clarifiers at its Los Angeles production
facility and a third clarifier was removed in 1994. In February 1996, the
Company retained an environmental consultant to perform soil sampling in the
area of the closed and the two active clarifiers. Based on the consultant's
conclusions as to the remedial costs, assuming any remediation is required,
management does not believe the cost to the Company would be material.
OTHER
In December 1995, the Company entered into employment agreements with its
officers for three-year terms providing for base salaries plus bonuses.
F-13
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is subject to certain miscellaneous legal claims in the ordinary
course of business. Management does not believe that any liability as a result
of such claims would have a material impact on the Company's results of
operations or financial condition.
(8) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company had sales to four significant customers with sales constituting
72%, 71% and 68% of net sales in 1995, 1996 and 1997, respectively. These
customers comprised 82% and 81% of accounts receivable at December 31, 1996 and
1997, respectively. The loss of any of these customers could have a material
adverse effect on the Company.
Management performs regular evaluations concerning the ability of its
customers to satisfy their obligations and records a provision for doubtful
accounts based upon these evaluations. The Company's credit losses for the
period presented were not material and have not exceeded management's estimates.
(9) ACQUISITION
On August 6, 1997, the Company acquired certain assets of Wheeler
Manufacturing of Macon, Georgia, an automotive engine remanufacturing firm. The
Company accounted for the acquisition using the purchase method. This purchase
included manufacturing machinery and equipment, plant equipment, office
furniture, fixtures and equipment, automotive parts inventory and supplies. 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 values of the assets
acquired were as follows on the acquisition date.
<TABLE>
<S> <C>
Inventories............................................... $ 137,676
Plant, machinery and equipment............................ 317,762
Goodwill.................................................. 211,880
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Total acquisition costs................................... $ 667,318
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</TABLE>
(10) SHAREHOLDERS' EQUITY, STOCK OPTIONS AND STOCK WARRANTS
In April 1996, the Company completed its initial public offering of
1,000,000 shares of its common stock at a public offering price of $5.875 per
share. 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. Shares issued pursuant to
these stock options were paid for by 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 December 7, 2002. During 1997, one of
the officers repaid his note of $100,000.
F-14
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) SHAREHOLDERS' EQUITY, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
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. During 1996 and 1997, the Company
granted 255,000 and 185,000 options, respectively, with exercise prices ranging
between $5.50 and $10.00, 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. 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. At December 31,
1997, 400,400 shares were subject to options under this plan, of which options
for 119,500 shares were exercisable.
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 and 1997, options
to purchase 20,000 and 6,000 shares, respectively, were granted with exercise
prices ranging between $6.50 and $7.38, the estimated fair market value at date
of grant. During 1997, options to purchase 10,000 shares were canceled. At
December 31, 1997 options to purchase 16,000 shares were outstanding under this
plan, of which options to purchase 10,900 shares were exercisable.
During 1996, the Company granted warrants to purchase 100,000 shares of
common stock to the Company's underwriters in the Company's initial public
offering. These warrants have exercise prices of $7.05 per share, the then
estimated fair market value, and a five-year term. These warrants were
outstanding and exercisable as of December 31, 1997.
(11) SIGNIFICANT FOURTH-QUARTER ADJUSTMENT
During the fourth quarter of the year ended December 31, 1996, the Company
recorded an adjustment of $447,977 for the effects of a change in the Company's
estimate of overhead costs included in finished engine inventory.
(12) EXTRAORDINARY ITEM
During 1995, the Company settled its obligations with these creditors for
amounts less than the original amounts due resulting in a gain from forgiveness
of debt, net of income tax effect, of $119,000.
(13) SUBSEQUENT EVENT (UNAUDITED)
In May 1998, the Company reached an agreement in principle to grant options
to purchase 25,000 shares of common stock exercisable at $7.75 per share to
consultants as compensation for services rendered. Compensation expense for the
difference between the grant price and the fair market value of the common stock
plus the fair market value of the options of $137,000 will be recognized as
expense during the quarter ended June 30, 1998.
F-15
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS OR ANY OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 9
Price Range of Common Stock.................... 10
Capitalization................................. 11
Dividend Policy................................ 11
Selected Financial and Other Data.............. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 19
Management..................................... 23
Principal and Selling Shareholders............. 26
Description of Capital Stock................... 27
Underwriting................................... 28
Certain Legal Matters.......................... 29
Experts........................................ 29
Available Information.......................... 30
Index to Financial Statements.................. F-1
</TABLE>
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2,000,000 Shares
[LOGO]
Common Stock
----------------
PROSPECTUS
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VAN KASPER & COMPANY
COMMONWEALTH
ASSOCIATES
JUNE , 1998
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