SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
Commission File No. 0-23538
MOTORCAR PARTS & ACCESSORIES, INC. (Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (310) 212-7910
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes / / No /x/
There were 7,960,455 shares of Common Stock outstanding at December 31, 2001.
MOTORCAR PARTS & ACCESSORIES
INDEX
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MOTORCAR PARTS & ACCESSORIES, INC.Consolidated Balance Sheets
The accompanying condensed notes to consolidated financial statements are an integral part hereof.
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MOTORCAR PARTS & ACCESSORIES, INC.Consolidated Statements of Operations(Unaudited)
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MOTORCAR PARTS & ACCESSORIES, INC.Consolidated Statement of Cash Flows(Unaudited)
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MOTORCAR PARTS & ACCESSORIES, INC.Condensed Notes to Consolidated Financial StatementsDecember 31, 2001 and 2000(Unaudited)
NOTE A—The Company and its Significant Accounting Policies:
Motorcar Parts & Accessories, Inc., and its subsidiaries (the "Company"), remanufactures and distributes alternators and starters and assembles and distributes spark plug wire sets for the automotive after-market industry (replacement parts sold for use on vehicles after initial purchase). These automotive parts are sold to automotive retail chains and warehouse distributors throughout the United States and in Canada.
The Company obtains used alternators and starters, commonly known as cores, primarily from its customers (retailers) as trade-ins and by purchasing them from vendors (core brokers). The retailers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the retailer upon return to the Company. These cores are an essential material needed for the remanufacturing operations. The Company has remanufacturing operations for alternators and starters in California, Singapore and Malaysia. Assembly operations for spark plug wire sets are performed in California and Malaysia.
The accompanying consolidated financial statements include accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2001.
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NOTE B—Inventory
Inventory is comprised of the following:
NOTE C—Line of Credit and Term Loan
On May 31, 2001 the Company and the bank executed the second amended and restated credit agreement. Under the new credit agreement, the maturity date on the advances made to the Company was extended to April 30, 2002 and the balance due of $33,750,000 was split into two separate credit facilities, a revolving line of credit facility of up to $24,750,000 and a $9,000,000 term loan. The amounts available under the line of credit facility are limited to 75% of Eligible Accounts Receivable and 80% of Appraised Net Recovery Value of inventory, in each case as such terms are defined in the May 31, 2001 amended and restated credit agreement. The line of credit facility and the term note provide for interest rates of 2.50% and 2.75%, respectively, above the bank's prime rate, which was 4.75% on December 31, 2001. Each quarter, the spreads above the bank's prime rate can be reduced to 1.75% and 2.00%, respectively and increased to 2.50% and 2.75%, respectively, depending upon changes in the ratio of the Company's funded debt to cash flow. On December 31, 2001, the interest rates for the line of credit facility and the term loan was 6.50% and 6.75% respectively.
The bank loan agreement includes various financial conditions, including minimum levels of monthly and 12-month cash flow, monthly net operating income (and maximum levels of any net operating loss), tangible net worth and gross sales, and a number of restrictive covenants, including prohibitions against additional indebtedness, payment of dividends, pledge of assets and capital expenditures in excess of $1,000,000 in any 12-month period. If the Company is in default with any of its financial reporting obligations, the bank has the option of increasing the applicable line of credit margin and the applicable term loan margin to 3.00% and 3.25%, respectively, and the option to apply the default interest rate margin of 4% above the then-prevailing rate until such default is cured. Currently, the Company is in compliance with all of its financial conditions and restrictive covenants.
NOTE D—Net Income Per Share
Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and assumes that all dilutive potential shares were converted at the beginning of the year. The Company only has common stock
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outstanding. Net income (loss) per share data for the three months ended December 31, 2001 and 2000 is as follows:
Net income (loss) per share data for the nine months ended December 31, 2001 and 2000 is as follows:
The above computations, for both the three and nine month periods ended December 31, 2001 include 62,000 of employee stock options authorized by the Board, which were issued during the period ended December 31, 2001.
NOTE E—Litigation
The Company has settled the class action lawsuit and related litigation that had been filed against the Company in the United States District Court, Central District of California, Western Division. The class action lawsuit alleged that, over a four-year period during 1996 to 1999, the Company misstated earnings in violation of securities laws. Under the terms of the settlement agreement, the class action plaintiffs will receive $7,500,000. Of this amount, the Company's directors and officer's insurance carrier will pay $6,000,000 and the Company will pay the balance. All parties have exchanged releases in connection with this settlement.
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To finance the Company's portion of the settlement agreement, the Company and Mel Marks, the Company's founder and a board member, entered into a stock purchase agreement. Under the terms of this agreement, Mr. Marks purchased shares of the Company's common stock as of September 19, 2001. The total purchase price for the stock was $1,500,000. The price per share was $1.00. The valuation firm that the Company engaged to render a fairness opinion of this transaction, concluded that this price per share was fair to the Company's shareholders, from a financial point of view. For purposes of this determination, the fairness of the transaction was evaluated as of November 30, 2000, the date that Mr. Marks agreed to provide $1,500,000 to the Company to finance a portion of the class action settlement. In recording the final settlement, the Company reclassified the "Deposit from Shareholder" of $1,500,000 to Shareholders' Equity.
On January 20, 2000, the Securities and Exchange Commission issued a formal order of investigation with respect to the Company. In this order, the SEC authorized an investigation into, among other things; the accuracy of the financial information previously filed with the Commission and potential deficiencies in the Company's records and system of internal control. The SEC investigation is proceeding. There can be no assurance with respect to the outcome of the SEC's investigation. In addition, the Company has not filed a number of periodic reports that it is obligated to file under the Securities Exchange Act of 1934. The SEC is aware of this failure and has reminded the Company that it has the authority to revoke or suspend the Company's registration under the Securities Exchange Act of 1934 as a result of this failure, which SEC action would prevent sales of the Company's common stock through broker/dealers.
The Company is subject to various other lawsuits and claims in the normal course of business. Management does not believe that the outcome of these matters will have a materially adverse effect on its financial position or future results of operations.
NOTE F—Income Taxes
There has been no provision for income taxes included in these Financial Statements. The Company has a net operating loss carry-forward from the Fiscal Year ending March 31, 2001 of approximately $26,000,000; therefore, at this time, Management believes that the Company's net operating loss carry-forward will offset any anticipated income tax expense.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Selected Financial Data
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.
Results of Operations
Nine Months Ended December 31, 2001 Compared to Nine Months Ended December 31, 2000
Net sales for the nine months ended December 31, 2001 were $130,317,000 an increase of $5,983,000 or 4.8% over the nine months ended December 31, 2000. Of this increase in net sales, $3,870,000 was due to the Company's expansion into new product lines; $545,000 was a direct result of increased sales to existing customers; and $1,568,000 was related to a decrease in warranty and sales returns attributable to the engineering department focusing on warranty reductions.
Cost of goods sold increased over the period by $2,410,000 or 2.1% to $115,607,000 for the nine months ended December 31, 2001 from $113,197,000 for the nine months ended December 31, 2000. This increase is primarily attributable to additional costs incurred with increased production and sales. As a percentage of net sales, cost of goods sold decreased to 88.7% for the nine months ended December 31, 2001 as compared to 91.0% for the nine months ended December 31, 2000. This percentage decrease is principally attributable to a reduction in labor costs associated with greater manufacturing efficiencies and improved productivity due to the Company's consolidation of its facilities.
General and administrative expenses decreased over the periods by $2,060,000 or 27.1% to $5,554,000 for the nine months ended December 31, 2001 from $7,614,000 for the nine months ended December 31, 2000. As a percentage of sales, these expenses decreased over the periods to 4.3% from 6.1%, and are principally the result of a $1,500,000 decrease in expenses related to the class action settlement and a $915,000 decrease in other non-recurring legal and accounting expenses, which are partially offset by an increase in bonus expense associated with the Company's improved performance and an increase in customer allowances.
Sales and marketing expenses decreased over the periods by $54,000 or 6.3% to $810,000 for the nine months ended December 31, 2001 from $864,000 for the nine months ended December 31, 2000.
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This decrease resulted principally from a reduction in outside commissions paid. As a percentage of sales, these expenses decreased over the periods to 0.6% from 0.7%.
Research and development expenses increased over the periods by $36,000 or 9.9% to $399,000 for the nine months ended December 31, 2001 from $363,000 for the nine months ended December 31, 2000. As a percentage of sales, these expenses remained constant at 0.3%.
For the nine months ended December 31, 2001 interest expense net of interest income was $2,939,000. This represents a decrease of $37,000 or 1.2% over net interest expense of $2,976,000 for the nine months ended December 31, 2000. This decrease is principally the result of the Company amending its loan agreement with its bank. As part of the amendment, 400,000 warrants previously issued to the bank were re-priced. This re-pricing resulted in a one-time charge of $360,000. This one-time charge and the increase in the overall level of outstanding debt were partially offset by lower interest rates. Interest expense was comprised principally of interest on the Company's revolving credit facility, term loan and capital leases.
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31, 2000
Net sales for the three months ended December 31, 2001 were $38,837,000, a decrease of $132,000 or 0.3% over the three months ended December 31, 2000. This net decrease in sales is principally the result of the loss of one of the Company's customers that accounted for approximately 3% of the Company's net sales for the preceding 12-month period. This loss was substantially offset by additional sales to the Company's ongoing customers.
Cost of goods sold decreased over the period by $281,000 or 0.8% to $35,084,000 for the three months ended December 31, 2001 from $35,365,000 for the three months ended December 31, 2000. This decrease is primarily attributable to a reduction in costs incurred due to lower sales and production costs. As a percentage of net sales, cost of goods sold decreased to 90.4% for the three months ended December 31, 2001 as compared to 90.8% for the three months ended December 31, 2000. This decrease is attributable to a reduction in labor costs associated with greater manufacturing efficiencies and improved productivity due to the Company's consolidation of its facilities.
General and administrative expenses decreased over the periods by $2,553,000 or 67.1% to $1,251,000 for the three months ended December 31, 2001 from $3,804,000 for the three months ended December 31, 2000. As a percentage of sales, these expenses decreased over the periods to 3.2% from 9.8%, and are principally attributable to a $1,500,000 decrease in expenses related to the class action settlement and a $1,002,000 decrease in other non-recurring legal and accounting expenses.
Sales and marketing expenses remained relatively flat and decreased over the periods by $2,000 or 0.7% to $268,000 for the three months ended December 31, 2001 from $270,000 for the three months ended December 31, 2000. As a percentage of sales, these expenses remained constant at approximately 0.7%.
Research and development expenses increased over the periods by $31,000 or 32.0% to $128,000 for the three months ended December 31, 2001 from $97,000 for the three months ended December 31, 2000. As a percentage of sales, these expenses increased by 0.1% for the three months ended December 31, 2001 to 0.3% from 0.2% for the three months ended December 31, 2000 and are the result of increased spending for supplies and equipment.
For the three months ended December 31, 2001 interest expense net of interest income was $806,000. This represents a decrease of $151,000 or 15.8% over net interest expense of $957,000 for the three months ended December 31, 2000. This decrease is principally the result of lower interest rates, which was partially offset by an increase in the overall level of outstanding debt. Interest expense was comprised principally of interest on the Company's revolving credit facility, term loan and capital leases.
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Liquidity and Capital Resources
The Company finances its operations out of cash flow from operations and historically has utilized borrowings under its existing line of credit. On May 31, 2001 the Company and the bank executed the second amended and restated credit agreement. Under the new credit agreement, the maturity date on the advances made to the Company was extended to April 30, 2002 and the balance due of $33,750,000 was split into two separate credit facilities, a revolving line of credit facility of up to $24,750,000 and a $9,000,000 term loan. The amounts available under the line of credit facility are limited to 75% of Eligible Accounts Receivable and 80% of Appraised Net Recovery Value of inventory, in each case as such terms are defined in the May 31, 2001 amended and restated credit agreement. The line of credit facility and the term note provide for interest rates of 2.50% and 2.75%, respectively, above the bank's prime rate, which was 4.75% on December 31, 2001. Each quarter, the spreads above the bank's prime rate can be reduced to 1.75% and 2.00%, respectively and increased to 2.50% and 2.75%, respectively, depending upon changes in the ratio of the Company's funded debt to cash flow. On December 31, 2001, the interest rates for the line of credit facility and the term loan was 6.50% and 6.75% respectively.
The bank loan agreement includes various financial conditions, including minimum levels of monthly and 12-month cash flow, monthly net operating income (and maximum levels of any net operating loss), tangible net worth and gross sales, and a number of restrictive covenants, including prohibitions against additional indebtedness, payment of dividends, pledge of assets and capital expenditures in excess of $1,000,000 in any 12-month period. If the Company is in default with any of its financial reporting obligations, the bank has the option of increasing the applicable line of credit margin and the applicable term loan margin at 3.00% and 3.25%, respectively, and the option to apply an additional default interest rate margin of 4% above the then-prevailing rate previously stated, until such default is cured. Currently, the Company is in compliance with all of its financial conditions.
In connection with the execution of the April 20, 2000 amended and restated credit agreement, the Company issued the bank a warrant to purchase 400,000 shares of the Company's common stock at an exercise price of $2.045 per share. In connection with the execution of the May 31, 2001 second amended and restated credit agreement, the exercise price under the warrant was reduced to $.01 per share. This resulted in interest expense and additional paid-in capital increasing by $360,000.
To date, the bank has been willing to waive defaults by the Company with respect to its obligations under its credit agreement with the bank. There can be no assurance that the bank will be willing to waive any future defaults by the Company, and the refusal by the bank to do so in the future could have a material adverse impact on the Company. In addition, the Company is in the process of seeking replacement financing. If the Company is not able to refinance the bank debt at maturity (April 30, 2002), and the bank refuses to extend the maturity date, this could have a material adverse impact upon the Company.
During the nine months ended December 31, 2001, the Company's liquidity and need for capital resources was impacted by an increase in accounts receivable from $7,324,000 at March 31, 2001 to $19,471,000 at December 31, 2001. This increase was primarily attributable to the timing of customer payments and stock adjustments and returns that occurred during the three months ended March 31, 2001 and the overall increase in Company sales during the period ended December 31, 2001. This increase was also attributable to changes in payment terms provided by the Company to certain of its customers. These changes have significantly increased the Company's need for working capital and this increased capital requirement is expected to continue.
Consolidation of Operations
At the present time, the consolidation effort pertaining to the Company's facilities in Torrance, California is nearly 100% complete. When this consolidation is completed, the Company believes that
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its facilities will be sufficient to satisfy its foreseeable production and warehouse requirements. The Company has also completed its consolidation efforts in Nashville and has moved to a smaller facility.
In addition, the Company has facilities at its subsidiary locations in Malaysia and Singapore.
Customer Concentration
The Company is substantially dependent upon sales to five major customers. During the three months ended December 31, 2001 sales to these five customers constituted approximately 96% of the Company's total sales. During the same period in fiscal 2000, sales to the Company's top five customers totaled approximately 96% of the Company's total sales. Any meaningful reduction in the level of sales to any of these customers could have a materially adverse impact upon the Company. In addition, the concentration of the Company's sales and the competitive environment in which the Company operates has increasingly limited the Company's ability to negotiate favorable prices for its products.
Seasonality of Business
Due to the nature and design as well as the current limits of technology, alternators and starters traditionally fail when operating in extreme conditions. That is, during the summer months, when the temperature typically increases over a sustained period of time, alternators and starters are more apt to fail and thus, an increase in demand for the Company's products typically occurs. Similarly, during winter months, when the temperature is colder, alternators and starters tend to fail and require replacing immediately, since these parts are mandatory for the operation of the vehicle. As such, summer months tend to show an increase in overall volume with a few spikes in the winter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures. The Company is subject to interest rate risk on its existing debt and any future financing requirements. The Company's variable rate debt relates to borrowings under the Credit Facility (see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources").
The following table presents the weighted-average interest rates expected on the Company's existing debt instruments.
Principal (Notional) Amount by Expected Maturity Date (As of December 31, 2001)
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Qualitative Disclosures. The Company's primary exposure relates to (1) interest rate risk on its long-term and short-term borrowings, (2) the Company's ability to pay or refinance its borrowings at maturity at market rates and (3) the impact of interest rate movements on the Company's ability to meet interest expense requirements and exceed financial covenants. While the Company cannot predict or manage its ability to refinance existing debt or the impact interest rate movement will have on its existing debt, management evaluates the Company's financial position on an on-going basis.
Disclosure Regarding Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements with respect to the future performance of the Company that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. These factors include, but are not limited to: concentration of sales to certain customers, changes in the Company's relationship with any of its customers, the Company's failure to meet the financial covenants or the other obligations set forth in its bank credit agreement and the bank's refusal to waive any such defaults, the Company's ability to refinance its bank debt at maturity, the potential for changes in consumer spending, consumer preferences and general economic conditions, increased competition in the automotive parts remanufacturing industry, unforeseen increases in operating costs associated with and the anticipated savings from the Company's consolidation of facilities, the uncertainty of the class action lawsuit against the company and other factors discussed herein and in the Company's other filings with the Securities and Exchange Commission.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
See Item 1. Note E to the Consolidated Financial Statements included in Item 1 of Part I and incorporated by reference to this Item 1 of Part II.
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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