SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________
TO___________.
Commission File No. 0-23538
MOTORCAR PARTS & ACCESSORIES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2153962
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2727 Maricopa Street, Torrance, California 90503
- - ------------------------------------------- -----
(Address of principal executive offices) Zip Code
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 [X] No [ ]
There were 6,433,455 shares of Common Stock outstanding at October 29, 1998.
MOTORCAR PARTS & ACCESSORIES
INDEX
-----
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets as of September 30, 1998 (unaudited)
and March 31, 1998.................................................................3
Statements of Operations (unaudited) for the six and three month
periods ended September 30, 1998 and 1997..........................................4
Statements of Cash Flows (unaudited) for the six month
periods ended September 30, 1998 and 1997..........................................5
Notes to Financial Statements (unaudited)..................................................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...........................................9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders..........................................................................13
Item 6. Exhibits and Reports on Form 8-K..........................................................15
Signatures................................................................................16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MOTORCAR PARTS & ACCESSORIES, INC.
Balance Sheets
A S S E T S September 30, March 31,
----------- ------------- ----------
1998 1998
------- -------
(Unaudited)
Current assets:
Cash and cash equivalents.................................................... $3,117,000 $ 3,108,000
Accounts receivable - net of allowance for doubtful accounts................. 25,474,000 29,591,000
Inventory.................................................................... 65,979,000 54,736,000
Prepaid expenses and other current assets.................................... 2,141,000 1,862,000
-------------- ------------
Total current assets.................................................. 96,711,000 89,297,000
Plant and equipment - net....................................................... 9,568,000 7,141,000
Other assets.................................................................... 1,760,000 1,807,000
-------------- ------------
T O T A L............................................................. $108,039,000 $98,245,000
============ ===========
L I A B I L I T I E S
---------------------
Current liabilities:
Current portion of capital lease obligations................................. $523,000 $ 395,000
Accounts payable and accrued expenses........................................ 10,960,000 11,816,000
Income taxes payable......................................................... 2,332,000 1,592,000
Deferred income tax liability................................................ 211,000 161,000
--------------- -------------
Total current liabilities............................................. 14,026,000 13,964,000
Long-term debt.................................................................. 18,792,000 13,983,000
Other liabilities............................................................... 1,302,000 1,163,000
Capitalized lease obligations - less current portion............................ 1,634,000 602,000
Deferred income tax liability................................................... 506,000 406,000
-------------- --------------
T O T A L............................................................. $ 36,260,000 $30,118,000
------------ -----------
S H A R E H O L D E R S' E Q U I T Y
------------------------------------
Preferred stock; par value $.01 per share, 5,000,000 shares authorized;
none issued................................................................. 0 0
Common stock; par value $.01 per share, 20,000,000 shares authorized;
6,433,455 shares issued and outstanding at September 30, 1998 and
6,428,455 issued and outstanding at March 31, 1998.......................... 64,000 64,000
Additional paid-in capital...................................................... 50,968,000 50,927,000
Unearned portion of compensatory stock options.................................. 0 (48,000)
Accumulated foreign currency translation adjustment............................. (62,000) (57,000)
Retained earnings............................................................... 20,809,000 17,241,000
---------- ----------
Total shareholders' equity............................................ 71,779,000 68,127,000
---------- ----------
T O T A L............................................................. $108,039,000 $98,245,000
============ ===========
The accompanying notes to financial statements
are an integral part hereof.
3
MOTORCAR PARTS & ACCESSORIES, INC.
Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
September 30, September 30,
------------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ -----
Income:
Net sales............................................ $66,977,000 $50,455,000 $35,955,000 $28,671,000
----------- ----------- ----------- -----------
Operating expenses:
Cost of goods sold................................... 55,001,000 40,464,000 29,639,000 22,960,000
Research and development............................. 505,000 267,000 248,000 122,000
Selling, general and administrative.................. 4,974,000 3,897,000 2,554,000 2,061,000
------------- ------------- ------------- -------------
Total operating expenses...................... 60,480,000 44,628,000 32,441,000 25,143,000
------------ ------------ ------------ ------------
Operating income........................................ 6,497,000 5,827,000 3,514,000 3,528,000
Interest expense (net of interest income)............... 702,000 892,000 379,000 496,000
-------------- -------------- -------------- --------------
Income before income taxes.............................. 5,795,000 4,935,000 3,135,000 3,032,000
Provision for income taxes.............................. 2,227,000 1,924,000 1,186,000 1,192,000
------------- ------------- ------------- -------------
Net income.............................................. $ 3,568,000 $ 3,011,000 $ 1,949,000 $ 1,840,000
============ ============ ============ ============
Basic net income per common share....................... $ 0.55 $ 0.60 $ 0.30 $ 0.36
============ ============= ============ ============
Weighted average common shares
outstanding - basic.................................. 6,431,000 5,028,000 6,433,000 5,065,000
============= ============= ============= =============
Diluted income per common share......................... $ 0.54 0.58 $ 0.30 $ 0.35
============== ============= ============= =============
Weighted average common shares 6,551,000 5,224,000 6,523,000 5,305,000
============= ============= ============= =============
outstanding - diluted................................
The accompanying notes to financial statements
are an integral part hereof.
4
MOTORCAR PARTS & ACCESSORIES, INC.
Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
------------------------------
1998 1997
------------ -----------
Cash flows from operating activities:
Net income.......................................................... $ 3,568,000 $ 3,011,000
Adjustments to reconcile net income to net cash
(used in) operating activities:
Noncash charge for compensatory stock options
issued.......................................................... 48,000 95,000
Depreciation and amortization................................... 892,000 511,000
Changes in:
Accounts receivable........................................... 4,117,000 2,580,000
Inventory..................................................... (11,243,000) (16,408,000)
Prepaid expenses and other current assets..................... (279,000) (337,000)
Other assets.................................................. 47,000 80,000
Accounts payable and accrued expenses......................... (856,000) (1,266,000)
Income taxes payable.......................................... 740,000 119,000
Other liabilities............................................. 139,000 223,000
Deferred income taxes......................................... 150,000
--------------- ------------
Net cash (used in) operating activities................... (2,677,000) (11,392,000)
--------------- ------------
Cash flows from investing activities:
Purchase of property, plant and equipment........................... (1,838,000) (1,623,000)
Change in investments............................................... 1,257,000
--------------------- ------------
Net cash provided by (used in)
investing activities................................. (1,838,000) (366,000)
--------------- --------------
Cash flows from financing activities:
Net increase (decrease) in line of credit........................... 4,809,000 10,167,000
Payments on capital lease obligation................................ (326,000) (408,000)
Proceeds from exercise of warrants and options...................... 41,000 744,000
---------------- --------------
5
Six Months Ended September 30,
------------------------------
1998 1997
------------ -----------
Net cash provided by (used in) financing activities........... 4,524,000 10,503,000
-------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................................................... 9,000 (1,255,000)
Cash and cash equivalents - beginning of period........................ 3,108,000 3,539,000
Beginning cash balance of pooled entity................................ 124,000
-------------- -------------
CASH AND CASH EQUIVALENTS - END OF
PERIOD.............................................................. $ 3,117,000 $ 2,408,000
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.......................................................... $ 688,000 $ 941,000
Income taxes...................................................... $ 1,337,000 $ 1,805,000
Noncash investing and financing activities:
Property acquired under capital lease............................. $ 1,486,000
The accompanying notes to financial statements
are an integral part hereof.
6
MOTORCAR PARTS & ACCESSORIES, INC.
Notes to Financial Statements (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.
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries as of September 30,
1998. All significant intercompany accounts and transactions have been
eliminated in consolidation.
[2] Basis of presentation:
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 six month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending
March 31, 1999. 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, 1998.
7
MOTORCAR PARTS & ACCESSORIES, INC.
Notes to Financial Statements (Unaudited)
(NOTE B)- Inventory:
Inventory is comprised of the following:
September 30, 1998 March 31, 1998
------------------ --------------
Raw materials................... $ 35,475,000 $ 28,609,000
Work-in-process................. 6,542,000 7,066,000
Finished goods.................. 23,962,000 19,061,000
------------- -------------
T o t a l.......... $ 65,979,000 $ 54,736,000
============ ============
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere herein.
Results of Operations
- - ---------------------
Six Months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 82.1 80.2 82.4 80.1
------ ------ ------ ------
Gross profit.................................... 17.9 19.8 17.6 19.9
Research and development........................ 0.8 0.6 0.7 0.4
Selling, general and administrative
expenses.................................... 7.4 7.7 7.1 7.2
------- ------- ------- -------
Operating income................................ 9.7 11.5 9.8 12.3
Interest expense - net of
interest income............................. 1.0 1.7 1.1 1.7
------- ------- ------- -------
Income before income taxes...................... 8.7 9.8 8.7 10.6
Provision for income taxes...................... 3.4 3.8 3.3 4.2
------- ------- ------- -------
Net income...................................... 5.3% 6.0% 5.4% 6.4%
======= ======= ======= =======
In its remanufacturing operations, the Company obtains used
alternators and starters, commonly known as "cores," from its customers as
trade-ins and by purchasing them from vendors. Such trade-ins are recorded when
cores are received from customers. Credits for cores are allowed only against
purchases of similar remanufactured products and are generally used within 60
days of issuance by the customer. Due to this trade-in policy, the Company does
not reserve for trade-ins. In addition, since it is unlikely that a customer
will not utilize its trade-in credits, the credit is recorded when the core is
returned as opposed to when the customer purchases new products. The Company
believes that this policy is consistent throughout the remanufacturing and
rebuilding industry.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
- - -------------------------------------------------------------------------------
Net sales for the three months ended September 30, 1998 were
$35,955,000, an increase of $7,284,000 or 25.4% over the three months ended
September 30, 1997. The increase in net sales is primarily attributable to sales
to one of the Company's largest customers of alternators for domestic vehicles
in connection with the expansion of the Company's product line to include
remanufactured products for domestic vehicles.
9
Cost of goods sold increased over the periods by $6,679,000 or 29.1%
from $22,960,000 to $29,639,000. The increase primarily is attributable to
additional costs incurred with increased production and sales. As a percentage
of net sales, cost of goods sold increased from 80.1% for the three months ended
September 30, 1997 to 82.4% for the three months ended September 30, 1998. The
increase as a percentage of net sales is attributable to (i) an increase in the
Company's product mix of products for domestic vehicles, which tend to carry
lower gross margins and (ii) pricing pressures.
Selling, general and administrative expenses increased over the
periods by $493,000 or 23.9% from $2,061,000 for the three months ended
September 30, 1997 to $2,554,000 for the three months ended September 30, 1998.
The increase resulted principally from the addition of certain personnel in the
Company's information systems, sales and general accounting departments and
generally in connection with the expansion of the Company's operations and
increased production. As a percentage of net sales, these expenses decreased
over the periods from 7.2% to 7.1%, reflecting the leveraging of these costs
over the Company's increased net sales.
For the three months ended September 30, 1998, interest expense, net
of interest income, was $379,000. This represents a decrease of $117,000 or
23.6% from interest expense of $496,000 for the three months ended September 30,
1997. Interest expense was comprised principally of interest on the Company's
revolving credit facility and capital leases.
Six Months Ended September 30, 1998 Compared to Six Months Ended September 30,
1997
- - --------------------------------------------------------------------------------
Net sales for the six months ended September 30, 1998 were
$66,977,000, an increase of $16,522,000 or 32.7% over the six months ended
September 30, 1997. The increase in net sales is primarily attributable to sales
to one of the Company's largest customers of alternators for domestic vehicles
in connection with the expansion of the Company's product line to include
remanufactured products for domestic vehicles.
Cost of goods sold increased over the periods by $14,537,000 or 35.9%
from $40,464,000 to $55,001,000. The increase primarily is attributable to
additional costs incurred with increased production and sales. As a percentage
of net sales, cost of goods sold increased from 80.2% for the six months ended
September 30, 1997 to 82.1% for the six months ended September 30, 1998. The
increase as a percentage of net sales is attributable to (i) an increase in the
Company's product mix of products for domestic vehicles, which tend to carry
lower gross margins and (ii) pricing pressures.
Selling, general and administrative expenses increased over the
periods by $1,077,000 or 27.6% from $3,897,000 for the six months ended
September 30, 1997 to $4,974,000 for the six months ended September 30, 1998.
The increase resulted principally from the addition of certain personnel in the
Company's information systems, sales and general accounting departments and
generally in connection with the expansion of the Company's operations and
increased production. As a percentage of net sales, these expenses decreased
over the periods from 7.7% to 7.4%, reflecting the leveraging of these costs
over the Company's increased net sales.
10
For the six months ended September 30, 1998, interest expense, net of
interest income, was $702,000. This represents a decrease of $190,000 or 21.3%
over net interest expense of $892,000 for the six months ended September 30,
1997. Interest expense was comprised principally of interest on the Company's
revolving credit facility and capital leases.
Liquidity and Capital Resources
- - -------------------------------
The Company's recent operations have been financed principally from
the net proceeds of the Company's public offering in November 1997, borrowings
under its revolving credit facility and cash flow from operations. As of
September 30, 1998, the Company's working capital was $82,685,000, including
$3,117,000 of cash and cash equivalents.
Net cash used in operating activities during the six months ended
September 30, 1998 was $2,677,000. The principal use of cash during the six
months related to an increase in inventory of $11,243,000 and a decrease in
accounts payable and accrued expenses of $856,000 offset by a decrease in
accounts receivable of $4,117,000. The increase in inventory and the decrease in
accounts receivable was due principally to increased returns of cores from
customers.
Net cash used in investing activities during the six months ended
September 30, 1998 and September 30, 1997 was $1,838,000 and $366,000,
respectively. During the six months ended September 30, 1998, the Company
purchased $3,324,000 of property, plant and equipment, of which $1,486,000 was
acquired under a capital lease.
Net cash provided by financing activities in the six months ended
September 30, 1998 and September 30, 1997 was $4,524,000 and $10,503,000,
respectively. The net cash provided by financing activities in the quarter ended
September 30, 1998 primarily was attributable to increased borrowings of
$4,809,000 under the Company's revolving credit facility.
The Company has a credit agreement expiring in August 2001 with Wells
Fargo Bank, National Association (the "Bank") that provides for a revolving
credit facility in an aggregate principal amount not exceeding $35,000,000,
which credit facility is secured by a lien on substantially all of the assets of
the Company. The credit facility provides for an interest rate on borrowings at
the Bank's prime rate less .25% or LIBOR plus 1.00%. Under the terms of the
credit facility and included in the maximum amount thereunder, the Bank will
issue letters of credit and banker's acceptances for the account of the Company
in an aggregate amount not exceeding $7,500,000. At October 28, 1998, the
outstanding balance on the credit facility was approximately $20,109,000.
The Company's accounts receivable as of September 30, 1998 was
$25,474,000, representing a decrease of $4,117,000 or 13.9% from accounts
receivable on March 31, 1998. The decrease, notwithstanding the increase in net
sales, reflects increased core returns from customers, which returns are
credited to the customers against future purchases. The Company partially
protects itself from losses due to uncollectible accounts receivable through an
insurance policy with an independent credit insurance company at an annual
premium of approximately $75,000. The Company's policy
11
generally has been to issue credit to new customers only after the customers
have been included to some extent under the coverage of its accounts receivable
insurance policy. As of September 30, 1998, the Company's accounts receivable
from its largest customer represented approximately 57% of all accounts
receivable.
The Company's inventory as of September 30, 1998 was $65,979,000,
representing an increase of $11,243,000 or 20.5% over inventory as of March 31,
1998. This increase, as discussed above, primarily reflects the Company's
anticipated growth in net sales in connection with domestic vehicles, increased
core returns and, to a lesser extent, increased business from existing customers
and the need to have sufficient inventory to support shorter lead times for
deliveries to customers. Also, the Company continues to increase the number of
SKUs sold requiring the Company to carry raw materials for this wider variety of
parts.
Year 2000 Compliance
- - --------------------
The Company is working to resolve the potential impact of the year
2000 on the ability of the Company's computerized information systems to
accurately process information that may be date- sensitive. Any of the Company's
programs that recognize a date using "00" as the year 1900 rather than the year
2000 could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation and has recently selected a new
information system, one benefit of which is expected to be year 2000 compliance.
The new system is expected to cost approximately $1,800,000. The Company has not
completed its assessment, but currently believes that costs of addressing this
issue will not have a material adverse impact on the Company's financial
position. However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a material
financial risk to the Company. In order to ensure that this does not occur, the
Company plans to devote all resources required to resolve any significant year
2000 issues in a timely manner.
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, the
uncertainty of long-term results from the Company's recent entrance into the
business of remanufacturing alternators and starters for domestic vehicles,
concentration of sales to certain customers, 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 and other factors discussed herein and
in the Company's other filings with the Securities and Exchange Commission.
12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held on
September 9, 1998 for the purpose of: (1) electing seven directors; (2)
approving a series of proposed amendments to the Company's By-Laws to: (a)
classify the Board of Directors into three classes, each of which, after a
transitional arrangement, will serve for three years, with one class being
elected each year; (b) provide that directors may be removed only for cause and
only (i) with the approval of the holders of at least 66 2/3% of the voting
power of the then outstanding shares of capital stock of the Company entitled to
vote generally in the election of directors, voting together as a single class,
or (ii) with the approval of a majority of the entire Board of Directors; and
(c) provide that the shareholder vote required to amend or repeal the foregoing
provisions of the By-Laws, or to adopt any provision inconsistent therewith,
shall be 66 2/3% of the voting power of the Company entitled to vote generally
in the election of directors; (3) approving an amendment to the Company's 1994
Stock Option Plan; and (4) ratifying the appointment of the Company's
independent certified public accountant for the fiscal year ending March 31,
1999. Proxies for the meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934 and there was no solicitation in opposition.
The following directors were elected by the following vote:
Votes
-----
For Withheld
--- --------
Mel Marks 4,264,988 317,260
Richard Marks 4,265,188 317,060
Karen Brenner 4,146,080 436,168
Selwyn Joffe 4,145,580 436,668
Mel Moskowitz 4,265,588 316,660
Murray Rosenzweig 4,265,588 316,660
Gary Simon 4,145,780 436,468
The proposal to approve a proposed amendment to the Company's By-Laws
that would classify the Board of Directors into three classes, each of which,
after a transitional arrangement, will serve for three years, with one class
being elected each year, failed by the following vote:
For Against
--- -------
2,145,702 2,162,119
The proposal to approve a proposed amendment to the Company's By-Laws
that would provide that directors may be removed only for cause and only (i)
with the approval of the holders of at least 66 2/3% of the voting power of the
then outstanding shares of capital stock of the
13
Company entitled to vote generally in the election of directors, voting together
as a single class, or (ii) with the approval of a majority of the entire Board
of Directors, failed by the following vote:
For Against
--- -------
2,120,887 2,172,849
The proposal to approve a proposed amendment to the Company's By-Laws
that would provide that the shareholder vote required to amend or repeal the
foregoing provisions of the By-Laws, or to adopt any provision inconsistent
therewith, shall be 66 2/3% of the voting power of the Company entitled to vote
generally in the election of directors, failed by the following vote:
For Against
--- -------
2,141,372 2,159,249
The proposal to amend the Company's 1994 Stock Option Plan was
approved by the following vote:
For Against
--- -------
4,348,579 1,321,075
The proposal to ratify the appointment of the independent certified
public accountant for the fiscal year ending March 31, 1999 was approved by the
following vote:
For Against
--- -------
5,676,393 9,148
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Credit Agreement, dated as of August 1, 1998, by and
between the Company and Wells Fargo Bank, National
Association.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the
quarterly period ended September 30, 1998.
15
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.
MOTORCAR PARTS & ACCESSORIES, INC.
Dated: November 13, 1998 By: /s/ Peter Bromberg
-----------------------------
Peter Bromberg
Chief Financial Officer
16
EXHIBIT INDEX
--------------
Exhibit
Number Description
- - ------- -----------
10.1 Credit Agreement, dated as of August
1, 1998, by and between the Company
and Wells Fargo Bank, National Association
27.1 Financial Data Schedule