UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MARCH 28, 2001
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MOTORCAR PARTS & ACCESSORIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW YORK 0-23538 11-2153962
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(State or other (Commission File Number) (IRS Employer
jurisdiction Identification No.)
of incorporation)
2727 MARICOPA STREET, TORRANCE, CALIFORNIA 90503
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 212-7910
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(Former name or former address, if changed since last report.)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS.
UNAUDITED FINANCIAL INFORMATION FOR THE THREE AND NINE MONTH PERIODS ENDED
DECEMBER 31, 2000.
Attached to this Form 8-K as Exhibit 99.1 are the Company's unaudited
financial statements for the interim period ended December 31, 2000.
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
Company's unaudited financial statements for the period ended December 31, 2000.
This selected financial data should be read in conjunction with the notes that
appear elsewhere herein.
Table 1.
Nine Months Three Months
Ended Ended
December 31, December 31,
2000 2000
(Unaudited) (Unaudited)
Net sales 100.0% 100.0%
Costs of goods sold 91.0% 91.1%
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Gross profit 9.0% 8.9%
Research and development 0.3% 0.2%
Sales and marketing 0.7% 0.7%
General and administrative 6.1% 9.8%
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Operating / income (loss) 1.9% (1.8%)
Interest expense - net 2.4% 2.4%
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Net (loss) (0.5%) (4.2%)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
The following discussion includes references to certain operating
results during the three and nine month periods ended December 31, 1999. While
the Company believes these references are helpful for purposes of understanding
the discussion of the Company's operating results, the Company has not included
financial statements for the three and nine month periods ended December 31,
1999 in this Form 8-K because the Company has not restated these financial
statements to give effect to the change in the Company's method of accounting
for inventory or any adjustments that might result from an audit or review of
these statements.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
Net sales for the three months ended December 31, 2000 were $38,969,000
a decrease of more than 6% from sales for the third quarter of the prior year.
This decrease in net sales was the direct result of the Company eliminating an
unprofitable line of domestic business during the second quarter of fiscal 2001.
Gross profit for the three months ended December 31, 2000 decreased to
8.9% for the three months ended December 31, 2000 as compared to the third
quarter of the prior year. While there was some improvement in gross margins
associated with the elimination of an unprofitable line, this improvement was
more than offset by the establishment of a stock return allowance.
Under the terms of certain Company agreements with its customers and
industry practice, the Company's customers from time to time are allowed stock
adjustments when the inventory level of certain product lines exceed their
anticipated level of sales to their end-user customers. These adjustments are
made by the Company's acceptance into inventory of these customer's overstocks,
and they do not come at any specific time during the year and can have a
distorting effect on the financial statements. An allowance was set up by
analyzing the last three years inventory adjustments and estimating potential
stock adjustments in the future.
Historically, the Company charged a portion of stock adjustment returns
against net sales and expensed the balance as cost of goods sold when the
returns are made. To refine its method of accounting for stock adjustments, the
Company now provides for an allowance to address the anticipated impact of stock
adjustments. These adjustments resulted in gross profit and net income
decreasing by $898,000 for the nine months ended December 31, 2000, of which
$180,000 related to the first quarter of fiscal year 2001. The establishment of
a stock adjustment allowance would not have had a significant impact on the
prior two fiscal years or the three months ending September 30, 2000. The
Company will accrue an additional amount monthly and the costs associated with
stock adjustments will be charged against this allowance. This policy will be
reviewed quarterly looking back at a rolling 12 months to determine if the
monthly accrual should be adjusted.
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FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 (continued)
Research and development expenses decreased by more than 40% during the
three months ended December 31, 2000 compared to the third quarter of the prior
year. This decrease was due to a reduction in labor and related expenses as well
as a reduction in supplies. This was done as part of the Company's cost cutting
efforts.
Sales and marketing expenses decreased significantly during the three
months ended December 31, 2000 compared to the third quarter of the prior year.
This decrease was due to a reduction in advertising costs and a reduction in
personnel. General and administrative expenses increased significantly over the
same comparable periods principally due to increased legal costs for the
Securities and Exchange Commission Investigation and an accrual of $1,500,000
for a proposed class action settlement discussed under the caption "Class Action
Lawsuit".
For the three months ended December 31, 2000 interest expense was
$957,000. This represents a more than 5% increase over net interest expense for
the same three months of the prior year. This increase is attributed to
generally higher interest rates, coupled with a 1% interest rate increase
charged by the bank in connection with the related amended loan agreement and
waivers entered into September 2000.
FOR THE NINE MONTHS ENDED DECEMBER 31, 2000
Net sales for the nine months ended December 31, 2000 were $124,334,000
a decrease of more than 16% from sales for the first nine months of the prior
year. This decrease in net sales was the direct result of the Company
eliminating an unprofitable line of domestic business.
Gross profit for the nine months ended December 31, 2000 improved to
9.0% from lower profit margins realized during the first nine months of the
prior year. This improvement is attributed to the Company moving away from an
unprofitable line of domestic business plus an increase in manufacturing
efficiencies. The improvement in gross profit margins associated with the
elimination of an unprofitable product line was partially offset by the
establishment of a stock adjustment allowance noted in the preceding discussion.
Research and development expenses decreased by more than 30% during the
nine months ended December 31, 2000 compared to the first nine months of the
prior year. This decrease was due to a reduction in labor and related expenses
as well as a reduction in expendable tools and supplies. This was done as part
of the Company's cost cutting efforts.
Sales and marketing expenses decreased during the nine months ended
December 31, 2000 as compared to the first nine months of the prior year. The
decrease resulted principally from a reduction in personnel and a reduction in
advertising costs. General and administrative expenses increased significantly
over the same comparable periods principally due to increased legal costs for
the Securities and Exchange Commission Investigation and an accrual of
$1,500,000 for a proposed class action settlement discussed under the caption
"Class Action Lawsuit".
For the nine months ended December 31, 2000, net interest expense was
$2,976,000. This represents a more than 10% increase over net interest expense
for the first nine months of the prior year. This increase is attributed to
generally higher interest rates.
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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.
Because of the Company's failure to satisfy certain financial covenants,
including minimum cash flow levels, or to provide the bank with required
financial information, the Company was in default under its credit agreement. In
connection with the bank's agreement to waive these defaults September 2000, the
Company agreed to reduce the maximum level of borrowings under this line of
credit from the original level of $38 million to $33 million by March 31, 2001.
This reduction was required to be made generally in monthly increments of
$500,000 through March 31, 2001. While the Company has made net payments on its
line of credit totaling $4,250,000 over the eleven months through February 2001,
the Company requested that the bank waive the requirement that the Company make
the permanent reduction in its credit facility of $750,000 (to $33 million) that
is due to be made by March 31, 2001. The bank has agreed to waive this
requirement in connection with the amendment to the Company's loan agreement
discussed below.
In March 2001, the Company notified the bank that it was in default of
several provisions of its credit agreement, including the failure to maintain
minimum monthly cash flow levels in December 2000 and January 2001 and to
provide the bank with certain required financial information. In light of its
projected cash flow needs associated with anticipated revenue growth, the
Company requested that the bank waive the requirement that the Company use the
$1.2 million tax refund it received in February 2001 to make a permanent
reduction in the credit facility and the requirement that it deposit $500,000 in
a non-interest bearing account as security for the Company's letter of credit
facility. The bank granted these waiver requests in connection with the
recently-executed amendment to the Company's bank agreement discussed in the
following paragraph.
In March 2001, the Company and the bank executed a third amendment to
the loan agreement to reflect the bank waivers through January 31, 2001 noted in
the preceding paragraphs. The terms of this third amendment also included an
increase in the effective rate of interest charged by the bank on credit
advanced to the Company effective April 1, 2001. Until the escrow account called
for as part of the proposed settlement of the class action litigation (discussed
below) has been established and fully funded, the interest rate increases from
the current rate of prime plus 1% to prime plus 2.5%. Once the escrow account
has been established and funded, the interest rate decreases to prime plus
2.25%. The rate decreases to prime plus 2% when the class action lawsuit has
been finally settled. If the loan is not paid in full at maturity, the
interest rate would increase by an additional 4%.
As part of the recently-executed third amendment to the Company's loan
agreement, the bank also agreed to extend the March 31, 2001 maturity date to
May 31, 2001. The bank is considering the Company's request that the maturity
date be extended for an additional year. The Company believes that, if an
additional extension is granted, the bank may require a significant increase in
the interest rate paid by the Company on borrowed funds. Although the Company is
investigating other sources of financing with potential lenders, the Company
believes that its most recently reported results will make it more difficult to
arrange this replacement financing. The failure to successfully negotiate an
extension of the maturity date of its current bank loan or arrange replacement
financing could have a material adverse impact on the Company.
CLASS ACTION LAWSUIT
The Company is a defendant in a class action lawsuit pending in the
United States District Court, Central District of California. The complaint in
the class action alleges that, over a three year period, the Company misstated
earnings in violation of securities laws. The complaint seeks damages on behalf
of all investors who purchased common stock of the Company from August 1, 1996
to July 30, 1999. The Company's Directors and Officers insurance carrier has
also filed a claim against the Company and certain of its officers that seeks to
rescind coverage for the claims made against the Company and certain of its
officers in the class action lawsuit and the related insurance litigation. The
Company, counsel for the class action plaintiffs and counsel for the insurance
carrier have entered into a Memorandum of Understanding to settle the class
action lawsuit. The terms of the proposed settlement include the payment of
$7,500,000 to the plaintiffs in the class action. Of this amount, $6,000,000
would be paid by the Company's directors and officers insurance carrier, and the
balance would be paid by the Company. In connection with the payment by the
insurance carrier, the Company's directors and officers insurance would be
cancelled.
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CLASS ACTION LAWSUIT (continued)
To finance the Company's portion of the settlement plan, the Company
and Mel Marks, the Company's founder and a board member, have entered into the
stock purchase agreement that is filed as Exhibit 99.2 to this 8-K. Under the
terms of this agreement, Mr. Marks would purchase shares of the Company's common
stock, and the total purchase price for this stock would be $1,500,000. The
price per share is expected to be $1.00. If the valuation firm that the Company
engages to evaluate the fairness of the transaction concludes that this price
per share is not fair to the Company's shareholders, from a financial point of
view, the price per share will be increased to a price that the valuation firm
determines would be fair. For purposes of this determination, the fairness of
the transaction will be 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 the event the settlement is not complete, this
agreement would be rescinded.
While management is hopeful that the settlement can be finalized, there
can be no assurances that the settlement would be approved by the court, such
approval being required for settlement to be consummated. In the absence of
final resolution of the litigation and in view of the position articulated by
the Directors and Officers insurance carrier, continued litigation of the class
action lawsuit could have a materially adverse effect on the Company.
PENDING INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION
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.
CONSOLIDATION OF OPERATIONS
Presently, the Company conducts its operations primarily in two
facilities located in Torrance, California. One building, housing Executive
Offices, Sales Offices, and Final Assembly Operations, consists of approximately
123,000 square feet. The other facility consists of nearly 240,000 square feet
of primarily Warehousing, Shipping/Receiving, Engineering and Tear-down and
Assembly Operations. The Company is in the process of consolidating all
operations into the single larger facility. As a result the Company anticipates
the following to happen:
- Savings in rent and utilities will be achieved;
- Efficiencies in production will be realized due to redesigning
many current operations, including kitting, remanufacturing and
packaging; and
- The effectiveness of Management will be increased by residing
in one facility
The cost of this consolidation is anticipated to be $750,000 of which
$158,000 has been spent as of December 31, 2000. This consolidation is expected
to result in annualized savings of nearly $1,000,000, and capacity will be
increased through production and design efficiencies. The actual costs and
savings could vary significantly from these estimates. The consolidation is
scheduled to be completed during the first quarter of fiscal year 2002.
The Company is also evaluating the costs and benefits associated with
its Singapore and Malaysian manufacturing, purchasing and warehousing operations
and facilities.
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CUSTOMER CONCENTRATION
The Company is substantially dependent upon sales to six major
customers. During the nine months ended December 31, 2000 sales to these six
customers constituted approximately 91% of the Company's total sales. During the
same period, sales to the Company's top three customers totaled approximately
76% 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 has increasingly
limited the Company's ability to negotiate favorable prices for its products.
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 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, the costs associated with and the anticipated
savings from the Company's consolidation of facilities and other factors
discussed herein and in the Company's other filings with the Securities and
Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(C) Exhibits: The following exhibits are filed as part of this report:
Exhibit 99.1 Interim Financial Information of Motorcar Parts &
Accessories at and for the period ended December 31, 2000
Exhibit 99.2 Stock Purchase Agreement between the Company and Mel Marks
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 hereunto duly authorized.
MOTORCAR PARTS & ACCESSORIES, INC.
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(Registrant)
Date March 28, 2001 /s/ ANTHONY SOUZA
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(Signature)
Anthony Souza
President
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
Exhibit 99.1 Interim Financial Information of Motorcar Parts &
Accessories at and for the period ended December 31, 2000
Exhibit 99.2 Stock Purchase Agreement between the Company and Mel Marks
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