# Motorcar Parts of America Inc: Form 10-Q for the period ended Sep 30, 2013

- Company: [Motorcar Parts of America Inc](/companies/mpaa.md) (CIK 918251)
- Form: 10-Q
- Filed: 2013-11-12
- Accepted by EDGAR: Nov 12, 2013, 16:14 ET
- Period: 2013-09-30
- Accession: 0001140361-13-041801
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/918251/000114036113041801/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/918251/000114036113041801/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $66.2m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2013-04-01 to 2013-09-30 | $116.4m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $46.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2013-04-01 to 2013-09-30 | $80.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2013-07-01 to 2013-09-30 | $19.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2013-04-01 to 2013-09-30 | $35.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2013-07-01 to 2013-09-30 | $398.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2013-04-01 to 2013-09-30 | $947.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | $8.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2013-04-01 to 2013-09-30 | $12.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2013-04-01 to 2013-09-30 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | $2.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2013-04-01 to 2013-09-30 | $103.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2013-04-01 to 2013-09-30 | $7.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | $0.15 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2013-04-01 to 2013-09-30 | $7.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 14,554,457 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2013-04-01 to 2013-09-30 | 14,612,288 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2013-04-01 to 2013-09-30 | $8.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2013-04-01 to 2013-09-30 | $1.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2013-09-30 | $100.0m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $289.5m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $75.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $189.6m | us-gaap:Liabilities |
| Long-term debt | at 2013-09-30 | $94.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-09-30 | $8.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2013-09-30 | $99.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,655 characters.

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our,” “we” or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2013 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 17, 2013, as amended by the Form 10-K/A filed with the SEC on July 29, 2013.

### Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements with respect to our future performance 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 bankruptcy of the Fenco Entities, concentration of sales to certain customers, changes in our relationship with any of our major customers, the increasing customer pressure for lower prices and more favorable payment and other terms, the increasing demands on our working capital, the significant strain on working capital associated with large Remanufactured Core inventory purchases from customers, our ability to obtain any additional financing we may seek or require, our ability to achieve positive cash flows from operations, potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal controls over financial reporting, lower revenues than anticipated from new and existing contracts, our failure to meet the financial covenants or the other obligations set forth in our credit agreements and the lenders’ refusal to waive any such defaults, any meaningful difference between projected production needs and ultimate sales to our customers, increases in interest rates, changes in the financial condition of any of our major customers, the impact of high gasoline prices, the potential for changes in consumer spending, consumer preferences and general economic conditions, increased competition in the automotive parts industry, including increased competition from Chinese and other offshore manufacturers, difficulty in obtaining Used Cores and component parts or increases in the costs of those parts, political, criminal or economic instability in any of the foreign countries where we conduct operations, currency exchange fluctuations, unforeseen increases in operating costs, the strategic cooperation agreement, and other factors discussed herein and in our other filings with the SEC.

### Management Overview

We are a leading manufacturer, remanufacturer, and distributor of alternators and starters for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications.

We began selling wheel hub assemblies and wheel hub bearings and we now carry over 800 stock keeping units of these parts. Currently, these parts are sold only to one of MPA’s major existing customers.

The aftermarket for automobile parts is divided into two markets. The first market is the do-it-yourself (“DIY”) market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second market is the professional installer market, commonly known as the do-it-for-me (“DIFM”) market. This market is serviced by the traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. Generally, the consumer in this channel is a professional parts installer.

Our products are distributed to both the DIY and DIFM markets and are distributed predominantly throughout North America. We sell our products to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their warranty replacement programs (“OES”). Demand and replacement rates for aftermarket remanufactured automobile parts generally increase with the age of vehicles and increases in miles driven.

The DIFM market is an attractive opportunity for growth. We are positioned to benefit from this market opportunity in two ways: (1) our auto parts retail customers are expanding their efforts to target the DIFM market and (2) we sell our products under private label and our own brand names directly to suppliers that focus on professional installers. In addition, we sell our products to OE manufacturers for distribution to the professional installer both for warranty replacement and their general aftermarket channels. We have been successful in growing sales to this market.

As a result of the deconsolidation of the discontinued subsidiary, we now have one reportable segment based on the way we manage, evaluate and internally report our business activities.

### Results of Operations for the Three Months Ended September 30, 2013 and 2012

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

The following table summarizes certain key operating data of our continuing operations for the periods indicated:

|  | Three Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Gross profit percentage | 29.8% | 34.9% |
| Cash flow provided by continuing operations | $10,592,000 | $10,946,000 |
| Finished goods turnover (annualized) (1) | 9.1 | 7.4 |
| Annualized return on equity (2) | 7.7% | 19.1% |

(1) Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of sales for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. We believe this provides a useful measure of our ability to turn our inventory into revenues.

(2) Annualized return on equity is computed as income from continuing operations for the fiscal quarter multiplied by 4 and dividing the result by beginning shareholders’ equity of continuing operations. Annualized return on equity measures our ability to invest shareholders’ funds profitably.

### Net Sales and Gross Profit

The following table summarizes net sales and gross profit of our continuing operations for the three months ended September 30, 2013 and 2012:

|  | Three Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net sales | $66,174,000 | $57,652,000 |
| Cost of goods sold | 46,469,000 | 37,556,000 |
| Gross profit | 19,705,000 | 20,096,000 |
| Cost of goods sold as a percentage of net sales | 70.2% | 65.1% |
| Gross profit percentage | 29.8% | 34.9% |

*Net Sales*. Our net sales for the three months ended September 30, 2013 increased by $8,522,000, or 14.8%, to $66,174,000 compared to net sales for the three months ended September 30, 2012 of $57,652,000. The increase in net sales was due primarily to sales of wheel hub assemblies and wheel hub bearings to one of our major existing customers. We began selling these products in June 2013.

*Cost of Goods Sold/Gross Profit.* Our cost of goods sold as a percentage of net sales increased during the three months ended September 30, 2013 to 70.2% from 65.1% for the three months ended September 30, 2012, resulting in a corresponding decrease in our gross profit to 29.8% for the three months ended September 30, 2013 from 34.9% for the three months ended September 30, 2012. Our gross profit was negatively impacted by lower gross margins on wheel hub assemblies and wheel hub bearings which we began selling in June 2013. In addition, the gross profit for the prior year three months ended September 30, 2012 had a less than normal cost of manufacturing resulting in higher gross margin during the prior year period.

### Operating Expenses

The following table summarizes operating expenses of our continuing operations for the three months ended September 30, 2013 and 2012:

|  | Three Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| General and administrative | $8,706,000 | $4,392,000 |
| Sales and marketing | 2,143,000 | 1,724,000 |
| Research and development | 398,000 | 461,000 |
| **Percent of net sales** |  |  |
| General and administrative | 13.2% | 7.6% |
| Sales and marketing | 3.2% | 3.0% |
| Research and development | 0.6% | 0.8% |

*General and Administrative.* Our general and administrative expenses for the three months ended September 30, 2013 were $8,706,000, which represents an increase of $4,314,000, or 98.2%, from general and administrative expenses for the three months ended September 30, 2012 of $4,392,000. The increase in general and administrative expenses was primarily due to (i) $2,458,000 of increased loss recorded due to the change in the fair value of the warrant liability, (ii) a loss of $100,000 recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts compared to a gain of $431,000 recorded during the three months ended September 30, 2012, (iii) $276,000 of increased salaries and wages, (iv) $181,000 of increased fees for professional services, and (v) $107,000 of increased share-based compensation expense. In addition, general and administrative expenses increased during the three months ended September 30, 2013 due to $692,000 of legal and other professional services expenses related to the discontinued subsidiary.

*Sales and Marketing*. Our sales and marketing expenses for the three months ended September 30, 2013 increased $419,000, or 24.3%, to $2,143,000 from $1,724,000 for the three months ended September 30, 2012. The increase was due primarily to (i) $129,000 of increased commissions, (ii) $102,000 of increased trade show expense, (iii) $67,000 of increased employee-related expenses, and (iv) $62,000 of increased consulting fees.

*Research and Development*. Our research and development expenses decreased by $63,000, or 13.7%, to $398,000 for the three months ended September 30, 2013 from $461,000 for the three months ended September 30, 2012. The decrease was due primarily to $65,000 of decreased supplies expense.

### Interest Expense

*Interest Expense.* Our interest expense for the three months ended September 30, 2013 increased $1,570,000, or 50.8%, to $4,663,000 from $3,093,000 for the three months ended September 30, 2012. Our prior year interest expense reflects $1,273,000 of interest income in connection with the long-term note receivable from the discontinued subsidiary. The remaining increase in interest expense was due primarily to interest on outstanding Obligations to the Supplier, which was paid in full on August 26, 2013.

### Provision for Income Taxes

*Income Tax*. Our income tax expense from continuing operations was $1,631,000, or the effective tax rate of 43.0%, and $3,923,000, or the effective tax rate of 37.6% during the three months ended September 30, 2013 and 2012, respectively. The income tax rates for both periods were higher than the federal statutory rate primarily due to state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions. In addition, our income tax rate for the three months ended September 30, 2013 was impacted by the non-deductible expenses in connection with the fair value adjustments on the warrants.

### Income (Loss) from Discontinued Operations

*Income (Loss) from Discontinued Operations*. In connection with the deconsolidation of the discontinued subsidiary in June 2013, the prior year losses of $15,436,000 for the three months ended September 30, 2012, are reflected as a loss from discontinued operations.

### Results of Operations for the Six Months Ended September 30, 2013 and 2012

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

The following table summarizes certain key operating data of our continuing operations for the periods indicated:

|  | Six Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Gross profit percentage | 30.7% | 33.4% |
| Cash flow provided by continuing operations | $7,520,000 | $340,000 |
| Finished goods turnover (annualized) (1) | 7.7 | 7.2 |
| Annualized return on equity (2) | 4.0% | 13.0% |

(1) Annualized finished goods turnover for each six month period is calculated by multiplying cost of sales for each six month period by 2 and dividing the result by the average between beginning and ending non-core finished goods inventory values for each six month period. We believe this provides a useful measure of our ability to turn our inventory into revenues.

(2) Annualized return on equity is computed as income from continuing operations for the each six month period multiplied by 2 and dividing the result by beginning shareholders’ equity of continuing operations. Annualized return on equity measures our ability to invest shareholders’ funds profitably.

### Net Sales and Gross Profit

The following table summarizes net sales and gross profit of our continuing operations for the six months ended September 30, 2013 and 2012:

|  | Six Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net sales | $116,419,000 | $104,451,000 |
| Cost of goods sold | 80,700,000 | 69,536,000 |
| Gross profit | 35,719,000 | 34,915,000 |
| Cost of goods sold as a percentage of net sales | 69.3% | 66.6% |
| Gross profit percentage | 30.7% | 33.4% |

*Net Sales*. Our net sales for the six months ended September 30, 2013 increased by $11,968,000, or 11.5%, to $116,419,000 compared to net sales for the six months ended September 30, 2012 of $104,451,000. The increase in net sales was due primarily to sales of wheel hub assemblies and wheel hub bearings to one of our major existing customers. We began selling these products in June 2013. In addition, our net sales of alternators and starters to our existing customers increased during the six months ended September 30, 2013 compared to the same period of the prior year.

*Cost of Goods Sold/Gross Profit.* Our cost of goods sold as a percentage of net sales increased during the six months ended September 30, 2013 to 69.3% from 66.6% for the six months ended September 30, 2012, resulting in a corresponding decrease in our gross profit to 30.7% for the six months ended September 30, 2013 from 33.4% for the six months ended September 30, 2012. Our gross profit was negatively impacted by lower gross margin on wheel hub assemblies and wheel hub bearings which we began selling in June 2013.

### Operating Expenses

The following table summarizes operating expenses of our continuing operations for the six months ended September 30, 2013 and 2012:

|  | Six Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| General and administrative | $18,338,000 | $10,306,000 |
| Sales and marketing | 3,874,000 | 3,496,000 |
| Research and development | 947,000 | 897,000 |
| **Percent of net sales** |  |  |
| General and administrative | 15.8% | 9.9% |
| Sales and marketing | 3.3% | 3.3% |
| Research and development | 0.8% | 0.9% |

*General and Administrative.* Our general and administrative expenses for the six months ended September 30, 2013 were $18,338,000, which represents an increase of $8,032,000, or 77.9%, from general and administrative expenses for the six months ended September 30, 2012 of $10,306,000. The increase in general and administrative expenses was primarily due to (i) $4,018,000 of increased loss recorded due to the change in the fair value of the warrant liability, (ii) a loss of $833,000 recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts compared to a gain of $340,000 recorded during the six months ended September 30, 2012, (iii) $583,000 of increased legal fees, (iv) $278,000 of increased salaries and wages, (v) $227,000 of increased consulting expenses primarily related to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and (vi) $217,000 of increased share-based compensation expense. These increases were partly offset by $750,000 of decreased bonus expense due to the payment of one-time awards under our Chief Executive Officer’s new employment agreement during the six months ended September 30, 2012. In addition, general and administrative expenses increased during the six months ended September 30, 2013 due to $1,810,000 of legal and professional services expenses related to the discontinued subsidiary.

*Sales and Marketing*. Our sales and marketing expenses for the six months ended September 30, 2013 increased $378,000, or 10.8%, to $3,874,000 from $3,496,000 for the six months ended September 30, 2012. The increase was due primarily to (i) $208,000 of increased commissions and (ii) $135,000 of increased trade show expense.

*Research and Development*. Our research and development expenses increased by $50,000, or 5.6%, to $947,000 for the six months ended September 30, 2013 from $897,000 for the six months ended September 30, 2012. The increase was due primarily to $75,000 of increased consulting fees partly offset by $33,000 of decreased supplies expense.

### Interest Expense

*Interest Expense.* Our interest expense for the six months ended September 30, 2013 increased $2,599,000, or 43.4%, to $8,588,000 from $5,989,000 for the six months ended September 30, 2012. Our prior year interest expense reflects $2,169,000 of interest income in connection with the long-term note receivable from the discontinued subsidiary. In addition, the increase in interest expense was due primarily to increased interest on outstanding Obligations to the Supplier, which was paid in full on August 26, 2013 and increased outstanding loan balances partly offset by lower discount rates on factored receivables.

### Provision for Income Taxes

*Income Tax*. Our income tax expense from continuing operations was $1,705,000, or the effective tax rate of 42.9%, and $5,357,000, or the effective tax rate of 37.7% during the six months ended September 30, 2013 and 2012, respectively. The income tax rates for both periods were higher than the federal statutory rate primarily due to state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions. In addition, our income tax rate for the six months ended September 30, 2013 was impacted by the non-deductible expenses in connection with the fair value adjustments on the warrants.

### Income (Loss) from Discontinued Operations

*Income (Loss) from Discontinued Operations.* Our income from discontinued operations was $100,877,000 during the six months ended September 30, 2013 compared to a loss from discontinued operations of $27,665,000 for the six months ended September 30, 2012. The income from discontinued operations during the six months ended September 30, 2013 consists of (i) a $118,095,000 gain on the deconsolidation of the discontinued subsidiary, (ii) a loss of approximately $20,464,000 in connection with the guarantee of obligations to certain suppliers of the discontinued subsidiary, and (iii) losses of approximately $5,910,000 incurred by the discontinued subsidiary from April 1, 2013 to May 31, 2013. In addition, we recorded income tax benefits of $9,156,000 during the six months ended September 30, 2013.

### Liquidity and Capital Resources

### Overview

At September 30, 2013, we had working capital of $24,595,000, a ratio of current assets to current liabilities of 1.3:1, and cash of $23,549,000, compared to working capital from our continuing operations of $32,676,000, a ratio of current assets to current liabilities of 1.5:1, and cash of $19,346,000 at March 31, 2013.

During the six months ended September 30, 2013, we used cash generated from (i) the use of our receivable discount programs with certain of our major customers, (ii) from operations, including an income tax refund of $7,000,000, and (iii) additional borrowing under our term loan which was primarily used to pay all of our outstanding liabilities, including interest, under the Guaranty. In addition, we used cash to build up our long-term core inventory, repay our term loan, and pay for capital expenditure obligations.

We believe our cash on hand, short-term investments, use of receivable discount programs with certain of our major customers, amounts available under our credit agreement, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, capital lease commitments, and capital expenditure obligations over the next twelve months.

### Cash Flows

Net cash provided by operating activities from continuing operations was $7,520,000 and $340,000 during the six months ended September 30, 2013 and 2012, respectively. The significant changes in our operating activities from continuing operations were due primarily to (i) the pay down of accounts payable balances in the prior year which were incurred in connection with the inventory provided to the discontinued subsidiary during fiscal 2012, (ii) the receipt of an income tax refund of $7,000,000, and (iii) a less significant decrease in accounts receivable during the six months ended September 30, 2013 compared to the same period of the prior year.

Net cash used in investing activities of continuing operations was $1,501,000 and $1,437,000 during the six months ended September 30, 2013 and 2012, respectively, and primarily related to the purchase of office equipment and equipment for our manufacturing and warehousing facilities.

Net cash provided by financing activities of continuing operations was $18,082,000 and $23,022,000 during the six months ended September 30, 2013 and 2012, respectively. This change was due mainly to $20,000,000 of additional borrowing under the Financing Agreement partly offset by the repayment of our term loans during the six months ended September 30, 2013 compared to $10,000,000 of additional borrowings under the Financing Agreement and $13,970,000 of net proceeds received from our private placement during the six months ended September 30, 2012.

### Capital Resources

#### Debt

We have the following outstanding credit agreements.

#### Financing Agreement

We are party to the Financing Agreement, which consists of the Term Loans and the Revolving Loans. The Loans mature on January 17, 2017. The lenders hold a security interest in substantially all of our assets.

The Term Loans required quarterly principal payments of $600,000 per quarter beginning April 1, 2013, increasing to $1,350,000 on October 1, 2013 until the final maturity date. The Term Loans bear interest at rates equal to, at our option, either LIBOR plus 8.5% or a base rate plus 7.5%.

In June 2013, we entered into the Sixth Amendment, under the terms of which the agents and lenders agreed to waive any event of default that would otherwise arise under the Financing Agreement due to the qualification in the opinion by our certified public accountants with respect to the financial statements for the fiscal year ended March 31, 2013. In addition, the Sixth Amendment (i) added a reporting requirement with respect to our liquidity levels and certain inventory purchases and (ii) added a financial covenant under which we must maintain the following levels of liquidity on the following dates unless otherwise consented to by the lenders: on June 28, 2013, an aggregate amount of at least $25,000,000, subject to certain adjustments; on July 31, 2013, an aggregate amount of at least $26,000,000, subject to certain adjustments; and on August 30, 2013, an aggregate amount of at least $27,000,000, subject to certain adjustments. We were in compliance with these minimum liquidity requirements at each date.

In August 2013, we entered into the Seventh Amendment, pursuant to which (i) we borrowed an additional $20,000,000 in term loans, (ii) modified certain financial covenants, and (iii) lenders provided consent to the payment of certain subordinated debt with respect to the guaranty as described below under Strategic Cooperation Agreement. Among other things, the Seventh Amendment also requires quarterly principal payments of $2,100,000 beginning on October 1, 2013 until the final maturity date.

The Financing Agreement, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio, a minimum fixed charge coverage ratio, and minimum consolidated earnings before interest, income tax, depreciation and amortization expenses (“EBITDA”). We were in compliance with all financial covenants under the Financing Agreement as of September 30, 2013.

The following table summarizes the financial covenants required under the Financing Agreement as of September 30, 2013:

|  | Calculation as of September 30, 2013 | Financial covenants required per the Financing Agreement |
| --- | ---: | ---: |
| Maximum senior leverage ratio | 2.38 | 3.55 |
| Minimum fixed charge coverage ratio | 1.89 | 1.05 |
| Minimum consolidated EBITDA | $43,448,000 | $31,000,000 |

There was no outstanding balance on the Revolving Loans at September 30, 2013 and March 31, 2013. As of September 30, 2013, $16,225,000 was available under the Revolving Loans. We had reserved $476,000 of the Revolving Loans for standby letters of credit for workers’ compensation insurance and $3,148,000 for commercial letters of credit as of September 30, 2013.

#### Strategic Cooperation Agreement

In August 2012, we entered into the Agreement with the Supplier and FAPL. Under the terms of the Agreement, the Supplier agreed to provide a revolving credit line for purchases of automotive parts and components by the discontinued subsidiary in an aggregate principal amount not to exceed $22,000,000, of which $2,000,000 would only be available for accrued interest and other amounts payable. Payment for all purchases became due and payable 120 days after the date of the bill of lading. Any amounts remaining unpaid following the due date would bear interest at a rate of 1% per month. The Fenco Credit Line would have matured on July 31, 2017. Pursuant to the Guaranty, the Obligations under the Agreement were guaranteed by us and certain of our subsidiaries.

On July 9, 2013, we received notice from the Supplier that the filing of the voluntary petition for relief under Chapter 7 of Title 11 of the United States Code in the U.S. Bankruptcy Court for the District of Delaware by the Fenco Entities constituted an “Event of Default” under the Agreement.As a result of the Event of Default, all amounts outstanding under the Agreement together with all accrued interest and all other amounts payable automatically became immediately due and payable subject to the terms of the Guaranty and a subordination agreement with the lender under the Financing Agreement. In addition, subject to certain adjustments, the interest rate applicable to all amounts remaining unpaid will increase, to the extent permitted by law, to 1.25% per month, compounding monthly, on December 10, 2013, and to 1.50% per month, compounding monthly, on June 10, 2014.

On August 26, 2013, in connection with the Seventh Amendment, we paid $20,843,000 to the Supplier for payments of all our outstanding liabilities, including interest payments, under the Guaranty.

In connection with the Agreement and the Guaranty, we also issued the Supplier Warrant to the Supplier to purchase up to 516,129 shares of our common stock for an initial exercise price of $7.75 per share exercisable at any time after two years from August 22, 2012 and on or prior to September 30, 2017. The exercise price is subject to adjustments, among other things, for sales of common stock by us at a price below the exercise price. The fair value of the Supplier Warrant using the Monte Carlo simulation model was $4,561,000 and $1,639,000 at September 30, 2013 and March 31, 2013, respectively. This amount is recorded as a warrant liability which is included in other liabilities in the consolidated balance sheets at September 30, 2013 and March 31, 2013. During the three months ended September 30, 2013 and 2012, a loss of $1,782,000 and $193,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability. During the six months ended September 30, 2013 and 2012, a loss of $2,922,000 and $193,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.

#### Receivable Discount Programs

We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allows us to accelerate collection of customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands or if the discount period is extended to reflect more favorable payment terms to customers.

The following is a summary of the receivable discount programs from continuing operations:

|  | Six Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Receivables discounted | $100,076,000 | $98,974,000 |
| Weighted average days | 335 | 338 |
| Annualized weighted average discount rate | 2.4% | 2.7% |
| Amount of discount as interest expense | $2,188,000 | $2,534,000 |

#### Off-Balance Sheet Arrangements

At September 30, 2013, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

### Capital Expenditures and Commitments

### Capital Expenditures

Our capital expenditures were $1,483,000 and $1,415,000 for the six months ended September 30, 2013 and 2012, respectively. Our capital expenditures were primarily related to the purchase of office equipment and equipment for our manufacturing and warehousing facilities. We expect our fiscal year 2014 capital expenditures to be in the range of $2,000,000 to $3,000,000. We expect to use our working capital and incur additional capital lease obligations to finance these capital expenditures.

### Related Party Transactions

Our related party transactions primarily consist of employment and director agreements and stock option agreements. Our related party transactions have not changed since March 31, 2013, except as described below.

During the six months ended September 30, 2013, we paid $304,000 to Houlihan Lokey Howard & Zukin Capital, Inc. in connection with the restructuring of the discontinued operation. A member of our Board of Directors, is a Co-President and Global Co-Head of Corporate Finance for Houlihan Lokey Howard & Zukin Capital, Inc.

### Subsequent Events

On October 9, 2013, we entered into the Option Purchase Agreement with Mr. Joffe, pursuant to which, among other things, we purchased Mr. Joffe’s option to purchase 100,000 shares of our common stock which were originally granted on January 14, 2004 under our1994 Stock Option Plan at a net purchase price of $626,500. This payment represents the difference between $12.66, the closing price per share of our common stock on the measurement date under the Option Purchase Agreement, and the exercise price per share of the stock option, multiplied by the total number of shares under Mr. Joffe’s stock option, and less an administrative fee.

In connection with the Option Purchase Agreement, we entered into the Eighth Amendment to the Financing Agreement, which among other things, permitted us to purchase Mr. Joffe’s stock options pursuant to the Option Purchase Agreement.

On November 6, 2013 we entered into the Ninth Amendment with a syndicate of lenders party thereto, Cerberus, as collateral agent and PNC Bank, National Association, as administrative agent. Pursuant to the terms of the Ninth Amendment, (i) the agents and lenders waived a requirement for us to pay down loans with our receipt of certain state tax refunds, (ii) the Revolving Credit Commitment was increased by $10,000,000 to $30,000,000, (iii) the Term Loan Commitment was decreased by $10,000,000 to $95,000,000, (iv) the final maturity date was extended to November 6, 2018, (v) we have the right, subject to meeting certain conditions, to repurchase up to $10,000,000 of our equity interests and (vi) certain other amendments and modifications were made to the Financing Agreement, in the form of an amended and restated financing agreement in the form attached to the Ninth Amendment.

Among other things, the Amended Term Loans require quarterly principal payments of $2,100,000 and bear interest at rates equal to, at our option, either LIBOR (subject to a 1.50% LIBOR floor) plus 5.25% or a reference rate plus 4.25%. The Amended Revolving Loans bear interest at rates equal to, at our option, either LIBOR plus 2.50% or a reference rate plus 1.00%, and are subject to borrowing base restrictions based on the lesser of (i)(a) specified percentages of our eligible accounts receivable and eligible US and Mexican inventory, minus (b) reserves and (ii)(a) our trailing twelve month Consolidated EBITDA times the Applicable EBITDA Multiple (as such terms are defined in the A&R Financing Agreement), minus (b) the aggregate outstanding principal amount of Term Loans and capitalized lease obligations. The terms “reference rate” and “Eurodollar rate” have meanings customary for financings of this type. Fees payable for unused portions of the revolving line of credit will be 0.50% per annum.

The Amended Revolving Loans may, at our option, be prepaid in whole or in part. We may reduce or terminate the commitments of the lenders to make the Amended Revolving Loans or prepay in whole or in part, the Amended Term Loans, but such prepayments are subject to a prepayment penalty of (i) 3.00% times the sum of the reduction of the revolving credit commitment plus the principal amount of any prepayment of the term loan from the Ninth Amendment Effective Date to January 18, 2014 and (ii) 2.00% times the sum of the reduction of the revolving credit commitment plus the principal amount of any prepayment of the term loan from January 19, 2014 to January 18, 2015. Notwithstanding the foregoing, we have the right to prepay up to $10,000,000 of the Amended Term Loans without any prepayment penalty if such payment is made within 120 days of the Ninth Amendment Effective Date.

The Amended Term Loans and the Amended Revolving Loans are subject to mandatory prepayment under certain circumstances, with specified exceptions, from the proceeds of the sale of assets and issuance of equity, certain insurance and condemnation proceeds, other extraordinary receipts and a percentage of excess cash flow.

Our obligations pursuant to the A&R Financing Agreement will be guaranteed by any of our future domestic subsidiaries. We have granted a security interest in substantially all of our assets (including the stock of certain of our subsidiaries) to secure our obligations pursuant to a Security Agreement and certain other related documents.

The A&R Financing Agreement contains various affirmative and negative covenants, including limitations on liens, indebtedness, mergers, investments, sale and leaseback transactions, capital expenditures, operating lease liabilities, restricted payments, affiliate transactions and consignments. In addition, the A&R Financing Agreement requires us to maintain a maximum senior leverage ratio (calculated as a ratio of consolidated funded debt to consolidated EBITDA), a minimum fixed charge coverage ratio and a minimum Consolidated EBITDA.

Failure to comply with these covenants and restrictions could result in an event of default under the A&R Financing Agreement. In such an event, we could not request borrowings under the revolving facility, and all amounts outstanding under the A&R Financing Agreement, together with accrued interest, could then be declared immediately due and payable.

### Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2013, which was filed on June 17, 2013, except as discussed below.

### New Accounting Pronouncements

#### Accumulated other comprehensive income

In the first quarter of fiscal 2014, we adopted an accounting standard issued by the FASB that requires entities to provide details of reclassifications in the disclosure of changes in AOCI balances. In addition, for significant items reclassified out of AOCI in the fiscal quarter, entities must provide information about the effects on net income together, in one location, on the face of the statement where net income is presented, or as a separate disclosure in the notes. For items not reclassified to net income in their entirety in the fiscal quarter, entities must cross-reference to the note where additional details about the effects of the reclassifications are disclosed. The adoption of this update did not impact our financial position, results of operations or cash flows.

#### Income Taxes

In July 2013, the FASB issued guidance that requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law and the Company intends to use the deferred tax asset for that purpose. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. We are currently evaluating the impact the adoption of this standard will have on our financial position, results of operations or cash flows.

## Market risk

As filed, 243 characters.

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2013, which was filed on June 17, 2013.

## Controls and procedures

As filed, 3,202 characters.

### Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that MPA’s disclosure controls and procedures were effective as of September 30, 2013.

### Inherent Limitations Over Internal Controls

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates

and judgments as required.

Internal control over financial reporting includes those policies and procedures that:

1\. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

2\. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

3\. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

### Changes in Internal Control Over Financial Reporting

There were no changes in MPA’s internal control over financial reporting during the second quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, MPA’s internal control over financial reporting.

## Risk factors

As filed, 791 characters.

In addition to the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed on June 17, 2013.

### There may be claims filed against us in connection with the bankruptcy proceedings involving the Fenco Entities

There may be claims filed against us by the trustee and some or all of the creditors in connection with the bankruptcy proceedings involving the Fenco Entities. We do not know what forms these claims, if any, may take, the basis on which these claims may be asserted, or their ultimate resolution. Any litigation to determine the validity of these claims, regardless of their merit or resolution, may be costly and time consuming and divert the efforts and attention of our management from our business strategy.

Filed Nov 12, 2013.
Source: SEC EDGAR, the filing index for accession 0001140361-13-041801. Last ingested by Listed: Oct 24, 2026, 15:00 ET. No prices; not investment advice.