e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED MARCH 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD
FROM TO |
Commission File No. 0-23538
MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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New York
(State or other jurisdiction of
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11-2153962
(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2929 California Street, Torrance, California
(Address of principal executive offices)
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90503
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 o No þ
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value, calculated on the basis of the price at which the stock was last sold
on the Pink Sheets, of Common Stock held by non-affiliates of the Registrant as of September 30,
2004 was approximately $60,513,000.
There were 8,208,955 shares of Common Stock outstanding at September 1, 2005.
DOCUMENTS INCORPORATED BY REFERENCE: None
MOTORCAR PARTS OF AMERICA, INC.
Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “the
Company,” “we,” “us,” and “our” refer to Motorcar Parts of America, Inc. and its subsidiaries. This
Form 10-K may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve risks and uncertainties. Our actual results may differ significantly from the
results discussed in any forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth under “Item 1. Business,” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as
within this Form 10-K generally.
We file annual, quarterly and special reports, proxy statements and other information with the
SEC. Our SEC filings are available free of charge to the public over the Internet at the SEC’s
website at http://www.sec.gov. Our SEC filings are also available on our website
http://www.motorcarparts.com. You may also read and copy any document we file with the SEC at its
public reference rooms in Washington, D.C., New York, NY and Chicago, IL. Please call the SEC at
(800) SEC-0330 for further information on the public reference rooms.
Item 1 Business
General
Motorcar Parts of America, Inc. and its subsidiaries remanufacture and distribute alternators
and starters for import and domestic cars and light trucks. These replacement parts are sold for
use on vehicles after initial vehicle purchase and are sold throughout the United States to some of
the nation’s largest chains of retail automotive stores, including AutoZone, O’Reilly Automotive,
and CSK Automotive. Our marketing and sales efforts are geared toward both the automotive chain
stores and the traditional warehouse distributors. We believe that chain stores represent the
fastest growing segment of the automotive after-market industry, which is consistent with our
existing targeted customers. During fiscal 2005, 2004 and 2003, approximately 94%, 96% and 99%,
respectively, of our sales were to automotive chain stores consisting of approximately 6,000
stores. We also supply remanufactured alternators and starters to General Motors that are
distributed through GM’s Service Parts Operation to warehouse distributors and smaller retail
chains in the United States and Canada.
We have remanufacturing, warehousing and shipping/receiving operations for alternators and
starters in California, Singapore and Malaysia, and in June 2005 we began limited remanufacturing
in Mexico. In addition, we opened a warehouse distribution facility in Nashville, Tennessee during
August 2005. Because our foreign operations experience lower production costs for the same
remanufacturing process, we expect to continue to grow the portion of our remanufacturing
operations that is conducted outside the United States.
We have sought to reposition ourselves as a value-added provider of replacement parts and to
strengthen our relationships with key customers in this market. In January 2005, we were awarded a
five-year contract to supply one of the largest automobile manufacturers in the world with a new
line of remanufactured alternators and starters. This line of remanufactured alternators and
starters covers substantially all domestic and import makes and models of cars and light trucks and
will be distributed in the United States and Canada. In March 2005, we entered into a new
agreement with one of our major customers that extended our designation as this customer’s
exclusive supplier of remanufactured import alternators and starters from February 28, 2008 to
December 31, 2012. While these strengthened customer relationships improve our overall business
base, these arrangements require a substantial amount of working capital to meet ramped up
production demands and typically include marketing and other allowances that meaningfully limit the
near-term revenues and associated cash flow from these new or expanded arrangements.
Presently, we believe that automotive retail chains control approximately 43% of the
automotive after-market for remanufactured alternators and starters. We have a strong presence in
the retail aftermarket. Of the remaining 57%, 45% is controlled by traditional distributors,
mostly focused on the professional installer market. We believe we are well-positioned to
penetrate this segment of the market through our affiliation with General Motors’ Service Parts
Operation which is currently supplying a portion of this market and through the launch of our
“Quality-Built"™ line of alternators and starters targeted to the traditional market. In addition,
we see potential growth through the efforts
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that our existing retail chain store customers are
making to target the professional installer marketplace by providing products directly to those
professionals. Though the traditional marketplace now represents only a small portion of our
business, management believes the traditional channels represent a growth opportunity for us.
The Automotive After-Market Industry
The automotive after-market for alternators and starters has grown in recent years. We
believe that this growth has resulted from, among other trends, (1) the increased number of
vehicles in use, (2) the increased number of miles driven each year and (3) the growth of vehicles
at their prime repair age of seven years and older. Conversely, higher gasoline prices over a
sustained period may negatively affect the after-market. Based upon market information it has
reviewed, management believes the average age of vehicles in operation in the United States is
approximately 9 years.
Two distinct groups of end-users buy replacement automotive parts: (1) individual
“do-it-yourself” “DIY” consumers; and (2) professional “do-it-for-me” “DIFM” installers. The
individual consumer market is typically supplied through retailers and retail arms of warehouse
distributors. Automotive repair shops generally purchase parts through local independent parts
wholesalers, through national warehouse distributors and, at a growing rate, through commercial
account programs with automotive parts retailers aimed at servicing the professional DIFM
installers. We believe we are well-positioned for potential growth in both the DIY market through
increased sales to our existing retail chain store customers and the DIFM market through the
efforts of automotive parts retailers to expand their sales to professional installers and through
our sales directly into the traditional warehouse distributors.
The increasing complexity of cars and light trucks and the number of different makes and
models of these vehicles have resulted in a significant increase in the number of different
alternators and starters required to service imported and domestic cars and light trucks. During
fiscal year 2005, we carried approximately 2,500 SKUs.
The technology used in our products, particularly alternators, has become more advanced in
response to the installation in vehicles with an increasing number of electrical components such as
navigation systems, steering wheel-mounted electronic controls, keyless entry devices, cellular
telephones, power windows and mirrors, heated rear windows and seats, high-powered radio and stereo
systems and audio/visual equipment. As a result of this increased electrical demand, alternators
are more technologically advanced and per unit sales prices have increased accordingly.
Remanufacturing, which involves the reuse of parts which might otherwise be discarded, creates
a supply of parts at a lower cost to the end user than newly manufactured parts, and makes
available automotive parts which are no longer being manufactured. Remanufacturing benefits
automotive repair shops by relieving them of the need to rebuild worn parts on an individual basis
and conserves material which would otherwise be used to manufacture new replacement parts. Our
remanufactured parts are sold at competitively lower prices than most new replacement parts.
Company Products
Our products principally consist of remanufactured replacement alternators and starters for
both imported and domestic cars and light trucks. During fiscal 2005, 2004 and 2003, sales of
replacement alternators and starters constituted 99% of total sales. Alternators and starters are
non-elective replacement parts in all makes and models of vehicles and are required for a vehicle
to operate. Approximately 98% of our products are sold for resale under customer private labels,
with the remaining 2% being sold under our brand name, which includes the use of our registered
trademark, “Quality Built to Last”®. Customers that sell our products under private label include
AutoZone, CSK Automotive, O’Reilly Automotive, and General Motors.
Our alternators and starters are produced to meet or exceed automobile manufacturer
specifications. We remanufacture a broad assortment of alternators and starters in order to
accommodate the proliferation of applications and products in use. Currently, we provide a full
line of approximately 1,560 different alternators and 940 different starters. Our alternators and
starters are provided for virtually all foreign and domestic vehicle manufacturers.
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Customers and Customer Concentration
Our products are marketed throughout the United States and Canada. Our customers consist of
three of the largest retail automotive chain stores along with small to medium-sized automotive
warehouse distributors. Currently, we service automotive retail chain store accounts that have
approximately 6,000 retail outlets. We also sell our products in Canada and the United States via
the distribution network of one of the largest automobile manufacturers in the world and have
entered into a new agreement with this enterprise to provide this customer with a new line of
remanufactured alternators and starters that will be sold in both the United States and Canada.
We are substantially dependent upon sales to the major customers. For fiscal 2005, 2004 and
2003, sales to our three largest customers, AutoZone, O’Reilly Automotive and CSK Automotive,
constituted approximately 93%, 93% and 91%, respectively, of our total sales. Any meaningful
reduction in the level of sales to any of these customers, deterioration of any customer’s
financial condition or the loss of a customer could have a materially adverse impact upon us. In
addition, the concentration of our sales and the competitive environment in which we operate has
increasingly limited our ability to negotiate favorable prices and terms for our products. Because
of the very competitive nature of the market for remanufactured starters and alternators and the
limited number of customers for these products, our customers have increasingly sought and obtained
price concessions, significant marketing allowances and more favorable payment terms. The
increased pressure we have experienced from our customers may increasingly and adversely impact our
profit margins in the future.
Multi-Year Exclusive Arrangements and Inventory Transactions
In May 2004, we entered into an agreement with a large customer to become its primary supplier
of import alternators and starters for its eight distribution centers. As part of this four year
agreement, we entered into a pay-on-scan (POS) arrangement with the customer. Under this
arrangement, the customer is not obligated to purchase the POS merchandise shipped to the customer
until that merchandise is ultimately sold to the end user. As part of this agreement, we also
purchased $24,130,000 of the customer’s then-current inventory of import starters and alternators
transitioning to the POS program at the price the customer originally paid for this inventory. We
are paying for this inventory over a 24-month period that began in the first quarter of fiscal
2005, without interest, through the issuance of monthly credits against receivables generated by
sales to the customer. The contract requires that we continue to meet our historical performance
and competitive standards. We have also agreed to work with the customer to transition all of the
products we sell to this customer to the POS arrangement by April 2006. If that is not
accomplished, the contract requires us to acquire an additional $24 million of the customer’s
inventory to be included in the expanded POS arrangement. We will then provide this customer with
an additional $24 million of credits, to be taken in equal monthly installments over a 24-month
period beginning in May 2006, and the contract will be extended for an additional two years through
May 2010.
In January 2005, we were awarded a contract to supply one of the largest automobile
manufacturers in the world with a new line of remanufactured alternators and starters covering
substantially all domestic and import makes and models of cars and light trucks for distribution in
the United States and Canadian markets. As part of the agreement, we agreed to grant the customer
credits of $6,000,000 which are expected to be issued during fiscal 2006. Because sales to this
customer during the initial term of this agreement have been below expectations, the inventory
buildup we made in connection with this new agreement has put an additional strain on our working
capital. Under the agreement we must continue to meet performance, quality and fulfillment
requirements and provide marketing support to this customer. The agreement also includes
provisions that are standard in this manufacturer’s vendor agreements, including a provision
granting the manufacturer the right to terminate the agreement at any time for any reason.
As of March 1, 2005, we entered into a new agreement with one of our major customers. As part
of this agreement, our designation as this customer’s exclusive supplier of remanufactured import
alternators and starters was extended from February 28, 2008 to December 31, 2012. In addition to
customary marketing allowances, we agreed to acquire the customer’s import alternator and starter
core inventory by issuing $10,300,000 of credits over a five-year period. The amount of credits to
be issued is subject to adjustment if our sales to the customer decrease in any quarter by more
than an agreed upon percentage. The customer is obligated to repurchase the cores in the
customer’s inventory upon termination of the agreement for any reason.
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As we issue credits to this customer over the five year period, we establish a long-term asset
account for the value of the core inventory estimated to be on hand with the customer and subject
to repurchase upon termination of the agreement, and reduce revenue by the amount by which the
credit exceeds the estimated core inventory value. As of March 31, 2005, the long-term asset
account was approximately $67,000. We will regularly review the long-term asset account for
impairment and make any necessary adjustment to the carrying value of this asset. Additionally, as
of the date of the new agreement, the unrecognized revenue from the under-return of cores from this
customer was $1,314,000, and the related cost of sales was $649,000. These amounts are being
deferred and amortized over the five year period that the credits are issued.
While these longer-term agreements strengthen our customer relationships and business base,
they result in a continuing concentration of our revenue sources among a few key customers and
require a significant amount of working capital to meet production demands. In addition, the
marketing and other allowances that we have typically granted our customers in connection with
these new or expanded relationships meaningfully limit the near-term revenues and associated cash
flow from these arrangements.
Operations of the Company
Cores
In our remanufacturing operations, we obtain used alternators and starters, commonly known as
“cores”, from our customers or core brokers. When needed for remanufacturing, the cores are
completely disassembled into component parts. Components which can be incorporated into the
remanufactured product are thoroughly cleaned, tested and refinished. All components known to be
subject to major wear and those components determined not to be reusable or repairable are replaced
by new components. The unit is then assembled in a work cell into a finished product. Inspection
and testing are conducted at multiple stages of the remanufacturing process, and each finished
product is inspected and tested on equipment designed to simulate performance under operating
conditions. Components of cores, which are not used by us in our remanufacturing process, are sold
as scrap.
The majority of the cores remanufactured by us are obtained from customers as trade-ins, which
are credited against accounts receivable. Our customers offer their consumers a credit to exchange
their used units at the time of purchase. We purchase approximately 15% of our cores in the open
market from core brokers who specialize in buying and selling cores. Although the open market is
not a primary source of cores, it does offer us a supplemental source for maintaining stock
balances. Other materials and components used in remanufacturing are purchased in the open market.
The ability to obtain cores of the types and quantities required by us is essential to our ability
to meet demand.
The price of a finished product sold to our customers is generally comprised of a separately
invoiced amount for the core included in the product (“core charge”) and an amount for
remanufacturing (“unit value”). In accordance with our net-of-core-value revenue recognition
policy, at the time a sale is recorded, we only recognize as revenue the unit value of the finished
product. We also record as inventory unreturned the standard cost of cores that are shipped to
customers and expected to be returned to us. During the twelve-month shipment/return cycle ending
on March 31, 2005, approximately 96% of the cores we shipped as part of finished goods were
returned to us. In fiscal 2005, we began to recognize revenue from the under-return of cores on a
quarterly basis. Previously, revenue from any under-returns of cores was recognized at the end of
our fiscal year and prior to the start of the next shipment/return cycle.
Production Process; Offshore Manufacturing
The initial step in our remanufacturing process begins with the receipt of cores. The cores
are assessed and evaluated for inventory control purposes and then sorted by part number. Each
core is completely disassembled into its fundamental components. The components are cleaned in a
process that employs customized equipment and cleaning materials in accordance with the required
specifications of the particular component.
After the cleaning process is complete, the component parts are inspected and tested as
prescribed by our QS-9000 approved quality control program, which is implemented throughout the
production process. (QS-9000 is an internationally recognized, world class, automotive quality
system.) Upon passage of all tests, which are monitored
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by designated quality control personnel,
the components are assembled into required units. Each fully assembled unit is then subjected to
additional testing to ensure performance and quality. Finished products are either stored in our
warehouse facility or packaged for immediate shipment. To maximize manufacturing efficiency, we
store component parts ready for assembly in our warehousing facilities. Our management information
systems, including hardware and software, facilitate the remanufacturing process from cores to
finished products.
We continue to explore opportunities for improving efficiencies in our manufacturing process.
In the last few years, we have reorganized our manufacturing processes to combine product families
with similar configurations into dedicated factory work cells. This manufacturing process, known
as lean manufacturing, replaced the more traditional assembly line approach we had previously
utilized and eliminated the need to move and track inventory throughout our remanufacturing
facility. This change impacted approximately 100% of our production volume in California and
Malaysia. Because of this “lean manufacturing” approach, we have significantly reduced the time it
takes to produce a finished product.
We also conduct business through two wholly owned foreign subsidiaries, MVR Products Pte. Ltd.
(“MVR”), which operates a shipping and receiving warehouse, testing facility and maintains office
space in Singapore, and Unijoh Sdn. Bhd. (“Unijoh”), which conducts remanufacturing operations in
Malaysia. To take further advantage of the production savings associated with manufacturing
outside the United States, we have established a 125,000-square foot remanufacturing facility in
Tijuana, Baja California, Mexico and began initial remanufacturing at this facility in June 2005.
These foreign operations are conducted with quality control standards similar to those currently
implemented at our remanufacturing facilities in Torrance. We believe that our foreign
subsidiaries’ operations are important because of the lower production costs experienced by these
entities for the same remanufacturing process, and we expect to continue to grow the portion of our
remanufacturing operations that is conducted outside the United States. The foreign subsidiaries
produced in fiscal 2005, 2004 and 2003 approximately 423,000, 211,000 and 160,000 units, or 15%, 9%
and 7%, respectively, of our total production for each of the last three years. We distribute
these units from our US facilities.
Rights of Return
Under the terms of certain agreements with our customers and general industry practice, our
customers, from time to time, may be allowed stock adjustments when their inventory of certain
product lines exceeds the anticipated sales to end-user customers. Stock adjustment returns are
not recorded until they are authorized by the Company and they do not occur at any specific time
during the year.
In addition to stock adjustment returns, we also allow our customers to return goods to us
that their end-user customers have returned to them. This general right of return is allowed
regardless of whether the returned item is defective. We seek to limit the aggregate of customer
returns, including slow moving and other inventory, to 20% of unit sales. We provide for such
anticipated returns of inventory in accordance with Statement of Financial Accounting Standards 48,
“Revenue Recognition When Right of Return Exists” by reducing revenue and cost of sales for the
unit value based on a historical return analysis and information obtained from customers about
current stock levels.
As is standard in the industry, we only accept returns from on-going customers. If a customer
ceases doing business with us, we have no further obligation to accept additional product returns
from that customer, and we do not accept any such returns. Similarly, we accept product returns
and grant appropriate credits from new customers from the time the new customer relationship is
established. This obligation to accept returns from new customers does not result in decreased
liquidity or increased expenses since we only accept one returned product for each unit sold to the
new customer.
For additional information, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operation — Critical Accounting Policies.”
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Sales, Marketing and Distribution
We market and distribute our products throughout North America. Our products are sold
principally under our customers’ private labels. Products are delivered directly to the chain’s
distribution centers which then deliver the merchandise directly to the retail stores for purchase
by consumers. During fiscal 2004, we expanded our sales efforts beyond automotive retail chains to
include the traditional warehouse distribution centers. We satisfy our customers’ needs for
special and timely products by producing individual units and shipping those units for overnight
delivery via our special order programs. We believe we have obtained significant marketing,
distribution and manufacturing efficiencies by focusing our sales efforts on automotive retail
store chains.
We publish for print and electronic distribution a catalog with part numbers and applications
of our alternators and starters, along with a detailed technical glossary and explanation database.
We believe that we maintain one of the market’s most extensive catalog and product identification
systems, offering one of the widest varieties of alternators and starters available in the market.
Included in sales are royalties we received from the license of our intellectual property
specifications for rotating electrical products (alternators and starters) that we developed over
many years.
Seasonality of Business
Due to the nature and design as well as the current limits of technology, alternators and
starters traditionally fail when operating in extreme conditions, especially during the summer
months, when the temperature typically increases over a sustained period of time and the
alternators are more apt to fail. Accordingly, the summer months typically result in an increase
in demand for our products. Similarly, during winter months and a period of sustained cold
weather, starters are more apt to fail and this also typically results in an increase in demand for
our products. Since alternators and starters are mandatory for the operation of the vehicle, they
require replacing immediately. As such, summer months tend to show an increase in overall volume -
particularly for alternators, and an increase in overall volume in the winter — particularly for
starters. A mild summer or winter can have a negative impact on our sales.
Competition
The automotive after-market industry for remanufacturers and rebuilders of alternators and
starters for imported and domestic cars and light trucks is highly competitive. Our direct
competitors include one other large remanufacturers as well as several medium-sized rebuilders and
a large number of small regional and specialty remanufacturers.
The reputation for quality and customer service that a supplier enjoys is a significant factor
in a purchaser’s decision as to which product lines to carry in the limited space available. We
believe that these factors favor our company, which provides quality replacement automotive
products, rapid and reliable delivery capabilities as well as promotional support. In this regard,
there is increasing pressure from customers, particularly the largest customers, for suppliers to
provide “just-in-time” delivery, which allows delivery on an as-needed basis to promptly meet
customer orders. We believe that our ability to provide “just-in-time” delivery distinguishes us
from many of our competitors and provides a competitive advantage that may represent a barrier to
entry to current or future competitors.
Price and payment terms are very important competitive factors. The concentration of our
sales among a small group of customers has increasingly limited our ability to negotiate favorable
terms for sales of our products. As such, we are pursuing other outlets to market our products.
For the most part, our products have not been patented nor do we believe that our products are
patentable. We will continue to attempt to protect our proprietary processes and other information
by relying on trade secret laws and non-disclosure and confidentiality agreements with certain of
our employees and other persons who have access to our proprietary processes and other information.
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Governmental Regulation
A significant amount of management’s time has been focused on responding to the questions and
comments that the Securities and Exchange Commission has raised with respect to our previously
filed financial reports. We have incurred significant general and administrative expenses in
connection with these ongoing efforts and the associated restatement of our financial statements.
In addition, the delays associated with the filing of our SEC reports have triggered defaults under
our bank agreement and impeded progress in our relations with our customers and other third
parties.
Our operations are subject to federal, state and local laws and regulations governing, among
other things, emissions to air, discharge to waters, and the generation, handling, storage,
transportation, treatment and disposal of waste and other materials. We believe that our business,
operations and facilities have been and are being operated in compliance in all material respects
with applicable environmental and health and safety laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. Potentially significant expenditures,
however, could be required in order to comply with evolving environmental and health and safety
laws, regulations or requirements that may be adopted or imposed in the future.
Employees
We have approximately 1,100 full-time employees in the United States, substantially all of
whom are located in Torrance, California. Of our U.S.-based employees, 56 are administrative
personnel and 17 are sales personnel. In addition, we employ approximately 230 people at our
wholly owned subsidiary companies in Singapore and Malaysia and approximately 110 people at our
newly-established remanufacturing facility in Mexico. None of our employees is a party to any
collective bargaining agreement. We have not experienced any work stoppages and consider our
employee relations to be satisfactory.
Evaluation of Strategic Options
We are continuing to evaluate strategic options that we might pursue to enhance shareholder
value. These could include an acquisition of another company or a sale of our company to a third
party. We have hired an investment-banking firm to assist us in these efforts, which are ongoing.
There is no assurance, however, that we will enter into any transaction as a result of our efforts
in this regard.
Item 2 Properties
We presently lease U.S.-based facilities in Torrance, California, Nashville, Tennessee and
Charlotte, North Carolina. In fiscal 2002 we completed the consolidation of our two Torrance
facilities into a single building aggregating approximately 227,000 square feet. As part of this
consolidation and renegotiation, we extended the lease term for an additional five years, through
March 31, 2007, with a base rent of $94,358 per month. We have also entered into an agreement to
lease an additional 4,005 square feet of office space adjacent to our current facility in Torrance,
California. This new lease was effective June 1, 2004, and has terms which coincide with our
current Torrance lease and a base rent of $3,400 per month.
We entered into an agreement to lease an additional 860 square feet of office space in
Nashville, Tennessee effective June 1, 2004. With this expansion, we now lease approximately 2,100
square feet at a base rent of $2,820 per month. This office is used to manage our purchasing
activities. Additionally, in April 2005, we entered in an agreement to lease approximately 82,600
square feet of warehouse and office space in Nashville, Tennessee for a term of five years and two
months, with a starting base rent of $20,994 per month. This facility opened for operations in
August 2005.
In addition, our subsidiaries in Singapore and Malaysia occupy nearly 50,000 square feet of
leased manufacturing, warehousing, and office space under eight separate leases which expire on
various dates through March 31, 2007. The average monthly lease expense for the Singapore and
Malaysia properties combined is $7,500. As the leases expire, we expect to renew these leases for
similar monthly lease amounts.
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On October 28, 2004, our wholly-owned subsidiary, Motorcar Parts de Mexico, S.A. de C.V.,
entered into a build-to-suit lease covering approximately 125,000 square feet of industrial
premises in Tijuana, Baja California, Mexico. We guarantee the payment obligations of our
wholly-owned subsidiary under the terms of the lease. The lease provides for a monthly rent of
$47,500, which increases by 2% each year beginning with the third year of the lease term. The
lease has a term of 10 years from the date the facility was available for occupancy, and Motorcar
Parts de Mexico has an option to extend the lease term for two additional 5-year periods. In May
2005, we took possession of these premises, and in June 2005, we began limited remanufacturing at
the location. In April 2006, Motorcar Parts de Mexico will lease an additional 41,000 square feet
adjoining its existing space.
We believe our facilities are sufficient to satisfy our foreseeable requirements.
Item 3 Legal Proceedings
In fiscal 2003, the SEC filed a civil suit against the Company and its former chief financial
officer, Peter Bromberg, arising out of the SEC’s investigation into the Company’s fiscal 1997 and
1998 financial statements (“Complaint”). Simultaneously with the filing of the SEC Complaint, we
agreed to settle the SEC’s action without admitting or denying the allegations in the Complaint.
Under the terms of the settlement agreement, we are subject to a permanent injunction barring us
from future violations of the antifraud and financial reporting provisions of the federal
securities laws. No monetary fine or penalty was imposed upon us in connection with this settlement
with the SEC.
On May 20, 2004, the SEC and the United States Attorney’s Office announced that Peter Bromberg
was sentenced to ten months, including five months of incarceration and five months of home
detention, for making false and misleading statements about our financial condition and
performance in our 1997 and 1998 Forms 10-K filed with the SEC.
In December 2003, the SEC and the United States Attorney’s Office brought actions against
Richard Marks, our former President and Chief Operating Officer. Mr. Marks agreed to plead guilty
to the criminal charges, and on June 17, 2005 he was sentenced to nine months of incarceration,
nine months of home detention, 18 months of probation and fined $50,000. In settlement of the
SEC’s civil fraud action, Mr. Marks paid over $1.2 million in fines and was permanently barred from
serving as an officer or director of a public company.
Based upon the terms of agreements we previously entered into with Mr. Marks, we have been
paying the costs he has incurred in connection with the SEC and U.S. Attorney’s Office’s
investigation. During fiscal 2005, 2004 and 2003, we incurred costs of approximately $556,000,
$966,000 and $560,000, respectively, pursuant to this indemnification arrangement.
The United States Attorney’s Office has informed the Company that it does not intend to pursue
criminal charges against the Company arising from the events involved in the SEC Complaint.
We are subject to various other lawsuits and claims in the normal course of business.
Management does not believe that the outcome of these matters will have a material adverse effect
on its financial position or future results of operations.
10
Item 4 Submission of Matters to a Vote of Security Holders
None
11
PART II
Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters
Our Common Stock is currently traded on the Pink Sheets under the trading symbol MPAA.PK. The
trading on the Pink Sheets can be sporadic, and may not constitute an established trading market
for our Common Stock. The following table sets forth the high and low bid prices for our Common
Stock during each quarter of fiscal 2005 and 2004 as tracked on the Pink Sheets. The prices
reflect inter-dealer quotations and may not represent actual transactions and do not include any
retail mark-ups, markdowns or commissions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 |
|
|
Fiscal 2004 |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
1st Quarter |
|
$ |
9.55 |
|
|
$ |
6.00 |
|
|
$ |
2.49 |
|
|
$ |
2.40 |
|
2nd Quarter |
|
$ |
10.15 |
|
|
$ |
7.15 |
|
|
$ |
3.75 |
|
|
$ |
3.68 |
|
3rd Quarter |
|
$ |
9.70 |
|
|
$ |
7.05 |
|
|
$ |
4.97 |
|
|
$ |
4.89 |
|
4th Quarter |
|
$ |
11.00 |
|
|
$ |
9.15 |
|
|
$ |
7.04 |
|
|
$ |
6.89 |
|
At September 1, 2005, there were 8,208,955 shares of Common Stock outstanding held by 45
holders of record. We have never declared or paid dividends on our Common Stock. The declaration
of any prospective dividends is at the discretion of the Board of Directors and will be dependent
upon sufficient earnings, capital requirements and financial position, general economic conditions,
state law requirements and other relevant factors. Additionally, our agreement with our lender
prohibits payment of dividends, except stock dividends, without the lender’s prior consent.
Preferred Stock
On February 24, 1998, we entered into a Rights Agreement with Continental Stock Transfer &
Trust Company. As part of this agreement, we established 20,000 shares of Series A Junior
Participating Preferred Stock, par value $.01 per share. The Series A Junior Participating
Preferred Stock has preferential voting, dividend and liquidation rights over the Common Stock.
On February 24, 1998, we also declared a dividend distribution to the March 12, 1998 holders
of record of one Right for each share of Common Stock held. Each Right, when exercisable, entitles
its holder to purchase one one-thousandth of a share of our Series A Junior Participating Preferred
Stock at a price of $65 per one one-thousandth of a share (subject to adjustment).
The Rights are not exercisable or transferable apart from the Common Stock until an Acquiring
Person, as defined in the Rights Agreement acquires 20% or more of the outstanding shares of the
Common Stock or announces a tender offer that would result in 20% ownership, in each case without
the prior consent of our Board of Directors. We are entitled to redeem the Rights, at $.001 per
Right, any time until ten days after a 20% position has been acquired. Under certain
circumstances, including the acquisition of 20% of our Common Stock, each Right not owned by a
potential Acquiring Person will entitle its holder to receive, upon exercise, shares of Common
Stock having a value equal to twice the exercise price of the Right.
Holders of a Right will be entitled to buy stock of an Acquiring Person at a similar discount
if, after the acquisition of 20% or more of our outstanding Common Stock, we are involved in a
merger or other business combination transaction with another person in which we are not the
surviving company, our common shares are changed or converted, or we sell 50% or more of our assets
or earning power to another person. The Rights expire on March 12, 2008 unless earlier redeemed by
the Company.
The Rights make it more difficult for a third party to acquire a controlling interest in the
Company without our Board’s approval. As a result, the existence of the Rights could have an
adverse impact on the market for our Common Stock.
12
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of March 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
(b) |
|
(c) |
|
|
Number of securities to |
|
Weighted-average |
|
Number of securities remaining |
|
|
be issued upon exercise |
|
exercise price |
|
available for future issuance under |
|
|
of outstanding options, |
|
of outstanding options |
|
equity compensation plans |
Plan Category |
|
warrants and rights |
|
warranties and rights |
|
[excluding securities reflected in column (a)] |
Equity
compensation plans
approved by
securities holders |
|
|
1,093,650 |
(1) |
|
$ |
5.36 |
|
|
|
975,850 |
(2) |
Equity compensation
plans not approved
by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Total |
|
|
1,093,650 |
|
|
$ |
5.36 |
|
|
|
975,850 |
|
|
|
|
(1) |
|
Consists of options issued pursuant to our 1994 Employee Stock Option Plan, 1996 Employee
Stock Option Plan, Director’s Plan, 2003 Long-Term Incentive Plan and 2004 Non-Employee
Director Stock Option Plan. |
|
(2) |
|
Consists of options available for issuance under our 2003 Long-Term Incentive Plan and 2004
Non-Employee Director Stock Option Plan. |
13
Item 6 Selected Financial Data
The following selected historical consolidated financial information as of and for each of the
years ended March 31, 2005, March 31, 2004, March 31, 2003, March 31, 2002 and March 31, 2001, has
been derived from and should be read in conjunction with our consolidated financial statements and
related notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, |
|
Income Statement Data |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
Net sales |
|
$ |
95,785,000 |
|
|
$ |
80,548,000 |
|
|
$ |
83,969,000 |
|
|
$ |
87,059,000 |
|
|
$ |
76,779,000 |
|
Operating income |
|
|
11,836,000 |
|
|
|
9,865,000 |
|
|
|
7,095,000 |
|
|
|
11,469,000 |
|
|
|
89,000 |
|
Net income (loss) |
|
|
6,288,000 |
|
|
|
5,811,000 |
|
|
|
10,718,000 |
|
|
|
11,828,000 |
|
|
|
(3,811,000 |
) |
Basic net income
(loss) per share |
|
$ |
0.77 |
|
|
$ |
0.72 |
|
|
$ |
1.35 |
|
|
$ |
1.63 |
|
|
$ |
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
(loss) per share |
|
$ |
0.73 |
|
|
$ |
0.69 |
|
|
$ |
1.25 |
|
|
$ |
1.52 |
|
|
$ |
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31 |
|
Balance Sheet Data |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
Total assets |
|
$ |
83,348,000 |
|
|
$ |
61,766,000 |
|
|
$ |
56,739,000 |
|
|
$ |
68,661,000 |
|
|
$ |
57,333,000 |
|
Working capital |
|
|
42,820,000 |
|
|
|
35,818,000 |
|
|
|
25,590,000 |
|
|
|
5,083,000 |
|
|
|
(2,713,000 |
) |
Line of credit |
|
|
— |
|
|
|
3,000,000 |
|
|
|
9,932,000 |
|
|
|
28,029,000 |
|
|
|
28,950,000 |
|
Capital lease
obligations — less
current portion |
|
|
938,000 |
|
|
|
1,247,000 |
|
|
|
209,000 |
|
|
|
915,000 |
|
|
|
2,099,000 |
|
Shareholders’ equity |
|
|
47,224,000 |
|
|
|
40,381,000 |
|
|
|
34,910,000 |
|
|
|
24,188,000 |
|
|
|
10,523,000 |
|
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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:
concentration of sales to certain customers, changes in our relationship with any of our customers,
including the increasing customer pressure for lower prices and more favorable payment and other
terms, potential future changes in our accounting policies that may be made as the SEC’s review of
our previously filed public reports proceeds, our failure to meet the financial covenants or the
other obligations set forth in our bank credit agreement and the bank’s 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, political or economic instability in one of the foreign countries where we conduct
operations, unforeseen increases in operating costs and other factors discussed herein and in our
other filings with the Securities and Exchange Commission.
Management Overview
Both the retail and traditional markets in our rotating electrical category are continuing to
grow in size; however, both markets continue to experience consolidation. We make it a priority to
focus our efforts on those customers we believe will be successful in the industry and will provide
a strong distribution base for our future. We operate in a very competitive environment, where our
customers expect us to provide quality products, in a timely manner at a low cost. To meet these
expectations while maintaining or improving gross margins, we have focused on regular changes and
improvements to make our manufacturing processes more efficient, and our movement to lean
manufacturing cells, increased production in Malaysia, establishment of a production facility in
northern Mexico, utilization of advanced inventory tracking technology and development of in-store
testing equipment reflect this focus. Our sales are increasingly concentrated among a very few
customers, and these key customers regularly seek
14
more favorable pricing, marketing allowances,
delivery and payment terms as a condition to the continuation of existing business or expansion of
a particular customer’s business.
To partially offset some of these customer demands, we have sought to position ourselves as a
preferred supplier by working closely with our key customers to satisfy their particular needs and
entering into longer-term preferred supplier agreements. While these longer-term agreements
strengthen our customer relationships and improve our overall business base, they require a
substantial amount of working capital to meet ramped up production demands and typically include
marketing and other allowances that meaningfully limit the near-term revenues and associated cash
flow from these new or expanded arrangements.
To grow our revenue base, we have been seeking to broaden our retail distribution network and
have begun to target sales to the traditional warehouse and professional installer markets. We
continue to expand our product offerings to respond to changes in the marketplace, including those
related to the increasing complexity of automotive electronics.
A significant amount of management’s time has been focused on responding to the SEC’s
questions and comments with respect to our previously filed financial reports, and we have incurred
significant general and administrative expenses in connection with these ongoing efforts and the
associated restatement of our financial statements. In addition, the delays associated with the
filing of our SEC reports have triggered defaults under our bank agreement and impeded progress in
our relations with our customers and other third parties.
General
The following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere herein.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. generally accepted
accounting principles, or GAAP. Our significant accounting policies are discussed in detail below
and in Note B to our consolidated financial statements.
In preparing our consolidated financial statements, it is necessary that we use estimates and
assumptions for matters that are inherently uncertain. We base our estimates on historical
experiences and reasonable assumptions. Our use of estimates and assumptions affects the reported
amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for
and during the reporting period. Actual results may differ from estimates.
Revenue Recognition
We recognize revenue when our performance is complete, and all of the following criteria
established by Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition have been met:
|
• |
|
Persuasive evidence of an arrangement exists, |
|
|
• |
|
Delivery has occurred or services have been rendered, |
|
|
• |
|
The seller’s price to the buyer is fixed or determinable, and |
|
|
• |
|
Collectibility is reasonably assured. |
For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date
of shipment. For products shipped FOB destination, revenues are recognized two days after the date
of shipment based on our experience regarding the length of transit duration. We include shipping
and handling charges in the gross invoice price to customers and classify the total amount as
revenue in accordance with Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and
Handling Fees and Costs.” Shipping and handling costs are recorded in cost of sales.
15
Revenue Recognition; Net-of-Core-Value Basis
The price of a finished product sold to customers is generally comprised of separately
invoiced amounts for the core included in the product (“core value”) and for the value added by
remanufacturing (“unit value”). The unit value is recorded as revenue in accordance with our
net-of-core-value revenue recognition policy. This revenue is recorded based on our then current
price list, net of applicable discounts and allowances. We do not recognize the core value as
revenue when the finished products are sold. For a discussion of our accounting for core revenue
from under returns of cores, see “Accounting for Under Returns of Cores” below.
Stock Adjustments and Other Returns
Under the terms of certain agreements with our customers and industry practice, our customers
from time to time may be allowed stock adjustments when their inventory quantity of certain product
lines exceeds the anticipated quantity of sales to end-user customers. Stock adjustment returns
are not recorded until they are authorized by the Company and they do not occur at any specific
time during the year. We provide for a monthly allowance to address the anticipated impact of
stock adjustments based on customer’s inventory levels, movement and timing of stock adjustments.
Our estimate of the impact on revenues and cost of goods sold of future inventory overstocks is
made at the time revenue is recognized for individual sales and is based on the following factors:
|
• |
|
The amount of the credit granted to a customer for inventory overstocks is negotiated
between our customers and us and may be different than the total sales value of the
inventory returned based on our price lists; |
|
|
• |
|
The product mix of anticipated inventory overstocks often varies from the product mix sold; and |
|
|
• |
|
The standard costs of inventory received will vary based on the part numbers received. |
In addition to stock adjustment returns, we also allow our customers to return goods to us
that their end-user customers have returned to them. This general right of return is allowed
regardless of whether the returned item is defective. We seek to limit the aggregate of customer
returns, including slow moving and other inventory, to 20% of unit sales. We provide for such
anticipated returns of inventory in accordance with Statement of Financial Accounting Standards 48,
“Revenue Recognition When Right of Return Exists” by reducing revenue and cost of sales for the
unit value based on a historical return analysis and information obtained from customers about
current stock levels.
Core Inventory Valuation
We value cores at the lower of cost or market. To take into account the seasonality of our
business, market value of cores is recalculated at March and September of each year. The
semi-annual recalculation in March reflects the higher seasonal demand which typically precedes the
warm summer months and the semi-annual recalculation in September reflects the lower seasonal
demand which normally precedes the colder months. Because March generally represents the high
point in the core broker market, we revalue cores using the high core broker price. In September,
we revalue our cores to high core broker price plus a factor to allow for the temporary decrease in
market value during the slower season.
Accounting for Under Returns of Cores
Based on our experience, contractual arrangements with customers and inventory management
practices, we receive and purchase a used but remanufacturable core from customers for almost every
remanufactured alternator or starter we sell to customers. However, both the sales and receipt of
cores throughout the year are seasonal with the receipt of cores lagging sales. Our customers
typically purchase more cores than they return during the months of April through September (the
first six months of the fiscal year) and return more cores than they purchase during the months of
October through March (the last six months of the fiscal year). In accordance with our
net-of-core-value revenue recognition policy, when we ship a product, we record an amount to the
inventory unreturned account for the standard cost of the core expected to be returned. In fiscal
year 2005, we began to recognize core charge revenue from under return of cores on a quarterly
basis. The rate at which core revenue is recognized is based on our historical experience of
customers paying cash for cores in lieu of returning cores for credit.
16
Sales Incentives
We provide various marketing allowances to our customers, including sales incentives and
concessions. Voluntary marketing allowances related to a single exchange of product are recorded
as a reduction of revenues at the time the related revenues are recorded or when such incentives
are offered. Other marketing allowances, which may only be applied against future purchases, are
recorded as a reduction to revenues over the life of the contract using the straight-line method.
Sales incentive amounts are recorded based on the value of the incentive provided.
Accounting for Deferred Taxes
The valuation allowance for deferred tax assets was based upon management’s estimate of
current and future taxable income using the accounting guidance in SFAS 109, “Accounting for Income
Taxes.” Based on SFAS 109, the seasonality of our earnings stream and numerous other factors
discussed below, management considered it appropriate to defer recognition of tax benefits to the
fourth quarters of fiscal 2003 when we recognized a tax benefit of $4,331,000. For fiscal 2005 and
2004, management determined that there was no valuation allowance necessary for deferred tax
assets.
In the fourth quarter of fiscal 2003, the IRS approved our treatment of the amount to be
deducted relating to a fiscal 2000 change in accounting for inventory and allowed us to deduct the
entire amount in fiscal year 2003 instead of the four years originally anticipated. In addition,
the IRS concluded its audits. Furthermore, we resolved our financing contingency and signed an
agreement with a new bank. These positive factors, as well as another year’s history of operating
profits, lead us to conclude that a valuation allowance was no longer required. Thus, the balance
in the allowance was eliminated in the fourth quarter of fiscal 2003.
Results of Operations
The following table summarizes certain key operating data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Gross margin |
|
|
28.2 |
% |
|
|
27.4 |
% |
|
|
20.9 |
% |
EBITDA(1) |
|
$ |
13,768,000 |
|
|
$ |
12,234,000 |
|
|
$ |
9,479,000 |
|
Cash flow from operations |
|
$ |
4,447,000 |
|
|
$ |
15,152,000 |
|
|
$ |
21,026,000 |
|
Finished goods turnover |
|
|
3.08 |
|
|
|
4.85 |
|
|
|
6.07 |
|
Return on equity (2) |
|
|
15.6 |
% |
|
|
16.6 |
% |
|
|
44.3 |
% |
Return on equity (before income taxes) (3) |
|
|
25.1 |
% |
|
|
25.6 |
% |
|
|
23.8 |
% |
|
|
|
(1) |
|
EBITDA is computed as earnings before interest, taxes, depreciation and amortization.
We believe this is a useful measure of our ability to operate successfully. |
|
(2) |
|
Return on equity is computed as net income divided by beginning shareholders’ equity
and measures our ability to invest shareholders’ funds profitably. |
|
(3) |
|
Return on equity (before income taxes) is computed as net income before income taxes,
divided by beginning shareholders’ equity and measures our ability to invest shareholders’
funds profitably. Because we benefited from a favorable tax ruling in fiscal 2003 that
eliminated all taxes that would otherwise have been recognized during that year, we believe
the return on equity (before income taxes) presents this useful measure of our performance
on a more comparable basis. |
Following is our results of operation, reflected as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of Goods Sold |
|
|
71.8 |
% |
|
|
72.6 |
% |
|
|
79.1 |
% |
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
28.2 |
% |
|
|
27.4 |
% |
|
|
20.9 |
% |
General and Administrative Expenses |
|
|
12.1 |
% |
|
|
11.9 |
% |
|
|
10.5 |
% |
Sales and Marketing Expenses |
|
|
2.9 |
% |
|
|
2.5 |
% |
|
|
1.3 |
% |
Research and Development |
|
|
0.8 |
% |
|
|
0.7 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
12.4 |
% |
|
|
12.3 |
% |
|
|
8.5 |
% |
Interest Expense, net of Interest Income |
|
|
1.8 |
% |
|
|
1.2 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
10.6 |
% |
|
|
11.1 |
% |
|
|
6.9 |
% |
Provision for Income Tax (expense) benefit |
|
|
(4.0 |
%) |
|
|
(3.9 |
%) |
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
6.6 |
% |
|
|
7.2 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
17
Fiscal 2005 compared to Fiscal 2004
Net Sales. Our net sales for fiscal year 2005 were $95,785,000, an increase of $15,237,000 or
18.9 % over fiscal year 2004 net sales of $80,548,000. In addition to increased sales to existing
customers, net sales was also positively impacted by a one-time refund of $1,673,000 resulting from
a modified arrangement we entered into with a customer in August 2004 that terminated a discount
arrangement. In addition, revenues from the under-return of cores by our customers, which are
included in net sales, increased by $2,018,000 to $5,046,000 for fiscal year 2005 from $3,028,000
for fiscal year 2004. The increase in sales was partially offset by the increase in all marketing
allowances, which are accounted for as a reduction to sales, from $6,784,000 in fiscal year 2004 to
$11,317,000 in fiscal year 2005.
The increase in net sales for the year ended March 31, 2005, did not fully reflect the
increased volume in products that we have shipped to our largest customer on a pay-on-scan (“POS”)
basis. These shipments resulted in an increase in our pay-on-scan inventory from $2,346,000 at
March 31, 2004 to $17,036,000 at March 31, 2005. (For additional information, see Note G to the
Consolidated Financial Statements included in this Form 10-K.)
Cost of Goods Sold. Cost of goods sold as a percentage of net sales remained relatively flat
and decreased from 72.6% in fiscal 2004 to 71.8% in fiscal 2005. This percentage was positively
impacted by the one-time refund of $1,673,000 noted above, for which there was no cost of goods
sold, and higher revenues from core under-returns, which have a higher margin than unit sales.
Also, our production in Malaysia increased from 9% of total units produced in fiscal 2004 to 15% of
total units produced in fiscal 2005. Because overseas manufacturing has lower production costs
compared to domestic production, this increase in overseas production helped reduce our cost of
goods sold as a percentage of net sales during fiscal year 2005 compared to fiscal year 2004.
These positive developments were partially offset by higher per unit manufacturing costs associated
with the ramped up production at our Torrance facility that was made to meet demands associated
with the new business we received.
General and Administrative. Our general and administrative expense for fiscal year 2005 was
$11,622,000, which represents an increase of $1,993,000 or 20.7%, from fiscal year 2004 of
$9,629,000. This increase is principally due to an increase of $1,310,000 in outside professional
and consulting fees associated with the SEC’s review of our SEC filings and the related restatement
of our financial statements, an increase of approximately $809,000 primarily related to higher
staffing levels required by new corporate initiatives, approximately $694,000 in expenses we
incurred in fiscal 2005 to establish our manufacturing facility in Mexico, an increase of $140,000
related to the information technology and operating system repairs and maintenance, approximately
$137,000 primarily related to the acquisition of additional software licenses, and a $93,000
increase in bank fees related to our credit facility, including annual letter of credit fees for
workers compensation. These increases were partially offset by a $410,000 decrease in the expenses
associated with our indemnification of Richard Marks, a former officer, in connection with the
SEC’s and the U.S. Attorney’s investigations of him. In addition, fiscal year 2004 included a
$400,000 contract settlement payment to Richard Marks, who at the request of the Board of
Directors, submitted his resignation as an Advisor to the Board and the Chief Executive Officer in
September 2003.
Sales and Marketing. Our sales and marketing expenses increased by $782,000 or 39.6% to
$2,759,000 for the year ended March 31, 2005 from $1,977,000 for the year ended March 31, 2004.
This increase is principally attributable to costs incurred in connection with various marketing
initiatives undertaken to strengthen our overall market presence and increase our sales to both the
retailers and the traditional warehouse market. These initiatives included an update to, and
electronic conversion of, our product catalog, and the development of an interactive website for
consumer use. In addition, in November 2003 we hired a new senior sales executive, and related
support staff, to target the traditional warehouse market. Though the traditional marketplace now
represents only a small portion of our business, management believes the traditional channels
represent a growth opportunity for us.
Research and Development. Our research and development expenses increased over the year by
$271,000 or 48.0% to $836,000 for the year ended March 31, 2005 from $565,000 for the year ended
March 31, 2004. This increase was primarily attributable to personnel hired to assist with our
expanded business.
18
Interest Expense. For the year ended March 31, 2005, interest expense, net of interest
income, was $1,692,000. This represents an increase of $761,000 over net interest expense of
$931,000 for the year ended March 31, 2004. This increase was principally attributable to an
increase in short-term interest rates and an increase of $32,220,000 in the amount of accounts
receivables that we discounted under our factoring arrangements. This increase was offset by the
payoff of the outstanding loan balance under our line of credit in the first quarter of fiscal year
2005. Our outstanding loan balance under this line of credit was $3,000,000 as of March 31, 2004.
Interest expense is comprised principally of discounts recognized in connection with our
receivables discounting arrangements, interest on our line of credit facility and capital leases.
Income Tax. For the year ended March 31, 2005 and 2004, we recognized income tax expense of
$3,856,000 and $3,123,000, respectively. For income tax purposes, we have available $2,509,000 of
federal carry forwards, which expire in varying amounts through 2023. The complete utilization of
our tax loss carryforwards will increase the demands on our available cash.
Fiscal 2004 compared to Fiscal 2003
Net Sales. Our net sales for the fiscal year ended March 31, 2004 were $80,548,000, a
decrease of $3,421,000 or 4.1% from the prior years’ sales of $83,969,000. This decrease
principally reflects a net decrease in sales of $1,305,000 attributable to lost customers and
terminated distribution channels in fiscal 2004 as compared to fiscal 2003, a mild summer in fiscal
year 2004 that reduced sales of a particular product line that often fails during hot summers by
$1,360,000; a decrease of $1,242,000 representing a year-to-year increase in the allowances for
future returns of finished goods and cores from our customers resulting from a change in our
estimates, a decrease of $730,000 in revenues from the under-return of cores by our customers and a
decrease of $625,000 resulting from higher amortized marketing allowances and one-time incentive
credits for items such as testing equipment. These reductions were partially offset by
approximately a $1,100,000 increase in revenues attributable to an improvement in product returns
and allowances in fiscal year 2004.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold decreased in fiscal 2004
to 72.6% when compared to 79.1% for fiscal 2003. Our improved gross margin is primarily due to
lowered production costs, estimated to be approximately 4.2% of net sales in fiscal 2004 as
compared to fiscal 2003, associated with manufacturing efficiencies we have adopted, raw material
savings of 1.7% of net sales from price concessions we realized from our suppliers in excess of the
amount realized in fiscal 2003 and cost savings of 0.5% of net sales that we realized by increasing
production in our Malaysian facilities. These improvements were partially offset by lower core
under-return revenues which have a higher margin than unit sales.
General and Administrative. Our general and administrative expense for fiscal 2004 was
$9,629,000, which represents an increase of $817,000 or 9.3%, from the prior year’s expense of
$8,812,000. This increase is primarily attributable to a year-to year increase in legal fees of
$406,000 pursuant to our indemnification agreement with Richard Marks, a former officer, in
connection with the SEC’s and the U.S. Attorney’s investigations of him; a $240,000 increase in
expenses relating to the implementation of an automated inventory tracking system and increased
staffing in our information technology department and $155,000 in increased travel expenses
incurred in connection with greater trade show participation, visiting customers and suppliers.
These increases were offset by a decrease in bank fees of $126,000 recognized in fiscal 2003
associated with the financing we secured in December 2002.
Included in general and administrative expense is our provision for doubtful accounts which
reflected an increase in expense of $117,000 in fiscal 2004 as compared to fiscal 2003. In fiscal
2004, we recorded a provision of $13,000 and in fiscal 2003, we recognized a recovery of $104,000,
an amount that had previously been expensed in a prior year. Because we have a small number of key
customers, we believe we are able to effectively manage our bad debt.
Sales and Marketing. Our sales and marketing expenses increased by $906,000, or 84.6%, to
$1,977,000 in fiscal 2004 from $1,071,000 in fiscal 2003. This increase is principally
attributable to costs incurred in connection with various marketing initiatives to strengthen our
overall presence in the marketplace and increase our sales to the traditional warehouse market.
These initiatives included the preparation of primary and collateral sales and marketing materials,
costs incurred in connection with our name change, our increased participation in various trade
19
shows, the development of materials relating to our new brand introduction, “Quality-Built,” and
the hiring of a new senior sales executive.
Research and Development. Our research and development expenses remained consistent at
$565,000 in fiscal 2004 compared to $564,000 spent in fiscal 2003. Research and development
activities primarily relate to design and development of new products and test systems.
Interest Expense. For fiscal 2004, interest expense, net of interest income, was $931,000
which represented a decrease of $413,000 or 30.7% from fiscal 2003 interest expense of $1,344,000.
This decrease is the result of lower interest rates and lower outstanding loan balances, which was
partially offset by an increase in the discounts we recognized in connection with our receivables
discount program and a reduction in our interest income during fiscal 2004. Our outstanding loan
balance was $3,000,000 as of March 31, 2004 as compared to $9,932,000 as of March 31, 2003, a
reduction of $6,932,000 over the twelve-month period. Partially offsetting this was an increase of
$318,000 in the amount of discounts we accepted in connection with the receivable discount programs
we have with two of our customers, which was largely attributable to an increase of $15,506,000 in
the amount of receivables that we discounted under these programs. In addition, in fiscal 2003,
only one of our customers participated in the receivable discount program, compared to two in
fiscal 2004. Interest expense was comprised principally of interest on our line of credit, capital
leases (and related notes payable) and our receivable discount programs.
Interest income for fiscal 2004 was $37,000. This is a decrease of $599,000 or 94.2% when
compared to interest income of $636,000 for fiscal 2003. This decrease is principally related to
the $606,000 of interest income we received from federal and California taxing authorities as a
result of a favorable determination following an examination of our 1996 through 2001 income tax
returns.
Income Tax. For the year ended March 31, 2004 we recognized income tax expense of $3,123,000,
and in fiscal 2003 we recognized an income tax benefit of $4,967,000. The tax benefit was
primarily attributable to the elimination of the deferred income tax valuation allowance of
$4,331,000 and federal income tax refunds of $821,000 and $694,000 from the Job Creation and Work
Assistance Act of 2002 related to the five-year carry-back provision and the successful conclusion
of a tax examination of our income tax returns covering fiscal years 1996 to 2001. As a result of
income tax expense during fiscal 2004 compared to income tax benefit during fiscal 2003, return on
equity has been additionally presented before the effect of income taxes.
Liquidity and Capital Resources
We have financed our operations through cash flows from operating activities, the receivable
discount programs we have established with two of our customers, and when necessary, the use of our
bank credit facility. Our working capital needs have increased significantly in light of the
ramped up production demands associated with our new or expanded customer arrangements and the
adverse impact that the marketing and other allowances that we have typically granted our customers
in connection with these new or expanded relationships have on the near-term revenues and
associated cash flow from these arrangements. Since initial sales to one of the world’s largest
automobile manufacturers under an agreement we signed with this customer during the fourth quarter
of fiscal 2005 have been below expectations, the inventory buildup we made in connection with this
new agreement has put an additional strain on our working capital. Because our net operating loss
carry forwards for tax purposes have been substantially utilized, we anticipate that our future
cash flow will be adversely impacted by our future tax payments. In addition, while our cash
position has benefited from the way in which the purchase of the transition inventory associated
with our POS arrangement has been structured, satisfaction of the credit due customer through the
issuance of credits against that customer’s receivables will have an adverse impact on our future
cash flow. Although we cannot provide assurance, we believe our cash and short term investments on
hand, cash flows from operations and the availability under our bank credit facility will be
sufficient to satisfy our currently expected working capital needs, capital lease commitments and
capital expenditure obligations over the next year.
Working Capital and Net Cash Flow
At March 31, 2005, we had working capital of $42,820,000, a ratio of current assets to current
liabilities of 2.25:1, and cash and cash equivalents of $6,211,000, which compares to working
capital of $35,818,000, a ratio of current assets to current liabilities of 2.79:1, and cash and
cash equivalents of $7,630,000 at March 31, 2004.
20
Working capital increased primarily due to a
year-to-year increase in POS inventory of $14,690,000 (for additional information, see Note G to
the Consolidated Financial Statements included in this Form 10-K) and our expanded business. The
increase was partially offset by $12,543,000 of credit due customer under our new POS arrangement.
Our net cash provided by operating activities was $4,447,000 for the year ended March 31,
2005, compared to $15,152,000 for the year ended March 31, 2004. The decrease of $10,705,000 from
2004 to 2005 was primarily due to the overall increase in inventory of $22,785,000, which includes
a $14,690,000 increase in our POS inventory, offset by $12,543,000 of credits due to customers
under our new POS arrangement, and the payoff of our line of credit, which had a balance of
$3,000,000 at March 31, 2004.
Inventory was notably impacted by our supply arrangements. Inventory increased by a total of
$22,785,000 principally due to our new POS arrangement and new business we have realized. The
accounting treatment that we have adopted to account for the POS arrangement has also resulted in a
net liability to this customer of $12,543,000 at March 31, 2005. (For an explanation of this
accounting treatment, see Note G to the Consolidated Financial Statements included in this report.)
This liability will be satisfied through the issuance of monthly credit memos through April 2006.
The increase in inventory due to increased production was slightly offset by a reduction of
$245,000 in our excess and obsolete inventory reserve account of $2,637,000 at March 31, 2004 to
$2,392,000 at March 31, 2005.
Net accounts receivable
increased by $2,781,000 as of March 31, 2005 compared to March 31,
2004. The increase was primarily due to an increase in trade receivables of $3,352,000,
attributable to the increased level of sales year on year, offset by increases in specific accounts
receivable contra accounts relating to the allowance for stock adjustments and other returns of
$475,000 and an $1,083,000 increase in customer allowances.
Accounts payable at March 31, 2005 were $14,502,000 compared to $13,456,000 at March 31, 2004.
The $1,046,000 increase in accounts payable is consistent with the overall increase in the level
of sales and increased production in fiscal 2005 as compared to fiscal 2004.
Our utilization of federal and state net operating loss carry forwards positively impacted our
cash flow by $3,305,000 during fiscal 2005. At March 31, 2005, we had federal net operating loss
carry forwards of $2,509,000, which expire in varying amounts through 2023. Because our net
operating loss carry forwards for tax purposes have been substantially utilized, we anticipate that
our future cash flow will be adversely impacted by our future tax payments.
We used net cash in investing activities for each of the years ended March 31, 2005, 2004 and
2003. Investing activities are primarily related to capital expenditures and the purchase and sale
of investments. We expect to use cash in investing activities for the foreseeable future.
During each of the three years ended March 31, 2005, 2004 and 2003, we used cash in financing
activities primarily related to payment and borrowings under our line of credit and payments on our
capital lease obligations. Our financing activity net uses for the year ended March 31, 2005
consisted primarily of repayments under our line of credit totaling $3,000,000, exercise of stock
options of $291,000 and payments on our capital lease obligations of $411,000. For future expected
line of credit and capital lease payments and purchase obligations, see the contractual obligation
table included below.
Capital Resources
Line of Credit
In May 2004, we entered into a loan agreement which provides for borrowings of up to
$15,000,000 without reference to a borrowing base. The interest rate on this credit facility
fluctuates and is based upon the (i) bank’s reference rate or (ii) LIBOR, as adjusted to take into
account any bank reserve requirements, plus a margin of 2.00%. The bank holds a security interest
in substantially all of our assets. As of March 31, 2005, we had reserved $4,301,000 of our line
for standby letters of credit for worker’s compensation insurance, and no balance was outstanding
under this line of credit. This loan agreement expires on October 2, 2006.
21
The loan agreement includes various financial conditions, including minimum levels of tangible
net worth, cash flow, fixed charge coverage ratio and a number of restrictive covenants, including
prohibitions against additional indebtedness, payment of dividends, pledge of assets and capital
expenditures as well as loans to officers and/or affiliates. In addition, it is an event of
default under the loan agreement if Selwyn Joffe is no longer our CEO. Pursuant to the loan
agreement, we have agreed to pay a fee of 3/8% per year on any difference between the $15,000,000
commitment and the outstanding amount of credit we actually use, determined by the average of the
daily amount of credit outstanding during the specified period.
We were in default under this loan agreement for: (i) failing to provide the bank with our
public reports on Form 10-Q for the fiscal quarters ended June 30, 2004, September 30, 2004 and
December 31, 2004, (ii) failing to maintain a quick ratio of not less than 0.65 to 1.00 for the
fiscal quarter ended March 31, 2005, (iii) making capital expenditures during the fiscal year ended
March 31, 2005 in an amount in excess of $2,500,000 and (iv) failing to provide the bank with
certain notices, monthly financial statements and required compliance certificates. On June 29,
2005, the bank provided us with a waiver of these covenant defaults. The ongoing effect of this
waiver was conditioned upon our delivery to the bank of (i) our 10-Q for the quarter ended
September 30, 2004 by July 15, 2005, (ii) our 10-Q for the quarter ended December 31, 2004 by July
29, 2005 and (iii) our 10-K for the fiscal year ended March 31, 2005 by August 22, 2005.
While we satisfied the first two conditions identified in the preceding paragraph, we did not
provide the bank with our fiscal 2005 10-K by August 22, 2005. We were in further default under
this loan agreement for: (i) failing to provide the bank with our public report on Form 10-Q for
the fiscal quarter ended June 30, 2005, (ii) failing to achieve EBITDA of not less than $3 million
for the fiscal quarter ended June 30, 2004 (iii) failing to achieve EBITDA of not less than $14
million for the four consecutive fiscal quarters ended June 30, 2004 and March 31, 2005, (iv)
failing to maintain a fixed charge coverage ratio of not less than 1.25 to 1.00 as of the last day
of the fiscal quarter ended March 31, 2005, (v) failing to maintain a quick ratio of not less than
0.65 to 1.00 as of the last day of the fiscal quarters ended June 30, 2004, September 30, 2004,
December 31, 2004 and March 31, 2005 and (vi) failing to provide the bank with certain notices,
monthly financial statements and required compliance certificates. On August 30, 2005, the bank
provided us with a waiver of these covenant defaults. The ongoing effect of this waiver was
conditioned upon our delivery to the bank of (i) our 10-K for the year ended March 31, 2005 by
September 9, 2005 and (ii) our 10-Q for the fiscal quarter ended June 30, 2005 by September 30,
2005. Because we provided the bank with our fiscal 2005 10-K by September 9, 2005, the bank has
restored our ability to fully access the line of credit.
Receivable Discount Program
Our liquidity has been positively impacted by receivable discount programs we have established
with two of our customers. Under this program, we have the option to sell the customers’
receivables to their respective banks at an agreed upon discount set at the time the receivables
are sold. The discount has averaged 2.2% during the year ended March 31, 2005 and has allowed us
to accelerate collection of receivables aggregating $81,487,000 by an average of 187 days. On an
annualized basis, the weighted average discount rate on receivables sold to banks during the year
ended March 31, 2005 was 4.2%. While this arrangement has reduced our working capital needs, there
can be no assurance that it will continue in the future. These programs resulted in interest costs
of $1,539,000 during the year ended March 31, 2005. These interest costs will increase as interest
rates rise and as our customers increase their utilization of this discounting arrangement.
Multi-year Vendor Agreements
We significantly expanded our production during the year ended March 31, 2005 to meet our
obligations under our new POS arrangement with our largest customer. This increased production
caused significant increases in our inventories and accounts payable. With respect to merchandise
covered by the pay-on-scan arrangement with this customer, the customer is not obligated to
purchase the goods we ship to it until that merchandise is purchased by one of its customers.
While these arrangements will defer recognition of income from sales to the customer, we do not
believe they will ultimately have an adverse impact on our liquidity. In addition, although we
have increased our inventory levels and our employee base to accommodate the incremental business
we received from this customer, we believe that this incremental business will improve our overall
liquidity and cash flow from operations
22
over time. Net sales from POS inventory were $6,191,000
and $5,561,000 for the years ended March 31, 2005 and 2004, respectively.
As part of this new POS arrangement, we agreed to purchase the customer’s inventory of
alternators and starters that is being transitioned to a POS basis. The customer is paying us the
proceeds from its POS sale of this transition inventory, and we are paying for this inventory
through the issuance of monthly credits to this customer, which will continue through April 2006.
Because we are collecting cash for the transition inventory before we issue the monthly credits to
purchase this inventory, this transaction helps finance our inventory build-up to meet production
requirements. Satisfaction of the credit due customer through the issuance of credits against that
customer’s receivables, however, will have an adverse impact on our future cash flow. While we did
not record the $24,130,000 of transition inventory that we purchased or the associated payment
liability on our balance sheet, the accounting treatment that we have adopted to account for this
purchase resulted in a net liability to this customer of $12,543,000 at March 31, 2005. (For an
explanation of this accounting treatment, see Note G to the Consolidated Financial Statements
included in this report.)
In the fourth quarter of fiscal 2005, we entered into a five-year agreement with one of the
largest automobile manufacturers in the world to supply this manufacturer with a new line of
remanufactured alternators and starters for the United States and Canadian markets. We have
expanded our operations and built-up our inventory to meet the requirements of this contract and
have incurred certain transition costs associated with this build-up. As part of the agreement, we
agreed to grant this customer $6,000,000 of credits that are being issued as sales to this customer
are made. These credits are expected to be fully issued during fiscal 2006. The agreement also
contains other typical provisions, such as performance, quality and fulfillment requirements that
we must meet, a requirement that we provide marketing support to this customer and a provision
(standard in this manufacturer’s vendor agreements) granting the manufacturer the right to
terminate the agreement at any time for any reason. Our cash flow has been adversely impacted by
the operational steps we have taken and the marketing allowances we have agreed to in order to
respond to this opportunity. In addition, sales to this customer during the initial term of this
agreement have been below expectations. As a result, the inventory buildup we made in connection
with this new agreement has put an additional strain on our working capital. We believe, however,
that this new business will improve our overall liquidity over time.
In March 2005, we entered into a new agreement with one of our major customers. As part of
this agreement, our designation as this customer’s exclusive supplier of remanufactured import
alternators and starters was extended from February 28, 2008 to December 31, 2012. In addition to
customary promotional allowances, we agreed to acquire the customer’s import alternator and starter
core inventory by issuing $10,300,000 of credits over a five year period subject to adjustment if
our sales to the customer decrease in any quarter by more than an agreed upon percentage. The
customer is obligated to repurchase from us the cores in the customer’s inventory upon termination
of the agreement for any reason.
Our customers continue to aggressively seek extended payment terms, pay-on-scan inventory
arrangements, price concessions and other terms that could adversely affect our liquidity.
Capital Expenditures and Commitments
Our capital expenditures were $2,549,000 for the year ended March 31, 2005. Approximately
$1,300,000 of these expenditures related to our Mexico production facility, with the remainder made
to accommodate the increased capacity necessary to meet our production obligations under our new
five-year agreement with one of the largest automobile manufacturers in the world and recurring
capital expenditures. The amount and timing of capital expenditures during fiscal 2006 may vary
depending on the final build-out schedule for the Mexico production facility.
23
Contractual Obligations
The following summarizes our contractual obligations and other commitments as of March 31,
2005, and the effect such obligations could have on our cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
Contractual Obligations |
|
Total |
|
|
Less than 1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
More than 5 years |
|
Long-Term Debt Obligation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital (Finance) Lease Obligations |
|
$ |
1,467,000 |
|
|
$ |
483,000 |
|
|
$ |
762,000 |
|
|
$ |
222,000 |
|
|
|
— |
|
Operating Lease Obligations |
|
$ |
10,334,000 |
|
|
$ |
2,232,000 |
|
|
$ |
3,054,000 |
|
|
$ |
1,743,000 |
|
|
$ |
3,305,000 |
|
Purchase Obligations |
|
$ |
27,146,000 |
|
|
$ |
15,042,000 |
|
|
$ |
8,144,000 |
|
|
$ |
3,960,000 |
|
|
|
— |
|
Other Long-Term Obligations |
|
$ |
17,000,000 |
|
|
$ |
8,084,000 |
|
|
$ |
4,105,000 |
|
|
$ |
2,547,000 |
|
|
$ |
2,264,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,947,000 |
|
|
$ |
25,841,000 |
|
|
$ |
16,065,000 |
|
|
$ |
8,472,000 |
|
|
$ |
5,569,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations represent amounts due under finance leases of various types of
machinery and computer equipment that are accounted for as capital leases.
Operating Lease Obligations represent amounts due for rent under our leases for office and
warehouse facilities in California, Tennessee, North Carolina, Malaysia, Singapore and Mexico.
Purchase Obligations represent our obligation to issue credits to (i) a large customer for the
acquisition of transition inventory from that customer and (ii) another large customer for the
acquisition of that customer’s core inventory.
Other Long-Term Obligations represent commitments we have with certain customers to provide a
marketing allowance in consideration for supply agreements to provide products over a defined
period.
Offshore Manufacturing
To take further advantage of the production savings associated with manufacturing outside the
United States, on October 28, 2004, our wholly owned subsidiary, Motorcar Parts de Mexico, S.A. de
C.V., entered into a build-to-suit lease covering approximately 125,000 square feet of industrial
premises in Tijuana, Baja California, Mexico for a remanufacturing facility. We guarantee the
payment obligations of our subsidiary under the terms of the lease. The lease provides for a
monthly rent of $47,500, which increases by 2% each year beginning with the third year of the lease
term. The lease has a term of 10 years from May 2005, the date the facility was available for
occupancy, and Motorcar Parts de Mexico has an option to extend the lease term for two additional
5-year periods. In May 2005, we took possession of these premises, and in June 2005, we began
limited remanufacturing at the location. In April 2006, Motorcar Parts de Mexico will lease an
additional 41,000 square feet adjoining its existing space. Because our foreign operations
experience lower production costs for the same remanufacturing process, we expect to continue to
grow the portion of our remanufacturing operations that is conducted outside the United States.
Seasonality of Business
Due to the nature and design as well as the current limits of technology, alternators and
starters traditionally fail when operating in extreme conditions. That is, during the summer
months, when the temperature typically increases over a sustained period of time, alternators and
starters are more apt to fail and thus, an increase in demand for our products typically occurs.
Similarly, during winter months, when the temperature is colder, alternators and starters tend to
fail but not to the same extent as summer months. These parts require replacing immediately to
maintain the operation of the vehicle. As such, summer months tend to show an increase in overall
volume with a few spikes in the winter.
24
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements or liabilities. In addition, we
do not have any majority-owned subsidiaries or any interests in, or relationships with, any
material special-purpose entities that are not included in the consolidated financial statements.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R (revised 2004), “Share-Based Payment.” This
statement is a revision to SFAS 123, "Accounting for Stock-Based Compensation”, and supersedes
Opinion 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of the
cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. The requirements of SFAS
No.123R are effective as of the beginning of the first interim reporting period that begins on
April 1, 2006 for the Company, requiring compensation cost to be recognized as expense for the
portion of outstanding unvested awards, based on the grant-date fair value of those awards
calculated under SFAS 123 for pro forma disclosures. We have not yet completed our analysis of the
impact of adopting SFAS 123R.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS No. 151”). SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). This statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of “so abnormal.” In addition, this statement
requires that allocation of fixed production overhead to the costs of conversion be based on the
normal capacity of the production facilities. The requirements of SFAS No. 151 are effective as of
the beginning of the first interim or annual reporting period that begins after June 15, 2005. We
do not expect the adoption of SFAS No. 151 to have a material effect on our financial statements.
In December 2004, the FASB issued SFAS No. 153 “Exchange of Non-monetary Assets an amendment
of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange
has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. A reciprocal transfer of a non-monetary asset shall be
deemed an exchange only if the transferor has no substantial continuing involvement in the
transferred asset such that the usual risks and rewards of ownership of the asset are transferred.
The requirements of SFAS No. 153 are effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a
material effect on our financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154,
“Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces Accounting
Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statements,” and requires the direct effects of accounting principle
changes to be retrospectively applied. The existing guidance with respect to accounting estimate
changes and corrections of errors is carried forward in SFAS No. 154. The requirements of SFAS No.
154 are effective for as of the beginning of the first interim or annual reporting period that
begins after December 15, 2005. We do not expect the adoption of SFAS No. 154 to have a material
effect on our financial statements.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk relates to changes in interest rates. Market risk is the potential
loss arising from adverse changes in market prices and rates, including interest rates. We do not
enter into derivatives or other financial instruments for trading or speculative purposes. As our
overseas operations expand, our exposure to the risks associated with currency fluctuations will
increase.
25
The following table presents the weighted-average interest rates expected on our debt
instruments in effect at March 31, 2005.
Principal (Notional) Amount by Expected Maturity Date
(As of March 31, 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
Fiscal 2007 |
|
|
Fiscal 2008 |
|
|
Fiscal 2009 |
|
|
Fiscal 2010 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt, Including
Current Portion
Line of Credit Facility |
|
$ |
15,000,000 |
|
|
$ |
15,000,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest Rate |
|
|
5.92%/6.25 |
% |
|
|
6.25%/6.75 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital lease obligations |
|
$ |
483,000 |
|
|
$ |
438,000 |
|
|
$ |
324,000 |
|
|
$ |
222,000 |
|
|
|
— |
|
Interest Rate |
|
|
4.28-10.36 |
% |
|
|
4.28-10.36 |
% |
|
|
4.28-9.07 |
% |
|
|
4.28-6.96 |
% |
|
|
— |
|
Our $15,000,000 credit facility bears interest at various rates equal to the LIBOR rate plus
2% or the bank’s reference rate, at our option. This obligation is the only variable rate facility
we have outstanding. An increase in interest rates of 1% would not have a material impact on our
results from operations because we did not have any variable rate debt outstanding as of March 31,
2005. In addition, for each $100,000,000 of accounts receivable we discount over a period of 180
days, a 1% increase in interest rates would decrease our operating results by $500,000.
Our primary exposure relates to (1) interest rate risk on our long-term and short-term
borrowings, (2) our ability to pay or refinance our borrowings at maturity and (3) the impact of
interest rate movements on the cost of the receivable discount program we have established with two
of our customers. While we cannot predict or manage our ability to refinance existing debt or the
impact interest rate movements will have on our existing debt, we evaluate our financial position
on an on-going basis. An increase in interest rates of 1% would have the effect of reducing our
results from operations by approximately $15,000, based on interest-bearing debt and capitalized
lease obligations at March 31, 2005 of $1,470,000. In addition, for each $100,000,000 of accounts
receivable we discount over a period of 180 days, a 1% increase in interest rates would decrease
our operating results by $500,000.
We are exposed to foreign currency exchange risk inherent in our sales commitments,
anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other
than the U.S. dollar. We transact business in three foreign currencies which affect our
operations: the Malaysian Ringit, which has been fixed in relation to the U.S. dollar, the
Singapore dollar, and, in fiscal 2006 we began to transact business in the Mexican peso. During
the past three years, we have experienced a $6,000 gain, $8,000 gain, and a $5,000 gain, in fiscal
years 2005, 2004 and 2003, respectively, relative to our transactions involving the Malaysian
Ringit and the Singapore dollar. Our total foreign assets were $985,000 as of March 31, 2005.
Based upon our current overseas operations, a change of 10% in exchange rates would result in an
immaterial change in the amount reported in our financial statements. We anticipate, however, that
our exposure to currency risks will increase significantly as we expand our remanufacturing
operations in Mexico. Since these operations will be accounted for primarily in pesos, fluctuations in the
value of the peso are expected to have a growing level of impact on our reported results.
Item 8 Financial Statements and Supplementary Data
The information required by this item is set forth in the Consolidated Financial Statements,
commencing on page F-1 included herein.
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A Controls and Procedures
In connection
with the preparation and filing of this Annual Report, we
completed an evaluation under the supervision and with the participation of our chief executive
officer and chief financial officer of the effectiveness of our disclosure controls and procedures,
as of the end of the period covered by that report,
26
pursuant to the Securities and Exchange Act of 1934, as amended. Based on this evaluation,
our chief executive officer and chief financial officer concluded that, as of the end of the period
covered by that report, there were material weaknesses in our disclosure controls and procedures as
discussed below.
We have been in the process of reviewing a number of our accounting policies, including our
revenue recognition policies and our policies for recording our allowance for stock adjustments and
other returns. This review was precipitated in part by comments we received from the SEC with
respect to our prior public filings. During the course of this review, we concluded that our
policy of including the core charge in our revenues and cost of sales was inconsistent with
generally accepted accounting principles and that our policy of only charging cost of sales for the
gross profit impact of stock adjustments and other returns in connection with the accrual for
future stock adjustments and returns was in error. Accordingly, we decided to restate our
financial statements to account for revenues and cost of sales on a net-of-core-value basis and to
record the accrual for stock adjustments and other returns by reducing sales for the estimated
gross selling price of future returns and making an associated reduction to cost of goods sold.
During their audit of our restated financial statements included in the Form 10-K/A (Amendment
No. 2) for the year ended March 31, 2004 that we filed on June 10, 2005 to give effect to this
restatement, Grant Thornton LLP, our current independent auditing firm and the independent auditors
of our financial statements for each of the last five fiscal years, notified management and our
Audit Committee that they had identified significant deficiencies involving our internal controls
that, in the aggregate, constitute a material weakness in these internal controls. In particular,
Grant Thornton noted that our internal control over the application of accounting principles with
respect to revenue recognition, the return of products under warranty programs, stock adjustments,
the valuation of inventory (including the utilization of broker prices), the computation of
valuation allowances, and the accrual for estimated returns of finished goods and used cores was
not sufficient. Grant Thornton further noted that, in their view, our financial reporting and
accounting personnel did not have sufficient expertise and that we placed too much reliance on
outside consultants in connection with the interpretation and application of accounting literature.
Grant Thornton also expressed their view that we did not have adequate controls over the Excel
spreadsheets that we use to maintain a large portion of our accounting analysis. Grant Thornton
also expressed their view that the foregoing deficiencies were indicative of a control environment
that lacks a sufficient level of control consciousness.
As part of their review of the restated financial statements for the three months ended June
30, 2004 included in the Form 10-Q/A we filed on June 30, 2005, Grant Thornton notified our Audit
Committee that Grant Thornton had concluded that the accounting treatment we initially proposed
with respect to a certain customer’s inventory transaction, after consultation with outside
accounting experts, was in error. While Grant Thornton recognized the complexity associated with
an analysis of this accounting treatment, they expressed their view that our need to change the
proposed accounting treatment may indicate a weakness in the operational effectiveness of our
control process.
In connection with their audit of our financial statements for the year ended March 31, 2005
included in this Form 10-K, Grant Thornton notified us that our failure to correctly value our
cores in the inventory unreturned account and our failure to correctly accrue for credits to a
customer constituted material weaknesses in internal control. We have restated the impacted interim income
statements to correct these errors. See Note T.
As part of our current evaluation of the effectiveness of our disclosure controls and
procedures under the supervision and with the participation of our chief executive officer and
chief financial officer, we undertook a comprehensive review of our accounting policies and
procedures and the relevant accounting literature and pronouncements, including those related to
revenue recognition and the accounting for stock adjustments and other returns, and considered
Grant Thornton’s views in this regard, the views of outside accounting consultants that we have
engaged together with our own observations. Based upon this evaluation, we have concluded that
there are material weaknesses in our disclosure controls and procedures, as summarized above.
In an on-going effort to remedy these weaknesses, we have increased the active participation of our Audit Committee
in the evaluation of our accounting policies and disclosure controls, and strengthened our internal
audit function. In July 2005, we engaged a consulting firm to further assist in the implementation
and compliance requirements of the Sarbanes-Oxley Act of 2002. We believe that changes to our
disclosure controls and procedures will be adequate to provide reasonable assurance that the
objectives of these control systems will be met. In addition, as a result of the
27
resignation of Charles Yeagley, our Chief Financial Officer, we have engaged a search firm to
identify a new Chief Financial Officer who will continue to focus on remaining current with the
relevant accounting literature and official pronouncements and assuring that our disclosure
controls and procedures remain up-to-date.
Except as noted in the preceding paragraphs, there have been no changes in our internal
control, over financial reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect financial reporting.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
Our directors, their ages and present positions with us as of September 1, 2005 are as
follows:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position with the Company |
Selwyn Joffe
|
|
|
47 |
|
|
Chairman of the Board of Directors, President
and Chief Executive Officer |
|
|
|
|
|
|
|
Mel Marks
|
|
|
77 |
|
|
Director |
|
|
|
|
|
|
|
Irv Siegel
|
|
|
59 |
|
|
Director, Chairman of the Compensation
Committee, and member of the Audit and Ethics
Committees |
|
|
|
|
|
|
|
Philip Gay
|
|
|
47 |
|
|
Director, Chairman of the Audit and Ethics
Committees, and member of the Compensation
Committee |
|
|
|
|
|
|
|
Rudolph J. Borneo
|
|
|
64 |
|
|
Director and member of the Audit, Compensation
and Ethics Committees |
Selwyn Joffe has been our Chairman of the Board, President and Chief Executive Officer since
February 2003. He has been a director of our company since 1994 and Chairman since November 1999.
From 1995 until his election to his present positions, he served as a consultant to us. Prior to
February 2003, Mr. Joffe was Chairman and CEO of Protea Group, Inc. a company specializing in
consulting and acquisition services. From September 2000 to December 2001, Mr. Joffe served as
President and CEO of Netlock Technologies, a company that specializes in securing network
communications. In 1997, Mr. Joffe co-founded Palace Entertainment, a roll-up of amusement parks
and served as its President and COO until August 2000. Prior to the founding of Palace
Entertainment, Mr. Joffe was the President and CEO of Wolfgang Puck Food Company from 1989 to 1996.
Mr. Joffe is a graduate of Emory University with degrees in both Business and Law and is a member
of the Georgia State Bar as well as a Certified Public Accountant.
Mel Marks founded our company in 1968. Mr. Marks served as our Chairman of the Board of
Directors and Chief Executive Officer from that time until July 1999. Prior to founding our
company, Mr. Marks was employed for over twenty years by Beck/Arnley-Worldparts, a division of
Echlin, Inc. (one of the largest importers and distributors of parts for imported cars), where he
served as Vice President. Mr. Marks has continued to serve as a consultant and director to us since
July 1999.
Irv Siegel joined our Board of Directors on October 8, 2002 and is the Chairman of our
Compensation Committee and a member of our Audit and Ethics Committees. Mr. Siegel is a retired
attorney admitted to the bar of the state of New Jersey with a background in corporate finance.
Since 1993, Mr. Siegel has been the principal owner of Siegel Company, a full service commercial
real estate firm, and Mr. Siegel has also served as the director of real estate for Wolfgang Puck
Food Company since 1992.
Philip Gay joined our Board of Directors on November 20, 2004. Mr. Gay is currently serving
as Executive Vice President and Chief Financial Officer of Grill Concepts, Inc., a publicly-traded
company that operates a chain of upscale casual restaurants throughout the United States. From
March 2000 until he joined Grill Concepts, Inc. in June 2004, Mr. Gay served as Managing Director
of Triple Enterprises, a business advisory firm that assisted mid-cap sized companies with
financing, mergers and acquisitions, franchising and strategic planning. From March 2000 to
November 2001, Mr. Gay served as an independent consultant with El Paso Energy from time to time
and assisted El Paso Energy with its efforts to reduce overall operating and manufacturing overhead
costs. Previously he served as Chief Financial Officer for California Pizza Kitchen (1987 to 1994)
and Wolfgang Puck Food Company (1994 to 1996) and held various Chief Operating Officer and Chief
Executive Officer positions at Color Me Mine
29
and Diversified Food Group from 1996 to 2000. Mr. Gay is also on the financial advisory board
for Concours Consulting and is a Certified Public Accountant, a former audit manager at Laventhol
and Horwath and a graduate of the London School of Economics. Mr. Gay is the Chairman of our Audit
and Ethics Committees, and a member of our Compensation Committee.
Rudolph J. Borneo joined our Board of Directors on November 20, 2004. Mr. Borneo is currently
Vice Chairman and Director of Stores, Macy’s West, a division of Federated Department Stores, Inc.
Mr. Borneo served as President of Macy’s California from 1989 to 1992 and President of Macy’s West
from 1992 until his appointment as Vice Chairman and Director of Stores. Mr. Borneo is member of
our Audit, Compensation and Ethics Committees.
Our
Audit Committee is comprised of three members –
Messrs. Borneo, Gay and Siegel. Mr. Gay is the audit committee financial expert and is “independent” within the meaning of Federal
securities laws.
Code of Ethics
Our Board of Directors formally approved the creation of our Ethics Committee on May 8, 2003
and adopted a Code of Business Conduct and Ethics, which applies to all our employees. This
committee is currently comprised of Messrs. Gay, Borneo and Siegel, with Mr. Gay serving as
Chairman.
Information about our non-director executive officers
Our executive officers (other than executive officers who are also members of our board of
directors), their ages and present positions with our company, are as follows:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position with the Company |
Steven Kratz
|
|
|
50 |
|
|
Sr. Vice President—QA/Engineering |
|
|
|
|
|
|
|
Charles Yeagley (1)
|
|
|
57 |
|
|
Chief Financial Officer/Secretary |
|
|
|
|
|
|
|
Michael Umansky
|
|
|
64 |
|
|
Vice President and General Counsel |
|
|
|
(1) |
|
Charles Yeagley has submitted his resignation as our chief financial officer
and secretary effective August 31, 2005. Our Board has appointed him interim chief financial
officer pending the employment of his replacement. |
Our executive officers are appointed by and serve at the discretion of our Board of
Directors. A brief description of the business experience of each of our executive officers, other
than executive officers who are also members of our Board of Directors, is set forth below.
Steven Kratz, our Senior Vice President-QA/Engineering, has been employed by our company since
1988 and assumed the position of Senior Vice President-QA/Engineering in 2001. Before joining us,
Mr. Kratz was the General Manager of GKN Products Company, a division of Beck/Arnley-Worldparts.
As Senior Vice-President-QA/Engineering, Mr. Kratz heads our quality assurance, research and
development and engineering departments.
Charles Yeagley has been our Chief Financial Officer since June 2000, responsible for all
Finance issues, including Investor Relations, Product Costing, Cash Flow, Capital Expenditures,
Budgeting, Forecasting, and Financial Planning. Mr. Yeagley is also responsible for the management
of the Accounting, Purchasing, Information Technology, and Human Resource Departments. From 1995
to June 2000, Mr. Yeagley was the Chief Financial Officer
for Goldenwest Diamond Corporation — DBA
The Jewelry Exchange, which is the largest privately-held manufacturer and retailer of fine
jewelry. From July 1979 to December 1994, Mr. Yeagley was a principal in Faulkinbury and Yeagley,
a certified public accounting firm that he co-founded. Mr. Yeagley is a Certified Public
Accountant and holds a Bachelor of Business Administration Degree with an emphasis in Accounting
from Fort Lauderdale University and a Master of Business Administration Degree from Golden Gate
University.
30
Michael Umansky has been our Vice President and General Counsel since January 2004 and is
responsible for all legal matters. Mr. Umansky was a partner of Stroock & Stroock & Lavan LLP, and
the founding and managing partner of its Los Angeles office from 1975 until 1997 and was Of Counsel
to that firm from 1998 to July 2001. Immediately prior to joining our company, Mr. Umansky was in
the private practice of law, and during 2002 and 2003, he provided legal services to us. From
February 2000 until March 2001, Mr. Umansky was Vice President, Administration and Legal, of Hiho
Technologies, Inc., a venture capital financed producer of workforce management software. Mr.
Umansky is admitted to practice law in California and New York and is a graduate of The Wharton
School of the University of Pennsylvania and Harvard Law School.
There are no family relationships among our directors or named executive officers. There are
no material proceedings to which any of our directors or executive officers or any of their
associates, is a party adverse to us or any of our subsidiaries, or has a material interest adverse
to us or any of our subsidiaries. To our knowledge, none or our directors or executive officers has
been convicted in a criminal proceeding during the last five years (excluding traffic violations or
similar misdemeanors), and none of our directors or executive officers was a party to any judicial
or administrative proceeding during the last five years (except for any matters that were dismissed
without sanction or settlement) that resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities subject to, federal or state securities
laws, or a finding of any violation of federal or state securities laws.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Act of 1934, as amended, requires our directors and executive
officers, and persons who own more than ten percent of our common stock, to file with the
Securities and Exchange Commission (the “SEC”) initial reports of ownership and reports of changes
in ownership of our common stock and other equity securities. Based solely on our review of copies
of such forms received by us, or written representations from reporting persons that no Form 4s
were required for those persons, we believe that our insiders complied with all applicable Section
16(a) filing requirements during the 2005 fiscal year, except that timely filings were not made of
(i) a Statement of Changes in Beneficial Ownership on Form 4 for Mr. Yeagley upon the grant of
stock options on May 11, 2004, (ii) a Statement of Changes in Beneficial Ownership on Form 4 for
Mr. Kratz upon the grant of stock options on May 11, 2004, and (iii) Statements of Changes in
Beneficial Ownership on Form 4 reporting stock option grants to each of Messrs. Borneo and Gay upon
their election to the Board on November 30, 2004. All such Section 16(a) filings have since been
made.
Item 11. Executive Compensation
The following table sets forth information concerning the annual compensation of our Chief
Executive Officer and the other four most highly compensated executive officers and other
individuals for whom disclosure is required, whose salary and bonus exceeded $100,000 for the 2005
fiscal year and for services in all capacities to us during our 2005, 2004 and 2003 fiscal years.
We refer to these individuals as our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual |
|
|
Underlying |
|
|
All Other |
|
Name & Principal Position |
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Compensation |
|
|
Options |
|
|
Compensation |
|
Selwyn Joffe (1) |
|
|
2005 |
|
|
$ |
542,000 |
|
|
$ |
600,000 |
|
|
$ |
— |
|
|
|
200,000 |
(2) |
|
$ |
29,000 |
(3) |
Chairman of the Board |
|
|
2004 |
|
|
|
457,000 |
|
|
|
500,000 |
|
|
|
89,000 |
|
|
|
101,500 |
(2) |
|
|
28,000 |
(3) |
President & CEO |
|
|
2003 |
|
|
|
— |
|
|
|
— |
|
|
|
380,000 |
|
|
|
101,500 |
(2) |
|
|
4,000 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mel Marks |
|
|
2005 |
|
|
|
— |
|
|
|
— |
|
|
$ |
350,000 |
|
|
|
1,500 |
|
|
|
— |
|
Director and Consultant |
|
|
2004 |
|
|
|
— |
|
|
|
50,000 |
|
|
|
350,000 |
|
|
|
1,500 |
|
|
|
— |
|
|
|
|
2003 |
|
|
|
— |
|
|
|
— |
|
|
|
313,000 |
|
|
|
1,500 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Kratz |
|
|
2005 |
|
|
$ |
231,000 |
|
|
$ |
30,000 |
|
|
$ |
50,000 |
(5) |
|
|
2,500 |
|
|
|
— |
|
Sr. VP – Engineering |
|
|
2004 |
|
|
|
231,000 |
|
|
|
19,000 |
|
|
|
61,000 |
(5) |
|
|
— |
|
|
|
— |
|
|
|
|
2003 |
|
|
|
225,000 |
|
|
|
19,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles Yeagley |
|
|
2005 |
|
|
$ |
221,000 |
|
|
$ |
55,000 |
|
|
|
— |
|
|
|
15,000 |
|
|
$ |
29,000 |
(3) |
Chief Financial Officer |
|
|
2004 |
|
|
|
239,000 |
|
|
|
65,000 |
|
|
|
— |
|
|
|
— |
|
|
|
28,000 |
(3) |
|
|
|
2003 |
|
|
|
179,000 |
|
|
|
63,000 |
|
|
|
— |
|
|
|
— |
|
|
|
25,000 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Umansky |
|
|
2005 |
|
|
$ |
400,000 |
|
|
$ |
40,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
Vice President & General
Counsel (4) |
|
|
2004 |
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
300,000 |
|
|
|
|
2003 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
31
|
|
|
(1) |
|
Mr. Joffe became our President and Chief Executive Officer in February 2003. The
salary amount shown for fiscal year 2004 is based upon an annualized salary rate of
$542,000, Mr. Joffe’s salary level for fiscal 2004. The other annual compensation amounts
in fiscal 2004 include the amounts paid to Protea Group Inc., a consulting company
wholly-owned by Mr. Joffe. Our contract with Protea was terminated when Mr. Joffe became
our President and Chief Executive Officer. |
|
(2) |
|
The amount for fiscal 2005 includes 200,000 options granted on July 20, 2004 which
were exercisable immediately. The amounts for fiscal 2004 includes 100,000 options granted
on January 14, 2004 and 1,500 options granted on April 30, 2003. The amounts for fiscal
2003 includes 100,000 options granted on March 3, 2003, of which 50,000 were exercisable
immediately and 50,000 became exercisable on March 3, 2004, and 1,500 options granted on
April 30, 2002. |
|
(3) |
|
Represents reimbursement for health insurance premiums paid by employee. |
|
(4) |
|
Mr. Umansky became our Vice President and General Counsel on January 1, 2004. The
salary amount shown for fiscal 2004 is based on upon an annualized salary of $400,000,
which is Mr. Umansky’s current salary level. The other compensation amount in 2004
represents legal fees paid to Mr. Umansky from April 1, 2003 to December 31, 2003 . |
|
(5) |
|
Represents compensation from the exercise of employee stock options. |
Compensation of Directors
We have supplemental compensatory arrangements with Mel Marks, our founder, largest
shareholder and member of our board. In August 2000, our Board of Directors agreed to engage Mel
Marks to provide consulting services to our company. Mr. Marks has 45 years of relevant experience
in the industry and our company. Mr. Marks is paid an annual consulting fee of $350,000 per year.
We can terminate our consulting arrangement with Mr. Marks at any time.
We agreed to pay Mr. Gay $90,000 per year for serving on our Board of Directors, as well as
assuming the responsibility for being Chairman of our Audit and Ethics Committees.
In addition, each of our non-employee directors, other than Mr. Gay, receives annual
compensation of $20,000 and is paid a fee of $2,000 for attending each Board of Directors meeting,
$2,000 for attending each Audit Committee meeting and $500 for any other Board committee meeting
attended. Each director is also reimbursed for reasonable out-of-pocket expenses incurred to
attend Board or Board committee meetings.
At the November 30, 2004 annual meeting of shareholders, our shareholders approved the 2004
Non-Employee Director Stock Plan. A total of 175,000 shares of common stock have been reserved for
grants of stock options under the 2004 Non-Employee Director Stock Option Plan. Each non-employee
director will be granted options to purchase 25,000 shares of our common stock upon their election
to our Board of Directors and will be awarded an option to purchase an additional 3,000 shares of
our common stock for each full year of service on our Board of Directors. The exercise price for
each of these options will be equal to the fair market value of our common stock on the date the
option is granted. The exercise price of an option is payable only in cash. Each of these options
will have a ten-year term. One-third of the options will be exercisable immediately upon grant,
and one-half of the remaining portion of each option grant will vest and become exercisable on the
first and second anniversary dates of the date of grant, assuming that the non-employee director
remains on our Board on each such anniversary date. In the event of a change of control, we may,
after notice to the grantee, require the grantee to “cash-out” his rights by transferring them to
us in exchange for their equivalent “cash value.” The Board does not have the right to modify the
number of options granted to a non-employee director or the terms of the option grants under the
2004 Non-Employee Director Stock Plan.
32
Option Grants in the Last Fiscal Year
The following table provides summary information regarding stock options granted during the
fiscal year ended March 31, 2005 to each of our named executive officers. The potential realizable
value is calculated assuming that the fair market value of our common stock appreciates at the
indicated annual rate compounded annually for the entire term of the options, and that the option
is exercised and sold on the last day of its term for the appreciated stock price. The assumed
rates of appreciation are mandated by the rules of the SEC and do not represent our estimate of the
future prices or market value of our common stock.
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|
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|
Potential RealizableValue at |
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|
|
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|
|
|
Assumed Annual Rates of Stock |
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|
|
Price Appreciate for Option |
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|
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|
|
|
|
|
Terms |
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
Granted To |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
Employees in |
|
|
Exercise or |
|
|
Expiration |
|
|
|
|
|
|
|
Name |
|
Options Granted* |
|
|
Fiscal 2005 |
|
|
Base Price |
|
|
Date |
|
|
5%($) |
|
|
10%($) |
|
Selwyn Joffe |
|
|
200,000 |
|
|
|
54.4 |
% |
|
$9.27/share |
|
|
7/19/2014 |
|
|
$ |
1,165,971 |
|
|
$ |
2,954,799 |
|
Charles Yeagley |
|
|
15,000 |
|
|
|
4.1 |
% |
|
$8.70/share |
|
|
5/11/2014 |
|
|
$ |
82,071 |
|
|
$ |
207,983 |
|
Steven Kratz |
|
|
2,500 |
|
|
|
0.7 |
% |
|
$8.70/share |
|
|
5/11/2014 |
|
|
$ |
13,678 |
|
|
$ |
34,664 |
|
Totals |
|
|
217,500 |
|
|
|
59.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
All options are exercisable immediately. |
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
No options were exercised by the named executive officers during fiscal 2005. The following
table sets forth the number and value of exercisable and unexercisable options held as of March 31,
2005 by each of our named executive officers.
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|
Number of Securities Underlying |
|
|
Value of Unexercised |
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|
|
Unexercised Options at March |
|
|
In-the-Money Options |
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|
|
31, 2005 |
|
|
at March 31, 2005 |
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|
Shares |
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Acquired on |
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Value |
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|
|
|
|
Exercise |
|
|
Realized |
|
|
Exercisable |
|
|
Unexercisable |
|
|
Exercisable |
|
|
Unexercisable |
|
Selwyn Joffe |
|
|
— |
|
|
|
— |
|
|
|
489,750 |
|
|
|
— |
|
|
$ |
2,421,000 |
|
|
|
— |
|
Mel Marks |
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
|
|
— |
|
|
|
54,000 |
|
|
|
— |
|
Steven Kratz |
|
|
— |
|
|
|
— |
|
|
|
58,100 |
|
|
|
— |
|
|
|
439,000 |
|
|
|
— |
|
Charles Yeagley |
|
|
— |
|
|
|
— |
|
|
|
40,000 |
|
|
|
— |
|
|
|
284,000 |
|
|
|
— |
|
Michael Umansky |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Employment Agreements
We have entered into an employment agreement with Selwyn Joffe pursuant to which he is
employed full-time as our President and Chief Executive Officer in addition to serving as our
Chairman of the Board of Directors. This agreement, which was negotiated on our behalf by Mel
Marks, the then Chairman of the Compensation Committee, entered into on February 14, 2003 and
originally scheduled to expire on March 31, 2006. The February 14, 2003 agreement provides for an
annual base salary of $542,000, and Mr. Joffe participates in our executive bonus program. Mr.
Joffe remains entitled to receive a transaction fee of 1.0% of the “total consideration” of any
equity transaction his efforts bring to us that we previously agreed to provide to him as part of a
prior consulting agreement with Protea Group, Mr. Joffe’s company. Mr. Joffe was awarded an option
to purchase 100,000 shares of common stock effective March 3, 2003 at a strike price of $2.16,
50,000 of which vested on the date of grant and 50,000 of which became exercisable on the first
anniversary of the date of grant. In January 2004, we granted Mr. Joffe a ten-year option to
purchase 100,000 shares of our common stock at an exercise price of $6.345 per share and a ten year
option to purchase 1,500 shares at an exercise price of $1.80. On July 20, 2004, Mr. Joffe was
granted an additional
33
option to purchase 200,000 shares of our common stock. These options are immediately
exercisable, provide for an exercise price of $9.27 per share and have a ten year term. Mr. Joffe
also receives other benefits including those generally provided to other employees.
On April 22, 2005, we entered into an amendment to our employment agreement with Mr. Joffe.
Under the amendment, Mr. Joffe’s term of employment has been extended from March 31, 2006 to March
31, 2008, and his base salary, bonus arrangements, 1% transaction fee right and fringe benefits
remain unchanged.
Before the amendment, Mr. Joffe had the right to terminate his employment upon a change of
control and receive his salary and benefits through March 31, 2006. Under the amendment, upon a
change of control (which has been redefined pursuant to the amendment), Mr. Joffe will be entitled
to a sale bonus equal to the sum of (i) two times his base salary plus (ii) two times his average
bonus earned for the two years immediately prior to the change of control. The amendment also
grants Mr. Joffe the right to terminate his employment within one year of a change of control and
to then receive salary and benefits for a one-year period following such termination plus a bonus
equal to the average bonus Mr. Joffe earned during the two years immediately prior to his voluntary
termination.
If Mr. Joffe is terminated without cause or resigns for good reason (as defined in the
amendment), the registrant must pay Mr. Joffe (i) his base salary, (ii) his average bonus earned
for the two years immediately prior to termination, and (iii) all other benefits payable to Mr.
Joffe pursuant to the employment agreement, as amended, through the later of two years after the
date of termination of employment or March 31, 2008. Under the amendment, Mr. Joffe is also
entitled to an additional “gross-up” payment to offset the excise taxes (and related income taxes
on the “gross-up” payment) that he may be obligated to pay with respect to the first $3,000,000 of
“parachute payments” (as defined in Section 280G of the Internal Revenue Code) to be made to him
upon a change of control. The amendment has redefined the term “for cause” to apply only to
misconduct in connection with Mr. Joffe’s performance of his duties. Pursuant to the Amendment,
any options that have been or may be granted to Mr. Joffe will fully vest upon a change of control
and be exercisable for a two-year period following the change of control, and Mr. Joffe agreed to
waive the right he previously had under the employment agreement to require the registrant to
purchase his option shares and any underlying options if his employment were terminated for any
reason. The amendment further provides that Mr. Joffe’s agreement not to compete with the
registrant terminates at the end of his employment term.
We entered into an employment contract with Charles Yeagley on April 1, 2003 that calls for a
base salary of $215,000 per year, provides that Mr. Yeagley participates in our executive bonus
program and expires on March 31, 2006. This contract replaced the previous employment agreement
pursuant to which Mr. Yeagley received an annual base salary of $175,000. Under the previous
employment agreement, Mr. Yeagley was granted a ten-year option to purchase 25,000 shares of our
common stock, at $0.93 per share. On May 11, 2004, Mr. Yeagley was granted an additional ten-year
option to purchase 15,000 shares of our common stock at an exercise price of $8.70. In addition to
his cash compensation, Mr. Yeagley receives an automobile allowance and other benefits, including
those generally provided to other employees. On July 11, 2005, Mr. Yeagley tendered his
resignation as our chief financial officer and secretary. This
resignation was effective on August 31, 2005. The Board has appointed him interim chief financial officer pending the employment of
his replacement.
In conformity with our policy, all of our directors and officers execute confidentiality and
nondisclosure agreements upon the commencement of employment. The agreements generally provide that
all inventions or discoveries by the employee related to our business and all confidential
information developed or made known to the employee during the term of employment shall be our
exclusive property and shall not be disclosed to third parties without our prior approval. Our
employment agreement with Mr. Yeagley also contains non-competition provisions that preclude him
from competing with us for a period of two years from the date of termination of his employment.
Public policy limitations and the difficulty of obtaining injunctive relief may impair our ability
to enforce the non-competition and nondisclosure covenants made by our employees.
Performance Graph
The following graph compares the cumulative return to holders of common stock for the fiscal
years ended March 31, 2001, 2002, 2003, 2004 and 2005 with the National Association of Securities
Dealers Automated Quotation (“NASDAQ”) Market Index and an index for our peer group. The
comparison assumes $100 was
34
invested at the close of business on March 31, 2000 in our common stock and in each of the
comparison groups, and assumes reinvestment of dividends.
Annual Return Percentage – Based upon historical performance, the following table depicts the
annual percentage return earned in each of the three comparison groups :
Total Shareholder Returns—Dividends Reinvested
Annual Return Percentage
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|
|
|
|
|
Year Ended March 31, |
Company/Index |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
Motorcar Parts of America, Inc. |
|
|
-28.95 |
% |
|
|
225.00 |
% |
|
|
-50.55 |
% |
|
|
271.11 |
% |
|
|
31.15 |
% |
Peer Group |
|
|
-45.52 |
% |
|
|
152.19 |
% |
|
|
-28.01 |
% |
|
|
43.21 |
% |
|
|
5.71 |
% |
NASDAQ |
|
|
-59.66 |
% |
|
|
0.61 |
% |
|
|
-26.98 |
% |
|
|
49.38 |
% |
|
|
0.85 |
% |
Indexed Returns – Based upon historical performance, the following table displays the
results of $100 invested at the close of business on March 31, 2000 in the Common Stock of each of
the comparison groups and assumes reinvestment of dividends:
ZACKS TOTAL RETURN ANNUAL COMPARISON
5 YEAR CUMULATIVE TOTAL RETURN SUMMARY
Through March 31, 2005
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
MPA |
|
Return% |
|
|
|
|
|
|
-28.95 |
|
|
|
225.00 |
|
|
|
-50.55 |
|
|
|
271.11 |
|
|
|
31.15 |
|
|
|
Cum $ |
|
$ |
100.00 |
|
|
$ |
71.05 |
|
|
$ |
230.91 |
|
|
$ |
114.20 |
|
|
$ |
423.80 |
|
|
$ |
555.81 |
|
NASDAQ |
|
Return% |
|
|
|
|
|
|
-59.66 |
|
|
|
0.61 |
|
|
|
-26.98 |
|
|
|
49.38 |
|
|
|
0.85 |
|
|
|
Cum $ |
|
$ |
100.00 |
|
|
$ |
40.34 |
|
|
$ |
40.59 |
|
|
$ |
29.64 |
|
|
$ |
44.27 |
|
|
$ |
44.65 |
|
Peer Group |
|
Return% |
|
|
|
|
|
|
-45.52 |
|
|
|
152.19 |
|
|
|
-28.01 |
|
|
|
43.21 |
|
|
|
5.71 |
|
|
|
Cum $ |
|
$ |
100.00 |
|
|
$ |
54.48 |
|
|
$ |
137.40 |
|
|
$ |
98.92 |
|
|
$ |
141.66 |
|
|
$ |
149.76 |
|
35
Corporate Performance Graph with peer group uses peer group only performance and excludes
Motorcar Parts.
Peer group indices use beginning of period market capitalization weighting.
S&P index returns are calculated by Zacks.
Peer Group:
|
• |
|
Aftermarket Technologies Corporation |
|
|
• |
|
R & B, Incorporated |
|
|
• |
|
Standard Motor Products, Inc. |
|
|
• |
|
Transpro, Incorporated |
Report of the Compensation Committee Regarding Executive Compensation
Our Compensation Committee is composed of Irv Siegel, Rudolph J. Borneo and
Philip Gay, each of whom is an independent member of our Board of Directors. The Compensation
Committee is responsible for developing and making recommendations to the board with respect to our
executive compensation policies. The Compensation Committee is also responsible for evaluating the
performance of our chief executive officer and other senior company officers and to make
recommendations concerning the salary, bonuses and stock options to be awarded to our officers.
Compensation Philosophy
The objectives of our executive compensation program are to:
|
• |
|
Support the achievement of desired Company performance. |
|
|
• |
|
Provide compensation that will attract and retain superior talent and reward performance. |
The Compensation Committee reviews the scope of an executives duties and his or
her performance, in addition to the overall performance of our company in determining the
compensation of our executives. The Compensation Committee also considers the compensation
practices of other companies in the automotive remanufacturing industry and companies of a
comparable size and complexity. From time to time, the committee also engages outside consultants
to assist it.
We believe that the executive compensation program provides an overall level of compensation
opportunity that is competitive within the automotive remanufacturing industry, as well as with a
broader group of companies of comparable size and complexity.
Annual Compensation
Executive Officer Compensation Program. Our executive officer compensation program is
comprised of base salary, bonus and long-term incentive compensation in the form of stock options
and various benefits, including medical plans and deferred compensation arrangements. Our awards
of equity based compensation are intended to encourage maximizing shareholder value and align the
interests of our executives and shareholders.
Base Salary. Base salary levels for our executive officers are competitively set
relative to companies in comparable manufacturing industries. In determining salaries, the
committee also takes into account individual
36
experience and performance and specific issues particular to the Company. The committee considered
each of these factors in approving the salaries for all of the executive officers.
Bonus Arrangements. Historically, bonuses paid to several of our executive
officers were based upon the Compensation Committee’s evaluation of these officers’ respective
contribution to our financial results.
Stock Option Program. The stock option program is our long-term incentive plan
for providing an incentive to key employees (including directors and officers who are key
employees) and consultants.
Deferred Compensation. We contribute on behalf of each executive officer $.25 on
each dollar, up to 6% of such executive officer’s annual salary and bonus, to our non-qualified
deferred compensation plan.
Benefits. We provide to executive officers medical benefits that are generally
available to our other employees. Historically, the value of perquisites, as determined in
accordance with the rules of the SEC relating to executive compensation, do not exceed 10% of
salary.
Compensation of Chief Executive Officer
The terms of the employment agreement with Mr. Joffe entered into as of February 14, 2003 were
determined by negotiations between representatives of ours and Mr. Joffe. In this regard, we
reviewed statistical and other material available to us. The negotiated terms reflect the results
of our review and understanding of what a chief executive officer earns at comparable positions,
the unique background Mr. Joffe has with our company, and in marketing and management generally,
and what we understand an executive of Mr. Joffe’s stature could otherwise earn in the employment
market. In connection with the Compensation Committee’s award of 100,000 options to Mr. Joffe in
January 2004 and the award of an additional 200,000 options in July 2004, as described under the
caption “Employment Agreements” above, the Compensation Committee also considered the
recommendations of an independent executive compensation consultant.
The terms of the April 22, 2005 amendment to Mr. Joffe’s employment agreement were determined
by negotiations between our Compensation Committee and Mr. Joffe. In connection with these
negotiations it was important to our representatives that we retain Mr. Joffe’s services beyond the
March 31, 2006 originally scheduled expiration date of his employment agreement. In this regard,
the Compensation Committee reviewed an analysis of compensation arrangements for chief executive
officers of comparable public companies prepared by an executive compensation consulting firm. The
Compensation Committee concluded the changes to Mr. Joffe’s employment agreement made by the
amendment were appropriate in light of Mr. Joffe’s contribution to our success and these
representatives’ understanding of the compensation arrangements in place with executives of Mr.
Joffe’s stature. The Board and the Compensation Committee recognize that we operate in a
challenging business environment and are confident with Mr. Joffe as our Chief Executive Officer.
COMPENSATION COMMITTEE
Irv Siegel, Chairman
Philip Gay
Rudolph Borneo
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves on the compensation committee of any other company
or board of directors of any other company which any member of our Compensation Committee is an
executive officer.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 1, 2005, certain information as to the common
stock ownership of each of our named executive officers, directors and director nominees, all named
executive officers, directors and
37
director nominees as a group and all persons known by us to be the beneficial owners of more
than five percent of our common stock. The percentage of common stock beneficially owned is based
on 8,208,955 shares of common stock outstanding as of September 1, 2005.
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the
number of shares beneficially owned by a person and the percentage of ownership held by that
person, shares of common stock subject to options held by that person that are currently
exercisable or will become exercisable within 60 days of September 1, 2005 are deemed outstanding,
while these shares are not deemed outstanding for determining the percentage ownership of any other
person. Unless otherwise indicated in the footnotes below, the persons and entities named in the
table have sole voting and investment power with respect to all shares beneficially owned, subject
to community property laws where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and Nature of |
|
|
|
|
|
Percent of |
Name and Address of Beneficial Shareholder |
|
Beneficial Ownership (1) |
|
|
|
|
|
Class |
Mel Marks |
|
|
2,000,463 |
|
|
|
(2 |
) |
|
|
24.4 |
% |
c/o Motorcar Parts of America, Inc.
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Marks |
|
|
504,122 |
|
|
|
(3 |
) |
|
|
6.1 |
% |
11718 Barrington Court
P.O. Box 102
Los Angeles, CA 90049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Kratz |
|
|
58,100 |
|
|
|
(4 |
) |
|
|
* |
|
c/o Motorcar Parts of America, Inc
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selwyn Joffe |
|
|
489,750 |
|
|
|
(5 |
) |
|
|
5.6 |
% |
c/o Motorcar Parts of America, Inc
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip Gay |
|
|
8,334 |
|
|
|
(6 |
) |
|
|
* |
|
c/o Motorcar Parts of America, Inc
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rudolph Borneo |
|
|
8,334 |
|
|
|
(6 |
) |
|
|
* |
|
c/o Motorcar Parts of America, Inc
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Irv Siegel |
|
|
26,500 |
|
|
|
(7 |
) |
|
|
* |
|
c/o Motorcar Parts of America, Inc
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles Yeagley |
|
|
40,000 |
|
|
|
(8 |
) |
|
|
* |
|
c/o Motorcar Parts of America, Inc
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Umansky |
|
|
— |
|
|
|
|
|
|
|
— |
|
c/o Motorcar Parts of America, Inc.
2929 California Street
Torrance, CA 90503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers |
|
|
2,631,481 |
|
|
|
(9 |
) |
|
|
29.8 |
% |
as a group
— 8 persons |
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less than 1% of the outstanding common stock. |
38
|
1. |
|
The listed shareholders, unless otherwise indicated in the footnotes below, have direct
ownership over the amount of shares indicated in the table. |
|
|
2. |
|
Includes 6,000 shares issuable upon exercise of currently exercisable options under the
1994 Stock Option Plan. |
|
|
3. |
|
Includes 142,857 shares held by The Marks Family Trust, of which Richard Marks is a
Trustee and beneficiary and 67,040 shares held by Mr. Marks’ wife and their sons. |
|
|
4. |
|
Represents 55,600 shares issuable upon exercise of currently exercisable options under
the 1994 Stock Option Plan and 2,500 shares issuable upon exercise of currently exercisable
options under the 2003 Long Term Incentive Plan. |
|
|
5. |
|
Represents 30,000 shares issuable upon exercise of options exercisable under the 1996
Stock Option Plan (the “1996 Stock Option Plan”); 255,250 shares issuable upon exercise of
currently exercisable options under the 1994 Stock Option Plan; and 4,500 shares issuable
upon exercise of currently exercisable options granted under the Non-Employee Director Plan
and 200,000 shares issuable upon exercise of currently exercisable options under the 2003
Long Term Incentive Plan. |
|
|
6. |
|
Represents 8,334 shares issuable upon exercise of currently exercisable options granted
under the 2004 Non-Employee Director Stock Option Plan. |
|
|
7. |
|
Represents 26,500 shares issuable upon exercise of currently exercisable options
granted under the 1994 Stock Option. |
|
|
8. |
|
Includes 15,000 shares issuable upon exercise of currently exercisable options under
the 2003 Long Term Incentive Plan. |
|
|
9. |
|
Includes 368,350 shares issuable upon exercise of currently exercisable options granted
under the 1994 Stock Option Plan; 30,000 shares issuable upon exercise of currently
exercisable options granted under the 1996 Stock Option Plan; 4,500 shares issuable upon
exercise of currently exercisable options granted under the Non-Employee Director Plan;
217,500 shares issuable upon exercise of currently exercisable options granted under the
2003 Long Term Incentive Plan; and 16,668 shares issuable upon exercise of currently
exercisable options granted under the 2004 Non-Employee Director Stock Option Plan. |
Item 13. Certain Relationships and Related Transactions
We have entered into a consulting agreement with Mel Marks, our founder, Board member and
largest stockholder. We currently pay Mel Marks a consulting fee of $350,000 per year under this
arrangement. In addition, the Compensation Committee and the Board authorized a bonus payable to
Mr. Marks with respect to fiscal 2004 of $50,000. We have also agreed to pay Mr. Gay, a member of
our Board of Directors, $90,000 per year for his service as a member of our Board and Chairman of
our Audit Committee. For additional information, see the discussion under the caption
“Compensation of Directors”.
Based upon the terms of the agreement we previously entered into with Richard Marks, our
former President and Chief Operating Officer, we have been paying the costs he has incurred in
connection with the SEC and U.S. Attorney’s Office’s investigation. For additional information,
see the discussion under the caption “Legal Proceedings”. During fiscal 2005, 2004 and 2003 we
incurred costs of approximately $556,000 $966,000 and $560,000, respectively, on his behalf.
Richard Marks is the son of Mel Marks.
39
Item 14. Principal Accountant Fees and Services
The following table summarizes the total fees we paid to our independent certified public
accountants, Grant Thornton LLP, for professional services provided during the twelve month periods
ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Audit Fees |
|
$ |
619,000 |
|
|
$ |
282,000 |
|
Audit Related Fees |
|
|
29,000 |
|
|
|
22,000 |
|
Tax Fees |
|
|
— |
|
|
|
— |
|
All Other Fees |
|
|
69,000 |
|
|
|
— |
|
|
|
$ |
717,000 |
|
|
$ |
304,000 |
|
Audit fees billed in fiscal 2005 and 2004 consisted of (i) the audit of our annual
financial statements and (ii) the reviews of our quarterly financial statements, (iii) the review
of SEC letters and (iv) the review of restated financial statements and related Forms 10-K and
10-Q.
Audit related fees billed in fiscal 2005 and 2004 consisted of (i) review of our accounting
for customer long-term contracts, and (ii) professional services rendered in connection with S-8
registration statement that was filed on April 2, 2004.
Other fees billed in fiscal 2005 consisted of professional services for due diligence work
related to a potential acquisition that has been abandoned.
Our Audit Committee must pre-approve all audit and non-audit services to be performed by our
independent auditors and will not approve any services that are not permitted by SEC rules. All of
the audit fees in fiscal 2005 and 2004 were approved by the Audit Committee.
40
PART IV
Item 15. Exhibits and Financial Statement Schedules.
a. Documents filed as part of this report:
|
(1) |
|
Index to Consolidated Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-1 |
Consolidated Balance Sheets
|
|
F-2 |
Consolidated Statements of Operations
|
|
F-3 |
Consolidated Statement of Shareholders’ Equity
|
|
F-4 |
Consolidated Statements of Cash Flow
|
|
F-5 |
Notes to Consolidated Financial Statements
|
|
F-6 |
|
(2) |
|
Schedules. |
|
|
|
|
None. |
|
|
(3) |
|
Exhibits: |
|
|
|
|
|
Number |
|
Description of Exhibit |
|
Method of Filing |
3.1
|
|
Certificate of Incorporation of the Company
|
|
Incorporated by reference to Exhibit
3.1 to the Company’s Registration
Statement on Form SB-2 declared
effective on March 22, 1994 (the “1994
Registration Statement.”) |
|
|
|
|
|
3.2
|
|
Amendment to Certificate of Incorporation
of the Company
|
|
Incorporated by reference to Exhibit
3.2 to the Company’s Registration
Statement on Form S-1 (No. 33-97498)
declared effective on November 14, 1995
(the “1995 Registration Statement”) |
|
|
|
|
|
3.3
|
|
Amendment to Certificate of Incorporation
of the Company
|
|
Incorporated
by reference to Exhibit 3.3 to the
Company’s Annual Report on Form 10-K
for the fiscal year ended March 31,
1997 (the “1997 Form 10-K”) |
|
|
|
|
|
3.4
|
|
Amendment to Certificate of Incorporation
of the Company
|
|
Incorporated by reference to Exhibit
3.4 to the Company’s Annual Report on
Form 10-K for the fiscal year ended
March 31, 1998 (the “1998 Form 10-K”) |
|
|
|
|
|
3.5
|
|
Amendment to Certificate of Incorporation
of the Company
|
|
Incorporated by reference to Exhibit C
to the Company’s proxy statement on
Schedule 14A filed with the SEC on
November 25, 2003. |
|
|
|
|
|
3.6
|
|
By-Laws of the Company
|
|
Incorporated by reference to Exhibit
3.2 to the 1994 Registration Statement. |
|
|
|
|
|
4.1
|
|
Specimen Certificate of the Company’s
Common Stock
|
|
Incorporated by reference to Exhibit
4.1 to the 1994 Registration Statement. |
|
|
|
|
|
4.2
|
|
Form of Underwriter’s Common Stock Purchase
Warrant
|
|
Incorporated by reference to Exhibit
4.2 to the 1994 Registration Statement. |
|
|
|
|
|
4.3
|
|
1994 Stock Option Plan
|
|
Incorporated by reference to Exhibit
4.3 to the 1994 Registration Statement. |
41
|
|
|
|
|
Number |
|
Description of Exhibit |
|
Method of Filing |
4.4
|
|
Form of Incentive Stock Option Agreement
|
|
Incorporated by reference to Exhibit
4.4. to the 1994 Registration
Statement. |
|
|
|
|
|
4.5
|
|
1994 Non-Employee Director Stock Option Plan
|
|
Incorporated by reference to Exhibit
4.5 to the Company’s Annual Report on
Form 10-KSB for the fiscal year ended
March 31, 1995. |
|
|
|
|
|
4.6
|
|
1996 Stock Option Plan
|
|
Incorporated by reference to Exhibit
4.6 to the Company’s Registration
Statement on Form S-2 (No. 333-37977)
declared effective on November 18, 1997
(the “1997 Registration Statement”). |
|
|
|
|
|
4.7
|
|
Rights Agreement, dated as of February 24,
1998, by and between the Company and
Continental Stock Transfer and Trust
Company, as rights agent
|
|
Incorporated by reference to Exhibit
4.8 to the 1998 Registration Statement. |
|
|
|
|
|
4.8
|
|
2003 Long Term Incentive Plan
|
|
Incorporated by reference to Exhibit
4.9 to the Company’s Registration
Statement on Form S-8 filed with the
SEC on April 2, 2004. |
|
|
|
|
|
4.9
|
|
2004 Non-Employee Director Stock Option Plan
|
|
Incorporated by reference to Appendix A
to the Proxy Statement on Schedule 14A
for the 2004 Annual Shareholders
Meeting. |
|
|
|
|
|
10.1
|
|
Amendment to Lease, dated October 3, 1996,
by and between the Company and Golkar
Enterprises, Ltd. relating to additional
property in Torrance, California
|
|
Incorporated by reference to Exhibit
10.17 to the December 31, 1996 Form
10-Q. |
|
|
|
|
|
10.2
|
|
Lease Agreement, dated September 19, 1995,
by and between Golkar Enterprises, Ltd. and
the Company relating to the Company’s
facility located in Torrance, California
|
|
1997 Form 10-K. Incorporated by
reference to Exhibit 10.18 to the 1995
Registration Statement. |
|
|
|
|
|
10.3
|
|
Agreement and Plan of Reorganization, dated
as of April 1, 1997, by and among the
Company, Mel Marks, Richard Marks and
Vincent Quek relating to the acquisition of
MVR and Unijoh
|
|
Incorporated by reference to Exhibit
10.22 to the 1997 Form 10-K. |
|
|
|
|
|
10.4
|
|
Form of Indemnification Agreement for
officers and directors
|
|
Incorporated by reference to Exhibit
10.25 to the 1997 Registration
Statement. |
|
|
|
|
|
10.5
|
|
Warrant to Purchase Common Stock, dated
April 20, 2000, by and between the Company
and Wells Fargo Bank, National Association
|
|
Incorporated by reference to Exhibit
10.29 to the 2001 10-K. |
|
|
|
|
|
10.6
|
|
Amendment No. 1 to Warrant dated May 31,
2001, by and between the Company and Wells
Fargo Bank, National Association
|
|
Incorporated by reference to Exhibit
10.32 to the 2001 10-K. |
|
|
|
|
|
10.7
|
|
Form of Employment Agreement dated February
14, 2003 by and between the Company and
Selwyn Joffe.
|
|
Incorporated by reference to Exhibit
10.42 to the 2003 10-K. |
|
|
|
|
|
10.8
|
|
Letter Agreement dated July 17, 2002 by and
between the Company and Houlihan Lokey
Howard & Zukin Capital.
|
|
Incorporated by reference to Exhibit
10.43 to the 2003 10-K. |
42
|
|
|
|
|
Number |
|
Description of Exhibit |
|
Method of Filing |
10.9
|
|
Second Amendment to Lease dated March 15,
2002 between Golkar Enterprises, Ltd. and
the Company relating to property in
Torrance, California
|
|
Incorporated by reference to Exhibit
10.44 to the 2003 10-K. |
|
|
|
|
|
10.10
|
|
Separation Agreement and Release, dated
February 14, 2003, between the Company and
Anthony Souza
|
|
Incorporated by reference to Exhibit
10.45 to the 2003 10-K. |
|
|
|
|
|
10.11
|
|
Employment Agreement, dated April 1, 2003
between the Company and Charles Yeagley.
|
|
Incorporated by reference to Exhibit
10.46 to the 2003 10-K. |
|
|
|
|
|
10.12
|
|
Form of Warrant Cancellation Agreement and
Release, dated April 30, 2003, between the
Company and Wells Fargo Bank, N.A.
|
|
Incorporated by reference to Exhibit
10.47 to the 2003 10-K. |
|
|
|
|
|
10.13
|
|
Form of Agreement, dated June 5, 2002, by
and between the Company and Sun Trust Bank.
|
|
Incorporated by reference to Exhibit
10.38 to the 2002 10-K. |
|
|
|
|
|
10.14
|
|
Credit Agreement, dated May 28, 2004,
between the Company and Union Bank of
California, N.A.
|
|
Incorporated by reference to Exhibit
10.15 to the Company’s Annual Report on
Form 10-K for the year ended March 31,
2004 (the “2004 10-K”). |
|
|
|
|
|
10.15*
|
|
Addendum to Vendor Agreement, dated May 8,
2004, between AutoZone Parts, Inc. and the
Company.
|
|
Incorporated by reference to Exhibit
10.15 to the 2004 10-K. |
|
|
|
|
|
10.16
|
|
Employment Agreement, dated November 1,
2003, between the Company and Bill
Laughlin.
|
|
Incorporated by reference to Exhibit
10.16 to the 2004 10-K. |
|
|
|
|
|
10.17
|
|
Form of Orbian Discount Agreement between
the Company and Orbian Corp.
|
|
Incorporated by reference to Exhibit
10.17 to the 2004 10-K. |
|
|
|
|
|
10.18
|
|
Form of Standard Industrial/Commercial
Multi-Tenant Lease, dated May 25, 2004,
between the Company and Golkar Enterprises,
Ltd for property located at 530 Maple
Avenue, Torrance, California.
|
|
Incorporated by reference to Exhibit
10.18 to the 2004 10-K. |
|
|
|
|
|
10.19
|
|
Stock Purchase Agreement, dated February
28, 2001 between the Company and Mel Marks.
|
|
Incorporated by reference to Exhibit
99.2 to Form 8-K filed with the SEC on
March 29, 2001. |
|
|
|
|
|
10.20
|
|
Build to Suit Lease Agreement, dated
October 28, 2004, among Motorcar Parts de
Mexico, S.A. de CV, the Company and Beatrix
Flourie Geoffroy.
|
|
Incorporated by reference to Exhibit
99.1 to Current Report on Form 8-K
field on November 2, 2004. |
|
|
|
|
|
10.21
|
|
Amendment No. 1 to Employment Agreement,
dated April 19, 2004, between the Company
and Selwyn Joffe.
|
|
Incorporated by reference to Exhibit
99.1 to Current Report on Form 8-K
field on April 25, 2005. |
|
|
|
|
|
14.1
|
|
Code of Business Conduct and Ethics
|
|
Incorporated by reference to Exhibit
10.48 to the 2003 10-K. |
|
|
|
|
|
18.1
|
|
Preferability Letter to the Company from
Grant Thornton LLP
|
|
Incorporated by reference to Exhibit
18.1 to the 2001 10-K. |
|
|
|
|
|
21.1
|
|
List of Subsidiaries
|
|
Filed herewith. |
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer
pursuant
|
|
Filed herewith. |
43
|
|
|
|
|
Number |
|
Description of Exhibit |
|
Method of Filing |
|
|
to Section 302 of the Sarbanes
Oxley Act of 2002. |
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
|
|
Filed herewith. |
|
|
|
|
|
32.1
|
|
Certifications of Chief Executive Officer
and Chief Financial Officer pursuant to
Section 906 of the Sarbanes Oxley Act of
2002.
|
|
Filed herewith |
|
|
|
* |
|
Portions of this exhibit have been granted confidential treatment by the SEC. |
44
SIGNATURES
Pursuant to the requirements of Section 15(d) 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 OF AMERICA, INC |
|
|
|
|
|
Dated: September 2, 2005
|
|
By:
|
/s/ Charles W. Yeagley |
|
|
|
|
|
|
|
|
Charles W. Yeagley |
|
|
|
|
Chief Financial Officer and Secretary |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has
been signed by the following persons on behalf of the Registrant in the capacities and on the dates
indicated:
|
|
|
|
|
/s/ Selwyn Joffe
|
|
Chief Executive Officer and Director |
|
|
|
|
(Principal Executive Officer)
|
|
September 2, 2005 |
|
|
|
|
|
/s/ Charles Yeagley
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
September 2, 2005 |
|
|
|
|
|
/s/ Mel Marks |
|
|
|
|
|
|
Director
|
|
September 2, 2005 |
|
|
|
|
|
/s/ Rudolph Borneo |
|
|
|
|
|
|
Director
|
|
September 2, 2005 |
|
|
|
|
|
/s/ Philip Gay |
|
|
|
|
|
|
Director
|
|
September 2, 2005 |
|
|
|
|
|
/s/ Irv Siegel |
|
|
|
|
|
|
Director
|
|
September 2, 2005 |
|
|
|
|
|
45
MOTORCAR PARTS OF AMERICA, INC
AND SUBSIDIARIES
March 31, 2005, 2004 and 2003
CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
F-1 |
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
|
F-6 |
|
|
|
|
F-26 |
|
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Motorcar Parts of America, Inc.
We have audited the accompanying consolidated balance sheets of Motorcar Parts of America, Inc.
(formerly Motorcar Parts & Accessories, Inc.) and Subsidiaries as of March 31, 2005 and 2004, and
the related consolidated statements of operations, shareholders’ equity and cash flows for each of
the three years in the period ended March 31, 2005. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal controls over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Motorcar Parts of America, Inc. and Subsidiaries as of
March 31, 2005 and 2004, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited Schedule II of Motorcar Parts of America, Inc. and Subsidiaries for each of
the three years in the period ended March 31, 2005. In our opinion, this schedule, when considered
in relation to the basic consolidated financial statements taken as whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Grant Thornton LLP
Los Angeles, California
August 22, 2005, except for Note S, as to which the date is August 30, 2005
F-1
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Formerly MOTORCAR PARTS & ACCESSORIES, INC.)
Consolidated Balance Sheets
March 31
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,211,000 |
|
|
$ |
7,630,000 |
|
Short term investments |
|
|
503,000 |
|
|
|
288,000 |
|
Accounts receivable, net of allowance for
doubtful accounts of $20,000 and $14,000 in
2005 and 2004, respectively |
|
|
11,513,000 |
|
|
|
9,789,000 |
|
Inventory
— net |
|
|
48,587,000 |
|
|
|
25,595,000 |
|
Deferred income tax asset |
|
|
6,378,000 |
|
|
|
8,786,000 |
|
Prepaid income tax |
|
|
— |
|
|
|
172,000 |
|
Inventory unreturned |
|
|
2,409,000 |
|
|
|
2,716,000 |
|
Prepaid expenses and other current assets |
|
|
1,365,000 |
|
|
|
880,000 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
76,966,000 |
|
|
|
55,856,000 |
|
Plant and
equipment — net |
|
|
5,483,000 |
|
|
|
4,758,000 |
|
Deferred income taxes |
|
|
— |
|
|
|
378,000 |
|
Other assets |
|
|
899,000 |
|
|
|
774,000 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
83,348,000 |
|
|
$ |
61,766,000 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
14,502,000 |
|
|
$ |
13,456,000 |
|
Accrued liabilities |
|
|
1,378,000 |
|
|
|
509,000 |
|
Accrued salaries and wages |
|
|
2,235,000 |
|
|
|
1,754,000 |
|
Accrued workers’ compensation claims |
|
|
2,217,000 |
|
|
|
588,000 |
|
Income tax payable |
|
|
183,000 |
|
|
|
— |
|
Line of credit |
|
|
— |
|
|
|
3,000,000 |
|
Deferred compensation |
|
|
450,000 |
|
|
|
260,000 |
|
Deferred income |
|
|
133,000 |
|
|
|
— |
|
Other current liabilities |
|
|
89,000 |
|
|
|
62,000 |
|
Credit due customer |
|
|
12,543,000 |
|
|
|
— |
|
Current portion of capital lease obligations |
|
|
416,000 |
|
|
|
409,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
34,146,000 |
|
|
|
20,038,000 |
|
Deferred income, less current portion |
|
|
521,000 |
|
|
|
100,000 |
|
Deferred income tax liability |
|
|
519,000 |
|
|
|
— |
|
Capital lease obligations, less current portion |
|
|
938,000 |
|
|
|
1,247,000 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
36,124,000 |
|
|
|
21,385,000 |
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
— |
|
|
|
— |
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Preferred stock; par value $.01 per share,
5,000,000 shares authorized; none issued |
|
|
— |
|
|
|
— |
|
Series A junior participating preferred
stock; no par value, 20,000 shares
authorized; none issued |
|
|
— |
|
|
|
— |
|
Common stock; par value $.01 per share,
20,000,000 shares authorized; 8,183,955 and
8,085,955 shares issued and outstanding at
March 31, 2005 and 2004, respectively |
|
|
82,000 |
|
|
|
81,000 |
|
Additional paid-in capital |
|
|
53,627,000 |
|
|
|
53,096,000 |
|
Accumulated other comprehensive loss |
|
|
(55,000 |
) |
|
|
(78,000 |
) |
Accumulated deficit |
|
|
(6,430,000 |
) |
|
|
(12,718,000 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
47,224,000 |
|
|
|
40,381,000 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY |
|
$ |
83,348,000 |
|
|
$ |
61,766,000 |
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part hereof.
F-2
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Formerly MOTORCAR PARTS & ACCESSORIES, INC.)
Consolidated Statements of Operations
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
95,785,000 |
|
|
$ |
80,548,000 |
|
|
$ |
83,969,000 |
|
Cost of goods sold |
|
|
68,732,000 |
|
|
|
58,512,000 |
|
|
|
66,427,000 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
27,053,000 |
|
|
|
22,036,000 |
|
|
|
17,542,000 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
11,622,000 |
|
|
|
9,629,000 |
|
|
|
8,812,000 |
|
Sales and marketing |
|
|
2,759,000 |
|
|
|
1,977,000 |
|
|
|
1,071,000 |
|
Research and development |
|
|
836,000 |
|
|
|
565,000 |
|
|
|
564,000 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
15,217,000 |
|
|
|
12,171,000 |
|
|
|
10,447,000 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
11,836,000 |
|
|
|
9,865,000 |
|
|
|
7,095,000 |
|
Other (expense) income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,794,000 |
) |
|
|
(968,000 |
) |
|
|
(1,980,000 |
) |
Interest income |
|
|
102,000 |
|
|
|
37,000 |
|
|
|
636,000 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (expense) benefit |
|
|
10,144,000 |
|
|
|
8,934,000 |
|
|
|
5,751,000 |
|
Income tax (expense) benefit |
|
|
(3,856,000 |
) |
|
|
(3,123,000 |
) |
|
|
4,967,000 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,288,000 |
|
|
$ |
5,811,000 |
|
|
$ |
10,718,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.77 |
|
|
$ |
0.72 |
|
|
$ |
1.35 |
|
Diluted income per share |
|
$ |
0.73 |
|
|
$ |
0.69 |
|
|
$ |
1.25 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,151,459 |
|
|
|
8,023,228 |
|
|
|
7,960,455 |
|
Diluted |
|
|
8,599,969 |
|
|
|
8,388,129 |
|
|
|
8,540,560 |
|
The accompanying notes to consolidated financial statements are an integral part hereof.
F-3
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Formerly MOTORCAR PARTS & ACCESSORIES, INC.)
Consolidated Statement of Shareholders’ Equity
For the years ended March 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
|
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
Total |
|
|
Income |
|
Balance at March 31, 2002 |
|
|
7,960,455 |
|
|
|
80,000 |
|
|
|
53,126,000 |
|
|
|
(112,000 |
) |
|
|
(28,907,000 |
) |
|
|
24,187,000 |
|
|
|
|
|
Foreign currency
translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
|
— |
|
|
|
5,000 |
|
|
$ |
5,000 |
|
Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,718,000 |
|
|
|
10,718,000 |
|
|
|
10,718,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,723,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2003 |
|
|
7,960,455 |
|
|
|
80,000 |
|
|
|
53,126,000 |
|
|
|
(107,000 |
) |
|
|
(18,189,000 |
) |
|
|
34,910,000 |
|
|
|
|
|
Purchase and cancellation
of warrants and options |
|
|
— |
|
|
|
— |
|
|
|
(372,000 |
) |
|
|
— |
|
|
|
(340,000 |
) |
|
|
(712,000 |
) |
|
|
|
|
Exercise of options |
|
|
204,500 |
|
|
|
2,000 |
|
|
|
498,000 |
|
|
|
— |
|
|
|
— |
|
|
|
500,000 |
|
|
|
|
|
Tax benefit from employee
stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
139,000 |
|
|
|
— |
|
|
|
— |
|
|
|
139,000 |
|
|
|
|
|
Purchase of common stock |
|
|
(79,000 |
) |
|
|
(1,000 |
) |
|
|
(295,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(296,000 |
) |
|
|
|
|
Unrealized gain
on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,000 |
|
|
|
— |
|
|
|
21,000 |
|
|
$ |
21,000 |
|
Foreign currency
translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,000 |
|
|
|
— |
|
|
|
8,000 |
|
|
|
8,000 |
|
Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,811,000 |
|
|
|
5,811,000 |
|
|
|
5,811,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,840,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2004 |
|
|
8,085,955 |
|
|
$ |
81,000 |
|
|
$ |
53,096,000 |
|
|
$ |
(78,000 |
) |
|
$ |
(12,718,000 |
) |
|
$ |
40,381,000 |
|
|
|
|
|
Exercise of options |
|
|
98,000 |
|
|
|
1,000 |
|
|
|
290,000 |
|
|
|
— |
|
|
|
— |
|
|
|
291,000 |
|
|
|
|
|
Tax benefit from employee
stock options exercised |
|
|
— |
|
|
|
— |
|
|
|
241,000 |
|
|
|
— |
|
|
|
— |
|
|
|
241,000 |
|
|
|
|
|
Unrealized gain
on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,000 |
|
|
|
— |
|
|
|
17,000 |
|
|
$ |
17,000 |
|
Foreign currency
translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
|
|
— |
|
|
|
6,000 |
|
|
|
6,000 |
|
Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,288,000 |
|
|
|
6,288,000 |
|
|
|
6,288,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,311,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005 |
|
|
8,183,955 |
|
|
$ |
82,000 |
|
|
$ |
53,627,000 |
|
|
$ |
(55,000 |
) |
|
$ |
(6,430,000 |
) |
|
$ |
47,224,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part hereof.
F-4
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
(Formerly MOTORCAR PARTS & ACCESSORIES, INC.)
Consolidated Statements of Cash Flows
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,288,000 |
|
|
$ |
5,811,000 |
|
|
$ |
10,718,000 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,932,000 |
|
|
|
2,369,000 |
|
|
|
2,384,000 |
|
Provision for inventory reserves and stock adjustments |
|
|
812,000 |
|
|
|
2,566,000 |
|
|
|
2,796,000 |
|
Provision for (recovery of) doubtful accounts |
|
|
6,000 |
|
|
|
13,000 |
|
|
|
(104,000 |
) |
Deferred income taxes |
|
|
3,305,000 |
|
|
|
2,984,000 |
|
|
|
(4,213,000 |
) |
Tax benefit from employee stock options exercised |
|
|
241,000 |
|
|
|
139,000 |
|
|
|
— |
|
Loss on disposal of assets |
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,787,000 |
) |
|
|
(628,000 |
) |
|
|
4,189,000 |
|
Inventory |
|
|
(22,785,000 |
) |
|
|
(3,585,000 |
) |
|
|
4,866,000 |
|
Prepaid income tax |
|
|
172,000 |
|
|
|
(144,000 |
) |
|
|
3,381,000 |
|
Inventory unreturned |
|
|
41,000 |
|
|
|
(276,000 |
) |
|
|
(54,000 |
) |
Prepaid expenses and other current assets |
|
|
(180,000 |
) |
|
|
(303,000 |
) |
|
|
(171,000 |
) |
Other assets |
|
|
(130,000 |
) |
|
|
338,000 |
|
|
|
620,000 |
|
Accounts payable and accrued liabilities |
|
|
4,029,000 |
|
|
|
5,678,000 |
|
|
|
(3,163,000 |
) |
Income tax payable |
|
|
183,000 |
|
|
|
— |
|
|
|
— |
|
Deferred compensation |
|
|
191,000 |
|
|
|
46,000 |
|
|
|
(58,000 |
) |
Deferred income |
|
|
554,000 |
|
|
|
100,000 |
|
|
|
— |
|
Credit due customer |
|
|
12,543,000 |
|
|
|
— |
|
|
|
— |
|
Other liabilities |
|
|
26,000 |
|
|
|
44,000 |
|
|
|
(165,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,447,000 |
|
|
|
15,152,000 |
|
|
|
21,026,000 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(2,549,000 |
) |
|
|
(322,000 |
) |
|
|
(669,000 |
) |
Change in short term investments |
|
|
(199,000 |
) |
|
|
(126,000 |
) |
|
|
110,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,748,000 |
) |
|
|
(448,000 |
) |
|
|
(559,000 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net payments under the line of credit |
|
|
(3,000,000 |
) |
|
|
(6,932,000 |
) |
|
|
(18,097,000 |
) |
Net payments on capital lease obligations |
|
|
(411,000 |
) |
|
|
(945,000 |
) |
|
|
(1,160,000 |
) |
Repurchase of warrants and stock options |
|
|
— |
|
|
|
(1,008,000 |
) |
|
|
— |
|
Exercise of stock options |
|
|
291,000 |
|
|
|
500,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,120,000 |
) |
|
|
(8,385,000 |
) |
|
|
(19,257,000 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustment on cash |
|
|
2,000 |
|
|
|
4,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,419,000 |
) |
|
|
6,323,000 |
|
|
|
1,215,000 |
|
Cash and cash equivalents – beginning of year |
|
|
7,630,000 |
|
|
|
1,307,000 |
|
|
|
92,000 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents – end of year |
|
$ |
6,211,000 |
|
|
$ |
7,630,000 |
|
|
$ |
1,307,000 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,795,000 |
|
|
$ |
968,000 |
|
|
$ |
2,132,000 |
|
Income taxes |
|
$ |
59,000 |
|
|
$ |
253,000 |
|
|
$ |
32,000 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquired under capital lease |
|
$ |
109,000 |
|
|
$ |
1,577,000 |
|
|
$ |
— |
|
The accompanying notes to consolidated financial statements are an integral part hereof.
F-5
Note A — Company Background
|
|
Motorcar Parts of America, Inc. and its subsidiaries (the “Company” or “MPA”) remanufacture and
distribute alternators and starters for import and domestic cars and light trucks. These
replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive
parts are sold to automotive retail chain stores and warehouse distributors throughout the
United States and Canada. The Company also sells after-market replacement alternators and
starters to a major automotive manufacturer. |
|
|
|
The Company obtains used alternators and starters, commonly known as cores, primarily from its
customers (retailers) as trade-ins and by purchasing them from vendors (core brokers). The
retailers grant credit to the consumer when the used part is returned to them, and the Company
in turn provides a credit to the retailer upon return to the Company. These cores are an
essential material needed for the remanufacturing operations. The Company has remanufacturing,
warehousing and shipping/receiving operations for alternators and starters in California,
Singapore and Malaysia, and in June 2005 began limited remanufacturing in Mexico. |
|
|
|
The Company changed its name to Motorcar Parts of America, Inc. from Motorcar Parts &
Accessories, Inc. on January 8, 2004. The Company operates in one business segment pursuant to
Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of
Enterprise and Related Information.” |
Note B – Summary of Significant Accounting Policies
1. |
|
Principles of consolidation |
|
|
|
The accompanying consolidated financial statements include the accounts of Motorcar Parts of
America, Inc and its wholly owned subsidiaries, MVR Products Pte. Ltd., Unijoh Sdn. Bhd. and
Motorcar Parts de Mexico, S.A. de C.V. All significant inter-company accounts and transactions
have been eliminated. |
|
2. |
|
Cash Equivalents |
|
|
|
The Company considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company maintains its cash balances at several
financial institutions located in Southern California. At times, the cash balances exceed
federally insured limits. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash equivalents. Total amounts
uninsured at March 31, 2005 and 2004 were approximately $5,760,000 and $6,930,000, respectively. |
|
3. |
|
Accounts Receivable |
|
|
|
The allowance for doubtful accounts is developed based upon several factors including customers’
credit quality, historical write-off experience and any known specific issues or disputes which
exist as of the balance sheet date. The Company does not require collateral for accounts
receivable. See Note B8 – Revenue Recognition. |
|
4. |
|
Inventory |
|
|
|
Inventory is stated at the lower of cost or market. The standard cost of inventory is
based upon the direct costs of material and labor and an allocation of indirect costs. The
standard cost of inventory is continuously evaluated and adjusted to reflect current cost
levels. Standard costs are determined for each of the three classifications of inventory as
follows: |
|
|
|
Finished goods cost includes the standard cost of cores and raw materials and allocations of
labor and overhead. Work in process inventory historically comprises less than 3% of the
total inventory balance. Work in process is in various stages of production and, on
average, is 50% complete. Work in process is valued at 50% of the standard cost of a
finished good. |
F-6
|
|
|
Core and other raw materials inventory are stated at the lower of cost or market. The
Company determines the market value of cores based on purchases of core and core broker
prices lists. The Company provides an allowance for potentially excess and
obsolete inventory based upon historical usage. |
|
|
|
|
Inventory unreturned represents the value of cores and finished goods shipped to customers
and expected to be returned, stated at the lower of cost or market. Upon product shipment,
the Company reduces the inventory account for the amount of product shipped and establishes
the inventory unreturned asset account for that portion of the shipment that is expected to
be returned by the customer. |
|
|
The Company applies discounts on supplier invoices by reducing related accounts payable and
inventory at the time of payment. |
|
5. |
|
Income Taxes |
|
|
|
The Company accounts for income taxes in accordance with guidance issued by the Financial
Accounting Standard Board (“FASB”) in Statement of Financial Accounting Standards No. 109
(“SFAS”), “Accounting for Income Taxes,” which requires the use of the liability method of
accounting for income taxes. |
|
|
|
The liability method measures deferred income taxes by applying enacted statutory rates in
effect at the balance sheet date to the differences between the tax base of assets and
liabilities and their reported amounts in the financial statements. The resulting asset or
liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance
is provided to reduce deferred tax assets when it is more likely than not that a portion of the
deferred tax asset will not be realized. |
|
|
|
The primary components of the Company’s income tax provision (benefit) are (i) the current
liability or refund due for federal, state and foreign income taxes, including the effect of the
tax net operating loss carryback provisions of the Job Creation and Work Assistance Act of 2002
and (ii) the change in the amount of the net deferred income tax asset, including the effect of
any change in the valuation allowance. |
|
|
|
By eliminating the entire valuation allowance as of March 31, 2003, the Company has recorded
deferred tax assets on (i) federal net operating loss carry forwards of $15,264,000, which
expire in varying amounts through 2023 and (ii) other net temporary differences deductible in
the future. Realization of these deferred tax assets is dependent upon the Company’s ability to
generate sufficient future taxable income. Management believes that it is more likely than not
that future taxable income will be sufficient to realize the recorded deferred tax assets.
Future taxable income is based on management’s forecast of the future operating results of the
Company. Management periodically reviews such forecasts in comparison with actual results and
there can be no assurance that such results will be achieved. |
|
6. |
|
Plant and Equipment |
|
|
|
Plant and equipment are stated at cost, less accumulated depreciation and amortization. The
cost of additions and improvements are capitalized, while maintenance and repairs are charged to
expense when incurred. Depreciation and amortization are provided on a straight-line basis in
amounts sufficient to relate the cost of depreciable assets to operations over their estimated
service lives, which range from three to ten years. Leasehold improvements are amortized over
the lives of the respective leases or the service lives of the leasehold improvements, whichever
is shorter. |
|
7. |
|
Foreign Currency Translation |
|
|
|
For financial reporting purposes, the functional currency of the foreign subsidiaries is the
local currency. The assets and liabilities of foreign operations are translated into the
reporting currency (U.S. dollar) at the exchange rate in effect at the balance sheet date, while
revenues and expenses are translated at average exchange rates during the year in accordance
with SFAS 52, “Foreign Currency Translation.” The accumulated foreign currency translation
adjustment is presented as a component of Other Comprehensive Income in the Consolidated
Statement of Stockholders’ Equity. |
F-7
8. |
|
Revenue Recognition |
|
|
|
The Company recognizes revenue when performance by the Company is complete. Revenue is
recognized when all of the following criteria established by the Staff of the Securities and
Exchange Commission in Staff Accounting Bulletin 104, “Revenue Recognition,” have been met: |
|
• |
|
Persuasive evidence of an arrangement exists, |
|
|
• |
|
Delivery has occurred or services have been rendered, |
|
|
• |
|
The seller’s price to the buyer is fixed or determinable, and |
|
|
• |
|
Collectibility is reasonably assured. |
|
|
For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date of
shipment. For products shipping FOB destination, revenues are recognized two days after the
date of shipment based on the Company’s experience regarding the length of transit duration.
The Company includes shipping and handling charges in its gross invoice price to customers and
classifies the total amount as revenue in accordance with Emerging Issues Task Force Issue
(“EITF”) 00-10, “Accounting for Shipping and Handling Fees and Costs.” Shipping and handling
costs are recorded as cost of sales. |
|
|
|
The Company accounts for revenues and cost of sales on a net-of-core-value basis. Management
has determined that the Company’s business practices and contractual arrangements result in the
return to the Company of substantially all used cores. Accordingly, management excludes the
value of cores from revenue in accordance with Statement of Financial Accounting Standards 48,
“Revenue Recognition When Right of Return Exists” (“SFAS 48”). Core values charged to customers
and not included in revenues totaled $79,000,000, $71,173,000, and $84,629,000 for the fiscal
years ended March 31, 2005, 2004, and 2003, respectively. Upon receipt of a core, the Company
grants the customer a credit based on the core value billed. The Company generally limits core
returns to the number of similar cores previously shipped to each customer. |
|
|
|
Unit value revenue is recorded based on the Company’s price list, net of applicable discounts
and allowances. When the Company ships a product, it recognizes an obligation to accept a
returned core by recording a contra receivable account based upon the agreed upon core charge
and establishing an inventory unreturned account at the standard cost of the core expected to be
returned. The Company recognizes revenue for cores based upon an estimate of the rate in which
customers will pay cash for cores in lieu of returning cores for credits. In fiscal year 2005,
the Company began to recognize core charge revenue each fiscal quarter based on a quarterly
estimate. The revenue from core charges had previously been recorded at the end of the fiscal
year. |
|
|
|
The Company allows customers to return slow moving and other inventory. The Company provides
for such returns of inventory in accordance with SFAS 48, “Revenue Recognition When Right of
Return Exists”. The Company reduces revenue and cost of sales for the unit value based on a
historical return analysis and information obtained from customers about current stock levels. |
|
|
|
During fiscal 2004, the Company began to offer products on pay-on-scan (“POS”) arrangement to
one of its customers. For POS inventory, revenue is recognized when the customer has notified
the Company that it has sold a specifically identified product to another person or entity. POS
inventory represents inventory held on consignment at customer locations. This customer bears
the risk of loss of any consigned product from any cause whatsoever from the time possession is
taken until a third party customer purchases the product or its absence is noted in a cycle or
physical inventory count. Net sales from POS inventory were $6,191,000 and $5,561,000 for the
fiscal year ended March 31, 2005 and 2004, respectively. |
F-8
|
|
The Company also maintains accounts to accrue for estimated returns and to track unit and
core returns. The accrual for anticipated returns reduces revenues and accounts receivable.
The estimated unit sales returns and estimated core returns account balances are as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Estimated sales returns |
|
$ |
694,000 |
|
|
$ |
992,000 |
|
Estimated core inventory returns |
|
$ |
2,288,000 |
|
|
$ |
3,852,000 |
|
|
|
The amount of revenue recognized for core charges for the years ending March 31, 2005, 2004 and
2003 were $5,046,000, $3,120,000 and $3,850,000, respectively. |
|
9. |
|
Sales Incentives |
|
|
|
The Company records the cost of all marketing allowances provided to its customers in accordance
with EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer.” Such
allowances include sales incentives and concessions. Voluntary marketing allowances related to
a single exchange of product are recorded as a reduction of revenues at the time the related
revenues are recorded or when such incentives are offered. Other marketing allowances, which
may only be applied against future purchases, are recorded as a reduction to revenues over the
life of the contract using the straight-line method. Sales incentive amounts are recorded based
on the value of the incentive provided. For the years ended March 31, 2005, 2004 and 2003, the
Company recorded a reduction in revenues of $2,223,000, $2,276,000 and $1,651,000, respectively,
attributable to marketing allowances granted in connection with long-term contracts and a
reduction of $9,380,000, $4,508,000 and $7,834,000, respectively, attributable to marketing
allowances related to a single exchange of product. |
|
10. |
|
Net Income Per Share |
|
|
|
Basic income per share is computed by dividing net income by
the weighted-average number of shares of common stock outstanding during the period. Diluted income per share includes the
effect, if any, from the potential exercise or conversion of securities, such as stock options
and warrants, which would result in the issuance of incremental shares of common stock. |
|
|
|
The following represents a reconciliation of basic and diluted net income per share. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year end March 31 |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income |
|
$ |
6,288,000 |
|
|
$ |
5,811,000 |
|
|
$ |
10,718,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
8,151,459 |
|
|
|
8,023,228 |
|
|
|
7,960,455 |
|
Effect of dilutive options and warrants |
|
|
448,510 |
|
|
|
364,901 |
|
|
|
580,105 |
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
8,599,969 |
|
|
|
8,388,129 |
|
|
|
8,540,560 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.77 |
|
|
$ |
0.72 |
|
|
$ |
1.35 |
|
Diluted |
|
$ |
0.73 |
|
|
$ |
0.69 |
|
|
$ |
1.25 |
|
|
|
The effect of dilutive options and warrants excludes 361,525 options with exercise prices
ranging from $8.70 to $19.13 per share in 2005; 127,250 options with exercise prices ranging
from $6.35 to $19.13 per share in 2004 and 57,475 options with exercise prices ranging from
$3.60 to $19.13 per share in 2003 – all of which were anti-dilutive. |
|
11. |
|
Use of Estimates |
|
|
|
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. On an on-going basis,
the Company evaluates its estimates, including those related |
F-9
|
|
to the carrying amount of property, plant and equipment; valuation allowances for receivables,
inventories, and deferred income taxes; accrued liabilities; and litigation and disputes. |
|
|
|
The Company uses significant estimates in the calculation of sales returns. These estimates are
based on the Company’s historical return rates and specific evaluation of customers. |
|
|
|
The Company’s calculation of inventory reserves involves significant estimates. The basis for
the inventory reserve is a comparison of inventory on hand to historical sales volumes. |
|
|
|
The Company uses significant estimates in the calculation of its income tax provision or benefit
by using forecasts to estimate whether it will have sufficient future taxable income to realize
its deferred tax assets. There can be no assurances that the Company’s taxable income will be
sufficient to realize such deferred tax assets. |
|
|
|
A change in the assumptions used in the estimates for sales returns, inventory reserves and
income taxes could result in a difference in the related amounts recorded in the Company’s
consolidated financial statements. |
|
12. |
|
Financial Instruments |
|
|
|
The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued liabilities approximate their fair value due to the short-term
nature of these instruments. The carrying amounts of the line of credit and other long-term
liabilities approximate their fair value based on current rates for instruments with similar
characteristics. |
|
13. |
|
Stock-Based Compensation |
|
|
|
The Company accounts for stock-based employee compensation as prescribed by Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and has
adopted the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and
SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of
SFAS 123.” |
|
|
|
Under the provisions of APB No. 25, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company’s common stock at the date of the
grant over the amount an employee must pay to acquire the stock. SFAS 123 requires pro forma
disclosures of net income and net income per share as if the fair value based method of
accounting for stock-based awards had been applied. Under the fair value based method,
compensation cost is recorded based on the value of the award at the grant date and is
recognized over the service period. The following table presents pro forma net income had
compensation costs been determined on the fair value at the date of grant for awards under the
plan in accordance with SFAS 123. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net income, as reported: |
|
$ |
6,288,000 |
|
|
$ |
5,811,000 |
|
|
$ |
10,718,000 |
|
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects: |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects: |
|
|
(909,000 |
) |
|
|
(198,000 |
) |
|
|
(169,000 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income: |
|
$ |
5,379,000 |
|
|
$ |
5,613,000 |
|
|
$ |
10,549,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic income
per share — as reported |
|
|
0.77 |
|
|
|
0.72 |
|
|
|
1.35 |
|
Basic income
per share — pro forma |
|
|
0.66 |
|
|
|
0.70 |
|
|
|
1.33 |
|
Diluted
income per share — as reported |
|
|
0.73 |
|
|
|
0.69 |
|
|
|
1.25 |
|
Diluted
income per share — pro forma |
|
|
0.63 |
|
|
|
0.67 |
|
|
|
1.24 |
|
|
|
The weighted average estimated fair value of employee stock options granted during fiscal 2005,
2004 and 2003 was $3.91, $1.76 and $1.16, respectively. |
F-10
|
|
Under SFAS 123, compensation cost for options granted is recognized over the vesting period.
The compensation cost included in the pro forma amounts above represents the cost associated
with options granted during fiscal 1996 through fiscal 2005. The following assumptions were
used in the Black-Scholes pricing model to estimate stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Risk free interest rate |
|
|
3.22 |
% |
|
|
3.28 |
% |
|
|
2.23 |
% |
Expected life (years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Expected volatility |
|
|
45 |
% |
|
|
51 |
% |
|
|
53 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
14. |
|
Credit Risk |
|
|
|
The majority of the Company’s sales are to leading automotive after-market parts suppliers.
Management believes the credit risk with respect to trade accounts receivable is limited due to
the Company’s credit evaluation process and the nature of its customers. However, should the
Company’s customers experience significant cash flow problems, the Company’s financial position
and results of operations could be materially and adversely affected. |
|
15. |
|
Deferred Compensation Plan |
|
|
|
The Company has a deferred compensation plan for certain management. The plan allows
participants to defer salary, bonuses and commission. The assets of the plan are held in a
trust and are subject to the claims of the Company’s general creditors under federal and state
laws in the event of insolvency. Consequently, the trust qualifies as a Rabbi trust for income
tax purposes. The plan’s assets consist primarily of mutual funds and are classified as
“available for sale.” The investments are recorded at market value, with any unrealized gain or
loss recorded as other comprehensive loss in shareholders’ equity. Adjustments to the deferred
compensation obligation are recorded in operating expenses. The carrying value of plan assets
was $503,000 and $288,000, and deferred compensation obligation was $450,000 and $259,000 at
March 31, 2005 and 2004, respectively. See Note C. |
|
16. |
|
Comprehensive Income |
|
|
|
SFAS 130, “Reporting Comprehensive Income,” established standards for the reporting and display
of comprehensive income and its components in a full set of general purpose financial
statements. Comprehensive income is defined as the change in equity during a period resulting
from transactions and other events and circumstances from non-owner sources. The Company’s
total comprehensive income consists of net income, foreign currency translation adjustments and
unrealized gains/losses. The Company has presented Comprehensive Income on the Consolidated
Statement of Shareholders’ Equity. |
|
17. |
|
Recent Pronouncements |
|
|
|
In December 2004, the FASB issued SFAS 123R (revised 2004), “Share-Based Payment.” This
statement is a revision to SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes
Opinion 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires the measurement of
the cost of employee services received in exchange for an award of equity instruments based on
the grant-date fair value of the award. The cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. The requirements of
SFAS No. 123R are effective as of the beginning of the first interim reporting period that
begins on April 1, 2006 for the Company, requiring compensation cost to be recognized as expense
for the portion of outstanding unvested awards, based on the grant-date fair value of those
awards calculated using the Black-Scholes option pricing model under SFAS 123 for pro forma
disclosures. The Company has not yet completed the analysis of the impact of adopting SFAS
123R, but based upon current estimates of fair value, net income would have been reduced by
approximately $909,000 for the year ended March 31, 2005. |
F-11
|
|
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS No. 151”). SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). This statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of “so abnormal.” In addition, this statement
requires that allocation of fixed production overhead to the costs of conversion be based on the
normal capacity of the production facilities. The requirements of SFAS No. 151 are effective as
of the beginning of the first interim or annual reporting period that begins after June 15,
2005. The Company does not expect the adoption of SFAS No. 151 to have a material effect on its
financial statements. |
|
|
|
In December 2004, the FASB issued SFAS No. 153 “Exchange of Non-monetary Assets an amendment of
APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. A reciprocal transfer of a non-monetary asset shall
be deemed an exchange only if the transferor has no substantial continuing involvement in the
transferred asset such that the usual risks and rewards of ownership of the asset are
transferred. The requirements of SFAS No. 153 are effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the
adoption of SFAS No. 151 to have a material effect on its financial statements. |
|
|
|
In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154,
“Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces Accounting
Principles Board Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statements,” and requires the direct effects of accounting
principle changes to be retrospectively applied. The existing guidance with respect to
accounting estimate changes and corrections of errors is carried forward in SFAS No. 154. The
requirements of SFAS No. 154 are effective for as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005. The Company does not expect the
adoption of SFAS No. 154 to have a material effect on our financial statements. |
Note C
— Short-Term Investments
|
|
The short-term investments account contains the assets of the Company’s deferred compensation
plan. The plan’s assets consist primarily of mutual funds and are classified as available for
sale. As of March 31, 2005 and 2004, the fair market value of the short-term investments was
$503,000 and $288,000, and the cost basis was $454,000 and $267,000, respectively. |
Note D
— Inventory
|
|
Inventory is comprised of the following at March 31: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Raw materials and cores |
|
$ |
19,864,000 |
|
|
$ |
12,645,000 |
|
Work-in-process |
|
|
681,000 |
|
|
|
621,000 |
|
Finished goods |
|
|
13,398,000 |
|
|
|
12,620,000 |
|
|
|
|
|
|
|
|
|
|
|
33,943,000 |
|
|
|
25,886,000 |
|
|
|
|
|
|
|
|
|
|
Less allowance for excess and obsolete inventory |
|
|
(2,392,000 |
) |
|
|
(2,637,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,551,000 |
|
|
|
23,249,000 |
|
|
|
|
|
|
|
|
|
|
Pay-on-scan inventory |
|
|
17,036,000 |
|
|
|
2,346,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
48,587,000 |
|
|
$ |
25,595,000 |
|
|
|
|
|
|
|
|
F-12
Note E
— Inventory Unreturned
|
|
Inventory unreturned is comprised of the following at March 31: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Cores |
|
$ |
1,352,000 |
|
|
$ |
2,379,000 |
|
Finished goods |
|
|
1,057,000 |
|
|
|
337,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,409,000 |
|
|
$ |
2,716,000 |
|
|
|
|
|
|
|
|
Note F
— Plant and Equipment
Plant and equipment, at cost, are as follows at March 31:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Machinery and equipment |
|
$ |
15,052,000 |
|
|
$ |
13,564,000 |
|
Office equipment and fixtures |
|
|
5,269,000 |
|
|
|
4,718,000 |
|
Leasehold improvements |
|
|
1,153,000 |
|
|
|
1,099,000 |
|
|
|
|
|
|
|
|
|
|
|
21,474,000 |
|
|
|
19,381,000 |
|
Less accumulated depreciation and amortization |
|
|
(15,991,000 |
) |
|
|
(14,623,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
5,483,000 |
|
|
$ |
4,758,000 |
|
|
|
|
|
|
|
|
Note G — Multi-Year Exclusive Arrangement and Inventory Transaction with a Large Customer
|
|
In May 2004, the Company entered into an agreement with Customer A (see Note M) to become its
primary supplier of import alternators and starters for its eight distribution centers. As part
of this four-year agreement, the Company entered into a pay-on-scan (POS) arrangement with the
customer. Under this arrangement, the customer is not obligated to purchase the POS merchandise
the Company has shipped to the customer until that merchandise is ultimately sold to the end
user. As part of this agreement the Company purchased $24,130,000 of the customer’s
then-current inventory of import starters and alternators transitioning to the POS program at
the price the customer originally paid for this inventory. The Company is paying for this
inventory over 24 months, without interest, through the issuance of monthly credits against
receivables generated by sales to the customer. The contract requires that the Company continue
to meet its historical performance and competitive standards. |
|
|
|
The Company did not record the inventory acquired from the customer as part of this transaction
(the “transition inventory”) as an asset because it does not meet the description of an asset
provided in FASB Concepts Statement No. 6, “Elements of Financial Statements” (“CON 6”).
Therefore, the Company does not recognize revenues from the customer’s POS sales of the
transition inventory. |
|
|
|
The Company has agreed to issue credits in an amount equal to the transition inventory. Based
on the description of a liability in CON 6, the Company recognizes the amount of its obligation
to the customer as the customer sells the transition inventory and recognizes a payable to the
Company. During the year ended March 31, 2005, the customer sold $19,643,000 of the transition
inventory and MPA issued credits of $7,100,000, resulting in a net obligation to the customer of
$12,543,000 as reflected on the Company’s March 31, 2005 balance sheet. |
F-13
|
|
As the issuance of credits to the customer generally lags sales of the transition inventory, the
Company receives cash in the early months of the agreement which will be offset in the future by
lower cash collections resulting from credits issued to the customer. As of March 31, 2005, the
Company had agreed to issue future credits to Customer A in the following amounts: |
|
|
|
|
|
Q1 2006 |
|
$ |
3,180,000 |
|
Q2 2006 |
|
$ |
3,270,000 |
|
Q3 2006 |
|
$ |
3,270,000 |
|
Q4 2006 |
|
$ |
3,270,000 |
|
Q1 2007 |
|
$ |
4,040,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,030,000 |
|
|
|
|
|
|
|
In connection with this POS arrangement, the Company recognized a liability of approximately
$460,000 to reflect that the price the Company is paying for the cores included within the
non-MPA portion of the transition inventory is greater than the market value of these cores. |
|
|
|
The Company also agreed to cooperate with the customer to use reasonable commercial efforts to
convert all products sold by MPA to the customer to the POS arrangement by April 2006. In the
event the conversion is not accomplished by April 2006, the Company agreed to amend the
agreement to acquire an additional $24,000,000 of inventory and to provide the customer with an
additional $24,000,000 of credit memos to be issued and applied in equal monthly installments to
current receivables over a 24-month period ending April 2008. |
Note H
— Capital Lease Obligations
|
|
The Company leases various types of machinery and computer equipment under agreements accounted
for as capital leases and are included in plant and equipment as follows: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Cost |
|
$ |
2,299,000 |
|
|
$ |
7,681,000 |
|
Less accumulated amortization |
|
|
(1,127,000 |
) |
|
|
(5,498,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
1,172,000 |
|
|
$ |
2,183,000 |
|
|
|
|
|
|
|
|
|
|
Future minimum lease payments at March 31, 2005 for the capital leases are as follows: |
|
|
|
|
|
Year Ending March 31 |
|
|
|
|
2006 |
|
$ |
483,000 |
|
2007 |
|
|
438,000 |
|
2008 |
|
|
324,000 |
|
2009 |
|
|
222,000 |
|
2010 |
|
|
— |
|
|
|
|
|
Total minimum lease payments |
|
|
1,467,000 |
|
Less amount representing interest |
|
|
(113,000 |
) |
|
|
|
|
Present value of future minimum lease payment |
|
|
1,354,000 |
|
Less current portion |
|
|
(416,000 |
) |
|
|
|
|
|
|
$ |
938,000 |
|
|
|
|
|
Note I
— Line of Credit and Other Borrowings
|
|
On May 28, 2004 the Company secured a $15,000,000 credit facility with a new bank. This
revolving credit line, which replaced the Company’s previous asset-based facility, bears
interest either at the LIBOR rate plus 2% or the bank’s reference rate, at the Company’s option.
The bank holds a security interest in substantially all of the Company’s assets. As of March
31, 2005, no amounts were outstanding under this line of credit and the |
F-14
|
|
Company had reserved $4,301,000 of the line for standby letters of credit for worker’s
compensation insurance. The loan agreement matures on October 2, 2006. |
|
|
The bank loan agreement includes various financial covenants, including covenants requiring the
Company to (i) maintain tangible net worth of not less than $39,000,000, increased by 75% of net
profit after taxes each quarter, EBITDA of not less than $3,000,000 for each quarter and
$14,000,000 for the four most recent fiscal quarters, a fixed charge ratio of not less than 1.25
to 1.00 as of the last day of each quarter, and a quick ratio of not less than 0.65 to 1.00 as
of the close of each quarter and to (ii) limit capital expenditures to $2,500,000 and operating
lease obligations to $2,000,000 during any fiscal year. The Company was in default of a loan
covenant for failure to achieve EBITDA of not less than $14,000,000 in EBITDA for the four
fiscal quarters ended December 31, 2004. On February 18, 2005 the bank waived the Company’s
breach of this EBITDA covenant. |
|
|
|
The Company was in default for (i) failing to provide the bank with its public reports on Form
10-Q for the fiscal quarters ended June 30, 2004, September 30, 2004 and December 31, 2004, (ii)
failing to maintain a quick ratio of not less than 0.65 to 1.00 for the fiscal quarter ended
March 31, 2005, (iii) making capital expenditures during the fiscal year ended March 31, 2005 in
an amount in excess of $2,500,000 and (iv) failing to provide the bank with certain notices,
monthly financial statements and required compliance certificates. On June 29, 2005, the bank
provided the Company with a waiver of these covenant defaults. The waiver restricted the future
availability of the Company to access the line of credit until it had satisfied the conditions
included in the waiver. The ongoing effect of this waiver was conditioned upon the Company’s
delivery to the bank of (i) its 10-Q for the quarter ended September 30, 2004 by July 15, 2005,
(ii) its 10-Q for the quarter ended December 31, 2004 by July 29, 2005 and (iii) its 10-K for
the year ended March 31, 2005 by August 22, 2005. The Company filed the 10-Q for the quarter
ended September 30, 2004 by July 15, 2005, the 10-Q for the quarter ended December 31, 2004 by
July 29, 2005 and the 10-K for the year ended March 31, 2005 by August 22, 2005. While the
Company satisfied the first two conditions identified in the preceding paragraph, it did not
provide the bank with its fiscal 2005 10-K by August 22, 2005. See Note S. |
|
|
|
Under two separate agreements, executed on July 30, 2004 and August 21, 2003 with two customers
and their respective banks, the Company may sell those customers’ receivables to those banks at
an agreed-upon discount set at the time the receivables are sold. This discount arrangement has
allowed the Company to accelerate collection of the customers’ receivables aggregating
$81,487,000 and $48,679,000 for the years ended March 31, 2005 and 2004, respectively, by an
average of 187 days and 149 days, respectively. On an annualized basis the weighted average
discount rate on the receivables sold to the banks during the years ended March 31, 2005 and
2004 was 4.2% and 3%, respectively. The amount of the discount on these receivables, $1,539,000
and $588,000 for the years ended March 31, 2005 and 2004, respectively, was recorded as interest
expense. |
Note J
— Shareholders’ Equity
|
|
In connection with the execution of the May 31, 2001 second amended and restated credit
agreement, the exercise price of the warrants previously issued by the Company to its existing
lender was reduced to $.01 per share. This warrant provided the bank the right to purchase
400,000 shares of the Company’s common stock. During fiscal 2004, the Company obtained
replacement financing and paid its former lender $700,000 to cancel this warrant. This
transaction resulted in a reduction of $340,000 in retained earnings and a reduction of $360,000
in additional paid in capital. |
|
|
|
During the twelve months ended March 31, 2004, the Company also repurchased at market value
79,000 shares of its common stock for $296,000. |
Preferred Stock
|
|
On February 24, 1998, the Company entered into a Rights Agreement with Continental Stock
Transfer & Trust Company. As part of this agreement, the Company established 20,000 shares of
Series A Junior Participating Preferred Stock, par value $.01 per share. The Series A Junior
Participating Preferred Stock has preferential voting, dividend and liquidation rights over the
Common Stock. |
F-15
|
|
On February 24, 1998, the Company also declared a dividend distribution to the March 12, 1998
holders of record of one Right for each share of Common Stock held. Each Right, when
exercisable, entitles its holder to purchase one one-thousandth of a share of the Company’s
Series A Junior Participating Preferred Stock at a price of $65 per one one-thousandth of a
share (subject to adjustment). |
|
|
|
The Rights are not exercisable or transferable apart from the Common Stock until an Acquiring
Person, as defined in the Rights Agreement, without the prior consent of the Company’s Board of
Directors, acquires 20% or more of the outstanding shares of the Common Stock or announces a
tender offer that would result in 20% ownership. The Company is entitled to redeem the Rights,
at $0.001 per Right, any time until ten days after a 20% position has been acquired. Under
certain circumstances, including the acquisition of 20% of the Company’s common stock without
the prior consent of the Board, each Right not owned by a potential Acquiring Person will
entitle its holder to receive, upon exercise, shares of Common Stock having a value equal to
twice the exercise price of the Right. |
|
|
|
Holders of a Right will be entitled to buy stock of an Acquiring Person at a similar discount
if, after the acquisition of 20% or more of the Company’s outstanding Common Stock, the Company
is involved in a merger or other business combination transaction with another person in which
it is not the surviving company, the Company’s common stock is changed or converted, or the
Company sells 50% or more of its assets or earning power to another person. |
|
|
|
The Rights expire on March 12, 2008 unless earlier redeemed by the Company. |
|
|
|
The Rights make it more difficult for a third party to acquire a controlling interest in the
Company without the approval of the Company’s Board. As a result, the existence of the Rights
could have an adverse impact on the market for the Company’s Common Stock. |
Note K
— Employment Agreements
|
|
The Company has employment agreements with three employees, expiring on March 31, 2006. The
employment agreements provide for annual base salaries aggregating $924,000. In addition, these
employees were granted options in fiscal 2001 through 2005 pursuant to the Company’s stock
option plans for the purchase of 529,750 shares of common stock at exercise prices ranging from
$0.931 to $9.27 per share. |
Note L — Commitments
|
|
The Company leases office and warehouse facilities in California, Tennessee, North Carolina,
Malaysia, Singapore and Mexico under operating leases expiring through 2007. At March 31, 2005,
the remaining future minimum rental payments under the above operating leases are as follows: |
|
|
|
|
|
Year ending March 31, |
|
|
|
|
2006 |
|
$ |
2,232,000 |
|
2007 |
|
|
2,204,000 |
|
2008 |
|
|
850,000 |
|
2009 |
|
|
862,000 |
|
2010 |
|
|
881,000 |
|
Thereafter |
|
|
3,305,000 |
|
|
|
|
|
|
|
$ |
10,334,000 |
|
|
|
|
|
|
|
On October 28, 2004, the Company’s wholly owned subsidiary, Motorcar Parts de Mexico, S.A. de
C.V., entered into a build-to-suit lease covering approximately 125,000 square feet of
industrial premises in Tijuana, Baja California, Mexico for a remanufacturing facility. The
Company guarantees the payment obligations of its wholly owned subsidiary under the terms of the
lease. The lease provides for a monthly rent of $47,500, which increases by 2% each year
beginning with the third year of the lease term. The lease has a term of 10 years from the date
the facility was available for occupancy, and Motorcar Parts de Mexico has an option to extend
the lease term for two additional 5-year periods. In May 2005, the Company took possession of
these premises, |
F-16
|
|
and in June 2005, the Company began limited remanufacturing at the location. In April 2006,
Motorcar Parts de Mexico will lease an additional 41,000 square feet adjoining its existing
space. |
|
|
During fiscal years 2005, 2004 and 2003, the Company incurred total lease expenses of
$1,466,000, $1,263,000 and $1,226,000, respectively. |
|
|
|
Other Long-Term Agreements with Customers |
|
|
|
The Company entered into a five-year agreement with Customer C in March 2003 whereby the Company
was designated as the primary supplier for all remanufactured import alternators and starters
purchased by this customer. In consideration for this contract, the Company agreed to issue
credits to this customer of approximately $5,014,000, less cash received of $65,000 and
inventory received of $301,000, at various times over the life of this five-year period. In
connection with this agreement, the Company recognized a charge against revenues of $1,626,000
in fiscal 2003 related to a write-down of core inventory which was recorded as a marketing
allowance in accordance with EITF 01-9, received inventory valued at approximately $365,000 and
an update order from this customer for $8,329,000 and agreed to assist this customer with its
efforts to reduce its warranties by participating in a warranty reduction program. In fiscal
2005, 2004 and 2003, the Company recognized total incentives against revenues of $495,000,
$1,084,000 and $1,626,000, respectively, under this agreement. |
|
|
|
The Company supplemented the agreement in March 2003 and agreed to provide up to $1,500,000 for
testing equipment to this customer. The funds for the testing equipment allowance are being
credited to this customer in 60 equal monthly amounts of $25,000, which began in March 2003 and
will end in February 2008. These credits will be charged against gross revenues ratably over
the sixty-month period, in accordance with EITF 01-09 as the credits do not result in a single
exchange transaction and are dependent upon future sales to the customer. |
|
|
|
The Company again supplemented the agreement in January 2004 and agreed to provide a $500,000
marketing allowance to this customer. The funds for the marketing allowance were credited to
this customer in 12 equal monthly amounts of $41,666 ending in December 2004. These credits
were charged against gross revenues ratably over the twelve-month period, in accordance with
EITF 01-09 as the credits do not result in a single exchange transaction and are dependent upon
future sales to the customer. The Company also agreed to accept a stock adjustment of $550,000
from this customer. |
|
|
|
As of March 1, 2005, the Company entered into a new agreement with Customer C. As part of this
agreement, the Company’s designation as this customer’s exclusive supplier of remanufactured
import alternators and starters was extended from February 28, 2008 to December 31, 2012. The
Company agreed to acquire the customer’s import alternator and starter core inventory by issuing
$10,300,000 of credits over a five-year period. The amount of credits to be issued is subject
to adjustment if the Company’s sales to the customer decrease in any quarter by more than an
agreed upon percentage. The customer is obligated to repurchase the cores in the customer’s
inventory upon termination of the agreement for any reason. The Company also agreed to provide
a promotional allowance of $250,000 each year over the term of the agreement. |
|
|
|
As the Company issues credits to this customer over the five year period, the Company
establishes a long-term asset account for the value of the core inventory estimated to be on
hand with the customer and subject to repurchase upon termination of the agreement, and reduces
revenue by the amount by which the credit exceeds the estimated core inventory value. As of
March 31, 2005, the long-term asset account was approximately $67,000. The Company will
regularly review the long-term asset account for impairment and make any necessary adjustment to
the carrying value of this asset. Additionally, as of the date of the new agreement, the
unrecognized revenue from the under-return of cores from this customer was $1,314,000, and the
related cost of sales was $649,000. These amounts are being deferred and amortized over the
five year period that the credits are issued. |
F-17
|
|
The following table presents the outstanding commitments for all sales incentives and purchase
obligations for Customer C and sales incentives will be recognized as a charge against revenues
over the remaining term of the contract or subsequent agreement as follows: |
|
|
|
|
|
Year ending March 31, |
|
|
|
|
2006 |
|
$ |
3,099,000 |
|
2007 |
|
|
3,099,000 |
|
2008 |
|
|
3,036,000 |
|
2009 |
|
|
2,304,000 |
|
2010 |
|
|
2,129,000 |
|
Thereafter |
|
|
708,000 |
|
|
|
|
|
Total |
|
$ |
14,375,000 |
|
|
|
|
|
|
|
The Company entered into an eight-year agreement with Customer B in October 2003 whereby the
Company was designated as the exclusive supplier of all remanufactured import alternators and
starters for the customer. In consideration for this contract, the Company agreed to issue
credits to this customer of approximately $8,294,000 to be issued as monthly credits over the
96-month term of the contract. The Company also agreed to provide one-time incentive credits
when new stores and distribution stores are opened. In fiscal 2005 and 2004, the Company
recognized total incentives against gross revenues under this contract of $1,037,000 and
$518,000, respectively. The balance of the marketing allowance of $6,741,000 will be recognized
as a charge against gross revenues over the remaining term of the contract in accordance with
EITF 01-09 as follows: |
|
|
|
|
|
Year ending March 31, |
|
|
|
|
2006 |
|
$ |
1,037,000 |
|
2007 |
|
|
1,037,000 |
|
2008 |
|
|
1,037,000 |
|
2009 |
|
|
1,037,000 |
|
2010 |
|
|
1,037,000 |
|
Thereafter |
|
|
1,556,000 |
|
|
|
|
|
Total |
|
$ |
6,741,000 |
|
|
|
|
|
In January 2005, the Company was awarded a contract to supply one of the largest automobile
manufacturers in the world with a new line of remanufactured alternators and starters for the
United States and Canadian markets. Under this agreement, which expires on December 31, 2010,
the Company will supply a new line of remanufactured alternators and starters covering all
domestic and import makes and models of cars and light trucks. To satisfy the requirements of
this contract, the Company expanded its operations and built-up inventory incurring certain
transition costs associated with this build-up. As part of the agreement, the Company agreed to
grant the customer credits of $6,000,000, which is expected to be issued during fiscal 2006.
The agreement also contains other typical provisions, such as performance, quality and
fulfillment requirements that must be met by the Company, a requirement to provide marketing
support to this customer and a provision (standard in this manufacturer’s vendor agreements)
granting the manufacturer the right to terminate the agreement at any time for any reason.
|
|
The following table reflects activities related to sales incentives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
Year end |
|
Beginning |
|
|
New |
|
|
Charged to |
|
|
Ending |
|
March 31, |
|
Balance |
|
|
Commitments |
|
|
Sales |
|
|
Balance |
|
2003 |
|
$ |
0 |
|
|
$ |
6,148,000 |
|
|
$ |
1,651,000 |
|
|
$ |
4,497,000 |
|
2004 |
|
|
4,497,000 |
|
|
|
9,044,000 |
|
|
|
2,276,000 |
|
|
|
11,265,000 |
|
2005 |
|
|
11,265,000 |
|
|
|
7,958,000 |
|
|
|
2,223,000 |
|
|
|
17,000,000 |
|
|
|
There were no material commitments for contractual sales incentives prior to 2003, the year the
Company began to enter into long-term contracts with major customers. |
F-18
|
|
The Company is partially self-insured for workers compensation insurance and is liable for the
first $250,000 of each claim, with an aggregate amount of $2,500,000 per year. |
Note M — Major Customers
|
|
The Company’s three largest customers accounted for the following total percentage of accounts
receivable and sales for the fiscal year ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
2005 |
|
2004 |
|
2003 |
Customer A |
|
|
72 |
% |
|
|
64 |
% |
|
|
67 |
% |
Customer B |
|
|
12 |
% |
|
|
16 |
% |
|
|
11 |
% |
Customer C |
|
|
9 |
% |
|
|
13 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
2005 |
|
2004 |
Customer A |
|
|
68 |
% |
|
|
61 |
% |
Customer B |
|
|
10 |
% |
|
|
17 |
% |
Customer C |
|
|
18 |
% |
|
|
15 |
% |
Note N
— Income Taxes
|
|
The income tax (expense) benefit for the years ended March 31, 2005, 2004 and 2003 is as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Current tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(435,000 |
) |
|
$ |
(125,000 |
) |
|
$ |
821,000 |
|
State |
|
|
(85,000 |
) |
|
|
(7,000 |
) |
|
|
(67,000 |
) |
Foreign |
|
|
(31,000 |
) |
|
|
(7,000 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax (expense) benefit |
|
|
(551,000 |
) |
|
|
(139,000 |
) |
|
|
754,000 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(2,908,000 |
) |
|
|
(2,781,000 |
) |
|
|
3,653,000 |
|
State |
|
|
(397,000 |
) |
|
|
(203,000 |
) |
|
|
560,000 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax (expense) benefit |
|
|
(3,305,000 |
) |
|
|
(2,984,000 |
) |
|
|
4,213,000 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax (expense) benefit |
|
$ |
(3,856,000 |
) |
|
$ |
(3,123,000 |
) |
|
$ |
4,967,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes consist of the following at March 31: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Net operating loss carry-forwards |
|
$ |
853,000 |
|
|
$ |
4,383,000 |
|
Inventory valuation |
|
|
1,225,000 |
|
|
|
2,349,000 |
|
Estimate for returns |
|
|
2,195,000 |
|
|
|
890,000 |
|
Allowance for customer incentives |
|
|
1,300,000 |
|
|
|
833,000 |
|
Inventory capitalization |
|
|
173,000 |
|
|
|
57,000 |
|
Vacation pay |
|
|
256,000 |
|
|
|
177,000 |
|
Deferred compensation |
|
|
193,000 |
|
|
|
91,000 |
|
Accrued bonus |
|
|
510,000 |
|
|
|
— |
|
Tax credit |
|
|
328,000 |
|
|
|
— |
|
Other |
|
|
— |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
Total current deferred income tax |
|
|
7,033,000 |
|
|
|
8,786,000 |
|
|
|
|
|
|
|
|
Long-term assets |
|
|
|
|
|
|
|
|
Net operating loss carry-forwards |
|
|
— |
|
|
|
1,663,000 |
|
Other |
|
|
— |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
Total long-term deferred tax assets |
|
|
— |
|
|
|
1,683,000 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deferred state tax |
|
|
(355,000 |
) |
|
|
(269,000 |
) |
Deferred tax on unrealized gain |
|
|
(17,000 |
) |
|
|
(14,000 |
) |
F-19
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accelerated depreciation |
|
|
(802,000 |
) |
|
|
(1,022,000 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(1,174,000 |
) |
|
|
(1,305,000 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
5,859,000 |
|
|
$ |
9,164,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred income tax
asset |
|
$ |
6,378,000 |
|
|
$ |
8,786,000 |
|
Net long-term deferred income tax
(liability) asset |
|
|
(519,000 |
) |
|
|
378,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,859,000 |
|
|
$ |
9,164,000 |
|
|
|
|
|
|
|
|
|
|
Realization of the deferred tax assets is dependent upon the Company’s ability to generate sufficient taxable income. Management
believes that it is more likely than not that future taxable income will be sufficient to realize the recorded deferred tax assets.
At March 31, 2005, the Company had a federal net operating loss carry forward of $2,509,000, which will expire in 2023. |
|
|
|
For fiscal 2004, the primary components of the Company’s income tax provision (benefit) are (i)
the current liability or refund due for federal, state and foreign income taxes, including the
effect of the tax net operating loss carryback provisions of the Job Creation and Work
Assistance Act of 2002 and (ii) the change in the amount of the net deferred income tax asset,
including the effect of any change in the valuation allowance. |
|
|
|
The Job Creation and Work Assistance Act of 2002 (the “Act”) was passed by Congress and then
signed by the President on March 9, 2002. One of the provisions of the Act extends the
carry-back period five years for losses arising in years ending during 2001 and 2002. Under the
new tax law, the Company received tax refunds of $93,000 in fiscal 2004 and $821,000 in fiscal
2003 related to the five-year carry-back provision of the Act. In the fourth quarter of fiscal
2003, the IRS approved the Company’s treatment of the amount to be deducted relating to the
fiscal 2000 change in accounting for inventory and allowed the Company to deduct the entire
amount in one year (2003) instead of the four years requested. In addition, the IRS concluded
its audits. Furthermore, the Company resolved its financing contingency and signed an agreement
with a new bank. These positive factors, as well as another year’s history of operating
profits, lead management to conclude that a valuation allowance was no longer required. Thus,
the valuation allowance balance of $8,249,000 was eliminated in fiscal 2003. |
|
|
|
The difference between the income tax expense (benefit) at the federal statutory rate and the
Company’s effective tax rate is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Statutory federal income tax rate |
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
State income tax rate |
|
|
6 |
% |
|
|
5 |
% |
|
|
5 |
% |
State income tax credits |
|
|
(3 |
%) |
|
|
(3 |
)% |
|
|
— |
|
Change in tax law |
|
|
— |
|
|
|
(1 |
)% |
|
|
(15 |
)% |
Valuation allowance |
|
|
— |
|
|
|
— |
|
|
|
(110 |
)% |
Other income tax |
|
|
1 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
% |
|
|
35 |
% |
|
|
(86 |
)% |
|
|
|
|
|
|
|
|
|
|
Note O — Defined Contribution Plan
|
|
The Company has a 401(k) plan covering all employees who are 21 years of age with at least six
months of service. The plan permits eligible employees to make contributions up to certain
limitations, with the Company matching 25% of the employees contribution up to the first 6% of
employee compensation. Employees are immediately vested in their voluntary contributions and
vest in the Company’s matching contributions ratably over five years. The Company’s matching
contribution to the 401(k) plan was $67,000, $48,000 and $34,000 for the fiscal years ended
March 31, 2005, 2004 and 2003, respectively. |
Note P — Stock Options
|
|
In January 1994, the Company adopted the 1994 Stock Option Plan (the “1994 Plan”), under which
it was authorized to issue non-qualified stock options and incentive stock options to key
employees, directors and consultants. After a number of shareholder-approved increases to this
plan, at March 31, 2002 the aggregate number of stock options approved was 960,000 shares of the
Company’s common stock. The term and vesting period of options granted is determined by a
committee of the Board of Directors with a term not to exceed ten |
F-20
years. At the Company’s Annual Meeting of Shareholders held on November 8, 2002 the 1994
Plan was amended to increase the authorized number of shares issued to 1,155,000. As of March
31, 2005, there were 694,500 options outstanding under the 1994 Plan and no options were
available for grant.
In August 1995, the Company adopted the Non-employee Director Stock Option Plan (the “Directors
Plan”) which provides for the granting of options to directors to purchase a total of 15,000
shares of the Company’s common stock. Options to purchase 15,000 shares were granted under the
Director’s Plan and were exercised prior to March 31, 2001. There are no options outstanding as
of March 31, 2005.
In September 1997, the Company adopted the 1996 Stock Option Plan (the “1996 Plan”), under which
it is authorized to issue non-qualified stock options and incentive stock options to key
employees, consultants and directors to purchase a total of 30,000 shares of the Company’s
common stock. The term and vesting period of options granted is determined by a committee of
the Board of Directors with a term not to exceed ten years. Options to purchase 30,000 shares
were granted under the 1996 Plan and were exercised prior to March 31, 2001. There are no
options outstanding as of March 31, 2005.
At the Company’s Annual Meeting of Shareholders held on December 17, 2003, the shareholders
approved the Company’s proposed 2003 Long-Term Incentive Plan (“Incentive Plan”) which had been
adopted by the Company’s Board of Directors on October 31, 2003. Under the Incentive Plan, a
total of 1,200,000 shares of our Common Stock have been reserved for grants of Incentive Awards
and all of the Company’s employees are eligible to participate. The 2003 Incentive Plan will
terminate on October 31, 2013, unless terminated earlier by the Company’s Board of Directors.
As of March 31, 2005, there were 349,150 options outstanding under the Incentive Plan and
850,850 options were available for grant.
In November 2004, the Company’s shareholders approved the 2004 Non-Employee Director Stock
Option Plan (the “2004 Plan”) which provides for the granting of options to non-employee
directors to purchase a total of 175,000 shares of the Company’s common stock. As of March 31,
2005, there were 50,000 options issued, of which 33,332 options are not immediately exercisable
under the 2004 Plan and 125,000 options were available for grant.
A summary of stock option transactions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Exercise Price |
Outstanding at March 31, 2002 |
|
|
793,875 |
|
|
$ |
2.87 |
|
Granted |
|
|
154,500 |
|
|
$ |
2.38 |
|
Exercised |
|
|
0 |
|
|
$ |
0 |
|
Cancelled |
|
|
(8,000 |
) |
|
$ |
1.87 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2003 |
|
|
940,375 |
|
|
$ |
2.82 |
|
Granted |
|
|
112,875 |
|
|
$ |
6.04 |
|
Exercised |
|
|
(204,500 |
) |
|
$ |
2.44 |
|
Cancelled |
|
|
(55,500 |
) |
|
$ |
2.77 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2004 |
|
|
793,250 |
|
|
$ |
3.31 |
|
Granted |
|
|
401,150 |
|
|
$ |
8.83 |
|
Exercised |
|
|
(98,000 |
) |
|
$ |
2.98 |
|
Cancelled |
|
|
(2,750 |
) |
|
$ |
6.82 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2005 |
|
|
1,093,650 |
|
|
$ |
5.29 |
|
The followings table summarizes information about the options outstanding at March 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Remaining Life |
|
|
|
|
|
Weighted Average |
Range of Exercise Prices |
|
Shares |
|
Exercise Price |
|
In Years |
|
Shares |
|
Exercise Price |
$0.931 to $1.800 |
|
|
104,750 |
|
|
$ |
1.10 |
|
|
|
5.92 |
|
|
|
104,750 |
|
|
$ |
1.10 |
|
$2.160 to $3.600 |
|
|
472,000 |
|
|
$ |
2.81 |
|
|
|
6.86 |
|
|
|
472,000 |
|
|
$ |
2.81 |
|
$6.345 to $9.270 |
|
|
501,025 |
|
|
$ |
8.31 |
|
|
|
9.15 |
|
|
|
467,693 |
|
|
$ |
8.37 |
|
$11.813 to $19.125 |
|
|
15,875 |
|
|
$ |
15.87 |
|
|
|
2.73 |
|
|
|
15,875 |
|
|
$ |
15.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,093,650 |
|
|
|
|
|
|
|
|
|
|
|
1,060,318 |
|
|
|
|
|
F-21
The stock options exercisable at end of year fiscal 2005, 2004 and 2003 are 1,060,318, 793,250
and 940,375, respectively.
Note Q — Litigation
In fiscal 2003, the SEC filed a civil suit against the Company and its former chief financial
officer, Peter Bromberg, arising out of the SEC’s investigation into the Company’s fiscal 1997
and 1998 financial statements (“Complaint”). Simultaneously with the filing of the SEC
Complaint, the Company agreed to settle the SEC’s action without admitting or denying the
allegations in the Complaint. Under the terms of the settlement agreement, the Company is
subject to a permanent injunction barring the Company from future violations of the antifraud
and financial reporting provisions of the federal securities laws. No monetary fine or penalty
was imposed upon the Company in connection with this settlement with the SEC.
On May 20, 2004, the SEC and the United States Attorney’s Office announced that Peter Bromberg
was sentenced to ten months, including five months of incarceration and five months of home
detention, for making false and misleading statements about the Company’s financial condition
and performance in its 1997 and 1998 Forms 10-K filed with the SEC.
In December 2003, the SEC and the United States Attorney’s Office brought actions against
Richard Marks, the Company’s former President and Chief Operating Officer. Mr. Marks agreed to
plead guilty to the criminal charges, and on June 17, 2005 he was sentenced to nine months in
prison, nine months of home detention, 18 months of probation and fined $50,000. In settlement
of the SEC’s civil fraud action, Mr. Marks paid over $1.2 million and was permanently barred
from serving as an officer or director of a public company.
Based upon the terms of agreements it had previously entered into with Mr. Marks, the Company
has been paying the costs he has incurred in connection with the SEC and U.S. Attorney’s
Office’s investigation. During the years ended March 31, 2005, 2004 and 2003, the Company
incurred costs of approximately $556,000, $966,000 and $560,000, respectively, pursuant to this
indemnification arrangement.
The United States Attorney’s Office has informed the Company that it does not intend to pursue
criminal charges against the Company arising from the events involved in the SEC Complaint.
The Company is subject to various other lawsuits and claims in the normal course of business.
Management does not believe that the outcome of these matters will have a material adverse
effect on its financial position or future results of operations.
Note R
— Related Party Transactions
The Company has entered into agreements with three members of its Board of Directors, Messrs.
Mel Marks, Selwyn Joffe and Philip Gay.
In August 2000, the Company’s Board of Directors agreed to engage Mr. Mel Marks to provide
consulting services to the Company. Mr. Marks is currently paid an annual consulting fee of
$350,000 per year. He was paid $350,000 in fiscal 2005 and $350,000 plus a $50,000 bonus in
fiscal 2004. The Company can terminate this arrangement at any time.
Effective December 1, 1999, the Company entered into a consulting agreement with Mr. Selwyn
Joffe, the Chairman of the Board of the Company, pursuant to which he has been retained as a
consultant to provide oversight, management, strategic and other advisory services to the
Company. The consulting agreement was scheduled to expire on June 1, 2001 but was extended by
mutual agreement through June 1, 2003 and provided for annual compensation to Mr. Joffe in the
amount of $160,000. As additional consideration for the consulting services, Mr. Joffe was
granted an option to purchase 40,000 shares of the Company’s Common Stock pursuant to the
Company’s 1994 Stock Option Plan. Of these options, 20,000 options were exercisable on the date
of
F-22
grant and the remaining 20,000 options were fully vested on the first anniversary of the date
of grant. The options have an exercise price of $2.20 per share and expire ten (10) years after
the grant date.
Mr. Joffe and the Company entered into an additional consulting services agreement dated as of
May 9, 2002, providing for Mr. Joffe to assist the Company in considering and pursuing potential
transactions and relationships intended to enhance stockholder value. In connection with this
arrangement, the Company agreed to pay Mr. Joffe an additional $10,000 per month for one year
and 1% of the value of any transactions, which
close by the second anniversary of the agreement, less any monthly fees, paid. This agreement
remained in effect until February 14, 2003 at which time Mr. Joffe accepted his current position
as President and Chief Executive Officer in addition to serving as the Chairman of the Board of
Directors. Mr. Joffe’s current agreement calls for an annual salary of $542,000, the
continuation of his prior agreement relative to payment of 1% of the value of any transactions
which close by March 31, 2006 and other compensation generally provided to the Company’s other
executive staff members. In addition, Mr. Joffe was awarded 100,000 Stock Options effective
March 3, 2003 at a strike price of $2.16, 1,500 Stock Options effective April 30, 2003 at a
strike price of $1.80 and 100,000 Stock Options effective January 14, 2004 at a strike price of
$6.34. His contract was scheduled to expire on March 31, 2006. The term of the contract has
been extended. See Note S
The Company agreed to pay Mr. Gay $90,000 per year for serving on the Company’s Board of
Directors, as well as assuming the responsibility for being Chairman of the Company’s Audit and
Ethics Committees.
Note S
— Subsequent Event
On April 22, 2005, the Company entered into an amendment to its employment agreement with Mr.
Joffe. Under the amendment, Mr. Joffe’s term of employment has been extended from March 31,
2006 to March 31, 2008, and his base salary, bonus arrangements, 1% transaction fee right and
fringe benefits remain unchanged.
Before the amendment, Mr. Joffe had the right to terminate his employment upon a change of
control and receive his salary and benefits through March 31, 2006. Under the amendment, upon a
change of control (which has been redefined pursuant to the amendment), Mr. Joffe will be
entitled to a sale bonus equal to the sum of (i) two times his base salary plus (ii) two times
his average bonus earned for the two years immediately prior to the change of control. The
amendment also grants Mr. Joffe the right to terminate his employment within one year of a
change of control and to then receive salary and benefits for a one-year period following such
termination plus a bonus equal to the average bonus Mr. Joffe earned during the two years
immediately prior to his voluntary termination.
If Mr. Joffe is terminated without cause or resigns for good reason (as defined in the
amendment), the registrant must pay Mr. Joffe (i) his base salary, (ii) his average bonus earned
for the two years immediately prior to termination, and (iii) all other benefits payable to Mr.
Joffe pursuant to the employment agreement, as amended, through the later of two years after the
date of termination of employment or March 31, 2008. Under the amendment, Mr. Joffe is also
entitled to an additional “gross-up” payment to offset the excise taxes (and related income
taxes on the “gross-up” payment) that he may be obligated to pay with respect to the first
$3,000,000 of “parachute payments” (as defined in Section 280G of the Internal Revenue Code) to
be made to him upon a change of control. The amendment has redefined the term “for cause” to
apply only to misconduct in connection with Mr. Joffe’s performance of his duties. Pursuant to
the Amendment, any options that have been or may be granted to Mr. Joffe will fully vest upon a
change of control and be exercisable for a two-year period following the change of control, and
Mr. Joffe agreed to waive the right he previously had under the employment agreement to require
the registrant to purchase his option shares and any underlying options if his employment were
terminated for any reason. The amendment further provides that Mr. Joffe’s agreement not to
compete with the Company terminates at the end of his employment term.
The Company was in default under its loan agreement for: (i) failing to provide the bank with
its public report on Form 10-K for the fiscal year ended March 31, 2005 within the required time
period, as extended, (ii) failing to provide the bank with its public report on Form 10-Q for
the fiscal quarter ended June 30, 2005, (iii) failing to achieve EBITDA of not less than $3
million for the fiscal quarter ended June 30, 2004 (iv) failing to achieve EBITDA of not less
than $14 million for the four consecutive fiscal quarters ended June 30, 2004 and March 31,
2005, (v) failing to maintain a fixed charge coverage ratio of not less than 1.25 to 1.00 as of
the last day of
F-23
the fiscal quarter ended March 31, 2005, (vi) failing to maintain a quick ratio
of not less than 0.65 to 1.00 as of the last day of the fiscal quarters ended June 30, 2004,
September 30, 2004, December 31, 2004 and March 31, 2005 and (vii) failing to provide the bank
with certain notices, monthly financial statements and required compliance certificates. On
August 30, 2005, the bank provided the Company with a waiver of these covenant defaults. The
ongoing effect of this waiver was conditioned upon the Company’s delivery to the bank of (i) its
10-K for the year ended March 31, 2005 by September 9, 2005 and (ii) its 10-Q for the fiscal
quarter ended June 30, 2005 by September 30, 2005. Because the Company provided the bank with
its fiscal 2005 10-K by September 9, 2005, the bank has restored the Company’s ability to fully
access the line of credit.
Note T
— Unaudited and Restated Quarterly Financial Data
The unaudited quarterly financial
data for the quarter ended September 30,
2004 has been restated to properly reflect the accounting for unreturned core inventory and
marketing allowances provided to a customer. Also, the unaudited quarterly financial data for the
quarters ended September 30, 2003, March 31, 2004 and
June 30, 2004 have been restated to properly reflect the
accounting for unreturned core inventory.
Previously, cores recorded in the
inventory unreturned account had been misstated as a result
of errors in the cost basis used to value the unreturned cores.
In addition, the interim income statement for the fiscal quarter ended September 30, 2004 was
impacted by an error in the calculation of marketing allowances provided to a particular customer.
The Company had in previous periods overstated the reserve for the marketing allowances associated
with this customer. The effect of the overstatement was immaterial to those prior periods. The
Company adjusted the reserve balance during the fiscal quarter ended September 30, 2004. However,
it has now been determined that the adjustment was in error and material to the September 30, 2004
quarter.
The following summarizes selected quarterly financial data for the fiscal year ended March 31,
2005 including restated numbers for the first and second quarters of fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Net sales, as originally reported |
|
$ |
21,232,000 |
|
|
$ |
25,283,000 |
|
|
$ |
24,159,000 |
|
|
$ |
25,397,000 |
|
Marketing allowances |
|
|
— |
|
|
|
(286,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales, as restated |
|
|
21,232,000 |
|
|
|
24,997,000 |
|
|
|
24,159,000 |
|
|
|
25,397,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, as originally reported |
|
|
17,386,000 |
|
|
|
17,946,000 |
|
|
|
15,985,000 |
|
|
|
17,707,000 |
|
Unreturned core inventory |
|
|
(360,000 |
) |
|
|
68,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, as restated |
|
|
17,026,000 |
|
|
|
18,014,000 |
|
|
|
15,985,000 |
|
|
|
17,707,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit, as restated |
|
|
4,206,000 |
|
|
|
6,983,000 |
|
|
|
8,174,000 |
|
|
|
7,690,000 |
|
Total operating expenses |
|
|
3,422,000 |
|
|
|
3,136,000 |
|
|
|
4,155,000 |
|
|
|
4,504,000 |
|
Operating income, as restated |
|
|
784,000 |
|
|
|
3,847,000 |
|
|
|
4,019,000 |
|
|
|
3,186,000 |
|
Interest expense — net |
|
|
351,000 |
|
|
|
449,000 |
|
|
|
526,000 |
|
|
|
366,000 |
|
Income tax expense, as restated |
|
|
168,000 |
|
|
|
1,257,000 |
|
|
|
1,299,000 |
|
|
|
1,132,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as restated |
|
$ |
265,000 |
|
|
$ |
2,141,000 |
|
|
$ |
2,194,000 |
|
|
$ |
1,688,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.03 |
|
|
$ |
0.26 |
|
|
$ |
0.27 |
|
|
$ |
0.21 |
|
Diluted income per share |
|
$ |
0.03 |
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
0.20 |
|
F-24
The following summarizes selected quarterly financial data, as restated, for the fiscal year
ended March 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Net sales |
|
$ |
19,173,000 |
|
|
$ |
21,705,000 |
|
|
$ |
19,312,000 |
|
|
$ |
20,358,000 |
|
Cost of goods sold, as originally reported |
|
|
14,274,000 |
|
|
|
18,110,000 |
|
|
|
13,700,000 |
|
|
|
12,428,000 |
|
Unreturned core inventory |
|
|
— |
|
|
|
(621,000 |
) |
|
|
— |
|
|
|
621,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, as restated |
|
|
14,274,000 |
|
|
|
17,489,000 |
|
|
|
13,700,000 |
|
|
|
13,049,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as restated |
|
|
4,899,000 |
|
|
|
4,216,000 |
|
|
|
5,612,000 |
|
|
|
7,309,000 |
|
Total operating expenses |
|
|
2,799,000 |
|
|
|
3,472,000 |
|
|
|
3,269,000 |
|
|
|
2,631,000 |
|
Operating income as restated |
|
|
2,100,000 |
|
|
|
744,000 |
|
|
|
2,343,000 |
|
|
|
4,678,000 |
|
Interest expense — net |
|
|
293,000 |
|
|
|
288,000 |
|
|
|
143,000 |
|
|
|
207,000 |
|
Income tax expense as restated |
|
|
641,000 |
|
|
|
146,000 |
|
|
|
805,000 |
|
|
|
1,531,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as restated |
|
$ |
1,166,000 |
|
|
$ |
310,000 |
|
|
$ |
1,395,000 |
|
|
$ |
2,940,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
$ |
0.15 |
|
|
$ |
0.04 |
|
|
$ |
0.17 |
|
|
$ |
0.36 |
|
Diluted income (loss) per share |
|
$ |
0.14 |
|
|
$ |
0.04 |
|
|
$ |
0.17 |
|
|
$ |
0.34 |
|
F-25
Schedule II
— Valuation and Qualifying Accounts
Accounts Receivable — Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge to |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
(recovery) |
|
|
|
|
|
Balance at |
Year Ended |
|
|
|
|
|
beginning of |
|
bad debts |
|
Amounts |
|
end of |
March 31, |
|
Description |
|
period |
|
expense |
|
written off |
|
period |
2005 |
|
Allowance for doubtful accounts |
|
$ |
14,000 |
|
|
$ |
20,000 |
|
|
$ |
14,000 |
|
|
$ |
20,000 |
|
2004 |
|
Allowance for doubtful accounts |
|
|
87,000 |
|
|
|
13,000 |
|
|
|
86,000 |
|
|
|
14,000 |
|
2003 |
|
Allowance for doubtful accounts |
|
|
326,000 |
|
|
|
(104,000 |
) |
|
|
135,000 |
|
|
|
87,000 |
|
Accounts Receivable — Allowance for stock adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
stock |
|
|
|
|
|
Balance at |
Year Ended |
|
|
|
|
|
beginning of |
|
adjustment |
|
Returns |
|
end of |
March 31, |
|
Description |
|
period |
|
returns |
|
received |
|
period |
2005 |
|
Allowance for stock adjustments |
|
$ |
467,000 |
|
|
$ |
3,837,000 |
|
|
$ |
2,780,000 |
|
|
$ |
1,524,000 |
|
2004 |
|
Allowance for stock adjustments |
|
|
793,000 |
|
|
|
1,996,000 |
|
|
|
2,322,000 |
|
|
|
467,000 |
|
2003 |
|
Allowance for stock adjustments |
|
|
752,000 |
|
|
|
1,473,000 |
|
|
|
1,432,000 |
|
|
|
793,000 |
|
Inventory — Allowance for excess and obsolete inventory*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at |
Year Ended |
|
|
|
beginning of |
|
|
|
|
|
end of |
March 31, |
|
Description |
|
period |
|
Net change |
|
period |
|
2005 |
|
|
Allowance for excess and obsolete inventory |
|
$ |
2,637,000 |
|
|
|
($245,000 |
) |
|
$ |
2,392,000 |
|
|
2004 |
|
|
Allowance for excess and obsolete inventory |
|
|
3,149,000 |
|
|
|
(512,000 |
) |
|
|
2,637,000 |
|
|
2003 |
|
|
Allowance for excess and obsolete inventory |
|
|
2,872,000 |
|
|
|
277,000 |
|
|
|
3,149,000 |
|
* The allowance for excess and obsolete inventory is not a general type reserve that
can be rolled forward. Every month we calculate the reserve based on
a rolling 12 months of sales activity for each affected part number, and an adjustment is recorded
to reflect the calculated reserve balance, and as such, the net activity is presented
versus the gross increases and decreases to the account.
F-26