e10vqza
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
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11-2153962 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2929 California Street, Torrance, California
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90503 |
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(Address of principal executive offices)
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Zip Code |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer 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
There were 8,208,955 shares of Common Stock outstanding at October 11, 2005.
EXPLANATORY NOTE
Explanatory Note: This Form 10-Q/A amends our report on Form 10-Q for the period ended June
30, 2005 to restate our unaudited consolidated financial statements for the three-month periods
ended June 30, 2005 and 2004 that were included in that Form 10-Q. The unaudited quarterly
financial data for each of the three-month periods ended June 30, 2005 and 2004 have been
restated to correct misstatements which occurred when we (i) failed to record unreturned core
inventory and core charge revenue for the core portion of certain finished goods sold, (ii)
overstated inventory by not properly tracking unreturned core inventory from POS sales and (iii)
incorrectly calculated the value of finished goods to be returned from customers through stock
adjustments.
Except as required to reflect the effects of the restatement noted above, no attempt has
been made in this Form 10-Q/A to modify or update other disclosures presented in the original
report on Form 10-Q. Accordingly, this Form 10-Q/A, including the financial statements and notes
thereto included herein, generally do not reflect events occurring after the date of the original
filing of the Form 10-Q or modify or update those disclosures affected by subsequent events.
Consequently, all other information not affected by the restatement is unchanged and reflects the
disclosures made at the time of the original filing of the Form 10-Q on October 11, 2005. For a
description of subsequent events, this Form 10-Q/A should be read in conjunction with our filings
made subsequent to the filing of the original Form 10-Q, including this amended quarterly report
on Form 10-Q/A for the quarter ended June 30, 2005, the Companys annual report on Form 10-K for
the fiscal year ended March 31, 2006, the Companys quarterly reports on Form 10-Q for the
periods ended September 30, 2005 and December 31, 2005 and the Companys Current Reports on Form
8-K filed since October 11, 2005.
MOTORCAR PARTS OF AMERICA, INC.
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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June 30, |
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March 31, |
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2005 |
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2005 |
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(Unaudited and |
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Restated) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
645,000 |
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$ |
6,211,000 |
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Short term investments |
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537,000 |
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503,000 |
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Accounts receivable net |
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8,993,000 |
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11,513,000 |
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Inventory net |
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56,856,000 |
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48,587,000 |
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Deferred income tax asset |
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7,231,000 |
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6,378,000 |
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Inventory unreturned |
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2,581,000 |
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2,409,000 |
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Prepaid expenses and other current assets |
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1,779,000 |
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1,365,000 |
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Total current assets |
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78,622,000 |
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76,966,000 |
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Plant and equipment net |
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7,342,000 |
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5,483,000 |
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Other assets |
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1,149,000 |
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899,000 |
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TOTAL ASSETS |
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$ |
87,113,000 |
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$ |
83,348,000 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
21,002,000 |
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$ |
14,502,000 |
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Accrued liabilities |
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419,000 |
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1,378,000 |
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Accrued salaries and wages |
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3,267,000 |
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2,235,000 |
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Accrued workers compensation claims |
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2,257,000 |
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2,217,000 |
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Income tax payable |
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132,000 |
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183,000 |
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Deferred compensation |
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469,000 |
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450,000 |
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Deferred income |
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133,000 |
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133,000 |
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Other current liabilities |
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99,000 |
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89,000 |
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Credit due customer |
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10,340,000 |
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12,543,000 |
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Current portion of capital lease obligations |
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524,000 |
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416,000 |
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Total current liabilities |
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38,642,000 |
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34,146,000 |
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Deferred income, less current portion |
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488,000 |
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521,000 |
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Deferred income tax liability |
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491,000 |
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519,000 |
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Other liabilities |
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43,000 |
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Capitalized lease obligations, less current portion |
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1,624,000 |
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938,000 |
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TOTAL LIABILITIES |
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41,288,000 |
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36,124,000 |
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SHAREHOLDERS EQUITY |
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Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued |
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Series A junior participating preferred stock; par value $.01 per share, 20,000
shares authorized; none issued |
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Common stock; par value $.01 per share, 20,000,000 shares authorized; 8,183,955
shares issued and outstanding at June 30, 2005 and March 31, 2005 |
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82,000 |
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82,000 |
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Additional paid-in capital |
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53,627,000 |
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53,627,000 |
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Accumulated other comprehensive loss |
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(34,000 |
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(55,000 |
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Accumulated deficit |
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(7,850,000 |
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(6,430,000 |
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TOTAL SHAREHOLDERS EQUITY |
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45,825,000 |
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47,224,000 |
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TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
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$ |
87,113,000 |
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$ |
83,348,000 |
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The accompanying condensed notes to consolidated financial statements are an integral part hereof.
3
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited and Restated)
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Three Months Ended |
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June 30, |
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2005 |
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2004 |
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Net sales |
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$ |
21,351,000 |
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$ |
21,209,000 |
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Cost of goods sold |
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17,965,000 |
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17,338,000 |
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Gross profit |
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3,386,000 |
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3,871,000 |
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Operating expenses: |
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General and administrative |
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4,010,000 |
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2,621,000 |
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Sales and marketing |
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865,000 |
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622,000 |
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Research and development |
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314,000 |
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179,000 |
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Total operating expenses |
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5,189,000 |
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3,422,000 |
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Operating (loss) income |
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(1,803,000 |
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449,000 |
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Interest expense net of interest income |
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548,000 |
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351,000 |
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(Loss) income before income tax benefit (expense) |
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(2,351,000 |
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98,000 |
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Income tax benefit (expense) |
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931,000 |
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(41,000 |
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Net (loss) income |
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$ |
(1,420,000 |
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$ |
57,000 |
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Basic net (loss) income per share |
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$ |
(0.17 |
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$ |
0.01 |
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Diluted net (loss) income per share |
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$ |
(0.17 |
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$ |
0.01 |
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Weighted average number of shares outstanding: |
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basic |
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8,183,955 |
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8,094,450 |
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diluted |
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8,183,955 |
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8,575,210 |
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The accompanying condensed notes to consolidated financial statements are an integral part hereof.
4
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited and Restated)
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Three Months Ended |
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June 30, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
(1,420,000 |
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$ |
57,000 |
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Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities: |
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Depreciation and amortization |
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498,000 |
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578,000 |
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Deferred income taxes |
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(881,000 |
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93,000 |
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Tax benefit from employee stock options exercised |
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75,000 |
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Changes in current assets and liabilities: |
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Accounts receivable |
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2,520,000 |
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1,359,000 |
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Inventory |
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(8,244,000 |
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(9,826,000 |
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Inventory unreturned |
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(171,000 |
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(964,000 |
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Prepaid expenses and other current assets |
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(443,000 |
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(77,000 |
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Other current assets |
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(252,000 |
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7,000 |
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Accounts payable and accrued liabilities |
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6,629,000 |
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8,237,000 |
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Income tax payable |
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(50,000 |
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(127,000 |
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Deferred compensation |
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18,000 |
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76,000 |
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Deferred income |
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(33,000 |
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Credit due customer |
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(2,203,000 |
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6,529,000 |
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Other current liabilities |
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54,000 |
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47,000 |
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Net cash (used in) provided by operating activities |
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(3,978,000 |
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6,064,000 |
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Cash flows from investing activities: |
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Purchase of property, plant and equipment |
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(1,437,000 |
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(231,000 |
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Change in short term investments |
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(28,000 |
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(83,000 |
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Net cash used in investing activities |
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(1,465,000 |
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(314,000 |
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Cash flows from financing activities: |
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Net (payments) borrowings under line of credit |
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(3,000,000 |
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Net payments on capital lease obligations |
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(122,000 |
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(117,000 |
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Exercise of stock options |
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70,000 |
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Net cash used in financing activities |
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(122,000 |
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(3,047,000 |
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Effect of exchange rate changes on cash |
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(1,000 |
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(1,000 |
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
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(5,566,000 |
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2,702,000 |
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CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD |
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6,211,000 |
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7,630,000 |
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CASH AND CASH EQUIVALENTS END OF PERIOD |
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$ |
645,000 |
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$ |
10,332,000 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
557,000 |
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$ |
351,000 |
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Income taxes |
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$ |
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$ |
50,000 |
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Non-cash investing and financing activities: |
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Property acquired under capital lease |
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$ |
916,000 |
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$ |
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The accompanying condensed notes to consolidated financial statements are an integral part hereof.
5
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
June 30, 2005 and 2004
(Unaudited and Restated)
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 intercompany accounts and transactions have
been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three months ended
June 30, 2005 are not necessarily indicative of the results that may be expected for the year
ending March 31, 2006. Amounts related to disclosures of March 31, 2005 balances were derived from
the Companys audited consolidated financial statements as of March 31, 2005. For further
information, refer to the financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended March 31, 2005, filed on September 6, 2005.
NOTE A Company Background and Organization
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. In addition, the Company opened
a warehouse distribution facility in Nashville, Tennessee during August 2005.
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 Restatement of Financial Statements for the Quarters Ended June 30, 2005 and June 30, 2004
The consolidated balance sheet as of June 30, 2005, the consolidated statements of operations
for the quarters ended June 30, 2005 and June 30, 2004 and the consolidated statements of cash
flows for the quarters ended June 30, 2005 and June 30, 2004 have been restated to correct
misstatements which occurred when (i) the Company failed to record unreturned core inventory and
core charge revenue for the core portion of certain finished goods sold (core deposit adjustment),
(ii) the Company overstated inventory by not properly tracking unreturned core inventory from POS
sales (consignment core adjustment) and (iii) the Company incorrectly calculated the value of
finished goods to be returned from customers through stock adjustments (unit stock adjustment). The
estimated tax effect of the misstatements noted above is also reflected in the restatements. The
condensed notes to the financial statements for the periods ending June 30, 2005 and 2004 were also
restated as required to reflect the effect of the restatement noted above.
The impact of this restatement, which has been reflected throughout the consolidated financial
statements and accompanying notes, is as follows:
6
Consolidated Balance Sheet
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June 30, 2005 |
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(Unaudited) |
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Previously |
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Reported |
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Adjustment |
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Restated |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
645,000 |
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$ |
645,000 |
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Short term investments |
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|
537,000 |
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|
537,000 |
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Accounts receivable net, as previously reported |
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8,577,000 |
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Core deposit adjustment |
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$ |
380,000 |
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Unit stock adjustment |
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36,000 |
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Accounts receivable net, as restated |
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8,993,000 |
|
Inventory net, as previously reported |
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56,979,000 |
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Consignment core adjustment |
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(123,000 |
) |
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Inventory net, as restated |
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|
|
|
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|
56,856,000 |
|
Deferred income tax asset |
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|
7,231,000 |
|
|
|
|
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|
7,231,000 |
|
Inventory unreturned, as previously reported |
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|
2,998,000 |
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Core deposit adjustment |
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(492,000 |
) |
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Unit stock adjustment |
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|
75,000 |
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Inventory unreturned, as restated |
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|
|
|
|
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|
|
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2,581,000 |
|
Prepaid expenses and other current assets |
|
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1,779,000 |
|
|
|
|
|
|
|
1,779,000 |
|
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|
|
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Total current assets |
|
|
78,746,000 |
|
|
|
(124,000 |
) |
|
|
78,622,000 |
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment net |
|
|
7,342,000 |
|
|
|
|
|
|
|
7,342,000 |
|
Other assets |
|
|
1,149,000 |
|
|
|
|
|
|
|
1,149,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
87,237,000 |
|
|
$ |
(124,000 |
) |
|
$ |
87,113,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
21,002,000 |
|
|
|
|
|
|
$ |
21,002,000 |
|
Accrued liabilities |
|
|
419,000 |
|
|
|
|
|
|
|
419,000 |
|
Accrued salaries and wages |
|
|
3,267,000 |
|
|
|
|
|
|
|
3,267,000 |
|
Accrued workers compensation claims |
|
|
2,257,000 |
|
|
|
|
|
|
|
2,257,000 |
|
Income tax payable, as previously reported |
|
|
177,000 |
|
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
$ |
(40,000 |
) |
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(44,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
39,000 |
|
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
132,000 |
|
Deferred compensation |
|
|
469,000 |
|
|
|
|
|
|
|
469,000 |
|
Deferred income |
|
|
133,000 |
|
|
|
|
|
|
|
133,000 |
|
Other current liabilities |
|
|
99,000 |
|
|
|
|
|
|
|
99,000 |
|
Credit due customer |
|
|
10,340,000 |
|
|
|
|
|
|
|
10,340,000 |
|
Current portion of capital lease obligations |
|
|
524,000 |
|
|
|
|
|
|
|
524,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
38,687,000 |
|
|
|
(45,000 |
) |
|
|
38,642,000 |
|
Deferred income, less current portion |
|
|
488,000 |
|
|
|
|
|
|
|
488,000 |
|
Deferred income tax liability |
|
|
491,000 |
|
|
|
|
|
|
|
491,000 |
|
Other liabilities |
|
|
43,000 |
|
|
|
|
|
|
|
43,000 |
|
Capitalized lease obligations, less current portion |
|
|
1,624,000 |
|
|
|
|
|
|
|
1,624,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
41,333,000 |
|
|
|
(45,000 |
) |
|
|
41,288,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
|
|
|
|
|
Series A junior participating preferred stock;
par value $.01 per share, 20,000 shares
authorized; none issued |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; par value $.01 per share, 20,000,000 shares authorized; 8,183,955
shares issued and outstanding at June 30, 2005 and March 31, 2005 |
|
|
82,000 |
|
|
|
|
|
|
|
82,000 |
|
Additional paid-in capital |
|
|
53,627,000 |
|
|
|
|
|
|
|
53,627,000 |
|
Accumulated other comprehensive loss |
|
|
(34,000 |
) |
|
|
|
|
|
|
(34,000 |
) |
Accumulated deficit, as previously reported |
|
|
(7,771,000 |
) |
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
|
(72,000 |
) |
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(79,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
72,000 |
|
|
|
|
|
Accumulated deficit, as restated |
|
|
|
|
|
|
|
|
|
|
(7,850,000 |
) |
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY |
|
|
45,904,000 |
|
|
|
(79,000 |
) |
|
|
45,825,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
87,237,000 |
|
|
$ |
(124,000 |
) |
|
$ |
87,113,000 |
|
|
|
|
|
|
|
|
|
|
|
7
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Net sales, as previously reported |
|
$ |
20,935,000 |
|
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
$ |
380,000 |
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
36,000 |
|
|
|
|
|
Net sales, as restated |
|
|
|
|
|
|
|
|
|
$ |
21,351,000 |
|
Cost of goods sold, as previously reported |
|
|
17,425,000 |
|
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
|
492,000 |
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
122,000 |
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
(74,000 |
) |
|
|
|
|
Cost of goods sold, as restated |
|
|
|
|
|
|
|
|
|
|
17,965,000 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
3,510,000 |
|
|
|
(124,000 |
) |
|
|
3,386,000 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
4,010,000 |
|
|
|
|
|
|
|
4,010,000 |
|
Sales and marketing |
|
|
865,000 |
|
|
|
|
|
|
|
865,000 |
|
Research and development |
|
|
314,000 |
|
|
|
|
|
|
|
314,000 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,189,000 |
|
|
|
|
|
|
|
5,189,000 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(1,679,000 |
) |
|
|
(124,000 |
) |
|
|
(1,803,000 |
) |
Interest expense net |
|
|
548,000 |
|
|
|
|
|
|
|
548,000 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax expense |
|
|
(2,227,000 |
) |
|
|
(124,000 |
) |
|
|
(2,351,000 |
) |
Income tax benefit, as previously reported |
|
|
886,000 |
|
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
|
40,000 |
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
44,000 |
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
(39,000 |
) |
|
|
|
|
Income tax benefit, as restated |
|
|
|
|
|
|
|
|
|
|
931,000 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,341,000 |
) |
|
$ |
(79,000 |
) |
|
$ |
(1,420,000 |
) |
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
(0.16 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
(0.16 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
basic |
|
|
8,183,955 |
|
|
|
|
|
|
|
8,183,955 |
|
|
|
|
|
|
|
|
|
|
|
|
diluted |
|
|
8,183,955 |
|
|
|
|
|
|
|
8,183,955 |
|
|
|
|
|
|
|
|
|
|
|
|
8
Consolidated Statements of Operations (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2004 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Net sales, as previously reported |
|
$ |
21,232,000 |
|
|
|
|
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
$ |
(23,000 |
) |
|
|
|
|
Net sales, as restated |
|
|
|
|
|
|
|
|
|
$ |
21,209,000 |
|
Cost of goods sold, as previously reported |
|
|
17,026,000 |
|
|
|
|
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
189,000 |
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
123,000 |
|
|
|
|
|
Cost of goods sold, as restated |
|
|
|
|
|
|
|
|
|
|
17,338,000 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
4,206,000 |
|
|
|
(335,000 |
) |
|
|
3,871,000 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
2,621,000 |
|
|
|
|
|
|
|
2,621,000 |
|
Sales and marketing |
|
|
622,000 |
|
|
|
|
|
|
|
622,000 |
|
Research and development |
|
|
179,000 |
|
|
|
|
|
|
|
179,000 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,422,000 |
|
|
|
|
|
|
|
3,422,000 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
784,000 |
|
|
|
(335,000 |
) |
|
|
449,000 |
|
Interest expense net |
|
|
351,000 |
|
|
|
|
|
|
|
351,000 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
433,000 |
|
|
|
(335,000 |
) |
|
|
98,000 |
|
Income tax expense, as previously reported |
|
|
168,000 |
|
|
|
|
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(72,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
(55,000 |
) |
|
|
|
|
Income tax expense, as restated |
|
|
|
|
|
|
|
|
|
|
41,000 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
265,000 |
|
|
$ |
(208,000 |
) |
|
$ |
57,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.03 |
|
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.03 |
|
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
basic |
|
|
8,094,450 |
|
|
|
|
|
|
|
8,094,450 |
|
|
|
|
|
|
|
|
|
|
|
|
diluted |
|
|
8,575,210 |
|
|
|
|
|
|
|
8,575,210 |
|
|
|
|
|
|
|
|
|
|
|
|
9
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as previously reported |
|
$ |
(1,341,000 |
) |
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
$ |
(72,000 |
) |
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(79,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
72,000 |
|
|
|
|
|
Net loss, as restated |
|
|
|
|
|
|
|
|
|
$ |
(1,420,000 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
498,000 |
|
|
|
|
|
|
|
498,000 |
|
Deferred income taxes |
|
|
(881,000 |
) |
|
|
|
|
|
|
(881,000 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, as previously reported |
|
|
2,936,000 |
|
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
|
(380,000 |
) |
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(36,000 |
) |
|
|
|
|
Accounts receivable, as restated |
|
|
|
|
|
|
|
|
|
|
2,520,000 |
|
Inventory, as previously reported |
|
|
(8,367,000 |
) |
|
|
|
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
123,000 |
|
|
|
|
|
Inventory, as restated |
|
|
|
|
|
|
|
|
|
|
(8,244,000 |
) |
Inventory unreturned, as previously reported |
|
|
(588,000 |
) |
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
|
492,000 |
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
(75,000 |
) |
|
|
|
|
Inventory unreturned, as restated |
|
|
|
|
|
|
|
|
|
|
(171,000 |
) |
Prepaid expenses and other current assets |
|
|
(443,000 |
) |
|
|
|
|
|
|
(443,000 |
) |
Other assets |
|
|
(252,000 |
) |
|
|
|
|
|
|
(252,000 |
) |
Accounts payable and accrued liabilities |
|
|
6,629,000 |
|
|
|
|
|
|
|
6,629,000 |
|
Income tax payable, as previously reported |
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
Core deposit adjustment |
|
|
|
|
|
|
(40,000 |
) |
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(44,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
39,000 |
|
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
Deferred compensation |
|
|
18,000 |
|
|
|
|
|
|
|
18,000 |
|
Deferred income |
|
|
(33,000 |
) |
|
|
|
|
|
|
(33,000 |
) |
Credit due to customer |
|
|
(2,203,000 |
) |
|
|
|
|
|
|
(2,203,000 |
) |
Other liabilities |
|
|
54,000 |
|
|
|
|
|
|
|
54,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(3,978,000 |
) |
|
$ |
|
|
|
$ |
(3,978,000 |
) |
|
|
|
|
|
|
|
|
|
|
There were no changes to previously reported cash flows from investing and financing activities.
10
Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2004 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as previously reported |
|
$ |
265,000 |
|
|
|
|
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
$ |
(117,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
(91,000 |
) |
|
|
|
|
Net income, as restated |
|
|
|
|
|
|
|
|
|
$ |
57,000 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
578,000 |
|
|
|
|
|
|
|
578,000 |
|
Deferred income taxes |
|
|
93,000 |
|
|
|
|
|
|
|
93,000 |
|
Tax benefit from employee stock options exercised |
|
|
75,000 |
|
|
|
|
|
|
|
75,000 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, as previously reported |
|
|
1,336,000 |
|
|
|
|
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
23,000 |
|
|
|
|
|
Accounts receivable, as restated |
|
|
|
|
|
|
|
|
|
|
1,359,000 |
|
Inventory, as previously reported |
|
|
(10,015,000 |
) |
|
|
|
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
189,000 |
|
|
|
|
|
Inventory, as restated |
|
|
|
|
|
|
|
|
|
|
(9,826,000 |
) |
Inventory unreturned, as previously reported |
|
|
(1,087,000 |
) |
|
|
|
|
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
123,000 |
|
|
|
|
|
Inventory unreturned, as restated |
|
|
|
|
|
|
|
|
|
|
(964,000 |
) |
Prepaid expenses and other current assets |
|
|
(77,000 |
) |
|
|
|
|
|
|
(77,000 |
) |
Other assets |
|
|
7,000 |
|
|
|
|
|
|
|
7,000 |
|
Accounts payable and accrued liabilities |
|
|
8,237,000 |
|
|
|
|
|
|
|
8,237,000 |
|
Income tax payable, as previously reported |
|
|
|
|
|
|
|
|
|
|
|
|
Consignment core adjustment |
|
|
|
|
|
|
(72,000 |
) |
|
|
|
|
Unit stock adjustment |
|
|
|
|
|
|
(55,000 |
) |
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
(127,000 |
) |
Deferred compensation |
|
|
76,000 |
|
|
|
|
|
|
|
76,000 |
|
Credit due to customer |
|
|
6,529,000 |
|
|
|
|
|
|
|
6,529,000 |
|
Other liabilities |
|
|
47,000 |
|
|
|
|
|
|
|
47,000 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
6,064,000 |
|
|
$ |
|
|
|
$ |
6,064,000 |
|
|
|
|
|
|
|
|
|
|
|
There were no changes to previously reported cash flows from investing and financing activities.
11
NOTE C 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 sellers 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 Companys 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. Unit value
revenue is recorded based on the Companys price list, net of applicable discounts and allowances.
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.
Management has determined that the Companys business practices and contractual arrangements
result in the return to the Company of more than 90% of 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). 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. Upon receipt of a core, the Company grants
the customer a credit based on the core value billed, and restores the returned core to inventory.
The Company generally limits core returns to the number of similar cores previously shipped to each
customer. 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 this estimate. The
revenue from core charges had previously been recorded at the end of the fiscal year. Core values
charged to customers and not included in revenues totaled $16,099,000 and $18,397,000 for the three
months ended June 30, 2005 and 2004, respectively.
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 $5,295,000 and $1,376,000 for the three months
ended June 30, 2005 and 2004, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Estimated sales returns |
|
$ |
605,000 |
|
|
$ |
694,000 |
|
Estimated core inventory returns |
|
$ |
2,019,000 |
|
|
$ |
2,288,000 |
|
12
The amount of revenue recognized for core charges for the three months ended June 30, 2005 and
2004 were $713,000 and $1,017,000, respectively.
NOTE D 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.
The following table presents pro forma net income had compensation costs associated the Companys
option arrangements been determined in accordance with SFAS 123:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Net (loss) income |
|
$ |
(1,420,000 |
) |
|
$ |
57,000 |
|
Stock-based compensation charges reported in net (loss) income |
|
|
|
|
|
|
|
|
Pro forma stock-based compensation, net of tax |
|
|
|
|
|
|
(380,000 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(1,420,000 |
) |
|
$ |
(323,000 |
) |
|
|
|
|
|
|
|
Basic (loss) income per share |
|
$ |
(0.17 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Basic (loss) income per share pro forma |
|
$ |
(0.17 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
Diluted (loss) income per share |
|
$ |
(0.17 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Diluted (loss) income per share pro forma |
|
$ |
(0.17 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
NOTE E Inventory
Inventory is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Raw materials and cores |
|
$ |
21,169,000 |
|
|
$ |
19,864,000 |
|
Work-in-process |
|
|
403,000 |
|
|
|
681,000 |
|
Finished goods |
|
|
19,998,000 |
|
|
|
13,398,000 |
|
|
|
|
|
|
|
|
|
|
|
41,570,000 |
|
|
|
33,943,000 |
|
Less allowance for excess and obsolete inventory |
|
|
(2,394,000 |
) |
|
|
(2,392,000 |
) |
|
|
|
|
|
|
|
|
|
|
39,176,000 |
|
|
|
31,551,000 |
|
Pay-on-scan inventory |
|
|
17,680,000 |
|
|
|
17,036,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
56,856,000 |
|
|
$ |
48,587,000 |
|
|
|
|
|
|
|
|
NOTE F Inventory Unreturned
Inventory unreturned represents the average 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. Inventory unreturned is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Cores |
|
$ |
1,404,000 |
|
|
$ |
1,352,000 |
|
Finished goods |
|
|
1,177,000 |
|
|
|
1,057,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,581,000 |
|
|
$ |
2,409,000 |
|
|
|
|
|
|
|
|
13
NOTE G Multi-Year Exclusive Arrangement and Inventory Transaction with Largest Customer
In May 2004, the Company entered into an agreement with its largest customer to become the
customers 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 customers 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 customers 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. Since the inception of this arrangement, the customer has sold $20,620,000 of the
transition inventory and the Company has issued credits of $10,280,000, resulting in a net
obligation to the customer of $10,340,000, as reflected on the Companys June 30, 2005 balance
sheet.
As the issuance of credits to the customer generally lagged sales of the transition inventory
during the initial phase of this arrangement, the Company received cash in the early months which
is now being offset by lower cash collections resulting from credits issued to the customer. As of
June 30, 2005, the Company had agreed to issue future credits to the customer in the following
amounts:
|
|
|
|
|
Q2 2006 |
|
$ |
3,270,000 |
|
Q3 2006 |
|
$ |
3,270,000 |
|
Q4 2006 |
|
$ |
3,270,000 |
|
Q1 2007 |
|
$ |
4,040,000 |
|
|
|
|
|
Total |
|
$ |
13,850,000 |
|
|
|
|
|
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 Other Long-Term Agreements with Major Customers
The Company has long-term agreements with each of its major customers. Under these agreements,
which typically have initial terms of at least four years, the Company is designated as the
exclusive or primary supplier for specified categories of remanufactured alternators and starters.
In consideration for its designation as a customers exclusive or primary supplier, the Company
typically provides the customer with a package of marketing incentives. These incentives differ
from contract to contract and can include (i) the issuance of a specified amount of credits against
receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a
particular customers research or marketing efforts on a scheduled basis, (iii) discounts granted
in connection with each individual shipment of product and (iv) other marketing, research, store
expansion or product development support. The Company has also entered into agreements to purchase
certain customers core inventory and to issue credits to pay for that inventory according to an
agreed upon schedule set forth in the agreement. These contracts typically require that the Company
meet ongoing performance, quality and fulfillment requirements, and its contract with one of the
largest automobile manufacturers in the world includes a provision (standard in this manufacturers
vendor agreements) granting the manufacturer the right to terminate the agreement at any
14
time for any reason. The Companys contracts with major customers expire at various dates
ranging from May 2008 through December 2012.
In addition to the inventory transactions described in Note G, the Company has agreed to
acquire other core inventory by issuing $10,300,000 of credits over a five-year period (subject to
adjustment if customer sales decrease in any quarter by more than an agreed upon percentage) on a
straight-line basis. As the Company issues these credits, it establishes a long-term asset account
for the value of the core inventory estimated to be in customer hands and subject to repurchase
upon agreement termination, and reduces revenue by the amount by which the credit exceeds the
estimated core inventory value. As of June 30, 2005, the long-term asset account was approximately
$267,000. The Company will regularly review the long-term asset account for impairment and make any
necessary adjustment to the carrying value of this asset.
NOTE I Marketing Allowances
The Company records the cost of all marketing allowances provided to its customers in
accordance with EITF 01-9, 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 in accordance with the schedule set forth in the customer agreement. Sales incentive
amounts are recorded based on the value of the incentive provided. For the three months ended June
30, 2005 and 2004, the Company recorded a reduction in revenues of $3,090,000 and $581,000,
respectively, attributable to marketing allowances granted in connection with long-term contracts
and a reduction of $2,609,000 and $2,545,000, respectively, attributable to marketing allowances
related to a single exchange of product.
The following table presents the unrecognized marketing allowances to be provided to customers
which are not associated with a single exchange of product and which will be recognized as a charge
against revenues in accordance with the terms of the relevant long-term contracts:
|
|
|
|
|
|
Year ending March 31, |
|
|
|
|
2006 Remaining nine months |
$ |
4,993,000 |
|
2007 |
|
2,084,000 |
|
2008 |
|
2,022,000 |
|
2009 |
|
1,289,000 |
|
2010 |
|
1,289,000 |
|
Thereafter |
|
2,233,000 |
|
|
|
|
|
Total |
$ |
13,910,000 |
|
|
|
|
|
NOTE J Major Customers
The Companys three largest customers accounted for the following total percentage of sales
and accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Sales |
|
|
|
|
|
|
|
|
Customer A |
|
|
67 |
% |
|
|
74 |
% |
Customer B* |
|
|
12 |
% |
|
|
11 |
% |
Customer C* |
|
|
11 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2005 |
|
|
2005 |
|
Accounts Receivable |
|
|
|
|
|
|
|
|
Customer A |
|
|
64 |
% |
|
|
68 |
% |
Customer B* |
|
|
9 |
% |
|
|
10 |
% |
Customer C* |
|
|
10 |
% |
|
|
18 |
% |
|
|
|
* |
|
Between June 30, 2004 and June 30, 2005, the identity of our second and third largest customers
changed. |
15
NOTE K Line of Credit; Factoring Agreements
On May 28, 2004 the Company secured a $15,000,000 credit facility with a new bank. This
revolving credit line, which replaced the Companys previous asset-based facility, bears interest
either at the LIBOR rate plus 2% or the banks reference rate, at the Companys option. The bank
holds a security interest in substantially all of the Companys assets. As of June 30, 2005, no
amounts were outstanding under this line of credit and the Company had reserved $4,301,000 of the
line for standby letters of credit for workers 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.
During fiscal 2005, the Company was in default for violating certain bank covenants, including
(i) failing to provide the bank with its public reports on Form 10-Q and Form 10-K within the
required timeframe, (ii) failing to maintain a quick ratio of not less than 0.65 to 1.00 at the end
of several fiscal periods, (iii) making capital expenditures during fiscal year 2005 in excess of
the $2,500,000 limitation, (iv) failing to achieve EBITDA of not less than $3 million during
several fiscal quarters, (iv) failing to achieve EBITDA of not less than $14 million for several
consecutive four fiscal quarters, (v) failing to maintain a fixed charge coverage ratio of not less
than 1.25 to 1.00 as of the last day of several fiscal quarters and (vi) failing to provide the
bank with certain notices, monthly financial statements and required compliance certificates. The
bank provided the Company with a series of waivers with respect to these defaults. Certain of these
waivers restricted the Companys ability to access the line of credit until it had satisfied the
conditions included in the waiver. The Company ultimately satisfied these conditions and restored
its ability to access the line of credit in full.
For the fiscal quarter ended June 30, 2005, the Company was in default for (i) failing to
achieve EBITDA for the fiscal quarter ended June 30, 2005 of at least $3,000,000, (ii) failing to
achieve EBITDA for the four consecutive fiscal quarters ended June 30, 2005 of at least
$14,000,000, (iii) failing to maintain a quick ratio of not less than 0.65 to 1.00 for the fiscal
quarter ended June 30, 2005, (iv) failing to maintain a fixed charge ratio of not less than 1.25 to
1.00 as of June 30, 2005 and (v) incurring operating lease obligations in excess of $2,000,000
applicable to the fiscal year ended March 31, 2006. On September 29, 2005, the bank provided the
Company with a waiver of these covenant defaults. The ongoing effect of this waiver was conditioned
upon delivery to the bank of the Companys 10-Q for the fiscal quarter ended June 30, 2005 by
October 14, 2005. The Company has satisfied this condition.
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 $17,951,000 and $20,713,000 for the three months ended June 30, 2005 and 2004,
respectively, by an average of 194 days and 156 days, respectively. On an annualized basis the
weighted average discount rate on the receivables sold to the banks during the three months ended
June 30, 2005 and 2004 was 5.4% and 3.3%, respectively. The amount of the discount on these
receivables, $205,000 and $297,000 for the three months ended June 30, 2005 and 2004, respectively,
was recorded as interest expense.
NOTE L Net Income Per Share
The following represents a reconciliation of basic and diluted net income per share.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Net (loss) income |
|
$ |
(1,420,000 |
) |
|
$ |
57,000 |
|
|
|
|
|
|
|
|
Basic Shares |
|
|
8,183,955 |
|
|
|
8,094,450 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
480,760 |
|
|
|
|
|
|
|
|
Diluted shares |
|
|
8,183,955 |
|
|
|
8,575,210 |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.17 |
) |
|
$ |
0.01 |
|
Diluted |
|
$ |
(0.17 |
) |
|
$ |
0.01 |
|
16
The effect of dilutive options and warrants excludes 1,060,318 options with exercise prices
ranging from $0.93 to $19.13 per share for the three months ended June 30, 2005, and 170,025
options with exercise prices ranging from $8.70 to $19.13 per share for the three months ended June
30, 2004 all of which were anti-dilutive.
NOTE M 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 Companys total
comprehensive income consists of net income and foreign currency translation adjustments.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
Net (loss) income |
|
$ |
(1,420,000 |
) |
|
$ |
57,000 |
|
Foreign currency translation |
|
|
22,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(1,398,000 |
) |
|
$ |
57,000 |
|
|
|
|
|
|
|
|
NOTE N New Lease
In April 2005, the Company 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.
NOTE O Subsequent Event
Subsequent to June 30, 2005 and as of September 30, 2005, the Company has borrowed $6,831,000
against its line of credit and had reserved $4,301,000 of the line for standby letters of credit
for workers compensation insurance, resulting in $3,868,000 available under the line of credit at
September 30, 2005.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis presents factors that we believe are relevant to an
assessment and understanding of our unaudited and restated consolidated financial position and
results of operations. This financial and business analysis should be read in conjunction with our
March 31, 2005 consolidated financial statements included in our Annual Report on Form 10-K filed
on September 6, 2005 as well as our March 31, 2006 consolidated financial statements included in
our Annual Report on Form 10-K filed on July 13, 2006.
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, the increasing strain on our cash position, potential future changes in our accounting
policies that may be made as the SECs 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 banks 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
While sales in the automotive retail section were soft during the fiscal quarter ended June
30, 2005, both the retail and traditional markets in our rotating electrical category have
historically grown in size. 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 concentrated among a
very few customers, and these key customers regularly seek more favorable pricing, marketing
allowances, delivery and payment terms as a condition to the continuation of existing business or
expansion of a particular customers business. The increased pressure we have experienced from our
customers may increasingly and adversely impact our profit margins in the future.
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 and traditional
distribution networks 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 managements time has been focused on responding to the SECs
inquiries 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.
Our results for the fiscal quarter ended June 30, 2005 reflect the investments we have made to
implement our strategy and the progress that we have realized. During the June 2005 fiscal quarter,
we opened our new manufacturing facility in Mexico, a facility that at September 30, 2005 had
approximately 250 employees, significantly increased our production to accommodate the new business
we have received from one of the worlds largest automobile manufacturers, opened a new
distribution facility in Nashville, Tennessee and continued to make meaningful progress in
addressing and resolving the SECs inquiries concerning our previously
18
filed public reports. While we have incurred significant costs to achieve these objectives, we
believe these investments have helped position us to capitalize on the market opportunities that we
continue to see.
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 included in our Annual Report on Form 10-K
filed on September 6, 2005.
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; 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; General Right of Return
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 customers 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 most of 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 in March using only 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.
19
Accounting for Under Returns of Cores
Based on our experience, contractual arrangements with customers and inventory management
practices, we typically receive and purchase a used but remanufacturable core from customers for
more than 90% of the remanufactured alternators or starters 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.
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 in accordance with the timetable for issuing the credits as set
forth in the relevant agreement. Sales incentive amounts are recorded based on the value of the
incentive provided.
Results of Operations for the three months ended June 30, 2005 and 2004
The following discussion and analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.
The following table summarizes certain key operating data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
Gross margin |
|
|
15.9 |
% |
|
|
18.3 |
% |
EBITDA (1) |
|
$ |
(1,296,000 |
) |
|
$ |
1,043,000 |
|
Cash flow from operations |
|
$ |
(3,978,000 |
) |
|
$ |
6,064,000 |
|
Finished goods turnover (annualized) (2) |
|
|
2.11 |
|
|
|
3.84 |
|
Finished goods turnover, excluding POS inventory (annualized) (3) |
|
|
4.30 |
|
|
|
5.39 |
|
Annualized return on equity (4) |
|
|
(12.0 |
%) |
|
|
0.6 |
% |
|
|
|
(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) |
|
Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost
of sales for the quarter by 4 and dividing the result by the average between beginning and
ending finished goods inventory for the fiscal quarter. We believe this provides a useful
measure of our ability to turn production into revenues. |
|
(3) |
|
Calculated on the same basis as note (2) except for the exclusion in the denominator of
pay-on-scan inventory in this calculation. We believe this provides a useful measure of our
ability to manage inventory which is within our physical control. |
|
(4) |
|
Annualized return on equity is computed as net income (loss) for the fiscal quarter
multiplied by 4 and dividing the result by beginning shareholders equity and measures our
ability to invest shareholders funds profitably. |
20
Non-GAAP Measures A reconciliation of EBITDA to net (loss) income is provided below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
EBITDA |
|
$ |
(1,296,000 |
) |
|
$ |
1,043,000 |
|
Depreciation and amortization |
|
|
498,000 |
|
|
|
578,000 |
|
Interest expense |
|
|
557,000 |
|
|
|
367,000 |
|
Income tax benefit (expense). |
|
|
931,000 |
|
|
|
(41,000 |
) |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,420,000 |
) |
|
$ |
57,000 |
|
|
|
|
|
|
|
|
Following is our unaudited results of operations, reflected as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
84.1 |
% |
|
|
81.7 |
% |
|
|
|
|
|
|
|
Gross margin |
|
|
15.9 |
% |
|
|
18.3 |
% |
General and administrative expenses |
|
|
18.8 |
% |
|
|
12.4 |
% |
Sales and marketing expenses |
|
|
4.0 |
% |
|
|
2.9 |
% |
Research and development expenses |
|
|
1.5 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(8.4 |
%) |
|
|
2.2 |
% |
Interest expense net of interest income |
|
|
2.6 |
% |
|
|
1.7 |
% |
Income tax benefit (expense) |
|
|
4.4 |
% |
|
|
(0.2 |
%) |
|
|
|
|
|
|
|
Net (loss) income |
|
|
(6.6 |
%) |
|
|
0.3 |
% |
|
|
|
|
|
|
|
Our results for the fiscal quarter ended June 30, 2005 reflect the investments we have made to
implement our strategy. During the June 2005 fiscal quarter, we opened our new manufacturing
facility in Mexico, a facility that at September 30, 2005 had approximately 250 employees,
significantly increased our production to accommodate the new business we have received from one of
the worlds largest automobile manufacturers, opened a new distribution facility in Nashville,
Tennessee and continued to make meaningful progress in addressing and resolving the SECs inquiries
concerning our previously filed public reports. While we have incurred significant costs to achieve
these objectives, we believe these investments have helped position us to capitalize on the market
opportunities that we continue to see.
Net Sales. Our net sales for the three months ended June 30, 2005 were $21,351,000, an
increase of $142,000 or 0.7% compared to net sales for the three months ended June 30, 2004 of
$21,209,000. Gross sales increased by $1,724,000 during the first quarter of fiscal 2006 when
compared to the first quarter of fiscal 2005. This was due primarily to the new business from one
of the worlds largest automobile manufacturers. Returns decreased by $411,000 from the first
quarter of fiscal 2005 to the first quarter of fiscal 2006. In addition, we recorded $430,000 in
royalty income during the first quarter of fiscal 2006. These increases in sales were reduced in
the quarter ended June 30, 2005 by approximately $2,570,000 due to a front-loaded marketing
allowance we provided to a customer during this period in connection with a new five-year contract.
In total, marketing allowances increased from $3,126,000 for the three months ended June 30, 2004
to $5,699,000 for the three months ended June 30, 2005.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales increased 2.4% for the
three months ended June 30, 2005 to 84.1% when compared to 81.7% for the three months ended June
30, 2004. This percentage was adversely impacted by the front-loaded marketing allowance noted
above which offset sales but did not impact the cost of goods associated with those sales. Cost of
goods sold was also negatively impacted by the higher per unit manufacturing costs compared to the
prior period to meet demands of the new business we received, including increased overtime and
temporary labor costs, and the manufacturing inefficiencies from opening our Mexican facility. As
previously reported, cost of goods sold as a percentage of net sales during the three months ended
June 30, 2004 was adversely impacted by the ramp-up costs associated with business we received from
our largest customer.
General and Administrative. Our general and administrative expense for the three months ended
June 30, 2005 was $4,010,000, which represents an increase of $1,389,000 or 53%, from the three
months ended June 30, 2004 of $2,621,000. This increase is principally due to outside professional
and consulting fees associated with the SECs review of our SEC filings and the related restatement
of our financial statements, that increased from $543,000 for the three months ended June 30, 2004
to $1,236,000 for the three months ended June 30, 2005, $349,000 in expenses related to our new
production facility in Mexico, increased expenses incurred to expand our accounting and finance
departments from $194,000 in the earlier period to $298,000 for the current period, and additional
expenses in the Human Resource Department related to new business we have received that increased
from $150,000 for the three months ended June 30, 2004 to $230,000 for the three months ended June
30, 2005. These increases were partially offset by a decline in the indemnification expenses we
incurred in connection with the SEC and U.S. Attorneys Offices investigation of Richard Marks,
our former President and Chief Operating Officer, from $223,000 for the three months ended June 30,
2004 to $170,000 for the three months ended June 30, 2005.
21
Sales and Marketing. Our sales and marketing expenses increased over the periods by $243,000
or 39.1% to $865,000 for the three months ended June 30, 2005 from $622,000 for the three months
ended June 30, 2004. This increase is principally attributable to an
increase of approximately $120,000 in costs incurred to support customer sales initiatives,
such as salaries and benefits, and consulting fees, for the new business we received. We also
incurred $119,000 in increased catalog expenses.
Research and Development. Our research and development expenses increased over this period by
$135,000, or 75.4%, to $314,000 for the three months ended June 30, 2005 from $179,000 for the
three months ended June 30, 2004. This increase was attributable to the increased costs of
supporting the new business we obtained.
Interest Expense. For the three months ended June 30, 2005, interest expense, net of interest
income, was $548,000. This represents an increase of $197,000 over net interest expense of $351,000
for the three months ended June 30, 2004. This increase was principally attributable to an increase
in short-term interest rates related to accounts receivables that we discounted under our factoring
arrangements with our customers. The increase in short-term interest rates was partially offset by
a decline in the aggregate amount of receivables that were discounted during the most recent fiscal
quarter. Interest expense is comprised principally of discounts recognized in connection with our
receivables discounting arrangements and interest on our capital leases.
Income Tax. For the three months ended June 30, 2005 and June 30, 2004, we recognized income
tax benefit of $931,000 and income tax expense of $41,000, respectively. For income tax purposes,
we have available $1,953,000 of federal carry forwards which expire in varying amounts through
2023.
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 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 the sales program to one of the worlds largest automobile
manufacturers under an agreement we signed with this customer during the fourth quarter of fiscal
2005 was not fully launched in the expected timeframe, 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 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 customers 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 June 30, 2005, we had working capital of $39,980,000, a ratio of current assets to current
liabilities of 2.03:1, and cash and cash equivalents of $645,000, which compares to 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 at March 31, 2005.
Because of the factors discussed under the caption Liquidity and Capital Resources, our cash
position has been strained. Net cash used in operating activities was $3,978,000 for the three
months ended June 30, 2005, as compared to net cash provided by operating activities of $6,064,000
for the three months ended June 30, 2004. The structure of our purchase of transition inventory
associated with our POS arrangement had a significant impact on our cash flow. During the three
months ended June 30, 2005, this arrangement reduced our cash flow from operations by $2,203,000.
During the three months ended June 30, 2004, this arrangement increased our cash flow from
operations by $6,529,000. (For an explanation of this transaction, see Note G to the Consolidated
Financial Statements included in this report.) The net cash used in operating activities was also
impacted by our net loss during the current fiscal quarter of $1,420,000, compared to net income of
$57,000 during the June 2004 fiscal quarter. Our increased inventory of $8,244,000 during the three
months ended June 30, 2005 was partially offset by a net increase in accounts payable and accrued
liabilities of $6,629,000 associated with our ramped-up production.
Inventory and accounts payable were significantly impacted by our expanded customer
arrangements. Inventory and inventory unreturned increased by a combined total of $8,415,000
principally due to our POS arrangement and new business we have been awarded. As a result of
increased production related to new business, our accounts payable and accrued liabilities
increased by approximately $6,629,000 from March 31, 2005 to June 30, 2005. Even though inventory
increased by over $8,000,000, our excess
22
and obsolete inventory reserve remained essentially unchanged because the increase in
inventory was largely related to our production of a new line of remanufactured starters and
alternators for which we believe there is a high demand.
Net accounts receivable decreased by $2,520,000 as of June 30, 2005 compared to March 31,
2005, primarily due to the issuance of front-loaded marketing allowances we provided to one of our
customers.
We used net cash in investing activities in the three months ended June 30, 2005. These
investing activities were primarily related to capital expenditures of $1,437,000 during this
period. We expect to use cash in investing activities for the balance of fiscal 2006.
During each of the three month periods ending June 30, 2005 and 2004, the cash we used in
financing activities primarily related to our capital lease obligations.
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) banks 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 June 30, 2005, we had reserved $4,301,000 of our line for
standby letters of credit for workers compensation insurance, and no balance was outstanding under
this line of credit. This loan agreement expires on October 2, 2006.
Because of the strains on our working capital described in the preceding paragraphs, we have
borrowed increasing amounts under our line of credit. As of September 30, 2005, we had borrowed
$6,831,000 against our line of credit and reserved $4,301,000 of the line for standby letters of
credit for workers compensation insurance, resulting in $3,868,000 remaining available at
September 30, 2005.
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. The bank
also limited our ability to fully access the line of credit pending satisfaction of these
conditions.
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.
23
We were also in default for (i) failing to achieve EBITDA for the fiscal quarter ended June
30, 2005 of at least $3,000,000, (ii) failing to achieve EBITDA for the four consecutive fiscal
quarters ended June 30, 2005 of at least $14,000,000, (iii) failing to maintain a quick ratio of
not less than 0.65 to 1.00 for the fiscal quarter ended June 30, 2005, (iv) failing to maintain a
fixed charge ratio of not less than 1.25 to 1.00 as of the last day of the fiscal quarter ended
June 30, 2005 and (v) incurring operating lease obligations in excess of $2,000,000 during the
12-month period ended June 30, 2005. On September 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 our 10-Q for the fiscal quarter ended June 30, 2005 by October 14, 2005. The September 29,
2005 waiver extended the deadline for filing the June 2005 10-Q provided for in the August 30, 2005
waiver letter. See Note K.
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 2.9% during the three months ended June 30, 2005 and has
allowed us to accelerate collection of receivables aggregating $17,951,000 by an average of 194
days. On an annualized basis, the weighted average discount rate on receivables sold to banks
during the three months ended June 30, 2005 was 5.4%. 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 $506,000 during the three months ended June 30, 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 have significantly expanded our production during the past 12 months to meet the
obligations arising under our multi-year vendor agreements. This increased production caused
significant increases in our inventories, accounts payable and employee base. With respect to
merchandise covered by the pay-on-scan arrangement with our largest 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 this arrangement will defer recognition of income from sales to this customer, we
do not believe it will ultimately have an adverse impact on our liquidity. In addition, although
the significant marketing allowances we have provided our customers as part of these multi-year
agreements meaningfully limit the near-term revenues and associated cash flow from these new or
expanded arrangements, we believe this incremental business will improve our overall liquidity and
cash flow from operations over time.
As part of our POS arrangement with our largest customer, we agreed to purchase the customers
inventory of alternators and starters that was 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 collected cash for the transition inventory before we issued the monthly
credits to purchase this inventory during the initial phase of this arrangement, this transaction
helped finance our inventory build-up to meet production requirements. Satisfaction of the credit
due customer through the issuance of credits against that customers receivables, however, is now
having an adverse impact on our 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 $10,340,000 at June 30, 2005. Net sales from POS inventory were $5,295,000 and
$1,376,000 for the three months ended June 30, 2005 and 2004, respectively. (For an explanation of
this accounting treatment, see Note G to the Consolidated Financial Statements included in this
report.)
We have long-term agreements with each of our major customers. Under these agreements, which
typically have initial terms of at least five years, we are designated as the exclusive or primary
supplier for specified categories of remanufactured alternators and starters. In consideration for
its designation as a customers exclusive or primary supplier, we typically provide the customer
with a package of marketing incentives. These incentives differ from contract to contract and can
include (i) the issuance of a specified amount of credits against receivables in accordance with a
schedule set forth in the relevant contract, (ii) support for a particular customers research or
marketing efforts that can be provided on a scheduled basis, (iii) discounts that are granted in
connection with each individual shipment of product and (iv) other marketing, research, store
expansion or product development support. We have also entered into agreements to purchase certain
customers core inventory and to issue credits to pay for that inventory according to an agreed
upon schedule set forth in the agreement. These contracts typically require that we meet ongoing
performance, quality and fulfillment requirements, and its contract with one of the largest
automobile manufacturers in the world includes a provision (standard in this manufacturers vendor
agreements) granting the manufacturer the right to terminate the agreement at any time for any
reason. Our contracts with major customers expire at various dates ranging from May 2008 through
December 2012.
24
Our customers continue to aggressively seek extended payment terms, pay-on-scan inventory
arrangements, price concessions and other terms that adversely affect our liquidity.
Capital Expenditures and Commitments
Our capital expenditures were $1,437,000 for the three months ended June 30, 2005.
Approximately $1,226,000 of these expenditures relate to our Mexico production facility, with the
remainder for 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.
Contractual Obligations
The following summarizes our contractual obligations and other commitments as of June 30,
2005, and the effect such obligations could have on our cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Long-Term Debt
Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital (Finance)
Lease Obligations |
|
$ |
2,417,000 |
|
|
$ |
703,000 |
|
|
$ |
1,189,000 |
|
|
$ |
525,000 |
|
|
|
|
|
Operating Lease
Obligations |
|
$ |
9,794,000 |
|
|
$ |
2,247,000 |
|
|
$ |
2,714,000 |
|
|
$ |
1,752,000 |
|
|
$ |
3,081,000 |
|
Purchase Obligations |
|
$ |
24,427,000 |
|
|
$ |
16,579,000 |
|
|
$ |
4,401,000 |
|
|
$ |
3,447,000 |
|
|
|
|
|
Other Long-Term
Obligations |
|
$ |
13,910,000 |
|
|
$ |
5,514,000 |
|
|
$ |
3,907,000 |
|
|
$ |
2,578,000 |
|
|
$ |
1,911,000 |
|
Total |
|
$ |
50,548,000 |
|
|
$ |
25,043,000 |
|
|
$ |
12,211,000 |
|
|
$ |
8,302,000 |
|
|
$ |
4,992,000 |
|
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 customers core inventory.
Other Long-Term Obligations represent commitments we have with certain customers to provide
marketing allowances in consideration for supply agreements to provide products over a defined
period.
Customer Concentration
We are substantially dependent upon sales to our major customers. During the three months
ended June 30, 2005 and 2004, sales to our three largest customers constituted approximately 90%
and 95% of our total sales, respectively. We expect our customer concentration to continue to
decline as we add important new customers to our business base. Any meaningful reduction in the
level of sales to any of our significant customers, deterioration of any customers 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.
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
25
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.
During the three months ended June 30, 2005 and June 30, 2004, units produced outside the United
States constituted 14.8% and 10.7%, respectively, of our total production. Because our foreign
operations are expected to 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. During the initial phase manufacturing in Mexico, however, we have
incurred higher production costs as a result of the start-up manufacturing inefficiencies we have
experienced.
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.
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.
Related Party Transactions
Our related party transactions primarily consist of employment and director agreements, and
stock purchase agreements. Other than the changes to the employment agreement with Selwyn Joffe,
our Chairman and Chief Executive Officer, which are summarized in the Current Report on Form 8-K we
filed on April 25, 2005, our related party transactions have not changed since March 31, 2005.
26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
|
31.1 |
|
Certification of Chief Executive Officer pursuant 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. |
|
|
32.1 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K:
Current report on Form 8-K filed on April 25, 2005 which reported amendments to the employment
agreement with Selwyn Joffe, our Chairman and Chief Executive Officer.
Current report on Form 8-K filed on June 3, 2005 which reported restated audited financial
statements for the year ended March 31, 2004, 2003 and 2002 under new accounting policies.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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|
MOTORCAR PARTS OF AMERICA, INC
|
|
Dated: July 21, 2006 |
By: |
/s/ Mervyn McCulloch
|
|
|
|
Mervyn McCulloch |
|
|
|
Chief Financial Officer |
|
28