Motorcar Parts of America, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-23538
MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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New York
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11-2153962 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2929 California Street, Torrance, California
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90503 |
(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 o No þ
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 8,326,455 shares of Common Stock outstanding at August 9, 2006.
MOTORCAR PARTS OF AMERICA, INC.
EXPLANATORY NOTE
Explanatory Note: This Form 10-Q/A amends our report on Form 10-Q for the period ended June 30,
2006 to restate our unaudited consolidated financial statements for the three months ended June 30,
2006 and 2005 to correct errors which occurred when (i) we incorrectly recorded a duplicative entry
that continued to recognize a gross profit impact resulting from the accrual for certain cores authorized to be returned, but
still in-transit to us from our customers, (ii) we incorrectly recorded core charge revenue when
the amount of revenue was not fixed and determinable and (iii) we did not appropriately accrue losses for
all probable customer payment discrepancies. The impact of the duplicative entry (i) above on the accumulated deficit
at March 31, 2003 is a decrease of $865,000. The revenue entry (ii) and customer payment discrepancies
entry (iii) above did not impact periods prior to April 1, 2003. Management believes this Form 10-Q/A
and planned future filings are appropriate. However, we continue to evaluate this conclusion regarding filings for periods prior
to March 31, 2006.
Except as required to reflect the effects of these restatements, no attempt has been made in this
Form 10-Q/A to modify or update other disclosures presented in the original report on Form 10-Q.
Accordingly, this Form 10-Q/A, including the financial statements and notes thereto included
herein, generally do not reflect events occurring after the date of the original filing of the Form
10-Q or modify or update those disclosures affected by subsequent events. Consequently, all other
information not affected by the restatement is unchanged and reflects the disclosures made at the
time of the original filing of the Form 10-Q on August 14, 2006. For a description of subsequent
events, this Form 10-Q/A should be read in conjunction with our filings made subsequent to the
filing of the original Form 10-Q, including the Companys Current Reports on Form 8-K filed since
August 14, 2006.
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets ( Restated)
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June 30, |
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March 31, |
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2006 |
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2006 |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
97,000 |
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$ |
400,000 |
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Short term investments |
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681,000 |
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660,000 |
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Accounts receivable net |
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14,209,000 |
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13,902,000 |
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Due from customer |
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2,005,000 |
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Inventory net |
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63,244,000 |
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57,881,000 |
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Deferred income tax asset |
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5,827,000 |
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5,809,000 |
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Inventory unreturned |
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8,804,000 |
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8,171,000 |
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Prepaid expenses and other current assets |
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1,748,000 |
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918,000 |
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Total current assets |
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96,615,000 |
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87,741,000 |
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Plant and equipment net |
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12,766,000 |
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12,164,000 |
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Other assets |
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1,444,000 |
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1,231,000 |
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TOTAL ASSETS |
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$ |
110,825,000 |
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$ |
101,136,000 |
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LIABILITIES
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Current liabilities: |
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Accounts payable |
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$ |
24,467,000 |
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$ |
21,882,000 |
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Accrued liabilities |
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1,136,000 |
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1,587,000 |
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Accrued salaries and wages |
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2,651,000 |
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2,267,000 |
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Accrued workers compensation claims |
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3,832,000 |
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3,346,000 |
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Income tax payable |
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1,057,000 |
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1,021,000 |
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Line of credit |
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14,900,000 |
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6,300,000 |
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Deferred compensation |
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521,000 |
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495,000 |
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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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266,000 |
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988,000 |
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Credit due customer |
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1,793,000 |
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Current portion of capital lease obligations |
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1,499,000 |
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1,499,000 |
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Total current liabilities |
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50,462,000 |
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41,311,000 |
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Deferred income, less current portion |
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355,000 |
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388,000 |
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Deferred income tax liability |
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498,000 |
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562,000 |
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Deferred gain on sale-leaseback |
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2,248,000 |
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2,377,000 |
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Other liabilities |
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46,000 |
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46,000 |
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Capitalized lease obligations, less current portion |
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4,520,000 |
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4,857,000 |
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TOTAL LIABILITIES |
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58,129,000 |
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49,541,000 |
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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 $.01 per share, 20,000,000
shares authorized; 8,324,455 and 8,316,105 shares
issued and outstanding at June 30, 2006 and March
31, 2006, respectively |
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83,000 |
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83,000 |
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Additional paid-in capital |
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54,498,000 |
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54,326,000 |
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Accumulated other comprehensive (loss) income |
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(155,000 |
) |
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85,000 |
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Accumulated deficit |
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(1,730,000 |
) |
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(2,899,000 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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52,696,000 |
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51,595,000 |
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TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
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$ |
110,825,000 |
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$ |
101,136,000 |
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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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2006 |
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2005 |
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Net sales |
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$ |
27,424,000 |
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$ |
20,321,000 |
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Cost of goods sold |
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20,258,000 |
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17,798,000 |
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Gross profit |
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7,166,000 |
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2,523,000 |
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Operating expenses: |
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General and administrative |
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3,072,000 |
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4,010,000 |
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Sales and marketing |
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905,000 |
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865,000 |
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Research and development |
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416,000 |
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314,000 |
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Total operating expenses |
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4,393,000 |
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5,189,000 |
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Operating income (loss) |
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2,773,000 |
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(2,666,000 |
) |
Interest expense net of interest income |
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822,000 |
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548,000 |
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Income (loss) before income tax expense (benefit) |
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1,951,000 |
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(3,214,000 |
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Income tax expense (benefit) |
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782,000 |
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(1,250,000 |
) |
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Net income (loss) |
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$ |
1,169,000 |
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$ |
(1,964,000 |
) |
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Basic net income (loss) per share |
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$ |
0.14 |
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$ |
(0.24 |
) |
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Diluted net income (loss) per share |
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$ |
0.14 |
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$ |
(0.24 |
) |
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Weighted average number of shares outstanding: |
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basic |
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8,322,920 |
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8,183,955 |
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diluted |
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8,582,209 |
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8,183,955 |
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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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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
1,169,000 |
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$ |
(1,964,000 |
) |
Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
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Depreciation and amortization |
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649,000 |
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498,000 |
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Amortization of deferred gain on sale-leaseback |
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(129,000 |
) |
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Provision for (recovery of) inventory reserves and stock adjustments |
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(267,000 |
) |
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24,000 |
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Recovery of doubtful accounts |
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(14,000 |
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Deferred income taxes |
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(82,000 |
) |
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(881,000 |
) |
Share-based compensation expense |
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115,000 |
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Excess tax benefit from employee stock options exercised |
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(28,000 |
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Changes in current assets and liabilities: |
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Accounts receivable |
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169,000 |
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3,634,000 |
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Due from customer |
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(2,005,000 |
) |
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Inventory |
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(5,560,000 |
) |
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(8,296,000 |
) |
Inventory unreturned |
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(632,000 |
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(394,000 |
) |
Prepaid expenses and other current assets |
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(830,000 |
) |
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(443,000 |
) |
Other assets |
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(213,000 |
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(252,000 |
) |
Accounts payable and accrued liabilities |
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3,004,000 |
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6,629,000 |
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Income tax payable |
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37,000 |
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(369,000 |
) |
Deferred compensation |
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26,000 |
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18,000 |
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Deferred income |
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(33,000 |
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(33,000 |
) |
Credit due customer |
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(1,793,000 |
) |
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(2,203,000 |
) |
Other current liabilities |
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(722,000 |
) |
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54,000 |
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Net cash used in operating activities |
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(7,139,000 |
) |
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(3,978,000 |
) |
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Cash flows from investing activities: |
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Purchase of property, plant and equipment |
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(1,278,000 |
) |
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(1,437,000 |
) |
Change in short term investments |
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(21,000 |
) |
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(28,000 |
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Net cash used in investing activities |
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(1,299,000 |
) |
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(1,465,000 |
) |
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Cash flows from financing activities: |
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Net borrowings under line of credit |
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8,600,000 |
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Net payments on capital lease obligations |
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(310,000 |
) |
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(122,000 |
) |
Exercise of stock options |
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57,000 |
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Excess tax benefit from employee stock options exercised |
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28,000 |
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Net cash provided by (used in) financing activities |
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8,375,000 |
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(122,000 |
) |
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Effect of exchange rate changes on cash |
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(240,000 |
) |
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(1,000 |
) |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(303,000 |
) |
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(5,566,000 |
) |
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD |
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400,000 |
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6,211,000 |
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CASH AND CASH EQUIVALENTS END OF PERIOD |
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$ |
97,000 |
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$ |
645,000 |
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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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$ |
802,000 |
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$ |
557,000 |
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Income taxes |
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$ |
804,000 |
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$ |
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Non-cash investing and financing activities: |
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Property acquired under capital lease |
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$ |
27,000 |
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$ |
916,000 |
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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, 2006 and 2005
(Unaudited and Restated)
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, 2006 are not necessarily indicative of the results that may be expected for the year
ending March 31, 2007. Amounts related to disclosures of March 31, 2006 balances were derived from
the Companys audited consolidated financial statements as of March 31, 2006. For further
information, refer to the financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K/A for the year ended March 31, 2006, filed on February 12, 2007.
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, Malaysia
and Mexico. In addition, the Company has a warehouse distribution facility in Nashville, Tennessee
and fee warehouse distribution centers in New Jersey and Oregon.
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 Year Ended March 31, 2006 and the Three Months
Ended June 30, 2006 and June 30, 2005
The consolidated balance sheets as of June 30, 2006 and March 31, 2006, the consolidated
statements of operations for the three months ended June 30, 2006 and June 30, 2005 and the
consolidated statements of cash flows for the three months ended June 30, 2006 and June 30, 2005
have been restated to correct errors which occurred when (i) the Company incorrectly recorded a
duplicative entry that continued to recognize the gross profit impact resulting from the accrual for certain cores authorized
to be returned, but still in-transit to the Company from its customers, (ii) the Company
incorrectly recorded core charge revenue when the amount of revenue was not fixed and determinable
and (iii) the Company did not appropriately accrue losses for all existing and potential future customer
payment discrepancies. The estimated tax effect of the errors noted above is also reflected in the
restatements. The condensed notes to the financial statements for the periods ending June 30, 2006
and 2005 were also restated as required to reflect the effect of the restatements noted above.
The impact of this restatement has been reflected throughout the consolidated financial
statements and accompanying notes as follows:
6
Consolidated Balance Sheet
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June 30, 2006 |
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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 |
|
$ |
97,000 |
|
|
|
|
|
|
$ |
97,000 |
|
Short term investments |
|
|
681,000 |
|
|
|
|
|
|
|
681,000 |
|
Accounts receivable net, as previously reported |
|
|
14,698,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
$ |
2,282,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(666,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(2,105,000 |
) |
|
|
|
|
Accounts receivable net, as restated |
|
|
|
|
|
|
|
|
|
|
14,209,000 |
|
Due from customer |
|
|
2,005,000 |
|
|
|
|
|
|
|
2,005,000 |
|
Inventory net, as previously reported |
|
|
64,317,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(1,073,000 |
) |
|
|
|
|
Inventory net, as restated |
|
|
|
|
|
|
|
|
|
|
63,244,000 |
|
Deferred income tax asset |
|
|
5,827,000 |
|
|
|
|
|
|
|
5,827,000 |
|
Inventory unreturned, as previously reported |
|
|
7,333,000 |
|
|
|
|
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
1,471,000 |
|
|
|
|
|
Inventory unreturned, as adjusted |
|
|
|
|
|
|
|
|
|
|
8,804,000 |
|
Prepaid expenses and other current assets |
|
|
1,748,000 |
|
|
|
|
|
|
|
1,748,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
96,706,000 |
|
|
|
(91,000 |
) |
|
|
96,615,000 |
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment net |
|
|
12,766,000 |
|
|
|
|
|
|
|
12,766,000 |
|
Other assets |
|
|
1,444,000 |
|
|
|
|
|
|
|
1,444,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
110,916,000 |
|
|
$ |
(91,000 |
) |
|
$ |
110,825,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
24,467,000 |
|
|
|
|
|
|
$ |
24,467,000 |
|
Accrued liabilities |
|
|
1,136,000 |
|
|
|
|
|
|
|
1,136,000 |
|
Accrued salaries and wages |
|
|
2,651,000 |
|
|
|
|
|
|
|
2,651,000 |
|
Accrued workers compensation claims |
|
|
3,832,000 |
|
|
|
|
|
|
|
3,832,000 |
|
Income tax payable, as previously reported |
|
|
1,086,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
$ |
423,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(218,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(234,000 |
) |
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
1,057,000 |
|
Line of credit |
|
|
14,900,000 |
|
|
|
|
|
|
|
14,900,000 |
|
Deferred compensation |
|
|
521,000 |
|
|
|
|
|
|
|
521,000 |
|
Deferred income |
|
|
133,000 |
|
|
|
|
|
|
|
133,000 |
|
Other current liabilities |
|
|
266,000 |
|
|
|
|
|
|
|
266,000 |
|
Credit due customer |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of capital lease obligations |
|
|
1,499,000 |
|
|
|
|
|
|
|
1,499,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
50,491,000 |
|
|
|
(29,000 |
) |
|
|
50,462,000 |
|
Deferred income, less current portion |
|
|
355,000 |
|
|
|
|
|
|
|
355,000 |
|
Deferred income tax liability |
|
|
498,000 |
|
|
|
|
|
|
|
498,000 |
|
Deferred gain on sale-leaseback |
|
|
2,248,000 |
|
|
|
|
|
|
|
2,248,000 |
|
Other liabilities |
|
|
46,000 |
|
|
|
|
|
|
|
46,000 |
|
Capitalized lease obligations, less current portion |
|
|
4,520,000 |
|
|
|
|
|
|
|
4,520,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
58,158,000 |
|
|
|
(29,000 |
) |
|
|
58,129,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 8,324,455
shares issued and outstanding at June 30, 2006 |
|
|
83,000 |
|
|
|
|
|
|
|
83,000 |
|
Additional paid-in capital |
|
|
54,498,000 |
|
|
|
|
|
|
|
54,498,000 |
|
Accumulated other comprehensive loss |
|
|
(155,000 |
) |
|
|
|
|
|
|
(155,000 |
) |
Accumulated deficit, as previously reported |
|
|
(1,668,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
786,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(448,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(400,000 |
) |
|
|
|
|
Accumulated deficit, as restated |
|
|
|
|
|
|
|
|
|
|
(1,730,000 |
) |
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY |
|
|
52,758,000 |
|
|
|
(62,000 |
) |
|
|
52,696,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
110,916,000 |
|
|
$ |
(91,000 |
) |
|
$ |
110,825,000 |
|
|
|
|
|
|
|
|
|
|
|
7
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
400,000 |
|
|
|
|
|
|
$ |
400,000 |
|
Short term investments |
|
|
660,000 |
|
|
|
|
|
|
|
660,000 |
|
Accounts receivable net, as previously reported |
|
|
13,775,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
$ |
3,098,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(1,275,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(1,696,000 |
) |
|
|
|
|
Accounts receivable net, as restated |
|
|
|
|
|
|
|
|
|
|
13,902,000 |
|
Inventory net, as previously reported |
|
|
59,337,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(1,456,000 |
) |
|
|
|
|
Inventory net, as restated |
|
|
|
|
|
|
|
|
|
|
57,881,000 |
|
Deferred income tax asset |
|
|
5,809,000 |
|
|
|
|
|
|
|
5,809,000 |
|
Inventory unreturned, as previously reported |
|
|
7,052,000 |
|
|
|
|
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
1,119,000 |
|
|
|
|
|
Inventory unreturned, as restated |
|
|
|
|
|
|
|
|
|
|
8,171,000 |
|
Prepaid expenses and other current assets |
|
|
918,000 |
|
|
|
|
|
|
|
918,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
87,951,000 |
|
|
|
(210,000 |
) |
|
|
87,741,000 |
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment net |
|
|
12,164,000 |
|
|
|
|
|
|
|
12,164,000 |
|
Other assets |
|
|
1,231,000 |
|
|
|
|
|
|
|
1,231,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
101,346,000 |
|
|
$ |
(210,000 |
) |
|
$ |
101,136,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
21,882,000 |
|
|
|
|
|
|
$ |
21,882,000 |
|
Accrued liabilities |
|
|
1,587,000 |
|
|
|
|
|
|
|
1,587,000 |
|
Accrued salaries and wages |
|
|
2,267,000 |
|
|
|
|
|
|
|
2,267,000 |
|
Accrued workers compensation claims |
|
|
3,346,000 |
|
|
|
|
|
|
|
3,346,000 |
|
Income tax payable, as previously reported |
|
|
1,094,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
$ |
598,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(460,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(211,000 |
) |
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
1,021,000 |
|
Line of credit |
|
|
6,300,000 |
|
|
|
|
|
|
|
6,300,000 |
|
Deferred compensation |
|
|
495,000 |
|
|
|
|
|
|
|
495,000 |
|
Deferred income |
|
|
133,000 |
|
|
|
|
|
|
|
133,000 |
|
Other current liabilities |
|
|
988,000 |
|
|
|
|
|
|
|
988,000 |
|
Credit due customer |
|
|
1,793,000 |
|
|
|
|
|
|
|
1,793,000 |
|
Current portion of capital lease obligations |
|
|
1,499,000 |
|
|
|
|
|
|
|
1,499,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
41,384,000 |
|
|
|
(73,000 |
) |
|
|
41,311,000 |
|
Deferred income, less current portion |
|
|
388,000 |
|
|
|
|
|
|
|
388,000 |
|
Deferred income tax liability |
|
|
562,000 |
|
|
|
|
|
|
|
562,000 |
|
Deferred gain on sale-leaseback |
|
|
2,377,000 |
|
|
|
|
|
|
|
2,377,000 |
|
Other liabilities |
|
|
46,000 |
|
|
|
|
|
|
|
46,000 |
|
Capitalized lease obligations, less current portion |
|
|
4,857,000 |
|
|
|
|
|
|
|
4,857,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
49,614,000 |
|
|
|
(73,000 |
) |
|
|
49,541,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 8,316,105
shares issued and outstanding at March 31, 2006 |
|
|
83,000 |
|
|
|
|
|
|
|
83,000 |
|
Additional paid-in capital |
|
|
54,326,000 |
|
|
|
|
|
|
|
54,326,000 |
|
Accumulated other comprehensive loss |
|
|
85,000 |
|
|
|
|
|
|
|
85,000 |
|
Accumulated deficit, as previously reported |
|
|
(2,762,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
1,044,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(815,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(366,000 |
) |
|
|
|
|
Accumulated deficit, as restated |
|
|
|
|
|
|
|
|
|
|
(2,899,000 |
) |
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY |
|
|
51,732,000 |
|
|
|
(137,000 |
) |
|
|
51,595,000 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
101,346,000 |
|
|
$ |
(210,000 |
) |
|
$ |
101,136,000 |
|
|
|
|
|
|
|
|
|
|
|
8
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Net sales, as previously reported |
|
$ |
27,223,000 |
|
|
|
|
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
$ |
609,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(408,000 |
) |
|
|
|
|
Net sales, as restated |
|
|
|
|
|
|
|
|
|
$ |
27,424,000 |
|
Cost of goods sold, as previously reported |
|
|
20,177,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
432,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(351,000 |
) |
|
|
|
|
Cost of goods sold, as restated |
|
|
|
|
|
|
|
|
|
|
20,258,000 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7,046,000 |
|
|
|
120,000 |
|
|
|
7,166,000 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
3,072,000 |
|
|
|
|
|
|
|
3,072,000 |
|
Sales and marketing |
|
|
905,000 |
|
|
|
|
|
|
|
905,000 |
|
Research and development |
|
|
416,000 |
|
|
|
|
|
|
|
416,000 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,393,000 |
|
|
|
|
|
|
|
4,393,000 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,653,000 |
|
|
|
120,000 |
|
|
|
2,773,000 |
|
Interest expense net |
|
|
822,000 |
|
|
|
|
|
|
|
822,000 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
1,831,000 |
|
|
|
120,000 |
|
|
|
1,951,000 |
|
Income tax expense, as previously reported |
|
|
737,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(174,000 |
) |
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
242,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(23,000 |
) |
|
|
|
|
Income tax expense, as restated |
|
|
|
|
|
|
|
|
|
|
782,000 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,094,000 |
|
|
$ |
75,000 |
|
|
$ |
1,169,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.13 |
|
|
$ |
0.01 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.13 |
|
|
$ |
0.01 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
basic |
|
|
8,322,920 |
|
|
|
|
|
|
|
8,322,920 |
|
|
|
|
|
|
|
|
|
|
|
|
diluted |
|
|
8,582,209 |
|
|
|
|
|
|
|
8,582,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Net sales, as previously reported |
|
$ |
21,351,000 |
|
|
|
|
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
$ |
(650,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(380,000 |
) |
|
|
|
|
Net sales, as restated |
|
|
|
|
|
|
|
|
|
$ |
20,321,000 |
|
Cost of goods sold, as previously reported |
|
|
17,965,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
56,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(223,000 |
) |
|
|
|
|
Cost of goods sold, as restated |
|
|
|
|
|
|
|
|
|
|
17,798,000 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,386,000 |
|
|
|
(863,000 |
) |
|
|
2,523,000 |
|
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 loss |
|
|
(1,803,000 |
) |
|
|
(863,000 |
) |
|
|
(2,666,000 |
) |
Interest expense net |
|
|
548,000 |
|
|
|
|
|
|
|
548,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit |
|
|
(2,351,000 |
) |
|
|
(863,000 |
) |
|
|
(3,214,000 |
) |
Income tax benefit, as previously reported |
|
|
(931,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(21,000 |
) |
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(240,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(58,000 |
) |
|
|
|
|
Income tax benefit, as restated |
|
|
|
|
|
|
|
|
|
|
(1,250,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,420,000 |
) |
|
$ |
(544,000 |
) |
|
$ |
(1,964,000 |
) |
|
|
|
|
|
|
|
|
|
|
Basic loss per share |
|
$ |
(0.17 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
|
$ |
(0.17 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
basic |
|
|
8,183,955 |
|
|
|
|
|
|
|
8,183,955 |
|
|
|
|
|
|
|
|
|
|
|
|
diluted |
|
|
8,183,955 |
|
|
|
|
|
|
|
8,183,955 |
|
|
|
|
|
|
|
|
|
|
|
|
9
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as previously reported |
|
$ |
1,094,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
$ |
(258,000 |
) |
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
367,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(34,000 |
) |
|
|
|
|
Net income, as restated |
|
|
|
|
|
|
|
|
|
$ |
1,169,000 |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
649,000 |
|
|
|
|
|
|
|
649,000 |
|
Amortization of deferred gain on sale-leaseback |
|
|
(129,000 |
) |
|
|
|
|
|
|
(129,000 |
) |
Recovery of inventory reserves and stock adjustments |
|
|
(267,000 |
) |
|
|
|
|
|
|
(267,000 |
) |
Recovery of doubtful accounts |
|
|
(14,000 |
) |
|
|
|
|
|
|
(14,000 |
) |
Deferred income taxes |
|
|
(82,000 |
) |
|
|
|
|
|
|
(82,000 |
) |
Share-based compensation expense |
|
|
115,000 |
|
|
|
|
|
|
|
115,000 |
|
Excess tax benefit from employee stock options exercised |
|
|
(28,000 |
) |
|
|
|
|
|
|
(28,000 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, as previously reported |
|
|
(446,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
816,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(609,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
408,000 |
|
|
|
|
|
Accounts receivable, as restated |
|
|
|
|
|
|
|
|
|
|
169,000 |
|
Due from customer |
|
|
(2,005,000 |
) |
|
|
|
|
|
|
(2,005,000 |
) |
Inventory, as previously reported |
|
|
(5,176,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(384,000 |
) |
|
|
|
|
Inventory, as restated |
|
|
|
|
|
|
|
|
|
|
(5,560,000 |
) |
Inventory unreturned, as previously reported |
|
|
(281,000 |
) |
|
|
|
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(351,000 |
) |
|
|
|
|
Inventory unreturned, as restated |
|
|
|
|
|
|
|
|
|
|
(632,000 |
) |
Prepaid expenses and other current assets |
|
|
(830,000 |
) |
|
|
|
|
|
|
(830,000 |
) |
Other assets |
|
|
(213,000 |
) |
|
|
|
|
|
|
(213,000 |
) |
Accounts payable and accrued liabilities |
|
|
3,004,000 |
|
|
|
|
|
|
|
3,004,000 |
|
Income tax payable, as previously reported |
|
|
(8,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(174,000 |
) |
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
242,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(23,000 |
) |
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
37,000 |
|
Deferred compensation |
|
|
26,000 |
|
|
|
|
|
|
|
26,000 |
|
Deferred income |
|
|
(33,000 |
) |
|
|
|
|
|
|
(33,000 |
) |
Credit due to customer |
|
|
(1,793,000 |
) |
|
|
|
|
|
|
(1,793,000 |
) |
Other liabilities |
|
|
(722,000 |
) |
|
|
|
|
|
|
(722,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(7,139,000 |
) |
|
$ |
|
|
|
$ |
(7,139,000 |
) |
|
|
|
|
|
|
|
|
|
|
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, 2005 |
|
|
|
(Unaudited) |
|
|
|
Previously |
|
|
|
|
|
|
|
|
|
Reported |
|
|
Adjustment |
|
|
Restated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as previously reported |
|
$ |
(1,420,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
$ |
(35,000 |
) |
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(410,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(99,000 |
) |
|
|
|
|
Net loss, as restated |
|
|
|
|
|
|
|
|
|
$ |
(1,964,000 |
) |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
498,000 |
|
|
|
|
|
|
|
498,000 |
|
Provision for inventory reserves and stock adjustments |
|
|
24,000 |
|
|
|
|
|
|
|
24,000 |
|
Deferred income taxes |
|
|
(881,000 |
) |
|
|
|
|
|
|
(881,000 |
) |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, as previously reported |
|
|
2,498,000 |
|
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
106,000 |
|
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
650,000 |
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
380,000 |
|
|
|
|
|
Accounts receivable, as restated |
|
|
|
|
|
|
|
|
|
|
3,634,000 |
|
Inventory, as previously reported |
|
|
(8,246,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(50,000 |
) |
|
|
|
|
Inventory, as restated |
|
|
|
|
|
|
|
|
|
|
(8,296,000 |
) |
Inventory unreturned, as previously reported |
|
|
(171,000 |
) |
|
|
|
|
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(223,000 |
) |
|
|
|
|
Inventory unreturned, as restated |
|
|
|
|
|
|
|
|
|
|
(394,000 |
) |
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 |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
In-transit core adjustment |
|
|
|
|
|
|
(21,000 |
) |
|
|
|
|
A/R discrepancy adjustment |
|
|
|
|
|
|
(240,000 |
) |
|
|
|
|
Core-charge revenue adjustment |
|
|
|
|
|
|
(58,000 |
) |
|
|
|
|
Income tax payable, as restated |
|
|
|
|
|
|
|
|
|
|
(369,000 |
) |
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.
|
|
NOTE C Summary of Significant Accounting Policies |
|
1. |
|
Principles of consolidation |
|
|
|
The accompanying consolidated financial statements include the accounts of Motorcar Parts of
America, Inc and its wholly owned subsidiaries, MVR Products Pte. Ltd., Unijoh Sdn. Bhd. and
Motorcar Parts de Mexico, S.A. de C.V. All significant inter-company accounts and transactions
have been eliminated. |
|
2. |
|
Cash Equivalents |
|
|
|
The Company considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company maintains cash balances at several financial
institutions located in Southern California. The Company also maintains cash balances in local
and US dollar currencies in Singapore, Malaysia and Mexico for use by the facilities operating
in those foreign countries. The balances in these foreign accounts if translated into US dollars
at June 30, 2006 and March 31, 2006 were $562,000 and $399,000, respectively. |
|
3. |
|
Inventory |
|
|
|
Inventory is stated at the lower of cost or market. The standard cost of inventory is based upon
the direct costs of material and labor and an allocation of indirect costs. The standard cost of
inventory is continuously evaluated and adjusted to reflect current cost levels. Standard costs
are determined for each of the three classifications of inventory as follows: |
11
|
|
|
Finished goods cost includes the standard cost of cores and raw materials and allocations of
labor and overhead. Work in process inventory historically comprises less than 3% of the
total inventory balance. Work in process is in various stages of production, is on average
50% complete, and is valued at 50% of the standard cost of a finished
good. Core and other
raw materials inventory are stated at the lower of cost or market. The Company determines
the market value of cores based on purchases of core and core broker prices lists. |
|
|
In determining these standards, the Company excludes those costs deemed to be caused by abnormal
amounts of idle capacity and spoilage and expenses those costs as incurred. During the three
months ended June 30, 2006 and June 30, 2005, there were no material costs that were considered
abnormal as defined in Financial Accounting Standards Board (FASB) Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (FAS 151). |
|
|
|
Inventory unreturned represents the value of cores and finished goods shipped to customers and
expected to be returned, stated at the lower of cost or market. Upon product shipment, the
Company reduces the inventory account for the amount of product shipped and establishes the
inventory unreturned asset account for that portion of the shipment that is expected to be
returned by the customer. |
|
|
|
The Company provides an allowance for potentially excess and obsolete inventory based upon
historical usage. |
|
|
|
The Company applies discounts on supplier invoices by reducing related accounts payable and
inventory at the time of payment. |
|
4. |
|
Income Taxes |
|
|
|
The Company accounts for income taxes in accordance with guidance issued by the Financial
Accounting Standard Board (FASB) in Statement of Financial Accounting Standards No. 109
(SFAS), Accounting for Income Taxes, which requires the use of the liability method of
accounting for income taxes. |
|
|
|
The liability method measures deferred income taxes by applying enacted statutory rates in
effect at the balance sheet date to the differences between the tax base of assets and
liabilities and their reported amounts in the financial statements. The resulting asset or
liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is
provided to reduce deferred tax assets when it is more likely than not that a portion of the
deferred tax asset will not be realized. |
|
|
|
As required the liability method is also used in determining the impact of the adoption of FAS
123R on the deferred tax assets and liabilities of the Company. |
|
|
|
The primary components of the Companys income tax provision (benefit) are (i) the current
liability or refund due for federal, state and foreign income taxes, and (ii) the change in the
amount of the net deferred income tax asset, including the effect of any change in the valuation
allowance. |
|
|
|
Realization of these deferred tax assets is dependent upon the Companys ability to generate
sufficient future taxable income. Management believes that it is more likely than not that
future taxable income will be sufficient to realize the recorded deferred tax assets. Future
taxable income is based on managements forecast of the future operating results of the Company.
Management periodically reviews such forecasts in comparison with actual results and there can
be no assurance that such results will be achieved. |
|
5. |
|
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, |
12
|
|
|
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 shipped 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. |
|
|
|
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. |
|
|
|
The Company accounts for revenues and cost of sales on a net-of-core-value basis. 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). Core values charged to customers
and not included in revenues totaled $17,493,000 and $16,099,000 for the three months ended June
30, 2006 and 2005, respectively. |
|
|
|
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. |
|
|
|
When the Company ships a product, it invoices certain customers for the core portion of the
product at full sales price. For cores invoiced at full sales price, the Company recognizes core
charge revenue based upon an estimate of the rate at which customers will pay cash for cores in
lieu of returning cores for credits. |
|
|
|
The amount of revenue recognized for core charges for the three months ended June 30, 2006 and
2005 was $831,000 and $713,000, respectively. |
|
|
|
During fiscal 2004, the Company began to offer products on pay-on-scan (POS) arrangement with
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. |
|
|
|
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, |
|
|
2006 |
|
2006 |
Estimated sales returns |
|
$ |
833,000 |
|
|
$ |
977,000 |
|
Estimated core inventory returns |
|
$ |
6,078,000 |
|
|
$ |
6,457,000 |
|
13
6. |
|
Net Income Per Share |
|
|
|
Basic income per share is computed by dividing net income by
the weighted-average number of shares of common stock outstanding during the period. Diluted income per share includes the
effect, if any, from the potential exercise or conversion of securities, such as stock options
and warrants, which would result in the issuance of incremental shares of common stock. |
|
|
|
The following presents a reconciliation of basic and diluted net income (loss) per share. |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
1,169,000 |
|
|
$ |
(1,964,000 |
) |
|
|
|
|
|
|
|
Basic shares |
|
|
8,322,920 |
|
|
|
8,183,955 |
|
Effect of dilutive options and warrants |
|
|
259,289 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
8,582,209 |
|
|
|
8,183,955 |
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.14 |
|
|
$ |
(0.24 |
) |
Diluted net income (loss) per share |
|
$ |
0.14 |
|
|
$ |
(0.24 |
) |
|
|
The effect of dilutive options and warrants excludes 17,375 options with exercise prices ranging
from $13.80 to $19.13 per share for the three months ended June 30, 2006 and 1,060,318 options
with exercise prices ranging from $0.93 to $19.13 per share for the three months ended June 30,
2005 all of which were anti-dilutive. |
|
|
|
The calculation of dilutive earnings per share for the three months ended June 30, 2006 has been
adjusted to incorporate the amendments to Financial Accounting Standards Board (FASB) Statement
No. 128, Earnings Per Share (FAS 128) required under FAS 123R. |
|
7. |
|
New Accounting Pronouncements |
|
|
|
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements and
prescribes a recognition threshold for financial statement recognition and a measurement
attribute for a tax position taken or expected to be taken in a tax return. This Interpretation
also provides related guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. FIN 48 is effective for the Company beginning
April 1, 2007. The Company is currently evaluating the impact of this standard. |
NOTE D Stock Options and Share-Based Payments
Effective April 1, 2006, the Company adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (FAS
123R) using the modified prospective application method of transition for all its stock-based
compensation plans. Accordingly, while the reported results for the three months ended June 30,
2006 reflect the adoption of FAS 123R, prior year amounts have not been restated.
The following table presents the impact the adoption of FAS 123R had on the unaudited
consolidated statement of operations for the three months ended June 30, 2006.
|
|
|
|
|
|
|
Impact of |
|
Three Months Ended June 30, 2006 |
|
Adoption |
|
Operating income (expense) |
|
$ |
(115,000 |
) |
Interest expense net of interest income |
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
(115,000 |
) |
Income tax benefit |
|
|
47,000 |
|
|
|
|
|
Net income |
|
$ |
(68,000 |
) |
|
|
|
|
Basic net income per share |
|
$ |
(0.01 |
) |
|
|
|
|
Diluted net income per share |
|
$ |
(0.01 |
) |
|
|
|
|
14
Prior to the adoption of FAS 123R, the Company accounted for stock-based employee compensation
as prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees, and adopted the disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation, and SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS 123.
Under the provisions of APB No. 25, compensation cost for stock options is measured as the
excess, if, any, of the market price of the Companys common stock at the date of the grant over
the amount an employee must pay to acquire the stock. SFAS 123 requires pro forma disclosures of
net income and net income per share as if the fair value based method accounting for stock-based
awards had been applied. Under the fair value based method, compensation cost is recorded based on
the value of the award at the grant date and is recognized over the service period. The following
table presents pro forma net income for the three months ended June 30, 2005 as if compensation
costs associated with the Companys option arrangements had been determined in accordance with SFAS
123.
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended June 30, |
|
|
|
2005 |
|
Net loss, as reported: |
|
$ |
(1,964,000 |
) |
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects: |
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects: |
|
|
|
|
|
|
|
|
Pro forma net loss: |
|
$ |
(1,964,000 |
) |
|
|
|
|
Basic net loss per share as reported |
|
$ |
(0.24 |
) |
Basic net loss per share pro forma |
|
$ |
(0.24 |
) |
Diluted net loss per share as reported |
|
$ |
(0.24 |
) |
Diluted net loss per share pro forma |
|
$ |
(0.24 |
) |
In November 2005, the FASB issued Staff Position (FSP) FAS 123 (R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards (FSP 123 (R)-3). FSP 123
(R)-3 provides an elective alternative transition method for calculating the pool of excess tax
benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R.
Companies may take up to one year from the effective date of FAS 123R to evaluate the available
transition alternatives and make a one-time election as to which method to adopt. The Company is
currently in the process of evaluating the alternative methods. In the interim, the excess tax
benefits for the three months ended June 30, 2006 of $28,000 (determined based on the requirements
of paragraph 81 of FAS 123R) are presented as a cash outflow from operations and a cash inflow from
financing activities.
The fair value of stock options used to compute net income and net income per share for the
current period and the pro forma net income and pro forma net income per share disclosures for
prior periods is estimated using the Black-Scholes option pricing model, which was developed for
use in estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. This model requires the input of subjective assumptions including the expected
volatility of the underlying stock and the expected holding period of the option. These subjective
assumptions are based on both historical and other information. Changes in the values assumed and
used in the model can materially affect the estimate of fair value. There were no stock options
granted during the three months ended June 30, 2006 or 2005.
The table below summarizes the Black-Scholes option pricing model assumptions used to derive
the weighted average fair value of stock options granted in prior periods which vested during the
three months ending June 30, 2006, and thus were used to calculate the share-based compensation
recorded in the current quarter.
|
|
|
|
|
Risk free interest rate |
|
|
4.04 |
% |
Expected holding period (years) |
|
|
5 |
|
Expected volatility |
|
|
28.49 |
% |
Expected dividend yield |
|
|
0 |
% |
Weighted average fair value of options vested |
|
$ |
3.20 |
|
15
In January 1994, the Company adopted the 1994 Stock Option Plan (the 1994 Plan), under which
it was authorized to issue non-qualified stock options and incentive stock options to key
employees, directors and consultants. After a number of shareholder-approved increases to this
plan, options to purchase 1,155,000 shares of common stock were authorized for grant under the 1994
Plan. The term and vesting period of options granted is determined by a committee of the Board of
Directors with a term not to exceed ten years. As of June 30, 2006, options to purchase 556,500
shares of common stock were outstanding under the 1994 Plan and no additional shares of common
stock were available for option grants.
At the Companys Annual Meeting of Shareholders held on December 17, 2003, the shareholders
approved the Companys 2003 Long-Term Incentive Plan (Incentive Plan) which had been adopted by
the Companys Board of Directors on October 31, 2003. Under the Incentive Plan, a total of
1,200,000 shares of the Companys common stock were reserved for grants of Incentive Awards and all
of the Companys employees are eligible to participate. The 2003 Incentive Plan will terminate on
October 31, 2013, unless terminated earlier by the Companys Board of Directors. As of June 30,
2006, options to purchase 722,283 shares of common stock were outstanding under the Incentive Plan
and options to purchase an additional 470,717 shares of common stock were available for option
grants.
In November 2004, the Companys shareholders approved the 2004 Non-Employee Director Stock
Option Plan (the 2004 Plan) which provides for the granting of options to non-employee directors
to purchase a total of 175,000 shares of the Companys common stock. As of June 30, 2006, options
to purchase 59,000 shares of common stock were outstanding and options to purchase an additional
116,000 shares of common stock were available for option grants under the 2004 Plan.
A summary of stock option transactions for the three months ending June 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Exercise Price |
Outstanding at March 31, 2006 |
|
|
1,350,800 |
|
|
$ |
7.05 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(8,350 |
) |
|
$ |
2.92 |
|
Cancelled |
|
|
(4,667 |
) |
|
$ |
14.71 |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
1,337,783 |
|
|
$ |
7.05 |
|
|
|
|
|
|
|
|
|
|
A summary of changes in the status of nonvested stock options during the three months ended
June 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Grant Date Fair |
|
|
Number of Shares |
|
Value |
Nonvested at March 31, 2006 |
|
|
291,202 |
|
|
$ |
3.16 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,334 |
) |
|
$ |
3.18 |
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006 |
|
|
289,868 |
|
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006, approximately $628,000 of unrecognized compensation cost related to the
nonvested stock options. This cost is expected to be recognized over the remaining weighted average
vesting period of 1.4 years.
NOTE E Inventory
Inventory is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2006 |
|
|
2006 |
|
Raw materials and cores |
|
$ |
21,370,000 |
|
|
$ |
19,237,000 |
|
Work-in-process |
|
|
475,000 |
|
|
|
495,000 |
|
Finished goods pay-on-scan consignment inventory |
|
|
16,314,000 |
|
|
|
15,944,000 |
|
Finished goods |
|
|
27,270,000 |
|
|
|
24,194,000 |
|
|
|
|
|
|
|
|
|
|
|
65,429,000 |
|
|
|
59,870,000 |
|
Less allowance for excess and obsolete inventory |
|
|
(2,185,000 |
) |
|
|
(1,989,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
63,244,000 |
|
|
$ |
57,881,000 |
|
|
|
|
|
|
|
|
16
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, |
|
|
|
2006 |
|
|
2006 |
|
Cores |
|
$ |
8,142,000 |
|
|
$ |
7,223,000 |
|
Finished goods |
|
|
662,000 |
|
|
|
948,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
8,804,000 |
|
|
$ |
8,171,000 |
|
|
|
|
|
|
|
|
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 approximately $24,000,000 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 paid 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 $21,995,000 of the
transition inventory and the Company has issued credits of $24,000,000, resulting in a net due from
the customer of $2,005,000, as reflected on the Companys June 30, 2006 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
was then offset by lower cash collections resulting from credits issued to the customer in excess
of the sales of transition inventory. The final credit of $3,910,000 was issued during the three
months ended June 30, 2006.
In connection with this POS arrangement, the Company recognized a liability of approximately
$460,000 to reflect that the price the Company paid for the cores included within the non-MPA
portion of the transition inventory was 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. As the
conversion was not accomplished by April 2006, the Company is required by 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. However, the Company is currently in discussions with the
customer concerning the POS arrangement and it is uncertain if or how this arrangement might be
modified.
17
NOTE H Long Term Customer Contracts; Marketing Allowances
The Company has long-term agreements with substantially all 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. 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 time for any reason. The Companys contracts with major customers expire at various dates
ranging from May 2008 through December 2012.
The Company typically grants its customers marketing allowances in connection with these
customers purchase of goods. 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 and typically consist of the
following three types: (i) allowances which may only be applied against future purchases and are
recorded as a reduction to revenues in accordance with a schedule set forth in the long term
contract, (ii) allowances related to a single exchange of product that are recorded as a reduction
of revenues at the time the related revenues are recorded or when such incentives are offered and
(iii) allowances that are made in connection with the purchase of inventory from a customer.
The following table presents the breakout of marketing allowances recorded as a reduction to
revenues in the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Marketing allowances incurred under long-term customer contracts: |
|
$ |
754,000 |
|
|
$ |
3,090,000 |
|
Marketing allowances related to a single exchange of product: |
|
|
3,335,000 |
|
|
|
2,297,000 |
|
Marketing allowances related to core inventory purchase obligations: |
|
|
453,000 |
|
|
|
312,000 |
|
|
|
|
|
|
|
|
Total marketing allowances recorded as a reduction of revenues: |
|
$ |
4,542,000 |
|
|
$ |
5,699,000 |
|
|
|
|
|
|
|
|
The following table presents the commitments to incur marketing allowances which will be
recognized as a charge against revenue in accordance with the terms of the relevant long-term
customer contracts:
|
|
|
|
|
Year ending March 31, |
|
|
|
|
2007 remaining nine months |
|
$ |
6,088,000 |
|
2008 |
|
|
7,705,000 |
|
2009 |
|
|
2,970,000 |
|
2010 |
|
|
2,573,000 |
|
2011 |
|
|
1,841,000 |
|
Thereafter |
|
|
2,127,000 |
|
|
|
|
|
Total |
|
$ |
23,304,000 |
|
|
|
|
|
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
agreements. Under the largest of these agreements, the Company agreed to acquire core inventory by
issuing $10,300,000 of credits over a five-year period that began in March 2005 (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 recognizing the amount by which the credit
exceeds the estimated core inventory value as a marketing allowance. The amounts charged against
revenues under this arrangement in the three months ended June 30, 2006 and 2005 were $338,000 and
$312,000, respectively. As of June 30, 2006, the long-term asset account was approximately
$1,021,000. The Company will regularly review the long-term asset account for impairment and make
any necessary adjustment to the carrying value of this asset. As of June 30, 2006,
18
approximately $7,329,000 of credits remains to be issued under this arrangement and an
additional $1,495,000 under other similar arrangements.
The following table presents the core inventory purchase and credit issuance obligations which
will be recognized in accordance with the terms of the relevant long-term contracts:
|
|
|
|
|
Year ending March 31, |
|
|
|
|
2007 remaining nine months |
|
$ |
2,003,000 |
|
2008 |
|
|
2,566,000 |
|
2009 |
|
|
2,343,000 |
|
2010 |
|
|
1,806,000 |
|
2011 |
|
|
91,000 |
|
Thereafter |
|
|
15,000 |
|
|
|
|
|
Total |
|
$ |
8,824,000 |
|
|
|
|
|
NOTE I Major Customers
The Companys three largest customers accounted for the following total percentage of sales
and accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
Sales |
|
|
|
|
|
|
|
|
Customer A |
|
|
65 |
% |
|
|
67 |
% |
Customer B |
|
|
16 |
% |
|
|
12 |
% |
Customer C* |
|
|
11 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
March 31, |
|
|
2006 |
|
2006 |
Accounts Receivable |
|
|
|
|
|
|
|
|
Customer A |
|
|
54 |
% |
|
|
60 |
% |
Customer B |
|
|
15 |
% |
|
|
10 |
% |
Customer C* |
|
|
19 |
% |
|
|
21 |
% |
|
|
|
* |
|
Between June 30, 2006 and March 31, 2006, the identity of the Companys third and fourth
largest customers changed. |
NOTE J Line of Credit; Factoring Agreements
In April 2006, the Company entered into an amended credit agreement with the bank that
increased its credit availability from $15,000,000 to $25,000,000, extended the expiration date of
the credit facility from October 2, 2006 to October 1, 2008 and changed the manner in which the
margin over the benchmark interest rate is calculated. Starting June 30, 2006, the interest rate
fluctuates based upon the (i) banks reference rate or (ii) LIBOR, as adjusted to take into account
any bank reserve requirements, plus a margin dependant upon the leverage ratio as noted below:
|
|
|
|
|
|
|
Leverage ratio as of the end of the fiscal quarter |
|
|
Greater than or |
|
|
Base Interest Rate Selected by Borrower |
|
equal to 1.50 to 1.00 |
|
Less than 1.50 to 1.00 |
Banks Reference Rate, plus |
|
0.0% per year |
|
-0.25% per year |
Banks LIBOR Rate, plus |
|
2.0% per year |
|
1.75% per year |
The bank holds a security interest in substantially all of the Companys assets. As of June
30, 2006 and March 31, 2006 the Company had reserved $4,364,000 of this revolving line of credit
for standby letters of credit for workers compensation insurance and had borrowed $14,900,000 and
$6,300,000, respectively, under this line of credit.
19
The credit agreement as amended includes various financial conditions, including minimum
levels of tangible net worth, cash flow, fixed charge coverage ratio, maximum leverage ratios 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 the Companys CEO. At June 30, 2006, the Company was in compliance with each of these
covenants.
Under the amended credit agreement, the Company has agreed to pay a quarterly fee, commencing
on June 30, 2006 of 0.375% per year if the leverage ratio as of the last day of the previous fiscal
quarter was greater than or equal to 1.50 to 1.00 or 0.25% per year if the leverage ratio is less
than 1.50 to 1.00 as of the last day of the previous fiscal quarter. This fee is applied to any
difference between the $25,000,000 commitment and the average of the daily outstanding amount of
credit the Company actually uses during each quarter. A fee of $125,000 was charged by the bank in
order to complete the amendment. The fee is payable in three installments of $41,666, one on the
date of the amendment to the credit agreement, one on or before February 1, 2007 and one on or
before February 1, 2008.
The bank credit agreement was further amended in August 2006. For additional information, see
Note M Subsequent Events.
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 a
discount agreed-upon at the time the receivables are sold. One of the agreements was amended on
April 5, 2006 to provide for a different discounting agent, which resulted in a reduction in the
discount rate. These discount arrangements have allowed the Company to accelerate collection of the
customers receivables aggregating $15,529,000 and $17,951,000 for the three months ended June 30,
2006 and 2005, respectively, by an average of 191 days and 194 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, 2006 and 2005 was 6.7% and 5.4%, respectively. The amount of the discount on
these receivables, $504,000 and $506,000 for the three months ended June 30, 2006 and 2005,
respectively, was recorded as interest expense.
NOTE K 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, |
|
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
1,169,000 |
|
|
$ |
(1,964,000 |
) |
Foreign currency translation |
|
|
(240,000 |
) |
|
|
22,000 |
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
929,000 |
|
|
$ |
(1,942,000 |
) |
|
|
|
|
|
|
|
NOTE L Financial Risk Management and Derivatives
Purchases and expenses denominated in currencies other than the U.S. dollar, which are
primarily related to the Companys production facilities overseas, expose the Company to market
risk from material movements in foreign exchange rates between the U.S. dollar and the foreign
currency. The Companys primary risk exposure is from changes in the rate between the U.S. dollar
and the Mexican peso related to the operation of the Companys facility in Mexico. In August 2005,
the Company began to enter into forward foreign exchange contracts to exchange U.S. dollars for
Mexican pesos. The extent to which forward foreign exchange contracts are used is modified
periodically in response to managements estimate of market conditions and the terms and length of
specific purchase requirements to fund those overseas facilities.
The Company enters into forward foreign exchange contracts in order to reduce the impact of
foreign currency fluctuations and not to engage in currency speculation. The use of derivative
financial instruments allows the
20
Company to reduce its exposure to the risk that the eventual cash outflow resulting from
funding the expenses of the foreign operations will be materially affected by changes in exchange
rates. The Company does not hold or issue financial instruments for trading purposes. The forward
foreign exchange contracts are designated for forecasted expenditure requirements to fund the
overseas operations. These contracts expire in a year or less.
The forward foreign exchange contracts entered into require the Company to exchange Mexican
pesos for U.S. dollars at maturity, at rates agreed at the inception of the contracts. The
counterparty to this derivative transaction is a major financial institution with investment grade
or better credit rating; however, the Company is exposed to credit risk with this institution. The
credit risk is limited to the potential unrealized gains (which offset currency fluctuations
adverse to the Company) in any such contract should this counterparty fail to perform as
contracted. Any changes in the fair values of foreign exchange contracts are reflected in current
period earnings and accounted for as an increase or offset to general and administrative expenses.
For the three months ended June 30, 2006, the Company recognized additional general and
administrative expenses of $71,000 associated with these foreign exchange contracts.
NOTE M Subsequent Events
Amendment to Bank Credit Facility
In August 2006, the Company entered into an amended credit agreement with the bank. This
amendment increased the credit availability from $25,000,000 to $35,000,000, increased the minimum
fixed charge coverage ratio and the maximum leverage ratio and increased the amount of allowable
capital expenditures. As a result of the amendment, the unused facility fee is now applied against
any difference between the $35,000,000 commitment and the average daily outstanding amount of
credit the Company actually uses during each quarter. The bank charged an amendment fee of $30,000
which was paid on the effective date of the amendment to the credit agreement.
21
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 consolidated financial position and results of operations. This
financial and business analysis should be read in conjunction with our March 31, 2006 consolidated
financial statements included in our Annual Report on Form 10-K/A filed on February 12, 2007.
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, our ability to achieve positive cash flows from
operations, potential future changes in our accounting policies that may be made as a result of an
SEC review of our previously filed public reports, restatements of our previously issued financial
statements to correct errors in the application of generally accepted accounting principles, lower
revenues than anticipated from new and existing contracts, 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, difficulty in obtaining component parts or increases in the costs of
those parts, political or economic instability in any 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 SEC.
Management Overview
Sales in the retail and traditional warehouse and professional installer markets in our
remanufactured product category in North America have been stable. 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. Our movement
to lean manufacturing cells, increased production in Malaysia and northern Mexico, utilization of
advanced inventory tracking technology and development of in-store testing equipment reflect this
focus.
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. 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.
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,
in most cases, 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 increased our sales to the traditional warehouse and professional
installer markets. We continue to expand our product offerings, including offering new units when
needed to provide comprehensive coverage for our customers and to respond to changes in the
marketplace, including those related to the increasing complexity of automotive electronics.
22
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,
in Note C to our unaudited consolidated financial statements included in this Form 10-QA and in
Note C to our consolidated financial statements included in our Annual Report on Form 10-K/A filed
on February 12, 2007.
In preparing our consolidated financial statements, it is necessary that we use estimates and
assumptions for matters that are inherently uncertain. We base our estimates on historical
experiences and reasonable assumptions. Our use of estimates and assumptions affects the reported
amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for
and during the reporting period. Actual results may differ from estimates.
Revenue Recognition
We recognize revenue when our performance is complete, and all of the following criteria
established by Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition have been met:
|
|
|
Persuasive evidence of an arrangement exists, |
|
|
|
|
Delivery has occurred or services have been rendered, |
|
|
|
|
The 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 shipped FOB destination, revenues are recognized two days after the date
of shipment based on our experience regarding the length of transit duration. We include shipping
and handling charges in the gross invoice price to customers and classify the total amount as
revenue in accordance with Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and
Handling Fees and Costs. Shipping and handling costs are recorded in cost of sales.
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 based on our then current
price list, net of applicable discounts and allowances. In accordance with our net-of-core-value
revenue recognition policy, we do not recognize the core value as revenue when the finished
products are sold.
Stock Adjustments; General Right of Return
Under the terms of certain agreements with our customers and industry practice, our customers
from time to time are 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 us 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. |
23
In addition to stock adjustment returns, we also allow our customers to return goods to us
that their end-user customers have returned to them. This general right of return is allowed
regardless of whether the returned item is defective. Depending on the specific customer and
product mix, we seek to limit the aggregate of customer returns, including slow moving and other
inventory, to less than 20% of unit sales. We provide for such anticipated returns of inventory in
accordance with Statement of Financial Accounting Standards No. 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, the market value of cores is recalculated at March and September of each year. The
recalculation in March reflects the higher seasonal demand which typically precedes the warm summer
months and the recalculation in September reflects the lower seasonal demand which normally
precedes the colder months. Because March generally represents the high point in the core broker
market, we revalue cores using the high core broker price. In September, we revalue our cores to
high core broker price plus a factor to allow for the temporary decrease in market value during the
slower season.
Accounting for Under Returns of Cores
Based on our experience, contractual arrangements with customers and inventory management
practices, we receive and purchase a used but remanufacturable core from customers for 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 return less cores during the months of April through September (the first six
months of the fiscal year) and return more cores 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. We generally limit core returns to the number of
similar cores previously shipped to each customer.
When we ship a product, we invoice certain customers for the core portion of the product at
full sales price. For cores invoiced at full sales price, we recognize core charge revenue based
upon an estimate of the rate at which our customers will pay cash for cores in lieu of returning
cores for credits.
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 a schedule set forth in the relevant
contract. Sales incentive amounts are recorded based on the value of the incentive provided.
Accounting for Deferred Taxes
The valuation of deferred tax assets and liabilities is based upon managements estimate of
current and future taxable income using the accounting guidance in SFAS 109, Accounting for Income
Taxes. As of June 30, 2006 and 2005 management determined that there was no valuation allowance
necessary for deferred tax assets.
Financial Risk Management and Derivatives
We are exposed to market risk from material movements in foreign exchange rates between the
U.S. dollar and the currencies of the foreign countries in which we operate. Our primary risk
relates to changes in the rates between the U.S. dollar and the Mexican peso associated with our
growing operations in Mexico. To mitigate the risk of currency fluctuation between the U.S. dollar
and the Mexican peso, in August 2005 we began to enter into forward foreign exchange contracts to
exchange U.S. dollars for Mexican pesos. The extent to which we use forward foreign
24
exchange contracts is periodically reviewed in light of our estimate of market conditions and
the terms and length of anticipated requirements. The use of derivative financial instruments
allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from
funding the expenses of the foreign operations will be materially affected by changes in the
exchange rates. We do not engage in currency speculation or hold or issue financial instruments for
trading purposes. These contracts expire in a year or less. Any changes in fair values of foreign
exchange contracts are accounted for as an increase or offset to general and administrative
expenses in current period earnings. For the three months ended June 30, 2006, the net effect of
the foreign exchange contracts was to increase general and administrative expenses by approximately
$71,000.
Share-based Payments
Effective April 1, 2006, we adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (FAS 123R) using the
modified prospective application method of transition for all our stock-based compensation plans.
Accordingly, while the reported results for the three months ended June 30, 2006 reflect the
adoption of FAS 123R, prior year amounts have not been restated.
The following table presents the impact the adoption of FAS 123R had on our unaudited
consolidated statement of operations for the three months ended June 30, 2006.
|
|
|
|
|
|
|
Impact of |
|
Three Months Ended June 30, 2006 |
|
Adoption |
|
Operating loss |
|
$ |
(115,000 |
) |
Interest expense net of interest income |
|
|
|
|
|
|
|
|
Net loss before income tax benefit |
|
|
(115,000 |
) |
Income tax benefit |
|
|
47,000 |
|
|
|
|
|
Net loss |
|
$ |
(68,000 |
) |
|
|
|
|
Basic net
income per share |
|
$ |
(0.01 |
) |
|
|
|
|
Diluted net
income per share |
|
$ |
(0.01 |
) |
|
|
|
|
Prior to the adoption of FAS 123R, we accounted for stock-based employee compensation as
prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and adopted the disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation, and SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS 123.
Under the provisions of APB No. 25, compensation cost for stock options is measured as the
excess, if, any, of the market price of our common stock at the date of the grant over the amount
an employee must pay to acquire the stock. Under the fair value based method, compensation cost is
recorded based on the value of the award at the grant date and is recognized over the service
period.
As of June 30, 2006, approximately $628,000 of unrecognized compensation cost related to the
nonvested stock options. This cost is expected to be recognized over the remaining weighted average
vesting period of 1.4 years.
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements and
prescribes a recognition threshold for financial statement recognition and a measurement attribute
for a tax position taken or expected to be taken in a tax return. This Interpretation also provides
related guidance on derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. FIN 48 is effective for us beginning April 1, 2007. We are currently
evaluating the impact of this standard.
Results of Operations for the three months ended June 30, 2006 and 2005
The following discussion and analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.
25
The following table summarizes certain key operating data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2006 |
|
2005 |
|
|
(Restated) |
|
(Restated) |
Gross profit |
|
|
26.1 |
% |
|
|
12.4 |
% |
Cash flow from operations |
|
$ |
(7,139,000 |
) |
|
$ |
(3,978,000 |
) |
Finished goods turnover (annualized) (1) |
|
|
1.94 |
|
|
|
2.09 |
|
Finished goods turnover, excluding POS inventory (annualized) (2) |
|
|
3.15 |
|
|
|
4.26 |
|
Annualized return on equity (3) |
|
|
9.1 |
% |
|
|
(16.1 |
)% |
|
|
|
(1) |
|
Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost
of sales for the quarter by 4 and dividing the result by the average between beginning and
ending finished goods inventory for the fiscal quarter. We believe this provides a useful
measure of our ability to turn production into revenues. |
|
(2) |
|
Calculated on the same basis as note (1) 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. |
|
(3) |
|
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. |
Following is our unaudited results of operations, reflected as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2006 |
|
2005 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
73.9 |
% |
|
|
87.6 |
% |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.1 |
% |
|
|
12.4 |
% |
General and administrative expenses |
|
|
11.2 |
% |
|
|
19.7 |
% |
Sales and marketing expenses |
|
|
3.3 |
% |
|
|
4.3 |
% |
Research and development expenses |
|
|
1.5 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
10.1 |
% |
|
|
(13.1 |
%) |
Interest expense net of interest income |
|
|
3.0 |
% |
|
|
2.7 |
% |
Income tax expense (benefit) |
|
|
2.8 |
% |
|
|
(6.1 |
%) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
4.3 |
% |
|
|
(9.7 |
%) |
|
|
|
|
|
|
|
|
|
Our results for the fiscal quarter ended June 30, 2006 reflect the investments we have made to
implement our strategy. During the June 2005 fiscal quarter, we opened our new manufacturing
facility in Mexico. One year later, this facility has over 500 employees and provides 40% of our
production. We continue to grow the new business we have received from one of the worlds largest
automobile manufacturers and have added another large automotive retailer to our customer base.
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. Gross sales for the three months ended June 30, 2006 increased by $5,283,000 over
gross sales in the three months ended June 30, 2005 primarily due to increases in sales to our
retail customers. Marketing allowances for the quarter ending June 30, 2006 decreased $1,157,000 to
$4,542,000 from $5,699,000 for the quarter ending June 30, 2005. The decrease was due to a
front-loaded marketing allowance of $2,570,000 we provided to a customer during the first quarter
of the prior fiscal year in connection with a new five-year contract. This decrease was partially
offset by increases in marketing allowances to other customers in the quarter ending June 30, 2006.
Marketing allowances associated with customer contracts are expected to increase during the
remainder of fiscal 2007. During the three months ended June 30, 2006, we reduced the reserve for
anticipated returns by $463,000 resulting in an increase in sales for that three month period of
the same amount. Customer pricing and other non-marketing discounts, which reduce net sales,
decreased by approximately $738,000 during the three months ended June 30, 2006. These increases in
net sales were partially offset a reduction of $422,000 in royalty income from the three months
ending June 30, 2005 to the three months ending June 30, 2006. As a result of these factors, our
net
26
sales for the three months ended June 30, 2006 were $27,424,000, an increase of $7,103,000 or
34.9% over net sales for the three months ended June 30, 2005 of $20,321,000.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales decreased for the three
months ended June 30, 2006 to 73.9% from 87.6% for the three months ended June 30, 2005 causing an
increase in the gross profit percentage to 26.1% in the quarter ending June 30, 2006 from 12.4% in
the quarter ending June 30, 2005. Approximately 9.8% of the increase in gross profit was due to the
front-loaded marketing allowance noted above which offset net sales in the first quarter of the
prior fiscal year but did not impact the cost of goods associated with those sales. Cost of goods
sold in the quarter ending June 30, 2005 was also adversely impacted by the higher level of
non-marketing discounts, the higher per unit manufacturing costs incurred 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.
General and Administrative. Our general and administrative expense for the three months ended
June 30, 2006 was $3,072,000, which represents a decrease of $938,000 or 23.4%, from the general
and administrative expense for the three months ended June 30, 2005 of $4,010,000. This decrease is
principally due to the outside professional and consulting fees we incurred in the quarter ending
June 30, 2005 associated with the SECs review of our SEC filings and the related restatement of
our financial statements. Professional and consulting fees included in general and administrative
expenses decreased approximately $729,000 from $1,235,000 during the three months ended June 30,
2005 to $506,000 for the three months ended June 30, 2006. General and administrative expenses
related to our production facility in Mexico were approximately $158,000 higher during the three
months ending June 30, 2005 as compared to the three months ended June 30, 2006 due to additional
start-up costs related to the opening of the facility in June 2005. Partially offsetting these
decreases in general and administrative expenses was the increase in share-based compensation of
$115,000 posted during the quarter ending June 30, 2006 in compliance with the new Financial
Accounting Standards Board (FASB) Statement No. 123 (revised December 2004), Share-based Payment
(FAS 123R). See Note D Stock Options and Share-based Payments in the accompanying unaudited
condensed notes to the consolidated financial statements for the three months ending June 30, 2006
and 2005.
Sales and Marketing. Our sales and marketing expenses increased by $40,000 or 4.6% to $905,000
for the three months ended June 30, 2006 from $865,000 for the three months ended June 30, 2005.
This increase is principally attributable to an increase of approximately $185,000 in commission
and wage related expenses in the three months ending June 30, 2006 incurred to support customer
sales initiatives and the new business we received. This increase was partially offset by the
$119,000 in catalog expenses incurred during the quarter ending June 30, 2005, but not incurred
during the quarter ending June 30, 2006.
Research and Development. Our research and development expenses increased by $102,000, or
32.5%, to $416,000 for the three months ended June 30, 2006 from $314,000 for the three months
ended June 30, 2005. This increase, primarily in wage related expenses, was attributable to the
increased costs of supporting the new business we obtained.
Interest Expense. For the three months ended June 30, 2006, interest expense, net of interest
income, was $822,000. This represents an increase of $274,000 over net interest expense of $548,000
for the three months ended June 30, 2005. This increase was principally attributable to an increase
in the average outstanding balance on the line of credit and the increase in short-term interest
rates on both the line of credit and on our factoring agreements. These increases were 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 interest paid under our bank
credit agreement, discounts recognized in connection with our receivables factoring arrangements
and interest on our capital leases.
Income Tax. For the three months ended June 30, 2006 and June 30, 2005, we recognized income
tax expense of $782,000 and income tax benefit of $1,250,000, respectively. During fiscal 2006, we
utilized all of our net operating loss carry forwards available for income tax purposes. As a
result, we anticipate that our future cash flow will be more significantly impacted by our future
tax payments.
27
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, a capital financing sale-leaseback
transaction with our bank, and the use of our bank credit facility. Our working capital needs have
increased significantly in light of the ramped up production demands associated with our new or
expanded customer arrangements and the adverse impact that the marketing and other allowances that
we have typically granted our customers in connection with these new or expanded relationships have
on the near-term revenues and associated cash flow from these arrangements. Since 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 put an additional strain on our
working capital. Because our net operating loss carry forwards for tax purposes have been utilized,
we anticipate that our future cash flow will be negatively impacted by our future tax payments.
Finally while our cash position did benefit from the way in which the purchase of the transition
inventory associated with our POS arrangement has been structured, as anticipated, satisfaction of
the credit due the customer through the issuance of credits against that customers receivables has
most recently had a negative impact on our 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 amended 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. We may however, seek additional financing to pursue future business opportunities.
Working Capital and Net Cash Flow
At June 30, 2006, we had working capital of $46,153,000, a ratio of current assets to current
liabilities of 1.9:1, and cash and cash equivalents of $97,000, which compares to working capital
of $46,430,000, a ratio of current assets to current liabilities of 2.1:1, and cash and cash
equivalents of $400,000 at March 31, 2006.
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 $7,139,000 for the three
months ended June 30, 2006, as compared to net cash used in operating activities of $3,978,000 for
the three months ended June 30, 2005. 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, 2006, this arrangement reduced our cash flow from operations by $3,798,000.
During the three months ended June 30, 2005, this arrangement decreased our cash flow from
operations by $2,203,000. The total of our inventory and inventory unreturned increased by
$6,192,000 during the three months ended June 30, 2006, primarily as a result of our inventory
build up to meet the initial order from a new retail customer. This increase was partially offset
by a net increase in accounts payable and accrued liabilities of $3,004,000. The net cash used in
operating activities was also positively impacted by our net income during the current fiscal
quarter of $1,169,000, compared to net loss of $1,964,000 during the June 2005 fiscal quarter.
We used net cash in investing activities of $1,299,000 in the three months ended June 30,
2006. These investing activities were primarily related to capital expenditures of $1,278,000
during this period. We expect to use cash in investing activities for the balance of fiscal 2006.
During the three months ended June 30, 2006 we obtained $8,375,000 from financing activities
primarily related to the drawing of additional amounts under our bank credit agreement. These funds
were primarily used to make the final payment of $3,910,000 under our multi-year POS agreement with
our largest customer, to purchase property, plant and equipment and to build up our inventory to
meet the initial order from a new retail customer.
Capital Resources
Line of Credit
In April 2006, we entered into an amended credit agreement with our bank that increased our
credit availability from $15,000,000 to $25,000,000, extended the expiration date of the credit
facility from October 2, 2006 to October 1, 2008, and changed the manner in which the margin over
the benchmark interest rate is calculated. Starting June 30, 2006, the interest rate fluctuates
based upon the (i) banks reference rate or (ii) LIBOR, as adjusted to take into account any bank
reserve requirements, plus a margin dependant upon the leverage ratio as noted below:
28
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|
|
|
|
|
|
|
Leverage ratio as of the end of the fiscal quarter |
|
|
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Greater than or |
|
|
|
|
Base Interest Rate Selected by Borrower |
|
equal to 1.50 to 1.00 |
|
|
Less than 1.50 to 1.00 |
|
Banks Reference Rate, plus |
|
0.0% per year |
|
-0.25% per year |
Banks LIBOR Rate, plus |
|
2.0% per year |
|
1.75% per year |
The bank holds a security interest in substantially all of our assets. As of June 30, 2006, we
had reserved $4,364,000 of our line for standby letters of credit for workers compensation
insurance and had borrowed $14,900,000 under this revolving line of credit.
The credit agreement as amended includes various financial conditions, including minimum
levels of tangible net worth, cash flow, fixed charge coverage ratio, maximum leverage ratios 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. As of June 30, 2006, we were in compliance with each of the covenants of the credit
agreement.
Under the amended credit agreement, we have also agreed to pay a quarterly fee of 0.375% per
year if the leverage ratio as of the last day of the previous fiscal quarter was greater than or
equal to 1.50 to 1.00 or 0.25% per year if the leverage ratio is less than 1.50 to 1.00 as of the
last day of the previous fiscal quarter. This fee is applied against any difference between the
$25,000,000 commitment and the average of the daily outstanding amount of credit we actually use
during each quarter. A fee of $125,000 was charged by the bank in connection with the amendment.
The fee is payable in three installments of $41,666, one on the date of the amendment to the credit
agreement, one on or before February 1, 2007 and one on or before February 1, 2008.
In August 2006, our bank credit agreement was further amended. This amendment increased the
credit availability from $25,000,000 to $35,000,000, increased the minimum fixed charge coverage
ratio and the maximum leverage ratio and increased the amount of allowable capital expenditures. As
a result of the amendment, the unused facility fee is now applied against any difference between
the $35,000,000 commitment and the average daily outstanding amount of credit the Company actually
uses during each quarter. The bank charged an amendment fee of $30,000 which was paid on the
effective date of the amendment to the credit agreement.
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 a discount agreed upon at the time the receivables are
sold. The discount has averaged 3.6% during the three months ended June 30, 2006 and has allowed us
to accelerate collection of receivables aggregating $15,529,000 by an average of 191 days. On an
annualized basis, the weighted average discount rate on receivables sold to banks during the three
months ended June 30, 2006 was 6.7%. 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 $504,000 during the three months ended June 30, 2006. 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 long-term agreements with substantially all of our major customers. Under these
agreements, which typically have initial terms of at least four 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
29
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.
We continue to expand our production to meet our obligations arising under our 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 paid for this inventory
through the issuance of monthly credits to this customer that ended in 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. As anticipated, satisfaction of the credit due
customer through the issuance of credits against that customers receivables has had a negative
impact on our cash flow. While we did not record the approximately $24,000,000 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 due from
this customer of $2,005,000 at June 30, 2006.
In the fourth quarter of fiscal 2005, we entered into a five-year agreement with one of the
largest automobile manufacturers in the world to supply this manufacturer with a new line of
remanufactured alternators and starters for the United States and Canadian markets. We have
expanded our operations and built-up our inventory to meet the requirements of this contract and
have incurred certain transition costs associated with this build-up. As part of the agreement, we
agreed to grant this customer $6,000,000 of credits that are being issued as sales to this customer
are made. Of the total credits, $3,600,000 was issued during fiscal 2006, ($2,570,000 in the first
quarter of fiscal 2006,) and the remaining $2,400,000 is scheduled to be issued in four annual
payments of $600,000 in the second fiscal quarter of each of the fiscal years 2007 to 2010. The
agreement also contains other typical provisions, such as performance, quality and fulfillment
requirements that we must meet, a requirement that we provide marketing support to this customer
and a provision (standard in this manufacturers vendor agreements) granting the manufacturer the
right to terminate the agreement at any time for any reason. Our cash flow has been adversely
impacted by the operational steps we have taken and the marketing allowances we agreed to in order
to respond to this opportunity. In addition, sales to this customer during the initial term of this
agreement have been below expectations. As a result, the inventory buildup we made in connection
with this new agreement has put an additional strain on our working capital. We believe, however,
that this new business will improve our overall liquidity over time.
In March 2005, we entered into a new agreement with one of our major customers. As part of
this agreement, our designation as this customers exclusive supplier of remanufactured import
alternators and starters was extended from February 28, 2008 to December 31, 2012. In addition to
customary promotional allowances, we agreed to acquire the customers import alternator and starter
core inventory by issuing $10,300,000 of credits over a five year period subject to adjustment if
our sales to the customer decrease in any quarter by more than an agreed upon percentage. The
customer is obligated to repurchase from us the cores in the customers inventory upon termination
of the agreement for any reason.
Our customers continue to aggressively seek extended payment terms, pay-on-scan inventory
arrangements, significant marketing allowances, price concessions and other terms adversely
affecting our liquidity and reported operating results.
30
Capital Expenditures and Commitments
Our capital expenditures were $1,278,000 for the three months ended June 30, 2006.
Approximately $794,000 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 2007 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,
2006, and the effect such obligations could have on our cash flow in future periods:
|
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Payments due by period |
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Contractual Obligations |
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Total |
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Less than 1 year |
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1-3 years |
|
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3-5 years |
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More than 5 years |
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Long-Term Debt Obligation |
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|
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Capital (Finance) Lease
Obligations |
|
$ |
6,019,000 |
|
|
$ |
1,499,000 |
|
|
$ |
2,925,000 |
|
|
$ |
1,595,000 |
|
|
|
|
|
Operating Lease Obligations |
|
$ |
8,027,000 |
|
|
$ |
2,342,000 |
|
|
$ |
1,718,000 |
|
|
$ |
1,529,000 |
|
|
$ |
2,438,000 |
|
Purchase Obligations |
|
$ |
8,824,000 |
|
|
$ |
2,663,000 |
|
|
$ |
4,814,000 |
|
|
$ |
1,347,000 |
|
|
|
|
|
Other Long-Term Obligations |
|
$ |
23,304,000 |
|
|
$ |
8,756,000 |
|
|
$ |
8,600,000 |
|
|
$ |
4,282,000 |
|
|
$ |
1,666,000 |
|
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Total |
|
$ |
46,174,000 |
|
|
$ |
15,260,000 |
|
|
$ |
18,057,000 |
|
|
$ |
8,753,000 |
|
|
$ |
4,104,000 |
|
|
|
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|
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|
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, Malaysia, Singapore and Mexico.
Purchase Obligations primarily represents our obligations to issue credits to one large and
several smaller customers for the acquisition of those 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, 2006 and 2005, sales to our three largest customers constituted approximately 92%
and 90% 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 Remanufacturing
We also conduct business through three wholly owned foreign subsidiaries, MVR Products Pte.
Ltd. (MVR), which operates a shipping and receiving warehouse, a testing facility and office
space in Singapore, Unijoh Sdn. Bhd. (Unijoh), which conducts remanufacturing operations in
Malaysia, and Motorcar Parts de Mexico, S.A. de C.V., which operates a 186,000-square foot
remanufacturing facility in Tijuana, Baja California, Mexico. These foreign operations have quality
control standards similar to those currently implemented at our remanufacturing facilities in
Torrance. Our foreign subsidiaries operations are growing in importance as we take advantage of
lower production labor costs, and we expect to continue to grow the portion of our remanufacturing
operations that is
31
conducted outside the United States. In the three months ending June 30, 2006 and 2005, the
foreign subsidiaries produced 59.7% and 14.8%, respectively, of our total production. We anticipate
that by the end of fiscal 2007 approximately 95% of our remanufactured units will be produced by
the foreign subsidiaries.
Seasonality of Business
Due to their nature and design, as well as the limits of technology, alternators and starters
traditionally failed when operating in extreme conditions. During the summer months, when the
temperature typically increases over a sustained period of time, alternators were more apt to fail.
Similarly, during winter months, starters were more apt to fail. Since alternators and starters are
mandatory for the operation of the vehicle, failed units require immediate replacement. As a
result, during the summer months we experienced an increase in alternator sales, and during the
winter months we experienced an increase in starter sales. However, in recent years, advances in
technology and quality have mitigated this seasonal sales impact, especially for starters. A mild
summer or winter can have a negative impact on our sales.
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. Our related party transactions have not changed since March 31, 2006.
32
Item 4. Controls and Procedures.
In connection with the preparation and filing of this amended Quarterly Report, we completed
an evaluation of the effectiveness of our disclosure controls and procedures under the supervision
and with the participation of our chief executive officer and chief financial officer. This
evaluation was conducted as of the end of the period covered by this amended report, pursuant to
the Securities and Exchange Act of 1934, as amended.
Based on this evaluation, our chief executive officer and chief financial officer concluded
that there remain certain deficiencies we consider to be material weaknesses in our disclosure
controls and procedures as of the end of the period covered by this report, notwithstanding the
improvements we have made in this regard. These deficiencies are discussed below.
Because we receive a critical remanufacturing component through customer returns and we offer
marketing allowances and other incentives that impact revenue recognition, we recognize that the
accounting for our operations is more complex than that for many businesses of our size or larger.
In addition, the expansion of our overseas operations and the increase in our overall level of
activity have put additional strains on our system of disclosure controls and procedures. To
address this, we have added an experienced new chief financial officer and a new controller to help
assure that we remain current with the relevant accounting literature and official pronouncements
and that our disclosure controls and procedures remain effective and up-to-date. Our chief
financial officer regularly reviews our accounting controls and procedures to identify and address
areas where these controls could be improved.
During the review of our financial statements for the three and six months ended September 30,
2006, Grant Thornton LLP, our independent auditing firm, notified our Audit Committee and
management that they had identified material weaknesses in our internal controls. Grant Thornton
noted that (i) we incorrectly recorded a duplicative entry that
continued to recognize a gross profit impact resulting from
the accrual for certain cores authorized to be returned, but still in-transit to us from our
customers, (ii) we incorrectly recorded core charge revenue when the amount of revenue was not
fixed and determinable and (iii) we did not appropriately accrue
losses for all probable customer payment
discrepancies. We believe these errors were mainly attributable to the use of numerous complex
spreadsheets and top side adjustments to close the general ledger and prepare financial statements
for quarterly and annual reporting periods. The Companys current staffing levels are not
sufficient to fully review all these spreadsheets for accuracy, data integrity and logic.
As part of our current evaluation of the effectiveness of our disclosure controls and
procedures under the supervision and with the participation of our chief executive officer and
chief financial officer, we undertook a review of our accounting policies and procedures and the
relevant accounting literature and pronouncements, and considered Grant Thorntons views in this
regard, together with our own observations. Based upon this evaluation, we have concluded that
there is a material weakness in our disclosure controls and procedures, as summarized above.
In an on-going effort to remedy these weaknesses, we have increased the active participation
of our Audit Committee in the evaluation of our accounting policies and disclosure controls. We
have hired additional accounting staff to strengthen the Companys ability to review the complex
spreadsheets, the general ledger close process and assist in the preparation of financial
statements. We believe these changes to our disclosure controls and procedures and the ones
discussed above will be adequate to provide reasonable assurance that the objectives of these
control systems will be met.
Except as noted in the preceding paragraphs, there have been no changes in our internal control,
over financial reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect financial reporting.
33
PART II OTHER INFORMATION
Item 6. Exhibits.
(a) Exhibits:
|
31.1 |
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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.
|
34
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
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Dated: February 12, 2007 |
By: |
/s/ Mervyn McCulloch
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Mervyn McCulloch |
|
|
|
Chief Financial Officer |
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35