SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998
|_| TRANSITION REPORT UNDER 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 & ACCESSORIES, INC.
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(Exact name of Registrant as specified in its charter)
NEW YORK 11-2153962
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2727 MARICOPA STREET, TORRANCE, CALIFORNIA 90503
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 212-7910
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, $.01 par
value
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 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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Issuer's revenues for its most recent fiscal year: $112,952,000.
The aggregate market value, calculated on the basis of the average bid and asked
prices of such stock on the National Association of Securities Dealers Automated
Quotation System, of Common Stock held by non-affiliates of the Registrant as
of, June 26, 1998 was approximately $81,642,451.
There were 6,433,455 shares of Common Stock outstanding as of June 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Registrant's Proxy Statement relating to its 1998 Annual
Meeting of Shareholders is incorporated by reference herein
PART I
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ITEM 1. BUSINESS.
GENERAL
The Company is a leading remanufacturer of replacement alternators
and starters for imported and domestic cars and light trucks in the United
States and Canada. The Company's full line of alternators and starters are
remanufactured for vehicles imported from Japan, Germany, Sweden, England,
France, Italy and Korea and, as recently commenced, for domestic vehicles. The
imported vehicles for which the Company remanufactures alternators and starters
also include vehicles produced by General Motors, Chrysler and Ford that are
originally equipped with components produced by foreign manufacturers, and
"transplants," which are manufactured in the United States by Toyota, Nissan,
Honda, Mazda and other foreign manufacturers. The Company also assembles and
distributes ignition wire sets for imported and domestic cars and light trucks.
The Company's products are sold throughout the United States to many
of the nation's largest chains of retail automotive stores, including AutoZone,
CSK Auto, The Pep Boys, O'Reilly Automotive and Trak Automotive, and throughout
Canada to that country's largest chain of retail automotive stores, Canadian
Tire. The Company also supplies remanufactured alternators and starters for
imported vehicles to Delphi, a division of General Motors. During the last
several years, the Company's marketing and sales of its products for imported
vehicles principally has been to retail automotive chains, which the Company
believes has been the fastest growing segment of the automotive aftermarket
industry. During fiscal 1998, approximately 87% of the Company's sales were to
retail automotive chains comprised of approximately 5,000 stores, with the
balance of sales primarily to large warehouse distributors.
THE AUTOMOTIVE AFTERMARKET INDUSTRY
The Company's historical market, the import automotive aftermarket
for alternators and starters, has experienced significant growth in recent
years. The Company believes that this growth has resulted from, among other
trends, (i) the proliferation of imported cars and light trucks in use, (ii) the
increase in the number of miles driven each year and (iii) the growth in the
number of imported vehicles at the prime repair age of four years and older. In
addition, the Company recently entered the significantly larger domestic
automotive aftermarket for alternators and starters, which the Company believes
represents substantial growth opportunities.
Two distinct groups of end-users buy replacement automotive parts:
(i) individual "do-it-yourself" consumers; and (ii) professional "do-it-for-me"
installers. The individual consumer market is typically supplied through
retailers and through retail arms of warehouse distributors. Automotive repair
shops generally purchase parts through local independent parts wholesalers,
through national warehouse distributors and, at a growing rate, through
automotive parts retailers.
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The increasing complexity of cars and light trucks and the number of
different makes and models of these vehicles have resulted in a significant
increase in the number of different alternators and starters required to service
imported and domestic cars and light trucks. The technology used in starters and
alternators has become more advanced in response to the installation in vehicles
of an increasing number of electrical components such as cellular telephones,
electrically powered windows, air conditioning equipment, and radio and stereo
systems. Consequently, per unit sale prices have increased for such alternators
and starters.
Remanufacturing, which involves the reuse of parts which might
otherwise be discarded, creates a supply of parts at significantly lower cost to
the user than newly manufactured parts, and makes available automotive parts
which are no longer being manufactured. By making readily available parts for
automotive general use, remanufacturing benefits automotive repair shops by
relieving them of the need to rebuild worn parts on an individual basis and
conserves material which would otherwise be used to manufacture new replacement
parts. Most importantly, however, the Company's remanufactured parts are sold at
significantly lower prices than competitive new replacement parts.
COMPANY PRODUCTS
The Company's primary products are remanufactured replacement
alternators and starters for both imported and domestic cars and light trucks.
The Company also assembles and distributes ignition wire sets for the automotive
aftermarket for use in a wide variety of makes and models of foreign
automobiles. Alternators, starters and ignition wire sets are essential
components in all makes and models of automobiles. These products constitute
non-elective replacement parts, which are required for a vehicle to operate.
Most of the Company's products are sold for resale under customer private
labels, with the remaining products being sold under the Company's brand name,
which includes the use of its registered trademark, "MPA." Customers that sell
the Company's products under private label include AutoZone, CSK Auto, The Pep
Boys, Delphi, Canadian Tire and APS Holdings.
The Company's alternators and starters are produced to meet or exceed
automobile manufacturer specifications depending upon the make and model of the
automobile. The Company remanufactures a broad assortment of starters and
alternators in order to accommodate the numerous and increasing varieties of
these products currently in use. The Company currently provides a full line of
approximately 1,100 different alternators and 800 different starters. The
Company's import alternators and starters are provided for virtually all
Japanese manufacturers, including Toyota, Honda, Nissan, Mazda and Mitsubishi,
for certain European manufacturers, including Mercedes Benz, BMW, Volvo and
Volkswagen, for vehicles manufactured by Chrysler, General Motors and Ford that
are equipped with components produced by foreign manufacturers, and for
manufacturers of transplants.
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CUSTOMERS
The Company's products are marketed throughout the United States and
Canada. The Company's customers consist of many of the largest chains of retail
automotive stores and automotive warehouse distributors in the United States.
The Company also sells its products to Canada's largest chain of retail
automotive stores, Canadian Tire. The Company services automotive retail chain
store accounts servicing approximately 5,000 retail outlets and warehouse
distributor accounts servicing approximately 6,000 jobbers. Each jobber in turn
sells to various automotive repair facilities, such as garages, dealers and
service stations, as well as to individual motorists.
Many of the largest chains of retail automotive stores in the United
States obtain their imported car alternators and starters from the Company.
Consequently, a significant percentage of the Company's sales has been
concentrated among a relatively small number of customers. The Company's three
largest customers accounted for approximately 43%, 17% and 15%, respectively, of
net sales during fiscal 1998. The Company's three largest customers accounted
for approximately 29%, 18% and 18%, respectively, of net sales during fiscal
1997. The Company's four largest customers accounted for approximately 21%, 20%,
18% and 11%, respectively, of the Company's net sales during fiscal 1996. There
can be no assurance that this concentration of sales among customers will not
continue in the future. The loss of a significant customer or a substantial
decrease in sales to such a customer would have a material adverse effect on the
Company's sales and operating results. The Company's arrangements with most of
its customers are based principally on the receipt of purchase orders and any
long-term written contracts generally may be terminated by customers upon short
notice. In addition, customers may demand price concessions from the Company
that could adversely affect profit margins.
OPERATIONS OF THE COMPANY
CORES
In its remanufacturing operations, the Company obtains used
alternators and starters, commonly known as "cores," which are sorted by make
and model and stored until needed. When needed for remanufacturing, the cores
are completely disassembled into component parts. Components which can be
incorporated into the remanufactured product are thoroughly cleaned, tested and
refinished. All components known to be subject to major wear, and those
components determined not to be reusable or repairable, are replaced by new
components. The unit is then reassembled on an assembly line into a finished
product. Inspection and testing are conducted at various stages of the
remanufacturing process, and each finished product is inspected and tested on
equipment designed to simulate performance under operating conditions.
Components of cores which are not used by the Company in its remanufacturing
process are sold as scrap.
The majority of the cores remanufactured by the Company are obtained
from customers as trade-ins, which are credited against future purchases. The
Company's customers encourage consumers to exchange their used units at the time
of purchase through the use of credits. To a lesser
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extent, the Company also purchases cores in the open market from core brokers,
who are dealers specializing in buying and selling cores. Although the Company
believes that the open market does not and will continue not to represent a
primary source of cores, this market offers a reliable source for maintaining
stock balance. Other materials and components used in remanufacturing are also
purchased in the open market. The ability to obtain cores of the types and
quantities required by the Company is essential to the Company's ability to meet
demand and expand production.
The price of a finished product generally is comprised of a
separately invoiced amount for the core included in the product ("core value")
and an amount for remanufacturing. Upon receipt of a core as a trade-in, credit
generally is given to the customer for the amount originally invoiced with
respect to that core. The Company limits trade-ins to cores for units included
in its sales catalogs and in condition able to be remanufactured. Credit for
cores is allowed only against purchases by a customer of similar remanufactured
products within a specified time period. A customer's total allowable credit for
core trade-ins is further limited by the dollar volume of the customer's
purchases of similar products within such time period. Core values fluctuate on
the basis of several economic factors, including market availability and demand
and core prices then being paid by other remanufacturers and core brokers.
Beginning with fiscal 1997, the Company implemented a new accounting
presentation with respect to its reporting of sales. In the past, the Company
deducted the value of all cores returned from its customers in order to reach
net sales. Under the new presentation, revenues are reported on a gross basis,
that is core returns from customers are not deducted in order to reach net
sales, but rather are included in cost of goods sold. Net sales and cost of
goods sold for prior years have been reclassified to reflect this new
presentation. The Company believes that this new presentation provides a truer
depiction of actual sales and cost of goods sold. In addition, it reflects a
more proper relationship between sales and inventory.
PRODUCTION PROCESS
The initial step in the Company's remanufacturing process begins with
the receipt in boxed quantities of cores from various sources, including
trade-ins from customers and purchases in the open market. The cores are
assessed and evaluated for inventory control purposes and then sorted by part
number. Each core is then completely disassembled into all of its fundamental
components. The components are cleaned in a process that employs customized
equipment and cleaning materials. The cleaning process is accomplished in
accordance with the required specifications of the particular units.
After the cleaning process is complete, the components are then
inspected and tested as prescribed by the Company's rigorous quality control
program. This program, which is implemented throughout the operational process,
is known as statistical process control. Upon passage of all tests, the
components are placed on an automatic conveyor for assembly into the required
units. The assembly process is monitored by designated quality control
personnel. Each fully assembled unit is then subjected to additional testing to
ensure performance and quality. Finished products are then
-5-
either stored in the Company's warehouse facility or packaged for immediate
delivery. To maximize efficiency, the Company stores in its warehousing
facilities component parts ready for assembly. The Company's management
information systems, including hardware and software, facilitate the
remanufacturing process from cores to finished products. This process takes
approximately four days.
The Company generally assembles ignition wires from components
manufactured by third parties. The assembly process involves the cutting of
predetermined lengths of wire, which have been manufactured to the Company's
specifications, and the attaching of terminals to the ends of such wires. The
final product ultimately is tested and packaged under the Company's name or
customers' private labels.
The Company conducts business through two wholly owned foreign
subsidiaries, MVR Products Pte Limited ("MVR"), which operates a shipping
warehouse and testing facility and maintains office space and remanufacturing
capability in Singapore, and Unijoh Sdn, Bhd ("Unijoh"), which conducts in
Malaysia remanufacturing operations similar to those conducted by the Company at
its remanufacturing facility in Torrance. These foreign operations are conducted
with quality control standards and other internal controls similar to those
currently implemented at the Company's remanufacturing facilities in Torrance.
The facilities of MVR and Unijoh are located approximately one hour drive apart.
The Company believes that the operations of its foreign subsidiaries are
important because of the lower labor costs experienced by these subsidiaries in
the same remanufacturing process.
In April 1997, the Company acquired all of the outstanding capital
stock of MVR and Unijoh from its shareholders, Mel Marks, Richard Marks and
Vincent Quek (each of whom owned one-third of each acquired entity), for an
aggregate purchase price to all such selling shareholders for both acquired
entities of 145,455 shares of Common Stock. The shares of Common Stock
constituting the purchase price have not been registered for sale pursuant to
the Securities Act of 1933 and are subject to a lock-up arrangement between the
Company and each such selling shareholder releasing for public resale one-fourth
of such shares on each of the first four anniversaries of the acquisitions. The
purchase price and other terms of the acquisitions were determined by the
Special Committee of the Board of Directors of the Company following
negotiations with the selling shareholders. In connection with, and as a
condition to, the acquisitions, the Special Committee received a fairness
opinion from Houlihan Lokey Howard & Zukin, a specialty investment banking firm.
PRODUCT TRADE-INS
The Company has a trade-in policy that it believes is typical for the
remanufactured automotive replacement parts industry. A manufacturer typically
provides a product warranty that is honored whether or not the purchaser
continues to do business with the manufacturer. As the Company believes is the
practice in its industry, however, the Company accepts product trade-ins only if
the purchaser makes future purchases from the Company within a specified time
period. Product trade-ins to the Company result only in credits against future
purchases. If a customer ceases
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doing business with the Company, the Company recognizes no further obligations
to that customer with respect to product trade-ins and no additional product
returns would be accepted by the Company. The customer would return any
returnable products to a new remanufacturer maintaining the same policy, which
remanufacturer would accept the product trade-ins and grant appropriate credits
regardless of whether the units were originally purchased from that new
remanufacturer.
As a result of the product trade-in policy in the Company's industry,
the Company accounts for product trade-ins on a current basis. No reserve is
made for future product trade-ins since there is no on-going obligation to
accept such trade-ins in the absence of continuing sales to the returning
customer. The Company believes that its return rate has been consistent with the
return rates generally experienced in its industry. In addition, the obligation
to accept trade-ins is only recognized as a credit against future sales in the
form of a reduction in the purchase price for those sales.
MARKETING AND DISTRIBUTION
The Company markets and distributes its products regionally through
salaried personnel and independent sales representatives. The Company's products
are sold under either its registered name and trademark, "MPA," or private label
names.
Approximately 87% of the Company's sales are to chains or retail
stores, which, the Company believes, constitute the dominant distribution
channel in the Company's market. Sales to chains or retail stores involve fewer
tiers in the distribution process. Products are delivered directly by or on
behalf of the Company to the chain's distribution centers, which then deliver
the merchandise directly to the retail stores for purchase by consumers. By
contrast, sales to warehouse distributors involve more participants in the
distribution network. Products are delivered to warehouse distributors, which
then deliver the merchandise to jobbers, which then sell the merchandise to
automotive repair facilities as well as to individual motorists. The Company
believes that it has obtained significant marketing and distribution, as well as
manufacturing, efficiencies through its focus on sales efforts to chains of
automotive retail stores.
Each year, the Company exhibits its products at customer-sponsored
trade shows and several major national trade shows, including the trade shows of
the Automobile Parts and Accessories Association, Automotive Parts and
Rebuilders Association, the Automotive Service Industries Association and the
Automotive Warehouse Distributors Association. The Company believes that its
brand name is recognized throughout its industry. The Company prepares and
publishes a comprehensive catalog of its starters and alternators, including a
pictorial product identification guide and a detailed technical glossary and
explanation guide. The Company believes that it maintains one of its market's
most extensive catalog and product identification systems, offering one of the
widest varieties of alternators and starters available in that market. The
Company further believes that certain of its customers' use of and reliance on
the catalog and product identification system provide incentives to those
customers to continue to purchase products from the Company.
-7-
COMPETITION
The automotive aftermarket industry of remanufacturers and rebuilders
of alternators and starters for both imported cars and light trucks is highly
competitive. The Company's competitors include several other relatively large
sources of remanufactured units and numerous smaller, regional rebuilders.
Certain of the Company's competitors sell a wide variety of other automotive
parts, thereby establishing broader name recognition in the entire automotive
aftermarket. In addition, certain of the Company's competitors are divisions or
subsidiaries of entities also engaged in other businesses which have
substantially greater resources than those of the Company. The Company also
competes with several large regional remanufacturers and with remanufacturers
which are franchised by certain original equipment manufacturers to
remanufacture their products for regional distribution. Alternators and starters
produced by regional and other small rebuilders typically are not processed and
finished to the same extent as, and do not compete directly with, the Company's
products. The Company also competes with numerous rebuilders which serve
comparatively local areas.
Retailers and other purchasers of replacement automotive parts for
resale are constrained to a finite amount of space in which to display and stock
products. Consequently, the reputation for quality and customer service which a
supplier enjoys is a significant factor in a purchaser's decision as to which
product lines to carry in the limited space available. The Company believes that
these factors favor the Company, which provides quality replacement automotive
products, rapid and reliable delivery capabilities and promotional support. In
this regard, there is increasing pressure from customers, particularly larger
ones, for suppliers to provide "just-in-time" delivery, which allows delivery on
an as-needed basis to promptly meet customer orders. The Company believes that
its ability to provide "just-in-time" delivery distinguishes it from many of its
competitors and provides it a significant competitive advantage and also may
represent a barrier to entry to current or future competitors.
The Company's products have not been patented nor does the Company
believe that its products are patentable. The Company will continue to attempt
to protect its proprietary processes and other information by relying on trade
secret laws and non-disclosure and confidentiality agreements with certain of
its employees and other persons who have access to its proprietary processes and
other information.
GOVERNMENTAL REGULATION
The Company's operations are subject to federal, state and local laws
and regulations governing, among other things, emissions to air, discharge to
waters and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. The Company is not subject to any such
laws and regulations which are specific to the automotive aftermarket industry.
The Company believes that its business, operations and facilities have been and
are being operated in compliance in all material respects with applicable
environmental and health and safety laws and regulations, many of which provide
for substantial fines and criminal sanctions for violations. Potentially
significant expenditures, however, could be required in order to comply with
evolving
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environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future.
EMPLOYEES
The Company has approximately 690 full time employees. Of the
Company's employees, 30 are considered administrative personnel and eight are
sales personnel. None of the Company's employees is a party to any collective
bargaining agreement. The Company has not experienced any work stoppages and
considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES.
The Company maintains facilities in Torrance, California, Roslyn
Heights, New York and Nashville, Tennessee. The Torrance facilities contain an
aggregate of approximately 352,000 square feet and accommodate most of the
Company's corporate headquarters and remanufacturing, warehousing and other
office requirements. The Company moved into its initial Torrance facility,
consisting of approximately 125,000 square feet, in September 1993. The lease
for the initial facility provides for a monthly rental of $44,280 through
September 1999, increasing thereafter to $47,601 through March 31, 2002, the
termination date of the lease. In September 1995, the Company entered into a
lease for an additional approximately 80,000 square feet in a second facility in
the same industrial area in Torrance and, in April 1997, increased its leased
space in the second facility to a total of approximately 227,000 square feet.
The lease for the second facility provides for a base monthly rental of $60,252
through September 1999, increasing thereafter to $64,771 through March 31, 2002,
the termination date of the lease. The Company's facilities were designed and
equipped according to specifications generated by the Company in order to
accommodate the Company's current and projected needs. The Company believes that
its facilities are sufficient to satisfy its foreseeable production
requirements. The Company also maintains an East Coast administrative and sales
office in Roslyn Heights, New York. This site contains approximately 1,000
square feet of office space. In October 1995, the Company opened a 31,000-square
foot warehouse and distribution facility in Nashville, Tennessee to service the
Company's growing East Coast and Southern market. The lease for this facility
expires on October 31, 1998 and provides for a monthly rental of $9,331. In
addition, the Company has facilities at its subsidiaries' locations in Malaysia
and Singapore.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending material legal proceedings to which the Company
or any of its properties is subject nor, to the knowledge of the Company, are
any such legal proceedings threatened.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $0.01 per share (the "Common
Stock"), is quoted on the National Association of Securities Dealers' Automated
Quotation ("NASDAQ") National Market under the symbol MPAA. The following table
sets forth the high and low bid prices for the Common Stock during each quarter
of fiscal 1997 and fiscal 1998 as reported by NASDAQ. The prices reported
reflect inter-dealer quotations, may not represent actual transactions and do
not include retail mark-ups, mark-downs or commissions.
FISCAL 1997 FISCAL 1998
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HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter 19 14.250 18.50 13.250
Second Quarter 15.750 9.375 20.50 16.750
Third Quarter 15 11.875 20.250 16.250
Fourth Quarter 17.625 13.250 18 14.750
As of June 26, 1998, there were 6,433,455 shares of Common Stock
outstanding held by 47 holders of record.
The Company has not declared or paid dividends on the Common Stock
during the last two fiscal years.
The declaration of dividends in the future will be at the election of
the Board of Directors and will depend upon the earnings, capital requirements
and financial position of the Company, general economic conditions, state law
requirements and other relevant factors. In addition, the Company's agreement
with its bank lender prohibits payment of dividends without the bank's prior
consent, except dividends payable in Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data has been derived from the
Company's audited financial statements. The Income Statement Data relating to
the fiscal years 1998, 1997 and 1996 and the Balance Sheet Data as of March 31,
1998 and 1997 should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto appearing elsewhere herein.
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
INCOME STATEMENT DATA (1):
Net sales ........................................ $ 112,952 $ 86,872 $ 64,358 $ 39,235 $ 29,018
Cost of goods sold ............................... 91,317 69,255 50,965 30,690 21,816
Research and development ......................... 549 185 -- -- --
Selling expenses ................................. 2,417 2,305 1,984 1,498 2,117
General and administrative expenses .............. 6,298 4,974 4,577 3,704 2,593
Moving expenses .................................. -- -- -- -- 256
Operating income ................................. 12,371 10,153 6,832 3,343 2,236
Interest expense (net of interest income) ........ (1,577) (1,090) (833) (540) (453)
--------- --------- --------- --------- ---------
Income before income taxes ....................... 10,794 9,063 5,999 2,803 1,783
Provision for income taxes (pro forma for fiscal
1994) (2) ........................................ 4,192 3,529 2,353 1,197 728
--------- --------- --------- --------- ---------
Net income ................................. $ 6,602 $ 5,534 $ 3,646 $ 1,606 $ 1,055
========= ========= ========= ========= =========
Basic income per share (pro forma for
fiscal 1994) (3) ........................... $ 1.20 $ 1.14 $ 0.96 $ 0.50 $ 0.52
========= ========= ========= ========= =========
Diluted income per share (pro forma for
fiscal 1994) (3) ........................... $ 1.16 $ 1.11 $ 0.93 $ 0.49 $ 0.52
========= ========= ========= ========= =========
Weighted average common shares outstanding -
basic income per share (pro forma for fiscal
1994) (3) ........................................ 5,521 4,859 3,812 3,208 2,018
========= ========= ========= ========= =========
Weighted average common shares outstanding -
diluted income per share (pro forma for fiscal
1994) (3) ........................................ 5,693 5,007 3,939 3,295 2,018
========= ========= ========= ========= =========
MARCH 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Total assets ..................................... $ 98,245 $ 75,510 $ 60,189 $ 25,823 $ 16,871
Working capital .................................. 75,333 51,800 44,254 18,096 12,041
Long-term debt and capitalized lease
obligations -- less current portions ........ 14,585 17,839 15,135 9,502 4,920
Shareholders' equity ............................. 68,127 40,108 34,031 10,016 8,410
- ----------------------
(1) Net sales and cost of goods sold for fiscal 1996, 1995 and 1994 have been
reclassified to increase cost of goods sold, rather than decrease net
sales, by core trade-ins. See Note A[8] to the financial statements
contained herein.
(2) From January 1, 1987 through December 31, 1993, the Company was subject to
taxation as an "S" corporation in accordance with the Code. As a result,
the net income of the Company during that time was taxed for federal (and
some state) income tax purposes directly to the Company's shareholders
rather than to the Company. Pro forma data reflects the income tax expense
that would have been recorded had the Company not been exempt from the
payment of such taxes.
(3) Pro forma data for fiscal 1994 reflects the stock split effected by the
Company in January 1994, which increased the number of issued and
outstanding shares of Common Stock from 54.3428 shares to 2,000,000
shares.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere herein.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 80.8 79.7 79.2
------ ------ ------
Gross profit 19.2 20.3 20.8
Research and development 0.4 0.2 0.0
Selling expenses 2.1 2.7 3.1
General and administrative expenses 5.6 5.7 7.1
------ ------ ------
Operating income 10.9 11.7 10.6
Interest expense, net of interest income 1.4 1.3 1.3
------ ------ ------
Income before income taxes 9.5 10.4 9.3
Provision for income taxes 3.7 4.1 3.7
------ ------ ------
Net income 5.8% 6.4% 5.7%
====== ====== ======
In its remanufacturing operations, the Company obtains used
alternators and starters, commonly known as "cores," from its customers as
trade-ins and by purchasing them from vendors. Such trade-ins are recorded when
cores are received from customers. Credits for cores are allowed only against
purchases of similar remanufactured products and generally are used within 60
days of issuance by the customer. Due to this trade-in policy, the Company does
not reserve for trade-ins. In addition, since it is unlikely that a customer
will not utilize its trade-in credits, the credit is recorded when the core is
returned as opposed to when the customer purchases new products. The Company
believes that this policy is consistent throughout the remanufacturing and
rebuilding industry.
Beginning with fiscal 1997, the Company implemented a new accounting
presentation with respect to its reporting of sales. In the past, the Company
deducted the value of all cores returned from its customers in order to reach
net sales. Under the new presentation, net sales are reported on a gross basis,
that is core returns from customers are not deducted in order to reach net
sales, but rather are included in cost of goods sold. The Company's financial
information has been reclassified to reflect this new presentation. The Company
believes that this new presentation provides a truer depiction of actual sales
and cost of goods sold and reflects a more proper relationship between sales and
inventory.
-13-
Fiscal 1998 compared to Fiscal 1997
- -----------------------------------
Net sales for fiscal 1998 increased $26,080,000 or 30.0%, from
$86,872,000 to $112,952,000, over net sales for fiscal 1997. The increase in net
sales is primarily attributable to sales to one of the Company's largest
customers of alternators for domestic vehicles in connection with the recent
expansion of the Company's product line to include remanufactured products for
domestic vehicles.
Cost of goods sold for fiscal 1998 increased $22,062,000 or 31.9%,
from $69,255,000 to $91,317,000. The increase primarily is attributable to
additional costs incurred in connection with increased production. As a
percentage of net sales, cost of goods sold increased to 80.8% for fiscal 1998
as compared to 79.7% for fiscal 1997. The increase as a percentage of net sales
is attributable to (i) slightly reduced efficiencies resulting from increased
labor and overtime costs in connection with increased production requirements in
response to strong demand for the Company's products, (ii) lower gross margins
relating to the Company's new product line, and, (ii) to a lesser extent,
pricing pressures.
Selling expenses increased over the periods by $112,000 or 4.9%, from
$2,305,000 to $2,417,000. This increase resulted principally from an expansion
of the Company's sales force and related travel expenses offset partially by
reduced sales commissions to outside sales agents. As a percentage of net sales,
selling expenses decreased from 2.7% to 2.1%, reflecting the leveraging of these
expenses over the Company's increased net sales.
General and administrative expenses increased over the periods by
$1,324,000 or 26.6%, from $4,974,000 to $6,298,000. The increase over the
periods resulted principally from the addition of certain management personnel
in connection with the expansion of the Company's operations, an increase in
certain compensation expense and the inclusion of general and administrative
expenses related to the Company's ownership of MVR and Unijoh effective April
1997. Notwithstanding the increase, general administrative expenses as a
percentage of net sales decreased over the periods from 5.7% to 5.6%, reflecting
the leveraging of these expenses over the Company's increased net sales.
For fiscal 1998 interest expense net of interest income was
$1,577,000. This represents an increase of $487,000 or 44.7% over net interest
expense of $1,090,000 for fiscal 1997. Interest expense was comprised
principally of interest on the Company's revolving credit facility, borrowings
under which increased over the periods but were significantly reduced by
payments from the proceeds of the Company's public offering in November 1997.
Fiscal 1997 compared to Fiscal 1996
- -----------------------------------
Net sales for fiscal 1997 increased $22,514,000 or 35.0%, from
$64,358,000 to $86,872,000, over net sales for fiscal 1996. The increase is
attributable to the general growth of business with existing customers,
including the commencement of sales of alternators for domestic vehicles to one
of the Company's largest customers, and an unusually large increase in the
number of stock keeping
-14-
units ("SKUs") that these customers offer in their stores. In addition, the
Company believes that the continued aging of the import vehicle fleet also
contributed to its increased sales.
Cost of goods sold for fiscal 1997 increased $18,290,000 or 35.9%,
from $50,965,000 to $69,255,000, over cost of goods sold for fiscal 1996. The
increase is primarily attributable to additional costs in connection with
increased production. Cost of goods sold as a percentage of net sales increased
over the periods from 79.2% to 79.7%. While the increase in cost of goods sold
over the periods is minimal, it can be primarily attributed to pricing pressures
experienced by the Company as offset by the continuing lowering of manufacturing
costs by the Company.
Selling expenses for fiscal 1997 increased $321,000 or 16.2%, from
$1,984,000 to $2,305,000, over selling expenses for fiscal 1996. Selling
expenses as a percentage of net sales decreased to 2.7% for fiscal 1997 from
3.1% for fiscal 1996. This decrease in selling expenses as a percentage of net
sales represents the continued leveraging of selling costs over the Company's
increased net sales.
General and administrative expenses for fiscal 1997 increased
$397,000 or 8.7%, from $4,577,000 to $4,974,000, over general and administrative
expenses for fiscal 1996. As a percentage of net sales these expenses decreased
over the periods from 7.1% to 5.7%. This decrease represents the continued
leveraging of these costs over the Company's increased net sales. The increase
over the periods was the result of additional insurance costs, general salary
increases and certain non-income-based state and local taxes.
Interest expense net of interest income was $1,090,000 for fiscal
1997. This represents an increase of $257,000 or 30.9% over interest expense net
of interest income for fiscal 1996. Interest expense was comprised principally
of interest paid on the Company's revolving credit facility, borrowings under
which increased over the periods. The balance of interest expense relates to the
Company's capital leases.
Liquidity and Capital Resources
- -------------------------------
The Company's recent operations have been financed principally from
the net proceeds of the Company's public offering in November 1997, borrowings
under its revolving credit facility and cash flow from operations. As of March
31, 1998, the Company's working capital was $75,333,000, including $3,108,000 of
cash and cash equivalents.
Net cash used in operating activities during fiscal 1998, 1997 and
1996 was $15,616,000, $5,978,000 and $15,344,000, respectively. The principal
use of cash in fiscal 1998 related to an increase in inventory of $12,850,000
and an increase in accounts receivable of $7,263,000. The increase in inventory
was due principally to the addition of inventory in connection with the
Company's recent entrance into the business of remanufacturing alternators and
starters for domestic vehicles. The increase in accounts receivable was due
primarily to the increased net sales in fiscal
-15-
1998, although the days outstanding of the accounts receivable remained
relatively constant over the periods. As of March 31, 1998, the current portion
of capitalized lease obligations was $395,000.
Net cash used in investing activities during fiscal 1998 was
$1,367,000 as compared to net cash provided by investing activities during
fiscal 1997 of $6,770,000 and net cash used in investing activities of
$10,770,000 during fiscal 1996. During fiscal 1998, the Company used $1,874,000
of investments to fund its operations and purchased $3,241,000 of property,
plant and equipment in order to facilitate the continued expansion of the
Company's manufacturing capacity.
Net cash provided by financing activities in fiscal 1998, 1997 and
1996 was $16,431,000, $2,583,000 and $25,667,000, respectively. The net cash
provided by financing activities in fiscal 1998 primarily was attributable to
the net proceeds in the amount of $19,807,000 from the Company's public offering
in November 1997, the proceeds from which were used in part for a net reduction
of borrowing during the year under the Company's revolving line of credit in the
amount of $3,513,000. The Company also received during fiscal 1998 $911,000 from
the exercise of stock options. The net cash provided by financing activities in
1997 primarily was attributable to an increase in borrowing over the year under
the revolving line of credit and proceeds from the exercise of warrants and
stock options as offset primarily by payments on a capital lease obligation. The
increase in fiscal 1996 was primarily attributable to the net proceeds in the
amount of $19,501,000 from the Company's public offering in November 1995 and,
to a lesser extent, an increase in borrowing of $5,552,000 during the year under
the Company's revolving line of credit and the exercise of warrants and stock
options.
The Company has a credit agreement expiring in June 1999 with Wells
Fargo Bank, National Association (the "Bank") that provides for a revolving
credit facility in an aggregate principal amount not exceeding $25,000,000,
which credit facility is secured by a lien on substantially all of the assets of
the Company. The credit facility provides for an interest rate on borrowings at
the Bank's prime rate less .25% or LIBOR plus 1.25%. Under the terms of the
credit facility and included in the maximum amount thereunder, the Bank will
issue letters of credit and banker's acceptances for the account of the Company
in an aggregate amount not exceeding $2,500,000. At March 31, 1998, the
outstanding balance on the credit facility was approximately $13,983,000.
The Company's accounts receivable as of March 31, 1998 was
$29,591,000, representing an increase of $7,263,000 or 32.5% over accounts
receivable on March 31, 1997. This increase compares to the 30.0% increase in
net sales from fiscal 1997 to fiscal 1998. In addition, the Company occasionally
extends payment terms with certain customers. The Company partially protects
itself from losses due to uncollectible accounts receivable through an insurance
policy with an independent credit insurance company at an annual premium of
approximately $90,000. The Company's policy generally has been to issue credit
to new customers only after the customers have been included to some extent
under the coverage of its accounts receivable insurance policy. As of March 31,
1998, the Company's accounts receivable from its largest customer represented
approximately 49% of all accounts receivable.
-16-
The Company's inventory as of March 31, 1998 was $54,736,000,
representing an increase of $12,874,000 or 30.7% over inventory as of March 31,
1997. This increase, as discussed above, primarily reflects the Company's
anticipated growth in net sales in connection with domestic vehicles and, to a
lesser extent, increased business from existing customers and the need to have
sufficient inventory to support shorter lead times for deliveries to customers.
Also, the Company continues to increase the number of SKUs sold requiring the
Company to carry raw materials for this wider variety of parts.
The Company currently expects that its capital expenditures
(exclusive of any potential acquisitions) will be approximately $3,500,000 in
fiscal 1999. However, the Company's capital expenditures will be affected by,
and may be greater than currently anticipated depending upon, the size and
nature of new business opportunities.
Disclosure Regarding Private Securities Litigation Reform Act of 1995
- ---------------------------------------------------------------------
This report contains certain forward-looking statements with respect
to the future performance of the Company that involve risks and uncertainties.
Various factors could cause actual results to differ materially from those
projected in such statements. These factors include, but are not limited to, the
uncertainty of long-term results from the Company's recent entrance into the
business of remanufacturing alternators and starters for domestic vehicles,
concentration of sales to certain customers, the potential for changes in
consumer spending, consumer preferences and general economic conditions,
increased competition in the automotive parts remanufacturing industry,
unforeseen increases in operating costs and other factors discussed herein and
in the Company's other filings with the Securities and Exchange Commission.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth in the
Consolidated Financial Statements, commencing on page F-1 included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-18-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference
herein in the "Election of Directors" section of the Company's Proxy Statement
to be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference
herein in the "Executive Compensation" section of the Company's Proxy Statement
to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference
herein in the "Security Ownership of Management" section of the Company's Proxy
Statement to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference
herein in the "Certain Transactions" section of the Company's Proxy Statement to
be filed pursuant to Regulation 14A.
-19-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. EXHIBITS:
Number Description of Exhibit Method of Filing
- ------ ---------------------- ----------------
3.1 Certificate of Incorporation of the Incorporated by reference
Company. to Exhibit 3.1 to the
Company's Registration
Statement on Form SB-2
(No. 33-74528) declared
effective on March 22, 1994
(the "1994 Registration
Statement").
3.2 Amendment to Certificate of Incorporated by reference
Incorporation of the Company. to Exhibit 3.2 to the
Company's Registration
Statement on Form S-1 (No.
33-97498) declared
effective on November 14,
1995 (the "1995
Registration Statement").
3.3 Amendment to Certificate of Incorporated by reference
Incorporation of the Company. to Exhibit 3.3 to the
Company's Annual Report
on Form 10-K for the fiscal
year ended March 31, 1997
(the "1997 Form 10-K").
3.4 Amendment to Certificate of Filed herewith.
Incorporation of the Company.
3.5 By-Laws of the Company. Incorporated by reference
to Exhibit 3.2 to the 1994
Registration Statement.
4.1 Specimen Certificate of the Incorporated by reference
Company's Common Stock. to Exhibit 4.1 to the 1994
Registration Statement.
4.2 Form of Underwriter's Common Stock Incorporated by reference
Purchase Warrant. to Exhibit 4.2 to the 1994
Registration Statement.
-20-
Number Description of Exhibit Method of Filing
- ------ ---------------------- ----------------
4.3 1994 Stock Option Plan. Incorporated by reference
to Exhibit 4.3 to the 1994
Registration Statement.
4.4 Form of Incentive Stock Option Incorporated by reference
Agreement. to Exhibit 4.4 to the 1994
Registration Statement.
4.5 1994 Non-Employee Director Stock Incorporated by reference
Option Plan. to Exhibit 4.5 to the
Company's Annual Report on
Form 10-KSB for the fiscal
year ended March 31, 1995.
4.6 1996 Stock Option Plan. Incorporated by reference
to Exhibit 4.6 to the
Company's Registration
Statement on Form S-2 (No.
333-37977) declared
effective on November 18,
1997 (the "1997
Registration Statement").
4.7 Executive and Key Employee Incorporated by reference
Incentive Bonus Plan. to Exhibit 4.6 to the 1995
Registration Statement.
4.8 Rights Agreement, dated as Filed herewith.
of February 24, 1998, by
and between the Company and
Continental Stock Transfer &
Trust Company, as rights agent.
10.1 Credit Agreement, dated as of Incorporated by reference
June 1, 1996, by and between the to Exhibit 10.4 to the
Company and Wells Fargo Bank, N.A. Company's Quarterly Report
on Form 10-Q for the
quarter ended December 31,
1996 (the "December 31,
1996 Form 10-Q").
10.2 First Amendment to Credit Agreement, Incorporated by reference
dated as of November 1, 1996, by and to Exhibit 10.2 to the 1997
between the Company and Wells Fargo Form 10-K.
Bank, N.A.
-21-
Number Description of Exhibit Method of Filing
- ------ ---------------------- ----------------
10.3 Second Amendment to Credit Agreement, Incorporated by reference
dated as of August 8, 1997, by and to Exhibit 10.3 to the 1997
between the Company and Wells Fargo Registration Statement.
Bank, N.A.
10.4 Third Amendment to Credit Agreement, Filed herewith.
dated as of February 10, 1998,
by and between the Company and Wells
Fargo Bank, N.A.
10.5 Lease Agreement, dated March 9, 1993, Incorporated by reference
by and between the Company and Maricopa to Exhibit 10.3 to the 1994
Enterprises, Ltd., relating to the Registration Statement.
Company's initial facility located in
Torrance, California.
10.6 Second Amendment to Lease, dated Incorporated by reference
October 1, 1996, by and between the to Exhibit 10.5 to the 1997
Company and Maricopa Enterprises, Ltd., Form 10-K.
relating to the Company's initial
facility located in Torrance,
California.
10.7 Amendment to Lease, dated October 3, Incorporated by reference
1996, by and between the Company and to Exhibit 10.17 to the
Golkar Enterprises, Ltd. relating December 31, 1996
to additional property in Torrance, Form 10-Q.
California.
10.8 Amended and Restated Employment Incorporated by reference
Agreement, dated as of September 1, to Exhibit 10.7 to the 1995
1995, by and between the Company and Registration Statement.
Mel Marks.
10.9 First Amendment to Amended and Incorporated by reference
Restated Employment Agreement, to Exhibit 10.8 to the 1997
dated as of April 1, 1997, Form 10-K.
by and between the Company and
Mel Marks.
10.10 Amended and Restated Employment Incorporated by reference
Agreement, dated as of September 1, to Exhibit 10.8 to the 1995
1995, by and between the Company and Registration Statement.
Richard Marks.
-22-
Number Description of Exhibit Method of Filing
- ------ ---------------------- ----------------
10.11 First Amendment to Amended and Incorporated by reference
Restated Employment Agreement, dated to Exhibit 10.10 to the
as of April 1, 1997, by and between 1997 Form 10-K.
the Company and Richard Marks.
10.12 Employment Agreement, dated as of Incorporated by reference
February 1, 1994, by and between to Exhibit 10.7 to the 1994
the Company and Steven Kratz. Registration Statement.
10.13 First Amendment to Employment Exhibit 10.12 to the 1995
Agreement, dated as of September 1, Registration Statement.
1995, by and between the Company
and Steven Kratz.
10.14 Second Amendment to Employment Incorporated by reference
Agreement, dated as of April 1, to Exhibit 10.13 to the
1997, by and between the Company and 1997 Form 10-K.
Steven Kratz.
10.15 Employment Agreement, dated as of Incorporated by reference
March 1, 1994, by and between the to Exhibit 10.12 to the
Company and Peter Bromberg. 1994 Registration
Statement.
10.16 First Amendment to Employment Incorporated by reference
Agreement, dated as of September 1, to Exhibit 10.12 to the
1995, by and between the Company 1995 Registration
and Peter Bromberg. Statement.
10.17 Second Amendment to Employment Incorporated by reference
Agreement, dated as of April 1, to Exhibit 10.16 to the
1997, by and between the Company 1997 Form 10-K.
and Peter Bromberg.
10.18 Employment Agreement, dated as of Incorporated by reference
September 1, 1995, by and between to Exhibit 10.13 to the
the Company and Eli Markowitz. 1995 Registration
Statement.
10.19 Employment Agreement, dated as of Incorporated by reference
April 1, 1997, by and among MVR, to Exhibit 10.18 to the
Unijoh and Vincent Quek. 1997 Form 10-K.
10.20 Form of Consulting Agreement, dated Incorporated by reference
as of September 1, 1995, by and to Exhibit 10.14
between the Company and Selwyn Joffe. to the 1995 Registration
Statement.
-23-
Number Description of Exhibit Method of Filing
- ------ ---------------------- ----------------
10.21 Form of Employment Agreement, Incorporated by reference
dated as of October 1, 1997, by and to Exhibit 10.20 to the
between the Company and Karen Brenner. 1997 Registration
Statement.
10.22 Lease Agreement, dated March 28, Incorporated by reference
1995, by and between the Company to Exhibit 10.11 to the
and Equitable Life Assurance Company's Annual Report on
Society of the United States, Form 10-KSB for the fiscal
relating to the Company's facility year ended March 31, 1995.
located in Nashville, Tennessee.
10.23 Lease Agreement, dated September 19, Incorporated by reference
1995, by and between Golkar to Exhibit 10.18 to the
Enterprises, Ltd. and the Company 1995 Registration
relating to the Company's facility Statement.
located in Nashville, Tennessee.
10.24 Agreement and Plan of Reorganization, Incorporated by reference
dated as of April 1, 1997, by and to Exhibit 10.22 to the
among the Company, Mel Marks, 1997 Form 10-K.
Richard Marks and Vincent Quek
relating to the acquisition of MVR
and Unijoh.
10.25 Form of Indemnification Agreement Incorporated by reference
for officers and directors. to Exhibit 10.25 to the
1997 Registration
Statement.
21.1 List of Subsidiaries. Filed herewith.
23.1 Consent of Richard A. Eisner & Filed herewith.
Company, LLP.
27.1 Financial Data Schedule. Filed herewith.
B. REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by the Company during the fiscal
quarter ended March 31, 1998.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: June 29, 1998
MOTORCAR PARTS & ACCESSORIES, INC.
By: /s/ Mel Marks
------------------------------
Mel Marks,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Mel Marks Chairman of the Board and June 29, 1998
- ------------------------- Chief Executive Officer
Mel Marks (principal executive officer)
/s/ Richard Marks President, Chief Operating June 29, 1998
- ------------------------- Officer and Director
Richard Marks
/s/ Peter Bromberg Chief Financial Officer June 29, 1998
- ------------------------- (principal financial officer and
Peter Bromberg principal accounting officer)
/s/ Karen Brenner Director June 29, 1998
- -------------------------
Karen Brenner
Director June 29, 1998
- -------------------------
Selwyn Joffe
/s/ Mel Moskowitz Director June 29, 1998
- -------------------------
Mel Moskowitz
/s/ Murray Rosenzweig Director June 29, 1998
- -------------------------
Murray Rosenzweig
/s/ Gary Simon Director June 29, 1998
- -------------------------
Gary Simon
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
CONTENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report F-2
Consolidated balance sheets as of March 31, 1998 and March 31, 1997 F-3
Consolidated statements of income for the years ended March 31, 1998,
1997 and 1996 F-4
Consolidated statements of changes in shareholders' equity for the
years ended March 31, 1998, 1997 and 1996 F-5
Consolidated statements of cash flows for the years ended March 31,
1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Motorcar Parts & Accessories, Inc.
Torrance, California
We have audited the accompanying consolidated balance sheets of Motorcar Parts &
Accessories, Inc. and subsidiaries as of March 31, 1998 and 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the financial position of Motorcar Parts &
Accessories, Inc. and subsidiaries as of March 31, 1998 and 1997 and the results
of its operations and its cash flows for each of the years in the three-year
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
New York, New York
May 19, 1998
F-2
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31,
--------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,108 $ 3,539
Accounts receivable - net of allowance for doubtful
accounts of $250 and $200, respectively 29,591 22,328
Inventory 54,736 41,862
Prepaid expenses and other current assets 1,862 593
Deferred income tax asset -- 142
-------- --------
Total current assets 89,297 68,464
Long-term investments -- 1,874
Plant and equipment - net 7,141 4,291
Other assets 1,807 881
-------- --------
$ 98,245 $ 75,510
======== ========
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 395 $ 743
Accounts payable and accrued expenses 11,816 13,777
Income taxes payable 1,592 2,005
Deferred income tax liability 161 --
Due to affiliate -- 139
-------- --------
Total current liabilities 13,964 16,664
Long-term debt 13,983 17,496
Capitalized lease obligations - less current portion 602 343
Other liabilities 1,163 570
Deferred income tax liability 406 329
-------- --------
30,118 35,402
-------- --------
Commitments and other matters
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; 6,428,000 and 4,868,000 shares issued
and outstanding 64 49
Additional paid-in capital 50,927 28,973
Unearned portion of compensatory stock options (48) --
Accumulated foreign currency translation adjustment (57) --
Retained earnings 17,241 11,086
-------- --------
Total shareholders' equity 68,127 40,108
-------- --------
$ 98,245 $ 75,510
======== ========
See notes to financial statements
F-3
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
YEAR ENDED MARCH 31,
------------------------------
1998 1997 1996
-------- -------- --------
Income:
Net sales $112,952 $ 86,872 $ 64,358
-------- -------- --------
Operating expenses:
Cost of goods sold 91,317 69,255 50,965
Research and development 549 185 --
Selling expenses 2,417 2,305 1,984
General and administrative expenses 6,298 4,974 4,577
-------- -------- --------
Total operating expenses 100,581 76,719 57,526
-------- -------- --------
Operating income 12,371 10,153 6,832
Interest expense (net of interest income of $101, $218 and
$219 for 1998, 1997 and 1996, respectively) 1,577 1,090 833
-------- -------- --------
Income before income taxes 10,794 9,063 5,999
Provision for income taxes 4,192 3,529 2,353
-------- -------- --------
NET INCOME $ 6,602 $ 5,534 $ 3,646
======== ======== ========
BASIC INCOME PER SHARE $ 1.20 $ 1.14 $ .96
======== ======== ========
DILUTED INCOME PER SHARE $ 1.16 $ 1.11 $ .93
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
INCOME PER SHARE 5,521 4,859 3,812
Effect of potential common shares 172 148 127
-------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 5,693 5,007 3,939
INCOME PER SHARE ======== ======== ========
See notes to financial statements
F-4
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
UNEARNED ACCUMULATED
COMMON STOCK PORTION OF FOREIGN
------------------- ADDITIONAL COMPENSATORY CURRENCY
NUMBER OF PAID-IN STOCK TRANSLATION RETAINED
SHARES AMOUNT CAPITAL OPTIONS ADJUSTMENT EARNINGS TOTAL
-------- -------- -------- -------- -------- -------- --------
BALANCE - MARCH 31, 1995 3,208 $ 32 $ 8,078 -- -- $ 1,906 $ 10,016
Proceeds from exercise of warrants and options 112 1 867 -- -- -- 868
Proceeds from public offering (net of costs of
$ 1,874) 1,500 15 19,486 -- -- -- 19,501
Net income -- -- -- -- -- 3,646 3,646
-------- -------- -------- -------- --------
BALANCE - MARCH 31, 1996 4,820 48 28,431 -- -- 5,552 34,031
Proceeds from exercise of options 48 1 355 -- -- -- 356
Tax benefit from exercise of options -- -- 187 -- -- -- 187
Net income -- -- -- -- -- 5,534 5,534
-------- -------- -------- -------- --------
BALANCE - MARCH 31, 1997 4,868 49 28,973 -- -- 11,086 40,108
Issuance of shares for MVR and Unijoh 145 1 679 -- -- (447) 233
Proceeds from public offering (net of costs of
$ 1,806) 1,300 13 19,794 -- -- -- 19,807
Proceeds from exercise of warrants and options 115 1 910 -- -- -- 911
Tax benefit from exercise of stock options -- -- 381 -- -- -- 381
Compensatory stock options issued -- -- 190 $ (48) -- -- 142
Translation adjustment -- -- -- -- $ (57) -- (57)
Net income -- -- -- -- -- 6,602 6,602
-------- -------- -------- -------- -------- -------- --------
BALANCE - MARCH 31, 1998 6,428 $ 64 $ 50,927 $ (48) $ (57) $ 17,241 $ 68,127
======== ======== ======== ======== ======== ======== ========
See notes to financial statements
F-5
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,602 $ 5,534 $ 3,646
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 1,237 717 429
Noncash charge for compensatory stock options issued 142 -- --
Changes in:
Accounts receivable (7,263) (5,064) (6,589)
Inventory (12,850) (13,311) (16,434)
Prepaid expenses and other current assets (1,195) 44 (300)
Other assets (926) (732) (50)
Deferred income taxes 380 314 (82)
Accounts payable and accrued expenses (2,295) 5,134 3,094
Income taxes payable (32) 861 785
Due to affiliate 7 (45) 157
Other liabilities 577 570 --
-------- -------- --------
Net cash used in operating activities (15,616) (5,978) (15,344)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,241) (2,085) (657)
Change in investments 1,874 8,855 (10,113)
-------- -------- --------
Net cash (used in) provided by investing activities (1,367) 6,770 (10,770)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under line of credit (3,513) 2,955 5,552
Payments on capital lease obligation (774) (728) (254)
Proceeds from public offerings 19,807 -- 19,501
Proceeds from exercise of warrants and options 911 356 868
-------- -------- --------
Net cash provided by financing activities 16,431 2,583 25,667
-------- -------- --------
Effect of exchange rate change on cash (3) -- --
--------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (555) 3,375 (447)
Cash and cash equivalents - beginning of year 3,539 164 611
Beginning cash balance of pooled entity 124 -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,108 $ 3,539 $ 164
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,717 $ 1,262 $ 1,035
Income taxes 3,844 2,354 1,590
Noncash investing and financing activities:
Property acquired under capital lease 685 454 707
Property acquired included in accounts payable and accrued expense
at March 31, 1996 and financed through a capitalizable lease
during fiscal 1997 -- 212 212
See notes to financial statements
F-6
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Motorcar Parts & Accessories, Inc. and subsidiaries (the "Company"),
remanufactures and distributes alternators and starters and assembles and
distributes spark plug wire sets for the automotive after-market industry
(replacement parts sold for use on vehicles after initial purchase). These
automotive parts are sold to automotive retail chains and warehouse distributors
throughout the United States.
[1] PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries as of March
31, 1998 and for the year then ended. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
Company had no subsidiaries at March 31, 1997.
[2] CASH EQUIVALENTS:
The Company considers all highly liquid short-term investments
purchased with a maturity of three months or less to be cash
equivalents.
[3] INVESTMENTS:
The Company's marketable securities are classified as
available-for-sale and reported at fair value. Unrealized gains or
losses are classified as a separate component of shareholders'
equity.
[4] INVENTORY:
Inventory is stated at the lower of cost or market; cost is
determined by the average cost method.
[5] INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "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 bases 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.
[6] DEPRECIATION AND AMORTIZATION:
Property and equipment are depreciated on the straight-line method
over their estimated useful lives. Leasehold improvements are
amortized by the straight-line method over the shorter of their
estimated useful lives or the term of the lease.
F-7
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] FOREIGN CURRENCY TRANSLATION:
Results of the Company's foreign operations are translated using
average exchange rates during the period, while the related assets
and liabilities are translated at the exchange rate in effect at the
balance sheet date. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of
stockholders' equity.
[8] REVENUE RECOGNITION:
The Company recognizes sales when products are shipped. The Company
obtains used alternator and starter units, commonly known as cores,
from its customers as trade-ins and by purchasing them from vendors.
Cores are an essential material needed for remanufacturing
operations. During the year ended March 31, 1997, the Company
implemented a new accounting presentation with respect to its
reporting of sales. In the past, net sales were reduced by the core
inventory value to reflect deductions for cores returned for credit
from customers ("core trade-ins") and by the value of the credits
issued in excess of core inventory value ("product trade-ins"). As
reclassified, net sales are reduced by product trade-ins and other
deductions and allowances only and core trade-ins are included in
cost of goods sold. Net sales and cost of goods sold for the year
ended March 31, 1996 were reclassified to reflect this change.
Trade-ins are recorded upon receipt of cores from customers. Credits
for core and product trade-ins are allowed only against future
purchases of similar remanufactured products and are generally used
by the customer within sixty days of issuance. Accordingly, the
Company does not provide a reserve for trade-ins. In addition, since
it is remote that a customer will not utilize its trade-in credits,
the credit is recorded when the core is returned as opposed to when
the customer purchases new products. This policy is consistent
throughout the remanufacturing and rebuilding industry.
[9] EARNINGS PER SHARE:
The Company calculates its income per share under the provisions of
SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual
presentation of "basic" and "diluted" income per share on the face of
the statements of operations. Basic income per share is computed by
dividing the net income by the weighted average number of shares of
common stock outstanding during each 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.
F-8
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[10] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
[11] IMPAIRMENT OF LONG-LIVED ASSETS:
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" during
the year ended March 31, 1997. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain
identifiable assets, and goodwill related to those assets. There was
no effect of adoption of SFAS 121 on the financial statements.
[12] FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, investments,
accounts receivable, accounts payable, accrued expenses, other
liabilities, capitalized lease obligations and long-term debt
approximate their fair value.
Estimated fair value of these financial instruments, some of which
are for short durations, has been determined using available market
information. In evaluating the fair value information, considerable
judgment is required to interpret the market data used to develop the
estimates. The use of different market assumptions and/or different
valuation techniques may have a material effect on the estimated fair
value amounts. Accordingly, the estimates of fair value presented
herein may not be indicative of the amounts that could be realized in
a current market exchange.
[13] STOCK-BASED COMPENSATION:
The Financial Accounting Standards Board (the "FASB") has issued SFAS
No. 123, "Accounting for Stock-Based Compensation", which encourages,
but does not require, companies to record compensation cost for
stock-based employee compensation under a fair value based method.
The Company has elected to continue to account for its stock-based
employee compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees" and disclose the pro forma
effects on net income and earnings per share had the fair value of
such compensation been expensed. Under the provisions of APB No. 25,
compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's common stock at the
date of the grant over the amount an employee must pay to acquire the
stock.
F-9
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes 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 of a business enterprise during a period,
resulting from transactions and other events and circumstances from
nonowner sources. The Company is reviewing the impact of adopting
SFAS No. 130, which will be effective for the Company for the year
ending March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131
requires publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be
provided. SFAS No. 131 is effective for the Company for the year
ending March 31, 1999. The Company currently evaluates its operations
as one segment.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities," which requires costs of start-up
activities and organization costs to be expensed as incurred. The
Company believes that SOP 98-5 would not have a material effect on
its financial statements as of March 31, 1998. SOP 98-5 becomes
effective for the Company during the year ending March 31, 2000.
F-10
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE B - INVESTMENTS
The estimated fair value of available-for-sale investments at March 31, 1997 was
$1,874,000 and consisted of mortgage-backed securities and municipal bonds due
after one year.
The estimated fair value of each investment was approximately equal to the
amortized cost at March 31, 1997 and, therefore, there were no unrealized gains
or losses at that date. The Company did not hold any investments at March 31,
1998.
NOTE C - INVENTORY
Inventory is comprised of the following (in thousands):
MARCH 31,
---------------------------
1998 1997
------- -------
Raw material $28,609 $24,046
Work-in-process 7,066 4,270
Finished goods 19,061 13,546
------- -------
$54,736 $41,862
======= =======
NOTE D - PLANT AND EQUIPMENT
Plant and equipment, at cost, are summarized as follows (in thousands):
MARCH 31,
------------------------
1998 1997
-------- --------
Machinery and equipment $ 7,346 $ 4,362
Office equipment and fixtures 2,031 1,272
Leasehold improvements 1,211 472
-------- --------
10,588 6,106
Less accumulated depreciation and
amortization (3,447) (1,815)
-------- --------
$ 7,141 $ 4,291
======== ========
F-11
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE E - OBLIGATIONS UNDER CAPITAL LEASES
The Company has various capital leases for machinery and computer equipment. The
gross amount of such assets recorded under capital leases was $2,240,000 and
$2,338,000 at March 31, 1998 and 1997, respectively.
Future minimum lease payments at March 31, 1998 for the capitalized leases are
as follows (in thousands):
1999 $ 478
2000 233
2001 172
2002 172
2003 135
---------
1,190
Amount representing imputed interest 193
---------
Present value of future minimum lease payments 997
Less current maturities 395
---------
Long-term obligation at March 31, 1998 $ 602
=========
NOTE F - LONG-TERM DEBT
In November 1996, the Company amended its revolving line of credit agreement.
The agreement provides for a credit facility in an aggregate principal amount
not exceeding $25,000,000 and is collateralized by a lien on substantially all
of the assets of the Company. The agreement expires on June 1, 1998 and provides
for interest on borrowings at a fluctuating rate per annum .25% below the bank's
prime rate or at a fixed rate at 1.65% above LIBOR. The agreement allows the
Company to obtain from the bank letters of credit, and banker's acceptances in
an aggregate amount not exceeding $2,500,000 and requires the Company to
maintain certain financial ratios. As of March 31, 1998 balances due under this
agreement amounted to $13,983,000.
In August 1997, the Company further amended its revolving line of credit
agreement. The agreement provides for a credit facility in an aggregate
principal amount not exceeding $30,000,000 until December 31, 1997, reducing to
$25,000,000 on January 1, 1998, and is collateralized by a lien on substantially
all of the assets of the Company. The agreement expires on June 1, 1999 and
provides for interest on borrowings at a fluctuating rate per annum .25% below
the bank's prime rate or at a fixed rate at 1.25% above LIBOR, as further
amended in February 1998. The agreement also amends the requirements of certain
financial ratios.
F-12
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE G - RELATED PARTIES
In April 1997, MVR Products Co. PTE, Ltd. ("MVR") and Unijoh Sdn, Bhd ("Unijoh")
became wholly owned subsidiaries of the Company in a stock-for-stock merger
which has been accounted for in a manner similar to a pooling of interests.
Under the terms of the merger agreement, the Company issued 145,455 shares of
its common stock. The financial statements prior to the date of combination have
not been restated as the effect is not material to the Company's financial
condition and results of operations. The combined assets and combined
liabilities of MVR and Unijoh aggregated approximately $632,000 and $399,000,
respectively, at the date of combination.
Prior to the merger, the Company conducted business with MVR, which operates a
shipping warehouse and which conducts business with Unijoh. Unijoh operates a
remanufacturing facility similar to the Company. MVR's warehouse is located in
Singapore and Unijoh's factory is located in Malaysia. Two
shareholders/officers/directors of the Company owned 70% of both MVR and Unijoh,
with the remaining 30% owned by an unrelated third party. All of the cores
processed by Unijoh were produced for the Company on a contract remanufacturing
basis. The cores and other raw materials used in production by Unijoh were
supplied by the Company and were included in the Company's inventory. Inventory
owned by the Company and held by MVR and Unijoh was $762,000 at March 31, 1997.
The Company incurred costs of approximately $1,574,000 and $1,432,000 from the
affiliates for the years ended March 31, 1997 and 1996, respectively. The amount
reported as due to affiliate at March 31, 1997 was due to MVR.
NOTE H - EMPLOYMENT AGREEMENTS AND BONUS PLAN
The Company has employment agreements with eight officers, expiring at various
dates through September 1, 2000, which provide for annual base salaries
aggregating $1,473,000. In addition, six of the officers were granted options
pursuant to the Company's stock option plans for the purchase of 270,000 shares
of common stock (88,000, 92,000 and 90,000 granted in fiscal years 1998, 1997
and 1996, respectively). Of these options, 49,000, 25,000 and 10,000 were
exercised during the years ended March 31, 1998, 1997 and 1996, respectively.
The Company has established a bonus plan for the benefit of executives and
certain key employees. The bonus is calculated as a percentage of the base
salary ranging from 14% to 50%. The bonus percentage varies according to the
percentage increase in earnings before income taxes and other predetermined
parameters.
F-13
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE I - COMMITMENTS
The Company leases offices and warehouse facilities in New York, California and
Tennessee under operating leases expiring through 2002. The aggregate rentals
under these leases and leases which have been terminated was $1,175,000,
$819,000 and $609,000 for the years ended March 31, 1997, 1996 and 1995,
respectively. Certain leases contain escalation clauses for real estate taxes
and operating expenses.
Effective December 31, 1996, the Company amended a lease to acquire additional
space at one of its existing warehouse facilities.
The Company also leases office equipment and machinery under noncancellable
operating leases having remaining terms in excess of one year.
At March 31, 1998, the future minimum rental payments under the above operating
leases are as follows (in thousands):
REAL
TOTAL ESTATE MACHINERY
------------ --------------- ---------------
1999 $1,464 $1,339 $ 125
2000 1,393 1,321 72
2001 1,381 1,352 29
2002 1,364 1,348 16
2003 5 -- 5
------ ------ ------
$5,607 $5,360 $ 247
====== ====== ======
NOTE J - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
The Company partially protects itself from losses due to uncollectible accounts
receivable through the purchase of credit insurance. Accounts receivable
balances not covered by credit insurance are primarily due from leading
automotive parts retailers.
The Company's four largest customers accounted for the following percentage of
net sales:
YEAR ENDED MARCH 31,
----------------------------------
CUSTOMER 1998 1997 1996
-------- ---- ---- ----
A 17% 18% 21%
B 15 18 11
C 43 29 20
D 5 8 18
F-14
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE J - MAJOR CUSTOMERS AND CREDIT CONCENTRATION (CONTINUED)
Customer A accounted for approximately 17% and 13%, customer B accounted for
approximately 18% and 11% and customer C accounted for approximately 49% and 57%
of the accounts receivable at March 31, 1998 and 1997, respectively.
NOTE K - INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED MARCH 31,
---------------------------------------
1998 1997 1996
------- ------- -------
Current:
Federal $ 3,100 $ 2,750 $ 1,913
State 712 465 522
Deferred 380 314 (82)
------- ------- -------
$ 4,192 $ 3,529 $ 2,353
======= ======= =======
The difference between the tax provision and the amount that would be computed
by applying the statutory federal income tax rate to income before taxes is
attributable to the following (in thousands):
YEAR ENDED MARCH 31,
----------------------------------
1998 1997 1996
------- ------- -------
Income tax provision at 34% $ 3,628 $ 3,081 $ 2,040
State and local taxes, net of
federal benefit 469 307 345
Permanent differences 23 (20) 18
Other 72 161 (50)
------- ------- -------
$ 4,192 $ 3,529 $ 2,353
======= ======= =======
The deferred income tax asset of $142,000 at March 31, 1997 is comprised of
temporary differences in tax and financial reporting resulting primarily from
capitalization of certain inventory costs for tax purposes. Deferred tax
liabilities of $567,000 and $329,000 at March 31, 1998 and 1997, respectively,
are comprised of differences resulting from using accelerated depreciation rates
for tax purposes and from certain expenses for tax purposes which have been
capitalized in the Company's financial statements.
F-15
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE L - SHAREHOLDERS' EQUITY
[1] COMMON STOCK:
In November 1995, the Company effected a public offering of its
common stock. The Company issued 1,500,000 shares for $14.25 per
share, yielding net proceeds of $19,501,000 after underwriting
commissions and expenses totalling $1,874,000. In addition, two
principal shareholders sold an aggregate of 344,500 shares in
connection with this offering.
In November 1997, the Company effected a public offering of its
common stock. The Company issued 1,300,000 shares for $16.625 per
share, yielding net proceeds of $19,807,000 after underwriting
commissions and expenses totalling $1,806,000. In addition, two
principal stockholders sold an aggregate of 250,000 shares in
connection with this offering.
[2] PREFERRED STOCK:
In a Rights Agreement, dated as of February 24, 1998, between the
Company and Continental Stock Transfer & Trust Company, the Company
authorized 20,000 shares of Series A Junior Participating Preferred
Stock, par value $.01 per share. The Series A Junior Participating
Preferred Stock has preferential voting, dividend and liquidation
rights over the Common Stock.
On February 24, 1998, the Company declared a dividend distribution to
the holders of record at the close of business on March 12, 1998 of
one Right on each share of Common Stock. Each Right, when
exercisable, entitles the registered holder thereof to purchase from
the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock at a price of $65 per one
one-thousandth of a share (subject to adjustment).
The Rights will not be exercisable or transferable apart from the
Common Stock until an Acquiring Person, as defined in the Rights
Agreement, without the prior consent of the Company's Board of
Directors, acquires 20% or more of the outstanding shares of the
Common Stock or announces a tender offer that would result in 20%
ownership. The Company is entitled to redeem the Rights, at $.001 per
Right, any time until ten days after a 20% position has been
acquired. Under certain circumstances, including the acquisition of
20% of the Common Stock, each Right not owned by a potential
Acquiring Person will entitle its holder to receive, upon exercise,
shares of Common Stock having a value equal to twice the exercise
price of the Right.
Holders of a Right will be entitled to buy stock of an Acquiring
Person at a similar discount if, after the acquisition of 20% or more
of the Company's outstanding shares of Common Stock, the Company is
involved in a merger or other business combination transaction with
another person in which it is not the surviving company, its common
shares are changed or converted, or the Company sells 50% or more of
its assets or earning power to another person. The Rights expire on
March 12, 2008 unless earlier redeemed by the Company.
F-16
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE L - SHAREHOLDERS' EQUITY (CONTINUED)
[3] STOCK OPTION PLAN:
In January 1994, the shareholders approved the 1994 Stock Option Plan
(the "1994 Plan"), which was amended in October 1996, to provide for
the granting of options to purchase a total of 720,000 common shares
to key employees and directors. Options granted may be either
"incentive stock options" within the meaning of Section 422A of the
Internal Revenue Code or nonqualified options. The 1994 Plan is
administered by the Board of Directors, which determines the terms of
options exercised, including the exercise price, the number of shares
subject to the option and the terms and conditions of exercise.
In August 1995, the shareholders approved a Nonemployee Director
Stock Option Plan (the "Directors Plan") which provides for the
granting of options to purchase a total of 15,000 common shares to
directors. The Directors Plan is administered by the Board of
Directors.
In September 1997, the shareholders approved the 1996 Stock Option
Plan (the "1996 Plan") which provides for the granting of options to
purchase a total of 30,000 common shares to key employees,
consultants and directors. The 1996 Plan is administered by the Board
of Directors.
The following table summarizes the activity under these Plans (in
thousands, except for per share data):
YEAR ENDED MARCH 31,
---------------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Options outstanding at
beginning of year 489 $10.31 335 $ 9.23 250 $ 7.40
Granted 117 17.34 382 12.98 109 12.96
Exercised (101) 7.99 (48) 7.46 (23) 7.19
Cancelled -- -- (180) 14.69 (1) 8.13
----- ----- -----
Options outstanding at 505 12.40 489 10.31 335 9.23
end of year ===== ===== =====
Options exercisable at 383 11.95 290 9.34 278 8.83
end of year ===== ===== =====
F-17
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE L - SHAREHOLDERS' EQUITY (CONTINUED)
[3] STOCK OPTION PLAN: (CONTINUED)
The following table presents information relating to stock options
outstanding at March 31, 1998 (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE
EXERCISE PRICE SHARES PRICE LIFE IN YEARS SHARES PRICE
- --------------- ------ -------- ------------- ------ ---------
$ 6.00 - $ 8.13 96 $ 7.66 6 96 $ 7.66
$ 9.00 - $10.63 174 10.60 8 125 10.59
$11.88 - $13.44 58 12.48 8 37 12.75
$14.69 - $19.13 177 16.72 9 125 16.41
----- ------
505 12.40 8 383 11.95
===== ======
As of March 31, 1998, 66,000 options are available for future grant
under the 1994 Plan, 7,500 options are available for future grant
under the Directors Plan and 15,000 options are available for future
grant under the 1996 Plan.
The weighted-average fair value at date of grant for options granted
during the years ended March 31, 1998, 1997 and 1996 was $9.68, $5.50
and $5.63 per option, respectively. The fair value of options at date
of grant was estimated using the Black-Scholes option pricing model
utilizing the following assumptions:
MARCH 31,
------------------------------
1998 1997 1996
---- ---- ----
Risk-free interest rates 6.5% 5.8%-6.5% 6.1%-6.9%
Expected option life in years 5 5 5
Expected stock price volatility 55% 36% 38%
Expected dividend yield 0% 0% 0%
Had the Company elected to recognize compensation cost based on the
fair value of the options at the date of grant as prescribed by SFAS
123, net income for the years ended March 31, 1998, 1997 and 1996
would have been approximately $5,952,000, $5,180,000 and $3,425,000
or $1.04 per share, $1.03 per share and $.87 per share, respectively.
F-18
MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE L - SHAREHOLDERS' EQUITY (CONTINUED)
The effect of applying SFAS 123 for providing proforma disclosures
for each of the years in the three-year period ended March 31, 1998
is not likely to be representative of the effect on future years.
[4] WARRANTS:
In connection with the Company's initial public offering the Company
issued to the underwriter 105,000 warrants to purchase common stock
at an exercise price of $7.20 per share. In connection with a public
offering in November 1995, 90,000 warrants were exercised. 14,000
additional warrants were exercised during the year ended March 31,
1998.
F-19