EX-99.1 2 a2034947zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 Consolidated Financial Statements and Report of Independent Certified Public Accountants MOTORCAR PARTS & ACCESSORIES, INC. AND SUBSIDIARIES March 31, 2000 and 1999 C O N T E N T S
PAGE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..............................................................3 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS...............................................................................4 CONSOLIDATED STATEMENT OF OPERATIONS......................................................................6 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS........................................................................................7 CONSOLIDATED STATEMENT OF CASH FLOWS......................................................................8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................9
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Motorcar Parts & Accessories, Inc. We have audited the accompanying consolidated balance sheets of Motorcar Parts & Accessories, Inc. and Subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and comprehensive loss and cash flows for the year ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 financial statements referred to above presents fairly, in all material respects, the consolidated financial position of Motorcar Parts & Accessories, Inc. and Subsidiaries as of March 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for the year ended March 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note E, the Company changed its method of accounting for inventory. /s/ Grant Thornton LLP November 29, 2000 Los Angeles, California 3 Motorcar Parts & Accessories, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, 2000 and 1999
ASSETS 2000 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,123,000 $ 945,000 Short term investments - Deferred compensation plan assets 224,000 970,000 Accounts receivable, net of allowances of $6,717,000 and $17,180,000 in 2000 and 1999, respectively 15,263,000 11,620,000 Inventory, net of allowances of $5,256,000 and $17,064,000 in 2000 and 1999, respectively 36,246,000 68,337,000 Income tax refund receivable 1,173,000 1,990,000 Prepaid expenses and other current assets 313,000 450,000 ------------ ------------ Total current assets 54,342,000 84,312,000 PLANT AND EQUIPMENT, net 11,375,000 12,435,000 DEFERRED TAX ASSET 3,250,000 3,250,000 INCOME TAX REFUND RECEIVABLE 2,486,000 2,437,000 OTHER ASSETS 348,000 1,005,000 ------------ ------------ $ 71,801,000 $103,439,000 ============ ============
The accompanying notes are an integral part of these statements. 4 Motorcar Parts & Accessories, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS - CONTINUED March 31, 2000 and 1999
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 ------------- ------------- CURRENT LIABILITIES: Accounts payable $ 9,502,000 $ 18,245,000 Accrued liabilities 3,843,000 4,694,000 Line of credit 36,661,000 29,223,000 Deferred compensation 234,000 1,077,000 Current portion of capital lease obligations 1,106,000 1,012,000 ------------- ------------- Total current liabilities 51,346,000 54,251,000 CAPITAL LEASE OBLIGATIONS, less current portion 3,062,000 3,528,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued -- -- Series A Junior Participating Preferred Stock; no par value, 20,000 shares authorized; none issued -- -- Common Stock; par value $.01 per share, 20,000,000 shares authorized; 6,460,455 shares issued and outstanding 65,000 65,000 Additional paid-in capital 51,281,000 51,281,000 Accumulated other comprehensive loss (95,000) (72,000) Accumulated deficit (33,858,000) (5,614,000) ------------- ------------- Total shareholders' equity 17,393,000 45,660,000 ------------- ------------- $ 71,801,000 $ 103,439,000 ============= =============
The accompanying notes are an integral part of these statements. 5 Motorcar Parts & Accessories, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF OPERATIONS For the year ended March 31, 2000 NET SALES $ 194,293,000 COST OF GOODS SOLD 188,097,000 ------------- Gross margin 6,196,000 ------------- OPERATING EXPENSES General and administrative 11,832,000 Sales and marketing 1,864,000 Research and development 714,000 Provision for doubtful accounts 321,000 ------------- Total operating expenses 14,731,000 ------------- OPERATING LOSS (8,535,000) OTHER EXPENSE (INCOME) Interest expense 3,227,000 Interest income (47,000) ------------- LOSS BEFORE INCOME TAX BENEFIT AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (11,715,000) Income tax benefit 1,173,000 ------------- LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (10,542,000) Cumulative effect of accounting change (17,702,000) ------------- NET LOSS $ (28,244,000) ============= Basic and diluted loss per share before cumulative effect of accounting change $ (1.63) Cumulative effect of accounting change (2.74) ------------- Basic and diluted loss per share $ (4.37) ============= Weighted average common shares outstanding 6,460,455 =============
The accompanying notes are an integral part of this statement. 6 Motorcar Parts & Accessories, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS For the Year Ended March 31, 2000
COMMON STOCK --------------------------- ACCUMULATED ADDITIONAL OTHER NUMBER PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE OF SHARES AMOUNT CAPITAL LOSS DEFICIT TOTAL LOSS ------------- ------------ ------------- ---------------- ------------- ------------ ---------------- BALANCE - MARCH 31, 1999 6,460,455 $65,000 $51,281,000 $ (72,000) $ (5,614,000) $45,660,000 Translation adjustment - - - 2,000 - 2,000 $2,000 Unrealized loss on investments - - - (25,000) - (25,000) (25,000) Net loss - - - - (28,244,000) (28,244,000) (28,244,000) ---------------- Comprehensive loss - - - - - - $(28,267,000) ------------- ------------ ------------- ---------------- ------------- ------------ ================ BALANCE - MARCH 31, 2000 6,460,455 $65,000 $51,281,000 $(95,000) $(33,858,000) $(17,393,000) ============= ============ ============= ================ ============= ============
The accompanying notes are an integral part of this statement. 7 Motorcar Parts & Accessories, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended March 31, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(28,244,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,011,000 Provision for doubtful accounts 321,000 Cumulative effect of accounting change 17,702,000 Changes in: Accounts receivable (3,964,000) Inventory 14,389,000 Income tax refund receivable 768,000 Prepaid expenses and other current assets 137,000 Other assets 657,000 Accounts payable (8,743,000) Accrued liabilities (851,000) Deferred compensation obligation (843,000) ------------ Net cash used in operating activities (5,660,000) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of plant and equipment (1,184,000) Liquidation of investments 721,000 ------------ Net cash used by investing activities (463,000) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under the line of credit 7,438,000 Payments on capital lease obligations (1,139,000) ------------ Net cash provided by financing activities 6,299,000 ------------ EFFECT OF TRANSLATION ADJUSTMENT ON CASH 2,000 ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS: 178,000 Cash and cash equivalents, beginning of year 945,000 ------------ Cash and cash equivalents, end of year $ 1,123,000 ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 3,081,000 ============ Income taxes $ 500 ============ Non-cash investing and financing activities: Property acquired under capital lease $ 767,000 ============
The accompanying notes are an integral part of this statement. 8 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 and 1999 NOTE A - COMPANY BACKGROUND Motorcar Parts & Accessories, Inc. and its Subsidiaries (the "Company") remanufactures and distributes alternators and starters and assembles and distributes spark plug wire sets for the automotive aftermarket 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. The Company obtains used alternators and starters, commonly known as cores, primarily from its customers (retailers) as trade-ins and by purchasing them from vendors (core brokers). The retailers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the retailer upon return to the Company. These cores are an essential material needed for the remanufacturing operations. The Company has remanufacturing operations for alternators and starters in United States, Singapore and Malaysia. Assembly operations for spark plug wire kits are performed in Tennessee. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Motorcar Parts & Accessories, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 2. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 3. INVENTORY Inventory is stated at the lower of cost or market. Cost is determined using the average cost method, which approximates the first-in, first-out (FIFO) method. Beginning with the year ended March 31, 2000, market is determined by comparison to broker price lists. See Note E regarding the method used in previous years. The Company provides an allowance for potentially excess and obsolete inventory based upon historical usage and a product's life cycle. Inventory costs include material and core components, labor, freight and overhead. 9 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 4. 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 statement. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided against deferred tax assets when their estimated realization is uncertain. 5. DEPRECIATION AND AMORTIZATION Plant and equipment are stated at cost, less accumulated depreciation and amortization. The cost of additions, improvements, and interest on construction are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation and amortization are provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, which range from three to ten years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Accelerated depreciation methods are used for tax purposes. 6. FOREIGN CURRENCY TRANSLATION For financial reporting purposes, the functional currency of the foreign subsidiaries is the local currency. The assets and liabilities of foreign operations are translated at the exchange rate in effect at the balance sheet date. The accumulated foreign currency translation adjustment is presented as a component of other comprehensive income or loss. 7. REVENUE RECOGNITION The Company recognizes revenue when performance by the Company is complete. For products shipped free-on-board ("FOB") shipping point, revenue is recognized on the date of shipment. For products shipped FOB destination, revenues are recognized two days after date of shipment. Revenue is recognized for the "unit value", representing the remanufacturing value-added portion, plus the "core value", representing the assigned value of the core. 10 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7. REVENUE RECOGNITION - Continued Trade-ins are recorded in inventory and a credit is issued upon receipt of cores from customers. An allowance for trade-ins authorized but not received is recorded as a reduction of the receivable balance at the balance sheet date. Under the Company's new method of accounting for inventory, the difference in the amount of credit provided to the customer and the value of the returned core is charged to cost of goods sold. There was no difference between the customer credit and core value under the previous method (See Note E). 8. EARNINGS PER SHARE Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversation of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock. Diluted loss per share for year ended March 31, 2000 does not include the effect of 684,750 options outstanding at March 31, 2000 as they were anti-dilutive. 9. 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 statement. Actual results could differ from those estimates. 10. FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities and debt approximate their fair value due to the short-term nature of these instruments. The carrying amounts of long-term receivables, capital lease obligations and other long-term liabilities approximate their fair value based on current rates for instruments with similar characteristics. 11 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 11. STOCK-BASED COMPENSATION The Company has elected to continue to account for its stock-based employee compensation using the intrinsic value method and to disclose the pro forma effects on net income and earnings per share had the fair value of such compensation been expensed. Under the intrinsic value method, 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. Stock-based compensation cost has not been significant. 12. CREDIT RISK Substantially all of the Company's sales are to leading national automotive parts retailers. Credit risk with respect to trade accounts receivable is limited due to the Company's credit evaluation process and the nature of its customers. 13. DEFERRED COMPENSATION PLAN The Company has a deferred compensation plan for certain management. The plan allows participants to defer salary, bonuses and commission. The assets of the plan are held in a trust and are subject to the claims of the Company's general creditors under federal and state laws in the event of insolvency. Consequently, the trust qualifies as a Rabbi trust for income tax purposes. The plan's assets consist primarily of mutual funds. The investments are classified as "available for sale" and are recorded at market value with any unrealized gain or loss recorded as a component of shareholders' equity. Adjustments to the deferred compensation obligation are recorded in operating expenses. 14. COMPREHENSIVE INCOME - ADOPTION The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which 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 during a period, resulting from transactions and other events and circumstances from non-owner sources. The Company has presented comprehensive loss on the Consolidated Statement of Shareholders' Equity. 12 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 15. RECLASSIFICATION Certain reclassifications have been made to the 2000 balance sheet to conform with the 1999 presentation. NOTE C - REALIZATION OF ASSETS The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has incurred a significant loss during the year ended March 31, 2000, and has significant pending litigation and investigations (see Note O). Recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is dependent upon continued operations of the Company. This in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future operations. Management has taken steps to revise its operations and financial requirements, which it believes are sufficient to provide the Company with the ability to continue in existence, maintain its financing and return to profitability. These plans include the consolidation of operations, reduction of costs and restructuring its financing. Management also plans to terminate unprofitable product lines. Management believes that these changes will allow the Company to reduce its inventory levels, reduce manufacturing labor and overhead costs and eliminate low margin products. Management is actively pursuing resolution of the pending litigation and investigations. Although there can be no assurance as to the financial impact from these matters, management believes that it will be able to conclude these matters in a reasonable period. 13 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE D - ACCOUNTS RECEIVABLE Accounts receivable consists of:
March 31, ---------------------------- 2000 1999 ------------ ------------ Gross trade receivables $ 21,980,000 $ 28,800,000 Less Unprocessed credits for core returns (5,205,000) (15,017,000) Allowance for discounts (1,329,000) (1,932,000) Allowance for doubtful accounts (183,000) (231,000) ------------ ------------ $ 15,263,000 $ 11,620,000 ============ ============
NOTE E - INVENTORY AND CHANGE IN ACCOUNTING POLICY For the year ended March 31, 2000, management adopted a new methodology for accounting for inventory. Management believes that the new methodology better reflects the economics of its business while providing a better measurement under generally accepted accounting principles. Under the Company's new accounting methodology, in recording core inventory at the lower of cost or market, the Company determines the market value based on comparisons to current core broker prices. Such values are normally less than the core value credited to customers' accounts when cores are returned to the Company as trade-ins. In prior years when the Company valued its inventory at the lower of cost or market, cost was determined using an average weighted cost method and the market value of cores was determined by the weighted average of the repurchase price of cores acquired from the Company's customers and the price of cores purchased from core brokers. Additionally, management reviews core inventory to identify excess quantities and maturing product lines. An allowance for obsolescence is provided to reduce the carrying (market) value of inventory to its estimated market value. As a result of these changes, the Company recorded a cumulative effect of accounting change of approximately $17 million. The cumulative effect of the accounting change is summarized as follows:
Previous New Method Method Change ------------ ------------ ------------ Core inventory cost $ 51,480,000 $ 30,973,000 $ 20,507,000 Overhead application 5,196,000 3,461,000 1,735,000 Inventory allowances (12,968,000) (8,428,000) (4,540,000) ------------ ------------ ------------ $ 43,708,000 $ 26,006,000 $ 17,702,000 ============ ============ ============
14 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE E - INVENTORY AND CHANGE IN ACCOUNTING POLICY - Continued The adjustments to inventory at March 31, 2000 are summarized below: Cumulative effect of accounting change $17,702,000 Effect of accounting change on results of operations for the year ended March 31, 2000 1,050,000 Decrease to inventory balances at March 31, 1999, primarily attributable to increases in allowances 12,300,000 -------------- $31,052,000 ==============
The pro forma effect of the change in accounting on the prior year has not been presented as all adjustments to the Statement of Operations for the year ended March 31, 1999 have not yet been determined. Inventory is comprised of the following:
March 31, ---------------------------- 2000 1999 ------------ ------------ Raw materials and cores $ 24,393,000 $ 54,587,000 Work-in-process 1,758,000 2,693,000 Finished goods 15,351,000 28,121,000 ------------ ------------ 41,502,000 85,401,000 Less-allowance for excess and obsolete inventory (5,256,000) (17,064,000) ------------ ------------ $ 36,246,000 $ 68,337,000 ============ ============
15 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE F - PLANT AND EQUIPMENT Plant and equipment, at cost, are summarized as follows:
March 31, ---------------------------- 2000 1999 ------------ ------------ Machinery and equipment $ 11,959,000 $ 11,602,000 Office equipment and fixtures 4,452,000 3,286,000 Leasehold improvements 2,373,000 2,059,000 ------------ ------------ 18,784,000 16,947,000 Less-accumulated depreciation and amortization (7,409,000) (4,512,000) ------------ ------------ $ 11,375,000 $ 12,435,000 ============ ============
NOTE G - CAPITAL LEASE OBLIGATIONS The Company leases various machinery and computer equipment under agreements accounted for as capital leases. The cost and accumulated amortization of capital lease assets included in plant and equipment was $5,744,000 and $1,731,000, respectively, at March 31, 2000 and $4,977,000 and $650,000, respectively, at March 31, 1999. Future minimum lease payments at March 31, 2000 for the capital leases are as follows:
YEAR ENDING MARCH 31, --------------------- 2001 $ 1,381,000 2002 1,381,000 2003 1,318,000 2004 693,000 2005 16,000 ----------- Total minimum lease payments 4,789,000 Less amount representing interest (621,000) ----------- Present value of future minimum lease payments 4,168,000 Less current maturities (1,106,000) ----------- $3,062,000 ===========
16 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE H - LINE OF CREDIT Pursuant to an agreement dated August 1, 1998, as amended on April 15, 1999 and restated on April 20, 2000, the Company has a revolving line of credit with a bank for a credit facility in an aggregate principal amount not exceeding $38 million up to June 30, 2000. The maximum credit facility is reduced to $37.25 million from July 1, 2000 to September 30, 2000, $36.25 million from October 1, 2000 to December 31, 2000, $35 million from January 1, 2001 to March 31, 2001 and $34 million from April 1, 2001 to April 30, 2001. Additional permanent reductions shall be made for 100 percent of the net proceeds from (i) the sale of assets outside the ordinary course of business, (ii) the issuance of any debt or equity issued by the Company, (iii) any insurance payments received (exclusive of Director's and officers' insurance in connection with that certain litigation pending against the Company identified as JOSEPH L. SHALANT, IRA ON BEHALF OF HIMSELF AND OTHERS SIMILARLY SITUATED, PLAINTIFF VS. MOTORCAR PARTS AND ACCESSORIES, INC. ET AL, DEFENDANTS (SEE NOTE N)), and (iv) all local, state or federal tax refunds received. The agreement is collateralized by a lien on substantially all of the Company's assets. The agreement expires on April 30, 2001 and provides for interest on borrowings at the bank's prime rate (9% at March 31, 2000) plus 1%. An annual commitment fee of .5% is due monthly on the unused portion of the line of credit. The agreement allows the Company to obtain from the bank letters of credit and banker's acceptances in an aggregate amount not exceeding $1,000,000. In connection with the restated credit agreement, the Company granted to the bank warrants to purchase 400,000 shares of the Company's common stock at $2.045 per share, subject to adjustment as defined in the warrant agreement. The credit agreement requires the Company to meet certain financial conditions, including maintenance of certain minimum tangible net worth, cash flow and profitability measures. In addition, the Company is required to comply with various non-financial covenants. The Company was not in compliance with various financial and non-financial covenants at March 31, 2000. Subsequent to year end, the Company and the bank executed an amendment that, among other things, waived the events of default, amended certain covenants, provided for scheduled monthly mandatory reductions in the maximum principal amount under the line of credit to $33 million by March 31, 2001, and extended the due date for submission of audited annual financial statements covering the period through March 31, 2000. The Company has agreed to provide the bank by December 15, 2000 with a letter of intent by a third party lender for refinancing the loan. 17 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE I - ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss consists of the following components:
March 31, -------------------- 2000 1999 -------- -------- Foreign currency translation $(70,000) $(72,000) Unrealized losses on investments (25,000) -- -------- -------- $(95,000) $(72,000) ======== ========
NOTE J - EMPLOYMENT AGREEMENTS AND BONUS PLAN The Company has employment agreements with key employees, expiring at various dates through January 1, 2004. The employment agreements provide for annual base salaries aggregating $850,000 and bonuses based upon earnings. In addition, some of these employees were granted options pursuant to the Company's stock option plans for the purchase of 130,000 shares of common stock at exercise prices ranging from $2.50 to $18.50 per share. One such employment agreement provides for the employee to receive an amount equal to three times the annual base salary of $300,000 if the employee voluntarily terminates the agreement for good reason. Good reason is defined by the occurrence of any one of a number of circumstances after a change in control of the Company. 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. No accrual for bonuses was recorded at March 31, 2000 or 1999. NOTE K - COMMITMENTS The Company leases office and warehouse facilities in California and Tennessee under operating leases expiring through 2002. Certain leases contain escalation clauses for real estate taxes and operating expenses. 18 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE K - COMMITMENTS - Continued At March 31, 2000, the future minimum rental payments under the above operating leases are as follows:
Year ending March 31, ----------------------------------------- 2001 $1,688,000 2002 1,622,000 ----------- $3,310,000 ===========
Rent expense for operating leases was $1,539,000 for the year ended March 31, 2000. NOTE L - MAJOR CUSTOMERS The Company's three largest customers accounted for the following percentages of accounts receivable at:
March 31, ---------------------------------------------- Customer 2000 1999 ------------------------------------------ -------------------- --------------------- A 36% 45% B 24% 26% C 16% 4% -------------------- --------------------- 76% 75% -------------------- ---------------------
Customer A accounted for approximately 52%, Customer B accounted for approximately 17%, and Customer C accounted for approximately 8% of net sales for the year ended March 31, 2000. 19 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE M - INCOME TAXES Deferred income taxes consist of the following at:
March 31, ---------------------------- 2000 1999 ------------ ------------ Assets Net operating loss carryforwards $ 3,513,000 $ 2,470,000 Inventory 14,106,000 4,122,000 Allowance for bad debts 634,000 468,000 Inventory capitalization 195,000 238,000 Vacation pay 180,000 120,000 Accrued professional fees 241,000 241,000 Other 28,000 348,000 ------------ ------------ $ 18,897,000 $ 8,007,000 Liabilities State taxes (1,085,000) (423,000) Accelerated depreciation (1,033,000) (1,131,000) ------------ ------------ Net deferred tax asset 16,779,000 6,453,000 Less - valuation allowance (13,529,000) (3,203,000) ------------ ------------ $ 3,250,000 $ 3,250,000 ============ ============
The benefit for income taxes for the year ended March 31, 2000 consists of the following: Current: Federal $1,173,000 State - Deferred - ------------ $1,173,000 ============
The difference between the tax benefit and the amount that would be computed by applying the statutory federal income tax rate to income before taxes for the year ended March 31, 2000 is attributable to the following: Income tax benefit at 34% $ 10,002,000 State and local tax benefit, net of federal benefit 1,471,000 Valuation allowance (10,326,000) Other 26,000 ------------ $1,173,000 ============
20 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE M - INCOME TAXES - Continued The long-term income tax refund receivable relates to the carryback of tax losses to prior years. The tax returns for these prior years are currently under examination by Internal Revenue Service (IRS). The Company has classified a portion of the receivable as non-current, as there is some uncertainty as to when the IRS will complete its examination for certain years. At March 31, 2000, the Company has federal and state net operating loss carryforwards of approximately $13,918,000 and $10,880,000, respectively, which expire in varying amounts through 2020. NOTE N - STOCKHOLDERS' EQUITY SERIES A JUNIOR PARTICIPATING PREFERRED STOCK In a Rights Agreement dated February 24, 1998, between the Company and Continental Stock Transfer & Trust, the Company authorized 20,000 shares of Series A Junior Participating Preferred Stock. 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 now 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. 21 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE N - STOCKHOLDERS' EQUITY - Continued 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. STOCK OPTIONS In January 1994, the Company adopted the 1994 Stock Option Plan (the "1994 Plan"), under which it was authorized to issue non-qualified stock options and incentive stock options to key employees, directors and consultants to purchase up to an aggregate of 720,000 shares of the Company's common stock. The term and vesting period of options granted is determined by a committee of the Board of Directors with a term not to exceed ten years. In June 1998, the Plan was amended to increase the authorized number of shares issued to 960,000. As of March 31, 2000, there were 662,250 options outstanding under this plan and 73,250 options were available for grant. In August 1995, the Company adopted the Nonemployee Director Stock Option Plan (the "Directors Plan") which provides for the granting of options to directors to purchase a total of 15,000 shares of the Company's common stock. Options to purchase 7,500 shares have been granted under the Directors Plan as of March 31, 2000. In September 1997, the Company adopted the 1996 Stock Option Plan (the "1996 Plan"), under which it is authorized to issue non-qualified stock options and incentive stock options to key employees, consultants and directors to purchase a total of 30,000 shares of the company's common stock. The term and vesting period of options granted is determined by a committee of the Board of Directors with a term not to exceed ten years. Options to purchase 15,000 shares have been granted under the 1996 Plan as of March 31, 2000. 22 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE N - STOCKHOLDERS' EQUITY - Continued The following table summarizes information about the options outstanding at March 31, 2000:
Options Outstanding Options Exercisable ---------------------------------------------- --------------------------------- Weighted Average Weighted ----------------------------- Average Range of Exercise Remaining Exercise Exercise Prices Shares Price Life in years Shares Price --------------------- ------------- ----------- -------------- ------------- ---------------- $ 2.50 to $ 2.88 175,000 $ 2.61 6 years 112,500 $ 2.67 $ 6.00 to $ 9.00 67,600 $ 7.89 4 years 67,600 $ 7.89 $10.63 to $15.63 371,400 $11.75 6 years 336,234 $11.76 $17.32 to $19.13 70,750 $18.28 8 years 70,750 $18.28 ------------- ------------- 684,750 $ 9.71 587,084 $10.36 ============= =============
The following table summarizes the activity under these Plans for the year ended March 31, 2000:
Weighted Average Shares Exercise Price ----------------- ----------------------- Options outstanding at beginning of year 587,750 $12.16 Granted 185,500 3.13 Exercised - - Cancelled (88,500) 12.18 ----------------- Options outstanding at end of year 684,750 $ 9.71 ================= Options exercisable at end of year 587,084 $10.36 =================
As of March 31, 2000, there were 73,250 options available for future grant under the 1994 Plan, 7,500 options available for future grant under the Directors Plan, and 15,000 options available for future grant under the 1996 Plan. 23 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE N - STOCKHOLDERS' EQUITY - Continued The weighted-average fair value at date of grant for options granted during the year ended March 31, 2000 was $1.16 per option. The fair value of options at date of grant was estimated using the Black-Scholes option pricing model utilizing the following assumptions: Expected option life in years 5 years Risk-free interest rate 6.0 percent Expected stock price volatility 35 percent Expected dividend yield - Had the Company elected to recognize compensation cost based on the fair value of the options at the date of grant (See Note B11), net loss for the year ended March 31, 2000 would have increased by approximately $460,000 to $28,704,000, or $4.44 per share. Proforma disclosures for the year ended March 31, 2000 is not likely to be representative of the effect on future years. NOTE O - LITIGATION The Company is a defendant in a class action lawsuit pending in the United States District Court, Central District of California, Western Division. The complaint alleges that the Company misstated its earnings in violation of securities laws over a three-year period and seeks damages on behalf of all persons who purchased the Company's common stock from August 1, 1996 to July 30, 1999. The Company's answer to the complaint has not yet been served. A settlement conference is scheduled for November 30, 2000. The outcome of this lawsuit cannot presently be determined. The Company's insurance carrier has filed a claim against the Company and certain officers concerning the coverage under its Directors and Officers (D&O) liability policy. The claim purports to invalidate coverage for claims made against the Company's officers in the securities fraud matter described above. On or about July 17, 2000, the parties entered into a stipulation and order to stay the action for four months to allow the Company time to resolve the securities action. The Company's deadline for responding to the claim is November 17, 2000. Based on the opinion of legal counsel, management believes that the Company and the officers are covered under the Company's D&O policy. The outcome of this matter cannot presently be determined. 24 Motorcar Parts & Accessories, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 2000 and 1999 NOTE O - LITIGATION - Continued The Company is subject to an investigation by the Securities and Exchange Commission (SEC) relating to the same issues involved in the above-mentioned lawsuit. Management is cooperating with these investigations. The outcome of these investigations cannot presently be determined. The Company is subject to various other lawsuits and claims in the normal course of business. Management does not believe that the outcome of these matters will have a material adverse effect on its financial position or future results of operations. 25