Motorcar Parts of America, Inc. (MPAA, NASDAQ)
Industry: Auto Parts
Annual report, fiscal year 2014


# MOTORCAR PARTS AMERICA INC

FORM 10-K
(Annual Report)

## Filed 06/16/14 for the Period Ending 03/31/14

Address 2929 CALIFORNIA STREET

TORRANCE, CA 90503

Telephone 3109724015

CIK 0000918251

Symbol MPAA

SIC Code 3714 - Motor Vehicle Parts and Accessories

Industry Auto & Truck Parts

Sector Consumer Cyclical

Fiscal Year 12/31



# UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2014

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 001-33861

## MOTORCAR PARTS OF AMERICA, INC.

(Exact name of registrant as specified in its charter)

<table><tr><td>New York</td><td>11-2153962</td></tr><tr><td>(State or other jurisdiction of incorporation or organization)</td><td>(I.R.S. Employer Identification No.)</td></tr><tr><td>2929 California Street, Torrance, California</td><td>90503</td></tr><tr><td>(Address of principal executive offices)</td><td>Zip Code</td></tr></table>

Registrant’s telephone number, including area code: (310) 212-7910

Securities registered pursuant to Section 12(b) of the Act: common stock, $0.01 par value per share

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☑

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ 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. □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☑

Non-accelerated filer ☐
(Do not check if a smaller reporting company)

Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

As of September 30, 2013, which was the last business day of the registrant’s most recently completed fiscal second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $175,620,783 based on the closing sale price as reported on the NASDAQ Global Market.



There were 15,082,645 shares of common stock outstanding as of June 9, 2014.

## DOCUMENTS INCORPORATED BY REFERENCE:

In accordance with General Instruction G(3) of Form 10-K, the information required by Part III hereof will either be incorporated into this Form 10-K by reference to the registrant’s Definitive Proxy Statement for the registrant’s next Annual Meeting of Stockholders filed within 120 days of March 31, 2014 or will be included in an amendment to this Form 10-K filed within 120 days of March 31, 2014.



## TABLE OF CONTENTS

PART I
Item 1. Business 4
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Mine Safety Disclosures 14

PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
Item 9A. Controls and Procedures 37
Item 9B. Other Information 39

PART III
Item 10. Directors, Executive Officers and Corporate Governance 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 40
Item 13. Certain Relationships and Related Transactions and Director Independence 40
Item 14. Principal Accounting Fees and Services 40

PART IV
Item 15. Exhibits, Financial Statement Schedules 41

SIGNATURES 50



# MOTORCAR PARTS OF AMERICA, INC.

## GLOSSARY

The following terms are frequently used in the text of this report and have the meanings indicated below.

“Used Core” — An automobile part which has been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores cannot be obtained from our customers, we will purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are part of our raw material or work in process inventory included in long-term core inventory.

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores are included in our on-hand finished goods inventory and in the remanufactured finished good product held for sale at customer locations. Used Cores returned by consumers to our customers but not yet returned to us continue to be classified as Remanufactured Cores until we physically receive these Used Cores. All Remanufactured Cores are included in our long-term core inventory or in our long-term core inventory deposit.



# MOTORCAR PARTS OF AMERICA, INC.

Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “the Company,” “we,” “us,” “MPA,” and “our” refer to Motorcar Parts of America, Inc. and its subsidiaries. This Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from the results discussed in any forward-looking statements. Discussions containing such forward-looking statements may be found in the material set forth under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as within this Form 10-K generally.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available free of charge to the public over the Internet at the SEC’s website at www.sec.gov. Our SEC filings are also available free of charge on our website www.motorcarparts.com. You may also read and copy any document we file with the SEC at its Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information on the operation of the Public Reference Room.

## PART I

## Item 1. Business

## General

We are a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. We sell our products predominantly in North America to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their warranty replacement programs (“OES”).

The current population of vehicles in the U.S. is approximately 246 million and the average age of these vehicles is approximately 11 years. We believe the market for replacement parts is primarily driven by the age of vehicles and the miles driven. While an aged vehicle population is favorable today, miles driven continues to fluctuate primarily based on fuel prices. We believe demand and replacement rates for aftermarket automotive parts generally increase with the age of vehicles and increases in miles driven.

The aftermarket for automobile parts is divided into two markets. The first market is the do-it-yourself (“DIY”) market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second market is the professional installer market, commonly known as the do-it-for-me (“DIFM”) market. This market is serviced by the traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. Generally, the consumer in this channel is a professional parts installer. Our products are distributed to both the DIY and DIFM markets.

While both markets continue to grow and we continue to grow in both markets, we have distribution channels with all of the major retailers and have grown share with them. In particular as we introduce our new products we are leveraging our existing distribution channels. The DIFM market is growing faster and is an attractive opportunity for growth. We are positioned to benefit from this market opportunity in three ways: (i) our auto parts retail customers are expanding their efforts to target the DIFM market, (ii) we sell our products under private label and our own brand names directly to suppliers that focus on professional installers, and (iii) we sell our products to original equipment manufacturers for distribution to the professional installer both for warranty replacement and their general aftermarket channels. We have been successful in growing sales to this market.

We have two operating segments: (i) wheel hub assemblies and bearings and (ii) rotating electrical products which consist of alternators and starters. In accordance with the authoritative accounting guidance for segment reporting, we have determined that these operating segments meet the criteria for aggregation and accordingly we have one reportable segment for purposes of recording and reporting our financial results.



## Discontinued Operation and Deconsolidation of Fenco

In May 2011, we purchased (i) all of the outstanding equity of Fenwick Automotive Products Limited (“FAPL”), (ii) all of the outstanding equity of Introcan, Inc., a Delaware corporation (“Introcan”), and (iii) 1% of the outstanding equity of Fapco S.A. de C.V., a Mexican variable capital company (“Fapco”) (collectively, “Fenco” and also referred to herein as the “discontinued subsidiary”). Since FAPL owned 99% of Fapco prior to these acquisitions, we owned 100% of Fapco.

Between May 2011 and its bankruptcy in June 2013, Fenco had been attempting to turn around its business. However, revenues generated by its undercar product line segment were not sufficient to enable Fenco to meet its operating expenses and otherwise implement its undercar product line turnaround plan. Fenco had recurring operating losses since the date of acquisition and had a working capital and equity deficiency.

In May 2013, FAPL appointed a new board of independent directors, hired an independent chief restructuring officer and all its previously existing officers resigned from FAPL. As a result of loss of control of Fenco, we deconsolidated the assets and liabilities of Fenco from our consolidated financial statements effective May 31, 2013. On June 10, 2013, each of FAPL, Introcan and Introcan’s subsidiaries, Flo-Pro Inc., LH Distribution Inc., Rafko Logistics Inc., Rafko Holdings Inc. and Rafko Enterprises Inc. (collectively, the “Fenco Entities”), filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware. As a result of the loss of control of Fenco and the subsequent filing of the petition for relief under the Bankruptcy Code, Fenco had effectively been disposed of and we did not and do not retain any continuing involvement in the operations of Fenco (see Note 3 of the notes to consolidated financial statements). We may be subject to claims relating to the bankruptcy, as described in Item 3 – Legal Proceedings.

## Products

Our products include rotating electrical products such as alternators and starters and wheel hub assemblies and bearings.

Our products meet or exceed original equipment manufacturer specifications. Remanufacturing generally creates a supply of parts at a lower cost to the end user than newly manufactured parts and makes available automotive parts which are no longer manufactured as new. Our remanufactured parts are sold at competitively lower prices than most new replacement parts. We believe most of our automotive parts are non-elective replacement parts in all makes and models of vehicles because they are required for a vehicle to operate.

We recycle nearly all materials in keeping with our focus of positively impacting the environment. Nearly all parts, including metal from the Used Cores, and corrugated packaging are recycled.

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 automotive parts required to service vehicles. We carry over 9,000 stock keeping units (“SKUs”) for automotive parts that are sold under our customers’ widely recognized private label brand names and our Quality-Built \( ^{®} \) , Xtreme \( ^{®} \) , Reliance \( ^{TM} \)  and other brand names.

## Customers: Customer Concentration

We sell our products to the largest retail automotive chain stores including AutoZone, Advance, Genuine Parts (NAPA), O'Reilly, and Pep Boys, with an aggregate of approximately 16,000 retail outlets as well as a diverse group of automotive warehouse distributors and OES customers.

While we continually seek to diversify our customer base, we currently derive, and have historically derived, a substantial portion of our sales from a small number of large customers. During fiscal 2014, 2013 and 2012, sales to our four largest customers in the aggregate represented 87%, 82% and 78%, respectively, of our net sales, and sales to our largest customer, AutoZone, represented 53%, 41% and 49%, respectively, of our net sales. Any meaningful reduction in the level of sales to any of these customers, deterioration of any customer’s financial condition or the loss of a customer could have a materially adverse impact on our business, results of operations, and financial condition.



## Customer Arrangements; Impact on Working Capital

We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer's exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer's research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that we meet ongoing standards related to fulfillment, price, and quality. Our contracts with major customers expire at various dates through March 2019.

While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory also require the use of our available working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.

## Competition

The market for aftermarket automotive parts is highly competitive. We compete with several large and medium sized remanufacturers, including BBB Industries and Remy International, and a large number of smaller regional and specialty remanufacturers. We also compete with overseas manufacturers, particularly those located in China, who are increasing their operations and could become a significant competitive force in the future.

We believe that the reputations for quality and customer service that a supplier provides are significant factors in our customers' purchase decisions. We believe that our ability to provide quality replacement automotive products, rapid and reliable delivery capabilities as well as promotional support distinguishes us from many of our competitors and provides a competitive advantage. In addition, we believe favorable price and extended payment terms are also very important competitive factors in customers' purchase decisions.

We seek to protect our proprietary processes and other information by relying on trade secret laws and non-disclosure and confidentiality agreements with certain of our employees and other persons who have access to that information.

## Operations

Production Process. Our remanufacturing process begins with the receipt of Used Cores from our customers or core brokers. The Used Cores are evaluated for inventory control purposes and then sorted by part number. Each Used Core is completely disassembled into its fundamental components. The components are cleaned in a process that employs customized equipment and cleaning materials in accordance with the required specifications of the particular component. All components known to be subject to major wear and those components determined not to be reusable or repairable are replaced by new components. Non-salvageable components of the Used Core are sold as scrap.



## Table of Contents

After the cleaning process is complete, the salvageable components of the Used Core are inspected and tested as prescribed by our ISO TS 16949 approved quality control program, which is implemented throughout the production process. ISO TS 16949 is an internationally recognized, world class, automotive quality system. Upon passage of all tests, which are monitored by designated quality control personnel, all the component parts are assembled in a work cell into a finished product. Inspection and testing are conducted at multiple stages of the remanufacturing process, and each finished product is inspected and tested on equipment designed to simulate performance under operating conditions. Finished products are either stored in our warehouse facility or packaged for immediate shipment. To maximize remanufacturing efficiency, we store component parts ready for assembly in our warehousing facilities.

Our remanufacturing processes combine product families with similar configurations into dedicated factory work cells. This remanufacturing process, known as “lean manufacturing,” replaced the more traditional assembly line approach we had previously utilized and eliminated a large number of inventory moves and the need to track inventory movement through the remanufacturing process. This lean manufacturing process has been fully implemented at all of our production facilities. This lean manufacturing approach enables us to significantly reduce the time it takes to produce a finished product. We continue to explore opportunities for improving efficiencies in our remanufacturing process.

Offshore Remanufacturing. The majority of our remanufacturing operations are now conducted at our facilities in Mexico and Malaysia. We continue to maintain production of certain remanufactured units that require specialized service and/or rapid turnaround in our U.S. facilities. In addition, we operate a shipping and receiving warehouse and testing facility in Singapore for our products.

Used Cores. The majority of our Used Cores are obtained from customers using our core exchange program. The core exchange program consists of the following steps:

• Our customers purchase from us a remanufactured unit to be sold to their consumer.

- Our customers offer their consumers a credit to exchange their used unit (Used Core) at the time the consumer purchases a remanufactured unit.

• We, in turn, offer our customers a credit to send us these Used Cores. The credit reduces our accounts receivable.

Our customers are not obligated to send us all the Used Cores exchanged by their consumers. We have historically purchased Used Cores in the open market from core brokers who specialize in buying and selling Used Cores. Although the open market is not a primary source of Used Cores, it is a critical source for meeting our raw material demands. Remanufacturing consumes, on average, more than one Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the product and customer specifications.

The price of a finished rotating electrical product sold to our customers is generally comprised of an amount for remanufacturing (“unit value”) and an amount separately invoiced for the Remanufactured Core included in the product (“Remanufactured Core charge”). The Remanufactured Core charge is equal to the credit we offer to induce the customer to use our core exchange program and send back the Used Cores to us. The ability to obtain Used Cores, materials and components of the types and quantities we need is essential to our ability to meet demand.

Purchased Finished Goods . In addition to our remanufactured goods, we also purchase certain of our finished goods from various suppliers, including several located in Asia. We perform supplier qualification, product inspection and testing to assure product quality levels. We also perform periodic site audits of our suppliers' manufacturing facilities. Finished products purchased are either stored in our warehouse facility or packaged for immediate shipment. We currently use our existing Torrance, California facility to store and distribute wheel hub assemblies and bearings.



## Table of Contents

Return Rights. Under our customer agreements and general industry practice, our customers are allowed stock adjustments when their inventory of certain product lines exceeds the inventory necessary to support sales to end-user consumers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns which are typically less than 5% of units sold. In some instances, we allow a higher level of returns in connection with a significant update order. In addition, we allow customers to return goods to us that their end-user consumers have returned to them. We allow this general right of return regardless of whether the returned item is defective. We seek to limit the aggregate of stock adjustment and other customer returns, including general right of return, to less than 20% of unit sales. Stock adjustment returns do not occur at any specific time during the year.

As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer. Similarly, we accept product returns and grant appropriate credits from new customers from the time the new customer relationship is established. This obligation to accept returns from new customers does not result in decreased liquidity or increased expenses since we only accept one returned product for each unit sold to the new customer. In each case, the return must be received by us in the original box of the unit sold.

Sales, Marketing and Distribution. We have one of the widest varieties of automotive products available to the market, and we market and distribute our products throughout North America. Our products for the automotive retail chain market are primarily sold under our customers' widely recognized private labels. We have expanded our sales efforts beyond automotive retail chains to include warehouse distribution centers serving professional installers. We ship our products from our facilities and fee warehouses located in North America.

We publish, for print and electronic distribution, a catalog with part numbers and applications for our products along with a detailed technical glossary and informational database. We believe that we maintain one of the most extensive catalog and product identification systems available to the market.

## Employees

We had 2,270 employees and 1,852 employees at March 31, 2014 and 2013, respectively, in our continuing operations. Of these 302 employees were located in the U.S., 6 in Canada, 1,722 in Mexico, 251 in our Asian facilities, at March 31, 2014. We had 155 administrative employees, of which 25 were engaged in sales. A union represents 1,695 employees at our Mexico facility. All other employees are non-union. We consider our relations with our employees to be satisfactory.

## Governmental Regulation

Our operations are subject to federal, state and local laws and regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our businesses, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. Potentially significant expenditures, however, could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.



## Item 1A. Risk Factors

While we believe the risk factors described below are all the material risks currently facing our business, additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our financial condition or results of operations could be materially and adversely impacted by these risks, and the trading price of our common stock could be adversely impacted by any of these risks. In assessing these risks, you should also refer to the other information included in or incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes thereto appearing elsewhere or incorporated by reference in this Form 10-K.

We rely on a few large customers for a majority of our business, and the loss of any of these customers, significant changes in the prices, marketing allowances or other important terms provided to any of these customers or adverse developments with respect to the financial condition of these customers could reduce our net income and operating results.

Our net sales are concentrated among a small number of large customers. During fiscal 2014, sales to our four largest customers in the aggregate represented 87% of our net sales, and sales to our largest customer represented 53% of our net sales. We are under ongoing pressure from our major customers to offer lower prices, extended payment terms, increased marketing allowances and other terms more favorable to these customers because our sales to these customers are concentrated, and the market in which we operate is very competitive. These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers and significantly increased our working capital needs. In addition, this customer concentration leaves us vulnerable to any adverse change in the financial condition of these customers. The loss of or a significant decline in sales to any of these customers could adversely affect our business, results of operations and financial condition.

## There may be claims filed against us in connection with the bankruptcy proceedings involving the Fenco Entities.

There have been and may be additional claims filed against us by the trustee and some or all of the creditors in connection with the bankruptcy proceedings involving the Fenco Entities. For example, the trustee has notified our insurance companies that it may have claims for wrongful acts, breach of fiduciary duty, civil conspiracy, aiding and abetting, negligence and conversion. We are also a defendant in a case in Ontario Superior Court and in a case in the District Court for the District of Delaware claiming that we are liable for amounts due by the Fenco Entities to their employees under U.S. and Canadian law. Any litigation to determine the validity of these claims, regardless of their merit or resolution, may be costly and time consuming and divert the efforts and attention of our management from our business strategy. Any adverse judgment or settlement by us of these claims will also result in additional expense. We believe we no longer have any material obligations under any Fenco agreements nor have we assumed any of the Fenco product lines. Others such as the trustee may not agree with our position.

Our offshore remanufacturing and logistic activities expose us to increased political and economic risks and place a greater burden on management to achieve quality standards.

Our overseas operations, especially our operations in Mexico, increase our exposure to political, criminal or economic instability in the host countries and to currency fluctuations. Risks are inherent in international operations, including:

• exchange controls and currency restrictions;

• currency fluctuations and devaluations;

• changes in local economic conditions;

- repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries);

• global sovereign uncertainty and hyperinflation in certain foreign countries;

• laws and regulations relating to export and import restrictions;

• exposure to government actions; and

• exposure to local political or social unrest including resultant acts of war, terrorism or similar events.



## Table of Contents

These and other factors may have a material adverse effect on our offshore activities and on our business, results of operations and financial condition. Our overall success as a business depends, in part, upon our ability to manage our foreign operations. We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business, and failure to do so could adversely affect our business, results of operations and financial condition.

## Interruptions or delays in obtaining component parts could impair our business and adversely affect our operating results.

In our remanufacturing processes, we obtain Used Cores, primarily through the core exchange program with our customers, and component parts from third-party manufacturers. We generally purchase approximately 15-20% of our Used Cores from core brokers. Historically, the Used Core returned from customers together with purchases from core brokers have provided us with an adequate supply of Used Cores. If there was a significant disruption in the supply of Used Cores, whether as a result of increased Used Core acquisitions by existing or new competitors or otherwise, our operating activities could be materially and adversely impacted. In addition, a number of the other components used in the remanufacturing process are available from a very limited number of suppliers. We are, as a result, vulnerable to any disruption in component supply, and any meaningful disruption in this supply would materially and adversely impact our operating results.

Increases in the market prices of key component raw materials could increase the cost of our products and negatively impact our profitability.

In light of the continuous pressure on pricing which we have experienced from our large customers, we may not be able to recoup the higher costs of our products due to changes in the prices of raw materials, particularly aluminum and copper. If we are unable to recover a substantial portion of our raw materials from Used Cores returned to us by our customers through the core exchange program, the prices of Used Cores that we purchase may reflect the impact of changes in the cost of raw materials. However, we are unable to determine what adverse impact, if any, sustained raw material price increases may have on our product costs or profitability.

## Substantial and potentially increasing competition could reduce our market share and significantly harm our financial performance.

While we believe we are well-positioned in the aftermarket for remanufactured products, this market is very competitive. In addition, other overseas manufacturers, particularly those located in China, are increasing their operations and could become a significant competitive force in the future. We may not be successful competing against other companies, some of which are larger than us and have greater financial and other resources at their disposal. Increased competition could put additional pressure on us to reduce prices or take other actions which may have an adverse effect on our operating results.

## Our financial results are affected by automotive parts failure rates that are outside of our control.

Our operating results are affected over the long term by automotive parts failure rates. These failure rates are impacted by a number of factors outside of our control, including, the age of cars, product designs that have resulted in greater reliability, consumers driving fewer miles as a result of both high gasoline prices and the slowdown in the U.S. economy, and the average age of vehicles on the road. A reduction in the failure rates of automotive parts would adversely affect our sales and profitability.



## Table of Contents

Our operating results may continue to fluctuate significantly.

We have experienced significant variations in our annual and quarterly results of operations. These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products and general economic conditions, including changes in prevailing interest rates. Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control. These factors include the timing and level of marketing allowances provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions.

Our lenders may not waive future defaults under our credit agreements.

Over the past several years, we have violated a number of the financial and other covenants contained in our credit agreements, including our current financing agreement with a syndicate of lenders, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent. Our most recent waiver was in June 2013. If we fail to meet the financial covenants or the other obligations set forth in our credit agreements in the future, there is no assurance that our lenders will waive any such defaults. If obtained, any such waiver may impose significant costs or covenants on us.

Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position.

As of March 31, 2014, we had $97,277,000 of net debt under our credit agreement and cash on hand of $24,599,000. Our indebtedness may increase substantially from time to time for various reasons, including fluctuations in operating results, marketing allowances provided to customers, capital expenditures and possible acquisitions. Our indebtedness could materially affect our business because (i) a portion of our cash flow must be used to service debt rather than finance our operations, (ii) it may eventually impair our ability to obtain financing in the future, and (iii) it may reduce our flexibility to respond to changes in business and economic conditions or take advantage of business opportunities that may arise.

Our stock price may be volatile and could decline substantially.

Our stock price has fluctuated from $5.75 to $27.27 during fiscal 2014. It may decline substantially as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control. The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, including (i) our operating results failing to meet the expectations of securities analysts or investors in any quarter, (ii) downward revisions in securities analysts' estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, and (v) adverse changes in general market conditions or economic trends.

Unfavorable currency exchange rate fluctuations could adversely affect us.

We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. In fiscal 2014, approximately 13% of our total expenses were in currencies other than the U.S. dollar. As a result of our extensive operations in Mexico, our primary risk relates to changes in the rates between the U.S. dollar and the Mexican peso. To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S. dollars for Mexican pesos. We also enter into forward foreign exchange contracts to exchange U.S. dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors. The extent to which we use forward foreign exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in the exchange rates. We do not engage in currency speculation or hold or issue financial instruments for trading purposes. These contracts generally expire in a year or less. Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to general and administrative expenses in current period earnings.



## Table of Contents

We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.

In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include:

• the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner;

• the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

• the potential loss of key employees of the acquired businesses;

• the risk of diverting the attention of senior management from our operations;

• risks associated with integrating financial reporting and internal control systems;

• difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses; and

• future impairments of goodwill of an acquired business.

Any of the foregoing, or a combination of them, could cause us to incur additional expenses, distract management and adversely affect our business, financial condition, results of operations or liquidity.

Weakness in conditions in the global credit markets and macroeconomic factors could adversely affect our financial condition and results of operations.

Any weakness in the credit markets could result in significant constraints on liquidity and availability of borrowing terms from lenders and accounts payable with vendors. Modest economic growth in most major industrial countries in the world and uncertain prospects for continued growth threaten to cause further tightening of the credit markets, more stringent lending standards and terms, and higher volatility in interest rates. The persistence of these conditions could have a material adverse effect on our borrowings and the availability, terms and cost of such borrowings. In addition, deterioration in the U.S. economy could adversely affect our operating results.

Our reliance on foreign suppliers for some of the automotive parts we sell to our customers or included in our products presents risks to our business.

Certain of our automotive parts are imported from suppliers located outside the U.S., including various countries in Asia. As a result, we are subject to various risks of doing business in foreign markets and importing products from abroad, such as:

• significant delays in the delivery of cargo due to port security considerations;

• imposition of duties, taxes, tariffs or other charges on imports;

• imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business;

• financial or political instability in any of the countries in which our product is manufactured;

• potential recalls or cancellations of orders for any product that does not meet our quality standards;

• disruption of imports by labor disputes or strikes and local business practices;

• political or military conflict involving the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs;

• heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods;

• natural disasters, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;

• inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and

• our ability to enforce any agreements with our foreign suppliers.



## Table of Contents

Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to us and adversely affect our business, financial condition, results of operations or liquidity.

In addition, because we depend on independent third parties to manufacture a portion of certain automotive products, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs.

Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements.

Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) requires our management to assess the effectiveness of our internal control over financial reporting at the end of each fiscal year and certify whether or not internal control over financial reporting is effective. Our independent accountants are also required to express an opinion with respect to the effectiveness of our internal controls. In the past we have identified material weaknesses in our internal control over financial reporting in our discontinued subsidiary. We cannot assure that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement new or improved internal controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations (which may result in our failure to maintain the listing standards for our common stock) or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under SOX.

## An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.

Merchandise manufactured offshore represents a part of our total product purchases. A disruption in the shipping or cost of such merchandise may significantly decrease our sales and profits. In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Merchandise from alternative sources may also be of lesser quality and more expensive than those we currently import. Risks associated with our reliance on imported merchandise include disruptions in the shipping and importation or increase in the costs of imported products. For example, common risks may be:

• raw material shortages;

• work stoppages;

• strikes and political unrest;

• problems with oceanic shipping, including shipping container shortages;

• increased customs inspections of import shipments or other factors causing delays in shipments;

• economic crises;

• international disputes and wars;

• loss of “most favored nation” trading status by the U. S. in relations to a particular foreign country;

• import duties;

• import quotas and other trade sanctions; and

• increases in shipping rates.

Products manufactured overseas and imported into the U.S. and other countries are subject to import restrictions and duties.



## Table of Contents

## Item 1B. Unresolved Staff Comments

None.

## Item 2. Properties

The following table sets forth the location, type of facility, square footage and ownership interest in each of our facilities.

<table><tr><td>Location</td><td>Type of Facility</td><td>Approx. Square Feet</td><td>Leased or Owned</td><td>Date of Lease Expiration</td></tr><tr><td>Torrance, CA</td><td>Remanufacturing, Warehouse, Administrative, and Office</td><td>231,000</td><td>Leased</td><td>March 2022</td></tr><tr><td>Tijuana, Mexico (1)</td><td>Remanufacturing, Warehouse, and Office</td><td>311,000</td><td>Leased</td><td>April 2015</td></tr><tr><td>Singapore &amp; Malaysia</td><td>Remanufacturing, Warehouse, and Office</td><td>65,000</td><td>Leased</td><td>Various through August 2016</td></tr><tr><td>Shanghai, China</td><td>Warehouse and Office</td><td>27,000</td><td>Leased</td><td>March 2016</td></tr></table>

(1) We have an option to extend the lease term for two additional 5-year periods.

We believe the above mentioned facilities are sufficient to satisfy our foreseeable warehousing, production, distribution and administrative office space requirements for our current operations.

## Item 3. Legal Proceedings

There have been and may be additional claims filed against us by the trustee and some or all of the creditors in connection with the bankruptcy proceedings involving the Fenco Entities. For example, the trustee has notified our insurance companies that it may have claims for wrongful acts, breach of fiduciary duty, civil conspiracy, aiding and abetting, negligence and conversion. We are also a defendant in a case in Ontario Superior Court and in a case in the District Court for the District of Delaware claiming that we are liable for amounts due by the Fenco Entities to their employees under U.S. and Canadian law. Any litigation to determine the validity of these claims, regardless of their merit or resolution, may be costly and time consuming and divert the efforts and attention of our management from our business strategy. Any adverse judgment or settlement by us of these claims will also result in additional expense.

We are also subject to various other legal proceedings arising in the normal course of conducting business. Management does not believe that the outcome of these matters will have a material adverse impact on its financial position or future results of operations.

## Item 4. Mine Safety Disclosures

Not applicable.



## PART II

## Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the trading symbol MPAA. The following table sets forth the high and low sale prices for our common stock during fiscal 2014 and 2013.

<table><tr><td rowspan="2"></td><td colspan="3">Fiscal 2014</td><td colspan="3">Fiscal 2013</td></tr><tr><td colspan="2">High</td><td>Low</td><td colspan="2">High</td><td>Low</td></tr><tr><td>1st Quarter</td><td>$     9.60</td><td>$     5.75</td><td>$     10.00</td><td>$     4.04</td><td></td><td></td></tr><tr><td>2nd Quarter</td><td>$     12.93</td><td>$     8.27</td><td>$     5.16</td><td>$     3.96</td><td></td><td></td></tr><tr><td>3rd Quarter</td><td>$     19.40</td><td>$     12.39</td><td>$     6.85</td><td>$     4.22</td><td></td><td></td></tr><tr><td>4th Quarter</td><td>$     27.27</td><td>$     18.51</td><td>$     7.30</td><td>$     5.30</td><td></td><td></td></tr></table>

As of June 9, 2014, there were 15,082,645 shares of common stock outstanding held by 20 holders of record. We have never declared or paid dividends on our common stock. The declaration of any prospective dividends is at the discretion of the Board of Directors and will be dependent upon sufficient earnings, capital requirements and financial position, general economic conditions, state law requirements and other relevant factors. Additionally, our agreement with our lenders prohibits the payment of dividends, except stock dividends, without the lenders' prior consent.

## Share Repurchase Program

In March 2010, our Board of Directors authorized a share repurchase program of up to $5,000,000 of our outstanding common stock from time to time in the open market and in private transactions at prices deemed appropriate by management. The program does not have an expiration date. Under this program, we repurchased and retired a total of 67,347 shares at a total cost of approximately $389,000 during fiscal 2013. We did not repurchase any outstanding common stock during fiscal 2014.

## Equity Compensation Plan Information

The following table summarizes our equity compensation plans as of March 31, 2014:

<table><tr><td>Plan Category</td><td>(a)</td><td>(b)</td><td>(c)</td></tr><tr><td>Equity compensation plans approved by securities holders</td><td>Number of securities to be issued upon exercise of outstanding options, warrants and rights</td><td>Weighted-average exercise price of outstanding options</td><td>Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))</td></tr><tr><td>Equity compensation plans not approved by security holders</td><td>1,426,968(1)</td><td>9.21</td><td>1,794,983(2)</td></tr><tr><td>Total</td><td>1,426,968</td><td>9.21</td><td>1,794,983</td></tr></table>



## Performance Graph

The following graph compares the cumulative return to holders of our common stock for the five years ending March 31, 2014 with the NASDAQ Composite Index and the Zacks Retail and Wholesale Auto Parts Index. The comparison assumes $100 was invested at the close of business on March 31, 2009 in our common stock and in each of the comparison groups, and assumes reinvestment of dividends.

Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 March 2014






## Table of Contents

## Item 6. Selected Financial Data

The following selected historical consolidated financial information for the periods indicated below has been derived from and should be read in conjunction with our consolidated financial statements and related notes thereto.

Our selected income statement data below represents our continuing operations and excludes the results of the discontinued subsidiary subsequent to its acquisition in May 2011. See Note 3 of the notes to consolidated financial statements.

<table><tr><td rowspan="2">Income Statement Data</td><td colspan="6">Fiscal Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td></td></tr><tr><td>Net sales</td><td>$ 258,669,000</td><td>$ 213,151,000</td><td>$ 178,551,000</td><td>$ 161,285,000</td><td>$ 147,225,000</td><td></td></tr><tr><td>Operating income</td><td>32,104,000</td><td>34,314,000</td><td>26,574,000</td><td>25,384,000</td><td>18,307,000</td><td></td></tr><tr><td>Income from continuing operations</td><td>6,482,000</td><td>14,558,000</td><td>14,348,000</td><td>12,220,000</td><td>9,646,000</td><td></td></tr><tr><td>Basic net income per share from continuing operations</td><td>$ 0.45</td><td>$ 1.01</td><td>$ 1.15</td><td>$ 1.01</td><td>$ 0.80</td><td></td></tr><tr><td>Diluted net income per share from continuing operations</td><td>$ 0.42</td><td>$ 1.01</td><td>$ 1.13</td><td>$ 0.99</td><td>$ 0.80</td><td></td></tr><tr><td rowspan="2">Balance Sheet Data</td><td colspan="2">2014</td><td colspan="2">March 31, 2012</td><td>2011</td><td>2010</td></tr><tr><td>2014</td><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td></td></tr><tr><td>Total assets</td><td>$ 318,853,000</td><td>$ 364,969,000</td><td>$ 501,898,000</td><td>$ 191,865,000</td><td>$ 163,480,000</td><td></td></tr><tr><td>Working capital (1)</td><td>22,077,000</td><td>33,722,000</td><td>15,311,000</td><td>1,395,000</td><td>3,399,000</td><td></td></tr><tr><td>Revolving loan</td><td>10,000,000</td><td>-</td><td>-</td><td>-</td><td>-</td><td></td></tr><tr><td>Term loan</td><td>87,277,000</td><td>81,905,000</td><td>75,000,000</td><td>7,500,000</td><td>9,500,000</td><td></td></tr><tr><td>Capital lease obligations</td><td>318,000</td><td>214,000</td><td>463,000</td><td>834,000</td><td>1,398,000</td><td></td></tr><tr><td>Other long term liabilities</td><td>26,340,000</td><td>15,464,000</td><td>10,526,000</td><td>9,984,000</td><td>7,056,000</td><td></td></tr><tr><td>Shareholders&#x27; equity (deficit)</td><td>$ 109,636,000</td><td>$ (3,514,000)</td><td>$ 73,619,000</td><td>$ 117,177,000</td><td>$ 103,620,000</td><td></td></tr></table>

(1) The calculation of working capital excludes the impact of the discontinued subsidiary.



## Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

## Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. These factors include, but are not limited to: the bankruptcy of the Fenco Entities and related contingent liabilities, concentration of sales to certain customers, changes in the financial condition of or our relationship with any of our major customers, the increasing customer pressure for lower prices and more favorable payment and other terms, lower revenues than anticipated from new and existing contracts, the increasing demands on our working capital, the significant strain on working capital associated with large inventory purchases from customers, any meaningful difference between expected production needs and ultimate sales to our customers, our ability to obtain any additional financing we may seek or require, our ability to achieve positive cash flows from operations, potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or the potential material weaknesses in our internal controls over financial reporting, our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders' refusal to waive any such defaults, increases in interest rates, the impact of high gasoline prices, consumer preferences and general economic conditions, increased competition in the automotive parts industry including increased competition from Chinese and other offshore manufacturers, difficulty in obtaining Used Cores and component parts or increases in the costs of those parts, political, criminal or economic instability in any of the foreign countries where we conduct operations, currency exchange fluctuations, unforeseen increases in operating costs, and other factors discussed herein and in our other filings with the SEC.

## Management Overview

We are a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. We sell our products predominantly in North America to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their OES programs. Our products include rotating electrical products such as alternators and starters and wheel hub assemblies and bearings.

The current population of vehicles in the U.S. is approximately 246 million and the average age of these vehicles is approximately 11 years. We believe the market for replacement parts is primarily driven by the age of vehicles and the miles driven. While an aged vehicle population is favorable today, miles driven continues to fluctuate primarily based on fuel prices. We believe demand and replacement rates for aftermarket automotive parts generally increase with the age of vehicles and increases in miles driven.

The aftermarket for automobile parts is divided into two markets. The first market is the DIY market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second market is the professional installer market, commonly known as the DIFM market. This market is serviced by the traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. Generally, the consumer in this channel is a professional parts installer. Our products are distributed to both the DIY and DIFM markets.

While both markets continue to grow and we continue to grow in both markets, we have distribution channels with all of the major retailers and have grown share with them. In particular as we introduce our new products we are leveraging our existing distribution channels. The DIFM market is growing faster and is an attractive opportunity for growth. We are positioned to benefit from this market opportunity in three ways: (i) our auto parts retail customers are expanding their efforts to target the DIFM market, (ii) we sell our products under private label and our own brand names directly to suppliers that focus on professional installers, and (iii) we sell our products to original equipment manufacturers for distribution to the professional installer both for warranty replacement and their general aftermarket channels. We have been successful in growing sales to this market.



## Table of Contents

We have two operating segments: (i) wheel hub assemblies and bearings and (ii) rotating electrical products which consist of alternators and starters. In accordance with the authoritative accounting guidance for segment reporting, we have determined that these operating segments meet the criteria for aggregation and accordingly we have one reportable segment for purposes of recording and reporting our financial results.

## Discontinued Operation and Deconsolidation of Fenco

In May 2011, we purchased (i) all of the outstanding equity of FAPL, (ii) all of the outstanding equity of Introcan, and (iii) 1% of the outstanding equity of Fapco (collectively, “Fenco” and also referred to herein as the “discontinued subsidiary”). Since FAPL owned 99% of Fapco prior to these acquisitions, we owned 100% of Fapco.

Between May 2011 and its bankruptcy in June 2013, Fenco had been attempting to turn around its business. However, revenues generated by its undercar product line segment were not sufficient to enable Fenco to meet its operating expenses and otherwise implement its undercar product line turnaround plan. Fenco had recurring operating losses since the date of acquisition and had a working capital and equity deficiency.

In May 2013, FAPL appointed a new board of independent directors, hired an independent chief restructuring officer and all its previously existing officers resigned from FAPL. As a result of loss of control of Fenco, we deconsolidated the assets and liabilities of Fenco from our consolidated financial statements effective May 31, 2013. On June 10, 2013, the Fenco Entities filed a voluntary petition for relief under the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. As a result of the loss of control of Fenco and the subsequent filing of the petition for relief under the Bankruptcy Code, Fenco had effectively been disposed of and we did not and do not retain any continuing involvement in the operations of Fenco (see Note 3 of the notes to consolidated financial statements). We may be subject to claims relating to the bankruptcy, as described in Item 3 – Legal Proceedings.

The accompanying consolidated financial statements include the accounts of Motorcar Parts of America, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. We have classified Fenco operations as discontinued operations in the accompanying consolidated financial statements as a result of the Fenco Entities' voluntary petition for relief under the Bankruptcy Code in the U.S. Bankruptcy Court of the District of Delaware on June 10, 2013. Correspondingly, reclassifications of Fenco's assets, liabilities, and operations for prior year periods to discontinued operations have been made to conform to the current year's presentation.

## Critical Accounting Policies

We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the notes to consolidated financial statements.

In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates.

Our remanufacturing operations require that we acquire Used Cores, a necessary raw material, from our customers and offer our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to accounting issues that are more complex than many businesses our size or larger. In addition, the relevant accounting standards and issues continue to evolve.

## Inventory

Non-core Inventory



## Table of Contents

Non-core inventory is comprised of (i) non-core raw materials, (ii) the non-core value of work in process, (iii) the non-core value of remanufactured finished goods, and (iv) purchased finished goods. Used Cores, the Used Core value of work in process and the Remanufactured Core portion of finished goods are classified as long-term core inventory as described below under the caption “Long-term Core Inventory.” Used Cores are a source of raw materials used in the manufacturing of our rotating electrical products.

Non-core inventory is stated at the lower of cost or market. The cost of non-core remanufactured inventory approximates average historical purchase prices paid for raw materials, and is based upon the direct costs of material and an allocation of labor and variable and fixed overhead costs. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs. The cost of non-core inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to reflect current lower of cost or market levels. These adjustments are determined for individual items of inventory within each of the three classifications of non-core inventory as follows:

- Non-core raw materials are recorded at average cost, which is based on the actual purchase price of raw materials on hand. The average cost is updated quarterly. This average cost is used in the inventory costing process and is the basis for allocation of materials to finished goods during the production process.

- Non-core work in process is in various stages of production and is valued at the average cost of materials issued to the open work orders. Historically, non-core work in process inventory has not been material compared to the total non-core inventory balance.

- The cost of remanufactured finished goods includes the average cost of non-core raw materials and allocations of labor and variable and fixed overhead. The allocations of labor and variable and fixed overhead costs are determined based on the average actual use of the production facilities over the prior twelve months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, we exclude certain unallocated overhead such as severance costs, duplicative facility overhead costs, and spoilage from the calculation and expense these unallocated overhead as period costs. For the fiscal years ended March 31, 2014, 2013, and 2012, costs of approximately $1,070,000, $1,561,000, and $1,410,000, respectively, were considered unallocated overhead charged directly to cost of sales and thus excluded from the calculation of cost for remanufactured finished goods.

We record an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. We periodically review inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon management’s judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part.

The quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for our products or market changes that in management’s judgment, impact our ability to sell or liquidate potentially excess or obsolete inventory. We recorded $2,708,000 and $2,498,000 for excess and obsolete inventory at March 31, 2014 and 2013, respectively. This increase was primarily recorded in our non-core inventory due to the increased inventory levels.

We record vendor discounts as reductions of inventories that are recognized as reductions to cost of sales as the inventories are sold.



## Table of Contents

## Inventory Unreturned

Inventory unreturned represents our estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that we expect to be returned, under our general right of return policy, after the balance sheet date. Because all cores are classified separately as long-term assets, the inventory unreturned balance includes only the added unit value of a finished good. The return rate is calculated based on expected returns within the normal operating cycle of one year. As such, the related amounts are classified in current assets.

Inventory unreturned is valued in the same manner as our finished goods inventory.

## Long-term Core Inventory

Long-term core inventory consists of:

• Used Cores purchased from core brokers and held in inventory at our facilities,

• Used Cores returned by our customers and held in inventory at our facilities,

- Used Cores returned by end-users to customers but not yet returned to us which are classified as Remanufactured Cores until they are physically received by us,

• Remanufactured Cores held in finished goods inventory at our facilities; and

- Remanufactured Cores held at customer locations as a part of the finished goods sold to the customer. For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the customer, in each case, for credit.

Long-term core inventory is recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The cost and market value of Used Cores for which sufficient recent purchases have occurred are deemed the same as the purchase price for purchases that are made in arm’s length transactions.

Long-term core inventory recorded at average historical purchase prices is primarily made up of Used Cores for newer products related to more recent automobile models or products for which there is a less liquid market. We must purchase these Used Cores from core brokers because our customers do not have a sufficient supply of these newer Used Cores available for the core exchange program.

Used Cores obtained in core broker transactions are valued based on average purchase price. The average purchase price of Used Cores for more recent automobile models is retained as the cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to our core exchange program.

Long-term core inventory is recorded at the lower of cost or market value. In the absence of sufficient recent purchases, we use core broker price lists to assess whether Used Core cost exceeds Used Core market value on an item by item basis. The primary reason for the insufficient recent purchases is that we obtain most of our Used Core inventory from the customer core exchange program.

We classify all of our core inventories as long-term assets. The determination of the long-term classification is based on our view that the value of the cores is not consumed or realized in cash during our normal operating cycle, which is one year for most of the cores recorded in inventory. According to guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), current assets are defined as “assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.” We do not believe that core inventories, which we classify as long-term, are consumed because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. We do not expect the core inventories to be consumed, and thus we do not expect to realize cash, until our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience.



## Table of Contents

However, historically for a portion of finished goods sold, our customer will not send us a Used Core to obtain the credit we offer under our core exchange program. Therefore, based on our historical estimate, we relieve the core value for these finished goods upon sale, as we believe they have been consumed and we have realized cash.

We realize cash for only the core exchange program shortfall. This shortfall represents the historical difference between the number of finished goods shipped to customers and the number of Used Cores returned to us by customers. We do not realize cash for the remaining portion of the cores because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. We do not expect to realize cash for the remaining portion of these cores until our relationship with a customer ends, a possibility that we consider remote based on existing long-term customer agreements and historical experience.

For these reasons, we concluded that it is more appropriate to classify core inventory as long-term assets.

## Long-term Core Inventory Deposit

The long-term core inventory deposit account represents the value of Remanufactured Cores we have purchased from customers, which are held by the customers and remain on the customers' premises. The purchase is made through the issuance of credits against that customer's receivables either on a one time basis or over an agreed-upon period. The credits against the customer's receivable are based upon the Remanufactured Core purchase price previously established with the customer. At the same time, we record the long-term core inventory deposit for the Remanufactured Cores purchased at its cost, determined as noted under Long-term Core Inventory. The long-term core inventory deposit is stated at the lower of cost or market. The cost is established at the time of the transaction based on the then current cost, determined as noted under Long-term Core Inventory. The difference between the credit granted and the cost of the long-term core inventory deposit is treated as a sales allowance reducing revenue. When the purchases are made over an agreed-upon period, the long-term core inventory deposit is recorded at the same time the credit is issued to the customer for the purchase of the Remanufactured Cores.

At least annually, and as often as quarterly, reconciliations and confirmations are performed to determine that the number of Remanufactured Cores purchased, but retained at the customer locations, remains sufficient to support the amounts recorded in the long-term core inventory deposit account. At the same time, the mix of Remanufactured Cores is reviewed to determine that the aggregate value of Remanufactured Cores in the account has not changed during the reporting period. We evaluate the cost of Remanufactured Cores supporting the aggregate long-term core inventory deposit account each quarter. If we identify any permanent reduction in either the number or the aggregate value of the Remanufactured Core inventory mix held at the customer location, we will record a reduction in the long-term core inventory deposit account during that period.

## Revenue Recognition

We recognize revenue when our performance is complete, and all of the following criteria have been met:

• Persuasive evidence of an arrangement exists,

• Delivery has occurred or services have been rendered,

• The seller’s price to the buyer is fixed or determinable, and

• Collectability is reasonably assured.

For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date of shipment. For products shipped FOB destination, revenues are recognized on the estimated or actual date of delivery. We include shipping and handling charges in the gross invoice price to customers and classify the total amount as revenue. Shipping and handling costs are recorded in cost of sales.



## Table of Contents

## Revenue Recognition; Net-of-Core-Value Basis

The price of a finished rotating electrical product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and the unit value. The unit value is recorded as revenue based on our then current price list, net of applicable discounts and allowances. Based on our experience, contractual arrangements with customers and inventory management practices, a significant portion of the remanufactured automobile parts we sell to customers are replaced by similar Used Cores sent back for credit by customers under our core exchange program. In accordance with our net-of-core-value revenue recognition policy, we do not recognize the Remanufactured Core value as revenue when the finished products are sold. We generally limit the number of Used Cores sent back under the core exchange program to the number of similar Remanufactured Cores previously shipped to each customer.

## Revenue Recognition and Deferral — Core Revenue

Full price Remanufactured Cores: When we ship a rotating electrical product, we invoice certain customers for the Remanufactured Core value portion of the product at full Remanufactured Core sales price but do not recognize revenue for the Remanufactured Core value at that time. For these Remanufactured Cores, we recognize core revenue based upon an estimate of the rate at which our customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under our core exchange program.

Nominal price Remanufactured Cores: We invoice other customers for the Remanufactured Core value portion of a rotating electrical product shipped at a nominal Remanufactured Core price. Unlike the full price Remanufactured Cores, we only recognize revenue from nominal Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program when we believe that we have met all of the following criteria:

- We have a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be sent back under the core exchange program, and the agreement must specify the number of Remanufactured Cores our customer will pay cash for in lieu of sending back a similar Used Core under our core exchange program and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).

- The contractual date for reconciling our records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by similar Used Cores sent back under our core exchange program must be in the current or a prior period.

• The reconciliation must be completed and agreed to by the customer.

• The amount must be billed to the customer.

Deferral of Core Revenue. As noted previously, we have in the past and may in the future agree to buy back Remanufactured Cores from certain customers. The difference between the credit granted and the cost of the Remanufactured Cores bought back is treated as a sales allowance reducing revenue. As a result of the ongoing Remanufactured Core buybacks, we have now deferred core revenue from these customers until there is no expectation that sales allowances associated with Remanufactured Core buybacks from these customers will offset core revenues that would otherwise be recognized once the criteria noted above have been met.

## Revenue Recognition; General Right of Return

We allow our customers to return goods to us that their end-user customers have returned to them, whether the returned item is or is not defective (warranty returns). In addition, under the terms of certain agreements with our customers and industry practice, our customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns). Customers have various contractual rights for stock adjustment returns which are typically less than 5% of units sold. In some instances, we allow a higher level of returns in connection with a significant update order. In addition, we allow customers to return goods to us that their end-user consumers have returned to them. We seek to limit the aggregate of customer returns, including warranty and stock adjustment returns, to less than 20% of unit sales.



## Table of Contents

We provide for such anticipated returns of inventory by reducing revenue and the related cost of sales for the units estimated to be returned as further described under the captions “Customer Finished Goods Returns Accrual” and “Inventory Unreturned”.

Our allowance for warranty returns is established based on a historical analysis of the level of this type of return as a percentage of total unit sales. Stock adjustment returns do not occur at any specific time during the year, and the expected level of these returns cannot be reasonably estimated based on a historical analysis. Our allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements and information on the estimated timing of stock adjustment returns provided by our customers.

## Customer Finished Goods Returns Accrual

The customer finished goods returns accrual represents our estimate of our exposure to customer returns, including warranty returns, under our general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers' inventory of certain products exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the non-core sales value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year.

## Sales Incentives

We provide various marketing allowances to our customers, including sales incentives and concessions. Marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided.

## Intangible Assets

Our intangible assets other than goodwill are finite-lived and amortized on a straight line basis over their respective useful lives. We analyze our finite-lived intangible assets for impairment when and if indicators of impairment exist. As of March 31, 2014, there were no indicators of impairment.

## Income Taxes

We account for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized.

The primary components of our income tax expense are (i) the current liability or refund due for federal, state and foreign income taxes and (ii) the change in the amount of the net deferred income tax asset, including the effect of any change in the valuation allowance.

Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income. We review our deferred tax assets on a jurisdiction by jurisdiction basis to determine whether it is more likely than not that the deferred tax assets will be realized. We believe that it is more likely than not that our future taxable income will be sufficient to realize the recorded deferred tax assets. In evaluating this ability, we consider long-term agreements, including Remanufactured Core purchase obligations, with our major customers that expire at various dates through March 2019. We also periodically compare the forecasts to actual results. Although there can be no assurance that the forecasted results will be achieved, the history of income in all jurisdictions provides sufficient positive evidence that no valuation allowance is needed.



## Table of Contents

## Financial Risk Management and Derivatives

We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. As a result of our significant operations in Mexico, our primary risk relates to changes in the rates between the U.S. dollar and the Mexican peso. To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S. dollars for Mexican pesos. We also enter into forward foreign exchange contracts to exchange U.S. dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors. The extent to which we use forward foreign exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in the exchange rates. We do not engage in currency speculation or hold or issue financial instruments for trading purposes. These contracts generally expire in a year or less. Any changes in the fair value of foreign exchange contracts are accounted for as an increase or decrease to general and administrative expenses in current period earnings.

## Share-based Payments

In accounting for share-based compensation awards, we follow the accounting guidance for equity-based compensation, which requires that we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. The cost of equity instruments is recognized in the consolidated statements of operations on a straight-line basis (net of estimated forfeitures) over the period during which an employee is required to provide service in exchange for the award. Also, excess tax benefits realized are reported as a financing cash inflow.

## New Accounting Pronouncements

## Accumulated other comprehensive income (“AOCI”)

In the first quarter of fiscal 2014, we adopted an accounting standard issued by the FASB that requires entities to provide details of reclassifications in the disclosure of changes in AOCI balances. In addition, for significant items reclassified out of AOCI in the fiscal year, entities must provide information about the effects on net income together, in one location, on the face of the statement where net income is presented, or as a separate disclosure in the notes. For items not reclassified to net income in their entirety in the fiscal year, entities must cross-reference to the note where additional details about the effects of the reclassifications are disclosed. The adoption of this update did not have an impact on our financial position, results of operations or cash flows.

## Income Taxes

In July 2013, the FASB issued guidance that requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law and the Company intends to use the deferred tax asset for that purpose. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.



## Table of Contents

## Discontinued Operations

In April 2014, the FASB issued guidance on reporting discontinued operations. The new guidance changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on our financial position, results of operations or cash flows.

## Revenue Recognition

In May 2014, the FASB issued an amendment to the accounting guidance related to revenue recognition. The amendment was the result of a joint project between the FASB and the International Accounting Standards Board ("IASB") to clarify the principles for recognizing revenue and to develop common revenue standards for U.S. GAAP and International Financial Reporting Standards ("IFRS"). To meet those objectives, the FASB is amending the FASB ASC and creating a new Topic 606, Revenue from Contracts with Customers, and the IASB is issuing IFRS 15, Revenue from Contracts with Customers. The new guidance is effective prospectively for annual periods beginning after December 15, 2016, and interim periods within those years. Early application is not permitted. We are evaluating the impact of adopting this prospective guidance to our consolidated financial statements.

## Subsequent Events

On June 12, 2014, we entered into a first amendment to the amended and restated financing agreement, pursuant to which (i) the commitments to make revolving loans under the amended and restated financing agreement were increased by $10,000,000 to $40,000,000, and (ii) the maximum amount of capital expenditures was increased to $3,200,000 for fiscal year 2014, $7,000,000 for fiscal year 2015, and $4,000,000 for each of fiscal years 2016 and 2017. The maximum amount of capital expenditures for fiscal year 2018 remains at $2,500,000.

## Results of Operations

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

The following table summarizes certain key operating data for our continuing operations for the periods indicated:

<table><tr><td rowspan="2"></td><td colspan="4">Fiscal Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td><td></td></tr><tr><td>Gross profit percentage</td><td>31.5%</td><td>32.5%</td><td>32.1%</td><td></td></tr><tr><td>Cash flow provided by (used in) continuing operations</td><td>$ 13,290,000</td><td>$ (4,758,000)</td><td>$ 15,802,000</td><td></td></tr><tr><td>Finished goods turnover (1)</td><td>7.2</td><td>7.7</td><td>6.5</td><td></td></tr></table>

(1) Finished goods inventory turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending non-core finished goods inventory values, for each fiscal year. We believe that this provides a useful measure of our ability to turn inventory into revenues.



## Table of Contents

## Fiscal 2014 Compared to Fiscal 2013

## Net Sales and Gross Profit

The following table summarizes net sales and gross profit for our continuing operations for fiscal 2014 and 2013:

<table><tr><td rowspan="2"></td><td colspan="2">Fiscal Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td></tr><tr><td>Net sales</td><td>$ 258,669,000</td><td>$ 213,151,000</td></tr><tr><td>Cost of goods sold</td><td>177,103,000</td><td>143,810,000</td></tr><tr><td>Gross profit</td><td>81,566,000</td><td>69,341,000</td></tr><tr><td>Cost of goods sold as a percentage of net sales</td><td>68.5%</td><td>67.5%</td></tr><tr><td>Gross profit percentage</td><td>31.5%</td><td>32.5%</td></tr></table>

Net Sales. Our net sales for fiscal 2014 increased by $45,518,000, or 21.4%, to $258,669,000 compared to net sales for fiscal 2013 of $213,151,000. The increase in net sales was due to both the introduction of our new wheel hub products and growth in the sales of our rotating electrical products primarily to existing customers. We began selling wheel hub products in late June 2013 and they represented approximately 11% of our net sales during fiscal 2014.

Cost of Goods Sold/Gross Profit. Our cost of goods sold as a percentage of net sales increased during fiscal 2014 to 68.5% from 67.5% for fiscal 2013, resulting in a corresponding decrease in our gross profit to 31.5% for fiscal 2014 from 32.5% for fiscal 2013. Our gross profit was primarily impacted by lower gross margin on wheel hub products, which we began selling in late June 2013.

## Operating Expenses

The following table summarizes operating expenses for our continuing operations for fiscal 2014 and 2013:

<table><tr><td rowspan="2"></td><td colspan="2">Fiscal Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td></tr><tr><td>General and administrative</td><td>$ 39,684,000</td><td>$ 25,807,000</td></tr><tr><td>Sales and marketing</td><td>7,838,000</td><td>7,290,000</td></tr><tr><td>Research and development</td><td>1,940,000</td><td>1,930,000</td></tr><tr><td>Percent of net sales</td><td></td><td></td></tr><tr><td>General and administrative</td><td>15.3%</td><td>12.1%</td></tr><tr><td>Sales and marketing</td><td>3.0%</td><td>3.4%</td></tr><tr><td>Research and development</td><td>0.7%</td><td>0.9%</td></tr></table>

General and Administrative. Our general and administrative expenses for fiscal 2014 were $39,684,000, which represents an increase of $13,877,000, or 53.8%, from general and administrative expenses for fiscal 2013 of $25,807,000. The increase in general and administrative expenses was primarily due to (i) $10,054,000 of increased loss recorded due to the change in the fair value of the warrant liability, (ii) a loss of $842,000 recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts compared to a gain of $804,000 recorded during fiscal 2013, (iii) $780,000 of increased salaries and wages, (iv) $515,000 of increased legal fees, and (v) $406,000 of increased general and administrative expenses at our offshore locations due to increased employee-related expenses and outside services. These increases were partly offset by (i) $982,000 of expenses incurred during fiscal 2013 in connection with the discontinued subsidiary's initial implementation work related to the compliance with Section 404 of the Sarbanes-Oxley Act of 2002, (ii) $675,000 recorded during fiscal 2013 for the settlement of liquidated damages in connection with our April 2012 private placement, and (iii) $650,000 recorded in fiscal 2013 related to the termination of our consulting agreement with Mel Marks. In addition, general and administrative expenses increased during fiscal 2014 due to $2,868,000 of legal and professional services expenses incurred by us and related to the discontinued subsidiary.



## Table of Contents

Sales and Marketing. Our sales and marketing expenses for fiscal 2014 increased $548,000, or 7.5%, to $7,838,000 from $7,290,000 for fiscal 2013. The increase was due primarily to (i) $235,000 of increased employee-related expenses, (ii) $134,000 of increased professional services and consulting fees, and (iii) $120,000 of increased travel expenses.

Research and Development. Our research and development expenses increased by $10,000, or 0.5%, to $1,940,000 for fiscal 2014 from $1,930,000 for fiscal 2013. The increase was due primarily to increased consulting fees.

## Interest Expense

Interest Expense, net. Our interest expense, net from continuing operations for fiscal 2014 increased $5,965,000, or 48.4%, to $18,289,000 from $12,324,000 for fiscal 2013. Interest expense for fiscal 2013 reflects $5,182,000 of interest income in connection with the long-term note receivable from the discontinued subsidiary. In addition, interest expense increased due to (i) the write-off of approximately $2,581,000 in deferred financing costs in connection with the amendments to our credit agreements, (ii) interest on all of our outstanding obligations related to our discontinued subsidiary guaranteed by us that were paid in full on August 26, 2013. These increases were partly offset by (i) lower interest rates on our term loan and factored receivables during fiscal 2014 and (ii) expenses incurred in fiscal 2013 in connection with the third amendment and waiver to the Financing Agreement (as defined below).

## Provision for Income Taxes

Income Tax. Our income tax expense from continuing operations was $7,333,000, or the effective tax rate of 53.1%, and $7,432,000, or the effective tax rate of 33.8% during fiscal 2014 and 2013, respectively. The primary change in the effective tax rate was due to non-deductible expenses in connection with the fair value adjustments on the warrants and the impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m). The balance of the change in the effective tax rate was due to recurring rate impacting items, such as our state and foreign income taxes, uncertain tax positions, and permanent book to tax differences.

## Income (Loss) from Discontinued Operations

Income (Loss) from Discontinued Operations. Our income from discontinued operations was $100,877,000 during fiscal 2014 compared to a loss from discontinued operations of $106,069,000 for fiscal 2013. The income from discontinued operations during fiscal 2014 consists of (i) a $118,095,000 gain on the deconsolidation of the discontinued subsidiary, including an income tax benefit of $1,374,000, (ii) a loss of approximately $20,464,000 in connection with the guarantee of obligations to certain suppliers of the discontinued subsidiary partly offset by income tax benefits of $9,156,000 recorded during fiscal 2014, and (iii) losses of approximately $5,910,000 incurred by the discontinued subsidiary from April 1, 2013 to May 31, 2013.



## Table of Contents

## Fiscal 2013 Compared to Fiscal 2012

## Net Sales and Gross Profit

The following table summarizes net sales and gross profit for our continuing operations for fiscal 2013 and fiscal 2012:

<table><tr><td rowspan="2"></td><td colspan="2">Fiscal Years Ended March 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Net sales</td><td>$ 213,151,000</td><td>$ 178,551,000</td></tr><tr><td>Cost of goods sold</td><td>143,810,000</td><td>121,219,000</td></tr><tr><td>Gross profit</td><td>69,341,000</td><td>57,332,000</td></tr><tr><td>Cost of goods sold as a percentage of net sales</td><td>67.5%</td><td>67.9%</td></tr><tr><td>Gross profit percentage</td><td>32.5%</td><td>32.1%</td></tr></table>

Net Sales. Our net sales increased by $34,600,000, or 19.4%, to $213,151,000 for fiscal 2013 compared to net sales of $178,551,000 for fiscal 2012. The increase in net sales was the result of (i) new business awarded by one of our major customers, (ii) certain new customers acquired during fiscal 2013, and (iii) overall increase in net sales to our other existing customers.

Cost of Goods Sold/Gross Profit. Our cost of goods sold as a percentage of net sales decreased during fiscal 2013 to 67.5% from 67.9% for fiscal 2012, resulting in a corresponding increase in our gross profit percentage of 0.4% to 32.5% for fiscal 2013 from 32.1% for fiscal 2012. This increase in gross profit percentage is a result of lower per unit manufacturing costs, partially offset by $1,665,000 of marketing and certain other allowances made in connection with the purchase of inventory from a new customer we acquired in the first quarter of fiscal 2013.

## Operating Expenses

The following table summarizes operating expenses for our continuing operations for fiscal 2013 and 2012:

<table><tr><td rowspan="2"></td><td colspan="2">Fiscal Years Ended March 31,</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>General and administrative</td><td>$ 25,807,000</td><td>$ 20,621,000</td></tr><tr><td>Sales and marketing</td><td>7,290,000</td><td>7,659,000</td></tr><tr><td>Research and development</td><td>1,930,000</td><td>1,765,000</td></tr><tr><td>Acquisition costs</td><td>-</td><td>713,000</td></tr><tr><td></td><td></td><td></td></tr><tr><td>Percent of net sales</td><td></td><td></td></tr><tr><td></td><td></td><td></td></tr><tr><td>General and administrative</td><td>12.1%</td><td>11.5%</td></tr><tr><td>Sales and marketing</td><td>3.4%</td><td>4.3%</td></tr><tr><td>Research and development</td><td>0.9%</td><td>1.0%</td></tr><tr><td>Acquisition costs</td><td>-</td><td>0.4%</td></tr></table>



## Table of Contents

General and Administrative. Our general and administrative expenses for fiscal 2013 were $25,807,000, which represents an increase of $5,186,000, or 25.1%, from general and administrative expenses for fiscal 2012 of $20,621,000. The increase in general and administrative expenses was primarily due to (i) $1,031,000 of increased share-based compensation expense, (ii) $822,000 of increased legal fees, (iii) $675,000 for liquidated damages paid in connection with our April 2012 private placement, (iv) $658,000 of increased general and administrative expenses at our offshore locations, (v) $650,000 of accrual established related to the termination of our consulting agreement with Mel Marks, (vi) $514,000 of increased salaries and wages, (vii) $481,000 of increased consulting expenses primarily related to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, (viii) $389,000 recorded due to the change in the fair value of the warrants during fiscal 2013, (ix) $369,000 of increased expenses for work related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002, (x) $332,000 of incentives paid to certain executives, and (xi) $215,000 of increased expenses in connection with our income tax planning work. During fiscal 2013, we also recorded a gain of $804,000 due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts compared to a loss of $476,000 recorded during fiscal 2012. In addition, professional fees of $350,000 were incurred in connection with the restructuring of the discontinued subsidiary. Our prior year general and administrative expenses included $1,292,000 of professional services and travel incurred in connection with the discontinued subsidiary.

During fiscal 2013, our general and administrative expenses were negatively impacted by $982,000 of expenses incurred in connection with the discontinued subsidiary’s initial implementation work related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. These expenses were previously recorded by the discontinued subsidiary.

Sales and Marketing. Our sales and marketing expenses for fiscal 2013 decreased $369,000, or 4.8%, to $7,290,000 from $7,659,000 for fiscal 2012. The decrease in sales and marketing was due primarily to (i) $238,000 of decreased travel and professional services incurred in connection with the discontinued subsidiary and (ii) $114,000 of decreased employee-related expenses.

Research and Development. Our research and development expenses increased by $165,000, or 9.3%, to $1,930,000 for fiscal 2013 from $1,765,000 for fiscal 2012. The increase in research and development expenses was due primarily to increased employee-related expenses during fiscal 2013.

Acquisition Costs. During fiscal 2012, we incurred $713,000 of legal and professional fees in connection with the acquisition of the discontinued subsidiary.

## Interest Expense

Interest Expense. Our interest expense from continuing operations reflects our increased leverage as a result of the acquisition of the discontinued subsidiary and the increase in the size of our business. Net interest expense for fiscal 2013 increased $7,843,000, or 154.6%, to $12,324,000 from $4,841,000 for fiscal 2012. This increase in net interest expense was attributable to (i) increased outstanding loan balances and higher interest rates incurred during fiscal 2013 as compared to fiscal 2012 and (ii) a contingent fee payable in connection with the third amendment and waiver to the Financing Agreement (as defined below). These increases were partly offset by increased interest income in connection with the long-term note receivable from the discontinued subsidiary.

## Provision for Income Taxes

Income Tax. Our income tax expense from continuing operations was $7,432,000 and $7,385,000 during fiscal 2013 and 2012, respectively, an effective rate of 33.8% and 34.0% for fiscal 2013 and 2012, respectively.

## Income (Loss) from Discontinued Operations

Income (Loss) from Discontinued Operations. Our loss from discontinued operations was $106,069,000 and $62,862,000 during fiscal 2013 and 2012, respectively.

## Liquidity and Capital Resources

## Overview

At March 31, 2014, we had working capital of $22,077,000, a ratio of current assets to current liabilities of 1.2:1, and included in working capital is cash of $24,599,000, compared to working capital from our continuing operations of $33,722,000, a ratio of current assets to current liabilities of 1.5:1, and included in working capital is cash of $19,346,000 at March 31, 2013.



## Table of Contents

During fiscal 2014, we used cash generated from (i) the use of our receivable discount programs with certain of our major customers, (ii) operations, including net income tax refunds of $16,472,000, and (iii) additional borrowing under our credit agreement which was primarily used to pay in full on August 26, 2013 all of our outstanding obligations related to our guaranty of a loan to our discontinued subsidiary, including interest. In addition, we used cash to build up our inventory, repay our term loan, and make capital expenditures.

During fiscal 2014, we filed a universal shelf registration statement on Form S-3 (File No. 333-190966), which was declared effective on May 9, 2014, for the proposed offering from time to time of up to $100,000,000 of our securities, including common stock, preferred stock, and debt securities. The securities may be offered by us from time to time at amounts, prices, interest rates, and other terms to be determined at the time of the offering.

We believe our cash on hand, short-term investments, use of receivable discount programs, amounts available under our credit agreement, and other sources are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, capital lease commitments, and capital expenditures over the next twelve months.

## Cash Flows

Our cash flows from our continuing operations as reflected in the consolidated statement of cash flows for fiscal 2014, 2013, and 2012 are summarized as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Fiscal Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Cash provided by (used in):</td><td></td><td></td><td></td></tr><tr><td>Operating activities from our continuing operations</td><td>$ 13,290,000</td><td>$ (4,758,000)</td><td>$ 15,802,000</td></tr><tr><td>Investing activities from our continuing operations</td><td>(3,032,000)</td><td>(2,371,000)</td><td>(1,047,000)</td></tr><tr><td>Financing activities from our continuing operations</td><td>15,642,000</td><td>21,639,000</td><td>61,060,000</td></tr><tr><td>Effect of exchange rates on cash</td><td>(31,000)</td><td>45,000</td><td>37,000</td></tr><tr><td>Net increase in cash from our continuing operations</td><td>25,869,000</td><td>14,555,000</td><td>75,852,000</td></tr><tr><td>Additional selected cash flow data:</td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>$ 2,742,000</td><td>$ 2,849,000</td><td>$ 3,466,000</td></tr><tr><td>Capital expenditures</td><td>(2,978,000)</td><td>(2,330,000)</td><td>(1,010,000)</td></tr></table>

## Fiscal 2014 Compared to Fiscal 2013

Net cash provided by operating activities from our continuing operations was $13,290,000 during fiscal 2014 compared to net cash used in operating activities from our continuing operations of $4,758,000 during fiscal 2013. The significant changes in our operating activities from our continuing operations in fiscal 2014 were due primarily to (i) an increase in accounts payable balances due primarily to a buildup of our non-core inventory in the current fiscal year, in anticipation of increased sales, compared to the pay down of accounts payable balances in the prior year which were incurred in connection with the inventory provided to the discontinued subsidiary during fiscal 2012, (ii) the receipt of income tax refunds in the current fiscal year compared to cash payments for income taxes in the prior year, and (iii) an increase in accounts receivable during fiscal 2014 due to higher net sales compared to fiscal 2013. In addition, other changes in operating activities from our continuing operations were (i) a decrease of $546,000 to the provision for customer payment discrepancies, (ii) a decrease of $213,000 to the provision for bad debt, and (iii) a decrease of $194,000 to the provision for inventory reserves.

Net cash used in investing activities from our continuing operations was $3,032,000 and $2,371,000 during fiscal 2014 and 2013, respectively. This change was due primarily to (i) increase in purchase of equipment related to our wheel hub assemblies and bearings and (ii) increase in purchases of equipment related to our manufacturing facilities.



## Table of Contents

Net cash provided by financing activities from our continuing operations was $15,642,000 and $21,639,000 during fiscal 2014 and 2013, respectively. This change was due mainly to (i) additional borrowing under the amended credit agreement partly offset by the repayment of our term loan, (ii) net proceeds from the stock option exercises during fiscal 2014, (iii) financing costs paid in connection with the amendment of our credit agreement, and (iv) the repurchase of warrants from our lenders. In addition, our prior year financing activities from continuing operations included the net proceeds received from our private placement in April 2012.

## Fiscal 2013 Compared to Fiscal 2012

Net cash used in operating activities from our continuing operations was $4,758,000 during fiscal 2013 compared to cash provided from operations from our continuing operations of $15,802,000 during fiscal 2012. The significant changes in our operating activities from our continuing operations in fiscal 2013 were due primarily to (i) the pay down of accounts payable balances incurred in connection with the inventory provided to the discontinued subsidiary in fiscal 2012 to provide goods in order to maintain the service levels for the discontinued subsidiary’s customers, (ii) an increase in long-term core inventory due to higher sales, and (iii) a decrease in accounts receivable balances due to a higher balance of receivables discounted during fiscal 2013 compared to fiscal 2012. In addition, other changes in operating activities from our continuing operations were (i) a decrease of $1,402,000 to the provision for inventory reserves due to higher inventory levels, (ii) an increase of $266,000 to the provision for customer payment discrepancies, and (iii) an increase of $180,000 to the provision for bad debt.

Net cash used in investing activities from our continuing operations was $2,371,000 and $1,047,000 during fiscal 2013 and 2012, respectively. Our capital expenditures during fiscal 2013 and 2012 were $2,330,000 and $1,010,000, respectively, primarily related to the purchase of equipment for our manufacturing facilities, improvements to our California facility, and software.

Net cash provided by financing activities from our continuing operations was $21,639,000 and $61,060,000 during fiscal 2013 and 2012, respectively. This decrease was primarily due to decreased borrowings in fiscal 2013 compared to fiscal 2012 partly offset by the net proceeds received from our private placement during fiscal 2013. The net cash provided by financing activities was used primarily to finance the discontinued subsidiary.

## Capital Resources

## Debt

We are party to the following credit agreements.

## Financing Agreement

We are party to a financing agreement, as amended, (the “Financing Agreement”), with a syndicate of lenders, Cerberus Business Finance, LLC (“Cerberus”), as collateral agent, and PNC Bank, National Association, as administrative agent. The loans made thereunder (the “Loans”) consist of: (i) term loans aggregating $85,000,000 (the “Term Loans”) and (ii) revolving loans of up to $20,000,000, subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit (the “Revolving Loans”). The Loans were initially scheduled to mature on January 17, 2017. In connection with the Financing Agreement, the lenders were granted a security interest in substantially all of our assets.

The Term Loans required quarterly principal payments of $600,000 per quarter from April 1, 2013 to September 30, 2013 and $1,350,000 per quarter from October 1, 2013 until the final maturity date. The Term Loans bear interest at rates equal to, at our option, either LIBOR plus 8.5% or a base rate plus 7.5%.



## Table of Contents

In June 2013, we entered into a sixth amendment to the Financing Agreement (the "Sixth Amendment"), under the terms of which the agents and lenders agreed to waive any event of default that would otherwise arise under the Financing Agreement due to the qualification in the opinion by our certified public accountants with respect to the financial statements for the fiscal year ended March 31, 2013. In addition, the Sixth Amendment (i) added a reporting requirement with respect to our liquidity levels and certain inventory purchases and (ii) added a financial covenant under which we must maintain the following levels of liquidity on the following dates unless otherwise consented to by the lenders: on June 28, 2013, an aggregate amount of at least $25,000,000, subject to certain adjustments; on July 31, 2013, an aggregate amount of at least $26,000,000, subject to certain adjustments; and on August 30, 2013, an aggregate amount of at least $27,000,000, subject to certain adjustments. We were in compliance with these minimum liquidity requirements at each date.

In August 2013, we entered into a seventh amendment to the Financing Agreement (the "Seventh Amendment"), pursuant to which (i) we borrowed an additional $20,000,000 in Term Loans, (ii) modified certain financial covenants, and (iii) the lenders provided consent to the payment of certain subordinated debt with respect to the guaranty as described below under WX Agreement (as defined herein). Among other things, the Seventh Amendment required quarterly principal payments of $2,100,000, with respect to the Term Loans, beginning on October 1, 2013 until the final maturity date.

In October 2013, we entered into an eighth amendment to the Financing Agreement (the "Eighth Amendment"), which among other things, permitted us to purchase Mr. Joffe's stock options pursuant to an option purchase agreement.

In November 2013, we entered into a ninth amendment and waiver to the Financing Agreement (the "Ninth Amendment"), pursuant to which (i) the agents and lenders waived a requirement for us to pay down the Loans with our receipt of certain state tax refunds, (ii) the Revolving Loans were increased by $10,000,000 to $30,000,000 (the "Amended Revolving Loans), subject to certain borrowing base restrictions, (iii) the Term Loans were decreased by $10,000,000 to $95,000,000 (the "Amended Term Loans"), (iv) the final maturity date was extended to November 6, 2018, (v) we gained the right, subject to meeting certain conditions, to repurchase up to $10,000,000 of our equity interests, and (vi) certain other amendments and modifications were made to the Financing Agreement, in the form of an amended and restated financing agreement (the "Amended Financing Agreement").

Among other things, the Amended Term Loans require quarterly principal payments of $2,100,000 and bear interest at rates equal to, at our option, either LIBOR (subject to a 1.50% LIBOR floor) plus 5.25% or a reference rate plus 4.25%. The Amended Revolving Loans bear interest at rates equal to, at our option, either LIBOR plus 2.50% or a reference rate plus 1.00%. The interest rate on our term loans using the LIBOR option was 6.75% and 10.50% at March 31, 2014 and 2013, respectively. The interest rate on our Amended Revolving Loans using the LIBOR option was 2.66% at March 31, 2014.

The Amended Revolving Loans may, at our option, be prepaid in whole or in part. We may reduce or terminate the commitments of the lenders to make the Amended Revolving Loans or prepay the Amended Term Loans in whole or in part, but such prepayments are subject to a prepayment penalty of (i) 3.00% times the sum of the reduction of the revolving credit commitment plus the principal amount of any prepayment of the term loan from the Ninth Amendment Effective Date until January 18, 2014 and (ii) 2.00% times the sum of the reduction of the revolving credit commitment plus the principal amount of any prepayment of the term loan from January 19, 2014 to January 18, 2015. Notwithstanding the foregoing, we had the right to prepay up to $10,000,000 of the Amended Term Loans without any prepayment penalty if such payment was made within 120 days of the Ninth Amendment Effective Date. We did not exercise the prepayment option.

The Amended Financing Agreement, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio, a minimum fixed charge coverage ratio, and minimum consolidated earnings before interest, income tax, depreciation and amortization expenses (“EBITDA”). We were in compliance with all financial covenants under the Amended Financing Agreement as of March 31, 2014.



The following table summarizes the financial covenants required under the Amended Financing Agreement at March 31, 2014:

<table><tr><td></td><td>Calculation as of March 31, 2014</td><td>Financial covenants required per the Amended Financing Agreement</td></tr><tr><td>Maximum senior leverage ratio</td><td>1.87</td><td>3.30</td></tr><tr><td>Minimum fixed charge coverage ratio</td><td>1.96</td><td>1.05</td></tr><tr><td>Minimum consolidated EBITDA</td><td>$ 55,240,000</td><td>$ 31,500,000</td></tr></table>

At March 31, 2014, we had borrowed $10,000,000 under the Amended Revolving Loans. There was no outstanding balance on the Revolving Loans at March 31, 2013. We had reserved $476,000 of the Amended Revolving Loans for standby letters of credit for workers' compensation insurance and $1,614,000 for commercial letters of credit at March 31, 2014 and $17,720,000, subject to certain adjustments, was available under the Amended Revolving Loans at March 31, 2014.

## WX Agreement

In August 2012, we entered into a Revolving Credit/Strategic Cooperation Agreement (the "WX Agreement") with Wanxiang America Corporation (the "Supplier") and the discontinued subsidiary. Under the terms of the WX Agreement, the Supplier agreed to provide a revolving credit line for purchases of automotive parts and components by the discontinued subsidiary in an aggregate principal amount not to exceed $22,000,000 (the "Fenco Credit Line"), of which $2,000,000 would only be available for accrued interest and other amounts payable (the "Obligations"). Payment for all purchases became due and payable 120 days after the date of the bill of lading. Any amounts remaining unpaid following the due date would bear interest at a rate of 1% per month. The Fenco Credit Line was scheduled to mature on July 31, 2017. Pursuant to a guaranty (the "Guaranty"), the Obligations under the WX Agreement were guaranteed by us and certain of our subsidiaries.

On July 9, 2013, we received notice from the Supplier that the filing of the voluntary petition for relief under Chapter 7 of Title 11 of the United States Code in the U.S. Bankruptcy Court for the District of Delaware by the Fenco Entities constituted an "Event of Default" under the WX Agreement. As a result of the Event of Default, all amounts outstanding under the WX Agreement together with all accrued interest and all other amounts payable automatically became immediately due and payable subject to the terms of the Guaranty and a subordination agreement with the lender under the Financing Agreement. In addition, subject to certain adjustments, the interest rate applicable to all amounts remaining unpaid will increase, to the extent permitted by law, to 1.25% per month, compounding monthly, on December 10, 2013, and to 1.50% per month, compounding monthly, on June 10, 2014.

On August 26, 2013, in connection with the Seventh Amendment, we paid $20,843,000 to the Supplier for payments of all our outstanding liabilities, including interest payments, under the Guaranty.

In connection with the WX Agreement and the Guaranty, we also issued a warrant (the "Supplier Warrant") to the Supplier to purchase up to 516,129 shares of our common stock for an initial exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017. The exercise price is subject to adjustments, among other things, for sales of common stock by us at a price below the exercise price.

The fair value of the Supplier Warrant using the Monte Carlo simulation model was $10,047,000 and $1,639,000 at March 31, 2014 and 2013, respectively. This amount is recorded as a warrant liability which is included in other liabilities in the consolidated balance sheets at March 31, 2014 and 2013. During fiscal 2014 and 2013, a loss of $8,408,000 and $621,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.



## Table of Contents

## Receivable Discount Programs

We use receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers' receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allows us to accelerate collection of customers' receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands or if the discount period is extended to reflect more favorable payment terms to customers.

The following is a summary of the receivable discount programs from continuing operations:

<table><tr><td rowspan="2"></td><td colspan="2">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td></tr><tr><td>Receivables discounted</td><td>$ 210,752,000</td><td>$ 188,536,000</td></tr><tr><td>Weighted average days</td><td>337</td><td>336</td></tr><tr><td>Weighted average discount rate</td><td>2.2%</td><td>2.7%</td></tr><tr><td>Amount of discount as interest expense</td><td>$ 4,336,000</td><td>$ 4,654,000</td></tr></table>

## Off-Balance Sheet Arrangements

At March 31, 2014, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

## Multi-year Customer Agreements

We have or are renegotiating long-term agreements with many of our major customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer's exclusive or primary supplier. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer's research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that we meet ongoing standards related to fulfillment, price, and quality. Our contracts with major customers expire at various dates through March 2019.

While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase their Remanufactured Core inventory have also been a significant and an additional strain on our available working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact the near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.

## Share Repurchase Program

In March 2010, our Board of Directors authorized a share repurchase program of up to $5,000,000 of our outstanding common stock from time to time in the open market and in private transactions at prices deemed appropriate by management. The program does not have an expiration date. Under this program, we repurchased and retired a total of 67,347 shares at a total cost of approximately $389,000 during fiscal 2013. We did not repurchase any outstanding common stock during fiscal 2014.



## Table of Contents

## Capital Expenditures and Commitments

Our capital expenditures were $2,978,000 during fiscal 2014. A significant portion of these expenditures relate to the purchase of equipment for our manufacturing and warehousing facilities and improvements to our California facility and software. We expect our fiscal 2015 capital expenditures for our current operations to be in the range of $3,000,000 to $7,000,000 depending on the timing of initiatives primarily related to our purchases of equipment, information technology, and leasehold improvements to our current facilities. We expect to use our working capital and incur additional capital lease obligations to finance these capital expenditures.

## Contractual Obligations

The following summarizes our contractual obligations and other commitments as of March 31, 2014 and the effect such obligations could have on our cash flows in future periods:

<table><tr><td rowspan="2">Contractual Obligations</td><td colspan="6">Payments Due by Period</td></tr><tr><td>Total</td><td>Less than 1 year</td><td>2 to 3 years</td><td>4 to 5 years</td><td>More than 5 years</td><td></td></tr><tr><td>Capital Lease Obligations (1)</td><td>$ 353,000</td><td>$ 76,000</td><td>$ 152,000</td><td>$ 125,000</td><td>$ -</td><td></td></tr><tr><td>Operating Lease Obligations (2)</td><td>10,628,000</td><td>2,953,000</td><td>2,369,000</td><td>2,097,000</td><td>3,209,000</td><td></td></tr><tr><td>Revolving Loan</td><td>10,000,000</td><td>10,000,000</td><td>-</td><td>-</td><td>-</td><td></td></tr><tr><td>Term Loan (3)</td><td>116,000,000</td><td>14,437,000</td><td>27,129,000</td><td>74,434,000</td><td>-</td><td></td></tr><tr><td>Unrecognized Tax Benefits (4)</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td></td></tr><tr><td>Other Long-Term Obligations (5)</td><td>46,996,000</td><td>15,460,000</td><td>17,403,000</td><td>9,582,000</td><td>4,551,000</td><td></td></tr><tr><td>Total</td><td>$ 183,977,000</td><td>$ 42,926,000</td><td>$ 47,053,000</td><td>$ 86,238,000</td><td>$ 7,760,000</td><td></td></tr></table>

(1) Capital Lease Obligations represent amounts due under capital leases for various types of equipment.

(2) Operating Lease Obligations represent amounts due for rent under our leases for office and warehouse facilities in North America and Asia and for our Company automobile.

(3) Term Loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon the interest rate for our term loan using the LIBOR option at March 31, 2014 which was 6.75%.

(4) We are unable to reliably estimate the timing of future payments related to uncertain tax position liabilities at March 31, 2014 in the amount of $540,000; therefore, $493,000 of income taxes payable for the voluntary disclosure agreements which will be paid in fiscal 2015 has been excluded from the table above. However, future tax payment accruals related to uncertain tax positions are included in our balance sheets, reduced by the associated federal deduction for state taxes.

(5) Other Long-Term Obligations represent commitments we have with certain customers to provide marketing allowances in consideration for long-term agreements to provide products over a defined period. We are not obligated to provide these marketing allowances should our business relationships end with these customers.



## Table of Contents

## Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk relates to changes in interest rates and foreign currency exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. As our overseas operations expand, our exposure to the risks associated with foreign currency fluctuations will continue to increase.

## Interest rate risk

We are exposed to changes in interest rates primarily as a result of our borrowing and receivable discount programs, which have interest costs that vary with interest rate movements. Our credit facility bears interest at variable base rates, plus an applicable margin. At March 31, 2014, our net debt obligations totaled $97,277,000. If interest rates were to increase 1%, our net annual interest expense would have increased by approximately $973,000. In addition, for each $10,000,000 of accounts receivable we discount over a period of 180 days, a 1% increase in interest rates would increase our interest expense by $50,000.

## Foreign currency risk

We are exposed to foreign currency exchange risk inherent in our anticipated purchases and expenses denominated in currencies other than the U.S. dollar. We transact business in the following foreign currencies; Mexican pesos, Malaysian ringit, Singapore dollar, Chinese yuan, and the Canadian dollar. Our primary currency risks result from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, we enter into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which we use forward foreign currency exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates. These contracts generally expire in a year or less. Any changes in the fair values of our forward foreign currency exchange contracts are reflected in current period earnings. Based upon our forward foreign currency exchange contracts related to these currencies, an increase of 10% in exchange rates at March 31, 2014 would have increased our general and administrative expenses by approximately $1,603,000. During fiscal 2014 and 2013, a loss of $842,000 and a gain of $804,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.

## Item 8. Financial Statements and Supplementary Data

The information required by this item is set forth in the consolidated financial statements, commencing on page F-1 included herein.

## Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

## Item 9A. Controls and Procedures

## Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosures.



## Table of Contents

Under the supervision and with the participation of management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(b) and 15d-15(e). Based on this evaluation – and that the Company has remediated the prior year material weakness in internal control over financial reporting described below under Changes in Internal Control Over Financial Reporting – our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that the MPA’s disclosure controls and procedures were effective as of March 31, 2014.

## Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required.

Internal control over financial reporting includes those policies and procedures that:

1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in the 1992 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation – and that the Company has remediated the prior year material weakness in internal control over financial reporting described below under Changes in Internal Control Over Financial Reporting – management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2014.

The effectiveness of our internal control over financial reporting as of March 31, 2014 has been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Their assessment is included in the accompanying Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.

## Changes in Internal Control Over Financial Reporting

Other than the items noted immediately below, there were no changes in MPA’s internal control over financial reporting during the fourth quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, MPA’s internal control over financial reporting.



## Table of Contents

Discontinued Operation and Deconsolidation of Fenco

In May 2013, FAPL appointed a new board of independent directors, hired an independent chief restructuring officer and all its previously existing officers resigned from FAPL. As a result of loss of control of Fenco, we deconsolidated the assets and liabilities of Fenco from our consolidated financial statements effective May 31, 2013. Fenco has effectively been disposed of and we have not and do not retain any continuing involvement in its operations.

## Item 9B. Other Information

None.



## PART III

## Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to our Definitive Proxy Statement in connection with our next Annual Meeting of Stockholders (the “Proxy Statement”).

## Item 11. Executive Compensation

The information required by this item is incorporated by reference to the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners And Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to the Proxy Statement.

## Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the Proxy Statement.



## PART IV

## Item 15. Exhibits, Financial Statement Schedules.

## a. Documents filed as part of this report:

## (1) Index to Consolidated Financial Statements:

<table><tr><td>Reports of Independent Registered Public Accounting Firm</td><td>51</td></tr><tr><td>Consolidated Balance Sheets</td><td>F-1</td></tr><tr><td>Consolidated Statements of Operations</td><td>F-2</td></tr><tr><td>Consolidated Statements of Comprehensive Income (Loss)</td><td>F-3</td></tr><tr><td>Consolidated Statement of Shareholders&#x27; Equity (Deficit)</td><td>F-4</td></tr><tr><td>Consolidated Statements of Cash Flows</td><td>F-5</td></tr><tr><td>Notes to Consolidated Financial Statements</td><td>F-6</td></tr></table>

## (2) Schedules.

Schedule II — Valuation and Qualifying Accounts

S-1

(3) Exhibits:

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>3.1</td><td>Certificate of Incorporation of the Company</td><td>Incorporated by reference to Exhibit 3.1 to the Company&#x27;s Registration Statement on Form SB-2 declared effective on March 22, 1994 (the &quot;1994 Registration Statement&quot;).</td></tr><tr><td>3.2</td><td>Amendment to Certificate of Incorporation of the Company</td><td>Incorporated by reference to Exhibit 3.2 to the Company&#x27;s Registration Statement on Form S-1 (No. 33-97498) declared effective on November 14, 1995 (the &quot;1995 Registration Statement&quot;).</td></tr><tr><td>3.3</td><td>Amendment to Certificate of Incorporation of the Company</td><td>Incorporated by reference to Exhibit 3.3 to the Company&#x27;s Annual Report on Form 10-K for the fiscal year ended March 31, 1997 (the &quot;1997 Form 10-K&quot;).</td></tr><tr><td>3.4</td><td>Amendment to Certificate of Incorporation of the Company</td><td>Incorporated by reference to Exhibit 3.4 to the Company&#x27;s Annual Report on Form 10-K for the fiscal year ended March 31, 1998 (the &quot;1998 Form 10-K&quot;).</td></tr><tr><td>3.5</td><td>Amendment to Certificate of Incorporation of the Company</td><td>Incorporated by reference to Exhibit C to the Company&#x27;s proxy statement on Schedule 14A filed with the SEC on November 25, 2003.</td></tr><tr><td>3.6</td><td>Amended and Restated By-Laws of the Company</td><td>Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 24, 2010.</td></tr><tr><td>3.7</td><td>Certificate of Amendment of the Certificate of Incorporation of the Company</td><td>Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 9, 2014.</td></tr><tr><td>4.1</td><td>Specimen Certificate of the Company&#x27;s common stock</td><td>Incorporated by reference to Exhibit 4.1 to the 1994 Registration Statement.</td></tr><tr><td>4.2</td><td>Form of Underwriter&#x27;s common stock purchase warrant</td><td>Incorporated by reference to Exhibit 4.2 to the 1994 Registration Statement.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>4.3</td><td>1994 Stock Option Plan</td><td>Incorporated by reference to Exhibit 4.3 to the 1994 Registration Statement.</td></tr><tr><td>4.4</td><td>Form of Incentive Stock Option Agreement</td><td>Incorporated by reference to Exhibit 4.4 to the 1994 Registration Statement.</td></tr><tr><td>4.5</td><td>1994 Non-Employee Director Stock Option Plan</td><td>Incorporated by reference to Exhibit 4.5 to the Company&#x27;s Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995.</td></tr><tr><td>4.6</td><td>1996 Stock Option Plan</td><td>Incorporated by reference to Exhibit 4.6 to the Company&#x27;s Registration Statement on Form S-2 (No. 333-37977) declared effective on November 18, 1997 (the &quot;1997 Registration Statement&quot;).</td></tr><tr><td>4.7</td><td>2003 Long Term Incentive Plan</td><td>Incorporated by reference to Exhibit 4.9 to the Company&#x27;s Registration Statement on Form S-8 filed with the SEC on April 2, 2004.</td></tr><tr><td>4.8</td><td>2004 Non-Employee Director Stock Option Plan</td><td>Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A for the 2004 Annual Shareholders Meeting.</td></tr><tr><td>4.9</td><td>Registration Rights Agreement among the Company and the investors identified on the signature pages thereto, dated as of May 18, 2007</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on May 18, 2007.</td></tr><tr><td>4.10</td><td>Form of Warrant to be issued by the Company to investors in connection with the May 2007 Private Placement</td><td>Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on May 18, 2007.</td></tr><tr><td>4.11</td><td>2010 Incentive Award Plan</td><td>Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on December 15, 2010.</td></tr><tr><td>4.12</td><td>Amended and Restated 2010 Incentive Award Plan</td><td>Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 5, 2013.</td></tr><tr><td>4.14</td><td>Second Amended and Restated 2010 Incentive Award Plan</td><td>Incorporated by reference to Appendix A to the Proxy Statement on Schedule 14A filed on March 3, 2014.</td></tr><tr><td>4.15</td><td>2014 Non-Employee Director Incentive Award Plan</td><td>Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on March 3, 2014.</td></tr><tr><td>10.1</td><td>Amendment to Lease, dated October 3, 1996, by and between the Company and Golkar Enterprises, Ltd. relating to additional property in Torrance, California</td><td>Incorporated by reference to Exhibit 10.17 to the December 31, 1996 Form 10-Q.</td></tr><tr><td>10.2</td><td>Lease Agreement, dated September 19, 1995, by and between Golkar Enterprises, Ltd. and the Company relating to the Company&#x27;s facility located in Torrance, California</td><td>Incorporated by reference to Exhibit 10.18 to the 1995 Registration Statement.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.3</td><td>Agreement and Plan of Reorganization, dated as of April 1, 1997, by and among the Company, Mel Marks, Richard Marks and Vincent Quek relating to the acquisition of MVR and Unijoh</td><td>Incorporated by reference to Exhibit 10.22 to the 1997 Form 10-K.</td></tr><tr><td>10.4</td><td>Form of Indemnification Agreement for officers and directors</td><td>Incorporated by reference to Exhibit 10.25 to the 1997 Registration Statement.</td></tr><tr><td>10.5</td><td>Second Amendment to Lease, dated March 15, 2002, between Golkar Enterprises, Ltd. and the Company relating to property in Torrance, California</td><td>Incorporated by reference to Exhibit 10.44 to the 2003 10-K.</td></tr><tr><td>10.6*</td><td>Addendum to Vendor Agreement, dated May 8, 2004, between AutoZone Parts, Inc. and the Company</td><td>Incorporated by reference to Exhibit 10.15 to the 2004 10-K.</td></tr><tr><td>10.7</td><td>Form of Orbian Discount Agreement between the Company and Orbian Corp.</td><td>Incorporated by reference to Exhibit 10.17 to the 2004 10-K.</td></tr><tr><td>10.8</td><td>Form of Standard Industrial/Commercial Multi-Tenant Lease, dated May 25, 2004, between the Company and Golkar Enterprises, Ltd for property located at 530 Maple Avenue, Torrance, California</td><td>Incorporated by reference to Exhibit 10.18 to the 2004 10-K.</td></tr><tr><td>10.9</td><td>Build to Suit Lease Agreement, dated October 28, 2004, among Motorcar Parts de Mexico, S.A. de CV, the Company and Beatrix Flourie Geoffroy</td><td>Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 2, 2004.</td></tr><tr><td>10.10</td><td>Amendment No. 3 to Pay-On-Scan Addendum, dated August 22, 2006, between AutoZone Parts, Inc. and the Company</td><td>Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on August 30, 2006.</td></tr><tr><td>10.11*</td><td>Amendment No. 1 to Vendor Agreement, dated August 22, 2006, between AutoZone Parts, Inc. and Motorcar Parts of America, Inc.</td><td>Incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K filed on August 30, 2006.</td></tr><tr><td>10.12</td><td>Lease Agreement Amendment, dated October 12, 2006, between the Company and Beatrix Flourie Geoffroy</td><td>Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on October 20, 2006.</td></tr><tr><td>10.13</td><td>Third Amendment to Lease Agreement, dated as of November 20, 2006, between Motorcar Parts of America, Inc. and Golkar Enterprises, Ltd.</td><td>Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed on November 27, 2006.</td></tr><tr><td>10.14</td><td>Securities Purchase Agreement among the Company and the investors identified on the signature pages thereto, dated as of May 18, 2007</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 18, 2007.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.15</td><td>Amended and Restated Employment Agreement, dated as of December 31, 2008, by and between the Company and Selwyn Joffe</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed January 7, 2009.</td></tr><tr><td>10.16*</td><td>Vendor Agreement dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 5, 2009.</td></tr><tr><td>10.17*</td><td>Core Amendment to Vendor Agreement, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed May 5, 2009.</td></tr><tr><td>10.18 *</td><td>Vendor Agreement Addendum, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed on December 23, 2009.</td></tr><tr><td>10.19 *</td><td>Core Amendment to Vendor Agreement Addendum, dated as of March 31, 2009, between the Company and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed on December 23, 2009.</td></tr><tr><td>10.20 *</td><td>Master Vendor Agreement, dated as of April 1, 2009, between the Company and O&#x27;Reilly Automotive, Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on January 13, 2010.</td></tr><tr><td>10.21 *</td><td>Letter Agreement, dated as of April 1, 2009, between the Company and O&#x27;Reilly Automotive, Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on January 13, 2010.</td></tr><tr><td>10.22 *</td><td>Vendor Agreement Addendum, dated as of April 1, 2009 between the Company and O&#x27;Reilly Automotive, Inc.</td><td>Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on January 13, 2010.</td></tr><tr><td>10.23</td><td>Debenture, dated August 24, 2010, issued by Fenwick Automotive Products Limited to Motorcar Parts of America, Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 30, 2010.</td></tr><tr><td>10.24</td><td>Addendum to Unanimous Shareholders Agreement, dated August 24, 2010, between Motorcar Parts of America, Inc., Fenwick Enterprises Inc., Escal Holdings Inc., Fencity Holdings Inc., Jofen Holdings Inc., Gordon Fenwick, Paul Fenwick, Joel Fenwick, Stanley Fenwick, Karen Fenwick, Jack Shuster and FAPL Holdings Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 30, 2010.</td></tr><tr><td>10.25</td><td>Amended and Restated Debenture, dated December 15, 2010, issued by Fenwick Automotive Products Limited to Motorcar Parts of America, Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 21, 2010.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.26</td><td>Amended and Restated Addendum to Unanimous Shareholders Agreement, dated December 15, 2010, between Motorcar Parts of America, Inc., Fenwick Enterprises Inc., Jack Shuster, Gordon Fenwick, Paul Fenwick, Joel Fenwick, FAPL, Fenwick Automotive Products Limited, Introcan Inc., Escal Holdings Inc., Fencity Holdings Inc. and Jofen Holdings Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on December 21, 2010.</td></tr><tr><td>10.27*</td><td>Consignment Agreement, dated as of March 1, 2011, among Motorcar Parts of America, Inc., Rafko Logistics Inc., Fenwick Automotive Products Limited and FAPL Holdings Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on March 7, 2011.</td></tr><tr><td>10.28</td><td>Purchase Agreement, dated May 6, 2011, by and among Motorcar Parts of America, Inc., FAPL Holdings Inc., Jack Shuster, Gordon Fenwick, Paul Fenwick and Joel Fenwick.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 12, 2011.</td></tr><tr><td>10.29</td><td>Hold Agreement, dated May 6, 2011, between Motorcar Parts of America, Inc. and FAPL Holdings Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on May 12, 2011.</td></tr><tr><td>10.30</td><td>Escrow Agreement, dated May 6, 2011, by and among Motorcar Parts of America, Inc., FAPL Holdings Inc., Jack Shuster, Gordon Fenwick, Paul Fenwick, Joel Fenwick and Strikeman Elliott LLP</td><td>Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on May 12, 2011.</td></tr><tr><td>10.31</td><td>Amended and Restated Credit Agreement, dated May 6, 2011, by and among Fenwick Automotive Products Limited, Introcan Inc., Manufactures and Traders Trust Company, M&amp;T Bank and such other lenders from time to time as may become a party thereto</td><td>Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on May 12, 2011.</td></tr><tr><td>10.32</td><td>Core Amendment No. 3 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 16, 2011.</td></tr><tr><td>10.33</td><td>Core Amendment No. 4 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on June 16, 2011.</td></tr><tr><td>10.34</td><td>Addendum No. 2 to Amendment No. 1 to Vendor Agreement, dated as of May 31, 2011, by and between Motorcar Parts of America, Inc. and AutoZone Parts, Inc.</td><td>Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on June 16, 2011.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.35</td><td>Fifth Amendment, dated as of November 17, 2011, to that certain Standard Industrial Commercial Single Tenant Lease-Gross, dated as of September 19, 1995, between Golkar Enterprises, Ltd and Motorcar Parts of America, Inc., as amended</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on November 25, 2011.</td></tr><tr><td>10.36</td><td>Financing Agreement, dated as of January 18, 2012, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on January 24, 2012.</td></tr><tr><td>10.37</td><td>Subscription Agreement, dated April 20, 2012</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 23, 2012.</td></tr><tr><td>10.38</td><td>Registration Rights Agreement, dated April 20, 2012</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on April 23, 2012.</td></tr><tr><td>10.39</td><td>Right of First Refusal Agreement, dated May 3, 2012</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 7, 2012.</td></tr><tr><td>10.40</td><td>Employment Agreement, dated as of May 18, 2012, between Motorcar Parts of America, Inc., and Selwyn Joffe</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 24, 2012.</td></tr><tr><td>10.41</td><td>Second Amendment to the Financing Agreement, dated as of May 24, 2012, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 31, 2012.</td></tr><tr><td>10.42</td><td>Warrant to Purchase Common Stock, dated May 24, 2012, issued by Motorcar Parts of America, Inc. to Cerberus Business Finance, LLC in connection with the Second Amendment to the Financing Agreement</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on May 31, 2012.</td></tr><tr><td>10.43</td><td>Revolving Credit/Strategic Cooperation Agreement, dated as of August 22, 2012, by and among Motorcar Parts of America, Inc. (solely for purposes of provisions specified thereto), Fenwick Automotive Products Limited and Wanxiang America Corporation</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 28, 2012.</td></tr><tr><td>10.44</td><td>Guaranty, dated as of August 22, 2012, by Motorcar Parts of America, Inc. for the benefit of Wanxiang America Corporation</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 28, 2012.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.45</td><td>Warrant to Purchase Common Stock, dated as of August 22, 2012, issued by Motorcar Parts of America, Inc. to Wanxiang America Corporation</td><td>Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on August 28, 2012.</td></tr><tr><td>10.46</td><td>Third Amendment and Waiver to the Financing Agreement, dated as of August 22, 2012, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association as administrative agent</td><td>Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on August 28, 2012.</td></tr><tr><td>10.47</td><td>Amendment No. 2 to the Amended and Restated Credit Agreement, dated as of August 22, 2012, by and among Fenwick Automotive Products Limited, Introcan Inc., Manufacturers and Traders Trust Company, as lead arranger, and M&amp;T Bank, as administrative agent and a lender</td><td>Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed on August 28, 2012.</td></tr><tr><td>10.48</td><td>Stock Repurchase Agreement, dated as of December 3, 2012, by and among Motorcar Parts of America, Inc., Mel Marks and Melmarks Enterprises LLLP</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 6, 2012.</td></tr><tr><td>10.49</td><td>Fourth Amendment to Financing Agreement, dated as of December 3, 2012, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on December 6, 2012.</td></tr><tr><td>10.50</td><td>Option Purchase Agreement, dated as of January 16, 2013, by and between Motorcar Parts of America, Inc. and Selwyn Joffe</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on January 17, 2013.</td></tr><tr><td>10.51</td><td>Fifth Amendment to Financing Agreement, dated as of January 16, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on January 17, 2013.</td></tr><tr><td>10.52</td><td>Amendment No. 3 to the Amended and Restated Credit Agreement, dated as of February 13, 2013, by and among Fenwick Automotive Products Limited, Introcan Inc., Manufacturers and Traders Trust Company, as lead arranger, and M&amp;T Bank, as administrative agent and a lender</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on February 20, 2013.</td></tr></table>



Table of Contents

<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.53</td><td>Mel Marks Agreement, dated and effective as of March 31, 2013, among Motorcar Parts of America, Inc., Mel Marks and Mel Marks Enterprises LLLP</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 16, 2013.</td></tr><tr><td>10.54</td><td>Sixth Amendment to Financing Agreement, dated as of June 14, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.58 to the 2013 Annual Report on Form 10-K filed on June 17, 2013.</td></tr><tr><td>10.55</td><td>Form of Stock Option Notice for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 12, 2013.</td></tr><tr><td>10.56</td><td>Form of Stock Option Agreement for use in connection with stock options granted to Selwyn Joffe pursuant to the Motorcar Parts of America, Inc. 2010 Incentive Award Plan</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on August 12, 2013.</td></tr><tr><td>10.57</td><td>Seventh Amendment to the Financing Agreement, dated as of August 26, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 30, 2013.</td></tr><tr><td>10.58</td><td>Option Purchase Agreement, dated as of October 9, 2013, by and between Motorcar Parts of America, Inc. and Selwyn Joffe</td><td>Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on October 10, 2013.</td></tr><tr><td>10.59</td><td>Eighth Amendment to the Financing Agreement, dated as of October 9, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on October 10, 2013.</td></tr><tr><td>10.60</td><td>Ninth Amendment and Waiver to the Financing Agreement, dated as of November 6, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on November 12, 2013.</td></tr></table>



<table><tr><td>Number</td><td>Description of Exhibit</td><td>Method of Filing</td></tr><tr><td>10.61</td><td>Amended and Restated Financing Agreement, dated as of November 6, 2013, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Incorporated by reference to Exhibit 10.1 to Amended Quarterly Report on Form 10-Q/A filed on February 10, 2014.</td></tr><tr><td>10.62</td><td>First Amendment to the Amended and Restated Financing Agreement, dated as of June 12, 2014, among Motorcar Parts of America, Inc., each lender from time to time party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent</td><td>Filed herewith.</td></tr><tr><td>10.63</td><td>Amendment No. 1 to Employment Agreement, dated as July 1, 2014, between Motorcar Parts of America, Inc., and Selwyn Joffe</td><td>Filed herewith.</td></tr><tr><td>14.1</td><td>Code of Business Conduct and Ethics</td><td>Incorporated by reference to Exhibit 10.48 to the 2003 Form 10-K.</td></tr><tr><td>21.1</td><td>List of Subsidiaries</td><td>Filed herewith.</td></tr><tr><td>23.1</td><td>Consent of Independent Registered Public Accounting Firm Ernst &amp; Young LLP</td><td>Filed herewith.</td></tr><tr><td>31.1</td><td>Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002</td><td>Filed herewith.</td></tr><tr><td>31.2</td><td>Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002</td><td>Filed herewith.</td></tr><tr><td>31.3</td><td>Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002</td><td>Filed herewith.</td></tr><tr><td>32.1</td><td>Certifications of Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002</td><td>Filed herewith.</td></tr><tr><td>101.1</td><td>The following financial information from Motorcar Parts of America, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014, formatted in Extensible Business Reporting Language (“XBRL”) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statement of Shareholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements</td><td>Filed herewith.</td></tr></table>



## SIGNATURES

Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MOTORCAR PARTS OF AMERICA, INC.

Dated: June 16, 2014

By: /s/ David Lee
David Lee
Chief Financial Officer

Dated: June 16, 2014

By: /s/ Kevin Daly
Kevin Daly
Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:

<table><tr><td>/s/ Selwyn Joffe</td><td>Chief Executive Officer and Director</td><td>June 16, 2014</td></tr><tr><td>Selwyn Joffe</td><td>(Principal Executive Officer)</td><td></td></tr><tr><td>/s/ David Lee</td><td>Chief Financial Officer</td><td>June 16, 2014</td></tr><tr><td>David Lee</td><td>(Principal Financial Officer)</td><td></td></tr><tr><td>/s/ Kevin Daly</td><td>Chief Accounting Officer</td><td>June 16, 2014</td></tr><tr><td>Kevin Daly</td><td>(Principal Accounting Officer)</td><td></td></tr><tr><td>/s/ Mel Marks</td><td>Director</td><td>June 16, 2014</td></tr><tr><td>Mel Marks</td><td></td><td></td></tr><tr><td>/s/ Scott Adelson</td><td>Director</td><td>June 16, 2014</td></tr><tr><td>Scott Adelson</td><td></td><td></td></tr><tr><td>/s/ Rudolph Borneo</td><td>Director</td><td>June 16, 2014</td></tr><tr><td>Rudolph Borneo</td><td></td><td></td></tr><tr><td>/s/ Philip Gay</td><td>Director</td><td>June 16, 2014</td></tr><tr><td>Philip Gay</td><td></td><td></td></tr><tr><td>/s/ Duane Miller</td><td>Director</td><td>June 16, 2014</td></tr><tr><td>Duane Miller</td><td></td><td></td></tr><tr><td>/s/ Jeffrey Mirvis</td><td>Director</td><td>June 16, 2014</td></tr><tr><td>Jeffrey Mirvis</td><td></td><td></td></tr></table>



## MOTORCAR PARTS OF AMERICA, INC.
AND SUBSIDIARIES

## CONTENTS

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Page 51
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-1
CONSOLIDATED STATEMENTS OF OPERATIONS F-2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) F-3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS S-1



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Motorcar Parts of America, Inc.

We have audited Motorcar Parts of America, Inc. and subsidiaries' internal control over financial reporting as of March 31, 2014 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Motorcar Parts of America, Inc. and subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Motorcar Parts of America, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2014, based on COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Motorcar Parts of America, Inc. and subsidiaries as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2014 and our report dated June 16, 2014 expressed an unqualified opinion.

/s/ Ernst & Young LLP

Los Angeles, California
June 16, 2014



# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Motorcar Parts of America, Inc.

We have audited the accompanying consolidated balance sheets of Motorcar Parts of America, Inc. and subsidiaries (the "Company") as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2014. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Motorcar Parts of America, Inc. and subsidiaries at March 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Motorcar Parts of America, Inc.'s internal control over financial reporting as of March 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated June 16, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California
June 16, 2014



## MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Current assets:</td><td></td><td></td></tr><tr><td>Cash</td><td>$ 24,599,000</td><td>$ 19,346,000</td></tr><tr><td>Short-term investments</td><td>521,000</td><td>411,000</td></tr><tr><td>Accounts receivable — net</td><td>22,283,000</td><td>3,689,000</td></tr><tr><td>Inventory — net</td><td>47,246,000</td><td>31,838,000</td></tr><tr><td>Inventory unreturned</td><td>7,534,000</td><td>6,981,000</td></tr><tr><td>Deferred income taxes</td><td>18,767,000</td><td>30,996,000</td></tr><tr><td>Prepaid expenses and other current assets</td><td>4,316,000</td><td>8,195,000</td></tr><tr><td>Current assets of discontinued operations (Note 3)</td><td>-</td><td>51,175,000</td></tr><tr><td>Total current assets</td><td>125,266,000</td><td>152,631,000</td></tr><tr><td>Plant and equipment — net</td><td>11,025,000</td><td>10,036,000</td></tr><tr><td>Long-term core inventory — net</td><td>143,476,000</td><td>118,211,000</td></tr><tr><td>Long-term core inventory deposits</td><td>29,375,000</td><td>27,610,000</td></tr><tr><td>Long-term deferred income taxes</td><td>2,614,000</td><td>2,377,000</td></tr><tr><td>Intangible assets — net</td><td>3,244,000</td><td>3,983,000</td></tr><tr><td>Other assets</td><td>3,853,000</td><td>5,618,000</td></tr><tr><td>Long-term assets of discontinued operations (Note 3)</td><td>-</td><td>44,503,000</td></tr><tr><td>TOTAL ASSETS</td><td>$ 318,853,000</td><td>$ 364,969,000</td></tr><tr><td>LIABILITIES AND SHAREHOLDERS&#x27; EQUITY</td><td></td><td></td></tr><tr><td>Current liabilities:</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 59,509,000</td><td>$ 39,152,000</td></tr><tr><td>Accrued liabilities</td><td>8,316,000</td><td>9,326,000</td></tr><tr><td>Customer finished goods returns accrual</td><td>16,251,000</td><td>14,289,000</td></tr><tr><td>Revolving loan</td><td>10,000,000</td><td>-</td></tr><tr><td>Other current liabilities</td><td>1,270,000</td><td>1,192,000</td></tr><tr><td>Current portion of term loan</td><td>7,843,000</td><td>3,775,000</td></tr><tr><td>Current liabilities of discontinued operations (Note 3)</td><td>-</td><td>151,914,000</td></tr><tr><td>Total current liabilities</td><td>103,189,000</td><td>219,648,000</td></tr><tr><td>Term loan, less current portion</td><td>79,434,000</td><td>78,130,000</td></tr><tr><td>Deferred core revenue</td><td>15,065,000</td><td>12,014,000</td></tr><tr><td>Other liabilities</td><td>11,529,000</td><td>3,481,000</td></tr><tr><td>Long-term liabilities of discontinued operations (Note 3)</td><td>-</td><td>55,210,000</td></tr><tr><td>Total liabilities</td><td>209,217,000</td><td>368,483,000</td></tr><tr><td>Commitments and contingencies</td><td></td><td></td></tr><tr><td>Shareholders&#x27; equity:</td><td></td><td></td></tr><tr><td>Preferred stock; par value $0.01 per share, 5,000,000 shares authorized; none issued</td><td>-</td><td>-</td></tr><tr><td>Series A junior participating preferred stock; par value $0.01 per share, 20,000 shares authorized; none issued</td><td>-</td><td>-</td></tr><tr><td>Common stock; par value $0.01 per share, 50,000,000 and 20,000,000 shares authorized; 13,067,645 and 14,460,979 shares issued and outstanding at March 31, 2014 and 2013, respectively</td><td>151,000</td><td>145,000</td></tr><tr><td>Additional paid-in capital</td><td>120,553,000</td><td>114,737,000</td></tr><tr><td>Accumulated other comprehensive loss</td><td>(877,000)</td><td>(846,000)</td></tr><tr><td>Accumulated deficit</td><td>(10,191,000)</td><td>(117,550,000)</td></tr><tr><td>Total shareholders&#x27; equity (deficit)</td><td>109,636,000</td><td>(3,514,000)</td></tr><tr><td>TOTAL LIABILITIES AND SHAREHOLDERS&#x27; EQUITY</td><td>$ 318,853,000</td><td>$ 364,969,000</td></tr></table>

The accompanying notes to consolidated financial statements are an integral part hereof.



## MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended March 31,

<table><tr><td></td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Net sales</td><td>$ 258,669,000</td><td>$ 213,151,000</td><td>$ 178,551,000</td></tr><tr><td>Cost of goods sold</td><td>177,103,000</td><td>143,810,000</td><td>121,219,000</td></tr><tr><td>Gross profit</td><td>81,566,000</td><td>69,341,000</td><td>57,332,000</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td></tr><tr><td>General and administrative</td><td>39,684,000</td><td>25,807,000</td><td>20,621,000</td></tr><tr><td>Sales and marketing</td><td>7,838,000</td><td>7,290,000</td><td>7,659,000</td></tr><tr><td>Research and development</td><td>1,940,000</td><td>1,930,000</td><td>1,765,000</td></tr><tr><td>Acquisition costs</td><td>-</td><td>-</td><td>713,000</td></tr><tr><td>Total operating expenses</td><td>49,462,000</td><td>35,027,000</td><td>30,758,000</td></tr><tr><td>Operating income</td><td>32,104,000</td><td>34,314,000</td><td>26,574,000</td></tr><tr><td>Interest expense, net</td><td>18,289,000</td><td>12,324,000</td><td>4,841,000</td></tr><tr><td>Income from continuing operations before income tax expense</td><td>13,815,000</td><td>21,990,000</td><td>21,733,000</td></tr><tr><td>Income tax expense</td><td>7,333,000</td><td>7,432,000</td><td>7,385,000</td></tr><tr><td>Income from continuing operations</td><td>6,482,000</td><td>14,558,000</td><td>14,348,000</td></tr><tr><td>Income (loss) from discontinued operations</td><td>100,877,000</td><td>(106,069,000)</td><td>(62,862,000)</td></tr><tr><td>Net income (loss)</td><td>$ 107,359,000</td><td>$ (91,511,000)</td><td>$ (48,514,000)</td></tr><tr><td>Basic net income per share from continuing operations</td><td>$ 0.45</td><td>$ 1.01</td><td>$ 1.15</td></tr><tr><td>Basic net income (loss) per share from discontinued operations</td><td>6.89</td><td>(7.40)</td><td>(5.05)</td></tr><tr><td>Basic net income (loss) per share</td><td>$ 7.34</td><td>$ (6.39)</td><td>$ (3.90)</td></tr><tr><td>Diluted net income per share from continuing operations</td><td>$ 0.42</td><td>$ 1.01</td><td>$ 1.13</td></tr><tr><td>Diluted net income (loss) per share from discontinued operation</td><td>6.59</td><td>(7.37)</td><td>(4.93)</td></tr><tr><td>Diluted net income (loss) per share</td><td>$ 7.01</td><td>$ (6.36)</td><td>$ (3.80)</td></tr><tr><td>Weighted average number of shares outstanding:</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>14,633,946</td><td>14,327,310</td><td>12,442,684</td></tr><tr><td>Diluted</td><td>15,317,931</td><td>14,385,515</td><td>12,756,845</td></tr></table>

The accompanying notes to consolidated financial statements are an integral part hereof.



## MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years Ended March 31,

<table><tr><td></td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Net income (loss)</td><td>$ 107,359,000</td><td>$ (91,511,000)</td><td>$ (48,514,000)</td></tr><tr><td>Other comprehensive (loss) income, net of tax:</td><td></td><td></td><td></td></tr><tr><td>Unrealized gain on short-term investments (net of tax of $22,000, $11,000, and $0, respectively)</td><td>34,000</td><td>162,000</td><td>70,000</td></tr><tr><td>Foreign currency translation (loss) gain</td><td>(65,000)</td><td>(124,000)</td><td>(605,000)</td></tr><tr><td>Total other comprehensive (loss) income, net of tax</td><td>(31,000)</td><td>38,000</td><td>(535,000)</td></tr><tr><td>Comprehensive income (loss)</td><td>$ 107,328,000</td><td>$ (91,473,000)</td><td>$ (49,049,000)</td></tr></table>

The accompanying notes to consolidated financial statements are an integral part hereof.



## MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
For the Years Ended March 31,

<table><tr><td colspan="3">Common Stock</td><td colspan="3">Treasury Stock</td><td rowspan="2">Additional Paid-in Capital Common Stock</td><td rowspan="2">Additional Paid-in Capital Warrants</td><td rowspan="2">Accumulated Other Comprehensive Income (Loss)</td><td rowspan="2">Retained Earnings (Accumulated Deficit)</td><td rowspan="2">Total</td></tr><tr><td></td><td>Shares</td><td>Amount</td><td>Shares</td><td>Amount</td></tr><tr><td>Balance at March 31, 2011</td><td>12,078,271</td><td>$121,000</td><td>(14,400)</td><td>(89,000)</td><td>$ 93,140,000</td><td>$ 1,879,000</td><td>$ (349,000)</td><td>$ 22,475,000</td><td>$117,177,000</td><td></td></tr><tr><td>Compensation recognized under employee stock plans</td><td>-</td><td>-</td><td>-</td><td>-</td><td>52,000</td><td>-</td><td>-</td><td>-</td><td>52,000</td><td></td></tr><tr><td>Exercise of options</td><td>95,550</td><td>1,000</td><td></td><td>-</td><td>320,000</td><td>-</td><td>-</td><td>-</td><td>321,000</td><td></td></tr><tr><td>Tax benefit from employee stock options exercised</td><td>-</td><td>-</td><td>-</td><td>-</td><td>172,000</td><td>-</td><td>-</td><td>-</td><td>172,000</td><td></td></tr><tr><td>Common stock issued as consideration for acquisition</td><td>360,000</td><td>3,000</td><td>-</td><td>-</td><td>4,943,000</td><td>-</td><td>-</td><td>-</td><td>4,946,000</td><td></td></tr><tr><td>Unrealized gain on investments, net of tax</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>70,000</td><td>-</td><td>70,000</td><td></td></tr><tr><td>Foreign currency translation</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(605,000)</td><td>-</td><td>(605,000)</td><td></td></tr><tr><td>Net loss</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(48,514,000)</td><td>(48,514,000)</td><td></td></tr><tr><td>Balance at March 31, 2012</td><td>12,533,821</td><td>$125,000</td><td>(14,400)</td><td>(89,000)</td><td>$ 98,627,000</td><td>$ 1,879,000</td><td>$ (884,000)</td><td>$ (26,039,000)</td><td>$ 73,619,000</td><td></td></tr><tr><td>Compensation recognized under employee stock plans</td><td>-</td><td>-</td><td>-</td><td>-</td><td>752,000</td><td>-</td><td>-</td><td>-</td><td>752,000</td><td></td></tr><tr><td>Common stock issued under stock plans, net of shares withheld for employee taxes</td><td>52,530</td><td>1,000</td><td></td><td></td><td>241,000</td><td></td><td></td><td></td><td>242,000</td><td></td></tr><tr><td>Repurchase of options granted</td><td></td><td></td><td></td><td></td><td>(455,000)</td><td></td><td></td><td></td><td>(455,000)</td><td></td></tr><tr><td>Tax benefit from employee stock options exercised</td><td>-</td><td>-</td><td>-</td><td>-</td><td>101,000</td><td>-</td><td>-</td><td>-</td><td>101,000</td><td></td></tr><tr><td>Expired unexercised warrants</td><td></td><td></td><td></td><td></td><td>1,879,000</td><td>(1,879,000)</td><td></td><td></td><td>-</td><td></td></tr><tr><td>Repurchase of common stock including fees</td><td></td><td></td><td>(52,947)</td><td>(300,000)</td><td></td><td></td><td></td><td></td><td>(300,000)</td><td></td></tr><tr><td>Cancellation of treasury stock</td><td>(67,347)</td><td>(1,000)</td><td>67,347</td><td>389,000</td><td>(388,000)</td><td></td><td></td><td></td><td>-</td><td></td></tr><tr><td>Common stock issued in connection with PIPE</td><td>1,936,000</td><td>20,000</td><td>-</td><td>-</td><td>14,985,000</td><td>-</td><td>-</td><td>-</td><td>15,005,000</td><td></td></tr></table>



<table><tr><td>Stock issuance costs</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(1,034,000)</td><td>-</td><td></td><td></td><td>(1,034,000)</td></tr><tr><td>Common stock issued in lieu of cash for PIPE liquidated damages</td><td>5,975</td><td>-</td><td>-</td><td>-</td><td>29,000</td><td></td><td></td><td></td><td>29,000</td></tr><tr><td>Unrealized gain on investments, net of tax</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>162,000</td><td>-</td><td>162,000</td></tr><tr><td>Foreign currency translation</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(124,000)</td><td>-</td><td>(124,000)</td><td>(91,511,000)</td></tr><tr><td>Net loss</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(91,511,000)</td><td>(91,511,000)</td></tr><tr><td>Balance at March 31, 2013</td><td>14,460,979</td><td>$145,000</td><td>-</td><td>$ -</td><td>$114,737,000</td><td>$ -</td><td>$ (846,000)</td><td>$ (117,550,000)</td><td>$ (3,514,000)</td></tr><tr><td>Compensation recognized under employee stock plans</td><td>-</td><td>-</td><td>-</td><td>-</td><td>969,000</td><td>-</td><td>-</td><td>-</td><td>969,000</td></tr><tr><td>Common stock issued under stock plans, net of shares withheld for employee taxes</td><td>606,666</td><td>6,000</td><td></td><td></td><td>5,760,000</td><td></td><td></td><td></td><td>5,766,000</td></tr><tr><td>Repurchase of options granted</td><td></td><td></td><td></td><td></td><td>(627,000)</td><td></td><td></td><td></td><td>(627,000)</td></tr><tr><td>Tax benefit from employee stock options exercised</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(286,000)</td><td>-</td><td>-</td><td>-</td><td>(286,000)</td></tr><tr><td>Unrealized gain on investments, net of tax</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>34,000</td><td>-</td><td>34,000</td></tr><tr><td>Foreign currency translation</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>(65,000)</td><td>-</td><td>(65,000)</td></tr><tr><td>Net income</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>107,359,000</td><td>107,359,000</td></tr><tr><td>Balance at March 31, 2014</td><td>15,067,645</td><td>$151,000</td><td>-</td><td>$ -</td><td>$120,553,000</td><td>$ -</td><td>$ (877,000)</td><td>$ (10,191,000)</td><td>$109,636,000</td></tr></table>

The accompanying notes to consolidated financial statements are an integral part hereof.



## MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended March 31,

<table><tr><td></td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Cash flows from operating activities:</td><td></td><td></td><td></td></tr><tr><td>Net income (loss)</td><td>$ 107,359,000</td><td>$ (91,511,000)</td><td>$ (48,514,000)</td></tr><tr><td>Less income (loss) from discontinued operations</td><td>100,877,000</td><td>(106,069,000)</td><td>(62,862,000)</td></tr><tr><td>Income from continuing operations</td><td>6,482,000</td><td>14,558,000</td><td>14,348,000</td></tr><tr><td>Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operating activities:</td><td></td><td></td><td></td></tr><tr><td>Depreciation</td><td>2,003,000</td><td>2,076,000</td><td>2,692,000</td></tr><tr><td>Amortization of intangible assets</td><td>739,000</td><td>773,000</td><td>774,000</td></tr><tr><td>Amortization of deferred financing costs</td><td>4,574,000</td><td>1,702,000</td><td>576,000</td></tr><tr><td>Loss due to change in fair value of warrant liability</td><td>10,443,000</td><td>389,000</td><td>-</td></tr><tr><td>Gain on extinguishment of warrant liability</td><td>(216,000)</td><td>-</td><td>-</td></tr><tr><td>Provision for inventory reserves</td><td>1,620,000</td><td>1,814,000</td><td>3,216,000</td></tr><tr><td>Net (recovery of) provision for customer payment discrepancies</td><td>(10,000)</td><td>536,000</td><td>270,000</td></tr><tr><td>Net (recovery of) provision for doubtful accounts</td><td>(47,000)</td><td>166,000</td><td>(14,000)</td></tr><tr><td>Deferred income taxes</td><td>20,124,000</td><td>1,561,000</td><td>1,673,000</td></tr><tr><td>Share-based compensation expense</td><td>969,000</td><td>1,083,000</td><td>52,000</td></tr><tr><td>Impact of tax benefit on APIC pool from stock options exercised</td><td>569,000</td><td>70,000</td><td>83,000</td></tr><tr><td>Loss on disposal of assets</td><td>9,000</td><td>3,000</td><td>14,000</td></tr><tr><td>Changes in current assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>Accounts receivable</td><td>(18,342,000)</td><td>5,940,000</td><td>(4,113,000)</td></tr><tr><td>Inventory</td><td>(14,478,000)</td><td>(1,491,000)</td><td>(1,753,000)</td></tr><tr><td>Inventory unreturned</td><td>(552,000)</td><td>(1,296,000)</td><td>(654,000)</td></tr><tr><td>Prepaid expenses and other current assets</td><td>3,689,000</td><td>(4,063,000)</td><td>2,982,000</td></tr><tr><td>Other assets</td><td>(463,000)</td><td>(321,000)</td><td>(234,000)</td></tr><tr><td>Accounts payable and accrued liabilities</td><td>18,965,000</td><td>(10,300,000)</td><td>12,834,000</td></tr><tr><td>Customer finished goods returns accrual</td><td>1,961,000</td><td>3,242,000</td><td>1,886,000</td></tr><tr><td>Deferred core revenue</td><td>3,051,000</td><td>2,239,000</td><td>1,046,000</td></tr><tr><td>Long-term core inventory</td><td>(26,519,000)</td><td>(22,993,000)</td><td>(18,554,000)</td></tr><tr><td>Long-term core inventory deposits</td><td>(1,766,000)</td><td>(671,000)</td><td>(955,000)</td></tr><tr><td>Other liabilities</td><td>485,000</td><td>225,000</td><td>(367,000)</td></tr><tr><td>Net cash provided by (used in) operating activities from continuing operations</td><td>13,290,000</td><td>(4,758,000)</td><td>15,802,000</td></tr><tr><td>Net cash provided by (used in) operating activities from discontinued operations</td><td>227,000</td><td>(26,303,000)</td><td>(54,290,000)</td></tr><tr><td>Net cash provided by (used in) operating activities</td><td>13,517,000</td><td>(31,061,000)</td><td>(38,488,000)</td></tr><tr><td>Cash flows from investing activities:</td><td></td><td></td><td></td></tr><tr><td>Purchase of plant and equipment</td><td>(2,978,000)</td><td>(2,330,000)</td><td>(1,010,000)</td></tr><tr><td>Change in short term investments</td><td>(54,000)</td><td>(41,000)</td><td>(37,000)</td></tr><tr><td>Net cash used in investing activities from continuing operations</td><td>(3,032,000)</td><td>(2,371,000)</td><td>(1,047,000)</td></tr><tr><td>Net cash used in investing activities from discontinued operations</td><td>(295,000)</td><td>(1,698,000)</td><td>(544,000)</td></tr><tr><td>Net cash used in investing activities</td><td>(3,327,000)</td><td>(4,069,000)</td><td>(1,591,000)</td></tr><tr><td>Cash flows from financing activities:</td><td></td><td></td><td></td></tr><tr><td>Borrowings under revolving loan</td><td>10,000,000</td><td>-</td><td>53,000,000</td></tr><tr><td>Repayments under revolving loan</td><td>-</td><td>-</td><td>(53,000,000)</td></tr><tr><td>Proceeds from term loan</td><td>20,000,000</td><td>10,000,000</td><td>75,000,000</td></tr><tr><td>Repayments of term loan</td><td>(11,600,000)</td><td>(500,000)</td><td>(7,500,000)</td></tr><tr><td>Deferred financing costs</td><td>(5,221,000)</td><td>(799,000)</td><td>(6,560,000)</td></tr><tr><td>Payments on capital lease obligations</td><td>(196,000)</td><td>(289,000)</td><td>(373,000)</td></tr><tr><td>Exercise of stock options</td><td>5,760,000</td><td>73,000</td><td>320,000</td></tr><tr><td>Tax benefit from employee stock options exercised</td><td>(286,000)</td><td>101,000</td><td>172,000</td></tr><tr><td>Cash used to net share settle equity awards</td><td>-</td><td>(163,000)</td><td>-</td></tr><tr><td>Repurchase of common stock and options, including fees</td><td>(627,000)</td><td>(755,000)</td><td>-</td></tr><tr><td>Repurchase of warrants</td><td>(2,194,000)</td><td>-</td><td>-</td></tr><tr><td>Proceeds from issuance of common stock</td><td>6,000</td><td>15,005,000</td><td>1,000</td></tr><tr><td>Stock issuance costs</td><td>-</td><td>(1,034,000)</td><td>-</td></tr><tr><td>Net cash provided by financing activities from continuing operations</td><td>15,642,000</td><td>21,639,000</td><td>61,060,000</td></tr><tr><td>Net cash (used in) provided by financing activities from discontinued operations</td><td>(20,636,000)</td><td>263,000</td><td>9,122,000</td></tr><tr><td>Net cash (used in) provided by financing activities</td><td>(4,994,000)</td><td>21,902,000</td><td>70,182,000</td></tr><tr><td>Effect of exchange rate changes on cash</td><td>(31,000)</td><td>45,000</td><td>37,000</td></tr><tr><td>Net (decrease) increase in cash</td><td>5,165,000</td><td>(13,183,000)</td><td>30,140,000</td></tr><tr><td>Cash — Beginning of period from continuing operations</td><td>19,346,000</td><td>32,379,000</td><td>2,477,000</td></tr><tr><td>Cash — Beginning of period from discontinued operations</td><td>88,000</td><td>238,000</td><td>-</td></tr></table>



<table><tr><td>Cash — End of period</td><td>24,599,000</td><td>19,434,000</td><td>32,617,000</td></tr><tr><td>Less Cash — End of period from discontinued operations</td><td>-</td><td>88,000</td><td>238,000</td></tr><tr><td>Cash — End of period from continuing operations</td><td>$ 24,599,000</td><td>$ 19,346,000</td><td>$ 32,379,000</td></tr></table>

<table><tr><td colspan="5">Supplemental disclosures of cash flow information:</td></tr><tr><td colspan="5">Cash paid during the period for:</td></tr><tr><td>Interest, net</td><td>$ 14,647,000</td><td>$ 22,923,000</td><td>$ 11,905,000</td><td></td></tr><tr><td>Income taxes, net of refunds</td><td>(16,472,000)</td><td>8,128,000</td><td>3,036,000</td><td></td></tr><tr><td>Non-cash investing and financing activities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Property acquired under capital lease</td><td>$ 303,000</td><td>$ 155,000</td><td>$ -</td><td></td></tr><tr><td>Warrants issued in connection with debt</td><td>-</td><td>1,625,000</td><td>-</td><td></td></tr><tr><td>Common stock issued in business combination</td><td>-</td><td>-</td><td>4,946,000</td><td></td></tr></table>

The accompanying notes to consolidated financial statements are an integral part hereof.



# MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

## 1. Company Background and Organization

## Overview

Motorcar Parts of America, Inc. and its subsidiaries (the “Company”, or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout North America and to major automobile manufacturers. The Company began selling new wheel hub assemblies and wheel hub bearings in late June 2013.

The Company obtains used automotive parts, commonly known as Used Cores, primarily from its customers under the Company’s core exchange program. It also purchases Used Cores from vendors (core brokers). The customers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the customers upon return to the Company. These Used Cores are an essential material needed for the remanufacturing operations.

The Company has remanufacturing, warehousing and shipping/receiving operations for automotive parts in North America and Asia. In addition, the Company utilizes various third party warehouse distribution centers in North America.

The Company has determined that it has two operating segments: (i) wheel hub assemblies and bearings and (ii) rotating electrical products which consist of alternators and starters. Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), for segment reporting the Company has determined that these operating segments meet the criteria for aggregation and accordingly the Company has one reportable segment for purposes of recording and reporting its financial results.

## 2. Summary of Significant Accounting Policies

## Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Motorcar Parts of America, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The Company has classified Fenco (as defined in Note 3) operations as discontinued operations in the accompanying consolidated financial statements as a result of the Fenco Entities (as defined in Note 3) voluntary petition for relief under Chapter 7 of Title 11 of the United States Code in the U.S. Bankruptcy Court of the District of Delaware on June 10, 2013 (see Note 3). Correspondingly, reclassifications of Fenco's assets, liabilities, and operations for prior year periods to discontinued operations have been made to conform to the current year's presentation.

## Reclassifications

Certain items in the consolidated balance sheet for the fiscal year ended March 31, 2013 have been reclassified to conform to fiscal 2014 classifications. Certain deferred fees and costs paid to the Company’s lenders under its financing agreement have been reclassified from other assets to an offset to the term loan in the consolidated balance sheet at March 31, 2013 to conform to the consolidated balance sheet presentation at March 31, 2014.

## Cash and Cash Equivalents

Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds. The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.



## Table of Contents

## Accounts Receivable

The allowance for doubtful accounts is developed based upon several factors including customer credit quality, historical write-off experience and any known specific issues or disputes which exist as of the balance sheet date. Accounts receivable are written off only when all collection attempts have failed. The Company does not require collateral for accounts receivable.

The Company has receivable discount programs that have been established with certain customers and their respective banks. Under these programs, the Company has the option to sell those customers' receivables to those banks at a discount to be agreed upon at the time the receivables are sold. Once the customer chooses which outstanding invoices are going to be made available for discounting, the Company can accept or decline the bundle of invoices provided. The receivable discount programs are non-recourse, and funds cannot be reclaimed by the customer or its bank after the related invoices have been discounted.

## Inventory

## Non-core Inventory

Non-core inventory is comprised of (i) non-core raw materials, (ii) the non-core value of work in process, (iii) the non-core value of rotating electrical finished goods, and (iv) purchased finished goods. Used Cores, the Used Core value of work in process and the Remanufactured Core portion of finished goods are classified as long-term core inventory as described below under the caption “Long-term Core Inventory.” Used Cores are a source of raw materials used in the manufacturing of the Company’s rotating electrical products.

Non-core inventory is stated at the lower of cost or market. The cost of non-core remanufactured inventory approximates average historical purchase prices paid for raw materials, and is based upon the direct costs of material and an allocation of labor and variable and fixed overhead costs. The cost of purchased finished goods inventory approximates average historical purchase prices paid, and an allocation of fixed overhead costs. The cost of non-core inventory is evaluated at least quarterly during the fiscal year and adjusted as necessary to reflect current lower of cost or market levels. These adjustments are determined for individual items of inventory within each of the three classifications of non-core inventory as follows:

- Non-core raw materials are recorded at average cost, which is based on the actual purchase price of raw materials on hand. The average cost is updated quarterly. This average cost is used in the inventory costing process and is the basis for allocation of materials to finished goods during the production process.

- Non-core work in process is in various stages of production and is valued at the average cost of materials issued to open work orders. Historically, non-core work in process inventory has not been material compared to the total non-core inventory balance.

- The cost of remanufactured finished goods includes the average cost of non-core raw materials and allocations of labor and variable and fixed overhead. The allocations of labor and variable and fixed overhead costs are determined based on the average actual use of the production facilities over the prior twelve months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, the Company excludes certain unallocated overhead such as severance costs, duplicative facility overhead costs, and spoilage from the calculation and expenses these unallocated overhead as period costs. For the fiscal years ended March 31, 2014, 2013, and 2012, costs of approximately $1,070,000, $1,561,000, and $1,410,000, respectively, were considered unallocated overhead charged directly to cost of sales and thus excluded from the calculation of the cost for remanufactured finished goods.

The Company records an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. The Company periodically reviews inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon management’s judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part.



## Table of Contents

The quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment, impact its ability to sell or liquidate potentially excess or obsolete inventory. The Company had recorded $2,708,000 and $2,498,000 for excess and obsolete inventory at March 31, 2014 and 2013, respectively. This increase was primarily recorded in the Company’s non-core inventory due to the increased inventory levels.

The Company records vendor discounts as a reduction of inventories that are recognized as a reduction to cost of sales as the inventories are sold.

## Inventory Unreturned

Inventory unreturned represents the Company’s estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that the Company expects to be returned after the balance sheet date. Because all cores are classified separately as long-term assets, the inventory unreturned balance includes only the added unit value of finished goods. The return rate is calculated based on expected returns within the normal operating cycle of one year. As such, the related amounts are classified in current assets.

Inventory unreturned is valued in the same manner as the Company’s finished goods inventory.

## Long-term Core Inventory

Long-term core inventory consists of:

• Used Cores purchased from core brokers and held in inventory at the Company’s facilities,

• Used Cores returned by the Company’s customers and held in inventory at the Company’s facilities,

- Used Cores returned by end-users to customers but not yet returned to the Company are classified as Remanufactured Cores until they are physically received by the Company,

• Remanufactured Cores held in finished goods inventory at the Company’s facilities; and

- Remanufactured Cores held at customer locations as a part of finished goods sold to the customer. For these Remanufactured Cores, the Company expects the finished good containing the Remanufactured Core to be returned under the Company’s general right of return policy or a similar Used Core to be returned to the Company by the customer, in each case, for credit.

Long-term core inventory is recorded at average historical purchase prices determined based on actual purchases of inventory on hand. The cost and market value of Used Cores for which sufficient recent purchases have occurred are deemed the same as the purchase price for purchases that are made in arm’s length transactions.

Long-term core inventory recorded at average historical purchase prices is primarily made up of Used Cores for newer products related to more recent automobile models or products for which there is a less liquid market. The Company must purchase these Used Cores from core brokers because its customers do not have a sufficient supply of these newer Used Cores available for the core exchange program.

Used Cores obtained in core broker transactions are valued based on average purchase price. The average purchase price of Used Cores for more recent automobile models is retained as the cost for these Used Cores in subsequent periods even as the source of these Used Cores shifts to the core exchange program.

Long-term core inventory is recorded at the lower of cost or market value. In the absence of sufficient recent purchases, the Company uses core broker price lists to assess whether Used Core cost exceeds Used Core market value on an item by item basis. The primary reason for the insufficient recent purchases is that the Company obtains most of its Used Core inventory from the customer core exchange program.



## Table of Contents

The Company classifies all of its core inventories as long-term assets. The determination of the long-term classification is based on its view that the value of the cores is not consumed or realized in cash during the Company’s normal operating cycle, which is one year for most of the cores recorded in inventory. According to guidance provided under the FASB ASC, current assets are defined as “assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.” The Company does not believe that core inventories, which the Company classifies as long-term, are consumed because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. The Company does not expect the core inventories to be consumed, and thus the Company does not expect to realize cash, until its relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.

However, historically for certain finished goods sold, the Company’s customer will not send the Company a Used Core to obtain the credit the Company offers under its core exchange program. Therefore, based on the Company’s historical estimate, the Company relieves the core value for these finished goods upon sale, as the Company believes they have been consumed and the Company has realized cash.

The Company realizes cash for only the core exchange program shortfall. This shortfall represents the historical difference between the number of finished goods shipped to customers and the number of Used Cores returned to the Company by customers. The Company does not realize cash for the remaining portion of the cores because the credits issued upon the return of Used Cores offset the amounts invoiced when the Remanufactured Cores included in finished goods were sold. The Company does not expect to realize cash for the remaining portion of these Remanufactured Cores until its relationship with a customer ends, a possibility that the Company considers remote based on existing long-term customer agreements and historical experience.

For these reasons, the Company concluded that it is more appropriate to classify core inventory as long-term assets.

## Long-term Core Inventory Deposit

The long-term core inventory deposit account represents the value of Remanufactured Cores the Company purchased from customers, which are held by the customers and remain on the customers' premises. The purchase is made through the issuance of credits against that customer's receivables either on a one-time basis or over an agreed-upon period. The credits against the customer's receivable are based upon the Remanufactured Core purchase price previously established with the customer. At the same time, the Company records the long-term core inventory deposit for the Remanufactured Cores purchased at its cost, determined as noted under Long-term Core Inventory. The long-term core inventory deposit is stated at the lower of cost or market. The cost is established at the time of the transaction based on the then current cost, determined as noted under Long-term Core Inventory. The difference between the credit granted and the cost of the long-term core inventory deposit is treated as a sales allowance reducing revenue. When the purchases are made over an agreed-upon period, the long-term core inventory deposit is recorded at the same time the credit is issued to the customer for the purchase of the Remanufactured Cores.

At least annually, and as often as quarterly, reconciliations and confirmations are performed to determine that the number of Remanufactured Cores purchased, but retained at the customer locations, remains sufficient to support the amounts recorded in the long-term core inventory deposit account. At the same time, the mix of Remanufactured Cores is reviewed to determine that the aggregate value of Remanufactured Cores in the account has not changed during the reporting period. The Company evaluates the cost of cores supporting the aggregate long-term core inventory deposit account each quarter. If the Company identifies any permanent reduction in either the number or the aggregate value of the Remanufactured Core inventory mix held at the customer location, the Company will record a reduction in the long-term core inventory deposit account resulting in a corresponding increase to cost of sales during that period.



## Table of Contents

## Customer Finished Goods Returns Accrual

The customer finished goods returns accrual represents the Company’s estimate of its exposure to customer returns, including warranty returns, under its general right of return policy to allow customers to return items that their end user customers have returned to them and from time to time, stock adjustment returns when the customers’ inventory of certain products exceeds the anticipated sales to end-user customers. The customer finished goods returns accrual represents the non-core sales value of the estimated returns and is classified as a current liability due to the expectation that these returns will occur within the normal operating cycle of one year.

## Income Taxes

The Company accounts for income taxes using the liability method, which measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur. A valuation allowance is provided to reduce deferred tax assets when it is more likely than not that a portion of the deferred tax asset will not be realized.

The primary components of the Company’s income tax provision are (i) the current liability or refund due for federal, state and foreign income taxes and (ii) the change in the amount of the net deferred income tax asset, including the effect of any change in the valuation allowance.

Realization of deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income. The Company reviews its deferred tax assets on a jurisdiction by jurisdiction basis to determine whether it is more likely than not that the deferred tax assets will be realized. The Company believes that it is more likely than not that future taxable income will be sufficient to realize the recorded deferred tax assets. In evaluating this ability, the Company considers long-term agreements, including Remanufactured Core purchase obligations, with each of its major customers that expire at various dates through March 2019. The Company periodically compares its forecasts to actual results. Although there can be no assurance that the forecasted results will be achieved, the history of income in all jurisdictions provides sufficient positive evidence that no valuation allowance is needed.

## Plant and Equipment

Plant and equipment are stated at cost, less accumulated depreciation. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation is provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Machinery and equipment are depreciated over a range from five to ten years. Office equipment and fixtures are depreciated over a range from three to ten years. Leasehold improvements are depreciated over the lives of the respective leases or the service lives of the leasehold improvements, whichever is shorter. Depreciation of assets recorded under capital leases is included in depreciation expense.

## Intangible Assets

The Company’s intangible assets other than goodwill are finite–lived and amortized on a straight line basis over their respective useful lives. Finite-lived intangible assets are analyzed for impairment when and if indicators of impairment exist. As of March 31, 2014, there were no indicators of impairment.

## Deferred Financing Costs

Deferred financing costs include fees and costs incurred to obtain financing. The fees and costs paid to lenders under the Company’s financing agreement are recorded as an offset to the term loan and the fees and costs paid to third party non-lenders are recorded in other assets in the accompanying consolidated balance sheets. These fees and costs are amortized using the straight-line method, which approximates the effective interest rate method, over the terms of the related loans and are included in interest expense in the Company’s consolidated statements of operations.



## Table of Contents

## 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 for which the local currency is the functional currency are translated into the U.S. dollar at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average exchange rates during the year. The accumulated foreign currency translation adjustment is presented as a component of comprehensive income or loss in the consolidated statements of shareholders' equity.

## Revenue Recognition

The Company recognizes revenue when performance by the Company is complete and all of the following criteria have been met:

• Persuasive evidence of an arrangement exists,

• Delivery has occurred or services have been rendered,

• The seller’s price to the buyer is fixed or determinable, and

• Collectability is reasonably assured.

For products shipped free-on-board (“FOB”) shipping point, revenue is recognized on the date of shipment. For products shipped FOB destination, revenues are recognized on the estimated or actual date of delivery. The Company includes shipping and handling charges in its gross invoice price to customers and classifies the total amount as revenue. Shipping and handling costs are recorded as cost of sales.

The price of a finished rotating electrical product sold to customers is generally comprised of separately invoiced amounts for the Remanufactured Core included in the product (“Remanufactured Core value”) and for the value added by remanufacturing (“unit value”). Unit value revenue is recorded based on the Company’s price list, net of applicable discounts and allowances. The Company allows customers to return slow moving and other inventory. The Company provides for such returns of inventory by reducing revenue and cost of sales for the unit value of goods sold that are expected to be returned based on a historical return analysis and information obtained from customers about current stock levels as further described under the captions “Customer Finished Goods Returns Accrual” and “Inventory Unreturned”.

The Company accounts for revenues and cost of sales on a net-of-core-value basis. The Company has determined that its business practices and contractual arrangements result in a significant portion of the Remanufactured Cores sold being replaced by similar Used Cores sent back for credit by customers under the Company’s core exchange program. Accordingly, the Company excludes the value of Remanufactured Cores from revenue.

When the Company ships a product, it recognizes an obligation to accept a similar Used Core sent back under the core exchange program by recording a contra receivable account based upon the Remanufactured Core price agreed upon by the Company and its customer. Upon receipt of a Used Core, the Company grants the customer a credit based on the Remanufactured Core price billed and restores the Used Core to on-hand inventory.

When the Company ships a product, it invoices certain customers for the Remanufactured Core portion of the product at full Remanufactured Core sales price. For these Remanufactured Cores, the Company recognizes core revenue based upon an estimate of the rate at which the Company’s customers will pay cash for Remanufactured Cores in lieu of sending back similar Used Cores for credits under the Company’s core exchange program.

In addition, the Company recognizes revenue related to Remanufactured Cores originally sold at a nominal price and not expected to be replaced by a similar Used Core under the core exchange program. Unlike the full price Remanufactured Cores, the Company only recognizes revenue from nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program when the Company believes it has met all of the following criteria:



## Table of Contents

- The Company has a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program. This agreement must specify the number of Remanufactured Cores its customer will pay cash for in lieu of sending back a similar Used Core and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).

- The contractual date for reconciling the Company’s records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program must be in the current or a prior period.

• The reconciliation of the nominally priced Remanufactured Cores must be completed and agreed to by the customer.

• The amount must be billed to the customer.

The Company has agreed in the past and may in the future agree to buy back Remanufactured Cores. The difference between the credit granted and the cost of the Remanufactured Cores bought back is treated as a sales allowance reducing revenue. As a result of the increasing level of Remanufactured Core buybacks, the Company now defers core revenue from these customers until there is no expectation that the sales allowances associated with Remanufactured Core buybacks from these customers will offset Remanufactured Core revenues that would otherwise be recognized once the criteria noted above have been met. At March 31, 2014 and 2013, Remanufactured Core revenue of $15,065,000 and $12,014,000, respectively, was deferred.

## Marketing Allowances

The Company records the cost of all marketing allowances provided to its customers. Such allowances include sales incentives and concessions. Voluntary marketing allowances related to a single exchange of product are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered. Other marketing allowances, which may only be applied against future purchases, are recorded as a reduction to revenues in accordance with a schedule set forth in the relevant contract. Sales incentive amounts are recorded based on the value of the incentive provided. See Note 14 for a description of all marketing allowances.

## Advertising Costs

The Company expenses all advertising costs as incurred. Advertising expenses from the Company’s continuing operations for the fiscal years ended March 31, 2014, 2013 and 2012 were $205,000, $343,000, and $381,000, respectively.

## Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) 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.



## Table of Contents

The following presents a reconciliation of basic and diluted net income (loss) per share.

<table><tr><td rowspan="2"></td><td colspan="4">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td><td></td></tr><tr><td>Income from continuing operations</td><td>$ 6,482,000</td><td>$ 14,558,000</td><td>$ 14,348,000</td><td></td></tr><tr><td>Income (loss) from discontinued operations</td><td>100,877,000</td><td>(106,069,000)</td><td>(62,862,000)</td><td></td></tr><tr><td>Net income (loss)</td><td>$ 107,359,000</td><td>$ (91,511,000)</td><td>$ (48,514,000)</td><td></td></tr><tr><td>Basic shares</td><td>14,633,946</td><td>14,327,310</td><td>12,442,684</td><td></td></tr><tr><td>Effect of dilutive stock options and warrants</td><td>683,985</td><td>58,205</td><td>314,161</td><td></td></tr><tr><td>Diluted shares</td><td>15,317,931</td><td>14,385,515</td><td>12,756,845</td><td></td></tr><tr><td>Net income (loss) per share:</td><td></td><td></td><td></td><td></td></tr><tr><td>Basic net income per share from continuing operations</td><td>$ 0.45</td><td>$ 1.01</td><td>$ 1.15</td><td></td></tr><tr><td>Basic net income (loss) per share from discontinued operations</td><td>6.89</td><td>(7.40)</td><td>(5.05)</td><td></td></tr><tr><td>Basic net income (loss) per share</td><td>$ 7.34</td><td>$ (6.39)</td><td>$ (3.90)</td><td></td></tr><tr><td>Diluted net income per share from continuing operations</td><td>$ 0.42</td><td>$ 1.01</td><td>$ 1.13</td><td></td></tr><tr><td>Diluted net income (loss) per share from discontinued operations</td><td>6.59</td><td>(7.37)</td><td>(4.93)</td><td></td></tr><tr><td>Diluted net income (loss) per share</td><td>$ 7.01</td><td>$ (6.36)</td><td>$ (3.80)</td><td></td></tr></table>

The effect of dilutive options and warrants excludes (i) 77,000 shares subject to options with exercise prices ranging from $13.65 to $19.94 per share for the year ended March 31, 2014, (ii) 1,922,334 shares subject to options and 735,484 shares subject to warrants with exercise prices ranging from $5.83 to $15.06 per share for the year ended March 31, 2013, and (iii) 463,000 shares subject to options and 546,283 shares subject to warrants with exercise prices ranging from $10.73 to $15.06 per share for the year ended March 31, 2012.

## Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to the carrying amount of plant and equipment, valuation of acquisition-related intangible assets, impairment of long-lived assets, valuation and return allowances for receivables, inventories, and deferred income taxes, accrued liabilities, warrant liability, share-based compensation, and litigation and disputes.

The Company uses significant estimates in the calculation of sales returns. These estimates are based on the Company’s historical return rates and an evaluation of estimated sales returns from specific customers.

The Company uses significant estimates in the calculation of the lower of cost or market value of long-term core inventory.

The Company’s calculation of inventory reserves involves significant estimates. The basis for the inventory reserve is a comparison of inventory on hand to historical production usage or sales volumes.

The Company records its liability for self-insured workers’ compensation by including an estimate of the liability associated with total claims incurred and reported as well as an estimate of the liabilities associated with incurred, but not reported, claims determined by applying the Company’s historical claims development factor to its estimate of the liabilities associated with incurred and reported claims.

The Company uses significant estimates in the calculation of its income tax provision or benefit by using forecasts to estimate whether it will have sufficient future taxable income to realize its deferred tax assets. There can be no assurances that the Company’s taxable income will be sufficient to realize such deferred tax assets.



## Table of Contents

The Company uses significant estimates in the ongoing calculation of potential liabilities from uncertain tax positions that are more likely than not to occur.

A change in the assumptions used in the estimates for sales returns, inventory reserves and income taxes could result in a difference in the related amounts recorded in the Company’s consolidated financial statements.

## Financial Instruments

The carrying amounts of cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loan, term loan and other long-term liabilities approximate their fair value based on current rates for instruments with similar characteristics.

## Stock Options and Share-Based Payments

In accounting for share-based compensation awards, the Company follows the accounting guidance for equity-based compensation, which requires that the Company measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost associated with stock options is estimated using the Black-Scholes option-pricing model. The cost of equity instruments is recognized in the consolidated statements of operations on a straight-line basis (net of estimated forfeitures) over the period during which an employee is required to provide service in exchange for the award. Also, excess tax benefits realized are reported as a financing cash inflow.

The Black-Scholes option pricing model requires the input of subjective assumptions including the expected volatility of the underlying stock and the expected holding period of the option. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value. Options to purchase 331,000, 635,800 and 15,000 shares of common stock were granted during the years ended March 31, 2014, 2013 and 2012, respectively.

The table below summarizes the Black-Scholes option pricing model assumptions used to derive the weighted average fair value of the stock options granted during the periods noted.

<table><tr><td rowspan="2"></td><td colspan="4">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td><td></td></tr><tr><td>Weighted average risk free interest rate</td><td>1.88%</td><td>1.17%</td><td>1.74%</td><td></td></tr><tr><td>Weighted average expected holding period (years)</td><td>5.89</td><td>6.60</td><td>6.29</td><td></td></tr><tr><td>Weighted average expected volatility</td><td>48.15%</td><td>44.25%</td><td>40.28%</td><td></td></tr><tr><td>Weighted average expected dividend yield</td><td>-</td><td>-</td><td>-</td><td></td></tr><tr><td>Weighted average fair value of options granted</td><td>$ 5.16</td><td>$ 2.92</td><td>$ 4.21</td><td></td></tr></table>

## Credit Risk

The majority of the Company’s sales are to leading automotive aftermarket parts suppliers. Management believes the credit risk with respect to trade accounts receivable is limited due to the Company’s credit evaluation process and the nature of its customers. However, should the Company’s customers experience significant cash flow problems, the Company’s financial position and results of operations could be materially and adversely affected, and the maximum amount of loss that would be incurred would be the outstanding receivable balance, Used Cores expected to be returned by customer, and the value of the Remanufactured Cores held at customers’ locations at March 31, 2014.



## Table of Contents

## Deferred Compensation Plan

The Company has a deferred compensation plan for certain members of management. The plan allows participants to defer salary and bonuses. The assets of the plan are held in a trust and are subject to the claims of the Company’s general creditors under federal and state laws in the event of insolvency. Consequently, the trust qualifies as a Rabbi trust for income tax purposes. The plan’s assets consist primarily of mutual funds and are classified as available for sale. The investments are recorded at market value, with any unrealized gain or loss recorded as other comprehensive income or loss in shareholders’ equity. Adjustments to the deferred compensation obligation are recorded in operating expenses. The Company did not redeem any of its short-term investments for the payment of deferred compensation liabilities during the years ended March 31, 2014 and 2013. The carrying value of plan assets was $521,000 and $411,000, and deferred compensation obligation was $521,000 and $411,000 at March 31, 2014 and 2013, respectively. During the years ended March 31, 2014, 2013, and 2012 an expense of $10,000, $8,000, and $8,000, respectively, was recorded for each year related to the deferred compensation plan.

## Comprehensive Income or Loss

Comprehensive income or loss is defined as the change in equity during a period resulting from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive income or loss consists of net unrealized income or loss from foreign currency translation adjustments and unrealized gains or losses on short-term investments.

## New Accounting Pronouncements

## Accumulated other comprehensive income ("AOCI")

In the first quarter of fiscal 2014, the Company adopted an accounting standard issued by the FASB that requires entities to provide details of reclassifications in the disclosure of changes in AOCI balances. In addition, for significant items reclassified out of AOCI in the fiscal year, entities must provide information about the effects on net income together, in one location, on the face of the statement where net income is presented, or as a separate disclosure in the notes. For items not reclassified to net income in their entirety in the fiscal year, entities must cross-reference to the note where additional details about the effects of the reclassifications are disclosed. The adoption of this update did not impact the Company’s financial position, results of operations or cash flows.

## Income Taxes

In July 2013, the FASB issued guidance that requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law and the Company intends to use the deferred tax asset for that purpose. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

## Discontinued Operations

In April 2014, the FASB issued guidance on reporting discontinued operations. The new guidance changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

## Revenue Recognition

In May 2014, the FASB issued an amendment to the accounting guidance related to revenue recognition. The amendment was the result of a joint project between the FASB and the International Accounting Standards Board ("IASB") to clarify the principles for recognizing revenue and to develop common revenue standards for U.S. GAAP and International Financial Reporting Standards ("IFRS"). To meet those objectives, the FASB is amending the FASB ASC and creating a new Topic 606, Revenue from Contracts with Customers, and the IASB is issuing IFRS 15, Revenue from Contracts with Customers. The new guidance is effective prospectively for annual periods beginning after December 15, 2016, and interim periods within those years. Early application is not permitted. The Company is evaluating the impact of adopting this prospective guidance to its consolidated financial statements.



## 3. Discontinued Operations and Deconsolidation of Fenco

In May 2011, the Company purchased (i) all of the outstanding equity of Fenwick Automotive Products Limited (“FAPL”), (ii) all of the outstanding equity of Introcan, Inc., a Delaware corporation (“Introcan”), and (iii) 1% of the outstanding equity of Fapco S.A. de C.V., a Mexican variable capital company (“Fapco”) (collectively, “Fenco” and also referred to herein as the “discontinued subsidiary”). Since FAPL owned 99% of Fapco prior to these acquisitions, the Company owned 100% of Fapco.

Between May 2011 and its bankruptcy in June 2013, Fenco had been attempting to turn around its business. However, revenues generated by its undercar product line segment were not sufficient to enable Fenco to meet its operating expenses and otherwise implement its undercar product line turnaround plan. Fenco had recurring operating losses since the date of acquisition and had a working capital and equity deficiency.

In May 2013, FAPL appointed a new board of independent directors, hired an independent chief restructuring officer and all its previously existing officers resigned from FAPL. As a result of loss of control of Fenco, the Company deconsolidated the assets and liabilities of Fenco from its consolidated financial statements effective May 31, 2013. On June 10, 2013, each of FAPL, Introcan and Introcan’s subsidiaries, Flo-Pro Inc., LH Distribution Inc., Rafko Logistics Inc., Rafko Holdings Inc. and Rafko Enterprises Inc. (collectively, the “Fenco Entities”), filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware. As a result of the loss of control of Fenco and the subsequent filing of the petition for relief under the Bankruptcy Code, Fenco had effectively been disposed of and the Company did not and does not retain any continuing involvement in the operations of Fenco. The Company may be subject to claims relating to the bankruptcy (see Note 19).

The following table summarizes the effects on the consolidated balance sheet of the deconsolidation of Fenco effective May 31, 2013.

<table><tr><td>Cash</td><td>$ (170,000)</td></tr><tr><td>Accounts receivable — net</td><td>(4,377,000)</td></tr><tr><td>Inventory— net</td><td>(25,731,000)</td></tr><tr><td>Inventory unreturned</td><td>(5,321,000)</td></tr><tr><td>Deferred income taxes</td><td>(225,000)</td></tr><tr><td>Prepaid expenses and other current assets</td><td>(2,436,000)</td></tr><tr><td>Plant and equipment — net</td><td>(4,018,000)</td></tr><tr><td>Long-term core inventory — net</td><td>(40,471,000)</td></tr><tr><td>Other assets</td><td>(22,000)</td></tr><tr><td>Reduction in total assets</td><td>$ (82,771,000)</td></tr><tr><td>Accounts payable</td><td>$ (75,454,000)</td></tr><tr><td>Accrued liabilities</td><td>(4,759,000)</td></tr><tr><td>Customer finished goods returns accrual</td><td>(10,744,000)</td></tr><tr><td>Other current liabilities</td><td>(1,761,000)</td></tr><tr><td>Revolving loan - in default</td><td>(48,520,000)</td></tr><tr><td>Term loan - in default</td><td>(10,000,000)</td></tr><tr><td>Customer core returns accrual</td><td>(49,531,000)</td></tr><tr><td>Other liabilities</td><td>(97,000)</td></tr><tr><td>Reduction in total liabilities</td><td>$ (200,866,000)</td></tr><tr><td>Gain from deconsolidation of Fenco</td><td>$ 118,095,000</td></tr></table>

Net sales from discontinued operations for the fiscal years ended March 31, 2013 and 2012 were $193,115,000 and $185,136,000, respectively. A loss of approximately $5,910,000 was incurred from discontinued operations from April 1, 2013 to May 31, 2013. In addition, during the fiscal year ended March 31, 2014, the Company recorded a loss of approximately $20,464,000 in connection with the guarantee of obligations to certain Fenco suppliers and recorded related income tax benefits of $9,156,000. In addition, an income tax benefit of $1,374,000 was included in the gain from deconsolidation of Fenco.



## 4. Intangible Assets

The following is a summary of the intangible assets subject to amortization at March 31:

<table><tr><td rowspan="2"></td><td colspan="3">2014</td><td colspan="2">2013</td></tr><tr><td>Weighted Average Amortization Period</td><td>Gross Carrying Value</td><td>Accumulated Amortization</td><td>Gross Carrying Value</td><td>Accumulated Amortization</td></tr><tr><td>Intangible assets subject to amortization</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Trademarks</td><td>9 years</td><td>$ 553,000</td><td>$ 391,000</td><td>$ 553,000</td><td>$ 337,000</td></tr><tr><td>Customer relationships</td><td>12 years</td><td>6,464,000</td><td>3,393,000</td><td>6,464,000</td><td>2,743,000</td></tr><tr><td>Non-compete agreements</td><td>4 years</td><td>257,000</td><td>246,000</td><td>257,000</td><td>211,000</td></tr><tr><td>Total</td><td>11 years</td><td>$ 7,274,000</td><td>$ 4,030,000</td><td>$ 7,274,000</td><td>$ 3,291,000</td></tr></table>

Amortization expense for acquired intangible assets is as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Amortization expense</td><td>$ 739,000</td><td>$ 773,000</td><td>$ 774,000</td></tr></table>

The estimated future amortization expense for intangible assets subject to amortization is as follows:

<table><tr><td colspan="2">Year Ending March 31,</td></tr><tr><td>2015</td><td>$ 670,000</td></tr><tr><td>2016</td><td>349,000</td></tr><tr><td>2017</td><td>266,000</td></tr><tr><td>2018</td><td>266,000</td></tr><tr><td>2019</td><td>266,000</td></tr><tr><td>Thereafter</td><td>1,427,000</td></tr><tr><td>Total</td><td>$ 3,244,000</td></tr></table>

## 5. Short-Term Investments

The short-term investments account contains the assets of the Company’s deferred compensation plan. The plan’s assets consist primarily of mutual funds and are classified as available for sale. The Company did not redeem any short-term investments for the payment of deferred compensation liabilities during the year ended March 31, 2014. As of March 31, 2014 and 2013, the fair market value of the short-term investments was $521,000 and $411,000, and the liability to plan participants was $521,000 and $411,000, respectively.

## 6. Accounts Receivable — Net

Included in accounts receivable — net are significant offset accounts related to customer allowances earned (see Note 14), customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, estimated future credits to be provided for Used Cores returned by the customers (see Note 2) and potential bad debts. Due to the forward looking nature and the different aging periods of certain estimated offset accounts, they may not, at any point in time, directly relate to the balances in the accounts receivable—trade account.



## Table of Contents

Accounts receivable — net is comprised of the following at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Accounts receivable — trade</td><td>$ 58,766,000</td><td>$ 40,686,000</td></tr><tr><td>Allowance for bad debts</td><td>(854,000)</td><td>(1,019,000)</td></tr><tr><td>Customer allowances earned</td><td>(9,088,000)</td><td>(11,160,000)</td></tr><tr><td>Customer payment discrepancies</td><td>(577,000)</td><td>(514,000)</td></tr><tr><td>Customer returns RGA issued</td><td>(5,809,000)</td><td>(4,966,000)</td></tr><tr><td>Customer core returns accruals</td><td>(20,155,000)</td><td>(19,338,000)</td></tr><tr><td>Less: total accounts receivable offset accounts</td><td>(36,483,000)</td><td>(36,997,000)</td></tr><tr><td>Total accounts receivable — net</td><td>$ 22,283,000</td><td>$ 3,689,000</td></tr></table>

As of May 31, 2013, $4,377,000 of accounts receivable at the discontinued subsidiary was deconsolidated from the consolidated financial statements of the Company (see Note 3).

## Warranty Returns

The Company allows its customers to return goods to the Company that their end-user customers have returned to them, whether the returned item is or is not defective (warranty returns). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. At March 31, 2014 and 2013, the warranty return accrual of $2,407,000 and $1,807,000, respectively, on the credits to be issued for the returns received was included under the customer returns RGA issued in the above table and the warranty return estimate of $5,632,000 and $4,398,000, respectively, was included in customer finished goods returns accrual (see Note 2) in the consolidated balance sheets.

Change in the Company’s warranty return accrual is as follows at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Balance at beginning of period</td><td>$ 6,205,000</td><td>$ 4,426,000</td></tr><tr><td>Charged to expense</td><td>56,284,000</td><td>48,948,000</td></tr><tr><td>Amounts processed</td><td>(54,450,000)</td><td>(47,169,000)</td></tr><tr><td>Balance at end of period</td><td>$ 8,039,000</td><td>$ 6,205,000</td></tr></table>

As of May 31, 2013, $5,642,000 of warranty return accrual at the discontinued subsidiary was deconsolidated from the consolidated financial statements of the Company (see Note 3).



## 7. Inventory

Non-core inventory, inventory unreturned, long-term core inventory, and long-term core inventory deposits are as follows at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Non-core inventory</td><td></td><td></td></tr><tr><td>Raw materials</td><td>$ 18,787,000</td><td>$ 14,152,000</td></tr><tr><td>Work-in-process</td><td>124,000</td><td>137,000</td></tr><tr><td>Finished goods</td><td>30,197,000</td><td>19,239,000</td></tr><tr><td></td><td>49,108,000</td><td>33,528,000</td></tr><tr><td>Less allowance for excess and obsolete inventory</td><td>(1,862,000)</td><td>(1,690,000)</td></tr><tr><td>Total</td><td>$ 47,246,000</td><td>$ 31,838,000</td></tr><tr><td>Inventory unreturned</td><td>$ 7,534,000</td><td>$ 6,981,000</td></tr><tr><td>Long-term core inventory</td><td></td><td></td></tr><tr><td>Used cores held at the Company&#x27;s facilities</td><td>$ 23,718,000</td><td>$ 22,227,000</td></tr><tr><td>Used cores expected to be returned by customers</td><td>6,160,000</td><td>5,147,000</td></tr><tr><td>Remanufactured cores held in finished goods</td><td>18,093,000</td><td>15,019,000</td></tr><tr><td>Remanufactured cores held at customers&#x27; locations</td><td>96,351,000</td><td>76,626,000</td></tr><tr><td></td><td>144,322,000</td><td>119,019,000</td></tr><tr><td>Less allowance for excess and obsolete inventory</td><td>(846,000)</td><td>(808,000)</td></tr><tr><td>Total</td><td>$ 143,476,000</td><td>$ 118,211,000</td></tr><tr><td>Long-term core inventory deposits</td><td>$ 29,375,000</td><td>$ 27,610,000</td></tr></table>

As of May 31, 2013, $25,731,000 of non-core inventory, $5,321,000 of inventory unreturned, and $40,471,000 of long-term core inventory at the discontinued subsidiary was deconsolidated from the consolidated financial statements of the Company (see Note 3).

## 8. Plant and Equipment

Plant and equipment, at cost, are as follows at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Machinery and equipment</td><td>$ 25,092,000</td><td>$ 24,342,000</td></tr><tr><td>Office equipment and fixtures</td><td>7,552,000</td><td>6,761,000</td></tr><tr><td>Leasehold improvements</td><td>7,569,000</td><td>7,613,000</td></tr><tr><td></td><td>40,213,000</td><td>38,716,000</td></tr><tr><td>Less accumulated depreciation</td><td>(29,188,000)</td><td>(28,680,000)</td></tr><tr><td>Total</td><td>$ 11,025,000</td><td>$ 10,036,000</td></tr></table>

Plant and equipment located in the foreign countries where the Company has facilities, net of accumulated depreciation, totaled $4,703,000 and $5,197,000 at March 31, 2014 and 2013, respectively. These assets constitute substantially all the long-lived production assets of the Company located outside of the United States.

As of May 31, 2013, $4,018,000 of plant and equipment at the discontinued subsidiary was deconsolidated from the consolidated financial statements of the Company (see Note 3).



## 9. Capital Lease Obligations

The Company leases various types of equipment under agreements accounted for as capital leases and included in plant and equipment as follows at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Cost</td><td>$ 343,000</td><td>$ 748,000</td></tr><tr><td>Less: accumulated depreciation</td><td>(25,000)</td><td>(461,000)</td></tr><tr><td>Total</td><td>$ 318,000</td><td>$ 287,000</td></tr></table>

Future minimum lease payments for the capital leases are as follows:

<table><tr><td colspan="3">Year Ending March 31,</td></tr><tr><td>2015</td><td>$ 76,000</td><td></td></tr><tr><td>2016</td><td>76,000</td><td></td></tr><tr><td>2017</td><td>76,000</td><td></td></tr><tr><td>2018</td><td>75,000</td><td></td></tr><tr><td>2019</td><td>50,000</td><td></td></tr><tr><td>Total minimum lease payments</td><td>353,000</td><td></td></tr><tr><td>Less amount representing interest</td><td>(35,000)</td><td></td></tr><tr><td>Present value of future minimum lease payment</td><td>318,000</td><td></td></tr><tr><td>Less current portion</td><td>(64,000)</td><td></td></tr><tr><td></td><td>$ 254,000</td><td></td></tr></table>

As of May 31, 2013, $169,000 in capital leases at the discontinued subsidiary were deconsolidated from the consolidated financial statements of the Company (see Note 3).

## 10. Debt

The Company has the following credit agreements.

## Financing Agreement

The Company is party to a financing agreement, as amended, (the “Financing Agreement”) with a syndicate of lenders, Cerberus Business Finance, LLC (“Cerberus”), as collateral agent, and PNC Bank, National Association, as administrative agent. The loans made thereunder (the “Loans”) consist of: (i) term loans aggregating $85,000,000 (the “Term Loans”) and (ii) revolving loans of up to $20,000,000, subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit (the “Revolving Loans”). The Loans were initially scheduled to mature on January 17, 2017. In connection with the Financing Agreement, the lenders were granted a security interest in substantially all of the assets of the Company.

The Term Loans required quarterly principal payments of $600,000 per quarter from April 1, 2013 to September 30, 2013 and $1,350,000 per quarter from October 1, 2013 until the final maturity date. The Term Loans bear interest at rates equal to, at the Company’s option, either LIBOR plus 8.5% or a base rate plus 7.5%.

In June 2013, the Company entered into a sixth amendment to the Financing Agreement (the "Sixth Amendment"), under the terms of which the agents and lenders agreed to waive any event of default that would otherwise arise under the Financing Agreement due to the qualification in the opinion by the Company's independent registered accounting firm with respect to the financial statements for the fiscal year ended March 31, 2013. In addition, the Sixth Amendment (i) added a reporting requirement with respect to the Company's liquidity levels and certain inventory purchases and (ii) added a financial covenant under which the Company must maintain the following levels of liquidity on the following dates unless otherwise consented to by the lenders: on June 28, 2013, an aggregate amount of at least $25,000,000, subject to certain adjustments; on July 31, 2013, an aggregate amount of at least $26,000,000, subject to certain adjustments; and on August 30, 2013, an aggregate amount of at least $27,000,000, subject to certain adjustments. The Company was in compliance with these minimum liquidity requirements at each date.



## Table of Contents

In August 2013, the Company entered into a seventh amendment to the Financing Agreement (the "Seventh Amendment"). Pursuant to the terms of the Seventh Amendment, (i) the Company borrowed an additional $20,000,000 in Term Loans, (ii) modified certain financial covenants, and (iii) provided consent from the lenders to the Company's payment of certain subordinated debt with respect to the guaranty as described below under WX Agreement (as defined herein). Among other things, the Seventh Amendment required quarterly principal payments of $2,100,000, with respect to the Term Loans, beginning on October 1, 2013 until the final maturity date.

In October 2013, the Company entered into an eighth amendment to the Financing Agreement (the "Eighth Amendment"), which among other things, permitted the Company to purchase Mr. Joffe's stock option pursuant to the Option Purchase Agreement (as defined in Note 20).

In November 2013, the Company entered into a ninth amendment and waiver to the Financing Agreement (the "Ninth Amendment"). Pursuant to the terms of the Ninth Amendment, (i) the agents and lenders waived a requirement for the Company to pay down the Loans with its receipt of certain state tax refunds, (ii) the Revolving Loans were increased by $10,000,000 to $30,000,000 (the "Amended Revolving Loans"), subject to certain borrowing base restrictions, (iii) the Term Loans were decreased by $10,000,000 to $95,000,000 (the "Amended Term Loans"), (iv) the final maturity date was extended to November 6, 2018, (v) the Company gained the right, subject to meeting certain conditions, to repurchase up to $10,000,000 of its equity interests, and (vi) certain other amendments and modifications were made to the Financing Agreement in the form of an amended and restated financing agreement (the "Amended Financing Agreement").

Among other things, the Amended Term Loans require quarterly principal payments of $2,100,000 and bear interest at rates equal to, at the Company’s option, either LIBOR (subject to a 1.50% LIBOR floor) plus 5.25% or a reference rate plus 4.25%. The Amended Revolving Loans bear interest at rates equal to, at the Company’s option, either LIBOR plus 2.50% or a reference rate plus 1.00%. The interest rate on the Company’s term loans using the LIBOR option was 6.75% and 10.50% at March 31, 2014 and 2013, respectively. The interest rate on the Company’s Amended Revolving Loans using the LIBOR option was 2.66% at March 31, 2014.

The following summarizes information about the Company’s term loan at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Principal amount of term loan</td><td>$ 92,900,000</td><td>$ 84,500,000</td></tr><tr><td>Unamortized financing fees</td><td>(5,623,000)</td><td>(2,595,000)</td></tr><tr><td>Net carrying amount of term loan</td><td>$ 87,277,000</td><td>$ 81,905,000</td></tr><tr><td>Less current portion of term loan</td><td>(7,843,000)</td><td>(3,775,000)</td></tr><tr><td>Long-term portion of term loan</td><td>$ 79,434,000</td><td>$ 78,130,000</td></tr></table>

Future repayments of the Company’s Amended Term Loan, by fiscal year, are as follows:

<table><tr><td colspan="2">Year Ending March 31,</td></tr><tr><td>2015</td><td>$ 8,400,000</td></tr><tr><td>2016</td><td>8,400,000</td></tr><tr><td>2017</td><td>8,400,000</td></tr><tr><td>2018</td><td>8,400,000</td></tr><tr><td>2019</td><td>59,300,000</td></tr><tr><td>Total payments</td><td>$ 92,900,000</td></tr></table>



## Table of Contents

The Amended Revolving Loans may, at the Company’s option, be prepaid in whole or in part. The Company may reduce or terminate the commitments of the lenders to make the Amended Revolving Loans or prepay the Amended Term Loans in whole or in part, but such prepayments are subject to a prepayment penalty of (i) 3.00% times the sum of the reduction of the revolving credit commitment plus the principal amount of any prepayment of the Amended Term Loans until January 18, 2014 and (ii) 2.00% times the sum of the reduction of the revolving credit commitment plus the principal amount of any prepayment of the Amended Term Loans from January 19, 2014 to January 18, 2015. Notwithstanding the foregoing, the Company had the right to prepay up to $10,000,000 of the Amended Term Loans without any prepayment penalty if such payment was made within 120 days of the Ninth Amendment effective date. The Company did not exercise the prepayment option.

The Amended Financing Agreement, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio, a minimum fixed charge coverage ratio, and minimum consolidated earnings before interest, income tax, depreciation and amortization expenses (“EBITDA”). The Company was in compliance with all financial covenants as of March 31, 2014.

At March 31, 2014, the Company had borrowed $10,000,000 under the Amended Revolving Loans. There was no balance on the Revolving Loans at March 31, 2013. The Company had reserved $476,000 of the Amended Revolving Loans for standby letters of credit for workers' compensation insurance and $1,614,000 for commercial letters of credit as of March 31, 2014. As of March 31, 2014, $17,720,000, subject to certain adjustments, was available under the Amended Revolving Loans at March 31, 2014.

## Cerberus Warrant

In connection with the Financing Agreement, the Company issued a warrant (the “Cerberus Warrant”) to Cerberus. Pursuant to the Cerberus Warrant, Cerberus could purchase up to 219,355 shares of the Company’s common stock (the “Warrant Shares”) for an adjusted exercise price of $7.75 per share exercisable on or before May 24, 2017. The exercise price was subject to adjustments, among other things, for sales of common stock by the Company at a price below the exercise price.

In November 2013, the Company entered into a warrant purchase agreement (the “Cerberus Warrant Purchase Agreement”) with Cerberus to purchase the Cerberus Warrant. Pursuant to the Cerberus Warrant Purchase Agreement, the Company paid $2,194,000, which is an amount equal to the closing price of the Company’s common stock on November 22, 2013 of $17.75 less the adjusted per share exercise price of $7.75, ($10.00 per Warrant Share) multiplied by the number of Warrant Shares. The fair value of the Cerberus Warrant as of the settlement date was $2,410,000 using the Monte Carlo simulation model. The following assumptions were used to calculate the fair value of the Cerberus Warrant: dividend yield of 0%; expected volatility of 45.69%; risk-free interest rate of 0.77%; subsequent financing probability of 0%; and an expected life of 3.5 years. As a result of this settlement, the Company recorded a gain of $216,000 which is included in general and administrative expenses during the fiscal year ended March 31, 2014. The fair value of the Cerberus Warrant using the Monte Carlo simulation model was $375,000 at March 31, 2013. This amount was recorded as a warrant liability which is included in other liabilities in the consolidated balance sheet at March 31, 2013.

During the fiscal years ended March 31, 2014 and 2013, a loss of $2,035,000 and a gain of $232,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability.

## Fenco Loans

As of May 31, 2013, $48,520,000 of revolving loan - in default and $10,000,000 of term loan - in default at the discontinued subsidiary were deconsolidated from the consolidated financial statements of the Company (see Note 3).



## Table of Contents

## WX Agreement

In August 2012, the Company entered into a Revolving Credit/Strategic Cooperation Agreement (the "WX Agreement") with Wanxiang America Corporation (the "Supplier") and the discontinued subsidiary. Under the terms of the WX Agreement, the Supplier agreed to provide a revolving credit line for purchases of automotive parts and components by the discontinued subsidiary in an aggregate principal amount not to exceed $22,000,000 (the "Fenco Credit Line"), of which $2,000,000 would only be available for accrued interest and other amounts payable (the "Obligations"). Payment for all purchases became due and payable 120 days after the date of the bill of lading. Any amounts remaining unpaid following the due date would bear interest at a rate of 1% per month. The Fenco Credit Line was scheduled to mature on July 31, 2017. Pursuant to a guaranty (the "Guaranty"), the Obligations under the WX Agreement were guaranteed by the Company and certain of its subsidiaries.

On July 9, 2013, the Company received notice from the Supplier that the filing of the voluntary petition for relief under Chapter 7 of Title 11 of the United States Code in the U.S. Bankruptcy Court for the District of Delaware by the Fenco Entities constituted an "Event of Default" under the WX Agreement. As a result of the Event of Default, all amounts outstanding under the WX Agreement together with all accrued interest and all other amounts payable automatically became immediately due and payable subject to the terms of the Guaranty and a subordination agreement with the lender under the Financing Agreement. In addition, subject to certain adjustments, the interest rate applicable to all amounts remaining unpaid will increase, to the extent permitted by law, to 1.25% per month, compounding monthly, on December 10, 2013, and to 1.50% per month, compounding monthly, on June 10, 2014.

On August 26, 2013, in connection with the Seventh Amendment, the Company paid $20,843,000 to the Supplier for payments of all outstanding liabilities, including interest payments, of the Company under the Guaranty.

In connection with the WX Agreement and the Guaranty, the Company also issued a warrant (the "Supplier Warrant") to the Supplier to purchase up to 516,129 shares of the Company's common stock for an initial exercise price of $7.75 per share exercisable at any time after August 22, 2014 and on or prior to September 30, 2017. The exercise price is subject to adjustments, among other things, for sales of common stock by the Company at a price below the exercise price.

The fair value of the Supplier Warrant using the Monte Carlo simulation model was $10,047,000 and $1,639,000 at March 31, 2014 and 2013, respectively. This amount is recorded as a warrant liability which is included in other liabilities in the consolidated balance sheets at March 31, 2014 and 2013. During the fiscal years ended March 31, 2014 and 2013, a loss of $8,408,000 and $621,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of this warrant liability.

## 11. Accounts Receivable Discount Programs

The Company uses receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers' receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate collection of customers' receivables.

The following is a summary of the Company’s accounts receivable discount programs for continuing operations:

<table><tr><td rowspan="2"></td><td colspan="2">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td></tr><tr><td>Receivables discounted</td><td>$210,752,000</td><td>$188,536,000</td></tr><tr><td>Weighted average days</td><td>337</td><td>336</td></tr><tr><td>Weighted average discount rate</td><td>2.2%</td><td>2.7%</td></tr><tr><td>Amount of discount as interest expense</td><td>$ 4,336,000</td><td>$ 4,654,000</td></tr></table>



## 12. Financial Risk Management and Derivatives

Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s facilities overseas, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currency. The Company’s primary risk exposure is from fluctuations in the value of the Mexican peso and to a lesser extent the Chinese yuan. To mitigate these risks, the Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for these foreign currencies. The extent to which forward foreign currency exchange contracts are used is modified periodically in response to the Company’s estimate of market conditions and the terms and length of anticipated requirements.

The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes. The forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations.

The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $17,796,000 and $17,543,000 at March 31, 2014 and 2013, respectively. These contracts generally expire in a year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade or better credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.

The following table shows the effect of the Company’s derivative instruments on its consolidated statements of operations:

<table><tr><td rowspan="2">Derivatives Not Designated as Hedging Instruments</td><td colspan="4">Gain (Loss) Recognized within General and Administrative Expenses</td></tr><tr><td>2014</td><td colspan="2">Years Ended March 31, 2013</td><td>2012</td></tr><tr><td>Forward foreign currency exchange contracts</td><td>$ (842,000)</td><td>$ 804,000</td><td>$ (476,000)</td><td></td></tr></table>

The fair value of the forward foreign currency exchange contracts of $159,000 is included in other current liabilities in the consolidated balance sheet at March 31, 2014. The fair value of the forward foreign currency exchange contracts of $683,000 is included in prepaid expenses and other current assets in the consolidated balance sheet at March 31, 2013.

## 13. Fair Value Measurements

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses a three-tier valuation hierarchy based upon observable and unobservable inputs:

• Level 1 — Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities.

- Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 — Valuation is based upon unobservable inputs that are significant to the fair value measurement.



The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at March 31, 2014 and 2013, according to the valuation techniques the Company used to determine their fair values.

<table><tr><td rowspan="3"></td><td colspan="4">March 31, 2014</td><td colspan="4">March 31, 2013</td></tr><tr><td colspan="4">Fair Value Measurements Using Inputs Considered as</td><td colspan="4">Fair Value Measurements Using Inputs Considered as</td></tr><tr><td>Fair Value</td><td>Level 1</td><td>Level 2</td><td>Level 3</td><td>Fair Value</td><td>Level 1</td><td>Level 2</td><td>Level 3</td></tr><tr><td>Assets</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Short-term investments</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mutual funds</td><td>$ 521,000</td><td>$ 521,000</td><td>-</td><td>-</td><td>$ 411,000</td><td>$ 411,000</td><td>-</td><td>-</td></tr><tr><td>Prepaid expenses and other current assets</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Forward foreign currency exchange contracts</td><td>-</td><td>-</td><td>-</td><td>-</td><td>683,000</td><td>-</td><td>$ 683,000</td><td>-</td></tr><tr><td>Liabilities</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Other current liabilities</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Deferred compensation</td><td>521,000</td><td>521,000</td><td>-</td><td>-</td><td>411,000</td><td>411,000</td><td>-</td><td>-</td></tr><tr><td>Forward foreign currency exchange contracts</td><td>159,000</td><td>-</td><td>$ 159,000</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Other liabilities</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Warrant liability</td><td>10,047,000</td><td>-</td><td>-</td><td>$10,047,000</td><td>2,014,000</td><td>-</td><td>-</td><td>$2,014,000</td></tr></table>

The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.

The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers and classified as Level 2. During the fiscal years ended March 31, 2014 and 2013, a loss of $842,000 and a gain of $804,000, respectively, were recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.

The Company estimates the fair value of the warrant liability using level 3 inputs and the Monte Carlo simulation model at each balance sheet date. Monte Carlo simulation model requires the input of subjective assumptions including the expected volatility of the underlying stock. These subjective assumptions are based on both historical and other information. Changes in the values assumed and used in the model can materially affect the estimate of fair value. This amount is recorded as a warrant liability which is included in other liabilities in the consolidated balance sheets at March 31, 2014 and 2013. Any subsequent changes in the fair value of the warrant liability will be recorded in current period earnings as a general and administrative expense. During the years ended March 31, 2014 and 2013, a loss of $10,443,000 and $389,000 was recorded in general and administrative expenses due to the change in the fair value of the warrant liability.

The assumptions used to determine the fair value of the Supplier Warrant recorded as warrant liability were:

<table><tr><td></td><td>March 31, 2014</td></tr><tr><td>Risk free interest rate</td><td>1.11%</td></tr><tr><td>Expected life in years</td><td>3.50</td></tr><tr><td>Expected volatility</td><td>45.90%</td></tr><tr><td>Dividend yield</td><td>-</td></tr><tr><td>Probability of future financing</td><td>0%</td></tr></table>



## Table of Contents

The risk free interest rate used was based on U.S. treasury-note yields with terms commensurate with the remaining term of the warrants. The expected life is based on the remaining contractual term of the warrants and the expected volatility is based on the Company’s daily historical volatility over a period commensurate with the remaining term of the warrants.

A summary of the change to the Company’s warrant liability, as measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is presented below:

<table><tr><td rowspan="2"></td><td colspan="2">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td></tr><tr><td>Beginning balance</td><td>$ 2,014,000</td><td>$ -</td></tr><tr><td>Newly issued</td><td>-</td><td>1,625,000</td></tr><tr><td>Total (gain) loss included in net loss</td><td>10,443,000</td><td>389,000</td></tr><tr><td>Exercises/settlements (1)</td><td>(2,410,000)</td><td>-</td></tr><tr><td>Net transfers in (out) of Level 3</td><td>-</td><td>-</td></tr><tr><td>Ending balance</td><td>$ 10,047,000</td><td>$ 2,014,000</td></tr></table>

(1) Represents the fair value of the Cerberus Warrant as of the settlement date (see Note 10).

During the fiscal year ended March 31, 2014 the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

## 14. Commitments and Contingencies

## Operating Lease Commitments

The Company leases various office and warehouse facilities in North America and Asia under operating leases expiring through 2022. The Company also has short term contracts of one year or less covering its third party warehouses that provide for contingent payments based on the level of sales that are processed through the third party warehouse.

The remaining future minimum rental payments under the above operating leases are as follows:

<table><tr><td colspan="2">Year Ending March 31,</td></tr><tr><td>2015</td><td>$ 2,953,000</td></tr><tr><td>2016</td><td>1,288,000</td></tr><tr><td>2017</td><td>1,081,000</td></tr><tr><td>2018</td><td>1,066,000</td></tr><tr><td>2019</td><td>1,031,000</td></tr><tr><td>Thereafter</td><td>3,209,000</td></tr><tr><td></td><td></td></tr><tr><td>Total minimum lease payments</td><td>$ 10,628,000</td></tr></table>

During fiscal years 2014, 2013 and 2012, the Company’s continuing operations incurred total operating lease expenses of $2,928,000, $2,567,000 and $2,825,000, respectively.



## Table of Contents

Commitments to Provide Marketing Allowances under Long-Term Customer Contracts

The Company has or is renegotiating long-term agreements with many of its major customers. Under these agreements, which typically have initial terms of at least four years, the Company is designated as the exclusive or primary supplier for specified categories of remanufactured alternators and starters. In consideration for the Company’s designation as a customer’s exclusive or primary supplier, the Company typically provides the customer with a package of marketing incentives. These incentives differ from contract to contract and can include (i) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (ii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iii) discounts granted in connection with each individual shipment of product, and (iv) other marketing, research, store expansion or product development support. These contracts typically require that the Company meet ongoing standards related to fulfillment, price, and quality. The Company’s contracts with major customers expire at various dates through March 2019.

The Company typically grants its customers marketing allowances in connection with these customers' purchase of goods. The Company records the cost of all marketing allowances provided to its customers. Such allowances include sales incentives and concessions and typically consist of: (i) allowances which may only be applied against future purchases and are recorded as a reduction to revenues in accordance with a schedule set forth in the long-term contract, (ii) allowances related to a single exchange of product that are recorded as a reduction of revenues at the time the related revenues are recorded or when such incentives are offered, and (iii) allowances that are made in connection with the purchase of inventory from a customer.

The following table presents the breakout of allowances for our continuing operations discussed above, recorded as a reduction to revenues:

<table><tr><td rowspan="2"></td><td colspan="3">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Allowances incurred under long-term customer contracts</td><td>$ 16,099,000</td><td>$ 13,590,000</td><td>$ 11,549,000</td></tr><tr><td>Allowances related to a single exchange of product</td><td>30,948,000</td><td>27,392,000</td><td>19,544,000</td></tr><tr><td>Allowances related to core inventory purchase obligations</td><td>2,506,000</td><td>2,615,000</td><td>3,030,000</td></tr><tr><td>Total customer allowances recorded as a reduction of revenues</td><td>$ 49,553,000</td><td>$ 43,597,000</td><td>$ 34,123,000</td></tr></table>

The following table presents the commitments to incur allowances, excluding allowances related to a single exchange of product, which will be recognized as a charge against revenue, and customer Remanufactured Core purchase obligations which will be recognized in accordance with the terms of the relevant long-term customer contracts:

<table><tr><td colspan="2">Year Ending March 31,</td></tr><tr><td>2015</td><td>$ 15,460,000</td></tr><tr><td>2016</td><td>11,420,000</td></tr><tr><td>2017</td><td>5,983,000</td></tr><tr><td>2018</td><td>5,390,000</td></tr><tr><td>2019</td><td>4,192,000</td></tr><tr><td>Thereafter</td><td>4,551,000</td></tr><tr><td>Total marketing allowances</td><td>$ 46,996,000</td></tr></table>

## Workers Compensation Insurance

Effective January 1, 2007 through the current fiscal year, the Company’s workers compensation insurance policy has been written on a guaranteed cost basis (first dollar payment of claims with no deductibles). For each of the five years prior to January 1, 2007, the Company purchased workers compensation insurance on a large deductible plan. The Company was, and still is, liable for the first $250,000 of each claim until all claims are settled (essentially self-insured). The Company records an estimate of its liability for the self-insured portion of its workers’ compensation policy by including an estimate of the total claims incurred and reported as well as an estimate of incurred, but not reported, claims by applying the Company’s historical claims development factor to its estimate of incurred and reported claims.



## 15. Major Customers and Suppliers

The Company’s largest customers accounted for the following total percentage of net sales from continuing operations:

<table><tr><td rowspan="2">Sales</td><td colspan="3">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Customer A</td><td>53%</td><td>41%</td><td>49%</td></tr><tr><td>Customer B</td><td>19%</td><td>24%</td><td>17%</td></tr><tr><td>Customer C</td><td>11%</td><td>12%</td><td>6%</td></tr><tr><td>Customer D</td><td>4%</td><td>5%</td><td>6%</td></tr></table>

The Company’s largest customers accounted for the following total percentage of accounts receivable — trade from continuing operations at March 31:

<table><tr><td>Accounts receivable - trade</td><td>2014</td><td>2013</td></tr><tr><td>Customer A</td><td>46%</td><td>27%</td></tr><tr><td>Customer B</td><td>12%</td><td>11%</td></tr><tr><td>Customer C</td><td>7%</td><td>7%</td></tr><tr><td>Customer D</td><td>10%</td><td>12%</td></tr></table>

The Company’s largest supplier accounted for 13%, 0%, and 16% of inventory purchases for the years ended March 31, 2014, 2013, and 2012, respectively. No other suppliers accounted for more than 10% of inventory purchases for the years ended March 31, 2014, 2013, and 2012.

## 16. Income Taxes

The income tax expense from the Company’s continuing operations for the years ended March 31 is as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Current tax expense</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ 4,564,000</td><td>$ 31,226,000</td><td>$ 5,081,000</td></tr><tr><td>State</td><td>614,000</td><td>3,368,000</td><td>319,000</td></tr><tr><td>Foreign</td><td>599,000</td><td>336,000</td><td>228,000</td></tr><tr><td>Total current tax expense</td><td>5,777,000</td><td>34,930,000</td><td>5,628,000</td></tr><tr><td>Deferred tax expense (benefit)</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>2,477,000</td><td>(25,074,000)</td><td>1,224,000</td></tr><tr><td>State</td><td>(162,000)</td><td>(2,706,000)</td><td>542,000</td></tr><tr><td>Foreign</td><td>(759,000)</td><td>282,000</td><td>(9,000)</td></tr><tr><td>Total deferred tax (benefit) expense</td><td>1,556,000</td><td>(27,498,000)</td><td>1,757,000</td></tr><tr><td>Total income tax expense</td><td>$ 7,333,000</td><td>$ 7,432,000</td><td>$ 7,385,000</td></tr></table>



## Table of Contents

Deferred income taxes from the Company’s continuing operations consist of the following at March 31:

<table><tr><td></td><td>2014</td><td>2013</td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Accounts receivable valuation</td><td>$ 3,926,000</td><td>$ 4,713,000</td></tr><tr><td>Allowance for customer incentives</td><td>1,343,000</td><td>1,222,000</td></tr><tr><td>Inventory obsolescence reserve</td><td>1,070,000</td><td>966,000</td></tr><tr><td>Stock options</td><td>1,426,000</td><td>1,488,000</td></tr><tr><td>Cancellation of indedtedness</td><td>-</td><td>20,510,000</td></tr><tr><td>Intangibles, net</td><td>796,000</td><td>704,000</td></tr><tr><td>Deferred core revenue</td><td>2,885,000</td><td>2,259,000</td></tr><tr><td>Claims payable</td><td>88,000</td><td>175,000</td></tr><tr><td>Accrued compensation</td><td>1,787,000</td><td>1,786,000</td></tr><tr><td>Net operating losses</td><td>9,117,000</td><td>190,000</td></tr><tr><td>Other</td><td>2,217,000</td><td>2,320,000</td></tr><tr><td>Total deferred tax assets</td><td>$ 24,655,000</td><td>$ 36,333,000</td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Prepaid expenses</td><td>$ (331,000)</td><td>$ (642,000)</td></tr><tr><td>Property and equipment, net</td><td>(298,000)</td><td>(391,000)</td></tr><tr><td>Estimate for returns</td><td>(916,000)</td><td>(219,000)</td></tr><tr><td>Other</td><td>(1,866,000)</td><td>(2,281,000)</td></tr><tr><td>Total deferred tax liabilities</td><td>$ (3,411,000)</td><td>$ (3,533,000)</td></tr><tr><td>Net deferred tax assets</td><td>$ 21,244,000</td><td>$ 32,800,000</td></tr><tr><td>Net current deferred income tax asset</td><td>$ 18,630,000</td><td>$ 30,851,000</td></tr><tr><td>Net long-term deferred income tax assets</td><td>2,614,000</td><td>1,949,000</td></tr><tr><td>Total</td><td>$ 21,244,000</td><td>$ 32,800,000</td></tr></table>

At March 31, 2014 current deferred income tax liabilities of $137,000 are included in other current liabilities in the consolidated balance sheet. At March 31, 2013, current deferred income tax liabilities of $145,000 are included in other current liabilities and $428,000 of long-term deferred income tax liabilities are included in other liabilities in the consolidated balance sheet.

At March 31, 2014, the Company had federal and state net operating loss carryforwards of $26,100,000 and $22,300,000, respectively. The utilization of these net operating loss carryforwards may be permanently limited due to Internal Revenue Code Section 382 in the Unites States. Prior to the utilization of such losses, the Company will perform further analysis to determine the amount subject to limitation. Additionally, in certain states the suspension of the usage of the net operating losses may apply. The net operating loss carryforwards expire between fiscal years 2020 and 2032.

The U.S. operating loss carryforwards include $5,800,000 of losses attributable to windfall stock option deductions. A net benefit of approximately $2,200,000 will be recorded to additional paid-in capital when realized as a reduction to income taxes payable.

Realization of the Company's deferred tax assets is dependent upon the Company's ability to generate sufficient taxable income. Management reviews the Company's deferred tax assets on a jurisdiction by jurisdiction basis to determine whether it is more likely than not that the deferred tax assets will be realized. Management believes that it is more likely than not that future taxable income will be sufficient to realize the recorded deferred tax assets. In evaluating this ability, management considers long-term agreements, including Remanufactured Core purchase obligations, with the Company's major customers that expire at various dates through March 2019. Management also periodically compares its forecasts to actual results. Even though there can be no assurance that the forecasted results will be achieved, the history of income in all other jurisdictions provides sufficient positive evidence that no valuation allowance is needed.



## Table of Contents

For the fiscal years ended March 31, 2014, 2013, and 2012, the primary components of the Company’s income tax expense were (i) the current liability due to federal, state and foreign income taxes, (ii) foreign income taxed at rates that are different from the federal statutory rate, (iii) non-deductible expenses in connection with the fair value adjustments on the warrants, and (iv) impact of the non-deductible executive compensation under Internal Revenue Code Section 162(m). A tax benefit of $10,530,000 is contained within the income from the discontinued operations as disclosed in Note 3 above.

The difference between the income tax expense at the federal statutory rate and the Company’s effective tax rate from the Company’s continuing operations is as follows:

<table><tr><td rowspan="2"></td><td colspan="3">Years Ended March 31,</td></tr><tr><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Statutory federal income tax rate</td><td>34%</td><td>34%</td><td>34%</td></tr><tr><td>State income tax rate, net of federal benefit</td><td>2%</td><td>2%</td><td>3%</td></tr><tr><td>Change in deferred tax rate</td><td>(2)%</td><td>-%</td><td>(1)%</td></tr><tr><td>Foreign income taxed at different rates</td><td>(7)%</td><td>-%</td><td>(3)%</td></tr><tr><td>Warrants</td><td>26%</td><td>-%</td><td>-%</td></tr><tr><td>Non-deductible executive compensation</td><td>2%</td><td>-%</td><td>-%</td></tr><tr><td>Uncertain Tax Positions</td><td>(2)%</td><td>-%</td><td>-%</td></tr><tr><td>Other income tax</td><td>-%</td><td>(2)%</td><td>1%</td></tr><tr><td></td><td>53%</td><td>34%</td><td>34%</td></tr></table>

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions with varying statutes of limitations. At March 31, 2014, the Company is under examination in the U.S. by the Internal Revenue Service for fiscal years 2011 through 2013 and by the State of California for fiscal years 2008 through 2010. The Company is not under examination in any another jurisdiction. The Company believes no significant changes in the unrecognized tax benefits will occur within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits from the Company’s continuing operations is as follows at March 31:

<table><tr><td></td><td>2014</td><td>2013</td><td>2012</td></tr><tr><td>Balance at beginning of period</td><td>$ 827,000</td><td>$ 634,000</td><td>$ 576,000</td></tr><tr><td>Additions based on tax positions related to the current year</td><td>71,000</td><td>227,000</td><td>116,000</td></tr><tr><td>Additions for tax positions of prior year</td><td>-</td><td>-</td><td>18,000</td></tr><tr><td>Reductions for tax positions of prior year</td><td>(358,000)</td><td>(34,000)</td><td>(76,000)</td></tr><tr><td>Settlements</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Balance at end of period</td><td>$ 540,000</td><td>$ 827,000</td><td>$ 634,000</td></tr></table>

At March 31, 2014, 2013 and 2012, there are $387,000, $597,000 and $480,000 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of income tax expense. During the fiscal years ended March 31, 2014, 2013 and 2012, the Company recognized approximately ($9,000), $32,000, and $6,000 in interest and penalties. The Company had approximately $112,000 and $121,000 for the payment of interest and penalties accrued at March 31, 2014 and 2013, respectively.



## 17. Defined Contribution Plans

The Company has a 401(k) plan covering all employees who are 21 years of age with at least six months of service. The plan permits eligible employees to make contributions up to certain limitations, with the Company matching 25% of each participating employee's contribution up to the first 6% of employee compensation. Employees are immediately vested in their voluntary employee contributions and vest in the Company's matching contributions ratably over five years. The Company's matching contribution to the 401(k) plan was $126,000, $117,000 and $102,000 for the fiscal years ended March 31, 2014, 2013 and 2012, respectively.

## 18. Stock Options and Restricted Stock Awards

In January 1994, the Company adopted the 1994 Stock Option Plan (the "1994 Plan"), under which it was authorized to issue non-qualified stock options and incentive stock options to key employees, directors and consultants. After a number of shareholder-approved increases to this plan, at March 31, 2002 the aggregate number of stock options approved was 960,000 shares of the Company's common stock. The term and vesting period of options granted is determined by a committee of the Board of Directors with a term not to exceed ten years. At the Company's Annual Meeting of Shareholders held on November 8, 2002, the 1994 Plan was amended to increase the authorized number of shares issued to 1,155,000. As of March 31, 2014 no options to purchase shares of common stock were outstanding or available for grant under the 1994 Plan. As of March 31, 2013, options to purchase 95,750 shares of common stock were outstanding and no options were available for grant under the 1994 Plan.

At the Company’s Annual Meeting of Shareholders held on December 17, 2003, the shareholders approved the Company’s 2003 Long-Term Incentive Plan (“Incentive Plan”) which had been adopted by the Company’s Board of Directors on October 31, 2003. Under the Incentive Plan, a total of 1,200,000 shares of the Company’s common stock were reserved for grants of Incentive Awards and all of the Company’s employees are eligible to participate. The 2003 Incentive Plan was terminated on October 31, 2013. As of March 31, 2014 and 2013, options to purchase 467,500 and 1,035,534 shares of common stock, respectively, were outstanding under the Incentive Plan. In January 2011, this Incentive Plan was replaced and no options were available for grant under the Incentive Plan.

In November 2004, the Company’s shareholders approved the 2004 Non-Employee Director Stock Option Plan (the “2004 Plan”) which provides for the granting of options to non-employee directors. At the Company’s Annual Meeting of Shareholders held on February 25, 2010, the Company’s shareholders approved an amendment to the 2004 Plan that increased the number of shares of common stock reserved for grant under the 2004 Plan from 175,000 to 275,000. As of March 31, 2014 and 2013, options to purchase 183,000 and 218,000, respectively, shares of common stock for grant under the 2004 Plan. In March 2014, the 2004 Plan was replaced and the Company will not make any further grants of awards under this plan.

In January 2011, the Company’s shareholders approved the 2010 Incentive Award Plan (the “2010 Plan”) which replaced the 2003 Long-term Incentive Plan. At the Company’s Annual Meeting of Shareholders held on March 28, 2013, the Company’s shareholders approved an amendment to the 2010 Plan that increased the number of shares of common stock reserved for grant under the 2010 Plan from 750,000 to 1,750,000. At the Company’s Annual Meeting of Shareholders held on March 31, 2014, the Company’s shareholders approved a second amendment to the 2010 Plan that further increased the number of shares of common stock reserved for grant under the 2010 Plan from 1,750,000 to 2,750,000. Under the 2010 Plan, all of the Company’s employees are eligible to participate. As of March 31, 2014 and 2013, options to purchase 776,468 and 620,800 shares of common stock, respectively, were outstanding and 1,452,983 and 1,078,033, respectively, shares of common stock were available for grant under the 2010 Plan.

At the Company’s Annual Meeting of Shareholders held on March 31, 2014, the shareholders approved the Company’s 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”) which had been adopted by the Company’s Board of Directors on February 23, 2014 and replaced the 2004 Plan. Under the 2014 Plan, a total of 342,000 shares of the Company’s common stock were reserved for grants to the Company’s non-employee directors. As of March 31, 2014, no options to purchase shares under the 2014 Plan were issued.

The shares of common stock issued upon exercise of a previously granted stock option are considered new issuances from shares reserved for issuance upon adoption of the various plans. The Company requires that the option holders provide a written notice of exercise to the stock plan administrator and payment for the shares prior to issuance of the shares.



## Table of Contents

A summary of stock option transactions follows:

<table><tr><td></td><td>Number of Shares</td><td>Weighted Average Exercise Price</td></tr><tr><td>Outstanding at March 31, 2011</td><td>1,591,084</td><td>$ 8.61</td></tr><tr><td>Granted</td><td>15,000</td><td>$ 10.04</td></tr><tr><td>Exercised</td><td>(95,550)</td><td>$ 3.36</td></tr><tr><td>Cancelled</td><td>(48,250)</td><td>$ 3.15</td></tr><tr><td>Outstanding at March 31, 2012</td><td>1,462,284</td><td>$ 9.15</td></tr><tr><td>Granted</td><td>635,800</td><td>$ 6.47</td></tr><tr><td>Exercised</td><td>(128,000)</td><td>$ 2.28</td></tr><tr><td>Cancelled</td><td>-</td><td>$ -</td></tr><tr><td>Outstanding at March 31, 2013</td><td>1,970,084</td><td>$ 8.73</td></tr><tr><td>Granted</td><td>331,000</td><td>$ 11.06</td></tr><tr><td>Exercised</td><td>(721,666)</td><td>$ 9.12</td></tr><tr><td>Cancelled</td><td>(152,450)</td><td>$ 7.44</td></tr><tr><td>Outstanding at March 31, 2014</td><td>1,426,968</td><td>$ 9.21</td></tr></table>

Based on the market value of the Company’s common stock at March 31, 2014, 2013 and 2012, the pre-tax intrinsic value of options exercised was $12,593,000, $493,000 and $598,000 respectively.

The followings table summarizes information about the options outstanding at March 31, 2014:

<table><tr><td rowspan="2"></td><td colspan="4">Options Outstanding</td><td colspan="4">Options Exercisable</td></tr><tr><td>Shares</td><td>Weighted Average Exercise Price</td><td>Weighted Average Remaining Life In Years</td><td>Aggregate Intrinsic Value</td><td>Shares</td><td>Weighted Average Exercise Price</td><td>Aggregate Intrinsic Value</td><td></td></tr><tr><td>Range of Exercise price</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>$ 1.800 to $ 6.345</td><td>81,000</td><td>$ 5.22</td><td>5.02</td><td>$ 1,729,000</td><td>78,000</td><td>$ 5.20</td><td>$ 1,667,000</td><td></td></tr><tr><td>$ 6.460 to $ 7.450</td><td>509,468</td><td>6.52</td><td>8.48</td><td>10,215,000</td><td>344,766</td><td>6.54</td><td>6,906,000</td><td></td></tr><tr><td>$ 8.700 to $ 9.900</td><td>279,250</td><td>9.33</td><td>9.10</td><td>4,814,000</td><td>12,250</td><td>9.48</td><td>209,000</td><td></td></tr><tr><td>$ 10.010 to $ 11.900</td><td>214,250</td><td>10.24</td><td>1.84</td><td>3,499,000</td><td>214,250</td><td>10.24</td><td>3,499,000</td><td></td></tr><tr><td>$ 12.000 to $ 19.94</td><td>343,000</td><td>13.41</td><td>3.87</td><td>4,514,000</td><td>287,000</td><td>$ 12.23</td><td>4,116,000</td><td></td></tr><tr><td></td><td>1,426,968</td><td></td><td></td><td>$24,771,000</td><td>936,266</td><td></td><td>$16,397,000</td><td></td></tr></table>

The aggregate intrinsic values in the above table represent the pre-tax value of all in-the-money options if all such options had been exercised on March 31, 2014 based on the Company’s closing stock price of $26.57 as of that date.

Options to purchase 936,266, 1,549,683 and 1,447,284 shares of common stock were exercisable as of March 31, 2014, 2013 and 2012, respectively. The weighted average exercise price of options exercisable was $9.06, $9.33 and $9.14 as of March 31, 2014, 2013 and 2012, respectively.



## Table of Contents

A summary of changes in the status of non-vested stock options is presented below.

<table><tr><td></td><td>Number of Shares</td><td>Weighted Average Grant Date Fair Value</td></tr><tr><td>Non-vested at March 31, 2013</td><td>420,401</td><td>$ 2.93</td></tr><tr><td>Granted</td><td>331,000</td><td>$ 5.16</td></tr><tr><td>Vested</td><td>(147,999)</td><td>$ 3.10</td></tr><tr><td>Cancelled</td><td>(112,700)</td><td>$ 2.92</td></tr><tr><td>Non-vested at March 31, 2014</td><td>490,702</td><td>$ 4.39</td></tr></table>

At March 31, 2014, there was $1,916,000 of total unrecognized compensation expense from stock-based compensation granted under the plans, which is related to non-vested shares. The compensation expense is expected to be recognized over a weighted average vesting period of 1.9 years.

## Restricted Stock

On September 3, 2013, the Company awarded 138,000 shares of restricted stock to certain executives at the closing market price of $9.32 per share. These awards vest in three equal installments beginning each anniversary from the award date, subject to continued employment. The fair value related to the restricted stock awards of $1,286,000 will be recognized as compensation expense over the vesting period. At March 31, 2014, there was $1,072,000 of total unrecognized compensation expense from these restricted stock awards, which will be recognized over the remaining vesting period.

## 19. Litigation

There have been and may be additional claims filed against the Company by the trustee and some or all of the creditors in connection with the bankruptcy proceedings involving the Fenco Entities. For example, the trustee has notified the Company’s insurance companies that it may have claims for wrongful acts, breach of fiduciary duty, civil conspiracy, aiding and abetting, negligence and conversion. The Company is also a defendant in a case in Ontario Superior Court and in a case in the District Court for the District of Delaware claiming that the Company is liable for amounts due by the Fenco Entities to their employees under U.S. and Canadian law. Any litigation to determine the validity of these claims, regardless of their merit or resolution, may be costly and time consuming and divert the efforts and attention of the Company’s management from its business strategy. Any adverse judgment or settlement by the Company of these claims will also result in additional expense.

The Company is also 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.

## 20. Related Party Transactions

The Company has arrangements or entered into agreements with the certain members of its Board of Directors.

In August 2000, the Company’s Board of Directors agreed to engage Mr. Mel Marks to provide consulting services to the Company. Mr. Marks was paid an annual consulting fee of $350,000 per year under this arrangement until its termination on March 31, 2013. In March 2013, the Company agreed to pay a one-time fee of $350,000 and additional compensation of $300,000 which was paid during fiscal 2014.

On May 18, 2012, the Company entered into a new employment agreement (the "New Employment Agreement") with Mr. Joffe, which terminated and superseded Mr. Joffe's previous employment agreement that was to expire on August 31, 2012. The New Employment Agreement provides for Mr. Joffe to serve as the Company's Chairman, President and Chief Executive Officer for a term expiring on August 31, 2015, unless extended or earlier terminated. Pursuant to the New Employment Agreement, Mr. Joffe will receive a base salary of $600,000 per year, which will be reviewed from time to time in accordance with the Company's established procedures for adjusting salaries for similarly situated employees. Mr. Joffe will be eligible to participate the Company's Annual Incentive Plan adopted and amended from time to time by the Board (the "Annual Incentive Plan"), with a target bonus equal to 100% of Mr. Joffe's salary (the "Annual Incentive Bonuses"). In addition to the Annual Incentive Bonuses, the Company paid Mr. Joffe a one-time bonus of $250,000 upon the signing of the New Employment Agreement and awarded Mr. Joffe a guaranteed bonus of $500,000, which is payable in three annual installments: $168,000 on May 18, 2012; $166,000 on May 18, 2013; and $166,000 on May 18, 2014.



## Table of Contents

Pursuant to Mr. Joffe’s previous employment agreement, he was entitled to receive a transaction fee of 1.0% of the “total consideration” of any transaction, including any transaction resulting in a change of control, his efforts brought to the Company. In lieu of this transaction fee, pursuant to the New Employment Agreement, the Company granted pursuant to its 2010 Plan (i) a fully-vested option to purchase 109,100 shares of the Company’s common stock equal to $250,000 based on the Black-Scholes valuation method and (ii) 51,167 shares of fully vested restricted stock with a fair value of $331,000 in December 2012. The Company withheld 25,137 shares based upon the Company’s closing stock price on the vesting date to settle Mr. Joffe’s minimum statutory obligation for the applicable income and other employment taxes. The Company then remitted cash to the appropriate taxing authorities. Total payment for this tax obligation to the taxing authorities was $163,000 and is reflected as a financing activity within the consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

Pursuant to the New Employment Agreement, Mr. Joffe will also be eligible to receive annual awards under the 2010 Plan in such amounts as are determined by the Compensation Committee as administrator of the 2010 Plan in its sole and absolute discretion (the “Annual Awards”). Such awards may be in the form of options, restricted stock, restricted stock units, performance shares, performance units or such other form of award as determined by the Compensation Committee as administrator of the 2010 Plan in its sole and absolute discretion.

On June 12, 2014, the Company and Mr. Joffe entered into Amendment No. 1 to the New Employment Agreement pursuant to which, effective as of July 1, 2014, (i) the last day of Mr. Joffe's term of employment was changed from August 31, 2015 to July 1, 2019 and (ii) his base salary was increased from $600,000 per year to $700,000 per year. All other terms and conditions of the New Employment Agreement remain the same.

In October 2013, the Company entered into an option purchase agreement (the “Option Purchase Agreement”) with Mr. Joffe, pursuant to which, among other things, the Company purchased Mr. Joffe’s option to purchase 100,000 shares of the Company’s common stock which were originally granted on January 14, 2004 under the Company’s 1994 Stock Option Plan at a net purchase price of $626,500. This payment represents the difference between $12.66, the closing price per share of the Company’s common stock on the measurement date under the Option Purchase Agreement, and the exercise price per share of the stock option, multiplied by the total number of shares under Mr. Joffe’s stock option, and less an administrative fee.

## Other Related Party Transactions

During fiscal 2014, the Company paid $304,000 to Houlihan Lokey Howard & Zukin Capital, Inc. in connection with the restructuring of the discontinued subsidiary. A member of the Company’s Board of Directors, is a Co-President and Global Co-Head of Corporate Finance for Houlihan Lokey Howard & Zukin Capital, Inc.

## 21. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) is as follows:

<table><tr><td></td><td>Unrealized gain on Short-Term Investments</td><td>Foreign Currency Translation</td><td>Total</td></tr><tr><td>Balance as of April 1, 2013</td><td>$ 287,000</td><td>$ (1,133,000)</td><td>$ (846,000)</td></tr><tr><td>Other comprehensive income (loss), net of tax</td><td>34,000</td><td>(65,000)</td><td>(31,000)</td></tr><tr><td>Amounts reclassified from other comprehensive income (loss), net of tax</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Balance as of March 31, 2014</td><td>$ 321,000</td><td>$ (1,198,000)</td><td>$ (877,000)</td></tr></table>



## 22. Subsequent Events

On June 12, 2014, the Company entered into a first amendment to the amended and restated financing agreement, pursuant to which (i) the commitments to make revolving loans under the amended and restated financing agreement were increased by $10,000,000 to $40,000,000, and (ii) the maximum amount of capital expenditures was increased to $3,200,000 for fiscal year 2014, $7,000,000 for fiscal year 2015, and $4,000,000 for each of fiscal years 2016 and 2017. The maximum amount of capital expenditures for fiscal year 2018 remains at $2,500,000.

## 23. Unaudited Quarterly Financial Data

The following table summarizes selected quarterly financial data for the fiscal year ended March 31, 2014.

<table><tr><td></td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>Net sales</td><td>$ 50,245,000</td><td>$ 66,174,000</td><td>$ 65,568,000</td><td>$ 76,682,000</td></tr><tr><td>Cost of goods sold</td><td>34,231,000</td><td>46,469,000</td><td>43,642,000</td><td>52,761,000</td></tr><tr><td>Gross profit</td><td>16,014,000</td><td>19,705,000</td><td>21,926,000</td><td>23,921,000</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td></tr><tr><td>General and administrative</td><td>9,632,000</td><td>8,706,000</td><td>9,580,000</td><td>11,766,000</td></tr><tr><td>Sales and marketing</td><td>1,731,000</td><td>2,143,000</td><td>1,905,000</td><td>2,059,000</td></tr><tr><td>Research and development</td><td>549,000</td><td>398,000</td><td>452,000</td><td>541,000</td></tr><tr><td>Total operating expenses</td><td>11,912,000</td><td>11,247,000</td><td>11,937,000</td><td>14,366,000</td></tr><tr><td>Operating income</td><td>4,102,000</td><td>8,458,000</td><td>9,989,000</td><td>9,555,000</td></tr><tr><td>Other expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest expense, net</td><td>3,925,000</td><td>4,663,000</td><td>6,524,000</td><td>3,177,000</td></tr><tr><td>Income from continuing operations before income tax expense</td><td>177,000</td><td>3,795,000</td><td>3,465,000</td><td>6,378,000</td></tr><tr><td>Income tax expense</td><td>74,000</td><td>1,631,000</td><td>2,317,000</td><td>3,311,000</td></tr><tr><td>Income from continuing operations</td><td>103,000</td><td>2,164,000</td><td>1,148,000</td><td>3,067,000</td></tr><tr><td>Income from discontinued operations</td><td>100,877,000</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Net income</td><td>$ 100,980,000</td><td>$ 2,164,000</td><td>$ 1,148,000</td><td>$ 3,067,000</td></tr><tr><td>Basic net income per share from continuing operations</td><td>$ 0.01</td><td>$ 0.15</td><td>$ 0.08</td><td>$ 0.20</td></tr><tr><td>Basic net income per share from discontinued operations</td><td>6.97</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Basic net income per share</td><td>$ 6.98</td><td>$ 0.15</td><td>$ 0.08</td><td>$ 0.20</td></tr><tr><td>Diluted net income per share from continuing operations</td><td>$ 0.01</td><td>$ 0.15</td><td>$ 0.07</td><td>$ 0.19</td></tr><tr><td>Diluted net income per share from discontinued operations</td><td>6.90</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Diluted net income per share</td><td>$ 6.91</td><td>$ 0.15</td><td>$ 0.07</td><td>$ 0.19</td></tr></table>



## Table of Contents

The following summarizes selected quarterly financial data for the fiscal year ended March 31, 2013:

<table><tr><td></td><td>First Quarter</td><td>Second Quarter</td><td>Third Quarter</td><td>Fourth Quarter</td></tr><tr><td>Net sales</td><td>$ 46,799,000</td><td>$ 57,652,000</td><td>$ 50,658,000</td><td>$ 58,042,000</td></tr><tr><td>Cost of goods sold</td><td>31,980,000</td><td>37,556,000</td><td>34,332,000</td><td>39,942,000</td></tr><tr><td>Gross profit</td><td>14,819,000</td><td>20,096,000</td><td>16,326,000</td><td>18,100,000</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td><td></td></tr><tr><td>General and administrative</td><td>5,914,000</td><td>4,392,000</td><td>8,848,000</td><td>6,653,000</td></tr><tr><td>Sales and marketing</td><td>1,772,000</td><td>1,724,000</td><td>1,983,000</td><td>1,811,000</td></tr><tr><td>Research and development</td><td>436,000</td><td>461,000</td><td>445,000</td><td>588,000</td></tr><tr><td>Total operating expenses</td><td>8,122,000</td><td>6,577,000</td><td>11,276,000</td><td>9,052,000</td></tr><tr><td>Operating income</td><td>6,697,000</td><td>13,519,000</td><td>5,050,000</td><td>9,048,000</td></tr><tr><td>Other expense:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest expense, net</td><td>2,896,000</td><td>3,093,000</td><td>2,384,000</td><td>3,951,000</td></tr><tr><td>Income from continuing operations before income tax expense</td><td>3,801,000</td><td>10,426,000</td><td>2,666,000</td><td>5,097,000</td></tr><tr><td>Income tax expense</td><td>1,434,000</td><td>3,923,000</td><td>880,000</td><td>1,195,000</td></tr><tr><td>Income from continuing operations</td><td>2,367,000</td><td>6,503,000</td><td>1,786,000</td><td>3,902,000</td></tr><tr><td>Loss from discontinued operations</td><td>(12,229,000)</td><td>(15,436,000)</td><td>(851,000)</td><td>(77,553,000)</td></tr><tr><td>Net (loss) income</td><td>$ (9,862,000)</td><td>$ (8,933,000)</td><td>$ 935,000</td><td>$ (73,651,000)</td></tr><tr><td>Basic net income per share from continuing operations</td><td>$ 0.17</td><td>$ 0.45</td><td>$ 0.12</td><td>$ 0.27</td></tr><tr><td>Basic net loss per share from discontinued operations</td><td>(0.88)</td><td>(1.07)</td><td>(0.06)</td><td>(5.36)</td></tr><tr><td>Basic net (loss) income per share</td><td>$ (0.71)</td><td>$ (0.62)</td><td>$ 0.06</td><td>$ (5.09)</td></tr><tr><td>Diluted net income per share from continuing operations</td><td>$ 0.17</td><td>$ 0.45</td><td>$ 0.12</td><td>$ 0.27</td></tr><tr><td>Diluted net loss per share from discontinued operations</td><td>(0.87)</td><td>(1.07)</td><td>(0.06)</td><td>(5.35)</td></tr><tr><td>Diluted net (loss) income per share</td><td>$ (0.70)</td><td>$ (0.62)</td><td>$ 0.06</td><td>$ (5.08)</td></tr></table>

Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year shown elsewhere in the Annual Report on Form 10-K.



## Table of Contents

Schedule II — Valuation and Qualifying Accounts

Accounts Receivable — Allowance for doubtful accounts

<table><tr><td>Years Ended March 31,</td><td>Description</td><td>Balance at beginning of period</td><td>Charge to (recovery of) bad debts expense</td><td>Amounts written off</td><td>Balance at end of period</td></tr><tr><td>2014</td><td>Allowance for doubtful accounts</td><td>$ 1,019,000</td><td>$ (47,000)</td><td>$ 118,000</td><td>$ 854,000</td></tr><tr><td>2013</td><td>Allowance for doubtful accounts</td><td>$ 947,000</td><td>$ 166,000</td><td>$ 94,000</td><td>$ 1,019,000</td></tr><tr><td>2012</td><td>Allowance for doubtful accounts</td><td>$ 1,026,000</td><td>$ (14,000)</td><td>$ 65,000</td><td>$ 947,000</td></tr></table>

Accounts Receivable — Allowance for customer-payment discrepancies

<table><tr><td>Years Ended March 31,</td><td>Description</td><td>Balance at beginning of period</td><td>Charge to discrepancies expense</td><td>Amounts Processed</td><td>Balance at end of period</td></tr><tr><td>2014</td><td>Allowance for customer-payment discrepancies</td><td>$ 514,000</td><td>$ (10,000)</td><td>$ (73,000)</td><td>$ 577,000</td></tr><tr><td>2013</td><td>Allowance for customer-payment discrepancies</td><td>$ 280,000</td><td>$ 536,000</td><td>$ 302,000</td><td>$ 514,000</td></tr><tr><td>2012</td><td>Allowance for customer-payment discrepancies</td><td>$ 648,000</td><td>$ 270,000</td><td>$ 638,000</td><td>$ 280,000</td></tr></table>

Inventory — Allowance for excess and obsolete inventory

<table><tr><td>Years Ended March 31,</td><td>Description</td><td>Balance at beginning of period</td><td>Provision for excess and obsolete inventory</td><td>Amounts written off</td><td>Balance at end of period</td></tr><tr><td>2014</td><td>Allowance for excess and obsolete inventory</td><td>$ 2,498,000</td><td>$ 1,620,000</td><td>$ 1,410,000</td><td>$ 2,708,000</td></tr><tr><td>2013</td><td>Allowance for excess and obsolete inventory</td><td>$ 2,164,000</td><td>$ 1,814,000</td><td>$ 1,480,000</td><td>$ 2,498,000</td></tr><tr><td>2012</td><td>Allowance for excess and obsolete inventory</td><td>$ 2,599,000</td><td>$ 3,216,000</td><td>$ 3,651,000</td><td>$ 2,164,000</td></tr></table>



## FIRST AMENDMENT TO FINANCING AGREEMENT

FIRST AMENDMENT, dated as of June 12, 2014 (this "First Amendment"), to the Amended and Restated Financing Agreement, dated as of November 6, 2013 (as amended, restated, supplemented, modified or otherwise changed from time to time, the "Financing Agreement"), by and among Motorcar Parts of America, Inc., a New York corporation (the "Borrower"), the lenders from time to time party thereto (each a "Lender" and collectively, the "Lenders"), Cerberus Business Finance, LLC, a Delaware limited liability company ("Cerberus"), as collateral agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the "Collateral Agent"), and PNC Bank, National Association ("PNC"), as administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the "Administrative Agent" and together with the Collateral Agent, each an "Agent" and collectively, the "Agents").

WHEREAS, the Borrower, the Agents and the Lenders wish to amend certain terms and provisions of the Financing Agreement as hereafter set forth.

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the parties hereto hereby agree as follows:

1. Defined Terms. Any capitalized term used herein and not defined shall have the meaning assigned to it in the Financing Agreement.

2. Recitals. The fourth paragraph of the recitals of the Financing Agreement is hereby amended and restated in its entirety to read as follows:

"The Borrower has requested that the Agents and the Lenders amend and restate the Existing Financing Agreement in order to, among other things, (a) amend, restate, convert and continue $95,000,000 of the Existing Term Loan as the Term Loan (as hereinafter defined) and (b) increase the amount of the revolving credit facility by $10,000,000 to $30,000,000. On the First Amendment Effective Date, the Borrower has requested that the Agents and the Lenders amend the Financing Agreement to, among other things, increase the amount of the revolving credit facility by $10,000,000 to $40,000,000. The proceeds of the term loans and the loans made under the revolving credit facility shall be used to (i) on the Restatement Effective Date, make the Ninth Amendment Effective Date Prepayment, (ii) fund general working capital purposes of the Borrower and for other general corporate purposes and (iii) pay fees and expenses related to this Agreement. The letters of credit will be used for general working capital purposes. The Lenders are severally, and not jointly, willing to extend and/or maintain such credit to the Borrower subject to the terms and conditions hereinafter set forth."



3. Amendments.

(a) New Definitions. Section 1.01 of the Financing Agreement is hereby amended by adding the following definitions, in appropriate alphabetical order:

(i) "First Amendment" means the First Amendment to this Agreement, dated as of June 12, 2014, among the Borrower, the Agents and the Lenders."

(ii) "First Amendment Effective Date" means the date on which the First Amendment shall become effective in accordance with its terms."

(iii) "Specified Account Debtor" means an Account Debtor of the Borrower who is (a) one of the top ten (10) largest customers of the Borrower (based on the reports most recently delivered to the Agents pursuant to Section 7.01(a)(v)), (b) provided extended payment terms and (c) not a party to a Factoring Agreement."

(b) Existing Definitions.

(i) The definition of "Borrowing Base" in Section 1.01 of the Financing Agreement is hereby amended and restated in its entirety to read as follows:

"Borrowing Base" means, as of any date of determination, the lesser of:

(a) the result of the sum of (i) 85% of the Net Amount of Eligible Accounts Receivable at such time; provided that the aggregate amount of Eligible Accounts Receivable due from the Specified Account Debtors at such time in excess of the amount equal to 20% of the Total Revolving Credit Commitment shall not be included in the calculation of this clause (a)(i), plus (ii) the lower of (A) 60% of the Book Value of Eligible Inventory located in the continental United States and any province or territory of Canada at such time and (B) the sum of (1) 90% times the most recently determined Net Liquidation Percentage times the Book Value of the Eligible Inventory consisting of rotating electrical products and (2) 85% times the most recently determined Net Liquidation Percentage times the Book Value of the Eligible Inventory consisting only of wheel hubs and new product lines, in each case of clauses (B)(1) and (B)(2), located in the continental United States and any province or territory of Canada at such time, plus (iii) the lowest of (A) 50% of the Book Value of Eligible Inventory located in Mexico at such time, (B) 60% times the most recently determined Net Liquidation Percentage times the Book Value of the Eligible Inventory located in Mexico at such time and (C) the lesser (1) 14,000,000 and (2) 60% of the Borrowing Base, minus (iv) Reserves, and

(b) an amount equal to the product of TTM Consolidated EBITDA for the most recently ended month of the Borrower and its Subsidiaries times the Applicable EBITDA Multiple, minus the aggregate outstanding principal amount of the Term Loan and Capitalized Lease Obligations at such time."

(ii) The definition of "Consolidated EBITDA" in Section 1.01 of the Financing Agreement is hereby amended and restated in its entirety to read as follows:



"" Consolidated EBITDA " means, with respect to any Person for any period, (a) the Consolidated Net Income of such Person and its Subsidiaries for such period, plus (b) without duplication, the sum of the following amounts of such Person and its Subsidiaries for such period and to the extent deducted in determining Consolidated Net Income of such Person for such period: (i) Consolidated Net Interest Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization expense, (v) the amount of all costs, fees and expenses incurred in connection with (A) the Transactions, (B) the Third Amendment and the Wanxiang Transaction Documents, (C) the Sixth Amendment, (D) the First Amendment and (E) liquidating the Excluded Subsidiaries in an aggregate amount not to exceed $3,000,000 and as approved in writing by the Required Lenders, (vi) severance charges in an aggregate amount not to exceed $100,000 for any Fiscal Year, (vii) the amount of all travel and other administrative costs, fees and expenses (including professional fees) incurred in connection with the management of the Excluded Subsidiaries in an aggregate amount not to exceed $75,000 for any fiscal quarter, (viii) any non-cash expenses incurred in connection with stock options and other equity-based compensation, (ix) non-cash charges reducing Consolidated Net Income (excluding any non-cash charge that results in an accrual of a reserve for cash charges in any future period) for such period, (x) standard inventory revaluation write-downs, (xi) non-cash losses on Hedging Agreements, (xii) commissions accrual adjustment, (xiii) losses from the Excluded Subsidiaries, (xiv) any expenses incurred in connection with stock offerings, (xv) for each fiscal quarter specified on Schedule 1.01(E), the expenses set forth on Schedule 1.01(E) in an aggregate amount not to exceed the amount set forth opposite such expenses for such fiscal quarter, (xvi) all Restricted Payments paid in cash during such period, if any, pursuant to clause (F) of the proviso in Section 7.02(h), (xvii) through the fiscal quarter ending September 31, 2014, start-up costs with respect to a specified new product line in an aggregate amount not to exceed $500,000, and (xviii) specified inventory purchases from certain customers in an aggregate amount not to exceed $6,800,000, minus (c) without duplication, the sum of the following amounts of such Person and its Subsidiaries for such period and to the extent included in determining Consolidated Net Income of such Person for such period: (i) non-cash items increasing Consolidated Net Income (other than the accrual of revenue or recording of Accounts Receivable in the ordinary course of business) for such period, (ii) non-cash gains on Hedging Agreements, and (iii) profits from the Excluded Subsidiaries, all as determined on a consolidated basis."

(iii) The definition of "Eligible Inventory" in Section 1.01 of the Financing Agreement is hereby amended by deleting the "and" immediately following clause (h) thereof, deleting clause (i) thereof and inserting following immediately at the end of clause (h) thereof:

"(i) if such Inventory consists of new product lines, the Administrative Agent shall have received an appraisal of such Inventory, in form and substance reasonably satisfactory to the Administrative Agent, from an appraiser; and (j) such Inventory is and at all times shall continue to be acceptable to the Administrative Agent in the exercise of its reasonable business judgment."



(iv) The definition of "Fee Letter" in Section 1.01 of the Financing Agreement is hereby amended and restated in its entirety to read as follows:

"" Fee Letter " means the first amended and restated fee letter, dated as of the First Amendment Effective Date, between the Borrower and the Collateral Agent."

(v) The proviso at the end of the first sentence of the definition of "Fixed Charge Coverage Ratio" in Section 1.01 of the Financing Agreement is hereby amended and restated in its entirety to read as follows:

"; provided that (A) for the fiscal quarter ending December 31, 2013, solely for the purposes of clause (b)(i) of this definition, the principal amount of the Existing Term Loan paid on October 1, 2013 pursuant to Section 2.03(b) of the Existing Financing Agreement shall be $1,350,000 and (B) for each of the fiscal quarters ending June 30, 2014, September 30, 2014, December 31, 2014 and March 30, 2015, solely for the purpose of clause (b)(v) of this definition, the aggregate amount of non-financed Capital Expenditures made by such Person and its Subsidiaries during such period shall be the lower of (1) $750,000 or (2) the amount actually spent during such fiscal quarter."

(c) Section 7.02(g) (Capital Expenditures). Section 7.02(g) of the Financing Agreement is hereby amended by amending and restating the table set forth therein to read as follows:

<table><tr><td>&quot;Period</td><td>Capital Expenditure</td></tr><tr><td>Fiscal Year ended March 31, 2014</td><td>$3,200,000</td></tr><tr><td>Fiscal Year ended March 31, 2015</td><td>$7,000,000</td></tr><tr><td>Fiscal Year ended March 31, 2016</td><td>$4,000,000</td></tr><tr><td>Fiscal Year ended March 31, 2017</td><td>$4,000,000</td></tr><tr><td>Fiscal Year ended March 31, 2018</td><td>$2,500,000&quot;</td></tr></table>

(d) Schedule 1.01(A) to Financing Agreement. Schedule 1.01(A) of the Financing Agreement is hereby replaced in its entirety with the new Schedule 1.01(A) attached as Annex I hereto.

4. Conditions to Effectiveness. The effectiveness of this First Amendment is subject to the fulfillment, in a manner satisfactory to the Agents, of each of the following conditions precedent (the date such conditions are fulfilled or waived by the Agents is hereinafter referred to as the "First Amendment Effective Date"):



(a) Representations and Warranties; No Event of Default. The following statements shall be true and correct: (i) the representations and warranties contained in this First Amendment, ARTICLE VI of the Financing Agreement and in each other Loan Document, certificate or other writing delivered to any Agent or any Lender pursuant hereto or thereto on or prior to the First Amendment Effective Date are true and correct on and as of the First Amendment Effective Date as though made on and as of such date, except to the extent that any such representation or warranty expressly relates solely to an earlier date (in which case such representation or warranty shall be true and correct on and as of such earlier date) and (ii) no Default or Event of Default shall have occurred and be continuing on the First Amendment Effective Date or would result from this First Amendment becoming effective in accordance with its terms.

(b) Execution of Amendment. The Agents and the Lenders shall have executed this First Amendment and shall have received a counterpart to this First Amendment, duly executed by each Loan Party.

(c) Payment of Fees, Etc. The Borrower shall have paid on or before the First Amendment Effective Date all fees and invoiced costs and expenses then payable by the Borrower pursuant to the Loan Documents, including, without limitation, Sections 2.06 and 12.04 of the Financing Agreement.

(d) Delivery of Documents. The Collateral Agent shall have received on or before the First Amendment Effective Date the following, each in form and substance reasonably satisfactory to the Collateral Agent and, unless indicated otherwise, dated the First Amendment Effective Date:

(i) the Fee Letter, duly executed by the Borrower;

(ii) a copy of the resolutions of each Loan Party, certified as of the First Amendment Effective Date by an Authorized Officer thereof, authorizing the execution, delivery and performance by such Loan Party of this First Amendment, the performance of the Loan Documents as amended thereby, and the execution and delivery of the other documents to be delivered by such Loan Party in connection herewith and therewith;

(iii) a certificate of an Authorized Officer of each Loan Party, certifying as to the matters set forth in subsection (a) of this Section 4; and

(iv) such other agreements, instruments, approvals, opinions and other documents, each satisfactory to the Agents in form and substance, as any Agent may reasonably request.



5. Representations and Warranties. Each Loan Party represents and warrants as follows:

(a) Organization, Good Standing, Etc. Each Loan Party (i) is a corporation, limited liability company or limited partnership duly organized, validly existing and in good standing under the laws of the state or jurisdiction of its organization, (ii) has all requisite power and authority to conduct its business as now conducted and as presently contemplated, and to execute and deliver this First Amendment, and to consummate the transactions contemplated hereby and by the Financing Agreement, as amended hereby, and (iii) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary, except (solely for the purposes of this subclause (iii)) where the failure to be so qualified or in good standing could not reasonably be expected to result in a Material Adverse Effect.

(b) Authorization, Etc. The execution, delivery and performance by each Loan Party of this First Amendment, and the performance of the Financing Agreement, as amended hereby, (i) have been duly authorized by all necessary action, (ii) do not and will not contravene any of its Governing Documents or any applicable Requirement of Law in any material respect or any material Contractual Obligation binding on or otherwise affecting it or any of its properties, (iii) do not and will not result in or require the creation of any Lien (other than pursuant to any Loan Document) upon or with respect to any of its properties, and (iv) do not and will not result in any default, noncompliance, suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties.

(c) Governmental Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required in connection with the due execution, delivery and performance of this First Amendment by the Loan Parties, and the performance of the Financing Agreement, as amended hereby.

(d) Enforceability of the First Amendment. This First Amendment and the Financing Agreement, as amended hereby, when delivered hereunder, will be a legal, valid and binding obligation of each Loan Party, enforceable against such Loan Party in accordance with the terms thereof, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally.

(e) Representations and Warranties; No Event of Default. The following statements shall be true and correct: (i) the representations and warranties contained in this First Amendment, ARTICLE VI of the Financing Agreement and in each other Loan Document, certificate or other writing delivered to any Agent or any Lender pursuant hereto or thereto on or prior to the First Amendment Effective Date are true and correct on and as of the First Amendment Effective Date as though made on and as of such date, except to the extent that any such representation or warranty expressly relates solely to an earlier date (in which case such representation or warranty shall be true and correct on and as of such earlier date) and (ii) no Default or Event of Default has occurred and is continuing on the First Amendment Effective Date or would result from this First Amendment becoming effective in accordance with its terms.

## 6. Covenants.

(a) Within 2 Business Days of the First Amendment Effective Date (or such later date as the Agents may agree in writing in their sole discretion), the Borrower shall deliver an amended and restated promissory note evidencing the Revolving Loans, duly executed by the Borrower, in form and substance reasonably satisfactory to the Agents.



(b) Within 10 Business Days of the First Amendment Effective Date (or such later date as the Collateral Agent may agree in writing in its sole discretion), the Borrower shall deliver an amendment to the Pledge Agreement, in form and substance reasonably satisfactory to the Collateral Agent, and such amendment shall be formalized in accordance with the laws of Mexico in a manner reasonably satisfactory to the Collateral Agent.

7. Release. Each Loan Party hereby acknowledges and agrees that: (a) neither it nor any of its Affiliates has any claim or cause of action against any Agent or any Lender (or any of their respective Affiliates, officers, directors, employees, attorneys, consultants or agents) and (b) each Agent and each Lender has heretofore properly performed and satisfied in a timely manner all of its obligations to the Loan Parties and their Affiliates under the Financing Agreement and the other Loan Documents that are required to have been performed on or prior to the date hereof. Notwithstanding the foregoing, the Agents and the Lenders wish (and the Loan Parties agree) to eliminate any possibility that any past conditions, acts, omissions, events or circumstances would impair or otherwise adversely affect any of the Agents' and the Lenders' rights, interests, security and/or remedies under the Financing Agreement and the other Loan Documents. Accordingly, for and in consideration of the agreements contained in this First Amendment and other good and valuable consideration, each Loan Party (for itself and its Affiliates and the successors, assigns, heirs and representatives of each of the foregoing) (collectively, the "Releases") does hereby fully, finally, unconditionally and irrevocably release and forever discharge each Agent, each Lender and each of their respective Affiliates, officers, directors, employees, attorneys, consultants and agents (collectively, the "Released Parties") from any and all debts, claims, obligations, damages, costs, attorneys' fees, suits, demands, liabilities, actions, proceedings and causes of action, in each case, whether known or unknown, contingent or fixed, direct or indirect, and of whatever nature or description, and whether in law or in equity, under contract, tort, statute or otherwise, which any Releasee has heretofore had or now or hereafter can, shall or may have against any Released Party by reason of any act, omission or thing whatsoever done or omitted to be done on or prior to the First Amendment Effective Date directly arising out of, connected with or related to this First Amendment, the Financing Agreement or any other Loan Document, or any act, event or transaction related or attendant thereto, or the agreements of any Agent or any Lender contained therein, or the possession, use, operation or control of any of the assets of any Loan Party, or the making of any Loans or other advances, or the management of such Loans or advances or the Collateral.

## 8. No Novation ; Reaffirmation and Confirmation.

(a) This First Amendment does not extinguish the obligations for the payment of money outstanding under the Financing Agreement or discharge or release the lien or priority of any mortgage, security agreement, pledge agreement or any other security therefore. Nothing herein contained shall be construed as a substitution or novation of the Obligations outstanding under the Financing Agreement or instruments securing the same, which shall remain in full force and effect, except as modified hereby or by instruments executed concurrently herewith. Nothing expressed or implied in this First Amendment shall be construed as a release or other discharge of the Borrower under the Financing Agreement, or the other Loan Documents, as amended hereby, from any of its obligations and liabilities as a "Borrower" thereunder.



(b) The Borrower hereby (i) acknowledges and reaffirms its obligations as set forth in each Loan Document, as amended hereby, (ii) agrees to continue to comply with, and be subject to, all of the terms, provisions, conditions, covenants, agreements and obligations applicable to it set forth in each Loan Document, as amended hereby, which remain in full force and effect, and (iii) confirms, ratifies and reaffirms that the security interest granted to the Collateral Agent, for the benefit of the Agents and the Lenders, pursuant to the Loan Documents, as amended hereby, in all of its right, title, and interest in all then existing and thereafter acquired or arising Collateral in order to secure prompt payment and performance of the Obligations, is continuing and is and shall remain unimpaired and continue to constitute a first priority security interest (subject to Permitted Liens) in favor of the Collateral Agent, for the benefit of the Agents and the Lenders, with the same force, effect and priority in effect both immediately prior to and after entering into this First Amendment.

## 9. Miscellaneous.

(a) Continued Effectiveness of the Financing Agreement and the Other Loan Documents. Except as otherwise expressly provided herein, the Financing Agreement and the other Loan Documents are, and shall continue to be, in full force and effect and are hereby ratified and confirmed in all respects, except that on and after the First Amendment Effective Date (i) all references in the Financing Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to the Financing Agreement shall mean the Financing Agreement as amended by this First Amendment, and (ii) all references in the other Loan Documents to the "Financing Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Financing Agreement shall mean the Financing Agreement as amended by this First Amendment. To the extent that the Financing Agreement or any other Loan Document purports to pledge to the Collateral Agent, or to grant to the Collateral Agent, a security interest or lien, such pledge or grant is hereby ratified and confirmed in all respects. Except as expressly provided herein, the execution, delivery and effectiveness of this First Amendment shall not operate as an amendment of any right, power or remedy of the Agents and the Lenders under the Financing Agreement or any other Loan Document, nor constitute an amendment of any provision of the Financing Agreement or any other Loan Document.

(b) Counterparts. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this First Amendment by telefacsimile or electronic mail shall be equally as effective as delivery of an original executed counterpart of this First Amendment.

(c) Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose.

(d) Costs and Expenses. The Borrower agrees to pay on demand all fees, costs and expenses of the Agents and the Lenders in connection with the preparation, execution and delivery of this First Amendment.



(e) First Amendment as Loan Document. Each Loan Party hereby acknowledges and agrees that this First Amendment constitutes a "Loan Document" under the Financing Agreement. Accordingly, it shall be an Event of Default under the Financing Agreement if (i) any representation or warranty made by any Loan Party under or in connection with this First Amendment, which representation or warranty is (A) subject to a materiality or a Material Adverse Effect qualification, shall have been incorrect in any respect when made or deemed made, or (B) not subject to a materiality or a Material Adverse Effect qualification, shall have been incorrect in any material respect when made or deemed made or (ii) any Loan Party shall fail to perform or observe any term, covenant or agreement contained in this First Amendment.

(f) Severability. Any provision of this First Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

(g) Governing Law. This First Amendment shall be governed by the laws of the State of New York.

(h) Waiver of Jury Trial. THE PARTIES HERETO HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS FIRST AMENDMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.

[Remainder of page intentionally left blank]



IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed and delivered by their respective duly authorized officers as of the date first written above.

BORROWER :

MOTORCAR PARTS OF AMERICA, INC.

By: /s/ Selwyn Joffe

Name: Selwyn Joffe

Title: Chief Executive Officer



COLLATERAL AGENT :

CERBERUS BUSINESS FINANCE, LLC

By: /s/ Daniel Wolf

Name: Daniel Wolf

Title: President



ADMINISTRATIVE AGENT AND LENDER :

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Fred Kiehne

Name: Fred Kiehne

Title: Senior Vice President



## LENDERS :

## CERBERUS ASRS FUNDING LLC

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President

## CERBERUS AUS LEVERED II LP

By: CAL II GP LLC
Its: General Partner

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President

## CERBERUS N-1 FUNDING LLC

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President

## CERBERUS OFFSHORE LEVERED I L.P.

By: COL I GP Inc.
Its: General Partner

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President

## CERBERUS ONSHORE LEVERED II LLC

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President



## CERBERUS OFFSHORE LEVERED II LP

By: COL II GP Inc.
Its: General Partner

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President

## CERBERUS NJ CREDIT OPPORTUNITIES FUND, L.P.

By: Cerberus NJ Credit Opportunities GP, LLC
Its: General Partner

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Senior Managing Director

## CERBERUS ONSHORE II CLO LLC

By: /s/ Daniel Wolf
Name: Daniel Wolf
Title: Vice President



BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse Aktiengesellschaft

By:/s/ Dr. Guido Jestadt

Name: Dr. Guido Jestadt

By:/s/Eric Song

Name: Eric Song



## ANNEX I

## SCHEDULE 1.01(A)

## LENDERS AND LENDERS' REVOLVING CREDIT COMMITMENTS

<table><tr><td>Lender</td><td>Revolving Credit Commitment</td></tr><tr><td>PNC BANK, NATIONAL ASSOCIATION</td><td>$ 40,000,000</td></tr><tr><td>Total</td><td>$ 40,000,000</td></tr></table>



# AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

THIS AMENDMENT NO. 1, dated as of July 1, 2014 (this “AMENDMENT”), to the Employment Agreement, dated as of May 18, 2012 (the “EMPLOYMENT AGREEMENT”), by and between Motorcar Parts of America, Inc. (“COMPANY”) and Selwyn Joffe, an individual residing at 2687 Cordelia Road, Los Angeles, CA 90049 (“EXECUTIVE”). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the EMPLOYMENT AGREEMENT.

## RECITALS

WHEREAS, the parties wish to amend the EMPLOYMENT AGREEMENT to change the SALARY and EMPLOYMENT TERM;

NOW, THEREFORE, in consideration of the promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Section 2 of the EMPLOYMENT AGREEMENT is hereby deleted in its entirety and is hereby replaced with the following:

“TERM. EXECUTIVE’S term of employment under this AGREEMENT shall commence on July 1, 2014 and shall continue for a period through and including July 1, 2019 (the ‘EMPLOYMENT TERM’), unless extended in writing by both parties or earlier terminated pursuant to the terms and conditions set forth herein.”

2. Section 5(a) of the EMPLOYMENT AGREEMENT is hereby amended by deleting the first sentence thereof and is hereby replaced with the following:

“The COMPANY shall pay EXECUTIVE a base salary (‘SALARY’) of Seven Hundred Thousand Dollars ($700,000) per year.”

3. Except as amended by this AMENDMENT, the EMPLOYMENT AGREEMENT shall remain in full force and effect.

4. This AMENDMENT may be executed by facsimile signature, in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



IN WITNESS WHEREOF, the undersigned have executed this AMENDMENT as of date first above written.

THE COMPANY :

MOTORCAR PARTS OF AMERICA, INC.

By: /s/ Michael M. Umansky

Name: Michael M. Umansky

Title: Vice President & General Counsel

EXECUTIVE:

/s/ Selwyn Joffe

SELWYN JOFFE



## List of Subsidiaries

MVR Products Pte. Limited, a company organized under the laws of Singapore

Unijoh Sdn. Bhd., a company organized under the laws of Malaysia

Motorcar Parts de Mexico, S.A. de C.V., a company organized under the laws of Mexico

Motorcar Parts of Canada, Inc., a company organized under the laws of Canada

Central Auto Parts Co., Ltd, a company organized under the laws of China



## CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

1. Registration Statement (Form S-8 No. 333-114169) pertaining to the Long Term Incentive Plan,

2. Registration Statement (Form S-8 No. 333-103313) pertaining to the 1994 Stock Option Plan,

3. Registration Statement (Form S-8 No. 333-144883) pertaining to the 2004 Non-Employee Director Stock Option Plan,

4. Registration Statement (Form S-1 No. 333-190966) of Motorcar Parts of America, Inc., and

5. Registration Statement (Form S-3 No. 333-195585) of Motorcar Parts of America, Inc.

of our reports dated June 16, 2014, with respect to the consolidated financial statements and schedule of Motorcar Parts of America, Inc. and the effectiveness of internal control over financial reporting of Motorcar Parts of America, Inc. included in this Annual Report (Form 10-K) for the year ended March 31, 2014.

/s/ Ernst & Young LLP

Los Angeles, CA

June 16, 2014



## CERTIFICATIONS

I, Selwyn Joffe, certify that:

1. I have reviewed this report on Form 10-K of Motorcar Parts of America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused, such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 16, 2014

/s/ Selwyn Joffe

Selwyn Joffe

Chief Executive Officer



## CERTIFICATIONS

I, David Lee, certify that:

1. I have reviewed this report on Form 10-K of Motorcar Parts of America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused, such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 16, 2014

/s/ David Lee

David Lee

Chief Financial Officer



## CERTIFICATIONS

I, Kevin Daly, certify that:

1. I have reviewed this report on Form 10-K of Motorcar Parts of America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused, such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 16, 2014

/s/ Kevin Daly

Kevin Daly

Chief Accounting Officer



## CERTIFICATE OF CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Selwyn Joffe, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

1. The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

<table><tr><td>/s/ Selwyn Joffe</td></tr><tr><td>Selwyn Joffe</td></tr><tr><td>Chief Executive Officer</td></tr><tr><td>June 16, 2014</td></tr></table>

In connection with the Annual Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I, David Lee, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

1. The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

<table><tr><td>/s/ David Lee</td></tr><tr><td>David Lee</td></tr><tr><td>Chief Financial Officer</td></tr><tr><td>June 16, 2014</td></tr></table>

In connection with the Annual Report of Motorcar Parts of America, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I, Kevin Daly, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

1. The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

<table><tr><td>/s/ Kevin Daly</td></tr><tr><td>Kevin Daly</td></tr><tr><td>Chief Accounting Officer</td></tr><tr><td>June 16, 2014</td></tr></table>

The foregoing certifications are being furnished to the Securities and Exchange Commission as part of the accompanying report on Form 10-K. A signed original of each of these statements has been provided to Motorcar Parts of America, Inc. and will be retained by Motorcar Parts of America, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.