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EX-31.1 - UNIVERSAL POWER GROUP INC. | c65613_ex31-1.htm |
EX-31.2 - UNIVERSAL POWER GROUP INC. | c65613_ex31-2.htm |
EX-32.1 - UNIVERSAL POWER GROUP INC. | c65613_ex32-1.htm |
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
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FORM 10-Q |
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2011 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ____________ to ____________ |
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Commission file number: 001-33207 |
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Universal Power Group, Inc. |
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(Exact name of registrant as specified in its charter) |
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TEXAS |
75-1288690 |
(State or other jurisdiction of incorporation or |
(I.R.S. Employer Identification No.) |
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1720 Hayden Drive, Carrollton, Texas |
75006 |
(Address of principal executive offices) |
(Zip Code) |
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(469) 892-1122 |
(Registrants telephone number, including area code) |
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None |
(Former name, former address and former fiscal year, if changed since last report) |
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Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company þ |
As of May 10, 2011, 5,020,000 shares of Common Stock were outstanding.
Table of Contents
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995 or by the U.S. Securities and Exchange Commission (SEC) in its rules, regulations and releases, regarding, among other things, all statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations. The words believe, may, estimate, continue, anticipate, intend, should, plan, could, target, potential, is likely, will, expect and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC (Annual Report) and elsewhere in this report. In addition, our past results of operations do not necessarily indicate our future results.
Other sections of this report may include additional factors which could adversely affect our business and financial performance. Moreover, the third-party logistics services business and the battery and related power accessory supply and distribution business are highly competitive and rapidly changing. New risk factors emerge from time to time and it is not possible for us to anticipate all the relevant risks to our business, and we cannot assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Those factors include, among others, those matters disclosed as Risk Factors set forth in our Annual Report.
Except as otherwise required by applicable laws and regulations, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in our Annual Report, whether as a result of new information, future events, changed circumstances or any other reason. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933 provides any protection to us for statements made in this report. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
(i)
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
UNIVERSAL POWER GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
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March
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December
31, |
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(unaudited) |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
120,333 |
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$ |
215,375 |
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Accounts receivable: |
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Trade, net of allowance for doubtful accounts of $702,138 (unaudited) and $656,989 |
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8,399,327 |
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10,189,716 |
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Other |
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47,257 |
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25,607 |
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Inventories finished goods, net of allowance for obsolescence of $1,335,647 (unaudited) and $1,155,852 |
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31,337,371 |
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32,893,837 |
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Current deferred tax asset |
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1,390,962 |
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1,564,433 |
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Income tax receivable |
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511,291 |
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Prepaid expenses and other current assets |
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946,967 |
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1,237,047 |
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Total current assets |
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42,753,508 |
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46,126,015 |
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PROPERTY AND EQUIPMENT |
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Logistics and distribution systems |
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1,834,125 |
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1,834,124 |
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Machinery and equipment |
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991,261 |
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991,260 |
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Furniture and fixtures |
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467,632 |
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467,632 |
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Leasehold improvements |
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387,620 |
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408,128 |
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Vehicles |
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199,992 |
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199,992 |
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Total property and equipment |
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3,880,630 |
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3,901,136 |
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Less accumulated depreciation and amortization |
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(2,695,329 |
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(2,561,314 |
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Net property and equipment |
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1,185,301 |
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1,339,822 |
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OTHER ASSETS |
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127,851 |
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127,018 |
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NON-CURRENT DEFERRED TAX ASSET |
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31,786 |
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17,784 |
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TOTAL ASSETS |
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$ |
44,098,446 |
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$ |
47,610,639 |
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See accompanying notes to unaudited condensed consolidated financial statements.
1
UNIVERSAL POWER GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS EQUITY
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March
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December
31, |
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(unaudited) |
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CURRENT LIABILITIES |
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Line of credit |
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$ |
11,360,802 |
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$ |
16,323,528 |
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Accounts payable |
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8,704,507 |
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7,559,445 |
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Income taxes payable |
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25,588 |
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Accrued liabilities |
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563,623 |
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456,418 |
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Current portion of settlement accrual |
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716,822 |
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733,540 |
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Current portion of capital lease and note obligations |
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26,131 |
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25,906 |
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Current portion of deferred rent |
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33,661 |
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52,672 |
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Total current liabilities |
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21,405,546 |
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25,177,097 |
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LONG-TERM LIABILITIES |
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Settlement accrual, less current portion |
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60,566 |
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241,490 |
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Capital lease and note obligations, less current portion |
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18,564 |
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25,183 |
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Total long-term liabilities |
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79,130 |
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266,673 |
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TOTAL LIABILITIES |
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21,484,676 |
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25,443,770 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock - $0.01 par value, 50,000,000 shares authorized, 5,020,000 shares issued and outstanding |
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50,200 |
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50,200 |
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Additional paid-in capital |
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16,091,051 |
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16,075,771 |
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Retained earnings |
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6,607,804 |
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6,205,127 |
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Accumulated other comprehensive loss |
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(135,285 |
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(164,229 |
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Total shareholders equity |
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22,613,770 |
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22,166,869 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
44,098,446 |
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$ |
47,610,639 |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
UNIVERSAL POWER GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended March 31, |
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2011 |
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2010 |
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Net sales |
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$ |
21,586,641 |
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$ |
26,034,805 |
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Cost of sales |
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17,278,190 |
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21,601,838 |
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Gross profit |
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4,308,451 |
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4,432,967 |
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Operating expenses |
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3,535,684 |
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3,473,275 |
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Operating income |
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772,767 |
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959,692 |
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Interest expense |
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(141,062 |
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(161,360 |
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Income before provision for income taxes |
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631,705 |
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798,332 |
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Provision for income taxes |
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(229,028 |
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(292,623 |
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Net income |
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$ |
402,677 |
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$ |
505,709 |
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Net income per share |
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Basic |
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$ |
0.08 |
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$ |
0.10 |
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Diluted |
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$ |
0.08 |
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$ |
0.10 |
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Weighted average shares outstanding |
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Basic |
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5,020,000 |
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5,000,000 |
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Diluted |
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5,046,381 |
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5,017,740 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
UNIVERSAL POWER GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended March 31, |
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2011 |
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2010 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
402,677 |
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$ |
505,709 |
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Items not requiring (providing) cash: |
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Depreciation and amortization |
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154,521 |
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192,193 |
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Provision for bad debts |
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45,000 |
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83,531 |
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Provision for obsolete inventory |
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180,000 |
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210,000 |
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Deferred income taxes |
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159,469 |
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109,440 |
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Gain on disposal of property |
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(2,000 |
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Stock-based compensation |
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15,280 |
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15,805 |
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Changes in operating assets and liabilities |
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Accounts receivable trade |
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1,745,389 |
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706,190 |
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Accounts receivable other |
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(21,650 |
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(981 |
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Inventories |
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1,376,466 |
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1,916,596 |
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Income taxes receivable/payable |
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(536,879 |
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30,430 |
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Prepaid expenses and other current assets |
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289,247 |
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(44,353 |
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Accounts payable |
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1,145,062 |
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(3,423,445 |
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Accrued liabilities |
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136,149 |
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427,733 |
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Settlement accrual |
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(197,642 |
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(234,179 |
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Deferred rent |
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(19,011 |
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(22,967 |
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Net cash provided by operating activities |
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4,874,078 |
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469,702 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
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(19,826 |
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Proceeds from sales of equipment |
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2,000 |
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Net cash used in investing activities |
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(17,826 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net activity on line of credit |
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(4,962,726 |
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2,038,290 |
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Payments on capital lease and note obligations |
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(6,394 |
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(20,638 |
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Net cash provided by (used in) financing activities |
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(4,969,120 |
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2,017,652 |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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(95,042 |
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2,469,528 |
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Cash and cash equivalents at beginning of period |
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215,375 |
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2,059,475 |
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Cash and cash equivalents at end of period |
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$ |
120,333 |
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$ |
4,529,003 |
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SUPPLEMENTAL DISCLOSURES |
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Income taxes paid |
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$ |
617,460 |
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$ |
150,110 |
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Interest paid |
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$ |
106,363 |
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$ |
15,627 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
UNIVERSAL POWER
GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A BASIS OF PRESENTATION
The condensed consolidated interim unaudited financial statements of Universal Power Group, Inc. (UPG or the Company) included in this quarterly report have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included for the three-month period ended March 31, 2011 and 2010. The results for the three-month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year. Certain information and note disclosures normally included in the Companys annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The unaudited condensed consolidated financial statements included in this filing should be read in conjunction with the Companys audited financial statements and notes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 31, 2011. The condensed consolidated balance sheet of the Company as of December 31, 2010 has been derived from the audited consolidated balance sheet as of that date.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
NOTE B ORGANIZATION
UPG, a Texas corporation, is a distributor and supplier of batteries and related power accessories to a diverse range of industries, and a provider of third-party fulfillment and logistics services and value-added solutions. The Companys primary logistics center is located in Carrollton, Texas and regional logistic centers are located in Las Vegas, Nevada and Atlanta, Georgia. The Companys customers are primarily located in the United States. A small portion of the Companys sales is to customers located in the United Kingdom, Australia, Ireland, China and Canada.
Until December 20, 2006, the Company was a wholly owned consolidated subsidiary of Zunicom, Inc. (Zunicom), a Texas corporation, whose stock is quoted on the OTC Bulletin Board under the symbol ZNCM.OB. On December 20, 2006, the U.S. Securities and Exchange Commission declared effective a registration statement filed by the Company registering the sale of 3,000,000 shares of its common stock, including 1,000,000 shares owned by Zunicom (the IPO). As a result of the IPO, Zunicoms interest in the Company was reduced to 40%. Although Zunicom owns less than a 50% interest in UPG, Zunicom continues to have significant influence over UPG.
On January 8, 2009, the Company formed a limited liability company under the name Monarch Outdoor Adventures LLC d/b/a Monarch Hunting (Monarch), through which it acquired all of the tangible and intangible assets of a business for approximately $892,000. Monarch is a manufacturer and retailer of high-quality hunting products including battery and solar powered deer feeders, hunting blinds, stands and accessories. Monarch is located in Arlington, Texas and has customers throughout the United States. Monarchs revenue and assets are not material to the consolidated financial statements.
NOTE C STOCK-BASED COMPENSATION
At March 31, 2011, common shares reserved for future issuance include 2,000,000 shares issuable under the 2006 Stock Option Plan, as amended, 20,000 shares issuable upon exercise of options not granted under the 2006 Stock Option Plan and 300,000 shares issuable upon exercise of outstanding warrants. At March 31, 2011, there were 1,381,842 options outstanding under the 2006 Stock Option Plan, and 618,158 options are available for future grants.
There were no options granted during the three months ended March 31, 2011 or 2010.
At March 31, 2011, the aggregate intrinsic value of options outstanding and exercisable was $85,250
At March 31, 2011, all outstanding options under the 2006 Stock Option Plan were fully vested with no remaining unrecognized compensation expense.
On June 25, 2007, Zunicom issued 645,133 shares of restricted stock to certain employees of UPG for past and future services. These shares may not be sold, conveyed, transferred, pledged, encumbered or otherwise disposed of prior to the earlier of June 25, 2011 or date on which the employees employment is terminated by UPG, whichever occurs first. The Company is amortizing the fair value of these shares as compensation expense over the 48 month vesting period. In January 2009, 227,229 of these shares were forfeited when the Chief Executive Officer resigned as an officer and director of the Company. Accordingly, 417,904 restricted shares remain outstanding at March 31, 2011. Approximately $15,000 of compensation expense related to these shares was recorded during each of the three month periods ended March 31, 2011 and 2010. There is approximately $15,000 of unvested expense remaining as of March 31, 2011 that will be recognized as compensation expense through July 2011.
On March 21, 2007, the Company issued stock options to non-employees to purchase 20,000 shares of the Companys common stock at an exercise price of $7.00 per share vesting over three years and expiring December 19, 2016. These stock options remain outstanding as of March 31, 2011.
5
UNIVERSAL POWER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE D NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period.
Diluted net income per share is computed by dividing net income by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. The Companys common stock equivalents include all common stock issuable upon the exercise of outstanding stock options and warrants.
For the three month period ended March 31, 2011, the dilutive effect of 146,250 stock options is included in the calculation and 1,255,592 stock options and 300,000 warrants are excluded from the calculation as they are antidilutive. For the three month period ended March 31, 2010, the dilutive effect of 40,000 stock options is included in the calculation and 1,354,842 stock options and 300,000 warrants are excluded from the calculation as they are antidilutive.
NOTE E LINE OF CREDIT
On December 16, 2009, the Company entered into a credit agreement with Wells Fargo under which the Company may borrow up to $30.0 million, or up to $40.0 million if it can satisfy certain defined criteria, on a revolving basis (the Credit Agreement). All borrowings under the Credit Agreement are secured by a first lien on all of the Companys assets. The Companys ability to draw on the credit line is limited to an amount equal to 80% of eligible accounts receivable and 80% of eligible inventory as defined in the Credit Agreement. In connection with each drawn down, the Company has an option to choose either a Base Rate or Eurodollar loan. Interest on Base Rate Loans is payable quarterly and interest on Eurodollar Loans is generally payable monthly or quarterly as selected by the Company. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors, all as described in the Credit Agreement. The Agreement terminates on July 30, 2013.
The Credit Agreement contains customary negative covenants restricting the Companys ability to take certain actions without Wells Fargos consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an event of default, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the Credit Agreement will become immediately due and payable. In addition, the Company must maintain certain financial covenants on a quarterly basis.
At March 31, 2011, approximately $11.4 million was outstanding under the Credit Agreement out of a maximum availability of approximately $18.1 million based on the borrowing formula. The interest rate on the outstanding balance was 2.56%.
Interest Rate Swap
In connection with the Credit Agreement, the Company terminated an Interest Swap Agreement (ISA) it had with its previous lender and, consequently, discontinued hedge accounting as of December 16, 2009. The Company continues to incur interest expense commensurate with its original, hedged risk, and there is currently no indication that interest payments on the hedged transaction would not continue. Therefore, the realized losses related to the ISA will not be recognized immediately and will remain in accumulated other comprehensive income (loss). These losses are reclassified into interest expense over the original contractual term of the ISA starting as of December 16, 2009 through July 5, 2012.
NOTE F CONCENTRATIONS
At March 31, 2011 and 2010, the Company had receivables due from ADT Security Services, Inc. (ADT) in the amount of approximately $0.3 million and $3.4 million, respectively. During the three months ended March 31, 2011 and 2010, ADT accounted for 21% and 36%, respectively, of net sales. A termination by ADT of its relationship with the Company, or even a significant reduction in the level of business it does with the Company, could have a material adverse impact on the Companys operating results and financial condition. This customer concentration could also adversely affect the market price of our stock.
NOTE G LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of these matters will have a material adverse effect on the Companys financial position, operating results, or cash flows. However, there can be no assurance that such legal proceedings will not have a material impact.
NOTE H INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction and various states. With a few exceptions, the Company is no longer subject to U.S. state and local income tax examinations by tax authorities for years before 2007.
The Company recorded income tax expense on continuing operations of approximately $0.2 million and $0.3 million for each of the three-month period ended March 31, 2011 and 2010, respectively. The Companys effective tax rate was
6
UNIVERSAL POWER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
36.3% and 36.8% for the three-month period ended March 31, 2011 and 2010, respectively. The taxes were higher than the statutory rate of 34% primarily as a result of state taxes.
NOTE I SEGMENT AND GEOGRAPHIC INFORMATION
The accounting standard for segment reporting requires enterprises to report financial information and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company evaluated the accounting standard for segment reporting and determined that the Company operates in only one segment.
NOTE J SUBSEQUENT EVENT ACQUISITION OF PROGRESSIVE TECHNOLOGIES, INC.
On April 20, 2011 (the Closing Date), the Company completed an acquisition of substantially all of the business assets of Progressive Technologies, Inc. (PTI), a North Carolina company that designs and builds custom battery packs. The acquisition consideration totaled $3.3 million, including $1.9 million in cash, $1.0 million in notes payable to PTI, and the assumption of $0.4 million in notes payable to third parties. The acquisition will be accounted for using the acquisition method of accounting, under which the aggregate purchase price (including liabilities assumed) is allocated to tangible and identifiable intangible assets acquired based on their fair values at the Closing Date. The excess of the purchase price over those fair values will be recorded as goodwill. PTIs expertise in lithium-ion battery packs among other chemistries, further enhances the Companys product and service offerings. In addition, PTIs products will strengthen the Companys position in the medical field and other market segments.
7
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. See Forward-Looking Statements following the Table of Contents of this Form 10-Q. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
Business Overview
We are (i) a leading supplier and distributor of batteries and related power accessories and (ii) a third-party logistics services provider, specializing in supply chain management and value-added services. We sell, distribute and market batteries and related power accessories under various manufacturer brands, private labels and our own proprietary brands. We are one of the leading domestic distributors of sealed, or maintenance-free, lead-acid batteries (SLA batteries). Our principal product lines include:
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batteries of a wide variety of chemistries, battery chargers and related accessories; |
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portable battery-powered products, such as jump starters and 12-volt DC power accessories; |
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security system components, such as alarm panels, perimeter access controls, horns, sirens, speakers, transformers, cable and wire. |
Our customers include original equipment manufacturers (OEMs), distributors and both online and traditional retailers. Our products represent basic power solutions to a wide variety of existing applications in a broad market spectrum. They are used in a diverse and growing range of industries and applications including automotive, medical mobility, consumer goods, electronics, marine, hunting, security and surveillance, telecommunications, uninterruptible power supply, power sports, solar and portable power.
The demand for batteries and related power accessories is impacted by consumer preferences, technological developments, fuel costs, which impact manufacturing and shipping, the cost of lead and copper, the two principal raw materials used to manufacture batteries, and general economic conditions. We believe that technological change drives growth as new product introductions accelerate sales and provide us with new opportunities. At the same time, battery chemistries are also evolving due to changes in consumer demands and preferences that are driven, in part, by environmental and safety concerns and the need for greater density power and longer life. Therefore, we continue to stay current regarding advances and changes in battery technology.
We are also a third-party logistics services provider specializing in supply chain management and value-added services, designed to help customers optimize performance by allowing them to outsource supply chain management functions. Our supply chain management services include inventory sourcing, procurement, warehousing and fulfillment. Our value-added services include custom battery pack assembly, custom kitting, private labeling, product development and engineering, graphic design and sales and marketing.
We believe that the demand for third-party logistics and supply chain management solutions is growing, particularly with globalization. To be successful, businesses have not only to excel in their core competencies, but they must also execute their supply chain processes quickly and accurately. To remain competitive, businesses strive to identify ways to more efficiently manage their supply chain and streamline their logistics processes by minimizing inventory levels, reducing order and cash-to-cash cycle lengths and outsourcing manufacturing and assembly operations to low-cost locations. An efficient supply chain has become a critical element to improving financial performance. As a result, businesses are increasingly turning to organizations that provide a broad array of logistics and supply chain solutions. These trends have been further facilitated by the rapid growth of technology enabling seamless electronic interfaces between systems of service providers and their customers.
Operations Overview
Tyco Internationals acquisition of Broadview Security, our largest customer, and its integration into ADT Security Services continue to impact our business. We continue to work closely with ADT Security Services and its authorized dealers to maintain the level of quality and service they have come to expect from UPG. In addition, we continue to focus on expanding and growing our core distribution business. Despite a decrease in sales to ADT Security Services and its authorized dealers, which was the primary contributor to our lower consolidated net sales, and price volatility in the commodities market, particularly lead and copper, which are the two primary raw materials used in our products, and oil which is a major factor in shipping costs, our gross profit margins for the first quarter of 2011 were higher than our gross profit margins in the corresponding 2010 period.
We continue to focus on executing upon our long-term strategic plan to penetrate new markets, develop new higher-margin products and diversifying to minimize our exposure to the broader economic trends. In addition, we believe that our financial condition continues to improve as we continue to execute on our strategy to reduce the level of our inventory and accounts receivable. Although these decreases were offset in part by an increase in our accounts payable by approximately $1.2 million and a decrease in our cash position, our strong operating results and operating cash flow enabled us to reduce the outstanding balance on our credit facility by almost $5.0 million and increase shareholders equity by $0.45 million.
In April 2011 we acquired substantially all of the business assets of Progressive Technologies, Inc., based in North Carolina, which specializes in assembling lithium-ion battery packs. The acquisition expands our battery solutions offerings and adds technical capabilities to grow the business in new markets including computers, camcorders, tools, medical equipment, military applications, metering, mining and handheld communications equipment. PTI also holds several ISO certifications required by medical and other specialized battery pack buyers. We believe that these synergies will result in opportunities to further grow business.
8
Results of Operations
The following table compares our statement of operations data for the three months ended March 31, 2011 and 2010. The trends suggested by this table may not be indicative of future operating results, which will depend on various factors including the nature of revenues (sales of batteries and other power accessory products versus logistics or value added services) and the relative mix of products sold (batteries versus other power supply products), which can vary from quarter to quarter, as well as the state of the general economy. In addition, our operating results in future periods may also be affected by acquisitions.
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Three months ended March 31, |
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2011 |
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2010 |
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Amount |
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Percentage |
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Amount |
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Percentage |
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(dollars in thousands) |
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Net sales |
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$ |
21,587 |
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100.0 |
% |
$ |
26,035 |
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100.0 |
% |
Cost of sales |
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17,278 |
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80.0 |
% |
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21,602 |
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83.0 |
% |
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Gross profit |
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4,309 |
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20.0 |
% |
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4,433 |
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17.0 |
% |
Operating expenses |
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3,536 |
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16.4 |
% |
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3,473 |
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13.3 |
% |
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Operating income |
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773 |
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3.6 |
% |
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960 |
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3.7 |
% |
Interest expense, net |
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(141 |
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(0.6 |
%) |
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(161 |
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(0.6 |
%) |
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Income before provision for income taxes |
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632 |
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3.0 |
% |
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798 |
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3.1 |
% |
Provision for income taxes |
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(229 |
) |
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(1.1 |
%) |
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(293 |
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(1.1 |
%) |
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Net income |
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$ |
403 |
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1.9 |
% |
$ |
506 |
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2.0 |
% |
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Comparison of the three months ended March 31, 2011 and 2010
Net sales
Consolidated net sales for the three month period ended March 31, 2011 was $21.6 million compared to $26.0 million for 2010, a decrease of $4.4 million or 17.1%. Net sales to customers other than ADT and its authorized dealers increased to $16.8 million in the 2011 period from $15.0 million in 2010 period. Net sales to ADT and its authorized dealers, our largest customer, were $4.7 million in the 2011 period compared to $11.0 million in the 2010 period, a decrease of approximately 57.1%. We believe this decrease reflects the integration of Broadview Security, our largest customer, which was acquired by Tyco International in May 2010, with and into ADT Security Systems.
Cost of sales
Cost of sales is comprised of the base product cost, freight, duty and servicing fees where applicable. Cost of sales totaled $17.3 million for the three month period ended March 31, 2011 compared to $21.6 million in the comparable 2010 period, a decrease of $4.3 million, or 20%. Cost of sales as a percentage of sales decreased to 80% in the 2011 period from 83% for 2010. This cost decrease was attributable to improved efficiencies across our supply chain, and a decrease in sales to ADT and its authorized dealers which carry lower margins. Our overall gross margin for the three month period ended March 31, 2011, was approximately 20% compared to a gross margin of 17% for the comparable period in 2010.
Operating expenses
Operating expenses for the three month period ended March 31, 2011 increased by approximately $62,000, or 1.8%, compared 2010. The increase in operating expenses is attributable to an increase of $103,000 in personnel costs, $57,000 in insurance costs, $37,000 in professional fees and $32,000 in marketing expenses, offset by a decrease of $62,000 in travel and entertainment expenses, $39,000 in bad debt expense, $35,000 in facilities and $31,000 in various operational expenses.
Operating income
Operating income for the three month period ended March 31, 2011 was approximately $0.8 million compared to $1.0 million in the corresponding 2010 period.
Interest expense
Interest expense totaled approximately $141,000 for the three month period ended March 31, 2011 compared to $161,000 for the corresponding 2010 period, a decrease of approximately $20,000. The average outstanding loan balance on the line of credit for the 2011 and 2010 periods was $11.6 million and $15.8 million, respectively, with a weighted average interest rate of 2.56% on all 2011 borrowings and a weighted average interest rate of 2.75% on 2010 borrowings.
9
Income before provision for income taxes
Pre-tax income for the three month period ended March 31, 2011 was approximately $0.6 million compared to pre-tax income of approximately $0.8 million in the corresponding 2010 period.
Income taxes
We recorded an income tax expense on continuing operations of approximately $0.2 million and $0.3 million for each of the three-month period ended March 31, 2011 and 2010, respectively. Our effective tax rate was 36.3% and 36.8% for the three-month period ended March 31, 2011 and 2010, respectively. The rates reflect federal as well as state taxes.
Liquidity
We had cash and cash equivalents of approximately $0.1 million and $0.2 million at March 31, 2011 and December 31, 2010, respectively
On December 16, 2009, we entered into a credit agreement with Wells Fargo to provide us with a new revolving credit facility. The credit agreement provides that we may borrow up to $30.0 million, with the possibility that we can increase the line to $40.0 million if we can satisfy certain defined criteria. All of our assets secure our obligations under the credit agreement. Our borrowing availability is limited to 80% of eligible accounts receivable and 80% of eligible inventory as those terms are defined in the credit agreement. For each borrowing, we have the option to choose a Base Rate or Eurodollar loan. Interest on Base Rate Loans is payable quarterly and interest on Eurodollar Loans is generally payable monthly or quarterly at our option. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors, all as described in the credit agreement. The Agreement terminates on July 30, 2013.
The credit agreement contains negative covenants restricting our ability to take certain actions without Wells Fargos consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an event of default, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the credit facility will become immediately due and payable. In addition, we must maintain certain financial covenants on a quarterly basis.
At March 31, 2011, approximately $11.4 million was outstanding under the credit facility out of a maximum availability of approximately $18.1 million based on the borrowing formula in the credit agreement. At March 31, 2011, the interest rate on all amounts outstanding under the credit agreement was 2.56%.
For the three-month period ended March 31, 2011, net cash provided by operating activities was approximately $4.9 million compared to $0.5 million provided by operating activities for the three month period ended March 31, 2010. The net cash provided by operating activities for 2011 reflects net income of $0.4 million, decreases in inventories and accounts receivable trade of $1.4 million and $1.8 million, respectively, and an increase in accounts payable and accrued liabilities of $1.3 million, partially offset by an increase in income tax receivable of $0.5 million. The increase in cash provided by operating activities was primarily due to changes in working capital usage, specifically increased payments for inventory in 2010 and improved collection of trade receivables in 2011.
Cash used in investing activities for the three month period ended March 31, 2011 was $0 compared to $18,000 for the corresponding period in 2010. The decrease in cash used in investing activities is due to purchases of property and equipment in 2010.
Net cash used in financing activities for the three month period ended March 31, 2011 was approximately $5.0 million as compared to $2.0 million provided by financing activities for the corresponding period in 2010. The increase in cash used for financing activities was primarily due to debt repayments on our line of credit.
On April 20, 2011, we acquired substantially all of the business assets of Progressive Technologies, Inc. (PTI), a North Carolina company that designs and builds custom battery packs. The acquisition consideration totaled $3.3 million, including $1.9 million in cash, $1.0 million in notes payable to PTI, and the assumption of $0.4 million in notes payable to third parties. The acquisition will be accounted for using the acquisition method of accounting, under which the aggregate purchase price (including liabilities assumed) is allocated to tangible and identifiable intangible assets acquired based on their fair values at the closing date. The excess of the purchase over those fair values will be recorded as goodwill.
We believe that cash provided by operations and cash available under our line of credit will be sufficient to meet our operational needs over the next year.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures
Management, with the participation of our chief executive officer/interim chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer/interim chief financial officer has concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms; and (ii) accumulated and communicated to management, including our chief executive/interim chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The following exhibits are furnished as part of this report or incorporated herein as indicated
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Exhibit No. |
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Description |
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3(i) |
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Amended and Restated Certificate of Formation (including Amended and Restated Articles of |
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Incorporation) (1) |
3(ii) |
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Amended and Restated Bylaws (1) |
4.1 |
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Specimen stock certificate (1) |
4.2 |
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Form of representatives warrant (1) |
10.1(a)** |
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Form of 2006 Stock Option Plan (1) |
10.1(b) |
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Form of Stock Option Agreement (1) |
10.1(c)** |
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Amendment to the 2006 Stock Option Plan (6) |
10.2 |
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Separation Agreement between UPG and Randy Hardin (2) |
10.3** |
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Form of Ian Edmonds Employment Agreement (7) |
10.7 |
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Real Property Lease for 1720 Hayden Drive, Carrollton, Texas (1) |
10.8 |
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Real Property Lease for 11605-B North Santa Fe, Oklahoma City, Oklahoma (1) |
10.9 |
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Real Property Lease for Las Vegas, Nevada (1) |
10.10 |
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Real Property Lease for Atlanta, GA (9) |
10.11 |
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Termination Agreement with Stan Battat d/b/a Import Consultants (3) |
10.12 |
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Third Party Logistics & Purchase Agreement, dated as of November 3, 2008, with Brinks Home Security, Inc., (currently ADT Security Services (formerly Broadview Security), Inc.) (4) |
10.13 |
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Credit Agreement with Wells Fargo Bank, National Association (8) |
10.14 |
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Security Agreement with Wells Fargo Bank, National Association (8) |
31.1 |
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Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
31.2 |
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Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
32.1 |
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Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
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* |
Filed herewith. |
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** |
Management Contract, compensatory plan or arrangement. |
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(1) |
Incorporated by reference to the Exhibit with the same number to our Registration Statement on Form S-1 (SEC File No. 333-137265) effective as of December 20, 2006. |
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(2) |
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 23, 2009. |
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(3) |
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 17, 2009. |
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(4) |
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2008. |
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(5) |
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 25, 2008. |
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(6) |
Incorporated by reference to Exhibit 10.1(c) to our Annual Report on Form 10-K for the year ended December 31, 2008. |
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(7) |
Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended June 30, 2009. |
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(8) |
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 23, 2009. |
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(9) |
Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 31, 2010. |
11
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Universal Power Group, Inc. |
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Date: May 11, 2011 |
/s/Ian Edmonds |
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Ian Edmonds |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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/s/Ian Edmonds |
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Ian Edmonds |
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Interim Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
12