XASE:UPG Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
   
For the quarterly period ended March 31, 2012
     
   
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
   
For the transition period from ____________ to ____________              
 
Commission file number:  001-33207
 
Universal Power Group, Inc.
(Exact name of registrant as specified in its charter)

TEXAS
 
75-1288690
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
     
1720 Hayden Drive, Carrollton, Texas
 
75006
(Address of principal executive offices)
 
(Zip Code)

(469) 892-1122
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

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 þ
No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ
No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company þ

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

As of May 9, 2012, 5,020,000 shares of Common Stock were outstanding.



 
 

 

Table of Contents

     
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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, 2011 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)
 
 

 



UNIVERSAL POWER GROUP, INC.
 
ASSETS
(Amounts in thousands)


   
March 31,
2012
   
December 31,
2011
 
   
(unaudited)
       
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 356     $ 283  
Accounts receivable:
               
Trade, net of allowance for doubtful accounts of $409 (unaudited) and $384
    15,937       12,972  
Other
    393       442  
Inventories – finished goods, net of allowance for obsolescence of $440 (unaudited) and $830
    24,164       24,174  
Current deferred tax asset
    823       972  
Income tax receivable
    661       721  
Prepaid expenses and other current assets
    3,199       1,426  
Total current assets
    45,533       40,990  
                 
PROPERTY AND EQUIPMENT
               
Logistics and distribution systems
    1,881       1,871  
Machinery and equipment
    1,044       1,044  
Furniture and fixtures
    513       511  
Leasehold improvements
    394       389  
Vehicles
    171       171  
Total property and equipment
    4,003       3,986  
Less accumulated depreciation and amortization
    (3,203 )     (3,128 )
Net property and equipment
    800       858  
                 
GOODWILL
    1,387       1,387  
INTANGIBLES, net
    467       527  
OTHER ASSETS
    108       100  
NON-CURRENT DEFERRED TAX ASSET
    233       213  
      2,195       2,227  
TOTAL ASSETS
  $ 48,528     $ 44,075  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
1

 
 
UNIVERSAL POWER GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
(Amounts in thousands)


   
March 31,
2012
   
December 31,
2011
 
   
(unaudited)
       
             
CURRENT LIABILITIES
           
Line of credit
  $ 13,923     $ 12,654  
Accounts payable
    10,220       6,845  
Income taxes payable
    18        
Accrued liabilities
    966       1,213  
Current portion of settlement accrual
          241  
Current portion of capital lease and note obligations
    114       119  
Current portion of deferred rent
          14  
Total current liabilities
    25,241       21,086  
                 
LONG-TERM LIABILITIES
               
Capital lease and note obligations, less current portion
    204       229  
Total long-term liabilities
    204       229  
                 
TOTAL LIABILITIES
    25,445       21,315  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Common stock - $0.01 par value, 50,000,000 shares authorized, 5,020,000 shares issued and outstanding
    50       50  
Additional paid-in capital
    16,342       16,339  
Retained earnings
    6,711       6,419  
Accumulated other comprehensive loss
    (20 )     (48 )
Total shareholders’ equity
    23,083       22,760  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 48,528     $ 44,075  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
2

 

UNIVERSAL POWER GROUP, INC.
(Amounts in thousands except per share data)


   
Three Months Ended March 31,
 
   
2012
   
2011
 
Net sales
  $ 26,410     $ 21,587  
Cost of sales
    21,734       17,278  
Gross profit
    4,676       4,309  
                 
Operating expenses
    4,167       3,536  
                 
Operating income
    509       773  
                 
Other income (expense)
               
Interest expense
    (144 )     (141 )
Other, net
    125        
      (19 )     (141 )
                 
Income before provision for income taxes
    490       632  
Provision for income taxes
    (198 )     (229 )
Net income
  $ 292     $ 403  
Earnings per share
               
Basic
  $ 0.06     $ 0.08  
Diluted
  $ 0.06     $ 0.08  
Weighted average shares outstanding
               
Basic
    5,020       5,020  
Diluted
    5,202       5,046  
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)


   
Three Months Ended March 31,
 
   
2012
   
2011
 
Net income
  $ 292     $ 403  
Amortization of hedging instrument
    28       29  
Comprehensive income
  $ 320     $ 432  
                 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3

 
 
UNIVERSAL POWER GROUP, INC.
(Amounts in thousands)


    Three Months Ended March 31,
   
2012
   
2011
CASH FLOWS FROM OPERATING ACTIVITIES
         
Net income
  $ 292     $ 403  
Items not requiring (providing) cash:
               
Depreciation and amortization
    135       155  
Provision for bad debts
    23       45  
Provision for obsolete inventory
    140       180  
Deferred income taxes
    129       159  
Stock-based compensation
    3       15  
Changes in operating assets and liabilities
               
Accounts receivable – trade
    (2,988 )     1,745  
Accounts receivable – other
    49       (21 )
Inventories
    (130 )     1,376  
Income taxes receivable/payable
    78       (537 )
Prepaid expenses and other current assets
    (1,773 )     289  
Accounts payable
    3,375       1145  
Accrued liabilities
    (219 )     136  
Settlement accrual
    (241 )     (197 )
Deferred rent
    (14 )     (19 )
Net cash provided by (used in) operating activities
    (1,141 )     4,874  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of property and equipment
    (17 )      
Net cash used in investing activities
    (17 )      
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net activity on line of credit
    1,269       (4,963 )
Payments on capital lease and note obligations
    (38 )     (6 )
Net cash provided by (used in) financing activities
    1,231       (4,969 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    73       (95 )
Cash and cash equivalents at beginning of period
    283       215  
Cash and cash equivalents at end of period
  $ 356     $ 120  
                 
SUPPLEMENTAL DISCLOSURES
               
Income taxes paid
  $ 7     $ 617  
Interest paid
  $ 144     $ 106  
                 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

 
 
UNIVERSAL POWER GROUP, INC.

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 periods ended March 31, 2012 and 2011.  The results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year.  Certain information and note disclosures normally included in the Company’s 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 Company's audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on April 5, 2012.  The condensed consolidated balance sheet of the Company as of December 31, 2011 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

    Universal Power Group, Inc. (“UPG” or the “Company”), 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 Company’s primary logistics center is located in Carrollton, Texas and regional logistic centers are located in Las Vegas, Nevada and Atlanta, Georgia.  The Company’s customers are primarily located in the United States.  A small portion of the Company’s sales is to customers located in the United Kingdom, Australia, Ireland, Japan, China, Canada and Latin America.

    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, Zunicom’s interest in the Company was reduced to 40%.  Zunicom no longer owns a controlling interest in UPG; however, as the largest shareholder, Zunicom does 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 manufacturer and retailer of high-quality hunting products including battery and solar powered deer feeders, hunting blinds, stands and accessories for approximately $892,000.  Monarch is located in Arlington, Texas and has customers throughout the United States.  Monarch’s revenue and assets are not material to the Companys consolidated financial statements. At March 31, 2012, the carrying value of Monarch’s assets was approximately $400,000. On May 4, 2012, the Company sold Monarch for $130,000.  See Note K.

    On April 20, 2011, 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 approximately $3,300,000.  PTI’s expertise in lithium-ion battery packs, among other chemistries, further enhances the Company’s product and service offerings.  In addition, PTI’s products will strengthen the Company’s position in the medical field and other market segments.  On September 1, 2011, PTI changed its legal name to ProTechnologies, Inc.

NOTE C — STOCK-BASED COMPENSATION

    At March 31, 2012, common shares reserved for future issuance include 1,980,000 shares issuable under the 2006 Stock Option Plan, as amended, as well as 20,000 shares issuable upon exercise of options not granted under the 2006 Stock Option Plan.  At March 31, 2012, there were 1,403,842 options outstanding under the 2006 Stock Option Plan, and 576,158  options are available for future grants.

    There were no options granted during the three months ended March 31, 2012 or 2011.

    At March 31, 2012, the aggregate intrinsic value of options outstanding and exercisable was $177,931.

    At March 31, 2012, all outstanding options under the 2006 Stock Option Plan were fully vested with no remaining unrecognized compensation expense.

    On June 25, 2007, Zunicom issued restricted stock to certain employees of UPG for past and future services.  The Company amortized the fair value of 398,144 shares, which had not been forfeited, as compensation expense over the 48 month vesting period.  Compensation expense related to these shares was recorded at $0 and $15,000 during March 31, 2012 and 2011, respectively
 
 
5

 
 
UNIVERSAL POWER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
    On June 24, 2011, Zunicom issued an additional 99,538 restricted shares of its common stock to the same Company employees who received the grant in June 2007 and who were still employed by the Company. As a condition to this grant, the grantees agreed to extend the restricted period on the shares issued in June 2007 for an additional three years.  As a result, all 497,682 shares will vest on June 24, 2014.  The Company is amortizing the fair value as compensation expense over the 36-month vesting period in accordance with ASC Topic 718, Compensation – Stock Compensation.  Approximately $2,800 and $0 compensation expense related to these shares was recorded during the three-month periods ended March 31, 2012 and 2011, respectively.  At March 31, 2012, there is approximately $26,000 of remaining unrecognized compensation expense associated with this grant.

NOTE D — EARNINGS 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 Company’s 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, 2012,  the dilutive effect of 852,592 stock options is included in the calculation and 571,250 stock options are excluded from the calculation as they are antidilutive.  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.

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 Company’s assets.  The Company’s 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 draw 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, as described in the Credit Agreement.  At March 31, 2012, all outstanding borrowings under the credit facility were accruing interest at the rate of 2.53% per annum.  The Credit Agreement matures on July 30, 2013.

    The Credit Agreement contains customary negative covenants restricting the Company’s ability to take certain actions without Wells Fargo’s 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, 2012, approximately $13.9 million was outstanding under the credit facility out of a maximum availability of approximately $19.7 million based on the borrowing formula.

   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, 2012 and 2011, the Company had receivables due from ADT Security Services, Inc. (“ADT”) in the amount of approximately $2.7 million and $0.3 million, respectively.  During the three months ended March 31, 2012 and 2011, ADT accounted for 11% and 21%, respectively, of  net sales.

NOTE G — LEGAL PROCEEDINGS

Universal Power Group, Inc.,(Plaintiff and Counterdefendant) v. Randy T. Hardin, Steven W. Crow and Bright Way Group, LLC (Defendants, Counter Plaintiffs and Third-Party Plaintiffs) v. William Tan, Ian Edmonds and Mimi Tan Edmonds (Third-Party Defendants), Cause No. 11-09787-E (In the District Court of Dallas County, Texas, 101st Judicial District).

    The Company initiated the above referenced case on August 8, 2011 by filing its Original Petition and Application for Temporary Injunction and for Permanent Injunctive Relief against Randy Hardin, a former President of the Company, Bright Way Group, Hardin’s new business venture, and Steven Crow, the Company’s former Vice President of Product Development and Retail Chain Sales.  On March 19, 2012, the parties entered into a settlement agreement whereby the defendants agreed to pay the Company a sum of money and agreed to the entry of a temporary injunction restricting them from contacting certain of the Company’s customers and suppliers until January 1, 2013.  The parties have agreed to dismiss all claims and counterclaims in the lawsuit.
 
 
6

 
 
UNIVERSAL POWER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

    The Company is not currently party to any legal proceedings than those arising in the ordinary course of business, which management does not believe will have a material adverse effect on the Company’s financial position, operating results, or cash flows, regardless of the outcome.

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 of approximately $0.2 million for each of the three-month periods ended March 31, 2012 and 2011, respectively.  The Company's effective tax rate was 40.5% and 36.3% for the three-month period ended March 31, 2012 and 2011, respectively.  The taxes were higher than the statutory rate of 34% primarily as a result of state income taxes and items not deductible for income tax reporting.

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 K — SUBSEQUENT EVENT
 
On May 4, 2012, pursuant to a Securities Purchase Agreement, dated as of May 4, 2012 (the “Agreement”), the Company sold all of the issued and outstanding membership interests of Monarch for $130,000.  Of the purchase price, $50,000 was paid in cash at closing and $80,000 was evidenced by a 6% secured promissory note due May 1, 2014.  The principal amount of the note and all accrued interest thereon is payable in 24 equal monthly installments of $3,692 beginning on June 1, 2012.  The note is secured by a pledge of all of the membership interests in Monarch as well as a lien on all of Monarch’s assets.  The Agreement contains representations and warranties, covenants and indemnification provisions typical of those in these types of transactions.  UPG expects to realize a pre-tax loss of approximately $500,000 related to the sale of Monarch, taking into account continuing lease obligations for the manufacturing facility, in its second-quarter financial results.
 

    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.
 
Business Overview

    We are (i) a leading supplier and distributor of batteries, related power accessories and security accessories and (ii) a third-party logistics services provider, specializing in supply chain management and value-added services.

Distribution Business

    We sell, distribute and market batteries, related power accessories, renewable power products and security 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”).  We also assemble lithium-ion and other custom battery packs.  Our principal product lines include:
 
 
batteries and custom battery packs of a wide variety of chemistries, battery chargers and related accessories;
     
 
portable battery-powered products, such as jump starters and 12-volt DC power accessories;
     
 
renewable power products such as solar power generators and solar products; and
     
 
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, powersports, 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.
 
 
7

 

Third-Party Logistics

    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 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

    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 economy.

    The acquisition of PTI is indicative of this strategy. PTI is a lithium-ion battery pack assembler and distributer; and holds several ISO certifications required by medical and other specialized purchasers of battery packs.  As a result, the acquisition of PTI expands our product and service offerings, adds to our technical capabilities and enables us to penetrate new markets such as medical, military, metering, mining, hobby, handheld communications and OEM applications.

    In May 2011, the government of the People’s Republic of China implemented a broad based inspection program for manufacturing facilities dealing with hazardous materials including lead.  These efforts came in response to a number of incidents involving the release of hazardous materials into the environment, resulting in contamination of water supplies and harm to the local population.  Chinese government authorities have been particularly focused on lead acid battery manufacturers given the potential for lead poisoning resulting from the methods used by manufacturing and recycling plants to treat waste product, including its potential release into the environment.  The Ministry of Environmental Protection in China has been inspecting these manufacturing plants and has closed a significant number of facilities due to their production practices and poor technical standards as well as their proximity to large population centers.  These recent closures have impacted production of lead acid batteries in China and have caused delays and disruptions in the supply of batteries to the United States and other global markets.  In turn, we continue to see delays in product shipments from a number of China-based factories in the first quarter of 2012.  We continue to monitor this situation as the remaining factories resume production and catch up on backorders.  We anticipate the supply chain disruptions to continue through the second quarter of 2012.
 
On May 4, 2012, pursuant to a Securities Purchase Agreement, dated as of May 4, 2012 (“Agreement”), we sold all of the issued and outstanding membership interests of Monarch for $130,000.  Of the purchase price, $50,000 was paid in cash at closing and $80,000 was evidenced by a 6% secured promissory note due May 1, 2014.  We expect to realize a pre-tax loss of approximately $500,000 related to the sale of Monarch in our second-quarter financial results. When we first purchased Monarch in January 2009, we believed that it held promise in terms of the variety of Monarch’s battery-powered products that might be enhanced by UPG’s supply chain infrastructure.  Unfortunately, over the past three years we determined there was not enough overlap and opportunity for growth in Monarch to justify continued investment in the business.  During that time, Monarch generated operating losses, and we were unable to generate profit or positive cash flow from its operations, however as a result of the sale, we expect improved cash flows for our overall business without the ongoing investment demands from Monarch.  Despite the loss on the sale of this business, we are encouraged by the opportunities this transaction presents to refocus UPG’s resources and management’s time on growing our core business of batteries, related power accessories and third-party logistics.

Results of Operations

    The following table compares our statement of operations data for the three months ended March 31, 2012 and 2011.  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.

  Three months ended March 31,
  2012  
2011
  Amount  
Percentage
 
Amount
 
Percentage
  (dollars in thousands)  
Net sales
  $ 26,410       100.0 %   $ 21,587       100.0 %
Cost of sales
    21,734       82.3 %     17,278       80.0 %
Gross profit
    4,676       17.7 %     4,309       20.0 %
Operating expenses
    4,167       15.8 %     3,536       16.4 %
Operating income
    509       1.9 %     773       3.6 %
Interest expense, net
    (144 )     (0.5 %)     (141 )     (0.6 %)
Other income, net
    125       0.5 %            
Income before provision for income taxes
    490       1.9 %     632       3.0 %
Provision for income taxes
    (198 )     (0.8 %)     (229 )     (1.1 %)
Net income
  $ 292       1.1 %   $ 403       1.9 %

 
8

 

Comparison of the three months ended March 31, 2012 and 2011

    Net sales

    Consolidated net sales for the three-month period ended March 31, 2012 was $26.4 million compared to $21.6 million for 2011, an increase of $4.8 million, or 22.3%.  Net sales to customers other than ADT and its authorized dealers increased to $23.5 million in the 2012 period from $16.8 million in 2011 period.  This increase is attributable to fulfillment of customer order back logs, new customers and PTI sales.  Net sales to ADT and its authorized dealers, our largest customer, were $2.9 million in the 2012 period compared to $4.7 million in the 2011 period, a decrease of approximately 36.3%.

    Cost of sales

    Cost of sales is comprised of the base product cost, freight, duty and servicing fees where applicable.  Cost of sales totaled $21.7 million for the three-month period ended March 31, 2012 compared to $17.3 million in the comparable 2011 period, an increase of $4.4 million, or 25.8%.  Cost of sales as a percentage of sales increased to 82.3% in the 2012 period from 80.0% for 2011.  This increase was driven by the closure of a significant number of factories as a result of the China Ministry of Environmental Protection’s investigative efforts on production practices, which in turn resulted in disruptions and shortages in the supply of batteries to the United States and other global markets.  Our overall gross margin for the three-month period ended March 31, 2012, was approximately 17.7% compared to a gross margin of 20% for the comparable period in 2011.

    Operating expenses

    Operating expenses for the three-month period ended March 31, 2012 increased by approximately $631,000, or 17.8%, compared to 2011.  The increase in operating expenses is attributable to an increase of $310,000 in personnel and sales representative costs which also includes PTI related personnel and sales representatives, $283,000 in professional fees, which includes litigation expenses on matters that were settled in the first quarter, $75,000 in marketing expenses, $40,000 in travel and entertainment expenses and $29,000 in facility expenses, offset by a decrease of $46,000 in insurance expense, $23,000 in bad debt expense, $21,000 in depreciation and amortization expenses and $16,000 in various operational expenses.

    Operating income

    Operating income for the three-month period ended March 31, 2012 was approximately $0.5 million compared to $0.8 million in the corresponding 2011 period.

    Interest expense

    Interest expense totaled approximately $144,000 for the three-month period ended March 31, 2012 compared to $141,000 for the corresponding 2011 period, a increase of approximately $3,000.  The average outstanding loan balance on the line of credit for the 2012 and 2011 periods was $13.3 million and $11.6 million, respectively, with a weighted average interest rate of 2.53% on all 2012 borrowings and a weighted average interest rate of 2.56% on 2011 borrowings.

    Income taxes

    We recorded an income tax expense on continuing operations of approximately $0.2 million for each of the three-month periods ended March 31, 2012 and 2011.  Our effective tax rate was 40.5% and 36.3% for the three-month periods ended March 31, 2012 and 2011, respectively.  The rates reflect federal as well as state taxes.  Our effective tax rate was higher than the federal statutory rate of 34% for the three-month period ended March 31, 2012 due to state income taxes and items not deductible for income tax reporting.
 
Liquidity and capital resources

    We had cash and cash equivalents of approximately $0.4 million and $0.3 million at March 31, 2012 and December 31, 2011, respectively.

    For the three-month period ended March 31, 2012, net cash used in operating activities was approximately $1.1 million compared to $4.9 million provided by operating activities for the three-month period ended March 31, 2011.  The net cash used in operating activities for 2012 reflects an increase in trade accounts receivable of $3.0 million, an increase in prepaid expenses and other current assets of $1.8 million, partially offset by an increase in accounts payable of $3.4 million.  This change in working capital is attributable to the increase in sales volume and an increase in inventory purchases.

    Cash used in investing activities for the three-month period ended March 31, 2012 was $17,000 compared to $0 for the corresponding period in 2011.  The increase in cash used in investing activities is due to purchases of property and equipment in 2012.

    Net cash provided by financing activities for the three-month period ended March 31, 2012 was approximately $1.2 million as compared to $5.0 million used in financing activities for the corresponding period in 2011.  The increase in cash provided by financing activities was primarily due to draw down our line of credit offset by payments on capital lease and note obligations.

    We have a revolving credit agreement with Wells Fargo that terminates on July 30, 2013.  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. At March 31, 2012, the interest rate was 2.53%.
 
 
9

 
 
    The credit agreement contains negative covenants restricting our ability to take certain actions without Wells Fargo’s 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, 2012, approximately $13.9 million was outstanding under the credit facility out of a maximum availability of approximately $19.7 million based on the borrowing formula.

    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.

   Capital Resources

At December 31, 2011, we did not have any material commitments for capital expenditures.  We may enter into various commitments during 2012 if expansion opportunities arise.  We will disclose material items in press releases and other appropriate filings as they develop.  We have no off balance sheet financing arrangements.


    As a smaller reporting company, we are not required to provide the information required by this item.


    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 SEC’s 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 Company is not currently party to any legal proceedings than those arising in the ordinary course of business, which management does not believe will have a material adverse effect on the Company’s financial position, operating results, or cash flows.  
 
 
10

 
 
Item 6.

The following exhibits are furnished as part of this report or incorporated herein as indicated

Exhibit No.
 
Description
     
3(i)
 
Amended and Restated Certificate of Formation (including Amended and Restated Articles of Incorporation) (1)
3(ii)
 
Amended and Restated Bylaws (1)
4.1
 
Specimen stock certificate (1)
4.2
 
Form of representatives' warrant (1)
10.1(a)**
 
Form of 2006 Stock Option Plan (1)
10.1(b)
 
Form of Stock Option Agreement (1)
10.1(c)**
 
Amendment to the 2006 Stock Option Plan (5)
10.2
 
Separation Agreement between UPG and Randy Hardin (2)
10.3**
 
Form of Ian Edmonds Employment Agreement (6)
10.7
 
Real Property Lease for 1720 Hayden Drive, Carrollton, Texas (1)
10.9
 
Real Property Lease for Las Vegas, Nevada (1)
10.10
 
Real Property Lease for Atlanta, GA (8)
10.11
 
Termination Agreement with Stan Battat d/b/a Import Consultants (3)
10.12
 
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
 
Credit Agreement with Wells Fargo Bank, National Association (7)
10.14
 
Security Agreement with Wells Fargo Bank, National Association (7)
31.1
 
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
 
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
 
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*
101.INS***
 
XBRL Instance Document
101.SCH***
 
XBRL Taxonomy Extension Schema Document
101.CAL***
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB***
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE***
 
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF***
 
XBRL Taxonomy Extension Definition Linkbase Document.
   
*
Filed herewith.
**
Management Contract, compensatory plan or arrangement.
***
Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
(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.
(2)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 23, 2009.
(3)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 17, 2009.
(4)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2008.
(5)
Incorporated by reference to Exhibit 10.1(c) to our Annual Report on Form 10-K for the year ended December 31, 2008.
(6)
Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended September 30, 2009.
(7)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 23, 2009.
(8)
Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 31, 2010.


 
(c)
Other Financial Statement Schedules.

    The information required by the schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.

 
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.
 
    Universal Power Group, Inc.  
       
       
       
Date: May 10, 2012
 
/s/ Ian Edmonds  
    Ian Edmonds  
    President and Chief Executive Officer  
    (Principal Executive Officer)  
 
 
 
/s/ Ian Edmonds  
    Ian Edmonds  
    Interim Chief Financial Officer  
    (Principal Financial and Accounting Officer)  
 
12

XASE:UPG Quarterly Report 10-Q Filling

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XASE:UPG Quarterly Report 10-Q Filing - 3/31/2012
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