UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2004
Commission file number 1-7807
Champion Parts, Inc.
(Exact name of registrant as specified in its charter)
Illinois
36-2088911
(State or other jurisdiction of
I.R.S. Employer Identification No.
incorporation or organization)
2005 West Avenue B, Hope, Arkansas 71801
(Address of principal executive offices)
870-777-8821
(Registrant’s telephone number, including area code)
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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding as of June 27, 2004
Common Shares - $0.10 Par Value 3,655,266
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
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Champion Parts, Inc.
Form 10-Q
Cross Reference Index
PART I | FINANCIAL INFORMATION | PAGE |
ITEM 1. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
Balance Sheet - Assets | 3 | |
Balance Sheet - Liabilities & Stockholders' Equity | 4 | |
Statement of Income | 5 | |
Statement of Stockholders' Equity | 6 | |
Statement of Comprehensive Income | 7 | |
Statement of Cash Flows | 8 | |
Notes to Financial Statements | 9-11 | |
ITEM 2. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL | |
CONDITION AND RESULTS OF OPERATIONS | ||
Management Overview | 12 | |
Results of Operations | ||
Three months Ended June 27, 2004 | 13 | |
Six months Ended June 27, 2004 | 13-14 | |
Critical Accounting Policies and Estimates | 14-15 | |
Recent Accounting Pronouncements | 15-16 | |
Liquidity and Capital Resources | ||
Liquidity Overview | 16-17 | |
Working Capital | 17-18 | |
Debt | 18 | |
Seasonality | 19 | |
Future Outlook | 19 | |
Factors Which May Affect Future Results | 19 | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 20 |
ITEM 4. | CONTROLS AND PROCEDURES | 20 |
PART II | OTHER INFORMATION | |
ITEM 1. | LEGAL PROCEEDINGS | 21 |
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 21-22 |
SIGNATURE PAGE | 23 | |
EXHIBITS | ||
31.1 | SECTION 302 OFFICER CERTIFICATION - CEO | 24 |
31.2 | SECTION 302 OFFICER CERTIFICATION -CFO | 25 |
32.1 | SECTION 906 CERTIFICATION - CEO | 26 |
32.2 | SECTION 906 CERTIFICATION - CFO | 27 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| June 27, 2004 (Unaudited) | December 31, 2003 (Audited) |
ASSETS | ||
CURRENT ASSETS: | ||
Cash | $ 530,000 | $ 135,000 |
Accounts receivable, less allowance for uncollectibles of $977,000 and $945,000 in 2004 and 2003, respectively | 8,439,000 | 9,956,000 |
Other receivables | 53,000 | 83,000 |
Inventories, net of reserves | 12,604,000 | 10,864,000 |
Prepaid expenses and other assets | 368,000 | 334,000 |
Deferred income tax asset | 36,000 | 36,000 |
|
| |
TOTAL CURRENT ASSETS | 22,030,000 | 21,408,000 |
PROPERTY, PLANT AND EQUIPMENT: | ||
Land | 70,000 | 70,000 |
Buildings | 4,443,000 | 4,405,000 |
Machinery and equipment | 14,315,000 | 14,272,000 |
Gross property, plant & equipment | 18,828,000 | 18,747,000 |
Less: Accumulated depreciation | 16,662,000 | 16,423,000 |
| ||
NET PROPERTY, PLANT & EQUIPMENT | 2,166,000 | 2,324,000 |
ASSETS HELD FOR SALE | 1,475,000 | 1,475,000 |
OTHER ASSETS | 436,000 | 434,000 |
TOTAL ASSETS | $26,107,000 | $25,641,000 |
The accompanying notes are an integral part of these statements.
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CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY | June 27, 2004 (Unaudited) | December 31, 2003 (Audited) |
CURRENT LIABILITIES: | ||
Accounts payable | $8,752,000 | $7,681,000 |
Accrued expenses: | ||
Salaries, wages and employee benefits | 587,000 | 549,000 |
Other accrued expenses | 4,758,000 | 4,803,000 |
Taxes other than income | 260,000 | 101,000 |
Current maturities of long-term debt: | ||
Current maturities – revolver | 127,000 | 8,386,000 |
Current maturities – term notes | 1,099,000 | 1,602,000 |
Current maturities – subordinated debt | 13,000 | 67,000 |
Current maturities – asset purchase note | 65,000 | 65,000 |
Total current maturities of long-term debt | 1,304,000 | 10,120,000 |
TOTAL CURRENT LIABILITIES | 15,660,000 | 23,254,000 |
DEFERRED INCOME TAXES | 36,000 | 36,000 |
LONG-TERM DEBT: | ||
Short-term debt refinanced | 7,682,000 | -0- |
Long-term notes payable – subordinated debt | 1,799,000 | 1,799,000 |
Long-term notes payable – City of Hope, Akansas note | -0- | 250,000 |
Long-term notes payable – asset purchase note | 35,000 | 65,000 |
TOTAL LONG-TERM DEBT | 9,516,000 | 2,114,000 |
STOCKHOLDERS' EQUITY: | ||
Preferred stock - No par value; authorized 10,000,000 | ||
shares; issued and outstanding, none | -0- | -0- |
Common stock - $.10 par value; auth. 50,000,000 shs; | ||
issued and outstanding, 3,655,266 shs | 366,000 | 366,000 |
Additional paid-in capital | 15,578,000 | 15,578,000 |
Accumulated (deficit) | (13,030,000) | (13,687,000) |
Accumulated other comprehensive (loss) | (2,020,000) | (2,020,000) |
TOTAL STOCKHOLDERS’ EQUITY | 894,000 | 237,000 |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $26,107,000 | $25,641,000 |
The accompanying notes are an integral part of these statements.
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CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (CONDENSED)
FOR THE PERIODS ENDED
(Unaudited)
Six Months June 27, 2004 | Six Months June 29, 2003 | Three Months June 27, 2004 | Three Months June 29, 2003 | |
Net Sales | $10,592,000 | $13,169,000 | $5,124,000 | $6,973,000 |
Costs and Expenses: | ||||
Cost of products sold | 8,528,000 | 10,704,000 | 3,971,000 | 5,545,000 |
Selling, distribution & administrative | 1,354,000 | 1,353,000 | 674,000 | 706,000 |
Total costs and expenses | 9,882,000 | 12,057,000 | 4,645,000 | 6,251,000 |
Operating income | 710,000 | 1,112,000 | 479,000 | 722,000 |
Non-operating income/(expense): | ||||
Interest (expense) | (300,000) | (243,000) | (155,000) | (122,000) |
Other non-operating income | 256,000 | 28,000 | 3,000 | 13,000 |
Total non-operating (expense) | (44,000) | (215,000) | (152,000) | (109,000) |
Net income before income taxes | 666,000 | 897,000 | 327,000 | 613,000 |
Income taxes | 9,000 | -0- | 5,000 | -0- |
Net income | $ 657,000 | $ 897,000 | $ 322,000 | $ 613,000 |
Weighted Average Common Shares Outstanding at June 27, 2004: | ||||
Basic | 3,655,266 | 3,655,266 | 3,655,266 | 3,655,266 |
Diluted | 3,754,222 | 3,655,266 | 3,752,191 | 3,655,266 |
Earnings Per Common Share - Basic: | ||||
Net income per common share - basic | $ 0.18 | $ 0.25 | $ 0.09 | $ 0.17 |
Earnings Per Common Share - Diluted: | ||||
Net income per common share - diluted | $ 0.18 | $ 0.25 | $ 0.09 | $ 0.17 |
The accompanying notes are an integral part of these statements
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CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated (Deficit) | Accumulated Comprehensive (Loss) | |
BALANCE – December 31, 2003 | 3,655,266 | $ 366,000 | $ 15,578,000 | $(13,687,000) | $ (2,020,000) |
Net Income | -0- | -0- | -0- | 657,000 | -0- |
BALANCE – June 27, 2004 | 3,655,266 | $ 366,000 | $ 15,578,000 | $(13,330,000) | $ (2,020,000) |
The accompanying notes are an integral part of these statements
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CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Six Months June 27, 2004 | Six Months June 29, 2003 | Three Months June 27, 2004 | Three Months June 29, 2003 | |
Net income & other comprehensive income | $ 657,000 | 897,000 | $ 322,000 | $ 613,000 |
The accompanying notes are an integral part of these statements.
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CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
The accompanying notes are an integral part of these statements.
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CHAMPION PARTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_________________________________________________________________
Note 1.
The accompanying financial statements for the three months and six months ending June 27, 2004 and June 29, 2003 have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements and these notes should be read in conjunction with the consolidated financial statements and footnotes of the Company included in the Company's Annual Report submitted on Form 10K and 10-K/A for the year ended December 31, 2003.
The consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.
Certain amounts relating to June 29, 2003 have been reclassified to conform to the current year's presentation.
The Company previously adopted Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information” and management views the Company as one business segment, the remanufacturing of replacement automobile parts for the aftermarket.
Note 2.
Basis of Presentation - The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, although the report of the independent accountant as of and for the year ended December 31, 2003 expressed substantial doubt as to the Company's ability to continue as a going concern reflecting the fact that the Company's credit facility was about to expire and had not been replaced at year-end. The financial statements at December 31, 2003, did not include any adjustments that might result from the outcome of this uncertainty.
Because a new credit facility was consummated prior to the date of this Form 10-Q Report, the revolving and term debt as of June 27, 2004 that was refinanced as of August 10, 2004 was reclassified from current maturities of debt to long-term debt in accordance with Financial Accounting Standards (FASB) No. 6, "Classification of Short-Term Obligations Expected to be Refinanced".
Note 3.
The information furnished herein reflects all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period. Results of operations for the six months ending June 27, 2004 are not necessarily indicative of results to be expected for the entire year.
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Note 4.
Inventories are valued at the lower of cost (first-in, first-out method) or market. A summary of the gross inventories and reserves follows:
June 27, 2004 | December 31, 2003 | |
Gross Inventories: | ||
Raw cores | $ 6,706,000 | $ 6,863,000 |
Parts | 2,666,000 | 2,369,000 |
Sub-total raw materials | 9,372,000 | 9,232,000 |
Work-in-process | 3,474,000 | 3,545,000 |
Finished goods | 6,606,000 | 4,762,000 |
Total gross inventories | $ 19,452,000 | $ 17,539,000 |
Inventory Reserves: | ||
Core devaluation | $ (3,233,000) | $ (3,089,000) |
Obsolescence | (3,182,000) | (3,062,000) |
Valuation reserves | (433,000) | (524,000) |
Total inventory reserves | $ (6,848,000) | $ (6,675,000) |
Total net inventories | $ 12,704,000 | $ 10,864,000 |
Note 5.
For reporting purposes, product and core returns are offset against gross sales in arriving at net sales. Total returns for the three months ended June 27, 2004 were $1,899,000 compared to $1,682,000 at June 29, 2003. Total returns for the six months ended June 27, 2004 were $3,285,000 compared to $3,417,000 at June 29, 2003.
Note 6.
Long-lived Assets - The Company reviews the carrying values of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or estimated fair value less cost to sell. As of June 27, 2004 there has been no impairment of long lived-assets.
Note 7.
Assets Held for Sale - At December 31, 2003, "Assets Held For Sale" represented the land, buildings and building improvements for the Beech Creek, Pennsylvania facility that ceased operation on March 15, 2002. Management reviewed the carrying values of these assets at December 31, 2003, for possible impairment and whether the carrying value would be recoverable. The assets were valued at the lower of cost or market. The sale of these assets was consummated on June 28, 2004 for $1.5 million. The net difference between sales proceeds received, assets held for sale and other costs of approximately $118,000 will be recorded against the restructuring reserve provided for this transaction in fiscal July 2004.
Note 8.
Income tax expense recorded for the six months ending June 27, 2004, represent an accrual for six months of the estimated annual tax liability. There was no income tax expense attributable to operations for the three and six months ended June 27, 2004 and June 29, 2003. The income tax expense attributable to operations for the three and six months ended June 29, 2003, differed from the amounts computed by applying the federal income tax rate of 34% principally as a result of tax benefits recognized related to the carry forward of net operating losses.
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Note 9.
On February 6, 2004, the Company entered into an amendment to the Loan and Security Agreement with Congress Financial Corporation extending the maturity date of its revolving line of credit and its term loan from February 8, 2004 to May 8, 2004. A Second Amendment was entered into on May 7, 2004 extending the expiration date to June 8, 2004 and a third amendment was entered into on June 6, 2004 extending the expiration date to August 8, 2004.. Under the terms of the amendments, the availability to borrow on the line of credit decreased from $14,000,000 to $10,500,000. The revolving loan interest and term loan interest rates increased to 2.75% and 3.00% in excess of the lender prime rate, respectively.
On August 10, 2004, the Company entered into a three-year secured revolving credit facility with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility. Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000. The interest rate on the revolving debt facility is lender prime plus 3/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.
Also on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas property with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions. The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.
At June 27, 2004, the balance outstanding on the Company’s total loan facility with Congress Financial Corporation was $8,908,000 (a revolver balance of $7,537,000 and a term loan balance of $1,371,000) and letter of credit accommodations were $40,000. The balance outstanding on the total loan facility at December 31, 2003 was $9,988,000 and letter of credit accommodations of $50,000.
The carrying amount of long-term debt (excluding the restructured vendor debt) approximates fair market value because the interest rates on substantially all the debt fluctuate based on changes in market rates.
The current maturities balances of term and revolver debt at June 27, 2004, reflect the balances to be reduced by the proceeds received from the sale of the Beech Creek, Pennsylvania properties. The amount of the term and revolver debt refinanced, net of the pay-down of the proceeds from the sale of the Beech Creek, Pennsylvania facility, has been reflected as long-term debt under the caption "Short-term debt refinanced".
The Company is in compliance with the tangible net worth covenant contained in the Congress loan agreement.
Note 10.
At March 28, 2004, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. The forgiveness of the debt was taken into non-operating income for March.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management Overview
Second quarter 2004 net sales of $5,124,000 were $1,849,000, or 26.5%, lower than second quarter 2003 primarily reflecting the continuing market decline of carburetor net sales and a soft market for air conditioning products. Cost of products sold for the quarter were lower than second quarter 2003 by $1,574,000, or 28.4%, more than exceeding the percentage net sales decline. Operating expenses were also lower than 2003 by $32,000, or 4.5%, reflecting reductions in distribution, selling and administrative costs. Operating income for the quarter was $479,000 versus $722,000 for the same period in 2003, with the decline principally a result of the significantly lower net sales for the quarter. Interest cost for the quarter was up $33,000 over 2003, reflecting the two-percentage point increase that resulted from extending the expired loan facility. The Company&# 146;s net income for the quarter was $322,000, a $291,000, or 47.5%, decrease versus the $613,000 reported for the same period in 2003. The decline in net income primarily reflects the significantly lower net sales combined with higher interest costs. Partially mitigating this was the favorable decline in cost of sales.
First six months 2004 net sales of $10,592,000 were 19.6%, less than the first six months of 2003 reflecting the continuing market decline of carburetor net sales combined with a soft market for air conditioning products. Year-to-date cost of products sold were lower than the same period in 2003 by $2,176,000, or 20.3%, more than proportionate with the net sales decline. Operating expenses were essentially even with the 2003 level reflecting the residual operating costs of the idle Pennsylvania facility being recorded in administrative overhead during the six-month period. Operating income year-to-date was $710,000 versus $1,112,000 for the same period in 2003, reflecting the decline in net sales. Interest cost for the six-month period was up $57,000 over 2003, reflecting the two-percentage point increase that resulted from extending the expired loan facility. At t he end of the first quarter, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. This accounts for the significant gain in non-operating income during the first six-month period. The Company’s net income for the six months was $657,000, a $240,000, or 26.8%, versus the $897,000 reported for the same period in 2003. The decline in net income principally reflects the significantly lower net sales combined with higher interest costs. Partially mitigating this was the $250,000 gain from the forgiveness of the City of Hope, Arkansas note.
The Company entered into a three-year secured revolving credit facility on August 10, 2004, with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility. Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000. The interest rate on the revolving debt facility is lender prime plus 3/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.
Also on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas property with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions. The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.
The Company has financed its working capital needs through the use of its bank credit facility and the cash flow generated from operations. At June 27, 2004, the total balance outstanding on the Company’s loan facility with Congress Financial Corporation, revolver and term loans, was $7,698,000 and letter of credit accommodations were $40,000. This compares to a total loan balance at December 31, 2003 of $9,988,000 and letter of credit accommodations of $50,000.
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Results of Operations
Three months ended June 27, 2004 compared to Three months ended June 29, 2003
Net sales for the quarter ending June 27, 2004 were $5,124,000 versus net sales of $6,973,000 for the second fiscal quarter in 2003. The $1,849,000, or 26.5%, decrease in net sales compared to 2003 reflects the continuing market decline of carburetor net sales combined with lower than expected demand in air conditioning products. Total product and core returns, which are accounted for as reductions to gross sales, were 26.6% and 19.1% of gross sales for the second quarter of 2004 and 2003, respectively. The higher percentage for the second quarter of 2004 reflects the impact of higher product return credits issued versus 2003 and lower gross sales.
Carburetor net sales were 50.4% and 45.8% of total net sales, respectively, for the second quarter of 2004 and 2003. Even though new vehicles sold are no longer equipped with carburetors in the United States and Canada, the Company continues to sell replacement units for older vehicles that predominantly use carburetors. Although Carburetor net sales as a percentage of total net sales was up for the second quarter 2004, on a dollar basis they continued downward and the Company expects that the trend in carburetor sales will continue to be a steady decline in future periods. In addition, carburetor margins may be negatively impacted in the future as customers accelerate product returns during periods of declining demand.
Cost of products sold were $3,971,000, or 77.5%, of net sales for 2004 as compared to $5,545,000, or 79.53%, for the second quarter of 2003. The $1,574,000, or 28.4% decrease versus 2003 is primarily attributed to the lower net sales volume.
Selling, distribution and administrative expenses for the second quarter 2004 were $674,000 compared to $706,000 in second quarter of 2003. The spending decrease of $32,000 reflects across the board reductions in distribution, selling and administrative costs relating to lower sales.
Operating income for the quarter was $479,000, compared to $722,000 for the second quarter of 2003. The operating income decline versus 2003 can be attributed to the significant decline in net sales.
Interest expense of $155,000 for the quarter was up $33,000 over 2003, reflecting the two-percentage point increase rates that resulted from extending the expired loan facility.
Non-operating income was $3,000 for the second quarter versus $13,000 recorded in 2003.
Net income was $322,000 for the second quarter versus $613,000 for 2003, a decrease of $291,000, or 47.5%. The decline in net income primarily reflects the significantly lower net sales combined with higher interest costs. Partially mitigating this was a favorable decline in cost of sales and operating expenses for reasons mentioned earlier.
Six months ended June 27, 2004 compared to six months ended June 29, 2003
Net sales for the six months ending June 27, 2004 were $10,592,000 versus net sales of $13,169,000 for the same fiscal period in 2003. The $2,577,000, or 19.6%, decrease in net sales compared to 2003 reflects the continued market decline of carburetor net sales combined with lower than expected demand in air conditioning products. Partially offsetting these declines were slightly higher sales in the traditional markets of heavy duty and agricultural product lines. Total product and core returns, which are accounted for as reductions to gross sales, were 23.3% and 20.3% of gross sales for the first half of 2004 and 2003, respectively. The higher percentage for the six months of 2004 reflects the impact of slightly higher product return credits issued versus 2003 and lower gross sales.
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Carburetor net sales were 47.4% and 47.6% of total net sales, respectively, for the first half of 2004 and 2003. Even though new vehicles sold are no longer equipped with carburetors in the United States and Canada, the Company continues to sell replacement units for older vehicles that predominantly use carburetors. Despite the level percentage of carburetors net sales to total net sales for the first six months of 2004, the Company still expects that the trend in carburetor sales will continue to be a steady decline in future periods. In addition, carburetor margins may be negatively impacted in the future as customers accelerate product returns during periods of declining demand.
Cost of products sold were $8,528,000, or 80.5%, of net sales for 2004 as compared to $10,704,000, or 81.3%, for the second quarter of 2003. The $2,176,000, or 20.3% decrease versus 2003 is primarily accounted for by the net sales decrease.
Selling, distribution and administrative expenses for year-to-date 2004 were $1,354,000 compared to $1,353,000 for the same fiscal period of 2003. Administrative spending remained approximately even with the prior year reflecting the residual operating costs of the idle Pennsylvania facility (taxes, insurance and utilities) being recorded in administrative overhead during the six-month period.
Operating income for the first half was $710,000, compared to $1,112,000 for the first half of 2003. The operating income decline versus 2003 can be attributed to relatively fixed operating costs combined with a significant decline in net sales.
Interest expense of $300,000 for the six months was up $57,000 over 2003, reflecting the two-percentage point interest rate increase that resulted from extending the expired loan facility.
Non-operating income was $256,000 for the period versus $28,000 recorded in 2003. At the end of the first quarter, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. The gain recorded from the reversal of this note accounts for the significant gain in non-operating income during the quarter.
Net income was $657,000 for the first six months versus $897,000 for 2003, a decrease of $240,000, or 26.8%. As discussed earlier, the significant decline in net sales is the primary reason for the drop in net income versus the same period in 2003. Partially mitigating this was the increase in non-operating income reflecting the loan City of Hope note write-off.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. Management believes that the following points are some of the more critical judgment areas in the application of accounting policies that currently affect the Company's financial condition and results of operations. Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses and related contingent liabilities. On an on-going basis, the Company evaluates its estimates for propriety, including those related to revenues, accounts receivable and inventory reserves, income taxes, and contingencies and litigation. The Company bases its reserve estimates on historical experience, current market and operating trends, and on various assumptions that are believed to be reasonable under current operating circumstances. Actual results may differ from these estimates under different assumptions or conditions.
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