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 April 3, 2005
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 April 3, 2005
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]
Champion Parts, Inc.
Form 10-Q
Cross Reference Index
PART I | FINANCIAL INFORMATION | PAGE |
ITEM 1. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
Balance Sheets - Assets | 3 | |
Balance Sheets - Liabilities & Stockholders' Equity | 4 | |
Statements of Income | 5 | |
Statement of Stockholders' Equity | 6 | |
Statements of Comprehensive Income | 7 | |
Statements 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 April 3, 2005 | 12-13 | |
Critical Accounting Policies and Estimates | 13-14 | |
Recent Accounting Pronouncements | 14 | |
Liquidity and Capital Resources | ||
Liquidity Overview | 14 | |
Working Capital | 15 | |
Debt | 15-16 | |
Seasonality | 16 | |
Future Outlook | 16 | |
Factors Which May Affect Future Results | 17 | |
Off-Balance Sheet Arrangements | 17 | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 18 |
ITEM 4. | CONTROLS AND PROCEDURES | 18 |
PART II | OTHER INFORMATION | |
ITEM 5. | LEGAL PROCEEDINGS | 19 |
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 19 |
SIGNATURE PAGE | 20 | |
EXHIBITS | ||
31.1 | SECTION 302 OFFICER CERTIFICATION | 21 |
32.1 | SECTION 906 CERTIFICATION | 22 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 3, 2005 | December 31, 2004 |
ASSETS | ||
CURRENT ASSETS: | ||
Cash | $ 285,000 | $ 358,000 |
Accounts receivable trade, less allowance for uncollectibles | ||
of $1,202,000 and $1,121,000 in 2005 and 2004, respectively | 10,584,000 | 10,410,000 |
Miscellaneous receivables | 194,000 | 197,000 |
Inventories, net of reserves | 12,380,000 | 12,710,000 |
Prepaid expenses and other assets | 630,000 | 634,000 |
Deferred income tax asset | 73,000 | 73,000 |
Total current assets | 24,146,000 | 24,382,000 |
PROPERTY, PLANT AND EQUIPMENT: | ||
Land | 70,000 | 70,000 |
Buildings | 4,456,000 | 4,453,000 |
Machinery and equipment | 14,428,000 | 14,383,000 |
Gross property, plant & equipment | 18,954,000 | 18,906,000 |
Less: Accumulated depreciation | 16,737,000 | 16,625,000 |
Net property, plant & equipment | 2,217,000 | 2,281,000 |
Total other assets | 404,000 | 408,000 |
Total assets | $26,767,000 | $27,071,000 |
The accompanying notes are an integral part of these statements.
3
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 3, 2005 | December 31, 2004 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
CURRENT LIABILITIES: | ||
Accounts payable | $8,147,000 | $8,001,000 |
Accrued expenses: | ||
Salaries, wages and employee benefits | 430,000 | 393,000 |
Other accrued expenses | 4,964,000 | 4,833,000 |
Taxes other than income | 124,000 | 51,000 |
Current maturities of long-term debt: | ||
Current maturities – mortgage note | 107,000 | 104,000 |
Current maturities – subordinated debt | -0- | 6,000 |
Total current maturities of long-term debt | 107,000 | 110,000 |
Total current liabilities | 13,772,000 | 13,388,000 |
DEFERRED INCOME TAXES | 73,000 | 73,000 |
LONG-TERM DEBT: | ||
Long-term notes payable – revolver | 9,375,000 | 10,195,000 |
Long-term notes payable – mortgage note | 734,000 | 762,000 |
Long-term notes payable – subordinated debt | 1,793,000 | 1,793,000 |
Long-term notes payable – asset purchase note | 130,000 | 130,000 |
Total long-term debt | 12,032,000 | 12,880,000 |
STOCKHOLDERS' EQUITY: | ||
Preferred stock - No par value; authorized, 10,000,000 | ||
shares; issued and outstanding, none | -0- | -0- |
Common stock - $.10 par value; authorized, 50,000,000 shares, | ||
issued and outstanding, 3,655,266 shares | 366,000 | 366,000 |
Additional paid-in capital | 15,578,000 | 15,578,000 |
Accumulated (deficit) | (12,812,000) | (12,972,000) |
Accumulated other comprehensive (loss) | (2,242,000) | (2,242,000) |
Total stockholders’ equity | 890,000 | 730,000 |
Total liabilities and stockholders’ equity | $26,767,000 | $27,071,000 |
The accompanying notes are an integral part of these statements.
4
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONDENSED)
FOR THE PERIODS ENDED
(Unaudited)
Three Months April 3, 2005 | Three Months March 28, 2004 | |
Net Sales | $5,813,000 | $5,468,000 |
Costs and Expenses: | ||
Cost of products sold | 4,937,000 | 4,557,000 |
Selling, distribution & administrative | 571,000 | 680,000 |
Total costs and expenses | 5,508,000 | 5,237,000 |
Operating income | 305,000 | 231,000 |
Non-operating expense/(income): | ||
Interest expense, net | 170,000 | 145,000 |
Other non-operating (income) | (43,000) | (254,000) |
Total non-operating expense/(income) | 127,000 | (109,000) |
Net income before income taxes | 178,000 | 340,000 |
Income taxes | 18,000 | 5,000 |
Net income | $ 160,000 | $ 335,000 |
Weighted Average Common Shares Outstanding at April 3, 2005: | ||
Basic | 3,655,266 | 3,655,266 |
Diluted | 3,753,371 | 3,756,252 |
Earnings Per Common Share - Basic: | ||
Net income per common share - basic | $ 0.04 | $ 0.09 |
Earnings Per Common Share - Diluted: | ||
Net income per common share - diluted | $ 0.04 | $ 0.09 |
The accompanying notes are an integral part of these statements
5
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated (Deficit) | Accumulated Comprehensive (Loss) | |
BALANCE – December 31, 2004 | 3,655,266 | $ 366,000 | $ 15,578,000 | $(12,972,000) | $ (2,242,000) |
Net Income | -0- | -0- | -0- | 160,000 | -0- |
BALANCE – April 3, 2005 | 3,655,266 | $ 366,000 | $ 15,578,000 | $(12,812,000) | $ (2,242,000) |
The accompanying notes are an integral part of these statements
6
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months April 3, 2005 | Three Months March 28, 2004 | |
Net income and other comprehensive income | $ 160,000 | $ 335,000 |
The accompanying notes are an integral part of these statements.
7
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
The accompanying notes are an integral part of these statements.
8
CHAMPION PARTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_________________________________________________________________
Note 1.
The accompanying financial statements for the three months ending April 3, 2005 and March 28, 2004 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 10-K for the year ended December 31, 2004.
The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date.
Certain amounts relating to March 28, 2004 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 auto parts.
Note2.
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 three months ending April 3, 2005 are not necessarily indicative of results to be expected for the entire year.
Note 3.
Inventories are valued at the lower of cost (first-in, first-out method) or market. A summary of the gross inventories and reserves follows:
9
Note 4.
For reporting purposes, product and core returns are offset against gross sales in arriving at net sales. Total returns for the three months ended April 3, 2005 were $1,947,000 compared to $1,387,000 at March 28, 2004.
Note 5.
In the first quarter of 2005, net sales to the Company's four largest customers were approximately 26%, 19%, 16% and 11% of total net sales. In the first quarter of 2004, net sales to the Company's four largest customers were approximately 22%, 21%, 20% and 14% of total net sales.
A reduction in the level of sales to or the loss of one or more of these customers would have a material adverse effect on the Company’s financial condition and results of operations.
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 fair value less cost to sell. As of April 3, 2005 there has been no impairment of long lived-assets.
Note 7.
The income tax expense attributable to operations for the three months ended April 3, 2005 and March 28, 2004, 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.
Note 8.
Debt - 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 1/4 % 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 properties 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.
On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement dated August 10, 2004 with PNC Bank, National Association. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
On June 28, 2004, the Company consummated the sale of its Beech Creek facility and property. The plant was vacated after consolidating operations in March of 2002. The gross value of the transaction was $1.5 million and the net proceeds were used to reduce property term debt and revolver debt in July. The net difference between sales proceeds received, assets held for sale and other costs of approximately $118,000 was recorded against the asset restructuring reserve provided for this transaction. A $200,000 escrow account was established at the closing of the sale of the property to cover future EPA issues. Sale of the Beech Creek property allowed the Company to proceed with replacing the Congress loan facility with the new lenders.
10
Note 8. (Continued)
At April 3, 2005, the balance outstanding on the Company’s revolver loan facility with PNC Bank, National Association was $9,375,000 and letter of credit accommodations were $40,000. Also at April 3, 2005, the balance outstanding on the Company’s commercial mortgage loan with Elk Horn Bank was $841,000. The total of the loan balances was $10,216,000, which compares to total loan balances at December 31, 2004 of $11,061,000 and letter of credit accommodations of $40,000.
At April 3, 2005, the Company was in compliance with the amended fixed charge coverage ratio covenant.
Note 9.
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.
11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management Overview
First quarter 2005 net sales of $5,813,000 were $345,000, or 6.3%, higher than the same period in 2004 primarily reflecting stronger constant velocity axle sales and higher than anticipated net sales of carburetor products. Cost of products sold for the quarter was higher than 2004 by $380,000, or 8.3%, principally as a result of significantly higher sales and increased costs of raw materials. Selling, distribution and administrative expenses for the quarter were lower than first quarter 2004 by $109,000, or 16.0%, primarily due to lower administrative salaries and elimination of costs associated with the Beech Creek, Pennsylvania facility that was sold in June of last year. Operating income for the quarter was $305,000 versus $231,000 in first quarter 2004, an increase of $74,000, or 32.0%.
Interest cost for the quarter was up $25,000 over 2004, reflecting a higher revolver balance this year plus a temporary one-percentage point interest increase that resulted from the Amendment to the PNC Bank loan facility. On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
Non-operating income for the quarter was $43,000 versus $254,000 in the same period of 2004, a $211,000 decrease. At the end of the first quarter of 2004, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. This accounts for the significant decline in non-operating income from last year. Net income for the first quarter was $160,000 versus $335,000 in 2004. The $175, 000 decline in net income primarily reflects the recognition of the $250,000 loan forgiveness in last year’s net income for the quarter. On a comparable basis, 2005 first quarter income exceeded the 2004 first quarter by $75,000.
RESULTS OF OPERATIONS
Three months ended April 3, 2005 compared to three months ended March 28, 2004
Net sales for the quarter ending April 3, 2005 were $5,813,000 versus net sales of $5,468,000 for the same fiscal quarter in 2004. The $345,000, or 6.3%, increase in net sales compared to 2004 reflected stronger net sales of constant velocity axle products and higher than anticipated net sales of carburetors. Net sales of air conditioning, heavy duty and agricultural product lines were essentially level with last year. Total product and core returns, which are accounted for as reductions to gross sales, were 24.7% and 19.9% of gross sales for the first quarter of 2005 and 2004, respectively. Product and core returns are accounted for on an accrual basis driven by gross sales, consequently the higher percentage for the first quarter of 2005 reflects the impact of the higher carburetor sales.
Carburetor net sales were 47.1% and 46.4% of total net sales, respectively, for the first quarter of 2005 and 2004. 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, which predominantly use carburetors. The Company expects that the trend in carburetor sales will 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.
12
Cost of products sold were $4,937,000, or 84.9%, of net sales for 2005 as compared to $4,557,000, or 83.3%, for the first quarter of 2004. The $380,000, or 8.3% increase versus 2004 is primarily due to significantly higher sales and increased prices of raw materials. Prices have increased for purchased materials that are petroleum based.
Selling, distribution and administrative expenses for the first quarter 2005 were $571,000 compared to $680,000 in first quarter of 2004. The spending decrease of $109,000 primarily reflects the elimination of residual operating costs recorded in administrative overhead last year for the idle Pennsylvania facility (taxes, insurance and utilities), sold in June of 2004. Administrative salaries and associated fringe costs were also lower than last year.
Operating income for the quarter was $305,000, compared to $231,000 for the first quarter of 2004. The operating income increase versus 2004 is attributed to the higher net sales.
Interest expense of $170,000 for the quarter was up $25,000 over 2004, reflecting a higher revolver balance this year plus the temporary percentage point interest increase that resulted from the Amendment to the PNC Bank loan facility. On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
Non-operating income for the quarter was $43,000 versus $254,000 in the same period of 2004, a $211,000 decrease. At the end of the first quarter of 2004, the Company met job expansion incentives and the $250,000 City of Hope, Arkansas note was forgiven. This accounts for the significant decline in non-operating income from last year.
Net income was $160,000 for the first quarter versus $335,000 for 2004. The $175, 000, or 52.2%, decline in primarily reflects the recognition of the $250,000 loan forgiveness in last year’s net income. On a comparable basis, 2005 first quarter income exceeded the 2004 first quarter by $75,000 due to lower costs and the stronger net sales performance.
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.
13
The Company recognizes sales when products are shipped. Net sales reflect deductions for cores returned for credit and other customary returns and allowances. Such deductions and returns and allowances are recorded currently based upon continuing customer relationships and other criteria. The Company's customers are encouraged to trade-in rebuildable cores for products that are included in the Company's current product line.
Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. At April 3, 2005, the Company’s deferred tax asset consisted principally of net inventory reserves and net operating loss carryforwards. The Company’s deferred tax asset has been reduced by a valuation allowance to the extent such benefits are not expected to be fully utilized.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123, as revised, requires recognition of the cost of employee services provided in exchange for stock options and similar equity instruments based on the fair value of the instrument at the date of grant. Statement 123, as originally issued, is effective until the provisions of Statement 123(R) are fully adopted. Statement 123(R) is effective the beginning of the next fiscal year. The Company will adopt this guidance as of January 1, 2006 and begin recognizing compensation expense related to stock options should any be issued.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company does not expect the adoption of the statement to have a material effect on its financial statements, which is effective with fiscal years beginning after June 15, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis. The Company has met all of the thresholds and terms of Amendment No.1 and returned to positive borrowing availability prior to the April 12, 2005 date specified in the Amendment. Interest rates have subsequently been returned to the original level specified in the Loan Agreement, 0.25% above bank prime (6.25%).
At April 3, 2005, the Company was in compliance with the amended fixed charge coverage ratio covenant.
Management believes that the Company will be able to finance its working capital needs in the current year and the foreseeable future through the use of borrowings and cash flows generated from operations.
14
Working Capital
Net working capital at April 3, 2005 was $10,374,000 compared to $10,994,000 at December 31, 2004, a reduction of $620,000 primarily reflecting higher trade accounts payable.
The March 28, 2004 net working capital balance was a negative $1,629,000, reflecting the reclassification of the Congress loan facility to current maturities of long-term debt. On a comparable basis with 2005, the March 28, 2004 net working capital was $7,464,000. The higher first quarter 2005 balance reflects significant increases in trade accounts receivable and inventories versus the first quarter of 2004.
Net trade accounts receivable at April 3, 2005 were $10,584,000, an increase of $174,000 versus the year-end 2004 balance of $10,410,000. The increase in the Company's accounts receivable balances at quarter-end versus the year-end primarily reflects the significant increase in net sales for February and March.
When compared to the March 28, 2004 trade receivables balance of $9,236,000, the quarter-end balance is $1,348,000 higher reflecting the lower sales in March of 2004.
Net inventories of $12,380,000 at April 3, 2005 were $330,000 lower as compared to the year-end 2004 balance of $12,710,000. The decrease in net inventory reflects primarily reflects $915,000 decrease finished goods. Raw core, work-in-process and parts inventories balances were up slightly for the quarter. The finished goods inventory decrease is due to a concerted effort being made to reduce on-hand balances.
Compared to the March 28, 2004 balance of $11,852,000, the inventory increase of $528,000 is explained by a build-up in 2004 to meet seasonal demand that did not materialize and is being worked-off in the current year.
Accounts payable at April 3, 2005 were $8,147,000 compared to a balance at year-end 2004 of $8,001,000. The $146,000 increase in accounts payable is due to the higher net trade accounts payable which have resulted from increase raw materials spending in the past two months to meet anticipated demand.
Compared to the March 28, 2004 balance of $9,120,000, accounts payable have decreased $973,000. Trade payables in the first quarter of 2004 increased significantly reflecting the constraints imposed by Congress Financial on borrowing availability during the quarter. Trade payables were substantially reduced after consummating the new loan with PNC Bank in August of 2004.
Accrued expenses of $4,964,000 were up $131,000 from the fiscal year-end 2004 balance of $4,833,000, principally reflecting an increase customer return reserves during the quarter.
Compared to the March 28, 2004 balance of $4,471,000, accrued expenses are higher by $493,000 for the same reason mentioned above.
Debt
On August 10, 2004, the Company entered into a three-year secure 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 0.25% or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.
15
Also on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas properties 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.
On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement dated August 10, 2004 with PNC Bank, National Association. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpreting the formula for calculating Eligible Receivables, the definition of collateral monitoring fees and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
At April 3, 2005, the balance outstanding on the Company’s revolver loan facility with PNC Bank, National Association was $9,375,000 and letter of credit accommodations were $40,000. Also at December 31, 2004, the balance outstanding on the Company’s commercial mortgage loan with Elk Horn Bank was $841,000. The total of the loan balances was $10,216,000, which compares