body_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark
One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended April 4, 2009
OR
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from
to
Commission
file number: 001-33264
U.S.
AUTO PARTS NETWORK, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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68-0623433
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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17150
South Margay Avenue Carson,
CA 90746
(Address
of principal executive office) (Zip Code)
(310)
735-0085
(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
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 ¨ No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer ¨
Accelerated
Filer ¨
Non-Accelerated
Filer ¨ (Do
not check if a smaller reporting
company) Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No x
As of
May 11, 2009, the registrant had 29,846,757 shares of common stock, $0.001
par value, outstanding.
U.S.
AUTO PARTS NETWORK, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE THIRTEEN WEEKS ENDED APRIL 4, 2009
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Page
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ITEM 1.
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4
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5
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6
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7
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ITEM 2.
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15
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ITEM 3.
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21
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ITEM 4.
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22
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ITEM 1.
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23
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ITEM 1A.
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23
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ITEM 2.
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33
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ITEM 3.
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33
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ITEM 4.
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33
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ITEM 5.
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33
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ITEM 6.
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34
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Unless
the context requires otherwise, as used in this report, the terms “U.S. Auto
Parts,” the “Company,” “we,” “us” and “our” refer to U.S. Auto Parts Network,
Inc. and its subsidiaries, and the term “Partsbin” refers to All OEM Parts,
Inc., ThePartsBin.com, Inc. and their affiliated companies, which we acquired in
May 2006.
U.S. Auto Parts®, U.S.
Auto Parts Network™, and
PartsTrain® are our
United States registered marks. Partsbin™,
Kool-Vue™ and
Auto-Vend™ are our
United States common law trademarks. All other trademarks and trade names
appearing in this report are the property of their respective owners.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that do not relate strictly to
historical or current facts, and anticipate results based on management's
beliefs and assumptions and on information currently available to
management. These statements are forward looking statements for the
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities
Act of 1933 (the “Securities Act”). In some cases, you can identify
forward-looking statements by terms such as “anticipates,” “believes,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,”
“projects,” “should,” “will,” “would,” “will likely continue,” “will likely
result” and similar expressions intended to identify forward-looking statements.
These forward-looking statements include but are not limited to statements
regarding our anticipated sales, revenue, expenses, profits and losses, capital
needs, capital deployment, liquidity, contracts, litigation, product offerings,
customers, acquisitions, competition and the status of our facilities.
Forward-looking statements, no matter where they occur in this document or in
other statements attributable to the Company involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. We
discuss many of these risks in greater detail under the heading “Risk Factors”
in Part II, Item 1A of this report. Given these uncertainties, you should
not place undue reliance on these forward-looking statements. You should read
this report and the documents that we reference in this report and have filed as
exhibits to the report completely and with the understanding that our actual
future results may be materially different from what we expect. Also,
forward-looking statements represent our management’s beliefs and assumptions
only as of the date of this report. Except as required by law, we assume no
obligation to update these forward-looking statements publicly, or to update the
reasons actual results could differ materially from those anticipated in these
forward-looking statements, even if new information becomes available in the
future.
U.S.
AUTO PARTS NETWORK, INC.
(in
thousands, except share data and par value)
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April
4,
2009
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December 31,
2008
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(unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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33,939
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$
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32,473
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Accounts
receivable, net
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2,008
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1,353
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Inventory,
net
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11,337
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10,910
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Deferred
income taxes
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2,095
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2,095
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Other
current assets
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2,934
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2,090
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Total
current assets
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52,313
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48,921
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Property
and equipment, net
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9,035
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8,203
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Intangible
assets, net
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2,658
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3,028
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Goodwill
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9,772
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9,772
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Deferred
income taxes
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12,744
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14,061
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Investments
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6,351
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6,351
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Other
non-current assets
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93
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94
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Total
assets
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$
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92,966
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$
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90,430
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$
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4,677
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$
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5,702
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Accrued
expenses
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8,426
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5,663
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Capital
leases payable, current portion
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28
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47
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Other
current liabilities
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1,911
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1,496
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Total
current liabilities
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15,042
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12,908
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Commitments
and contingencies
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Stockholders’
equity:
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Common
stock, $0.001 par value; 100,000,000 shares authorized at April 4, 2009
and December 31, 2008; 29,846,757 shares issued and outstanding at
April 4, 2009 and December 31, 2008
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30
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30
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Additional
paid-in capital
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147,490
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146,408
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Accumulated
other comprehensive loss
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(89
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)
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(88
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Accumulated
deficit
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(69,507
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(68,828
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Total
stockholders’ equity
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77,924
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77,522
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Total
liabilities and stockholders’ equity
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$
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92,966
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$
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90,430
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See accompanying notes to unaudited
condensed consolidated financial statements.
U.S.
AUTO PARTS NETWORK, INC.
(in
thousands, except share and per share data)
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Thirteen
Weeks Ended
April
4, 2009
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Three
Months Ended
March 31,
2008
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Net
sales
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$
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39,664
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$
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40,009
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Cost
of sales
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25,024
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26,259
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Gross
profit
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14,640
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13,750
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Operating
expenses:
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Marketing
(1)
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5,335
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5,967
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General
and administrative (1)
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4,765
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4,623
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Fulfillment
(1)
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2,652
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2,088
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Technology
(1)
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928
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684
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Amortization
of intangibles
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367
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2,099
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Total
operating expenses
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14,047
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15,461
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Income
(loss) from operations
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593
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(1,711
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Other
income, net
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91
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272
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Income
(loss) before income taxes
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684
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(1,439
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)
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Income
tax provision (benefit)
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1,363
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(564
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)
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Net
loss
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$
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(679
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)
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$
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(875
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)
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Basic
and diluted net loss per share
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$
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(0.02
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$
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(0.03
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Shares
used in computation of basic and diluted net loss per
share
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29,846,757
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29,846,757
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(1)
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Includes
share-based compensation expense as
follows:
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Thirteen
Weeks Ended
April
4, 2009
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Three Months
Ended
March 31,
2008
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Marketing
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$ |
106 |
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$ |
83 |
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General
and administrative
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822 |
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503 |
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Fulfillment
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47 |
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32 |
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Technology
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52 |
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13 |
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Total
share-based compensation expense
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$ |
1,027 |
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$ |
631 |
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See
accompanying notes to unaudited condensed consolidated financial
statements.
U.S.
AUTO PARTS NETWORK, INC.
(in
thousands)
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Thirteen
Weeks Ended
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Three
Months Ended
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April
4, 2009
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March
31, 2008
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Operating
activities
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Net
loss
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$
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(679
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)
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$
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(875
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)
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Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
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Depreciation
and amortization
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1,018
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795
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Amortization
of intangibles
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367
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2,099
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Share-based
compensation expense
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1,027
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631
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Deferred
taxes
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1,317
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—
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Changes
in operating assets and liabilities:
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Accounts
receivable, net
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(655
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)
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29
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Inventory,
net
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(427
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)
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|
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(1,449
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)
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Other
assets
|
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(843
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)
|
|
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(2,359
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)
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Accounts
payable and accrued expenses
|
|
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1,501
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|
826
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|
Other
current liabilities
|
|
|
415
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|
|
|
212
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|
Net
cash provided by (used in) operating activities
|
|
|
3,041
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|
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(91
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)
|
Investing
activities
|
|
|
|
|
|
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Additions
to property, equipment and intangibles
|
|
|
(1,565
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)
|
|
|
(1,024
|
)
|
Proceeds
from the sale of marketable securities
|
|
|
—
|
|
|
|
20,400
|
|
Purchase
of marketable securities
|
|
|
—
|
|
|
|
(5,500
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)
|
Net
cash provided by (used in) investing activities
|
|
|
(1,565
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)
|
|
|
13,876
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Payments
made on notes payable
|
|
|
—
|
|
|
|
(1,000
|
)
|
Payments
on short-term financing
|
|
|
(19
|
)
|
|
|
(18
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)
|
Net
cash used in financing activities
|
|
|
(19
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)
|
|
|
(1,018
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)
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Effect
of changes in foreign currencies
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|
|
9
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|
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|
(10
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)
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Net
increase in cash and cash equivalents
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|
|
1,466
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|
|
|
12,757
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Cash
and cash equivalents at beginning of period
|
|
|
32,473
|
|
|
|
19,399
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|
Cash
and cash equivalents at end of period
|
|
$
|
33,939
|
|
|
$
|
32,156
|
|
|
|
|
|
|
|
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Supplemental
disclosure of non-cash investing activities:
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|
|
|
|
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Accrued
asset purchases
|
|
$
|
237
|
|
|
$
|
—
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
U.S.
AUTO PARTS NETWORK, INC.
Note 1—Summary
of Significant Accounting Policies
Basis
of Presentation
The
condensed consolidated financial statements of U.S. Auto Parts Network, Inc.
(collectively with its subsidiaries, the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States
(“U.S. GAAP”) for interim financial information and with the instructions to
Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC
Regulation S-X. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the consolidated financial
position of the Company as of April 4, 2009 and December 31, 2008, and the
consolidated results of operations for the thirteen weeks ended April 4, 2009
and three months ended March 31, 2008, and cash flows for the thirteen
weeks ended April 4, 2009 and three months ended March 31, 2008. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to
the rules and regulations of the SEC. The results of operations for the thirteen
weeks ended April 4, 2009 are not necessarily indicative of those to be expected
for the entire year. The accompanying consolidated financial statements should
be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008, which was filed with the SEC on
March 26, 2009.
Change
in Fiscal Year
The
Company changed its fiscal year from a calendar year ending on December 31
to a 52/53 week fiscal year ending on the first Saturday following
December 31. The change in the Company’s fiscal year took effect on
January 1, 2009; therefore there was no transition period in connection
with this change in the Company’s fiscal year-end. As a result, the first
quarter of 2009 consists of the thirteen weeks ended April 4, 2009 and the
first quarter of 2008 consists of the three months ended March 31,
2008.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by management
include, but are not limited to, the valuation of investments, the valuation of
inventory, valuation of deferred tax assets and liabilities, estimated useful
lives of property, equipment and software, valuation of intangible assets,
including goodwill, recoverability of software development costs, valuation of
sales returns and allowances, and the collectibility of accounts receivable.
Actual results could differ from these estimates.
Reclassifications
Certain
reclassifications have been made to prior year financial statements in order to
conform to current year presentation.
Seasonality
The
Company has historically experienced seasonality in its business. The Company
expects seasonality to continue in future years as automobile collisions during
inclement weather generally create increased demand for auto body parts in
winter months and consumers often undertake projects to maintain and enhance the
performance of their automobiles in the summer months. The Company anticipates
that seasonality will continue to have a material impact on the Company’s
financial condition and results of operations in future years.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007),
“Business Combinations”
(“SFAS 141R”), which replaces SFAS No. 141, “Business Combinations” and
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. SFAS 141R also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The Company adopted SFAS 141R as of January 1, 2009. The adoption did
not have a material impact on its financial position and results of
operation.
In April
2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, "Determination of the Useful Life of
Intangible Assets" (“FSP 142-3”). FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under
SFAS No. 142, "Goodwill and Other Intangible
Asset" (“SFAS 142”). This new guidance applies prospectively
to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FSP 142-3 is
effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. Early adoption is
prohibited. The Company adopted FSP 142-3 as of January 1, 2009. The
adoption did not have a material effect on its financial position and results of
operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(“SFAS 161”). SFAS 161 requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. SFAS 161
also requires entities to disclose additional information about the amounts and
location of derivatives located within the financial statements, how the
provisions of SFAS 133 have been applied, and the impact that hedges have on an
entity’s financial position, financial performance and cash flows. SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. The Company adopted SFAS 161 on January
1, 2009. The adoption did not have a material impact on its financial
position or results of operations.
Note 2—Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with U.S. GAAP, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.
In
February 2008, the FASB issued SFAS No. 157-2, “Effective Date of FASB Statement
No. 157,” which delayed the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008 for all non-financial assets and
non-financial liabilities, except for those that are recognized or disclosed at
fair value in the financial statements on a recurring basis. As of January 1,
2009, the Company has adopted the provisions of SFAS 157 for all non-financial
assets and non-financial liabilities.
SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. These tiers include:
Level 1- defined as observable
inputs such as quoted prices in active markets;
Level 2- defined as inputs
other than quoted prices in active markets that are either directly or
indirectly observable; and
Level 3- defined as
unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
Financial
Assets Valued on a Recurring Basis
As of
April 4, 2009, the Company held certain assets that are required to be measured
at fair value on a recurring basis. These included the Company’s financial
instruments, including investments associated with the auction rate preferred
securities (“ARPS’). The Company measures the following financial assets at fair
value on a recurring basis. The fair value of these financial assets was
determined using the following inputs at April 4, 2009 and December 31, 2008 (in
thousands):
|
|
April
4, 2009
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Cash
and cash equivalents (1)
|
|
$ |
33,939 |
|
|
$ |
33,939 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-current
investments available-for-sale (2)
|
|
|
6,351 |
|
|
|
— |
|
|
|
— |
|
|
|
6,351 |
|
Total
|
|
$ |
40,290 |
|
|
$ |
33,939 |
|
|
$ |
— |
|
|
$ |
6,351 |
|
|
|
December
31, 2008
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Cash
and cash equivalents (1)
|
|
$ |
32,473 |
|
|
$ |
32,473 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-current
investments available-for-sale (2)
|
|
|
6,351 |
|
|
|
— |
|
|
|
— |
|
|
|
6,351 |
|
Total
|
|
$ |
38,824 |
|
|
$ |
32,473 |
|
|
$ |
— |
|
|
$ |
6,351 |
|
(1)
|
Cash
and cash equivalents consist primarily of money market funds with original
maturity dates of three months or less, for which we determine fair value
through quoted market prices.
|
(2)
|
Investments
available-for-sale consists of ARPS. ARPS are tax-exempt, long-term
variable rate securities tied to short-term interest rates that are reset
through a “Dutch Auction” process that occurs every seven days. The
Company has the option to participate in the auction and sell ARPS to
prospective buyers through a broker-dealer, but does not have the right to
put the security back to the issuer. The investments in ARPS all had AAA
credit ratings at the time of purchase and represent interests in
collateralized debt obligations issued by municipal and state agencies. In
the past, the auction process has allowed investors to obtain immediate
liquidity if so desired by selling the securities at their face amounts.
However, as has been recently reported in the financial press, the current
disruptions in the credit markets have adversely affected the auction
market for these types of securities. ARPS auctions “fail” when there are
not enough buyers to absorb the amount of securities available for sale
for that particular auction period. Historically, ARPS auctions have
rarely failed since the investment banks and broker dealers have been
willing to purchase the securities when investor demand was weak. However,
beginning in mid-February 2008, due to uncertainty in the global credit
and capital markets and other factors, investment banks and broker dealers
have been less willing to support ARPS and many ARPS auctions have failed.
The Company will not be able to access non-current investments until
future auctions for these ARPS are successful, or until the Company sells
the securities in a secondary market, which currently is not active,
although there have been certain instances of redemptions at par by
municipalities through the refinancing of new
instruments.
|
As of
April 4, 2009, the Company had invested $6.5 million (par value) in ARPS, which
are classified as available for sale securities and reflected at $6.4 million
(fair value), which includes an unrealized loss of $149,000. For the period
February 13, 2008 through April 4, 2009, $1.3 million of investments in ARPS had
been redeemed. The Company has included its investments related to ARPS in the
Level 3 category.
Before
utilizing Level 3 inputs in our fair value measurement, the Company considered
significant Level 2 observable inputs of similar assets in active and inactive
markets. The Company’s broker dealer received estimated market values from an
independent pricing service as of the balance sheet date which carry these
investments at par value due to the overall quality of the underlying
investments and the anticipated future market for such investments. Further
evidence includes the fact that these investments consist solely of
collateralized debt obligations supported by municipal and state agencies; do
not include mortgage-backed securities or student loans; have redemption
features that call for redemption at 100% of par value; and have a current
credit rating of A or AAA. However, the fact that there is not an active market
to liquidate these investments was considered in classifying them as Level 3.
Due to the uncertainty with regard to the short-term liquidity of these
securities, the Company determined that it could not rely on par value to
represent fair value. Therefore, the Company estimated the fair values of these
securities utilizing a discounted cash flow valuation model as of April 4, 2009.
This analysis considered the collateralization underlying the security
investments, the creditworthiness of the counterparty, the timing of expected
future cash flows, and the expectation of the next time the security is expected
to have a successful auction. These securities were also compared, when
possible, to other observable market data with similar characteristics to the
securities held by the Company.
As a
result of the temporary declines in fair value for the Company’s ARPS, which the
Company attributes to liquidity issues rather than credit issues, the Company
has recorded an unrealized loss of $149,000 to accumulated other comprehensive
income in 2008. Due to the Company’s belief that the market for these
collateralized instruments may take in excess of twelve months to fully recover,
the Company has classified these investments as noncurrent and has included them
in Investments on the unaudited Condensed Consolidated Balance Sheet at April 4,
2009. As of April 4, 2009, the Company continues to earn interest on all of its
ARPS instruments. Any future fluctuation in fair value related to these
instruments that the Company deems to be temporary, including any recoveries of
previous write-downs, would be recorded to accumulated other comprehensive
income. If the Company determines that any future valuation adjustment was
temporary, including any recoveries of previous write-downs, the adjustment
would be recorded to accumulated other comprehensive income
(loss). If the Company determines that any future valuation
adjustment was other-than-temporary, it would record a charge to earnings as
appropriate. The Company is not certain how long it may be
required to hold each security. However, given the Company’s current cash
position, liquid cash equivalents and expected cash flow from operations, it
believes it has the ability to hold, and intends to continue to hold the failed
ARPS as long-term investments until the market stabilizes.
The
following tables present the Company’s assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) as defined in
SFAS 157 at April 4, 2009 and December 31, 2008 (in thousands):
|
|
Long-Term
Investments
|
|
Balance
as of January 1, 2009
|
|
$
|
6,351
|
|
Transfers
in/out of Level 3
|
|
|
—
|
|
Balance
as of April 4, 2009
|
|
$
|
6,351
|
|
|
|
Long-Term
Investments
|
|
Balance
as of January 1, 2008
|
|
$
|
—
|
|
Transfers
to Level 3
|
|
|
7,750
|
|
Redemption
|
|
|
(1,250
|
)
|
Unrealized
losses recorded to other comprehensive loss
|
|
|
(149
|
)
|
Balance
at December 31, 2008
|
|
$
|
6,351
|
|
Note 3—Inventory
Inventories
consist of finished goods available-for-sale and are stated at the lower of cost
or market value, determined using the first in, first out (“FIFO”) method. The
Company purchases inventory from suppliers both domestically and
internationally. The Company believes that its inventoried products are
generally available from more than one supplier and seeks to maintain multiple
sources for its products, both internationally and domestically.
The
Company primarily purchases products in bulk quantities to take advantage of
quantity discounts and to improve inventory availability. Inventory is reported
net of inventory reserves for excess or obsolete product, which are established
based on specific identification of slow moving items and the evaluation of
overstock considering anticipated sales levels. Gross inventory, inventory
reserves and net inventory at April 4, 2009 and December 31, 2008 are as
follows (in thousands):
|
|
April
4, 2009
|
|
|
December 31,
2008
|
|
|
|
(unaudited)
|
|
|
Gross
inventory
|
|
$
|
13,141
|
|
|
$
|
12,205
|
|
Inventory
reserves
|
|
|
(1,804
|
)
|
|
|
(1,295
|
)
|
Total
net inventory
|
|
$
|
11,337
|
|
|
$
|
10,910
|
|
Note 4—Intangibles
Intangibles
subject to amortization are expensed on a straight-line basis. Amortization
expense relating to intangibles totaled $0.4 million and $2.1 million for the
quarter ended April 4, 2009 and March 31, 2008,
respectively. Assembled workforce, which is included in intangible
assets, decreased by $4,000 as of April 4, 2009 due to foreign currency
fluctuations.
Intangibles,
excluding goodwill, consisted of the following at April 4, 2009 and
December 31, 2008 (in thousands):
|
|
|
April
4, 2009
(unaudited)
|
|
|
December 31,
2008
|
|
|
Useful
Life
|
|
Gross
Carrying
Amount
|
|
|
Accum.
Amort.
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accum.
Amort.
|
|
|
Net
Carrying
Amount
|
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Websites
|
5
years
|
|
$ |
566 |
|
|
$ |
(63 |
) |
|
$ |
503 |
|
|
$ |
566 |
|
|
$ |
(35 |
) |
|
$ |
531 |
|
Software
|
2 -
5 years
|
|
|
1,040 |
|
|
|
(936
|
) |
|
|
104 |
|
|
|
1,040 |
|
|
|
(624
|
) |
|
|
416 |
|
Assembled
workforce
|
7 years
|
|
|
441 |
|
|
|
(21
|
) |
|
|
420 |
|
|
|
445 |
|
|
|
— |
|
|
|
445 |
|
Purchased
domain names
|
3 years
|
|
|
175 |
|
|
|
(175
|
) |
|
|
0 |
|
|
|
175 |
|
|
|
(170
|
) |
|
|
5 |
|
|
|
|
|
2,222 |
|
|
|
(1,195
|
) |
|
|
1,027 |
|
|
|
2,226 |
|
|
|
(829
|
) |
|
|
1,397 |
|
Intangible
assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain
names
|
indefinite life
|
|
|
1,631 |
|
|
|
— |
|
|
|
1,631 |
|
|
|
1,631 |
|
|
|
— |
|
|
|
1,631 |
|
Total
|
|
|
$ |
3,853 |
|
|
$ |
(1,195 |
) |
|
$ |
2,658 |
|
|
$ |
3,857 |
|
|
$ |
(829 |
) |
|
$ |
3,028 |
|
Note 5—Contingencies
The
Company is subject to legal proceedings and claims which arise in the ordinary
course of its business. Although occasional adverse decisions or settlements may
occur, the potential loss, if any, cannot be reasonably estimated. However, the
Company believes that the final disposition of such matters will not have a
material adverse effect on the financial position, results of operations or cash
flow of the Company with the exception of the items noted below. The Company
maintains liability insurance coverage to protect the Company’s assets from
losses arising out of or involving activities associated with ongoing and normal
business operations.
Ford
Global Technologies, LLC
On April
16, 2009, the Company entered into a settlement agreement with Ford Motor
Company and Ford Global Technologies, LLC (“Ford”) that ended the two pending
legal actions that were initiated by Ford with the United States International
Trade Commission. The first action was filed in December 2005 against the
Company and five other named respondents alleging that certain aftermarket parts
imported into the United States infringed on 14 design patents that Ford claimed
cover eight parts on the 2004-2005 Ford F-150 trucks. The second action was
filed in May 2008 alleging design patent infringement on certain automotive
parts relating to the 2005 Ford Mustang automobile. As part of the
settlement against the Company and seven other entities, the Company agreed to
not challenge the validity of the patents on Ford parts.
Note 6—Comprehensive
Loss
The Company reports comprehensive loss
in accordance with SFAS No. 130, “Reporting
Comprehensive Income,”
which defines comprehensive loss as non-stockholder changes in equity.
Comprehensive loss for the quarter ended April 4, 2009 and March 31, 2008,
respectively, includes the following (in thousands):
|
|
April
4, 2009
|
|
|
March
31, 2008
|
|
|
|
|
(unaudited)
|
|
|
Net
loss
|
|
$
|
(679
|
)
|
|
$
|
(875
|
)
|
|
Unrealized
loss on investments
|
|
|
—
|
|
|
|
(149
|
)
|
|
Foreign
currency translation adjustments
|
|
|
(1
|
)
|
|
|
(40
|
)
|
|
Comprehensive
loss
|
|
$
|
(680
|
)
|
|
$
|
(1,064
|
)
|
|
Sales
discounts are recorded in the period in which the related sale is recognized.
Credits are issued to customers for returned products. Credits amounted to $4.6
million and $4.4 million for the quarter ended April 4, 2009 and March 31,
2008, respectively. The Company’s sales returns and allowances reserve totaled
$762,000 and $662,000 at April 4, 2009 and December 31, 2008,
respectively.
The
following table provides an analysis of the reserve for sales returns (in
thousands):
|
As
of
December
31, 2008
|
|
Charged to
Revenue
|
|
Deductions
|
|
(unaudited)
As
of
April
4, 2009
|
|
Thirteen
Weeks Ended April 4, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for sales returns
|
|
$ |
662 |
|
|
$ |
4,715 |
|
|
$ |
(4,615 |
) |
|
$ |
762 |
|
For the
quarter ended April 4, 2009 and March 31, 2008, the effective tax rate for
the Company was 199.3% and 39.2%, respectively. The Company’s effective tax rate
is higher than the U.S. federal statutory rate during the first quarter of 2009
primarily as a result of state income taxes, and other non deductible permanent
differences. The increase in income tax provision during the first quarter of
2009 was primarily due to a $1.0 million tax effect of stock option forfeitures
and other non-deductible permanent differences.
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”), which
became effective for the Company on January 1, 2007. FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. The
amount recognized is measured as the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. As a result
of the implementation of FIN 48, the Company recognized no material adjustment
in the liability for unrecognized income tax benefits.
As of
April 4, 2009, the Company has no material unrecognized tax benefits, interest
or penalties related to various federal and state income tax matters. The
Company’s policy is to recognize accrued interest and penalties related to
unrecognized tax benefits as income tax expense.
The
Company is subject to U.S. federal income tax as well as income tax of foreign
and state tax jurisdictions. During 2008, the Company was under audit by the
Internal Revenue Service for the year ended December 31, 2006; the audit was
resolved through payment of a non-material sum of money for one calculation
error. The tax years 2004, 2005, and 2007 remain open to examination by the
major taxing jurisdictions to which the Company is subject. The Company’s
foreign and state income tax returns are open to audit under the statute of
limitations for the tax years 2003 through 2007. The Company does not anticipate
a significant change to the total amount of unrecognized tax benefits within the
next twelve months.
Net loss
per share has been computed in accordance with FASB Statement No. 128,
“Earnings Per Share.”
The following table sets forth the computation of basic and diluted net loss per
share (unaudited):
|
|
Thirteen
Weeks Ended
|
|
Three
Months Ended
|
|
|
|
April
4, 2009
|
|
|
March
31, 2008
|
|
|
|
(in thousands, except share and per share data)
|
|
Net Loss
Per Share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(679
|
)
|
|
$
|
(875
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (basic)
|
|
|
29,846,757
|
|
|
|
29,846,757
|
|
Common
equivalent shares from common stock options and warrants
|
|
|
—
|
|
|
|
—
|
|
Weighted-average
common shares outstanding (diluted)
|
|
|
29,846,757
|
|
|
|
29,846,757
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Note 10—Share-Based
Compensation
The
Company accounts for share-based compensation in accordance with SFAS
No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”), which was adopted on January 1, 2006. No stock options
were granted prior to January 1, 2006. All stock options issued to
employees are recognized as share-based compensation expense in the financial
statements based on their respective grant date fair values, and are recognized
within the statement of operations as general and administrative, marketing,
fulfillment or technology expenses, based on employee departmental
classifications.
Under
SFAS 123(R), the fair value of each share-based payment award is estimated on
the date of grant using an option pricing model that meets certain requirements.
The Company currently uses the Black-Scholes option pricing model to estimate
the fair value of share-based payment awards, with the exception of options
granted containing market conditions, which the Company estimates the fair value
using a Monte Carlo model. The determination of the fair value of share-based
payment awards utilizing the Black-Scholes and Monte Carlo models is affected by
the Company’s stock price and a number of assumptions, including expected
volatility, expected life, risk-free interest rate and expected dividends. As of
April 4, 2009, the Company did not have an adequate history of market prices of
its common stock as the Company only recently became a public company in
February 2007, and as such, the Company estimates volatility in accordance with
Staff Accounting Bulletin No. 107 (“SAB 107”) using historical volatilities
of similar public entities. The expected life of the awards is based on a
simplified method which defines the life as the average of the contractual term
of the options and the weighted average vesting period for all open tranches.
The risk-free interest rate assumption is based on observed interest rates
appropriate for the terms of awards. The dividend yield assumption is based on
the Company’s expectation of paying no dividends. Forfeitures are estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
For
non-employees, the Company accounts for share-based compensation expense in
accordance with Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” Equity instruments awarded to non-employees
are periodically re-measured as the underlying awards vest unless the
instruments are fully vested, immediately exercisable and non-forfeitable on the
date of grant.
The
Company granted 1,335,000 stock options under the Company’s 2007 Omnibus
Incentive Plan and 2007 New Employee Incentive Plan (collectively, the “Plans”)
during the quarter ended April 4, 2009 at a weighted-average fair value of $1.40
per share. There was $6.1 million of unrecognized share-based compensation
expense related to stock options as of April 4, 2009, which expense is expected
to be recognized over a weighted-average period of 3.01 years. During the
quarter ended April 4, 2009, there were no exercises under the
Plans.
The
Company’s Annual Meeting of the Stockholders was held on May 5,
2009. The stock option exchange program, pursuant to which up to
1,486,464 options would be exchanged for up to 743,232 new options was approved
at the Annual Meeting. The
option exchange has not yet commenced. Should the Board of Directors determine
to proceed with and commence the program, the Company will have up to
six months after stockholder approval to do so. US Auto Parts Network, Inc. will
file a Tender Offer Statement on Schedule TO with the Securities and Exchange
Commission, or SEC, upon the commencement of the option exchange.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement
You
should read the following discussion and analysis in conjunction with our
unaudited condensed consolidated financial statements and the related notes
thereto contained in Part I, Item 1 of this report. The information
contained in this Quarterly Report on Form 10-Q is not a complete description of
our business or the risks associated with an investment in our common stock. We
urge you to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the Securities and Exchange
Commission, or SEC, including our Annual Report on Form 10-K for the year ended
December 31, 2008 and subsequent reports on Forms 10-Q and 8-K, which
discuss our business in greater detail. The section entitled “Risk Factors” set
forth below, and similar discussions in our other SEC filings, describe some of
the important risk factors that may affect our business, results of operations
and financial condition. You should carefully consider those risks, in addition
to the other information in this report and in our other filings with the SEC,
before deciding to purchase, hold or sell our common stock.
Overview
We are
one of the largest online providers of aftermarket auto parts, including body
parts, engine parts, performance parts and accessories. Our user-friendly
websites provide customers with a broad selection of SKUs, with detailed
product descriptions and photographs. Our proprietary product database maps our
SKUs to product applications based on vehicle makes, models and years. We
principally sell our products to individual consumers through our network of
websites and online marketplaces. Our flagship websites are located at www.autopartswarehouse.com
and www.partstrain.com. We
believe our strategy of disintermediating the traditional auto parts supply
chain and selling products directly to customers over the Internet allows us to
more efficiently deliver products to our customers while generating higher
margins.
Our History. We were formed
in 1995 as a distributor of aftermarket auto parts and launched our first
website in 2000. We rapidly expanded our online operations, increasing the
number of SKUs sold through our e-commerce network, adding additional websites,
acquiring the Partsbin business, improving our Internet marketing proficiency
and commencing sales in online marketplaces. As a result, our business has grown
since 2000, generating net sales of $153.4 million for the year ended
December 31, 2008.
International Operations. In
April 2007, we entered into a purchase agreement to bring in-house certain sales
and customer service employees based in the Philippines who were providing
support to us through our outsourced call center provider, Access Worldwide. As
of the closing of this transaction, approximately 171 of the Access Worldwide
employees had agreed to transition over to direct employment by our Philippines
subsidiary. The purchase price for the right to acquire this
assembled workforce was approximately $1.7 million. We had 650 employees in
our Philippines operations as of April 4, 2009. In addition to our Philippines
operations, we own a Canadian subsidiary to facilitate sales of our products in
Canada which currently has no employees. We believe that the cost
advantages of our offshore operations provide us with the ability to grow our
business in a cost-effective manner, and we expect to continue to add headcount
and infrastructure to our offshore operations.
Acquisitions. From
time to time, we may acquire certain businesses, websites, domain names, or
other assets. During 2008, we acquired several websites and domain
name assets. In May 2006, we completed the acquisition of Partsbin,
which expanded our product offering, and enhanced our ability to reach more
customers. The Partsbin acquisition significantly increased our net
sales and added a complementary, drop-ship order fulfillment method, and
operations in Canada. We may pursue additional acquisition
opportunities in the future to increase our share of the aftermarket auto parts
market or expand our product offerings.
We
changed our fiscal year from a calendar year ending on December 31 to a
52/53 week fiscal year ending on the first Saturday following
December 31st. The change in the fiscal year took effect on January 1,
2009; therefore there was no transition period in connection with this change of
fiscal year-end. As a result, the first quarter of 2009 consists of the thirteen
weeks ended April 4, 2009 and the first quarter of 2008 consists of the
three months ended March 31, 2008.
Stock
Option Exchange Program
Our
Annual Meeting of the Stockholders was held on May 5, 2009. The stock
option exchange program, pursuant to which up to 1,486,464 options would be
exchanged for up to 743,232 new options was approved at the Annual
Meeting. The
option exchange has not yet commenced. Should the Board of Directors determine
to proceed with and commence the program, we will have up to six months after
stockholder approval to do so. US Auto Parts Network, Inc. will file a Tender
Offer Statement on Schedule TO with the Securities and Exchange Commission, or
SEC, upon the commencement of the option exchange.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our unaudited condensed consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”). The preparation of these unaudited condensed consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition,
uncollectible receivables, intangible and other long-lived assets and
contingencies. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. There were no significant changes to our critical accounting
policies during the quarter ended April 4, 2009, as compared to those
policies disclosed in our annual report on Form 10-K for the fiscal year ended
December 31, 2008.
Results
of Operations
The
following table sets forth certain unaudited statements of operations data as a
percentage of total net sales for the periods indicated:
|
|
Thirteen
Weeks Ended
|
|
%
of
|
|
Three
Months Ended
|
%
of
|
|
|
|
April
4, 2009
|
|
Net Sales
|
|
|
March
31, 2008
|
|
Net Sales
|
|
|
|
(in thousands)
|
|
|
|
|
(in thousands)
|
|
|
|
Net
sales
|
|
$
|
39,664
|
|
100.0
|
%
|
|
$
|
40,009
|
|
100.0
|
%
|
Cost
of sales
|
|
|
25,024
|
|
63.1
|
|
|
|
26,259
|
|
65.6
|
|
Gross
profit
|
|
|
14,640
|
|
36.9
|
|
|
|
13,750
|
|
34.4
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
5,335
|
|
13.5
|
|
|
|
5,967
|
|
14.9
|
|
General
and administrative
|
|
|
4,765
|
|
12.0
|
|
|
|
4,623
|
|
11.6
|
|
Fulfillment
|
|
|
2,652
|
|
6.7
|
|
|
|
2,088
|
|
5.2
|
|
Technology
|
|
|
928
|
|
2.3
|
|
|
|
684
|
|
1.7
|
|
Amortization
of intangibles
|
|
|
367
|
|
0.9
|
|
|
|
2,099
|
|
5.2
|
|
Total
operating expenses
|
|
|
14,047
|
|
35.4
|
|
|
|
15,461
|
|
38.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
593
|
|
1.5
|
|
|
|
(1,711
|
)
|
(4.2
|
)
|
Other
income, net
|
|
|
91
|
|
0.2
|
|
|
|
272
|
|
0.7
|
|
Income
(loss) before income taxes
|
|
|
684
|
|
1.7
|
|
|
|
(1,439
|
)
|
(3.5
|
)
|
Income
tax provision (benefit)
|
|
|
1,363
|
|
3.4
|
|
|
|
(564
|
)
|
(1.4
|
)
|
Net
loss
|
|
$
|
(679
|
)
|
(1.7
|
)%
|
|
$
|
(875
|
)
|
(2.1
|
)%
|
|
•
|
|
Net
sales increased by $1.4 million for the first quarter of 2009 due to three
additional business days. Excluding these additional days, net
sales would have been $38.3 million.
|
|
•
|
|
Net
loss would have been $0.8 million or $0.03 per diluted
share.
|
|
•
|
|
We
do not anticipate that the change to the 52/53 week fiscal year will have
a material effect on future
quarters.
|
Thirteen
Weeks Ended April 4, 2009 Compared to Three Months Ended March 31,
2008
Net
Sales and Gross Margin
|
Thirteen
Weeks Ended
April
4, 2009
|
|
Three
Months Ended
March 31,
2008
|
|
$ Change |
|
|
% Change |
|
|
(in
thousands) |
|
|
|
|
|
|
Net
sales
|
|
$
|
39,664
|
|
$
|
|
40,009
|
|
|
$
|
(345
|
)
|
|
|
(0.9
|
)%
|
Cost
of sales
|
|
|
25,024
|
|
|
|
26,259
|
|
|
|
(1,235
|
)
|
|
|
(4.7
|
)%
|
Gross
profit
|
|
$
|
14,640
|
|
$
|
|
13,750
|
|
|
$
|
890
|
|
|
|
6.5
|
%
|
Gross
margin
|
|
|
36.9
|
%
|
|
|
34.4
|
%
|
|
|
|
|
|
|
2.5
|
%
|
Net sales
decreased $0.3 million, or 0.9%, for the first quarter of 2009 compared to the
first quarter of 2008. The decrease was primarily attributable to a
25.9% decrease in our offline channels, partially offset by a 2.1% increase in
our online channels. The first quarter of 2009 was partially impacted by an
additional three business days in the current period due to our change from a
calendar year to a 52/53 week fiscal year. Excluding the three
additional business days, net sales on a calendar basis would have been $38.3
million on a calendar basis or a 4.3% decrease over the prior year
period.
Net sales
in our online channels consist of our e-commerce and online
marketplaces. Our e-commerce channel includes a network of e-commerce
websites, supported by our call-center sales agents who generate cross-sell and
up-sell opportunities. We also sell our products through our online
marketplaces, which primarily consist of auction and other third party
websites.
E-commerce
sales on a calendar basis decreased 2.3% for the first quarter of 2009 compared
to the first quarter of 2008. The decrease was primarily attributable to a
decline in the average order value, a lower conversion rate, and an extra
business day in 2008 (leap year), which was partially offset by improvements in
our revenue capture. The total number of our e-commerce orders for
the quarter remained relatively consistent year-over-year but our average order
value was $126 and $120 for the first quarters of 2008 and 2009, respectively.
The decline in our average order value was caused by a reduction in the number
of higher dollar items ordered and a reflection of unfavorable economic
conditions that have affected, and may continue to adversely affect retail sales
in general. During 2009, we plan to continue to expand our product
categories.
Online
marketplace sales on a calendar basis increased 4.6% in the first quarter of
2009 compared to the first quarter of 2008. The increase was primarily due to a
higher number of completed auctions in our eBay channel.
Net sales
of our offline business, which consists of our Kool-Vue™ and
wholesale operations, on a calendar basis decreased 27.5% for the first quarter
of 2009 compared to the first quarter of 2008. The decline in offline sales was
primarily due to the loss of sales from a significant customer in the third
quarter of 2008.
We have
historically experienced seasonality in our business. We expect seasonality to
continue in future years as automobile collisions during inclement weather
create increased demand for body parts in winter months, and consumers often
undertake projects to maintain and enhance the performance of their automobiles
in the summer months. We anticipate that seasonality will continue to have a
material impact on our financial condition and results of operations during any
given year.
Gross
profit was $14.6 million, or 36.9% of net sales, for the first quarter of 2009,
compared to $13.8 million or 34.4% of net sales in the first quarter of 2008.
The 2.5% increase in gross margin was primarily due to initiatives to lower
freight costs and a contract change with one of our suppliers regarding
marketing co-op, which is now included as a reduction in product cost.
Marketing
Expense
|
Thirteen
Weeks Ended
April
4, 2009
|
|
Three
Months Ended
March 31,
2008
|
|
$ Change
|
|
|
% Change
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Marketing
expense
|
|
$ |
5,335 |
|
|
$ |
5,967 |
|
|
$ |
(632 |
) |
|
|
(10.6
|
)% |
Percent
of net sales
|
|
|
13.5
|
% |
|
|
14.9
|
% |
|
|
|
|
|
|
(1.4
|
)% |
Marketing
expenses decreased $632,000, or 10.6%, for the first quarter of 2009 compared to
the first quarter of 2008. As a percentage of net sales, marketing expense
decreased 1.4% primarily due to lower personnel-related costs, lower
depreciation expense, and a decrease in online advertising spending from
continued improvements in our ROI-based spending model, fee reductions from eBay
and the removal of marketing co-op related to a contract change with one of our
suppliers which is now included in product cost.
General
and Administrative Expense
|
Thirteen
Weeks Ended
April
4, 2009
|
|
Three
Months Ended
March 31,
2008
|
|
$ Change
|
|
|
% Change
|
|
|
(in
thousands)
|
|
|
|
|
|
|
General
and administrative expense
|
|
$ |
4,765 |
|
|
$ |
4,623 |
|
|
$ |
142 |
|
|
|
3.1
|
% |
Percent
of net sales
|
|
|
12.0
|
% |
|
|
11.6
|
% |
|
|
|
|
|
|
0.4
|
% |
General
and administrative expenses increased $142,000, or 3.1%, for the first quarter
of 2009 compared to the first quarter of 2008. The increase was primarily due to
a $600,000 reduction in professional fees; partially offset by $500,000 higher
personnel-related expenses, which included a charge of $300,000 in share-based
compensation expense related to the voluntary forfeiture of certain stock
options by our CEO.
During
the first quarter of 2008, we recognized share-based compensation expense of
$1.0 million, net of capitalized internally developed software, determined in
accordance with SFAS 123(R). Based on options outstanding as of April 4, 2009,
we expect to recognize additional share-based compensation expense of $6.1
million over a weighted-average period of 3.01 years.
|
Thirteen
Weeks Ended
April
4, 2009
|
|
Three
Months Ended
March 31,
2008
|
|
$ Change
|
|
|
% Change
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Fulfillment
expense
|
|
$ |
2,652 |
|
|
$ |
2,088 |
|
|
$ |
564 |
|
|
|
27.0
|
% |
Percent
of net sales
|
|
|
6.7
|
% |
|
|
5.2
|
% |
|
|
|
|
|
|
1.5
|
% |
Fulfillment
expense increased $564,000, or 27.0%, for the first quarter of 2009 compared to
the first quarter of 2008, primarily due to an increase in personnel-related
costs and facility expenses to support the opening of our new distribution
center on the East Coast in the first quarter of 2009.
|
Thirteen
Weeks Ended
April
4, 2009
|
|
Three
Months Ended
March 31,
2008
|
|
$ Change
|
|
|
% Change
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Technology
expense
|
|
$ |
928 |
|
|
$ |
684 |
|
|
$ |
244 |
|
|
|
35.7
|
% |
Percent
of net sales
|
|
|
2.3
|
% |
|
|
1.7
|
% |
|
|
|
|
|
|
0.6
|
% |
Technology
expense increased $244,000, or 35.7%, for the first quarter of 2009 compared to
the first quarter of 2008, primarily due to higher personnel-related expenses to
support our expanded infrastructure and investment in our overall technology
platform.
Amortization
of Intangibles
|
Thirteen
Weeks Ended
April
4, 2009
|
|
Three
Months Ended
March 31,
2008
|
|
$ Change
|
|
|
% Change |
|
|
(in
thousands)
|
|
|
|
|
|
|
Amortization
of intangibles
|
|
$ |
367
|
|
|
$ |
2,099
|
|
|
$ |
(1,732
|
)
|
|
|
(82.5
|
)%
|
Percent
of net sales
|
|
|
0.9
|
%
|
|
|
5.2
|
%
|
|
|
|
|
|
|
(4.3
|
)%
|
Amortization
of intangibles decreased $1.7 million, or 82.5%, for the first quarter of 2009
compared to the first quarter of 2008. This decrease was primarily due to the
impairment write-off of certain intangible assets during 2008. We estimate
aggregate amortization expense for the balance of the fiscal year ending January
2, 2010, and the fiscal years ending 2011, 2012, 2013 and thereafter to be
approximately $252,000, $197,000, $197,000, $197,000 and $184,000,
respectively.
Income Tax
Provision (Benefit)
|
Thirteen
Weeks Ended April
4, 2009 |
|
Three
Months Ended
March 31,
2008
|
|
$ Change
|
|
% Change |
|
|
(in
thousands)
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
$ |
1,363 |
|
|
$ |
(564 |
) |
|
$ |
1,927 |
|
|
|
342
|
% |
Percent
of net sales
|
|
|
3.4 |
% |
|
|
(1.4
|
)% |
|
|
|
|
|
|
4.8
|
% |
The
effective tax rate for the quarter ended April 4, 2009 and March 31, 2008 was
199.3% and 39.2%, respectively. The increase in income tax provision during the
first quarter of 2009 was primarily due to a $1.0 million tax effect of stock
option forfeitures and other non-deductible permanent differences.
Sources
of Liquidity
We have
historically funded our operations from cash generated from operations, credit
facilities, bank and stockholder loans, an equity financing and capital lease
financings.
Cash
Flows
We had
cash and cash equivalents of $33.9 million as of April 4, 2009, representing a
$1.5 million increase from $32.5 million of liquid assets as of
December 31, 2008. The increase in our cash and cash equivalents as of
April 4, 2009 was primarily due to cash generated from operations less our
investment in property and equipment.
Operating
Activities
We
generated $3.0 million of net cash from operating activities for the first
quarter of 2009. The significant components of cash flows from operating
activities were a net loss of $679,000; a decrease of $1.3 million in deferred
tax assets primarily related to the tax effect of stock option forfeitures and
other non-deductible permanent differences; $1.4 million in non-cash
depreciation and amortization expense; and $1.0 million of non-cash share-based
compensation expense.
Investing
Activities
Cash used
in investing activities during the first quarter of 2009 totaled $1.6 million
which was attributable to purchases of property and equipment related to
technology investments to improve our websites, operating systems and back-end
platforms, as well as the opening of our East Coast distribution
center.
Financing
Activities
Cash used
in financing activities during the first quarter of 2009 totaled $19,000 and was
primarily due to repayments made on short-term financing.
Funding
Requirements
We had
working capital of $37.3 million as of April 4, 2009, which was primarily due to
the cash generated from our initial public offering. The historical seasonality
in our business during the fourth and first calendar quarters of each year cause
cash and cash equivalents, inventory and accounts payable to be generally higher
in these quarters, resulting in fluctuations in our working capital. We
anticipate that funds generated from operations and cash on hand will be
sufficient to meet our working capital needs and expected capital expenditures
for at least the next twelve months. Our future capital requirements may,
however, vary materially from those now planned or anticipated. Changes in our
operating plans, lower than anticipated net sales, increased expenses, continued
or worsened economic conditions, or other events, including those described in
“Risk Factors,” may cause us to seek additional debt or equity financings in the
future. Financings may not be available on acceptable terms, on a timely basis,
or at all, and our failure to raise adequate capital when needed could
negatively impact our growth plans and our financial condition and results of
operations. In addition, our $6.4 million (fair value) of ARPS investments as of
April 4, 2009 remain classified as long-term investments as a result of failed
auctions and liquidity issues, and we may not have immediate access to those
funds.
We opened
a new distribution center on the East Coast in the first quarter of 2009. We are
also accelerating our technology investments in an effort to improve our
websites, operating systems and back-end platforms. We anticipate these
decisions will increase our technology costs as a percentage of sales, as well
as increase our capitalized software and website development costs over the next
several quarters.
Seasonality
We
believe our business is subject to seasonal fluctuations. We have historically
experienced higher sales of body parts in winter months when inclement weather
and hazardous road conditions typically result in more automobile collisions.
Engine parts and performance parts and accessories have historically experienced
higher sales in the summer months when consumers have more time to undertake
elective projects to maintain and enhance the performance of their automobiles
and the warmer weather during that time is conducive for such projects. We
expect the historical seasonality trends to continue to have a material impact
on our financial condition and results of operations in subsequent
periods.
Inflation
Inflation
has not had a material impact upon our operating results, and we do not expect
it to have such an impact in the near future. We cannot assure you that our
business will not be affected by inflation in the future.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in financial commodity market
prices and rates. We are exposed to market risk primarily in the area of changes
in United States interest rates and conditions in the credit markets. We also
have some exposure related to foreign currency fluctuations. We do not have
other derivative financial instruments. Under our current policies, we do not
use interest rate derivative instruments to manage exposure to interest rate
changes. We attempt to increase the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities.
Interest Rate Risk. All of
our investments are classified as available-for-sale and therefore reported on
the balance sheet at market value. Our investment securities consist of
high-grade auction rate preferred securities. As of April 4, 2009, our long-term
investments included $6.4 million (fair value) of investments in ARPS, which
consist of high-grade (A or AAA rated) collateralized debt obligations issued by
municipalities and state agencies. Our ARPS have an interest rate that is reset
in short intervals through auctions. The recent conditions in the global credit
markets have prevented some investors from liquidating their holdings of ARPS
because the amount of securities submitted for sale has exceeded the amount of
purchase orders for these securities. If there is insufficient demand for the
securities at the time of an auction, the auction may not be completed and the
interest rates may be reset to predetermined higher rates. When auctions for
these securities fail, the investments may not be readily convertible to cash
until a future auction of these investments is successful or they are redeemed
or mature. If the credit ratings of the security issuers deteriorate and any
decline in market value is determined to be other-than-temporary, we would be
required to adjust the carrying value of the investment through an impairment
charge.
On February 13, 2008, we were
informed that there was insufficient demand at auctions for four of our
high-grade ARPS, representing approximately $7.8 million. As a result, these
affected securities are currently not liquid and the interest rates have been
reset to the predetermined higher rates. For the period February 13, 2008
through April 4, 2009, we have received partial redemptions at par on all four
ARPS totaling $1.3 million with a remaining principal balance on our ARPS of
$6.5 million.
In the
event we need to access the funds that are in an illiquid state, we will not be
able to do so without the possible loss of principal, until a future auction for
these investments is successful or they are redeemed by the issuer. At this
time, management has not obtained sufficient evidence to conclude that these
investments are impaired or that they will not be settled in the short term,
although the market for these investments is presently uncertain. If we are
unable to sell these securities in the market or they are not redeemed, then we
may be required to hold them indefinitely. We do not have a need to access these
funds for operational purposes for the foreseeable future. We will continue to
monitor and evaluate these investments on an ongoing basis for impairment or for
a short-term to long-term reclassification. Based on our ability to access our
cash and other short-term investments, our expected cash flows, and our other
sources of cash, we do not anticipate that the potential illiquidity of these
investments will affect our ability to execute our current business plan.
However, due to the illiquidity in the market, we have recorded $149,000 of
unrealized losses on our investment portfolio as of April 4, 2009.
Foreign Currency Risk. Our
purchases of auto parts from our Asian suppliers are denominated in U.S.
dollars; however a change in the foreign currency exchange rates could impact
our product costs over time. Our financial reporting currency is the U.S. Dollar
and changes in exchange rates significantly affect our reported results and
consolidated trends. For example, if the U.S. Dollar weakens year-over-year
relative to currencies in our international locations, our consolidated net
sales, gross profit, and operating expenses will be higher than if currencies
had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year
relative to currencies in our international locations, our consolidated net
sales, gross profit and operating expenses will be lower than if currencies had
remained constant. Our operating expenses in the Philippines are generally paid
in Philippine Pesos and as the exchange rate fluctuates, it adversely or
favorably impacts our operating results. In light of the above, we believe that
a fluctuation of 10% in the Peso/U.S. Dollar exchange rate would have
approximately a $0.2 million impact on our operating expenses for the quarter
ended April 4, 2009. Our Canadian website sales are denominated in Canadian
Dollars; however, fluctuations in exchange rates from these operations are only
expected to have a nominal impact on our operating results. We also believe it
is important to evaluate our operating results and growth rates before and after
the effect of currency changes.
ITEM 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We
carried out an evaluation required by the Securities Exchange Act of 1934 (the
“1934 Act”), under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Rule 13a-15(e) of the 1934 Act, as of the end of the period covered by this
report.
Disclosure
controls and procedures provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the 1934 Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and to provide reasonable assurance that
such information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
Based on
this evaluation, our CEO and CFO have concluded that, as of such date, our
disclosure controls and procedures were effective to meet the objectives for
which they were designed.
Changes
in Internal Control Over Financial Reporting
During
the most recent fiscal quarter, there has not occurred any change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
Inherent
Limitations on Internal Controls
Our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives as specified above. Management does not expect,
however, that our disclosure controls and procedures will prevent or detect all
error and fraud. Any control system, no matter how well designed and operated,
is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls
can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected.
The
information set forth under Note 5 of Notes to Unaudited Condensed Consolidated
Financial Statements, included in Part I, Item I of this report, is incorporated
herein by reference.
Risks Related To Our
Business
Purchasers of
aftermarket auto parts may not choose to shop online, which would prevent us
from acquiring new customers who are necessary to the growth of our
business.
The
online market for aftermarket auto parts is less developed than the online
market for many other business and consumer products. Our success will depend in
part on our ability to attract new customers and customers who have historically
purchased auto parts through traditional retail and wholesale operations.
Furthermore, we may have to incur significantly higher and more sustained
advertising and marketing expenditures or may need to price our products more
competitively than we currently anticipate in order to attract additional online
consumers and convert them into purchasing customers. Specific factors that
could prevent prospective customers from purchasing from us
include:
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concerns
about buying auto parts without face-to-face interaction with sales
personnel;
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the
inability to physically handle, examine and compare
products;
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delivery
time associated with Internet orders;
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concerns
about the security of online transactions and the privacy of personal
information;
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delayed
shipments or shipments of incorrect or damaged
products;
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increased
shipping costs; and
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the
inconvenience associated with returning or exchanging items purchased
online.
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If the
online market for auto parts does not gain widespread acceptance, our sales may
decline and our business and financial results may suffer.
We depend on
search engines and other online sources to attract visitors to our websites, and
if we are unable to attract these visitors and convert them into customers in a
cost-effective manner, our business and results of operations will be
harmed.
Our
success depends on our ability to attract online consumers to our websites and
convert them into customers in a cost-effective manner. We are significantly
dependent upon search engines, shopping comparison sites and other online
sources for our website traffic. We are included in search results as a result
of both paid search listings, where we purchase specific search terms that will
result in the inclusion of our listing, and algorithmic searches that depend
upon the searchable content on our sites. Algorithmic listings cannot be
purchased and instead are determined and displayed solely by a set of formulas
utilized by the search engine. Search engines, shopping comparison sites and
other online sources revise their algorithms from time to time in an attempt to
optimize their search results. If one or more of the search engines, shopping
comparison sites or other online sources on which we rely for website traffic
were to modify its general methodology for how it displays or selects our
websites, resulting in fewer consumers clicking through to our websites, our
financial results could be adversely affected. We operate a multiple website
platform that generally allows us to provide multiple search results for a
particular algorithmic search. If the search engines were to limit our display
results to a single result or entirely eliminate our results from the
algorithmic search, our website traffic would significantly decrease and our
business would be materially harmed. If any free search engine or shopping
comparison site on which we rely begins charging fees for listing or placement,
or if one or more of the search engines, shopping comparison sites and other
online sources on which we rely for purchased listings, modifies or terminates
its relationship with us, our expenses could rise, we could lose customers and
traffic to our websites could decrease. In addition, our success in attracting
visitors who convert to customers will depend in part upon our ability to
identify and purchase relevant search terms, provide relevant content on our
sites, and effectively target our other marketing programs such as e-mail
campaigns and affiliate programs. If we are unable to attract visitors to our
websites and convert them to customers in a cost-effective manner, then our
sales may decline and our business and financial results may be harmed.
Future
acquisitions could disrupt our business and harm our financial
condition.
As part
of our growth strategy, we expect that we will selectively pursue acquisitions
of businesses, technologies or services in order to expand our capabilities,
enter new markets or increase our market share. Integrating any newly acquired
businesses’ websites, technologies or services is likely to be expensive and
time consuming. For example, our acquisition of Partsbin resulted in significant
costs, including a material impairment charge, a write-down of goodwill
associated with the acquisition, and a number of challenges, including retaining
employees of the acquired company, integrating our order processing and credit
processing, integrating our product pricing strategy, and integrating the
diverse technologies and differing e-commerce platforms and accounting systems
used by each company. If we are unable to successfully complete the integration
of acquisitions, we may not realize the synergies from such acquisition, and our
business and results of operations could suffer. To finance any future
acquisitions, it may also be necessary for us to raise additional capital
through public or private financings or to obtain bank financing. Additional
funds may not be available on terms that are favorable to us, and, in the case
of equity financings, would result in dilution to our stockholders. Future
acquisitions by us could also result in large and immediate write-offs,
assumption of debt and unforeseen liabilities and significant adverse accounting
charges, any of which could substantially harm our business, financial condition
and results of operations.
If we are unable
to manage the challenges associated with our international operations, the
growth of our business could be limited and our business could
suffer.
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difficulties
and costs of staffing and managing foreign operations;
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restrictions
imposed by local labor practices and laws on our business and
operations;
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exposure
to different business practices and legal standards;
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unexpected
changes in regulatory requirements;
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the
imposition of government controls and restrictions;
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political,
social and economic instability and the risk of war, terrorist activities
or other international incidents;
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the
failure of telecommunications and connectivity
infrastructure;
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natural
disasters and public health emergencies;
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potentially
adverse tax consequences;
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the
failure of local laws to provide a sufficient degree of protection against
infringement of our intellectual property; and
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fluctuations
in foreign currency exchange rates and relative weakness in the U.S.
dollar.
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We
acquire substantially all of our products from manufacturers and distributors
located in Taiwan, China and the United States. Our top ten suppliers
represented approximately 68.6% of our total product purchases during the first
quarter ended April 4, 2009. We do not have any long-term contracts or exclusive
agreements with our foreign suppliers that would ensure our ability to acquire
the types and quantities of products we desire at acceptable prices and in a
timely manner. We continue to enter into supply agreements with our U.S.
based suppliers and our primary drop-ship vendors. In addition, our ability
to acquire products from our suppliers in amounts and on terms acceptable to us
is dependent upon a number of factors that could affect our suppliers and which
are beyond our control. For example, financial or operational difficulties that
some of our suppliers may face could result in an increase in the cost of the
products we purchase from them. In addition, the increasing consolidation among
auto parts suppliers may disrupt or end our relationship with some suppliers,
result in product shortages and/or could lead to less competition and,
consequently, higher prices.
In
addition, because many of our suppliers are outside of the United States,
additional factors could interrupt our relationships or affect our ability to
acquire the necessary products on acceptable terms,
including:
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political,
social and economic instability and the risk of war or other international
incidents in Asia or abroad;
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fluctuations
in foreign currency exchange rates that may increase our cost of
products;
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tariffs
and protectionist laws and business practices that favor local
businesses;
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difficulties
in complying with import and export laws, regulatory requirements and
restrictions; and
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natural
disasters and public health
emergencies.
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If we do
not maintain our relationships with our existing suppliers or develop
relationships with new suppliers on acceptable commercial terms, we may not be
able to continue to offer a broad selection of merchandise at competitive prices
and, as a result, we could lose customers and our sales could
decline.
We are dependent
upon third parties for distribution and fulfillment operations with respect to
many of our products.
For a
number of the products that we sell, we outsource the distribution and
fulfillment operation and are dependent on our distributors to manage inventory,
process orders and distribute those products to our customers in a timely
manner. For the first quarter ended April 4, 2009, our product purchases from a
single supplier represented 15.9% or more of our total product purchases. If we
do not maintain our existing relationships with our distributors on acceptable
commercial terms, we will need to obtain other suppliers and may not be able to
continue to offer a broad selection of merchandise at competitive prices, and
our sales may decrease.
In
addition, because we outsource to distributors a number of these traditional
retail functions relating to those products, we have limited control over how
and when orders are fulfilled. We also have limited control over the products
that our distributors purchase or keep in stock. Our distributors may not
accurately forecast the products that will be in high demand or they may
allocate popular products to other resellers, resulting in the unavailability of
certain products for delivery to our customers. Any inability to offer a broad
array of products at competitive prices and any failure to deliver those
products to our customers in a timely and accurate manner may damage our
reputation and brand and could cause us to lose customers.
We depend on
third-party delivery services to deliver our products to our customers on a
timely and consistent basis, and any deterioration in our relationship with any
one of these third parties or increases in the fees that they charge could
adversely affect our business and financial condition.
We rely
on third parties for the shipment of our products and we cannot be sure that
these relationships will continue on terms favorable to us, or at all. Shipping
costs have increased from time to time, and may continue to increase, which
could harm our business, prospects, financial condition and results of
operations by increasing our costs of doing business and resulting in reduced
gross margins. In addition, if our relationships with these third parties are
terminated or impaired, or if these third parties are unable to deliver products
for us, whether through labor shortage, slow down or stoppage, deteriorating
financial or business condition, responses to terrorist attacks or for any other
reason, we would be required to use alternative carriers for the shipment of
products to our customers. Changing carriers could have a negative effect on our
business and operating results due to reduced visibility of order status and
package tracking and delays in order processing and product delivery, and we may
be unable to engage alternative carriers on a timely basis, upon terms favorable
to us, or at all.
If commodity
prices such as fuel, plastic and steel continue to increase, our margins may
shrink.
If our
fulfillment operations are interrupted for any significant period of time or are
not sufficient to accommodate increased demand, our sales would decline and our
reputation could be harmed.
Our
success depends on our ability to successfully receive and fulfill orders and to
promptly deliver our products to our customers. The majority of orders for our
auto body parts products are filled from our inventory in our distribution
centers, where all our inventory management, packaging, labeling and product
return processes are performed. Increased demand and other considerations may
require us to expand our distribution centers or transfer our fulfillment
operations to larger facilities in the future.
Our
distribution centers are susceptible to damage or interruption from human error,
fire, flood, power loss, telecommunications failures, terrorist attacks, acts of
war, break-ins, earthquakes and similar events. We do not currently maintain
back-up power systems at our fulfillment centers. We do not presently have a
formal disaster recovery plan and our business interruption insurance may be
insufficient to compensate us for losses that may occur in the event operations
at our fulfillment center are interrupted. Any interruptions in our fulfillment
operations for any significant period of time, including interruptions resulting
from the expansion of our existing facilities or the transfer of operations to a
new facility, could damage our reputation and brand and substantially harm our
business and results of operations and alternate arrangements may increase the
cost of fulfillment. In addition, if we do not successfully expand our
fulfillment capabilities in response to increases in demand, we may not be able
to substantially increase our net sales.
We rely on
bandwidth and data center providers and other third parties to provide products
to our customers, and any failure or interruption in the services provided by
these third parties could disrupt our business and cause us to lose
customers.
We rely
on third-party vendors, including data center and bandwidth providers. Any
disruption in the network access or co-location services, which are the services
that house and provide Internet access to our servers, provided by these
third-party providers or any failure of these third-party providers to handle
current or higher volumes of use could significantly harm our business. Any
financial or other difficulties our providers face may have negative effects on
our business, the nature and extent of which we cannot predict. We exercise
little control over these third-party vendors, which increases our vulnerability
to problems with the services they provide. We also license technology and
related databases from third parties to facilitate elements of our e-commerce
platform. We have experienced and expect to continue to experience interruptions
and delays in service and availability for these elements. Any errors, failures,
interruptions or delays experienced in connection with these third-party
technologies could negatively impact our relationship with our customers and
adversely affect our business.
Our
systems also heavily depend on the availability of electricity, which also comes
from third-party providers. If we were to experience a major power outage, we
would have to rely on back-up generators. These back-up generators may not
operate properly through a major power outage, and their fuel supply could also
be inadequate during a major power outage. Information systems such as ours may
be disrupted by even brief power outages, or by the fluctuations in power
resulting from switches to and from backup generators. This could disrupt our
business and cause us to lose customers.
We face intense
competition and operate in an industry with limited barriers to entry, and some
of our competitors may have greater resources than us and may be better
positioned to capitalize on the growing e-commerce auto parts
market.
The auto
parts industry is competitive and highly fragmented, with products distributed
through multi-tiered and overlapping channels. We compete with both online and
offline retailers who offer OEM and aftermarket auto parts to either the
do-it-yourself or do-it-for-me customer segments. Current or potential
competitors include the following:
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national
auto parts retailers such as Advance Auto Parts, AutoZone, CSK Auto, Napa
Auto Parts, CarQuest, O’Reilly Automotive and Pep
Boys;
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large
online marketplaces such as Amazon.com and eBay;
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online
competitors;
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local
independent retailers or niche auto parts online retailers;
and
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wholesale
auto parts distributors such as LKQ
Corporation.
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Barriers
to entry are low, and current and new competitors can launch websites at a
relatively low cost. Many of our current and potential offline competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing, technical, management and other
resources than we do. In addition, some of our competitors have used and may
continue to use aggressive pricing tactics and devote substantially more
financial resources to website and system development than we do. We expect that
competition will further intensify in the future as Internet use and online
commerce continue to grow worldwide. Increased competition may result in reduced
operating margins, reduced profitability, loss of market share and diminished
brand recognition.
We would
also experience significant competitive pressure if any of our suppliers were to
sell their products directly to customers. Since our suppliers have access to
merchandise at very low costs, they could sell products at lower prices and
maintain higher gross margins on their product sales than we can. In this event,
our current and potential customers may decide to purchase directly from these
suppliers. Increased competition from any supplier capable of maintaining high
sales volumes and acquiring products at lower prices than us could significantly
reduce our market share and adversely impact our financial
results.
Original equipment manufacturers have attempted to use claims
of intellectual property infringement against manufacturers and distributors of
aftermarket products to restrict or eliminate the sale of aftermarket products
that are the subject of the claims. The OEMs have brought such claims in federal
court and with the United States International Trade Commission. We have
received in the past, and we anticipate we may in the future receive,
communications alleging that certain products we sell infringe the patents,
copyrights, trademarks and trade names or other intellectual property rights of
OEMs or other third parties. For instance, after 3 and a half years
of litigation and related costs and expenses, on April 16, 2009, we entered into
a settlement agreement with Ford Motor Company and Ford Global Technologies, LLC
that ended the two pending legal actions that were initiated by Ford with the
United States International Trade Commission. For further
information, see Note 5 of Notes to Unaudited Condensed Consolidated Financial
Statements, included in Part I, Item I of this report.
The
United States Patent and Trademark Office records indicate that OEMs are seeking
and obtaining more design patents then they have in the past. To the extent that
the OEMs are successful with intellectual property infringement claims, we could
be restricted or prohibited from selling certain aftermarket products which
could have an adverse effect on our business. Infringement claims could also
result in increased costs of doing business arising from increased legal
expenses, adverse judgments or settlements or changes to our business practices
required to settle such claims or satisfy any judgments. Litigation could result
in interpretations of the law that require us to change our business practices
or otherwise increase our costs and harm our business. We do not maintain
insurance coverage to cover the types of claims that could be asserted. If a
successful claim were brought against us, it could expose us to significant
liability.
If we are unable
to protect our intellectual property rights, our reputation and brand could be
impaired and we could lose customers.
We regard
our trademarks, trade secrets and similar intellectual property as important to
our success. We rely on trademark and copyright law, and trade secret
protection, and confidentiality and/or license agreements with employees,
customers, partners and others to protect our proprietary rights. We cannot be
certain that we have taken adequate steps to protect our proprietary rights,
especially in countries where the laws may not protect our rights as fully as in
the United States. In addition, our proprietary rights may be infringed or
misappropriated, and we could be required to incur significant expenses to
preserve them. We have common law trademarks, as well as pending federal
trademark registrations for several marks and one registered mark. Even if we
obtain approval of such pending registrations, the resulting registrations may
not adequately cover our inventions or protect us against infringement by
others. Effective trademark, service mark, copyright, patent and trade secret
protection may not be available in every country in which our products and
services may be made available online. We also currently own or control a number
of Internet domain names, including www.usautoparts.net, www.autopartswarehouse.com, and
www.partstrain.com and have invested time and money in the purchase of
domain names and other intellectual property, which may be impaired if we cannot
protect such intellectual property. We may be unable to protect these domain
names or acquire or maintain relevant domain names in the United States and in
other countries. If we are not able to protect our trademarks, domain names or
other intellectual property, we may experience difficulties in achieving and
maintaining brand recognition and customer loyalty.
If our product
catalog database is stolen, misappropriated or damaged, or if a competitor is
able to create a substantially similar catalog without infringing our rights,
then we may lose an important competitive advantage.
We have
invested significant resources and time to build and maintain our product
catalog, which is maintained in the form of an electronic database, and maps
SKUs to relevant product applications based on vehicle makes, models and years.
We believe that our product catalog provides us with an important competitive
advantage in both driving traffic to our websites and converting that traffic to
revenue by enabling customers to quickly locate the products they require. We
cannot assure you that we will be able to protect our product catalog from
unauthorized copying or theft or that our product catalog will continue to
operate adequately, without any technological challenges. In addition, it is
possible that a competitor could develop a catalog or database that is similar
to or more comprehensive than ours, without infringing our rights. In the event
our product catalog is damaged or is stolen, copied or otherwise replicated to
compete with us, whether lawfully or not, we may lose an important competitive
advantage and our business could be harmed.
Our e-commerce
system is dependent on open-source software, which exposes us to uncertainty and
potential liability.
We
utilize open-source software such as Linux, Apache, MySQL, PHP, Fedora and Perl
throughout our web properties and supporting infrastructure. Open-source
software is maintained and upgraded by a general community of software
developers under various open-source licenses, including the GNU General Public
License (“GPL”). These developers are under no obligation to maintain, enhance
or provide any fixes or updates to this software in the future. Additionally,
under the terms of the GPL and other open-source licenses, we may be forced to
release to the public source-code internally developed by us pursuant to such
licenses. Furthermore, if any of these developers contribute any code of others
to any of the software that we use, we may be exposed to claims and liability
for intellectual property infringement. A number of lawsuits are currently
pending against third parties over the ownership rights to the various
components within some open-source software that we use. If the outcome of these
lawsuits is unfavorable, we may be held liable for intellectual property
infringement based on our use of these open-source software components. We may
also be forced to implement changes to the code-base for this software or
replace this software with internally developed or commercially licensed
software.
We face exposure
to product liability lawsuits.
The
automotive industry in general has been subject to a large number of product
liability claims due to the nature of personal injuries that result from car
accidents or malfunctions. As a distributor of auto parts, including parts
obtained overseas, we could be held liable for the injury or damage caused if
the products we sell are defective or malfunction. While we carry insurance
against product liability claims, if the damages in any given action were high
or we were subject to multiple lawsuits, the damages and costs could exceed the
limits of our insurance coverage. If we were required to pay substantial damages
as a result of these lawsuits, it may seriously harm our business and financial
condition. Even defending against unsuccessful claims could cause us to incur
significant expenses and result in a diversion of management’s attention. In
addition, even if the money damages themselves did not cause substantial harm to
our business, the damage to our reputation and the brands offered on our
websites could adversely affect our future reputation and our brand, and could
result in a decline in our net sales and profitability.
We rely on key
personnel and may need additional personnel for the success and growth of our
business.
Our
business is largely dependent on the personal efforts and abilities of highly
skilled executive, technical, managerial, merchandising, marketing and call
center personnel. Competition for such personnel is intense, and we cannot
assure you that we will be successful in attracting and retaining such
personnel. The loss of any key employee or our inability to attract or retain
other qualified employees could harm our business and results of operations.
Risks Related To Our Common
Stock
Our stock price
has been and may continue to be volatile, which may result in losses to our
stockholders.
The
market prices of technology and e-commerce companies generally have been
extremely volatile and have recently experienced sharp share price and trading
volume changes. The trading price of our common stock is likely to be volatile
and could fluctuate widely in response to, among other things, the risk factors
described in this report and other factors beyond our control such as
fluctuations in the operations or valuations of companies perceived by investors
to be comparable to us, our ability to meet analysts’ expectations, or
conditions or trends in the Internet or auto parts
industries.
Since the
completion of our initial public offering in February 2007, the trading price of
our common stock has been volatile, declining from a high of $12.61 per share to
a low per share of $1.00. We have also experienced significant fluctuations in
the trading volume of our common stock. General economic and political
conditions unrelated to our performance may also adversely affect the price of
our common stock. In the past, following periods of volatility in the market
price of a public company’s securities, securities class action litigation has
often been initiated. Due to the inherent uncertainties of litigation, we cannot
predict the ultimate outcome of the litigation if it were to continue. An
unfavorable result could have a material adverse effect on our financial
condition and results of operation.
Our executive
officers and directors own a significant percentage of our
stock.
As of
April 4, 2009, our executive officers and directors and entities that are
affiliated with them beneficially owned approximately 67.0% of our outstanding
shares of common stock. This significant concentration of share ownership may
adversely affect the trading price for our common stock because investors often
perceive disadvantages in owning stock in companies with controlling
stockholders. Also, these stockholders, acting together, will be able to control
our management and affairs and matters requiring stockholder approval including
the election of our entire Board of Directors and certain significant corporate
actions such as mergers, consolidations or the sale of substantially all of our
assets. As a result, this concentration of ownership could delay, defer or
prevent others from initiating a potential merger, takeover or other change in
our control, even if these actions would benefit our other stockholders and
us.
Our future
operating results may fluctuate and may fail to meet market
expectations.
We expect
that our revenue and operating results will continue to fluctuate from quarter
to quarter due to various factors, many of which are beyond our control. If our
quarterly revenue or operating results fall below the expectations of investors
or securities analysts, the price of our common stock could significantly
decline. The factors that could cause our operating results to continue to
fluctuate include, but are not limited to:
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fluctuations
in the demand for aftermarket auto parts;
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price
competition on the Internet or among offline retailers for auto
parts;
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our
ability to attract visitors to our websites and convert those visitors
into customers;
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our
ability to maintain and expand our supplier and distribution
relationships;
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the
effects of seasonality on the demand for our products;
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our
ability to accurately forecast demand for our products, price our products
at market rates and maintain appropriate inventory
levels;
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our
ability to build and maintain customer loyalty;
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infringement
actions that could impact the viability of the auto parts aftermarket, or
portions thereof;
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the
success of our brand-building and marketing campaigns;
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our
ability to accurately project our future revenues, earnings, and results
of operations;
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government
regulations related to use of the Internet for commerce, including the
application of existing tax regulations to Internet commerce and changes
in tax regulations;
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technical
difficulties, system downtime or Internet brownouts; and
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the
amount and timing of operating costs and capital expenditures relating to
expansion of our business, operations and
infrastructure. |
While
management has concluded that our internal controls over financial reporting
were effective as of April 4, 2009, we have in the past, and could in the
future, have a material weakness or significant deficiency in our control over
financial reporting or fail to comply with Section 404 of the Sarbanes-Oxley Act
of 2002. If we fail to properly maintain an effective system of internal control
over financial reporting, it could impact our ability to prevent fraud or to
issue our financial statements in a timely manner that presents fairly our
financial condition and results of operations. The existence of any such
deficiencies or weaknesses, even if cured, may also lead to the loss of investor
confidence in the reliability of our financial statements, could harm our
business and negatively impact the trading price of our common stock. Such
deficiencies or material weaknesses may also subject us to lawsuits,
investigations and other penalties.
Our
charter documents could deter a takeover effort, which could inhibit your
ability to receive an acquisition premium for your shares.
Provisions
in our certificate of incorporation and bylaws could make it more difficult for
a third party to acquire us, even if doing so would be beneficial to our
stockholders. Such provisions include the following:
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our
Board of Directors are authorized, without prior stockholder approval, to
create and issue preferred stock which could be used to implement
anti-takeover devices;
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advance
notice is required for director nominations or for proposals that can be
acted upon at stockholder meetings;
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our
Board of Directors is classified such that not all members of our board
are elected at one time, which may make it more difficult for a person who
acquires control of a majority of our outstanding voting stock to replace
all or a majority of our directors;
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stockholder
action by written consent is prohibited except with regards to an action
that has been approved by the board;
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special
meetings of the stockholders are permitted to be called only by the
chairman of our Board of Directors, our chief executive officer or by a
majority of our Board of Directors;
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stockholders
are not be permitted to cumulate their votes for the election of
directors; and
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stockholders
are permitted to amend certain provisions of our bylaws only upon
receiving at least 66 2/3% of the votes entitled to be cast by holders of
all outstanding shares then entitled to vote generally in the election of
directors, voting together as a single
class.
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We do not intend
to pay dividends on our common stock.
We
currently intend to retain any future earnings and do not expect to pay any cash
dividends on our capital stock for the foreseeable future.
General Market and Industry
Risk
Economic
conditions have had, and may continue to have an adverse effect on the demand
for aftermarket auto parts and could adversely affect our sales and operating
results.
We sell
aftermarket auto parts consisting of body and engine parts used for repair and
maintenance, performance parts used to enhance performance or improve aesthetics
and accessories that increase functionality or enhance a vehicle’s features.
Demand for our products has been and may continue to be adversely affected by
general economic conditions. In declining economies, consumers often defer
regular vehicle maintenance and may forego purchases of nonessential performance
and accessories products, which can result in a decrease in demand for auto
parts in general. Consumers also defer purchases of new vehicles, which
immediately impacts performance parts and accessories, which are generally
purchased in the first six months of a vehicle’s lifespan. In addition, during
economic downturns some competitors may become more aggressive in their pricing
practices, which would adversely impact our gross margin and could cause large
fluctuations in our stock price. Certain suppliers may exit the industry which
may impact our ability to procure parts and may adversely impact gross margin as
the remaining suppliers increase prices to take advantage of limited
competition.
Vehicle miles
driven have and may continue to decrease, resulting in a decline of our revenues
and negatively affecting our results of operations.
We and
our industry depend on the number of vehicle miles driven. Decreased miles
driven reduce the number of accidents and corresponding demand for crash parts,
and reduce the wear and tear on vehicles with a corresponding reduction in
demand for vehicle repairs and replacement or hard parts.
The success of
our business depends on the continued growth of the Internet as a retail
marketplace and the related expansion of the Internet
infrastructure.
Our
future success depends upon the continued and widespread acceptance and adoption
of the Internet as a vehicle to purchase products. If customers or manufacturers
are unwilling to use the Internet to conduct business and exchange information,
our business will fail. The commercial acceptance and use of the Internet may
not continue to develop at historical rates, or may not develop as quickly as we
expect. The growth of the Internet, and in turn the growth of our business, may
be inhibited by concerns over privacy and security, including concerns regarding
“viruses” and “worms,” reliability issues arising from outages or damage to
Internet infrastructure, delays in development or adoption of new standards and
protocols to handle the demands of increased Internet activity, decreased
accessibility, increased government regulation, and taxation of Internet
activity. In addition, our business growth may be adversely affected if the
Internet infrastructure does not keep pace with the growing Internet activity
and is unable to support the demands placed upon it, or if there is any delay in
the development of enabling technologies and performance
improvements.
Negative
conditions in the global credit markets may impair the liquidity of a portion of
our investments portfolio, and adversely affect our results of operations and
access to financing.
Our
investment securities consist of high-grade ARPS. As of April 4, 2009, our
long-term marketable securities were comprised of $6.5 million (par value) of
high-grade (AAA rated) ARPS issued primarily by close end funds that primarily
hold debt obligations from municipalities. The recent negative conditions in the
global credit markets have prevented some investors from liquidating their
holdings, including their holdings of ARPS. In response to the credit situation,
on February 8, 2008, we instructed our investment advisor to liquidate all
our investments in close end funds and move these funds into money market
investments. On February 13, 2008, we were informed that there was
insufficient demand at auction for our remaining four high-grade ARPS,
representing approximately $7.8 million. As a result, these affected securities
currently are not liquid, and have been reclassified as long-term
investments. As of April 4, 2009, $1.3 million of our investments in
ARPS were redeemed. We do not know when we will have access to the
capital in these remaining investments. In the event we need to access the funds
that are in an illiquid state, we will not be able to do so without a loss of
principal or until a future auction on these investments is successful, the
securities are redeemed by the issuer or a secondary market emerges. If we
cannot readily access these funds, we may be required to borrow funds or issue
additional debt or equity securities to meet our capital requirements. At this
time, management has concluded that these remaining investments are impaired and
has recorded an impairment charge to other comprehensive income totaling
$149,000. Management is not sure that these investments will not be
settled in the short term, although the market for these investments is
presently uncertain. If the credit ratings of the security issuers deteriorate
and any decline in market value is determined to be other-than-temporary, we
would be required to adjust the carrying value of the investment through an
additional impairment charge.
If we fail to
offer a broad selection of products at competitive prices to meet our customers’
demands, our revenue could decline.
In order
to expand our business, we must successfully offer, on a continuous basis, a
broad selection of auto parts that meet the needs of our customers. Our auto
parts are used by consumers for a variety of purposes, including repair,
performance, improved aesthetics and functionality. In addition, to be
successful, our product offerings must be broad and deep in scope, competitively
priced, well-made, innovative and attractive to a wide range of consumers. We
cannot predict with certainty that we will be successful in offering products
that meet all of these requirements. If our product offerings fail to satisfy
our customers’ requirements or respond to changes in customer preferences, our
revenue could decline.
System failures,
including failures due to natural disasters or other catastrophic events, could
prevent access to our websites, which could reduce our net sales and harm our
reputation.
Our sales
would decline and we could lose existing or potential customers if they are not
able to access our websites or if our websites, transactions processing systems
or network infrastructure do not perform to our customers’ satisfaction. Any
Internet network interruptions or problems with our websites
could:
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prevent
customers from accessing our websites;
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reduce
our ability to fulfill orders or bill customers;
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reduce
the number of products that we sell;
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cause
customer dissatisfaction; or
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damage
our brand and reputation.
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We have
experienced brief computer system interruptions in the past, and we believe they
will continue to occur from time to time in the future. Our systems and
operations are also vulnerable to damage or interruption from a number of
sources, including a natural disaster or other catastrophic event such as an
earthquake, typhoon, volcanic eruption, fire, flood, terrorist attack, computer
viruses, power loss, telecommunications failure, physical and electronic
break-ins and other similar events. For example, our headquarters and the
majority of our infrastructure, including some of our servers, are located in
Southern California, a seismically active region. We also maintain offshore and
outsourced operations in the Philippines, an area that has been subjected to a
typhoon and a volcanic eruption in the past. In addition, California has in the
past experienced power outages as a result of limited electrical power supplies
and due to recent fires in the southern part of the state. Such outages, natural
disasters and similar events may recur in the future and could disrupt the
operation of our business. Our technology infrastructure is also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions.
Although the critical portions of our systems are redundant and backup copies
are maintained offsite, not all of our systems and data are fully redundant. We
do not presently have a formal disaster recovery plan in effect and may not have
sufficient insurance for losses that may occur from natural disasters or
catastrophic events. Any substantial disruption of our technology infrastructure
could cause interruptions or delays in our business and loss of data or render
us unable to accept and fulfill customer orders or operate our websites in a
timely manner, or at all.
We may be subject
to liability for sales and other taxes and penalties, which could have an
adverse effect on our business.
We
currently collect sales or other similar taxes only on the shipment of goods to
the states of California, New Jersey, Kansas and Tennessee. The U.S. Supreme
Court has ruled that vendors whose only connection with customers in a state is
by common carrier or the U.S. mail are free from state-imposed duties to collect
sales and use taxes in that state. However, states could seek to impose
additional income tax obligations or sales tax collection obligations on
out-of-state companies such as ours, which engage in or facilitate online
commerce, based on their interpretation of existing laws, including the Supreme
Court ruling, or specific facts relating to us. If sales tax obligations are
successfully imposed upon us by a state or other jurisdiction, we could be
exposed to substantial tax liabilities for past sales and penalties and fines
for failure to collect sales taxes. We could also suffer decreased sales in that
state or jurisdiction as the effective cost of purchasing goods from us
increases for those residing in that state or jurisdiction.
In
addition, a number of states, as well as the U.S. Congress, have been
considering various initiatives that could limit or supersede the Supreme
Court’s apparent position regarding sales and use taxes on Internet sales. If
any of these initiatives are enacted, we could be required to collect sales and
use taxes in additional states and our revenue could be adversely affected.
Furthermore, the U.S. Congress has not yet extended a moratorium, which was
first imposed in 1998 but has since expired, on state and local governments’
ability to impose new taxes on Internet access and Internet transactions. The
imposition by state and local governments of various taxes upon Internet
commerce could create administrative burdens for us as well as substantially
impair the growth of e-commerce and adversely affect our revenue and
profitability. Since our service is available over the Internet in multiple
states, these jurisdictions may require us to qualify to do business in these
states. If we fail to qualify in a jurisdiction that requires us to do so, we
could face liabilities for taxes and penalties.
Additionally,
in 2008, New York enacted a measure that requires many online retailers to begin
collecting sales taxes on purchases shipped to the state, even if they have no
operations or employees working there.
We could be
liable for breaches of security on our websites.
A
fundamental requirement for e-commerce is the secure transmission of
confidential information over public networks. Anyone who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations. Although we have developed systems and
processes that are designed to protect consumer information and prevent
fraudulent credit card transactions and other security breaches, failure to
mitigate such fraud or breaches may adversely affect our operating results. We
may be required to expend significant capital and other resources to protect
against potential security breaches or to alleviate problems caused by any
breach. We rely on licensed encryption and authentication technology to provide
the security and authentication necessary for secure transmission of
confidential information, including credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the algorithms that we use
to protect customer transaction data. In the event someone circumvents our
security measures, it could seriously harm our business and reputation and we
could lose customers. Security breaches could also expose us to a risk of loss
or litigation and possible liability for failing to secure confidential customer
information.
If we do not
respond to technological change, our websites could become obsolete and our
financial results and conditions could be adversely
affected.
We
maintain a network of websites which requires substantial development and
maintenance efforts, and entails significant technical and business risks. To
remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our websites. The Internet and the e-commerce
industry are characterized by rapid technological change, the emergence of new
industry standards and practices and changes in customer requirements and
preferences. Therefore, we may be required to license emerging technologies,
enhance our existing websites, develop new services and technology that address
the increasingly sophisticated and varied needs of our current and prospective
customers, and adapt to technological advances and emerging industry and
regulatory standards and practices in a cost-effective and timely manner. Our
ability to remain technologically competitive may require substantial
expenditures and lead time and our failure to do so may harm our business and
results of operations.
Existing or
future government regulation could expose us to liabilities and costly changes
in our business operations and could reduce customer demand for our products and
services.
We are
subject to federal and state consumer protection laws and regulations, including
laws protecting the privacy of customer non-public information and regulations
prohibiting unfair and deceptive trade practices, as well as laws and
regulations governing businesses in general and the Internet and e-commerce and
certain environmental laws. Additional laws and regulations may be adopted with
respect to the Internet, the effect of which on e-commerce is uncertain. These
laws may cover issues such as user privacy, spyware and the tracking of consumer
activities, marketing e-mails and communications, other advertising and
promotional practices, money transfers, pricing, content and quality of products
and services, taxation, electronic contracts and other communications,
intellectual property rights, and information security. Furthermore, it is not
clear how existing laws such as those governing issues such as property
ownership, sales and other taxes, trespass, data mining and collection, and
personal privacy apply to the Internet and e-commerce. California has enacted
legislation banning the sale of catalytic converters that do not meet California
emissions regulations, and the current federal administration has indicated that
13 additional states will be allowed to enact their own legislation that mirrors
California. This will impact sale of products for emissions systems
to those states and may adversely impact our sales and operating
results. To the extent we expand into international markets, we will
be faced with complying with local laws and regulations, some of which may be
materially different than U.S. laws and regulations. Any such foreign law or
regulation, any new U.S. law or regulation, or the interpretation or application
of existing laws and regulations to the Internet or other online services, may
have a material adverse effect on our business, prospects, financial condition
and results of operations by, among other things, impeding the growth of the
Internet, subjecting us to fines, penalties, damages or other liabilities,
requiring costly changes in our business operations and practices, and reducing
customer demand for our products and services. We do not maintain insurance
coverage to cover the types of claims or liabilities that could arise as a
result of such regulation.
The United States
government may substantially increase border controls and impose restrictions on
cross-border commerce that may substantially harm our
business.
We
purchase a substantial portion of our products from foreign manufacturers and
other suppliers who source products internationally. Restrictions on shipping
goods into the United States from other countries pose a substantial risk to our
business. Particularly since the terrorist attacks on September 11, 2001,
the United States government has substantially increased border surveillance and
controls. If the United States were to impose further border controls and
restrictions, impose quotas, tariffs or import duties, increase the
documentation requirements applicable to cross border shipments or take other
actions that have the effect of restricting the flow of goods from other
countries to the United States, we may have greater difficulty acquiring our
inventory in a timely manner, experience shipping delays, or incur increased
costs and expenses, all of which would substantially harm our business and
results of operations.
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Unregistered
Sales of Equity Securities and Use of
Proceeds
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Sales
of Unregistered Securities
None.
Use
of Proceeds from Sales of Registered Securities
On
February 14, 2007, we completed the initial public offering of our common stock,
pursuant to which we sold 8,000,000 shares of our common stock and the selling
stockholders sold an aggregate of 3,500,000 shares of our common stock (which
included 1,500,000 shares sold by the selling stockholders pursuant to the
exercise of the underwriters’ over-allotment option) at the initial public
offering price of $10.00 per share. The shares of common stock sold in the
offering were registered under the Securities Act on a registration statement on
Form S-1 (File. No. 333-138379) that was declared effective by the SEC on
February 8, 2007. RBC Capital Markets Corporation, Thomas Weisel Partners LLC,
Piper Jaffray & Co., and JMP Securities LLC were the co-managing
underwriters for the offering. The aggregate purchase price of the shares sold
by us in the offering was $80.0 million.
The
aggregate purchase price of the shares sold by the selling stockholders was
$35.0 million. We and the selling stockholders paid to the underwriters
underwriting discounts and commissions totaling $5.6 million and $2.5 million,
respectively, in connection with the offering. In addition, we incurred
additional expenses of approximately $2.9 million in connection with the
offering. After deducting the underwriting discounts and commissions and
offering expenses, we received net proceeds from the offering of approximately
$71.5 million. We did not receive any proceeds from the sale of shares by the
selling stockholders.
Approximately $28.0 million of the net
proceeds from the offering was used to repay our outstanding indebtedness under
two term loans for approximately $18.0 million and $10.0 million, payable to our
commercial lender. In addition, $5.0 million of the net proceeds from the
offering has been paid on the notes payable to the former stockholders of
Partsbin. Except for the payment of such debt, none of the net proceeds from the
offering were paid directly or indirectly to any of our directors or officers
(or their associates) or persons owning ten percent or more of any class of our
equity securities or to any other affiliate, other than in the form of wages or
salaries and bonuses paid out in the ordinary course of business. In July 2008,
the Company used $3.4 million to pay litigation settlement costs related to the
stockholder class action lawsuit. The remaining net proceeds from the offering
have been invested in investment-grade securities and cash equivalents. We will
retain broad discretion over the use of the net proceeds received from our
initial public offering. The amount and timing of our actual expenditures may
vary significantly depending on a number of factors, including, but not limited
to, the growth of our sales and customer base, the type of efforts we make to
build our brand and investments in our business.
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Defaults
Upon Senior Securities.
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None.
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Submission
of Matters to a Vote of Security
Holders
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None.
None.
The
following exhibits are filed herewith or are incorporated herein by reference to
the location indicated.
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Description
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31.1
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Certification
of the principal executive officer required by Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as amended
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31.2
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Certification
of the principal financial officer required by Rule 13a-14(a) or 15d-14(a)
of the Securities Exchange Act of 1934, as amended
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32.1
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Certification
of the Chief Executive Officer required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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32.2
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Certification
of the Chief Financial Officer required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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SIGNATURES
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.
Dated:
May 14, 2009
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U.S.
AUTO PARTS NETWORK, INC.
(Registrant)
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By
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/s/
SHANE EVANGELIST
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Shane
Evangelist
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Chief
Executive Officer
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(Principal
Executive Officer)
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By
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/s/
THEODORE R. SANDERS
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Theodore
R. Sanders,
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Chief
Financial Officer
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(Principal
Accounting Officer)
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