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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 0-14365
ALPHA TECHNOLOGIES GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0079338
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11990 San Vicente Blvd, Los Angeles, CA 90049
---------------------------------------------
(Address of principal executive offices)
310-566-4005
------------
(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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.03 par value 7,110,336
---------------------------- ---------
Class Outstanding at August 31, 2002
ALPHA TECHNOLOGIES GROUP, INC.
FORM 10-Q
JULY 28, 2002
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets July 28, 2002
and October 28, 2001 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended July 28, 2002
and July 29, 2001 4
Condensed Consolidated Statements of Comprehensive
(Loss) Income Three Months and Nine Months Ended
July 28, 2002 and July 29, 2001 5
Condensed Consolidated Statements of Cash Flow
Nine Months Ended July 28, 2002 and July 29, 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24
2
ALPHA TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share-Related Data)
(Unaudited)
July 28, October 28,
2002 2001
-------- -----------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 492 $ 2,701
Accounts receivable, net 8,504 9,317
Inventories, net 8,473 8,049
Prepaid expenses 1,619 1,771
-------- --------
Total current assets 19,088 21,838
PROPERTY AND EQUIPMENT, net 22,076 24,531
GOODWILL, net 12,980 28,582
OTHER ASSETS, net 8,324 2,500
-------- --------
TOTAL ASSETS $ 62,468 $ 77,451
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,916 $ 4,522
Accrued compensation and related benefits 870 1,000
Other accrued expenses 992 1,833
Current portion of long-term debt 9,350 32,600
-------- --------
Total current liabilities 15,128 39,955
REVOLVING CREDIT FACILITY 2,200 --
LONG-TERM DEBT, Net of current portion 18,050 --
OTHER LONG-TERM LIABILITIES 518 626
-------- --------
Total liabilities 35,896 40,581
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value; 180,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.03 par value; 17,000,000 shares authorized;
8,529,826 shares issued and outstanding at July 28, 2002
and October 28, 2001 256 256
Additional paid-in capital 47,060 46,895
Accumulated deficit (14,537) (4,042)
Accumulated other comprehensive (loss) (313) (345)
Treasury stock, at cost (1,419,490 common shares at
July 28, 2002 and October 28, 2001.) (5,894) (5,894)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 26,572 36,870
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,468 $ 77,451
======== ========
See notes to condensed consolidated financial statements
3
ALPHA TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
----------------------- -----------------------
July 28, July 29, July 28, July 29,
2002 2001 2002 2001
-------- -------- -------- --------
SALES $ 15,258 $ 16,655 $ 41,778 $ 52,453
COST OF SALES 12,768 14,120 35,119 40,658
-------- -------- -------- --------
Gross profit 2,490 2,535 6,659 11,795
-------- -------- -------- --------
OPERATING EXPENSES
Research and development 129 217 372 791
Selling, general and administrative 1,540 2,128 4,678 6,940
Goodwill impairment charge 15,602 -- 15,602 --
Restructuring and other non recurring charges -- 222 -- 222
-------- -------- -------- --------
Total operating expenses 17,271 2,567 20,652 7,953
-------- -------- -------- --------
OPERATING (LOSS) INCOME (14,781) (32) (13,993) 3,842
INTEREST EXPENSE (627) (741) (1,912) (1,856)
OTHER INCOME, net 8 100 26 257
-------- -------- -------- --------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES (15,400) (673) (15,879) 2,243
(BENEFIT) PROVISION FOR INCOME TAXES (5,567) (247) (5,748) 811
-------- -------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM (9,833) (426) (10,131) 1,432
LOSS FROM DISCONTINUED OPERATION, net of applicable taxes -- -- -- (59)
GAIN ON SALE OF DISCONTINUED OPERATION, net of applicable -- -- -- 207
taxes
EXTRAORDINARY LOSS, EARLY EXTINGUISHMENT OF DEBT, net of
applicable taxes -- -- (364) (400)
-------- -------- -------- --------
NET (LOSS) INCOME $ (9,833) $ (426) $(10,495) $ 1,180
======== ======== ======== ========
EARNINGS PER COMMON SHARE
BASIC
(Loss) income from continuing operations $ (1.38) $ (0.06) $ (1.43) $ 0.20
Loss from discontinued operation -- -- -- (0.01)
Gain on sale of discontinued operation -- -- -- 0.03
Extraordinary loss, early extinguishment of debt -- -- (0.05) (0.06)
-------- -------- -------- --------
Net (loss) income $ (1.38) $ (0.06) $ (1.48) $ 0.17
======== ======== ======== ========
DILUTED
(Loss) income from continuing operations $ (1.38) $ (0.06) $ (1.43) $ 0.19
Loss from discontinued operation -- -- -- (0.01)
Gain on sale of discontinued operation -- -- -- 0.03
Extraordinary loss, early extinguishment of debt -- -- (0.05) (0.05)
-------- -------- -------- --------
Net (loss) income $ (1.38) $ (0.06) $ (1.48) $ 0.16
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
Basic 7,109 7,083 7,110 7,006
Diluted 7,109 7,083 7,110 7,497
See notes to condensed consolidated financial statements
4
ALPHA TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
--------------------- -----------------------
July 28, July 29, July 28, July 29,
2002 2001 2002 2001
-------- -------- -------- --------
NET (LOSS) INCOME $(9,833) $(426) $(10,495) $ 1,180
OTHER COMPREHENSIVE (LOSS) INCOME
Change in value of interest rate swap, (net of applicable taxes) (70) (137) 32 (137)
------- ----- -------- -------
COMPREHENSIVE (LOSS) INCOME $(9,903) $(563) $(10,463) $ 1,043
======= ===== ======== =======
See notes to condensed consolidated financial statements
5
ALPHA TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
-----------------------
July 28, July 29,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(10,495) $ 1,180
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 2,835 3,549
Goodwill impairment charge 15,602 --
Gain on sale of discontinued operation -- (207)
Gain on sale of equipment -- (63)
Extraordinary loss on early extinguishment of debt 590 400
Deferred stock compensation expense 10 9
Deferred income taxes (5,948) 1,059
Net cash provided by discontinued operations -- 131
Changes in assets and liabilities:
Accounts receivable 813 4,809
Inventories (424) 207
Prepaid expenses 152 24
Accounts payable (606) (2,593)
Accrued compensation and related benefits (130) (1,025)
Other liabilities (915) (691)
-------- --------
Net cash provided by operating activities 1,484 6,789
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- 110
Purchase of property and equipment, net (369) (1,082)
Expenditures for business acquisitions -- (49,551)
Proceeds from business divestitures -- 2,200
Decrease in other assets 18 163
-------- --------
Net cash used in investing activities (351) (48,160)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 8 35
Proceeds from stock rights offering -- 1,800
Payments for debt issue costs (350) (1,327)
Proceeds from revolving credit lines -- 7,200
Payments on revolving credit lines -- (5,000)
Proceeds from issuance of long-term debt -- 35,000
Payments on long-term debt (3,000) (6,661)
-------- --------
Net cash (used in) provided by financing activities (3,342) 31,047
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,209) (10,324)
CASH AND CASH EQUIVALENTS, beginning of period 2,701 12,364
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 492 $ 2,040
======== ========
NON CASH ACTIVITY:
Issuance of warrants related to debt extinguishment $ 148 $ --
======== ========
See notes to condensed consolidated financial statements
6
ALPHA TECHNOLOGIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Alpha Technologies Group, Inc. (The "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
and with the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for the fair presentation of the Company's
condensed consolidated financial statements, have been included. The results for
the three and nine months ended July 28, 2002 are not necessarily indicative of
results for the full year ending October 27, 2002.
All material intercompany transactions and balances have been eliminated
during consolidation. As more fully described in Note 5 - Discontinued
Operation, prior year amounts have been restated, through reclassification, to
present the subsystems business, which was sold in November 2000 as a
discontinued operation.
The Company follows a 4-5-4 week quarterly accounting period cycle wherein
each quarter consists of two four week months and one five week month. The last
day of the fiscal year is always the last Sunday in October.
Note 2 - Significant Accounting Policies
The following narrative provides information about our business and the
accounting policies and principles we use to prepare our financial statements.
An understanding of these policies is critical to a reader's understanding of
our financial statements. The reader is encouraged to read our annual financial
statements and the notes thereto included in our Annual Report on Form 10-K for
the year ended October 28, 2001.
Business
The Company designs, extrudes, fabricates and sells thermal and non thermal
management products for use in a variety of industries including automotive,
telecommunication, industrial controls, transportation, power supply, factory
automation, consumer electronics, aerospace, defense, microprocessor and
computer industries. The Company extrudes aluminum for its use in the production
of thermal management products and sells aluminum extrusions to a variety of
industries including the construction, sporting goods and other leisure activity
markets.
Revenue Recognition and Allowance for Sales Return and Doubtful Accounts
The Company recognizes revenues when (1) persuasive evidence of an
arrangement exists, (2) products and services have been delivered to the
ultimate customers, (3) the price is fixed or determinable, and (4)
collectibility is reasonably assured. The Company's shipping terms are generally
FOB shipping point.
7
Reserve for sales returns are provided in the period in which the related
sale is recognized. Allowances for doubtful accounts are provided when an
account receivable is considered uncollectible. Adjustments to the allowance and
reserve accounts are made, when necessary, as new information becomes available.
Use of Estimates and Other Uncertainties
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America 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. Actual results could
differ from those estimates.
Risk Management and Hedging Activity
The Company's current risk management strategies include the use of an
interest rate swap (see Note 7) to hedge against its interest rate risk. The
interest rate swap is designated as a cash flow hedge and is carried on the
balance sheets at fair value. The Company evaluates its interest rate swap each
quarter to determine if it is effective. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the effective portion of unrealized gains
or losses on the fair value of the swap is charged to other comprehensive income
until the hedged transaction is complete and affects earnings. Ineffectiveness
is charged to earnings as incurred.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivables, accounts payables, accrued expenses, debt
instruments and interest rate swap (see Note 7). The interest rate swap was
entered into to manage the Company's interest rate risk. The interest rate swap
effectively fixes the interest rate on 50% of the outstanding term loan at
8.47%. The interest rate swap is stated at fair value which was approximately
$478,000 and $522,000 at July 28, 2002 and October 28, 2001, respectively, and
is included in other long-term liabilities on the accompanying balance sheets.
For all other financial instruments, the carrying value approximated their fair
value due to the short-term nature and the variable rate features of these
financial instruments.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money market accounts and other
highly liquid investments with remaining maturities of three months or less when
purchased.
Inventories
Inventories are stated at the lower of cost or market and are priced using
the first-in, first-out method.
Property and Equipment
The cost of property and equipment is depreciated using the straight-line
method over the estimated useful lives of such assets, ranging from three to
fifteen years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or the estimated useful lives of the leased
assets.
Goodwill and Long-Lived Assets
8
The Company performs impairment analyses of its long-lived assets whenever
events and circumstances indicate that they may be impaired. The Financial
Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the financial accounting and reporting for
goodwill and other acquired intangible assets. In addition, SFAS No. 142
mandates a fair value approach to assessing the potential impairment of goodwill
and other intangibles with indeterminable lives. The Company adopted SFAS No.
142 in the first quarter of fiscal year 2002. The Company conducted its initial
annual impairment test as of June 1, 2002 and concluded that approximately $15.6
million should be recorded as an impairment charge. This impairment has been
reported as a component of operating expenses in the quarter ended July 28,
2002. Goodwill on the Company's balance sheet has been reduced from $28.6
million at October 28, 2001 to $13.0 million at July 28, 2002.
Other Reserves
We establish reserves for potential liabilities, such as environmental
claims, product liability, litigation, and product warranty costs when it is
probable that a liability exists and the amount can be reasonably estimated.
Note 3 - Acquisitions
On January 9, 2001, we purchased all of the outstanding common stock of
National Northeast Corporation ("NNE") from Mestek, Inc. (the "Seller"). NNE was
engaged in the thermal management and aluminum extrusion business in Pelham, New
Hampshire. NNE is now fully integrated into and operates as part of Wakefield
Thermal Solutions, Inc., a wholly owned subsidiary of the Company. We do not
maintain separate books and records or financial statements for the business
formerly conducted by NNE.
The following unaudited proforma financial information was prepared based
on historical operations, and is not necessarily indicative of the results of
operations that would have occurred had the purchase been made as of the
beginning of the period presented, or of future results of operations of the
combined companies. Such proforma financial information does not include any
savings that the Company expects to achieve as a result of the combination.
Sales reflect the effect of accounting for its subsystems business as a
discontinued operation.
PROFORMA RESULTS
(In thousands, except per share data) Three Months Nine Months
Ended Ended
July 29, 2001 July 29, 2001
------------- -------------
Sales $ 16,655 $58,505
Income from continuing operations before interest and taxes $ (32) $ 4,169
(Loss) income from continuing operations before extraordinary item $ (426) $ 1,287
(Loss) earnings per share (basic) $ (0.06) $ 0.18
(Loss) earnings per share (diluted) $ (0.06) $ 0.17
9
Note 4 - Inventories
Inventories consisted of the following on July 28, October 28,
(In thousands): 2002 2001
-------- -----------
Raw materials and components $ 2,940 $ 2,871
Work in process 3,911 3,960
Finished goods 2,378 2,081
------- -------
9,229 8,912
Valuation allowance (756) (863)
------- -------
$ 8,473 $ 8,049
======= =======
Note 5 - Discontinued Operations
On November 17, 2000, Malco Technologies Group, Inc., a wholly-owned
subsidiary of the Company, pursuant to an asset purchase agreement, sold
substantially all of the assets and the subsystems business (the "Discontinued
Business") located in Colmar, Pennsylvania, to a privately owned company (the
"Buyer"). The sale included Malco's accounts receivable, inventory, machinery,
equipment, tools, business machines, office furniture and fixtures and certain
intangibles including but not limited to customer lists, trade names and
engineering designs and the agreement by the Company not to engage in any
business, directly or indirectly, that competes with Malco for three years. As a
result of the sale, Alpha received $2.2 million in cash plus a three-year, 12%
note for $300,000 and the Buyer assumed certain payables and liabilities of the
Discontinued Business. The purchase price was a negotiated amount between the
Buyer and the Company.
All assets and liabilities of the Discontinued Business were transferred to
the Buyer at the closing, and there are no assets or liabilities related to the
Discontinued Business included in the consolidated balances at July 28, 2002 and
October 28, 2001. Operating loss from the Discontinued Business and gain on the
sale are reflected in the accompanying statements of operations for the nine
months ended July 29, 2001
Note 6 - Restructuring Costs
In response to the decline in demand for the Company's products resulting
from the economic downturn in the markets served by the Company's products, the
Company took significant actions to reduce operating expenses and incurred
restructuring costs totaling $822,000 in fiscal 2001. Such restructuring costs
consisted of severance costs ($257,000) and a non-cancelable lease commitment on
an unused administrative facility ($565,000). The following summarizes the
changes in the restructuring cost liability since October 28, 2001.
Restructuring Charges Lease
(In thousands) Commitment Severance Total
---------- --------- -----
Balance October 28, 2001 $ 532 $ 69 $ 601
Payments made (47) (8) (55)
----- ---- -----
Balance January 27, 2002 485 61 546
Payments made (167) (31) (198)
----- ---- -----
Balance April 28, 2002 318 30 348
Payments made (26) (30) (56)
----- ---- -----
Balance July 28, 2002 $ 292 $ -- $ 292
===== ==== =====
10
Note 7 - Debt and Revolving Credit Facilities
Revolving Credit Facilities and Term Debt consisted of the following on July 28, October 28,
(In thousands): 2002 2001
-------- -----------
Variable-rate revolving credit facility (interest rate of 5.32% at July 28,
2002), interest payable monthly, principal is
repaid and re-borrowed based on cash requirements ........................... $ 2,200 $ 2,200
Variable-rate term notes (interest rate of 5.88% on $3.7 million and 5.36% on
$9.3 million at July 28, 2002) , interest is payable monthly,
principal is payable quarterly 12,900 15,150
Variable-rate term note under swap agreement ( interest rate of
8.47% at July 28, 2002) , interest and principal are payable quarterly 14,500 15,250
-------- --------
29,600 32,600
Less current portion ............................................................ (9,350) (32,600)
-------- --------
$ 20,250 $ --
======== ========
On January 9, 2001, the Company and its subsidiaries, as guarantors,
entered into a Credit Agreement (the "Credit Agreement") with several banks and
other financial institutions ("the Lenders"). The Credit Agreement consisted of
a revolving credit facility and a term loan. Borrowings under the Credit
Agreement are secured by a first lien on and the assignment of all of the
Company's assets. Under the Credit Agreement, the Company must meet certain
covenants. During the fiscal year ended October 28, 2001 and during the three
months ended January 27, 2002, the Company did not meet certain financial
covenants. As a result, all outstanding loan balances under the Credit Agreement
were classified as current liabilities at October 28, 2001.
On January 28, 2002, the Lenders amended the Credit Agreement to revise
certain financial covenants and waive certain events of non-compliance at
October 28, 2001 and January 27, 2002. Under this first amendment to the Credit
Agreement, interest on the revolving credit facility and the term note increased
by rates ranging from .5% to .75% depending on the amount of financial leverage.
Interest is now payable monthly on the revolver and the portion of the term loan
that is not covered by the swap agreement. Interest on the portion of the term
loan that is covered by the swap agreement is payable quarterly. In addition,
availability under the revolving credit facility was reduced from $15 million to
$5 million, the expiration date for the revolving credit facility was amended
from January 9, 2006 to June 30, 2003, and modifications were made to the
remaining payment schedule on the term loan.
On March 12, 2002, the Company and its Lenders entered into a second
amendment to the Credit Agreement, which amended certain financial and other
covenants. It also required the Company to make a $5 million principal payment
on June 28, 2002 which the Company contemplated making from the sale or
refinancing of the Company's Pelham, New Hampshire facility. Fees paid to the
Lenders for the January 28, 2002 and March 12, 2002 amendments to the Credit
Agreement, including the fair value of warrants to purchase the Company's common
stock, totaled approximately $600,000 and were expensed during the second
quarter.
On June 28, 2002, the Company did not make the $5 million principal payment
as a result of its inability to complete a sale and leaseback transaction by
that date. On July 24, 2002, the Company and its Lenders entered into a third
amendment to the Credit Agreement, by which the $5.0 million payment due on June
28, 2002 was delayed until September 30, 2002; the
11
Company was allowed to satisfy the difference between the $5.0 million
obligation and the proceeds from the sale and leaseback transaction with
additional borrowings from its revolving credit facility; the date by which
warrants granted pursuant to the Second Amended Credit Agreement must be
registered, was delayed to February 4, 2003; loan covenants were adjusted to
reflect the impact on EBITDA of the Company's most recent financial projections
as well as the sale and leaseback transaction. Fees paid to the Lenders for the
third amendment to the Credit Agreement totaled approximately $66,000 and are
being amortized over the remaining life of the loan.
Under the Amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (5.32% on July 28, 2002)
and expires on June 30, 2003. There is also an unused line fee equal to .75% per
annum. The Company may borrow up to the lesser of $5 million or 60% of eligible
accounts receivable ($4.9 million at July 28, 2002), as defined by the Amended
Credit Agreement. As of July 28, 2002, $2.2 million has been drawn and is
outstanding on the revolving credit facility. A portion of the outstanding term
loan ($14.5 million on July 28, 2002) is covered by an interest rate swap (the
"hedged loan"). The hedged loan accrues interest at a fixed rate of 8.47%. The
balance of the term loan not covered by the swap, $12.9 million on July 28,
2002, consists of two notes which accrue interest at the relevant LIBOR rate
plus 3.5% (5.88% on $3.7 million and 5.36% on $9.2 million on July 28, 2002).
The Company, as required by the Amended Credit Agreement utilizes an
interest rate swap (the "swap") to hedge against its interest rate risk. The
swap is designated as a cash flow hedge and is carried on the balance sheets at
fair value. The effective portion of unrealized gains or losses on the fair
value of the swap is charged to other comprehensive income until the hedged
transaction is complete and affects earnings. Ineffectiveness is charged to
earnings as incurred. The amount of ineffectiveness has not been material to
date. The effect of the swap is to convert the interest rate on the hedged loan
from a variable rate as described above to a fixed rate of 8.47%. The swap
matures on March 31, 2004.
Future minimum principal payments on the revolving credit facilities and
the term loans under the Amended Credit Agreement are as follows:
In thousands
------------
2002 $ 5,750
2003 7,000
2004 6,000
2005 7,200
2006 3,650
---------
$ 29,600
=========
Note 8 - Segment Related Information
We have one operating segment, thermal management products. We derive
substantially all of our operating revenue from the sale and support of one
group of products and services with similar characteristics such as the nature
of the production processes, the type and class of customers, and the methods of
distribution. Substantially all of our assets are located within the United
States. In addition, the Company's chief decision-maker and management make
decisions based on one product group.
12
Note 9 - New Accounting Pronouncements
The Company had adopted SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations be accounted for using the purchase method. Under SFAS No.
142, goodwill and certain intangible assets with indefinite useful lives will no
longer be amortized. Instead, these assets will be reviewed for impairment on an
annual basis. As discussed in Note 2, the Company recorded an impairment charge
against goodwill totaling $15.6 million in July 2002. As of July 28, 2002, the
net carrying value of the Company's goodwill totaled $13.0 million. Amortization
expense totaled approximately $1.3 million for the fiscal year ended October 28,
2001. No amortization expense was recorded for the three and nine months ended
July 28, 2002 as a result of the Company's adoption of SFAS No. 142.
The following reconciliation summarizes the impact that the adoption of SFAS No.
142 had on the Company's net (loss) income and earnings per share.
(In thousands, except per share data) Three Months Ended Nine Months Ended
---------------------------- ---------------------------
July 28, July 29, July 28, July 29,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Net (loss) income:
Net (loss) income, as reported $ (9,833) $ (426) $ (10,495) $ 1,180
Add: Goodwill amortization (1) - 247 - 565
Goodwill impairment charge (1) 9,954 - 9,954 -
-------------- ------------- ------------- -------------
Adjusted net income (loss) $ 121 $ (179) $ (541) $ 1,745
============== ============= ============= =============
Basic earnings per share:
Net (loss) income, as reported $ (1.38) $ (0.06) $ (1.48) $ 0.17
Add: Goodwill amortization (1) - 0.03 - 0.08
Goodwill impairment charge (1) 1.40 1.40 -
-------------- ------------- ------------- -------------
Adjusted net income (loss) $ 0.02 $ (0.03) $ (0.08) $ 0.25
============== ============= ============= =============
Diluted earnings per share:
Net (loss) income, as reported $ (1.38) $ (0.06) $ (1.48) $ 0.16
Add: Goodwill amortization (1) - 0.03 - 0.08
Goodwill impairment charge (1) 1.40 1.40 -
-------------- ------------- ------------- -------------
Adjusted net income (loss) $ 0.02 $ (0.03) $ (0.08) $ 0.24
============== ============= ============= =============
Weighted average shares outstanding:
Basic 7,109 7,083 7,110 7,006
Diluted 7,109 7,083 7,110 7,497
Note (1) - Net of applicable taxes
FASB has issued SFAS No. 143, "Accounting for Asset Retirement Obligations"
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company does not anticipate that the adoption of this
standard will have a significant effect on the Company's consolidated financial
statements.
In November 2001, the Emerging Issues Task Force ("EITF") released Issue
01-14, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred," which states that reimbursements received
for out-of-pocket expenses incurred should be reported as revenue in the
statements of operations. The Company does not anticipate that the adoption of
EITF 01-14 will have a material effect on the Company's consolidated financial
statements.
13
FASB has also issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is
effective January 1, 2002. SFAS No. 144 provides guidance on measuring and
recording impairments of assets, other than goodwill, and provides
clarifications on measurement of cash flow information and other variables to be
used to measure impairment. The Company believes that the adoption of SFAS
No.144 will not have a significant impact on its financial statements.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 clarifies guidance related to the reporting of gains and losses
from extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS No. 145 is effective
for financial statements issued for fiscal years beginning after May 15, 2002.
The effect of adoption of this standard on the Company's results of operations
and financial positions is being evaluated.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 nullifies previous guidance on
accounting for costs associated with exit or disposal activities and requires a
liability for these costs to be recognized and measured at its fair value in the
period in which the liability is incurred. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. The effect of adoption of
this standard on the Company's results of operations and financial positions is
being evaluated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on current expectations, estimates and projections about
the Company's business based, in part, on assumptions made by management. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements due to numerous factors, including the
following: changes in demand for the Company's products, product mix, the timing
of customer orders and deliveries, the impact of competitive products and
pricing, excess or shortage of production capacity, compliance with covenants in
the Company's loan documents, ability to meet principal payments under those
loan documents and other risks discussed from time to time in the Company's
Securities and Exchange Commission filings and reports. In addition, such
statements could be affected by general industry and market conditions and
growth rates, and general domestic and international economic conditions. Such
forward looking statements speak only as of the date on which they are made, and
the Company does not undertake any obligation to update any forward-looking
statement to reflect events or circumstances which may take place after the date
of this report.
CRITICAL ACCOUNTING POLICIES:
The Company recognizes revenues when (1) persuasive evidence of an
arrangement exists, (2) products and services have been delivered to the
ultimate customers, (3) the price is fixed or determinable, and (4)
collectibility is reasonably assured. The Company's shipping terms are generally
FOB shipping point.
14
Reserve for sales returns are provided in the period in which the related
sale is recognized. Allowances for doubtful accounts are provided when an
account receivable is considered uncollectible. Adjustments to the allowance and
reserve accounts are made, when necessary, as new information becomes available.
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America 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. Actual results could
differ from those estimates.
RESULTS OF OPERATIONS:
THIRD QUARTER 2002 COMPARED TO THIRD QUARTER 2001
Loss From Operations. Loss from continuing operations before extraordinary
items for the third quarter of fiscal 2002 was $9.8 million (which includes
goodwill impairment, under SFAS No. 142, of $15.6 million) compared to a loss of
$426,000 for the third quarter of fiscal 2001. Operating results for the third
quarter of fiscal 2002, excluding the goodwill impairment charge of $15.6
million ($10.0 million, net of tax), was income of $121,000. Operating results
for the third quarter of fiscal 2001 excluding restructuring and other
non-recurring charges of $222,000 ($141,000, net of tax) and goodwill
amortization of $390,000 ($247,000, net of tax) was a loss of $38,000. Decreases
in operating expenses and slightly higher profit margins on lower sales volumes
were the primary causes of this increase in income.
Sales. The Company's sales for the third quarter of fiscal 2002, which
include NNE sales, decreased by 8.4% to $15.3 million from $16.7 million for the
same period in fiscal 2001. Although the Company does not prepare separate
financial statements for the business previously conducted as NNE, management
believes that sales declined in both the NNE business as well as in its
previously existing business. Management believes that the overall decrease in
sales was due to continued reduced demand for the Company's products resulting
from the weakness in the economy, particularly in the computer, networking,
telecom and industrial controls markets.
Gross Profit. The Company's gross profit as a percentage of total revenues
("gross margin") for the third quarter of fiscal 2002 was 16.3% compared to
15.2% for the third quarter of fiscal 2001. This improvement is a direct result
of the Company's cost cutting measures over the past year. These measures
included employee layoffs, tight expense controls and improved factory
efficiencies. Despite these improvements, gross profit in absolute dollars
decreased by $45,000 as a result of revenues decreasing by $1.4 million.
Research and Development. Research and development expenses for the quarter
ended July 28, 2002 were $129,000 compared to $217,000 for the same period last
year. The decrease was primarily due to the reduction in headcount and travel
related expenses.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses for the quarter ended July 28, 2002 were $1.5 million or 10.1%
of sales as compared to $2.1 million or 12.8% of sales, for the same quarter in
fiscal 2001. SG&A expenses in absolute dollars decreased by $588,000 from fiscal
2001 due primarily to decreases in goodwill amortization, rent expense,
commission expense and compensation costs offset by increases in legal and audit
fees. Decreases in goodwill amortization was the result of the Company's
adoption of SFAS No. 142. Rent expense
15
decreased due to the vacating and subsequent sublease of the Company's
administrative offices located in Beverly, Massachusetts. Decreases in
commission expense is due to a reduction in the number of outside independent
sales representatives utilized by the Company as well as a reduction in the
commission rate paid to these representatives. Decreases in compensation costs
is the direct result of headcount reductions.
Goodwill Impairment Charges. The Company recorded a $15.6 million ($10.0
million, net of tax) goodwill impairment charge in the third quarter of fiscal
2002.
Interest Expense and Other Income (net). Interest expense was $627,000 and
$741,000 for the third quarter of fiscal 2002 and 2001 respectively. This
decrease was due to a lower average outstanding borrowing base resulting from a
$4.6 million reduction in debt since July 2001, offset slightly by higher
interest rates required under the amended Credit Facility. Other income (net)
was $8,000 for the current fiscal quarter compared to $100,000 for the same
period last year. The decrease in other income (net), was due to lower interest
income associated with a lower cash balances on hand during the quarter ended
July 28, 2002.
Benefit for Income Taxes. Benefit for income taxes was $5.6 million in the
third quarter of fiscal 2002 as compared to $247,000 for the same period last
year. The effective income tax rates for the third quarter of fiscal year 2002
and fiscal year 2001 were 36.1% and 36.7%, respectively.
NINE MONTHS 2002 COMPARED TO NINE MONTHS 2001
(Loss) Income From Continuing Operations. (Loss) income from continuing
operations before extraordinary items for the nine months ended July 28, 2002
was a loss of $10.1 million (which includes goodwill impairment, under SFAS No.
142, of $15.6 million) compared to an income of $1.4 million for the nine-months
ended July 29, 2001. (Loss) income from continuing operations before
extraordinary items for the nine months ended July 28, 2002, excluding the
goodwill impairment charge of $15.6 million ($10.0 million, net of taxes) was a
loss of $177,000. (Loss) income from continuing operations for the nine months
ended July 29, 2001, excluding restructuring and other non-recurring charges of
$222,000 ($141,000, net of taxes) and goodwill amortization of $885,000
($565,000, net of taxes) was an income of $2.1 million.
Sales. The Company's sales for the first nine months of fiscal 2002
decreased by 20.4% to $41.8 million from $52.5 million for the same period in
fiscal 2001 (which include NNE sales from January 9, 2001, the date of
acquisition). Although the Company does not prepare separate financial
statements for the business previously conducted as NNE, management believes
that sales declined in both the NNE business as well as in its previously
existing business. Management believes that this decrease was due to reduced
demand for the Company's products resulting from the weakness in the economy,
particularly in the computer, networking, telecom and industrial controls
markets.
Gross Profit. The Company's gross margin for the first nine months of
fiscal 2002 was 15.9% compared to 22.5% for the same period in fiscal 2001. The
Company implemented many cost cutting measures over the past year to improve
operating results, including employee layoffs, tight expense controls and
improved factory efficiencies. Despite these improvements, gross profit
decreased as a result of revenues decreasing by $10.7 million along with a
change in sales mix to products which generated lower profit margins.
16
Research and Development. Research and development expenses for the nine
months ended July 28, 2002 were $372,000 compared to $791,000 for the same
period last year. The decrease was primarily due to the reduction in headcount
and travel related expenses.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended July 28, 2002 were $4.7 million or 11.2% of
sales as compared to $6.9 million or 13.2% of sales, for the same period last
year. SG&A expenses in absolute dollars decreased by $2.3 million primarily due
to decreases in goodwill amortization, rent expense, commission expense and
compensation costs. Decreases in goodwill amortization was the result of the
Company's adoption of SFAS No. 142. Rent expense decreased due to the vacating
and subsequent sublease of the Company's administrative offices located in
Beverly, Massachusetts. Decreases in commission expense is due to a reduction in
the number of outside independent sales representatives utilized by the Company
as well as a reduction in the commission rate paid to these representatives.
Decreases in compensation costs is the direct result of headcount reductions.
Goodwill Impairment Charges. The Company recorded a $15.6 million ($10.0
million, net of tax) goodwill impairment charge in the third quarter of fiscal
2002.
Interest Expense and Other Income (net). Interest expense was consistent at
$1.9 million for the first nine months of fiscal 2002 and 2001. Other income
(net) was $26,000 for the nine months ended July 28, 2002 compared to $257,000
for the same period last year. The decrease in income was due to lower interest
income associated with a lower cash balances on hand during the period.
(Benefit) Provision for Income Taxes. Benefit for income taxes was $5.7
million in the first nine months of fiscal 2002 compared to a $811,000 income
tax provision for the first nine months of fiscal 2001. The effective income tax
rate for both the nine months of fiscal year 2002 and the nine months of fiscal
year 2001 was 36.2%.
Gain on Sale of Discontinued Operation. Gain on sale of discontinued
operations was the result of the Company's sale of Malco Technologies Group,
Inc.
Effects of SFAS No. 142. The Company adopted SFAS No. 142 in the first
quarter of fiscal year 2002. The Company conducted its initial annual impairment
test as of June 1, 2002 and concluded that approximately $15.6 million ($10.0
million, net of tax) or $1.40 per share, should be recorded as an impairment
charge. This impairment has been reported as a component of operating expenses
in the quarter ended July 28, 2002. Goodwill on the Company's balance sheet has
been reduced from $28.6 million at October 28, 2001 to $13.0 million at July 28,
2002.
LIQUIDITY AND CAPITAL RESOURCES
On January 9, 2001, the Company and its subsidiaries, as guarantors,
entered into a Credit Agreement (the "Credit Agreement") with several banks and
other financial institutions ("the Lenders"). The Credit Agreement consisted of
a revolving credit facility and a term loan. Borrowings under the Credit
Agreement are secured by a first lien on and the assignment of all of the
Company's assets. Under the Credit Agreement, the Company must meet certain
covenants. During the fiscal year ended October 28, 2001 and during the three
months ended January 27, 2002, the Company did not meet certain financial
17
covenants. As a result, all outstanding loan balances under the Credit Agreement
were classified as current liabilities at October 28, 2001.
On January 28, 2002, the Lenders amended the Credit Agreement to revise
certain financial covenants and waive certain events of non-compliance at
October 28, 2001 and January 27, 2002. Under this first amendment to the Credit
Agreement, interest on the revolving credit facility and the term note increased
by rates ranging from .5% to .75% depending on the amount of financial leverage.
Interest is now payable monthly on the revolver and the portion of the term loan
that is not covered by the swap agreement. Interest on the portion of the term
loan that is covered by the swap agreement is payable quarterly. In addition,
availability under the revolving credit facility was reduced from $15 million to
$5 million, the expiration date for the revolving credit facility was amended
from January 9, 2006 to June 30, 2003, and modifications were made to the
remaining payment schedule on the term loan.
On March 12, 2002, the Company and its Lenders entered into a second
amendment to the Credit Agreement, which amended certain financial and other
covenants. It also required the Company to make a $5 million principal payment
on June 28, 2002 which the Company contemplated making from the sale or
refinancing of the Company's Pelham, New Hampshire facility. Fees paid to the
Lenders for the January 28, 2002 and March 12, 2002 amendments to the Credit
Agreement, including the fair value of warrants to purchase the Company's common
stock, totaled approximately $600,000 and were expensed during the second
quarter.
On June 28, 2002, the Company did not make the $5 million principal payment
as a result of its inability to complete a sale and leaseback transaction by
that date. On July 24, 2002, the Company and its Lenders entered into a third
amendment to the Credit Agreement, by which the $5.0 million payment due on June
28, 2002 was delayed until September 30, 2002; the Company was allowed to
satisfy the difference between the $5.0 million obligation and the proceeds from
the sale and leaseback transaction with additional borrowings from its revolving
credit facility; the date by which warrants granted pursuant to the Second
Amended Credit Agreement must be registered, was delayed to February 4, 2003;
loan covenants were adjusted to reflect the impact on EBITDA of the Company's
most recent financial projections as well as the sale and leaseback transaction.
Fees paid to the Lenders for the third amendment to the Credit Agreement totaled
approximately $66,000 and are being amortized over the remaining life of the
loan.
Under the Amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (5.32% on July 28, 2002)
and expires on June 30,2003. There is also an unused line fee equal to .75% per
annum. The Company may borrow up to the lesser of $5 million or 60% of eligible
accounts receivable ($4.9 million at July 28, 2002). As of July 28, 2002, $2.2
million has been drawn and is outstanding on the revolving credit facility.
A portion of the outstanding term loan ($14.5 million on July 28, 2002) is
covered by an interest rate swap (the "hedged loan"). The hedged loan accrues
interest at a fixed rate of 8.47%. The balance of the term loan not covered by
the swap, $12.9 million on July 28, 2002, consists of two notes which accrue
interest at the relevant LIBOR rate plus 3.5% (5.88% on $3.7 million and 5.36%
on $9.2 million on July 28, 2002).
The Amended Credit Agreement contains financial and other covenants with
which the Company must comply. These covenants include limitations on the amount
of financial leverage the Company can incur, minimum fixed charge coverage,
limits on capital spending, required minimal amounts of net worth, and required
levels of earnings before interest,
18
taxes, depreciation and amortization (EBITDA). The maximum financial leverage
ratio, which is calculated by dividing funded debt by EBITDA, must not exceed
5:00:1, 3:90:1, 3.45:1, and 3.15:1 for the third quarter of fiscal 2002, full
year of fiscal 2002, first quarter of fiscal 2003 and second quarter of fiscal
2003 respectively. The fixed charge coverage ratio, which is calculated by
dividing fixed charges by EBITDA, must not exceed 1.15:1, 1.15:1, 1.10:1 and
1.05:1 for the third quarter of fiscal 2002, full year of fiscal 2002, first
quarter of fiscal 2003 and second quarter of fiscal 2003 respectively. Capital
spending is limited to $500,000, $700,000, and $1.0 million for fiscal years
2002, 2003 and thereafter, respectively. Minimum Net Worth must be no less than
$33,050,000 plus 75% of future Net Income plus 100% of the Net Proceeds of
future Equity Offerings. This amount is reduced by Permitted Stock Repurchases
and charges related to the issuance of warranty agreements in connection with
the Loan Documents. The "Minimum Net Worth" covenant excludes goodwill write off
in accordance with the provisions of FAS No.142 up to a maximum of $20 million.
EBITDA must be no less than $4.6 million and $6.1 million on an annual basis at
the end of the third quarter and full year of fiscal 2002, respectively. There
is no minimum annual EBITDA requirement beyond fiscal year 2002. The Company is
currently in compliance with all of the financial covenants under the Credit
Agreement.
On July 28, 2002, cash balance totaled approximately $492,000 as compared
to $2.7 million on October 28, 2001. For the nine months ended July 28, 2002,
$1.5 million was provided by operating activities and $3.3 million was used by
financing activities to pay the quarterly installment of its term loan. Deferred
tax assets which is classified as "Other Assets, net " in the Balance Sheet
increased by $5.9 million due primarily to the tax affect of the goodwill
impairment charge. Capital equipment purchases during the first nine months of
fiscal 2002 were $369,000 compared to $1.1 million during the same period last
year. The Company's capital equipment purchases are restricted by its credit
agreement with its Lenders and can not exceed $500,000 during fiscal 2002. The
Company believes that its current equipment in place is sufficient to meet
current and future business demand. The equipment is not subject to rapid
obsolescence and has the capability of handling significant increased volume.
Working capital on July 28, 2002 was $4.0 million as compared to a negative
balance of $18.1 million on October 28, 2001. Working capital on October 28,
2001, excluding $25.9 million of long-term debt classified as a current
liability due to the Company's non-compliance with certain financial covenants,
totaled approximately $7.7 million. A change in the loan amortization schedule
as a result of amendments to the bank Credit Agreement which increased the
current maturities of long term debt was the primary contributor to the decrease
in working capital from $7.7 million to $4.0 million. Other factors included
decreases in cash and accounts receivable, which were partially offset by
increases in inventories and decreases in accrued compensation and other accrued
liabilities. The Company believes that its available cash and future cash flow
from operations will be sufficient to fund operations over the next twelve
months. However, the Company will need to utilize borrowings under its revolving
credit facility to make a portion of the $5 million principal payment on its
term loan which is due on September 30, 2002. The revolving credit facility
expires on June 30, 2003. It is likely that the Company will need to extend or
replace this revolving credit agreement in order to have the funds necessary to
pay off any remaining outstanding balance on the revolver and to fund future
growth.
The Company has orally accepted an offer of $4.75 million for a sale and
leaseback transaction of its Pelham, New Hampshire facility which will provide
net cash proceeds of approximately $4.5 million from a group which includes a
director of the Company and two other private investors. The director has a 50%
ownership interest in this group. This transaction includes the issuance of
250,000 warrants of Company stock to the buyers at the market price of the
Company's common stock on the date the transaction closes. The parties are
currently in the final stages of documenting the transaction. The
19
Company understands that the Purchasers are in the process of completing their
final documents to finance the acquisition. The Agreement includes a 15-year
lease for the building. The lease, which will be accounted for as an operating
lease in accordance with SFAS No. 13, "Accounting for Leases", requires minimum
annual rental payments of approximately $629,000 subject to annual adjustments
ranging from 2% to 2.5%. The book value of the land, buildings and improvements
is approximately $6.3 million. Selling costs are anticipated to be approximately
$260,000. The value of the 250,000 warrants of Company stock using the
Black-Scholes valuation method is expected to be approximately $208,000. The
expected loss on the sale of the property will be approximately $2.0 million.
The Company expects to complete the sale and leaseback transaction before
September 30, 2002. If it does not, it will be in default under the Credit
Agreement and its Lenders will have the right, among other things to declare the
entire amount to be due and owing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Under the Amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (5.32% on July 28, 2002)
and expires on June 30, 2003. There is also an unused line fee equal to .75% per
annum. The Company may borrow up to the lesser of $5 million or 60% of eligible
accounts receivable ($4.9 million at July 28, 2002), as defined by the Amended
Credit Agreement. As of July 28, 2002, $2.2 million has been drawn and is
outstanding on the revolving credit facility. At current borrowing levels, a 1%
increase in interest rates in our variable rate revolving credit facility would
increase annual interest expense by approximately $22,000. The Company will need
to utilize a portion of the funds available from its revolving credit facility
to make the $5 million principal payment on its term loan which is due on
September 30, 2002. The revolving credit facility will expire on June 30, 2003.
It is likely that the Company will need to extend or replace this revolving
credit agreement in order to have the funds necessary to fund its operations in
the longer term and to pay off the remaining outstanding balance on this debt.
A portion of the outstanding term loan ($14.5 million on July 28, 2002) is
covered by an interest rate swap (the "hedged loan"). The hedged loan accrues
interest at a fixed rate of 8.47%. The balance of the term loan not covered by
the swap, $12.9 million on July 28, 2002, consists of two notes which accrue
interest at the relevant LIBOR rate plus 3.5% (5.88% on $3.7 million and 5.36%
on $9.2 million on July 28, 2002). At current borrowing levels, a 1% increase in
interest rates in our variable rate term debt would increase annual interest
expense by approximately $129,000.
The Company, as required by the Amended Credit Agreement, utilizes an
interest rate swap (the "swap") to hedge against its interest rate risk. The
swap is designated as a cash flow hedge and is carried on the balance sheets at
fair value. The effective portion of unrealized gains or losses on the fair
value of the swap is charged to other comprehensive income until the hedged
transaction is complete and affects earnings. Ineffectiveness is charged to
earnings as incurred. The amount of ineffectiveness has not been material to
date. The effect of the swap is to convert the interest rate on the hedged loan
from a variable rate as described above to a fixed rate of 8.47%. The swap
matures on March 31, 2004.
The Company is currently, in compliance with its loan covenants. Under the
Amended Credit Agreement, the Company is required to make a $5 million principal
payment by September 30, 2002. The Company has orally accepted an offer of $4.75
million for a sale and leaseback transaction of its Pelham, New Hampshire
facility which will provide net cash proceeds of approximately $4.5 million.
These funds along with additional borrowings from the Company's revolving credit
facility will be used to make the $5 million principal payment. The Company
expects to complete the sale and leaseback
20
transaction before September 30, 2002. If it does not, it will be in default
under the Credit Agreement and its Lenders will have the right, among other
things to declare the entire amount to be due and owing.
The principal raw material used in thermal management products is aluminum.
Raw materials represent a significant portion of the cost of Alpha's products.
Prices for raw materials are based on market prices at the time of purchase.
Historically, the price of aluminum has experienced substantial volatility.
Although thermal management products are generally shipped within 60 days
following the order date, increases in raw materials prices cannot always be
reflected in product sales prices. All raw materials are readily available from
multiple suppliers at competitive prices. Alpha does not believe its risk in
respect to raw materials price volatility is significant since the raw materials
for an order are usually purchased within a short period of time after the order
is accepted.
21
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Third Amendment to Credit Agreement and Waiver, dated as of
July 24, 2002 among Alpha Technologies Group, Inc., the Lenders
party thereto and Union Bank of California, N. A., as
administrative Agent for the Lenders.
11.1 Statement re Computation of Per Share Earnings for the quarter
and nine months ended July 28, 2002 and July 29, 2001.
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Form 8-K/A, Item 4, Changes in Registrant's Certifying Accountant,
filed June 11, 2002.
22
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.
Alpha Technologies Group, Inc.
------------------------------
(Registrant)
Date: September 11, 2002 By: /s/ Lawrence Butler
-------------------
Lawrence Butler
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: September 11, 2002 By: /s/ James J. Polakiewicz
------------------------
James J. Polakiewicz
Chief Financial Officer
(Principal Financial and Accounting
Officer)
23
CERTIFICATIONS
Pursuant to the requirements of the Section 302 of the Sarbanes-Oxley Act of
2002,
I, Lawrence Butler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alpha Technologies
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
/s/ Lawrence Butler
- --------------------------------
Lawrence Butler
Chief Executive Officer
September 11, 2002
I, James J. Polakiewicz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alpha Technologies
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
/s/ James J. Polakiewicz
- ----------------------------------
James J. Polakiewicz
Chief Financial Officer
September 11, 2002
24
EXHIBIT INDEX
Exhibit
- -------
4.1 Third Amendment to Credit Agreement and Waiver, dated as of July 24, 2002
among Alpha Technologies Group, Inc., the Lenders party thereto and Union
Bank of California, N. A., as administrative Agent for the Lenders.
(Exhibits to this Amendment have not been filed by the Registrant, who
hereby undertakes to file such exhibits upon the request of the
Commission.
(Filed Herewith)
11.1 Statement re Computation of Per Share Earnings for the quarter and nine
months ended July 28, 2002 and July 27, 2001. (Filed Herewith)
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed Herewith)
99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed Herewith)
25