Back to GetFilings.com
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 January 26, 2003
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 Identification No.)
incorporation or organization)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 February 28, 2003
ALPHA TECHNOLOGIES GROUP, INC.
FORM 10-Q
January 26, 2003
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
January 26, 2003 and October 27, 2002
Condensed Consolidated Statements of Operations 4
Three Months Ended January 26, 2003 and January 27, 2002
Condensed Consolidated Statements of Comprehensive Loss 5
Three Months Ended January 26, 2003 and January 27, 2002
Condensed Consolidated Statements of Cash Flow 6
Three Months Ended January 26, 2003 and January 27, 2002
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share-Related Data)
January 26, October 27,
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,105 $ 751
Accounts receivable, net 5,808 7,198
Inventories, net 7,630 7,585
Prepaid expenses 1,217 1,201
----------- -----------
Total current assets 15,760 16,735
PROPERTY AND EQUIPMENT, net 14,266 14,991
GOODWILL, net 12,980 12,980
DEFERRED INCOME TAXES 9,884 9,608
OTHER ASSETS, net 1,201 1,319
----------- -----------
TOTAL ASSETS $ 54,091 $ 55,633
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,792 $ 2,967
Accrued compensation and related benefits 620 700
Other accrued expenses 519 584
Current portion of long-term debt 3,750 3,000
----------- -----------
Total current liabilities 7,681 7,251
REVOLVING CREDIT FACILITY 3,200 3,200
LONG-TERM DEBT, Net of current portion 17,150 18,650
OTHER LONG-TERM LIABILITIES 609 652
----------- -----------
TOTAL LIABILITIES 28,640 29,753
----------- -----------
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 January 26, 2003
and October 27, 2002 256 256
Additional paid-in capital 47,339 47,336
Accumulated deficit (16,003) (15,530)
Accumulated other comprehensive (loss) (247) (288)
Treasury stock, at cost (1,419,490 common shares at January 26, 2003
and October 27, 2002) (5,894) (5,894)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 25,451 25,880
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 54,091 $ 55,633
=========== ===========
See notes to condensed consolidated financial statements
3
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended
----------------------------
January 26, January 27,
2003 2002
----------- -----------
SALES $ 11,421 $ 12,587
COST OF SALES 10,233 10,806
----------- -----------
Gross profit 1,188 1,781
----------- -----------
OPERATING EXPENSES
Research and development 93 112
Selling, general and administrative 1,362 1,541
----------- -----------
Total operating expenses 1,455 1,653
----------- -----------
OPERATING (LOSS) INCOME (267) 128
INTEREST EXPENSE (522) (635)
OTHER INCOME, net 4 8
----------- -----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (785) (499)
BENEFIT FOR INCOME TAXES (312) (185)
----------- -----------
NET LOSS (473) (314)
=========== ===========
LOSS PER COMMON SHARE:
BASIC $ (0.07) $ (0.04)
=========== ===========
DILUTED $ (0.07) $ (0.04)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 7,110 7,108
DILUTED 7,110 7,108
See notes to condensed consolidated financial statements
4
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands, Except Per Share Data)
Three Months Ended
-----------------------------
January 26, Janauary 27,
2003 2002
----------- ------------
NET LOSS $ (473) $ (314)
OTHER COMPREHENSIVE INCOME
Change in value of interest rate swap (net of applicable taxes) 41 67
----------- ------------
COMPREHENSIVE LOSS $ (432) $ (247)
=========== ============
See notes to condensed consolidated financial statements
5
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
-----------------------------
January 26, January 27,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (473) $ (314)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 871 953
Amortization of financing fees 91 -
Stock compensation 3 3
Deferred income taxes (304) (158)
Changes in assets and liabilities:
Accounts receivable 1,390 1,571
Inventories (45) (67)
Prepaid expenses (16) 1
Accounts payable (175) (946)
Accrued compensation and related benefits (80) (141)
Other liabilities (39) (169)
----------- -----------
Cash flows from operating activities 1,223 733
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (119) (132)
Decrease in other assets - 4
----------- -----------
Cash flows from investing activities (119) (128)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
` - 4
Payments on long-term debt (750) (1,500)
----------- -----------
Cash flows from financing activities (750) (1,496)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 354 (891)
CASH AND CASH EQUIVALENTS, beginning of period 751 2,701
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,105 $ 1,810
=========== ===========
See notes to condensed consolidated financial statements
6
ALPHA TECHNOLOGIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Business
Alpha Technologies Group, Inc. ("Alpha" or the "Company") designs,
extrudes, fabricates and sells thermal management and non-thermal fabricated
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 and non-thermal fabricated products and sells aluminum
extrusions to a variety of industries including the construction, sporting goods
and other leisure activity markets.
Recent Results of Operations
The Company has been impacted by the economic downturn and has suffered
a decline in revenues and profitability. In addition, this operational downturn
has resulted in noncompliance with the terms and conditions contained in the
Company's credit agreement. The Company has taken action to control expenses,
through cost containment and headcount reduction, and has negotiated amendments
to the terms and conditions of its credit agreement. As a result of these
actions, the Company believes that sufficient liquidity exists to support
operations for at least the forthcoming fiscal year.
Accounting Periods
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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Alpha Technologies Group, Inc. include the accounts of Alpha and its
wholly-owned subsidiaries and 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
months ended January 26, 2003 are not necessarily indicative of results for the
full year ending October 26, 2003. 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 27, 2002.
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.
Revenue Recognition and Allowances for Sales Returns, Doubtful Accounts and
Warranties
The Company recognizes revenue 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.
Allowances for doubtful accounts are provided for account receivables
considered uncollectible. Reserve for sales returns are provided in the period
in which the related sale is recognized. The allowance for doubtful accounts and
sales returns is based on our assessment of the collectibility of specific
customer accounts, the aging of our accounts receivable and trends in product
returns. While we believe that our allowance for doubtful accounts and sales
returns is adequate and that the judgment applied is appropriate, if there is a
deterioration of a major customer's credit worthiness, actual defaults are
higher than our previous experience, or actual future returns do not reflect
historical trends, our estimates of the recoverability of the amounts due us and
our sales could be adversely affected.
7
The Company does not generally provide a warranty on the goods that it
sells. However, customers do have the right to return merchandise deemed
defective when received. These returns generally occur at the point of delivery
when the goods are subject to customer inspections. Reserves for these potential
returns are provided when the related sale is recognized. Claims for defective
goods have not been significant in any period presented.
Risk Management and Hedging Activity
The Company's current risk management strategies include the use of an
interest rate swap (see Note 3) to hedge against the impact on cash flows of
changes in interest rates. The interest rate swap is designated as a cash flow
hedge of specific variable rate debt 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. No other derivative instruments are held. 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.
Amounts related to ineffectiveness have not been significant to date.
Inventories and Inventory Reserves
Inventories are stated at the lower of cost or market and are priced
using the first-in, first-out method. Inventory purchases and commitments are
based upon future demand forecasts for our products and our current level of
inventory. Inventory reserves have been established for excess and obsolete
items. If there is a sudden and significant decrease in demand for our products
or there is a higher risk of inventory obsolescence because of rapidly changing
technology and requirements, we may be required to increase our inventory
reserve and as a result, our gross profit margin could be adversely affected.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising
in the ordinary course of business. An estimated loss contingency is accrued
when it is probable that a liability has been incurred or an asset has been
impaired and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether such accruals
should be adjusted.
New Accounting Pronouncements
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 No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The disclosure requirements apply to all companies for
fiscal quarters beginning after December 15, 2002. The Company does not
currently intend to adopt the fair value based method of accounting for
stock-based employee compensation and will continue to use the intrinsic value
method.
8
2. INVENTORIES
Inventories consisted of the following on:
January 26, October 27,
2003 2002
------------ ------------
(In thousands)
Raw materials and components $ 2,440 $ 2,598
Work in process 3,201 3,219
Finished goods 2,402 2,428
----------- -----------
8,043 8,245
Valuation allowance (413) (660)
----------- -----------
$ 7,630 $ 7,585
=========== ===========
3. DEBT AND REVOLVING CREDIT FACILITIES
Term Debt and Revolving Credit Facilities consisted of the following on
January 26, October 27,
2003 2002
----------- -----------
(In thousands)
Variable-rate revolving credit facility (interest rate of
5.00% at January 26, 2003), interest payable monthly, principal is
repaid and re-borrowed based on cash requirements........................ $ 3,200 $ 3,200
Variable-rate term notes (interest rate of 5.26% at January 27, 2003),
interest is payable monthly, principal is payable quarterly ............. 8,900 9,650
Variable-rate term note under swap agreement ( interest rate of
8.47% at January 26, 2003) , interest and principal is payable quarterly. 12,000 12,000
----------- -----------
24,100 24,850
Less current portion...................................................... (3,750) (3,000)
----------- -----------
$ 20,350 $ 21,850
=========== ===========
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 consists of a
revolving credit facility which expires in June 2004 and a term loan which
expires in January 2006. Borrowings under the Credit Agreement are secured by a
first lien on and the assignment of all of the Company's assets. The Credit
Agreement has been amended five times. Under the Credit Agreement, the Company
must meet certain covenants. The Company was not in compliance with certain
financial covenants contained in the Amended Credit Agreement for the quarter
ended January 26, 2003. On February 6, 2003, the Credit Amendment was further
amended to revise the Maximum Leverage Ratio and Fixed Charge Coverage Ratio to
levels that management believes the Company will be able to achieve and which
waived the non-compliance at January 26, 2003. Fees for the Fifth Amendment and
waiver are estimated to be approximately $60,000.
Under the amended Credit Agreement, the revolving credit facility
accrues interest on outstanding borrowings at LIBOR plus 3.5% (5.00% on January
26, 2003) and expires on June 30, 2004. 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 ($3.4 million at January 26, 2003), as defined
by the Amended Credit Agreement. Prior to the amendments, the Company was
allowed to borrow up $15 million. As of January 26, 2003, $3.2 million has been
drawn and is outstanding on the revolving credit facility. A portion of the
outstanding term loan ($12.0 million on January 26, 2003) is covered by an
interest rate swap (the "hedged loan"). The hedged loan effectively accrues
interest at a fixed rate of 8.47%. The balance of the term loan not covered by
the swap, $8.9 million on January 26, 2003, consists accrues interest at the
relevant LIBOR rate plus 3.5% (5.26% on January 26, 2003). Term loans require
quarterly principal payments through January 2006.
The Company, as required by the amended Credit Agreement, utilizes an
interest rate swap (the "swap") to hedge against the impact on cash flows of
changes in interest rates. The interest rate swap is designated as a cash flow
hedge of a specific portion of the term loans outstanding under the Credit
Facility and is carried on the balance sheets at fair value. The
9
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.
Amounts related to ineffectiveness have not been significant to date. The effect
of the swap is to convert the interest rate on the hedged portion of the term
loans from a variable rate to a fixed rate of 8.47%. The swap matures on March
31, 2004. The carrying value and fair value of the swap was a liability of
$408,000 and $477,000 at January 26, 2003 and October 27, 2002, respectively.
Future minimum principal payments on the revolving credit facilities
and the term loans are as follows:
In thousands
------------
2003............................. 2,250
2004............................. 9,200
2005............................. 7,200
2006............................. 5,450
------------
$ 24,100
============
4. SEGMENT RELATED INFORMATION
The Company has 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. Net sales to one customer totaled
approximately 10.6% and 10.2% of consolidated revenues for the fiscal quarters
ended January 26, 2003 and January 27, 2002, respectively.
5. NET LOSS PER SHARE
Basic net loss per common share is computed by dividing loss available
to common shareholders by the weighted average number of shares of common stock
outstanding during each quarter year. Diluted earnings per common share are
calculated to give effect to stock options and warrants outstanding during the
period when such items are dilutive to basic earnings per share. Stock options
and warrants to purchase 1,952,376 and 1,576,994 shares of common stock were
outstanding at January 26, 2003 and at January 27, 2002, respectively, and were
not included in the computation as their effect was antidilutive.
10
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 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 judgements estimates and assumptions in
certain circumstances that affect the amounts reported in the consolidated
financial statements and related footnotes. We regularly evaluate the accounting
policies and estimates we use to prepare our financial statements. Estimates are
used for, but not limited to, the accounting for allowance for doubtful accounts
and sales returns, inventory reserves, and contingencies. These estimates are
based on historical experience and various assumptions that we believe to be
reasonable under the particular applicable facts and circumstances. Actual
results could differ from those estimates.
We consider our critical accounting policies to be those that (1)
involve significant judgements and uncertainties, (2) require estimates that are
more difficult for management to determine and (3) have the potential to result
in materially different outcomes under varying assumptions and conditions. Our
critical accounting policies include the following: recognition of revenues,
provision for sales returns, provision for doubtful accounts, provision for
inventory reserves, impairment of long-lived assets, and accounting for income
taxes. These policies are more fully described in Note 1, "Significant
Accounting Policies" in the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
First Quarter 2003 Versus First Quarter 2002 Comparison
Net Loss. The Company reported a net loss for the first quarter of
fiscal 2003 of $473,000 compared to a net loss of $314,000 for the first quarter
of fiscal 2002. The increased loss in fiscal 2003 was principally caused by the
decreased sales resulting from the continued downturn in the economy.
Sales. The Company's sales for the first quarter of fiscal year 2003
decreased by $1.2 million to $11.4 million from $12.6 million for fiscal year
2002. 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 telecommunications, networking, computer and industrial controls markets.
Gross Profit. The Company's gross profit margin for the first quarter
of fiscal year 2003 was 10.4% of revenue compared to 14.1% of revenue for first
quarter of fiscal year 2002. 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 $1.2
million while fixed overhead costs such as depreciation and insurance remained
relatively unchanged.
Research and Development. Research and development expenses for the
first quarter of fiscal year 2003 were $93,000 compared to $112,000 for the same
period last year. The decrease was primarily due to lower labor costs due to
facility shutdowns and containment of expenses.
Selling, General and Administrative. Selling, general and
administrative expenses for the first quarter of fiscal 2003
11
were $1.4 million or 11.9% of sales as compared to $1.5 million or 12.2% of
sales for the first quarter of fiscal 2002. SG&A expenses in absolute dollars
decreased by $179,000 primarily due to decreases in commission expense,
compensation costs and employee benefit costs. Decreases in commission expense
is due to decreased sales. Decreases in compensation costs are the direct result
of reducing headcount and as well as reducing certain employee benefits.
Interest Expense. Interest expense was $522,000 for the first quarter
of fiscal 2003 compared to $635,000 for the first quarter of fiscal 2002. This
decrease was due to lower interest rates and lower average outstanding
borrowings.
Benefit for Income Taxes. Benefit for income taxes was $312,000 for the
first quarter of fiscal 2003 compared to a benefit of $185,000 for first quarter
of fiscal 2002. The effective income tax rate for the first quarter of fiscal
2003 was 39.7% compared to 37.0% reported for the first quarter of fiscal 2002.
The Company evaluates the recoverability of its recorded deferred tax assets
each reporting period and provides valuation allowances where necessary for
assets not likely to be recovered. The Company believes its recognized deferred
tax assets, net of valuation allowances provided, are likely of recovery,
however, a continued deterioration in the Company's operating performance could
require that additional valuation allowances be provided.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
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 three months ended January 27, 2002, the Company did not
meet certain financial covenants.
On January 28, 2002, the Lenders amended the Credit Agreement to revise
certain financial covenants and waive certain events of non-compliance at
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. 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 and required
interest to be payable monthly rather than quarterly on the revolver and the
term loan. The net interest settlement on the portion of the term loan covered
by the swap agreement continues to be payable quarterly. Fees related to 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 $633,000.
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 earnings
before interest, taxes, depreciation and amortization (EBITDA) of the Company's
most recent financial projections as well as the sale and leaseback transaction.
Fees related to the third amendment to the Credit Agreement totaled
approximately $89,000.
On September 27, 2002, the Company and its Lenders under the Credit
Agreement entered into a Fourth Amendment to the Credit Agreement by which (i)
certain of the financial covenants were amended to reflect the Company's most
recent financial projections as well as the sale and leaseback transaction, (ii)
the expiration date for the revolving credit facility was extended to June 30,
2004 from June 30, 2003, (iii) modifications were made to the remaining payment
schedule on the term loan, (iv) the date by which common stock underlying the
warrants issued to the Lenders must be registered was delayed to March 31, 2004,
and (v) the Company agreed to the retention, if requested by the Lenders, of a
consultant for the purpose of reviewing its operations, projections, cash flows,
financial statements and books and records. Fees of approximately $82,000 were
paid related to the Fourth Amendment. In addition, a deferred restructuring fee
of approximately $126,500 equal to 1% of the aggregate revolving loan commitment
and the outstanding principal amount of the term loan as
12
of fiscal year end 2004 was deemed earned in full upon the effectiveness of the
Fourth Amendment but is not payable until October 31,2004.
Under the Amended Credit Agreement, the revolving credit facility
accrues interest on outstanding borrowings at LIBOR plus 3.5% (5.00% on January
26, 2003) and expires on June 30, 2004. 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 ($3.4 million at January 26, 2003), as defined
by the Amended Credit Agreement. As of January 26, 2003, $3.2 million has been
drawn and is outstanding on the revolving credit facility.
A portion of the outstanding term loan,$12.0 million on January 26,
2003, 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, $8.9 million on January 26, 2003, accrues interest at the
relevant LIBOR rate plus 3.5% (5.26% on January 26, 2003).
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 EBITDA. The maximum financial leverage ratio, which is
calculated by dividing funded debt by EBITDA, must not exceed 4.15:1 for the
first quarter of fiscal 2003, 4.30:1 for the second quarter of fiscal 2003,
4.60:1 for the third quarter of fiscal 2003, 4.15:1 for the fiscal year end,
1.85:1 for the first quarter of fiscal 2004 through fiscal year end 2004 , and
1.75:1 for first quarter of fiscal 2005 and thereafter. The fixed charge
coverage ratio, which is calculated by dividing fixed charges by EBITDA minus
Capital Expenditures, must not exceed 1.00:1 for the first quarter of fiscal
2003, 0.95:1 for second quarter of fiscal 2003, 0.90: 1 for third quarter of
fiscal 2003 and year end of fiscal 2003 and 0.80:1 for the first quarter of
fiscal 2004 through fiscal year end 2004 and 0.85:1 for the first quarter of
fiscal 2005 and thereafter. Capital spending is limited to $700,000, and $1.0
million for fiscal years 2003 and each year 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 offs in accordance with the provisions of SFAS
No. 142 up to a maximum of $20 million.
As a consequence of the continued economic downturn in the markets
served by the Company's products, the Company was not in compliance with certain
financial covenants contained in the Amended Credit Agreement for the quarter
ended January 26, 2003. On February 6, 2003, the Credit Agreement was further
amended to revise the Maximum Leverage Ratio and Fixed Charge Coverage Ratio to
levels that management believes the Company will be able to achieve and which
waived the non-compliance at January 26, 2003. Maximum Leverage Ratios as of the
first, second, third and fourth quarters of fiscal 2003 were revised to 4.70:1,
4.95:1, 4.90:1 and 4.50:1 from 4.15:1, 4.30:1, 4.60:1 and 4.15:1. Fixed Charge
Coverage ratio requirements for the first quarter of fiscal 2003 were waived and
ratios for the third and fourth quarter of fiscal 2003 were revised to 1:10:1
for the third quarter and 1.15:1 for the fourth quarter from 0.90:1. Under the
Amendment, the Fixed Charge Coverage Ratio for the remainder of fiscal 2003 is
based on the current quarter only rather than on the trailing quarters in fiscal
2003. In addition, EBITDA and Minimum Net Worth definitions were revised to
exclude the costs related to any annual impairment charges incurred by the
Borrower in connection with SFAS No. 142. Fees for the amendments and waiver are
estimated to be approximately $60,000.
Cash Flow Information
On January 26, 2003, the Company had cash of $1.1 million compared to
$751,000 on October 27, 2002. For the first quarter of fiscal 2003, $1.2 million
was provided by operating activities and $750,000 was used in financing
activities to pay down long-term debt. For the first quarter of fiscal 2002,
$733,000 was provided by operating activities and $1.5 million was used in
financing activities to pay down long-term debt. Capital equipment purchases for
the first quarter of fiscal 2003 was $119,000 compared to $132,000 in the first
quarter of Fiscal 2002.
Working capital on January 26, 2003 was $8.1 million as compared to
$9.5 million on October 27, 2002. Lower accounts receivable balances due to
lower sales in the current quarter compared to the previous quarter was the
primary contributor to the decrease in working capital. Approximately 50% of the
decline in working capital resulted from an increase of $750,000 in current
maturities of long term debt.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's revolving credit facility will expire
on June 30, 2004. If current economic conditions continue, it is likely that the
Company will need to extend or replace this revolving credit facility 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.
Results of Operations
The Company's results of operations have been affected by the economic
downturn. In response to the reduction in
13
revenue, the Company has taken a number of steps to improve operational
efficiency and profitability, including reductions in head count at several of
our facilities. These steps, coupled with the changes to our credit facilities
discussed above, should provide sufficient liquidity to fund operations for at
least the next twelve months.
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% (5.00% on January
26, 2003) and expires on June 30, 2004. 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 ($3.4 million at January 26, 2003), as defined
by the Amended Credit Agreement. As of January 26, 2003, $3.2 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 $32,000. The
revolving credit facility will expire on June 30, 2004. If current economic
conditions continue, 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 ($12.0 million on January 26,
2003) 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, $8.9 million on January 26, 2003, accrues interest at the
relevant LIBOR rate plus 3.5% ( 5.26% on January 26, 2003). At current borrowing
levels, a 1% increase in interest rates in our variable rate term debt would
increase annual interest expense by approximately $89,000.
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 principal raw material used in thermal management and non-thermal
fabricated 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 and non-thermal
fabricated 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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, the Company's principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation and up to the filing date of the Quarterly Report
on Form 10-Q. There were no significant deficiencies or material weaknesses, and
therefore were no corrective actions taken.
14
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
None
15
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: March 11, 2003 By: /s/ Lawrence Butler
-------------------
Lawrence Butler
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 11, 2003 By: /s/ James J. Polakiewicz
------------------------
James J. Polakiewicz
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Lawrence Butler
- --------------------
Lawrence Butler
Chief Executive Officer
March 11, 2003
17
CERTIFICATIONS
Pursuant to the requirements of the Section 302 of the Sarbanes-Oxley Act of
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ James J. Polakiewicz
- ------------------------
James J. Polakiewicz
Chief Financial Officer
March 11, 2003
18
EXHIBIT INDEX
Exhibit
- -------
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)
19