ALPHA TECHNOLOGIES GROUP INC - 10-Q Quarterly Report

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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 April 27, 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 incorporation or organization) (I.R.S. Employer 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
----- -----

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 June 4, 2003

ALPHA TECHNOLOGIES GROUP, INC.
FORM 10-Q

TABLE OF CONTENTS

2

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share-Related Data)

April 27, October 27,
2003 2002
---------- -----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,076 $ 751
Accounts receivable, net 6,278 7,198
Inventories, net 6,827 7,585
Prepaid expenses 1,131 1,201
-------- --------
Total current assets 15,312 16,735

PROPERTY AND EQUIPMENT, net 13,519 14,991

GOODWILL, net 12,980 12,980

DEFERRED INCOME TAXES 10,096 9,608

OTHER ASSETS, net 1,131 1,319
-------- --------
TOTAL ASSETS $ 53,038 $ 55,633
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,861 $ 2,967
Accrued compensation and related benefits 573 700
Other accrued expenses 545 584
Current portion of long-term debt 4,500 3,000
-------- --------
Total current liabilities 8,479 7,251

REVOLVING CREDIT FACILITY 3,200 3,200

LONG-TERM DEBT, Net of current portion 15,650 18,650

OTHER LONG-TERM LIABILITIES 559 652
-------- --------
TOTAL LIABILITIES 27,888 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 at April 27, 2003 and October 27, 2002 256 256
Additional paid-in capital 47,340 47,336
Accumulated deficit (16,351) (15,530)
Accumulated other comprehensive (loss) (201) (288)
Treasury stock, at cost (1,419,490 common shares at April 27, 2003
and October 27, 2002) (5,894) (5,894)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 25,150 25,880
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,038 $ 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 Six Months Ended
------------------------ -----------------------
April 27, April 28, April 27, April 28,
2003 2002 2003 2002
-------- -------- -------- --------

SALES $ 12,209 $ 13,933 $ 23,630 $ 26,520
COST OF SALES 10,727 11,545 20,960 22,351
-------- -------- -------- --------
Gross profit 1,482 2,388 2,670 4,169
-------- -------- -------- --------
OPERATING EXPENSES
Research and development 102 131 195 243
Selling, general and administrative 1,455 1,597 2,817 3,138
-------- -------- -------- --------
Total operating expenses 1,557 1,728 3,012 3,381
-------- -------- -------- --------

OPERATING (LOSS) INCOME (75) 660 (342) 788

INTEREST EXPENSE (509) (650) (1,031) (1,285)

OTHER INCOME, net 1 10 5 18

COSTS ASSOCIATED WITH DEBT EXTINGUISHMENTS AND
MODIFICATIONS -- (591) -- (591)
-------- -------- -------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES (583) (571) (1,368) (1,070)

BENEFIT FOR INCOME TAXES (235) (223) (547) (408)
-------- -------- -------- --------
NET LOSS $ (348) $ (348) $ (821) $ (662)
======== ======== ======== ========

LOSS PER COMMON SHARE:
BASIC $ (0.05) $ (0.05) $ (0.12) $ (0.09)
======== ======== ======== ========
DILUTED $ (0.05) $ (0.05) $ (0.12) $ (0.09)
======== ======== ======== ========

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 7,110 7,110 7,110 7,109
DILUTED 7,110 7,110 7,110 7,109

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 Six Months Ended
--------------------- ---------------------
April 27, April 28, April 27, April 28,
2003 2002 2003 2002
--------- --------- --------- ---------

NET LOSS $(348) $(348) $(821) $(662)

OTHER COMPREHENSIVE INCOME
Change in value of interest rate swap (net of applicable taxes) 46 35 87 100
----- ----- ----- -----

COMPREHENSIVE LOSS $(302) $(313) $(734) $(562)
===== ===== ===== =====

See notes to condensed consolidated financial statements

5

ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

Six Months Ended
------------------------
April 27, April 28,
2003 2002
--------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (821) $ (662)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization 1,697 1,895
Amortization of financing fees 180 --
Stock compensation 4 5
Deferred income taxes (547) (408)
Costs associated with debt extinguishments and modifications -- 591
Changes in assets and liabilities:
Accounts receivable 920 1,085
Inventories 758 (1,545)
Prepaid expenses 70 (56)
Accounts payable (106) 220
Accrued compensation and related benefits (127) (246)
Other liabilities 13 (518)
------- -------
Cash flows from operating activities 2,041 361

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (189) (235)
(Decrease) increase in other assets (27) 10
------- -------
Cash flows from investing activities (216) (225)
------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 8
Proceeds from revolving credit lines -- 800
Payments on long-term debt (1,500) (2,250)
------- -------
Cash flows from financing activities (1,500) (1,442)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 325 (1,306)

CASH AND CASH EQUIVALENTS, beginning of period 751 2,701
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,076 $ 1,395
======= =======

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 and six months ended April 27, 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.

Impairment of Long-Lived Assets

The Company assesses the recoverability of long-lived assets, including
intangible assets, held and used whenever events or changes in circumstances
indicate that future cash flows (undiscounted and without interest charges)
expected to be generated by an asset's disposition or use may not be sufficient
to support its carrying amount. If such undiscounted cash flows are not
sufficient to support the recorded value of assets, an impairment loss is
recognized to reduce the carrying value of long-lived assets to their estimated
fair value.

Goodwill and Other Intangible Assets

The Company records as goodwill the excess of purchase price over the fair
value of the identifiable net assets acquired. Statements of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
prescribe a two-step process for impairment testing of goodwill, which is
performed annually, as well as when an event triggering impairment may have
occurred. The first step tests for impairment, while the second step, if
necessary, measures the impairment. The Company has elected to perform its
annual analysis during the third quarter of each fiscal year as of June 1.

Loss Contingencies

The Company is 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 November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". The provisions of FIN 45 require
that a liability be recorded in the guarantor's balance sheet at fair value upon
issuance of a guarantee. The recognition provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have an impact on the Company's financial condition or results of
operations.

In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS

8

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.

9

2. INVENTORIES

Inventories consisted of the following on: April 27, October 27,
2003 2002
--------- -----------
(In thousands)

Raw materials and components $ 2,268 $ 2,598
Work in process 2,894 3,219
Finished goods 2,196 2,428
------- -------
7,358 8,245
Valuation allowance (531) (660)
------- -------
$ 6,827 $ 7,585
======= =======

3. DEBT AND REVOLVING CREDIT FACILITIES

Term Debt and Revolving Credit Facilities consisted of the following on April 27, October 27,
2003 2002
--------- -----------
(In thousands)

Variable-rate revolving credit facility, interest payable monthly,
principal is repaid and re-borrowed based on cash requirements ............... $ 3,200 $ 3,200

Variable-rate term notes, interest is payable monthly,
principal is payable quarterly ............................................... 8,150 9,650

Variable-rate term note under swap agreement, interest and
principal is payable quarterly ............................................... 12,000 12,000
-------- --------
23,350 24,850
Less current portion ............................................................. (4,500) (3,000)
-------- --------
$ 18,850 $ 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 six 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 and for the quarter ended April 27, 2003. The Credit
Amendment was amended on February 6, 2003 and May 27, 2003 to revise the Maximum
Leverage Ratio and Fixed Charge Coverage Ratio for the balance of the fiscal
year to levels that management believes the Company will be able to achieve. In
addition, the Lenders waived the non-compliance with certain covenants at
January 26, 2003 and April 27, 2003. Fees for the Fifth Amendment and waiver
were approximately $60,000. Fees for the Sixth Amendment and waiver are
estimated to be approximately $40,000.

Under the amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (4.82% on April 27, 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 ($3.6 million at April 27, 2003), as defined by the Amended
Credit Agreement. Prior to the amendments, the Company was allowed to borrow up
$15 million. As of April 27, 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 April 27, 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, $8.2 million on
April 27, 2003, consists of two notes which accrue interest at the relevant
LIBOR rate plus 3.5% (4.77% on $7.4 million, and 4.79% on $750,000 on April 27,
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

10

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 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 $332,000 and $477,000 at April 27, 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 (balance of fiscal year) .......................... 1,500
2004 ................................................... 9,200
2005 ................................................... 7,200
2006 ................................................... 5,450
-------
$23,350
=======

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 11.6% and 12.7% of consolidated revenues for the fiscal quarters
ended April 27, 2003 and April 28, 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 26,000 and 1,724,162 shares of common stock were
outstanding at April 27, 2003 and at April 28, 2002, respectively, and were not
included in the computation as their effect was antidilutive.

6. OFFER TO EXCHANGE OUTSTANDING OPTIONS FOR NEW OPTIONS

On February 28, 2003, the Company offered to eligible employees, directors
and consultants ("Eligible Employees") the opportunity to exchange all their
outstanding options to purchase shares of Alpha common stock for new options
which will be granted under the Company's Amended and Restated 1994 Stock Option
Plan. The number of shares subject to the new options to be granted to each
Eligible Employee will be equal to the number of shares subject to the options
tendered by the Eligible Employee and accepted for exchange. Eligible Employees
tendered options to purchase 1,575,708 shares. The exercise price per share of
the new options will be 100% of the fair market value on the date of grant,
which is expected to on or about October 3, 2003 which is at least six months
and one day after the date the Company cancelled the options accepted for
exchange.

11

7. STOCK OPTION PLANS

In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative
methods for a voluntary change to the fair value-based method of accounting for
employee stock-based compensation. These alternative methods will only impact
the Company if it changes to the fair value-based method of accounting for
employee stock-based compensation. The Company has not incurred any employee
stock-based compensation under the intrinsic value method of Accounting
Principles Board Opinion 25 in these financial statements. The Company has
computed below the pro forma disclosures required under SFAS No. 148 using the
Black-Scholes option pricing model with an assumed interest rate of 4% (3% in
fiscal 2002), volatility of 80% and an expected life of four years.

Three Months Ended Six Months Ended
--------------------------- ------------------------------
April 27, April 28, April 27, April 28,
2003 2002 2003 2002
--------- --------- --------- ---------

Net loss as reported $ (348) $ (348) $ (821) $ (662)
After tax stock based compensation
under fair value method (277) (466) (554) (931)
------- ------- ------- -------
Pro forma net loss $ (625) $ (814) $(1,375) $(1,593)
======= ======= ======= =======
Basic and diluted net loss per share:
As reported $ (0.05) $ (0.05) $ (0.12) $ (0.09)
======= ======= ======= =======
Pro forma $ (0.09) $ (0.11) $ (0.19) $ (0.22)
======= ======= ======= =======

12

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.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". The provisions of FIN 45 require
that a liability be recorded in the guarantor's balance sheet at fair value upon
issuance of a guarantee. The recognition provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have an impact on the Company's financial condition or results of
operations.

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.

13

RESULTS OF OPERATIONS

Second Quarter 2003 Versus Second Quarter 2002 Comparison

Net Loss. A net loss of $348,000 was reported in both the second quarter of
fiscal 2003 and the second quarter of fiscal 2002. Fiscal 2002 results after
excluding costs associated with debt extinguishments and modifications of
$591,000 ($364,000 after taxes) was a net profit of $16,000. The increased
operating loss in fiscal 2003 was principally caused by decreased sales.

Sales. The Company's sales for the second quarter of fiscal year 2003
decreased by $1.7 million to $12.2 million from $13.9 million for second quarter
of fiscal year 2002. Management believes that this decrease was primarily 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 second quarter of
fiscal year 2003 was 12.1% of revenue compared to 17.1% of revenue for second
quarter of fiscal year 2002. The Company implemented many cost cutting measures
over the past year in an effort to improve operating results such as tight
expense controls and improved factory efficiencies. Despite these improvements,
gross profit decreased as a result of proportionately higher fixed costs such as
depreciation and insurance relative to total sales for the period.

Research and Development. Research and development expenses for the second
quarter of fiscal year 2003 were $102,000 compared to $131,000 for the same
period last year. This decrease was primarily due to lower labor costs and
containment of expenses.

Selling, General and Administrative. Selling, general and administrative
expenses for the second quarter of fiscal 2003 were $1.5 million or 11.9% of
sales as compared to $1.6 million or 11.5% of sales for the second quarter of
fiscal 2002. SG&A expenses in absolute dollars decreased by $142,000 as a result
of decreases in commission expense, legal and professional fees and certain
employee benefit costs. Decreases in commission expense was due to decreased
sales. Decreases in the other expense categories was due to the Company's
continued efforts to contain costs.

Interest Expense. Interest expense was $509,000 for the second quarter of
fiscal 2003 compared to $650,000 for the second 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 $235,000 for the
second quarter of fiscal 2003 compared to a benefit of $223,000 for second
quarter of fiscal 2002. The effective income tax rate for the second quarter of
fiscal 2003 was 40.3.% compared to 39.1% reported for the second 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.

Six Months 2003 Versus Six Months 2002 Comparison

Net Loss. The Company reported a net loss for the first six months of
fiscal 2003 of $821,000 compared to a net loss of $662,000 for the first six
months of fiscal 2002. The increased loss in fiscal 2003 was principally caused
by decreased sales.

Sales. The Company's sales for the first six months of fiscal year 2003
decreased by $2.9 million to $23.6 million from $26.5 million for fiscal year
2002. Management believes that this decrease was primarily 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 six months of
fiscal year 2003 was 11.3% of revenue compared to 15.7% of revenue for second
quarter of fiscal year 2002. The Company implemented many cost cutting measures
over the past year in an effort to improve operating results such as tight
expense controls and improved factory efficiencies. Despite these improvements,
gross profit decreased as a result of proportionately higher fixed costs such as
depreciation and insurance relative to total sales for the period.

Research and Development. Research and development expenses for the first
six months of fiscal year 2003 were $195,000 compared to $243,000 for the same
period last year. The decrease was primarily due to lower labor costs and

14

containment of expenses.

Selling, General and Administrative. Selling, general and administrative
expenses for the first six months of fiscal 2003 were $2.8 million or 11.9% of
sales as compared to $3.1 million or 11.8% of sales for the second quarter of
fiscal 2002. SG&A expenses in absolute dollars decreased by $321,000. This
decrease was the result of decreases in commission expense, compensation costs,
legal and professional fees and certain employee benefit costs. Decreases in
commission expense was due to decreased sales. Decreases in the other expense
categories was due to the Company's continued efforts to contain costs.

Interest Expense. Interest expense was $1,031,000 for the first six months
of fiscal 2003 compared to $1,285,000 for the first six months 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 $547,000 for the
first six months of fiscal 2003 compared to a benefit of $408,000 for first six
months of fiscal 2002. The effective income tax rate for the first six months of
fiscal 2003 was 40.0% compared to 38.1% reported for the first six months 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"). Loans under the Credit Agreement
consist of a revolving credit facility and a term loan, and 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.

The Credit Agreement has been amended six times to revise various financial
covenants, revise principal payment schedules and to waive certain events of
covenant non-compliance. The Company has paid various cash fees and has issued
warrants to purchase 110,000 shares of the Company's common stock to the Lenders
in connection with the amendments.

On May 27, 2003, the Company and its Lenders entered into a Sixth Amendment
to the Credit Agreement which revised the Maximum Leverage Ratio and Fixed
Charge Coverage Ratio for the balance of the current fiscal year to levels that
management believes the Company will be able to achieve, In addition, the
Lenders waived the non-compliance at April 27, 2003. Maximum Leverage Ratios as
of the second quarter of fiscal 2003 were revised to 5.50:1 from 4.95:1. Fixed
Charge Coverage ratio requirements for the second quarter of fiscal 2003 were
revised to 0.52:1 from 0.95:1

Under the Amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (4.82% on April 27, 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 ($3.6 million at April 27, 2003), as defined by the Amended
Credit Agreement. As of April 27, 2003, $3.2 million has been drawn and is
outstanding on the revolving credit facility.

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: 4.60:1 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:
0.90: 1 for the 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

15

issuance of warranty agreements in connection with the Loan Documents. The
"Minimum Net Worth" covenant excludes impairment charges recorded in accordance
with the provisions of SFAS No. 142.

A portion of the outstanding term loan, $12.0 million on April 27, 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, $8.2 million on April 27, 2003, consists of two notes which accrue
interest at the relevant LIBOR rate plus 3.5% (4.77% on $7.4 million and 4.79%
on $750,000 on April 27, 2003).

Cash Flow Information

On April 27, 2003, the Company had cash of $1.1 million compared to
$751,000 on October 27, 2002. For the first six months of fiscal 2003, $2.0
million was provided by operating activities and $1,500,000 was used in
financing activities to pay down long-term debt. For the first six months of
fiscal 2002, $361,000 was provided by operating activities and $2.3 million was
used in financing activities to pay down long-term debt. The $1.7 million
increase in cash provided from operating activities for the first six months of
fiscal 2003 compared to the same period last year was due primarily to lower
levels of inventory on hand at April 27, 2003 compared to April 26, 2002.
Capital equipment purchases for the first six months of fiscal 2003 was $189,000
compared to $235,000 in the first six months of Fiscal 2002.

Working capital on April 27, 2003 was $6.8 million as compared to $9.5
million on October 27, 2002. Lower accounts receivable and inventory balances
due to lower sales in the first six months of 2003 compared to the last six
months of 2002 were significant contributors to the decrease in working capital.
In addition, current maturities of long term debt increased by $1.5 million to
$4.5 million at April 27, 2002 compared to $3.0 million at October 27, 2002. 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. There is no assurance that the Company will be
able to extend or replace the revolving credit facility.

Results of Operations

The Company's results of operations have been adversely affected by the
economic downturn. In response to the reduction in 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 assuming that revenues do not further decline.

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% (4.82% on April 27, 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 ($3.6 million at April 27, 2003), as defined by the Amended
Credit Agreement. As of April 27, 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 April 27, 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, $8.2 million on April 27, 2003, consists of two notes which accrue
interest at the relevant LIBOR rate plus 3.5% ( 4.77% on $7.4 million and 4.79%
on $750,000 on April 27, 2003). At current borrowing levels, a 1% increase in
interest rates in our variable rate term debt would increase annual interest
expense by approximately $82,000.

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

16

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 the Company'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. The Company 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 no corrective actions were taken.

PART II OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Annual Meeting of Stockholders held on April 17, 2003, the
stockholders elected six Directors as follows:

Number of Shares
------------------------
Voted For Withheld
--------- --------

Marshall D. Butler 6,001,518 56,508
Lawrence Butler 6,001,717 55,309
Richard E. Gormley 6,001,518 56,508
Donald K. Grierson 6,002,717 55,309
Frederic A. Heim 6,002,797 55,229
Robert C. Streiter 6,002,717 55,309

17

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1 Sixth Amendment to Credit Agreement and Waiver, dated as of May 27,
2003 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)

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)

(b) Reports on Form 8-K

None.

18

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: June 11, 2003 By: /s/ Lawrence Butler
----------------------
Lawrence Butler
Chairman and Chief Executive Officer
(Principal Executive Officer)

Date: June 11, 2003 By: /s/ James J. Polakiewicz
------------------------
James J. Polakiewicz
Chief Financial Officer
(Principal Financial and Accounting Officer)

19

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
June 11, 2003

20

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
June 11, 2003

21

EXHIBIT INDEX

Exhibit
- -------

4.1 Sixth Amendment to Credit Agreement and Waiver, dated as of May 27,
2003 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)

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)

22