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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
11990 San Vicente Blvd, Los Angeles, CA 90049
---------------------------------------------
(Address of principal executive offices)
310-566-4005
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 September 4, 2003
ALPHA TECHNOLOGIES GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
July 27, 2003 and October 27, 2002 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended July 27, 2003 and
July 28, 2002 4
Condensed Consolidated Statements of Comprehensive Loss
Three Months and Nine Months Ended July 27, 2003 and
July 28, 2002 5
Condensed Consolidated Statements of Cash Flows
Three Months and Nine Months Ended July 27, 2003 and
July 28, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share-Related Data)
July 27, October 27,
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,406 $ 751
Accounts receivable, net 6,052 7,198
Inventories, net 6,191 7,585
Prepaid expenses 1,209 1,201
-------- --------
Total current assets 14,858 16,735
PROPERTY AND EQUIPMENT, net 12,852 14,991
GOODWILL, net -- 12,980
DEFERRED INCOME TAXES 10,086 9,608
OTHER ASSETS, net 722 1,319
-------- --------
TOTAL ASSETS $ 38,518 $ 55,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,888 $ 2,967
Accrued compensation and related benefits 598 700
Other accrued expenses 603 584
Current portion of long-term debt 1,000 3,000
-------- --------
Total current liabilities 5,089 7,251
REVOLVING CREDIT FACILITY 3,200 3,200
LONG-TERM DEBT, Net of current portion 18,400 18,650
OTHER LONG-TERM LIABILITIES 495 652
-------- --------
TOTAL LIABILITIES 27,184 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 July 27, 2003 and October 27, 2002 256 256
Additional paid-in capital 47,340 47,336
Accumulated deficit (30,222) (15,530)
Accumulated other comprehensive (loss) (146) (288)
Treasury stock, at cost (1,419,490 common shares at July 27, 2003
and October 27, 2002) (5,894) (5,894)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,334 25,880
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,518 $ 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 Nine Months Ended
---------------------- ------------------------
July 27, July 28, July 27, July 28,
2003 2002 2003 2002
-------- -------- -------- --------
SALES $ 11,658 $ 15,258 $ 35,288 $ 41,778
COST OF SALES 10,465 12,768 31,425 35,119
-------- -------- -------- --------
Gross profit 1,193 2,490 3,863 6,659
-------- -------- -------- --------
OPERATING EXPENSES
Research and development 97 129 292 372
Selling, general and administrative 1,509 1,540 4,326 4,678
Impairment of Goodwill 12,980 15,602 12,980 15,602
Impairment of Other Intangible Asset 323 -- 323 --
-------- -------- -------- --------
Total operating expenses 14,909 17,271 17,921 20,652
-------- -------- -------- --------
OPERATING (LOSS) INCOME (13,716) (14,781) (14,058) (13,993)
INTEREST EXPENSE (494) (627) (1,525) (1,912)
OTHER INCOME, net 3 8 8 26
COSTS ASSOCIATED WITH DEBT EXTINGUISHMENTS AND
MODIFICATIONS -- -- -- (591)
-------- -------- -------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES (14,207) (15,400) (15,575) (16,470)
BENEFIT FOR INCOME TAXES (336) (5,567) (883) (5,975)
-------- -------- -------- --------
NET LOSS $(13,871) $ (9,833) $(14,692) $(10,495)
======== ======== ======== ========
LOSS PER COMMON SHARE:
BASIC $ (1.95) $ (1.38) $ (2.07) $ (1.48)
======== ======== ======== ========
DILUTED $ (1.95) $ (1.38) $ (2.07) $ (1.48)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 7,110 7,109 7,110 7,110
DILUTED 7,110 7,109 7,110 7,110
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 Nine Months Ended
---------------------- -----------------------
July 27, July 28, July 27, July 28,
2003 2002 2003 2002
-------- -------- -------- --------
NET LOSS $(13,871) $ (9,833) $(14,692) $(10,495)
OTHER COMPREHENSIVE INCOME
Change in value of interest rate swap (net of applicable taxes) 55 (70) 142 32
-------- -------- -------- --------
COMPREHENSIVE LOSS $(13,816) $ (9,903) $(14,550) $(10,463)
======== ======== ======== ========
See notes to condensed consolidated financial statements
5
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
-----------------------
July 27, July 28,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,692) $(10,495)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization 2,508 2,835
Amortization of financing fees 285 --
Impairment of Goodwill 12,980 15,602
Impairment of Other Intangible Asset 323 --
Stock compensation 4 10
Deferred income taxes (572) (5,948)
Costs associated with debt extinguishments and modifications -- 591
Changes in assets and liabilities:
Accounts receivable 1,146 813
Inventories 1,394 (424)
Prepaid expenses (8) 152
Accounts payable (79) (606)
Accrued compensation and related benefits (102) (130)
Other liabilities 98 (916)
-------- --------
Cash flows from operating activities 3,285 1,484
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (322) (369)
(Decrease) increase in other assets (58) 18
-------- --------
Cash flows from investing activities (380) (351)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 8
Payments for debt issue costs -- (350)
Payments on revolving credit lines -- --
Payments on long-term debt (2,250) (3,000)
-------- --------
Cash flows from financing activities (2,250) (3,342)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 655 (2,209)
CASH AND CASH EQUIVALENTS, beginning of period 751 2,701
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,406 $ 492
======== ========
NON CASH ACTIVITY:
Issuance of warrants related to debt extinguishment $ -- $ 148
======== ========
See notes to condensed consolidated financial statements
6
ALPHA TECHNOLOGIES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, which the Company's lenders have agreed to waive
and/or modify. 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 nine months ended July 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
7
of the amounts due us and our sales could be adversely affected.
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.
Income Taxes
The Company provides for income tax expense or benefit in interim
periods using the rate expected to be in effect for the entire year. Changes in
the estimated tax rate for a fiscal year are recorded in the period in which
they occur. The Company reassesses the recoverability of its deferred tax assets
each quarter by evaluating all available evidence and assessing whether it is
more likely than not that all or some portion of its recorded assets may not be
recoverable. To the extent that assets are not likely to be recovered, valuation
allowances are provided. In the quarter ended July 27, 2003, the Company
reserved in full the tax asset generated as a result of the write off of the
Company's remaining unamortized goodwill. This asset will be recovered through
tax amortization charges over the next thirteen years. Because the value of the
amortization of this tax asset will only be realized after the Company's net
loss carryforwards are utilized, the Company concluded that it was appropriate
to reserve this benefit. It is possible that additional valuation allowances
against our
8
deferred tax assets may be required in future periods, if the Company is unable
to return to profitability.
New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS 150 are effective for financial instruments entered into or
modified after May 31, 2003 and to all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003. We do not believe that the adoption of SFAS 150 will have a material
impact on our results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment Of Statement
133 On Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS No.
133 to provide clarification on the financial accounting and reporting of
derivative instruments and hedging activities and requires that contracts with
similar characteristics be accounted for on a comparable basis. The provisions
of SFAS 149 are effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. We do not
believe that the adoption of SFAS 149 will have a material impact on our results
of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not believe that
the adoption of FIN 46 will have a material impact on our results of operations
or financial position.
9
2. INVENTORIES
Inventories consisted of the following on: July 27, October 27,
2003 2002
-------- ----------
(In thousands)
Raw materials and components $ 2,004 $ 2,598
Work in process 2,762 3,219
Finished goods 2,007 2,428
------- -------
6,773 8,245
Valuation allowance (582) (660)
------- -------
$ 6,191 $ 7,585
======= =======
3. DEBT AND REVOLVING CREDIT FACILITIES
Term Debt and Revolving Credit Facilities consisted of the following on July 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 ..................................................... 7,400 9,650
Variable-rate term note under swap agreement, interest and
principal is payable quarterly ..................................................... 12,000 12,000
-------- --------
22,600 24,850
Less current portion ................................................................... (1,000) (3,000)
-------- --------
$ 21,600 $ 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 January 2005 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 seven 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 July 27, 2003. The Credit Amendment was amended on September 5, 2003 to
revise the Maximum Leverage Ratio and Fixed Charge Coverage Ratio for the
balance of the fiscal year 2003 and fiscal year 2004 to levels that management
believes the Company will be able to achieve. The Lenders waived the events of
non-compliance with certain covenants at July 27, 2003. In addition, the
September 5, 2003 amendment added new Minimum EBITDA and Interest Coverage
covenants for the remainder of fiscal year 2003 and fiscal year 2004, revised
the allowable amounts to be spent on capital expenditures for fiscal years 2003
and 2004 and eliminated the Minimum Net Worth requirement. For periods ending on
or after April 1, 2004, interest on the revolving credit facility and term loan
will increase by .5% at maximum financial leverage levels. Lastly, the September
5, 2003 amendment reduced the principal payments from $750,000 to $250,00 per
quarter for the remainder of fiscal year 2003 and from $1,500,000 to $250,000
per quarter fiscal year 2004. The maturity date of the revolver was extended
from June 2004 to January 2005. The term debt continues to mature on January
2006 at which time a final balloon payment of $11.0 million will be due. Fees
for the Fifth and Sixth Amendment and waiver were approximately $52,000 and
$38,000, respectively. Fees for the Seventh Amendment and waiver, including the
fair value of warrants to purchase the Company's common stock issued to the
lenders, totaled approximately $220,000.
Under the amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (4.61% on July 27, 2003)
and expires on January 31, 2005. 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 ($3.5 million at July 27, 2003), as defined by the
Amended Credit Agreement. Prior to the amendments, the Company was allowed to
borrow up $15 million. As of July 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 July 27, 2003) is covered by an interest rate swap (the
"hedged loan"). The hedged
10
loan effectively accrues interest at a fixed rate of 8.47%. The balance of the
term loan not covered by the swap, $7.4 million on July 27, 2003, consists of a
note which accrues interest at the relevant LIBOR rate plus 3.5% (4.77% at July
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 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 $241,000
and $477,000 at July 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)..................................... $ 250
2004.............................................................. 1,000
2005.............................................................. 10,400
2006.............................................................. 10,950
-------
$22,600
=======
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 11.4% and 11.8% of consolidated revenues for the nine months ended
July 27, 2003 and July 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 21,000 and 1,782,996 shares of common stock were
outstanding at July 27, 2003 and at July 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
The Company applies the intrinsic value method of accounting for stock
based compensation granted to employees and expects to continue to do so, unless
required to change by accounting principles generally accepted in the United
States. The table below discloses the effect on stock based compensation had
such compensation been measured using the fair value method. The Company has
computed the pro forma disclosures below using the Black-Scholes option-pricing
model with an assumed risk free interest rate of 3% (4% in fiscal 2002),
volatility of 80% and an expected life of four years.
Three Months Ended Nine Months Ended
----------------------- -----------------------
July 27, July 28, July 27, July 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net loss as reported $(13,871) $ (9,833) $(14,692) $(10,495)
After tax stock based compensation
under fair value method (277) (466) (831) (1,397)
-------- -------- -------- --------
Pro forma net loss $(14,148) $(10,299) $(15,523) $(11,892)
======== ======== ======== ========
Basic and diluted net loss per share:
As reported $ (1.95) $ (1.38) $ (2.07) $ (1.48)
======== ======== ======== ========
Pro forma $ (1.99) $ (1.45) $ (2.18) $ (1.67)
======== ======== ======== ========
8. GOODWILL AND OTHER LONG-LIVED ASSETS
In 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the financial accounting and reporting for
goodwill and other acquired intangible assets. In particular, SFAS No. 142
mandates a fair value approach to assessing the potential impairment of goodwill
and other intangibles with indeterminable lives. The Company engaged an
independent valuation advisory firm to conduct its annual impairment test as of
the designated test date of June 1. These tests concluded that $13.0 million and
$15.6 million of the goodwill carried on the books as of June 1, 2003 and June
1, 2002, respectively, was impaired. The fair value of the Company's single
reporting unit was determined by using established valuation techniques,
specifically, the income, market and cost approaches. Management believes that
this impairment was caused by the downturn in the economy which severely
impacted the markets served by the Company's products. This impairment has been
reported as a separate component of operating expenses in the Consolidated
Statement of Operations. Goodwill, net of amortization, has been reduced from
$28.6 million at October 28, 2001 to $13.0 million at July 28, 2002 and from
$13.0 million to $0 at July 27, 2003.
The Company performs impairment analyses of its long-lived assets whenever
events and circumstances indicate that they may be impaired. All long-lived
assets other than goodwill are assessed for impairment by comparison of the
total amount of undiscounted cash flows expected to be generated by such assets
to their carrying value. In July 2003 it was determined that an intangible
asset related to a non compete agreement between the Company and a former owner
of Lockhart Industries, Inc., which is now a subsidiary of Alpha Technologies
Group, Inc., no longer had any value. The carrying value of this asset before
the impairment write-off was $323,000. This impairment has been reported as a
separate component of operating expenses in the Consolidated Statement of
Operations
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
12
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, valuation allowances against deferred
income tax assets, 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.
13
RESULTS OF OPERATIONS
Third Quarter 2003 Versus Third Quarter 2002 Comparison
Net Loss. A net loss of $13.9 million and $9.8 million was reported in the
third quarter of fiscal 2003 and the third quarter of fiscal 2002, respectively.
The Company recorded a $13.0 million and a $15.6 million goodwill impairment
charge in the third quarter of fiscal 2003 and fiscal 2002, respectively. The
Company also reported an intangible asset impairment charge of $323,000 in the
third quarter of fiscal 2003 related to a non-compete agreement which was
determined to no longer have any value. After excluding the impairment charges,
the Company reported a net loss of $568,000 in fiscal 2003 compared to a net
profit of $121,000 in fiscal 2002. The increased loss in fiscal 2003 was
principally caused by decreased sales.
Sales. The Company's sales for the third quarter of fiscal year 2003
decreased by $3.6 million to $11.7 million from $15.3 million for third 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 computer, automotive and aluminum extrusion
markets.
Gross Profit. The Company's gross profit margin for the third quarter of
fiscal year 2003 was 10.2% of revenue compared to 16.3% of revenue for third
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, rent and insurance relative to total sales for the period.
Research and Development. Research and development expenses for the third
quarter of fiscal year 2003 were $97,000 compared to $129,000 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 totaled $1.5 million or 12.9% of sales for the third quarter of fiscal
2003 and were relatively unchanged from the $1.5 million or 10.1% of sales
reported for the third quarter of fiscal 2002. Selling, general and
administrative expenses in absolute dollars decreased by $31,000. Decreased
commission expense due to lower sales was slightly offset by an increase in
professional consulting fees.
Goodwill Impairment Charge. The Company recorded a $13.0 million and a
$15.6 million goodwill impairment charge in the third quarter of fiscal 2003 and
fiscal 2002, respectively. As a result of these charges, the Company no longer
has any goodwill on its books.
Other Intangible Asset Impairment Charge. The Company recorded a $323,000
impairment charge in the third quarter of fiscal 2003 related to an intangible
asset which was determined to no longer have any value.
Interest Expense. Interest expense was $494,000 for the third quarter of
fiscal 2003 compared to $627,000 for the third 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 $336,000 for the
third quarter of fiscal 2003 compared to a benefit of $5.6 million for third
quarter of fiscal 2002. The effective income tax rate for the third quarter of
fiscal 2003 was 2.4.% compared to 36.1% reported for the third 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 increased its valuation
allowance by $5.3 million for the quarter as it was considered unlikely that
the Company will be able to recover the tax benefit of the write-off of the
remaining carrying value of goodwill and other intangible assets. To the extent
that the Company does not return to profitability in the near future, additional
valuation allowances may be required against tax assets generated in future
periods or against currently recognized tax assets.
Nine Months 2003 Versus Nine Months 2002 Comparison
Net Loss. The Company reported a net loss for the first nine months of
fiscal 2003 of $14.7 million compared to a net loss of $10.5 million for the
first nine months of fiscal 2002. The Company recorded a $13.0 million and a
$15.6 million goodwill impairment charge in the third quarter of fiscal 2003 and
fiscal 2002, respectively. The Company also reported an intangible asset
impairment charge of $323,000 in the third quarter of fiscal 2003 related to a
non-compete agreement which was determined to no longer have any value. In
fiscal 2002, the Company incurred $591,000 in costs associated with debt
modifications. After excluding the impairment charges and costs associated with
debt modifications, the Company reported a
14
net loss of $1.4 million in fiscal 2003 compared to a net profit of $50,000 in
fiscal 2002. The increased loss in fiscal 2003 was principally caused by
decreased sales.
Sales. The Company's sales for the first nine months of fiscal year 2003
decreased by $6.5 million to $35.3 million from $41.8 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 computer, automotive and aluminum extrusion markets.
Gross Profit. The Company's gross profit margin for the first nine months
of fiscal year 2003 was 10.9% of revenue compared to 15.9% of revenue for third
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
nine months of fiscal year 2003 were $292,000 compared to $372,000 for the same
period last year. The decrease was primarily due to lower labor costs and
containment of expenses.
Selling, General and Administrative. Selling, general and administrative
expenses for the first nine months of fiscal 2003 were $4.3 million or 12.3% of
sales as compared to $4.7 million or 11.2% of sales for the first nine months of
fiscal 2002. SG&A expenses in absolute dollars decreased by $352,000. This
decrease was the result of decreases in commission costs, amortization expense,
compensation costs, legal fees and certain employee benefit costs. Decreases in
commission costs was due to decreased sales. The decrease in amortization
expense was due to the write-off of an intangible asset which was determined to
be impaired. Decreases in the other expense categories were due to the Company's
continued efforts to contain costs.
Goodwill Impairment Charge. The Company recorded a $13.0 million and a
$15.6 million goodwill impairment charge in the first nine months of fiscal 2003
and fiscal 2002, respectively. As a result of these charges, the Company no
longer has any goodwill on its books.
Other Intangible Asset Impairment Charge. The Company recorded a $323,000
impairment charge in the third quarter of fiscal 2003 related to an intangible
asset which was determined to no longer have any value.
Interest Expense. Interest expense was $1,525,000 for the first nine
months of fiscal 2003 compared to $1,912,000 for the first nine months of fiscal
2002. This decrease was due to lower interest rates and lower average
outstanding borrowings.
Losses Associated with Debt Extinguishments and Modifications. The Company
recorded a $591,000 charge during the second quarter of fiscal 2002 resulting
from amendments to Credit Agreements with its Lenders which revised certain
financial covenants and waived certain events of non-compliance.
Benefit for Income Taxes. Benefit for income taxes was $883,000 for the
first nine months of fiscal 2003 compared to a benefit of $6.0 million for first
nine months of fiscal 2002. The effective income tax rate for the first nine
months of fiscal 2003 was 5.7% compared to 36.2% reported for the first nine
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 increased its
valuation allowance by $5.3 million for the quarter as it is considered unlikely
that the Company will be able to recover the tax benefit of the write-off of the
remaining carrying value of goodwill and other intangible assets.
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 seven 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 258,225 shares of the Company's common stock to
the Lenders in connection with the
15
amendments.
On September 5, 2003, the Company and its Lenders entered into a Seventh
Amendment to the Credit Agreement which revised the Maximum Leverage Ratio and
Fixed Charge Coverage Ratio for the balance of fiscal year 2003 and fiscal year
2004 to levels that management believes the Company will be able to achieve. The
Lenders waived the non-compliance with certain covenants at July 27, 2003, added
new Minimum EBITDA and Interest Coverage covenants for the remainder of fiscal
year 2003 and fiscal year 2004, revised the allowable amounts to be spent on
capital expenditures for fiscal years 2003 and 2004 and eliminated the Minimum
Net Worth requirement. For periods ending on or after April 1, 2004, interest on
the revolving credit facility and term loan will increase by .5% at maximum
financial leverage levels. Lastly, the September 5, 2003 amendment reduced the
principal payments from $750,000 to $250,00 per quarter for the remainder of
fiscal year 2003 and from $1,500,000 to $250,000 per quarter for fiscal year
2004. The maturity date of the revolver was extended from June 2004 to January
2005. The term debt continues to mature on January 2006 at which time a final
balloon payment of $11.0 million will be due.
Under the Amended Credit Agreement, the revolving credit facility accrues
interest on outstanding borrowings at LIBOR plus 3.5% (4.61% on July 27, 2003)
and expires in January 2005. 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 ($3.5 million at July 27, 2003), as defined by the Amended
Credit Agreement. As of July 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,
minimum interest coverage, limits on capital spending, and required levels of
EBITDA. The maximum financial leverage ratio, which is calculated by dividing
funded debt by EBITDA, was waived for the third quarter of fiscal 2003 and must
not exceed: 11.0:1 for the fourth quarter of fiscal year 2003 through the second
quarter of fiscal 2004; 10.3:1 for the third quarter of fiscal 2004; 8.1:1 for
the fourth quarter of 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, was waived for the remainder
of fiscal year 2003. It must not exceed: 0.60:1 for the first quarter of fiscal
2004; 0.70:1 for the second and third quarters of fiscal 2004; and 0.85:1 for
the fourth quarter of fiscal 2004 and thereafter. The interest coverage ratio,
which is calculated by dividing EBITDA by interest expense, must not exceed
0.70:1 for the fourth quarter of fiscal 2003; 1.00:1 for the first quarter of
fiscal 2004; 1.20:1 for the second and third quarters of fiscal 2004 and 1.50:1
for the fourth quarter of fiscal 2004. Capital spending is limited to $450,000
for fiscal year 2003, $300,000 for fiscal year 2004, and $1.0 million for fiscal
years 2005 and each year thereafter. Required levels of EBITDA are $400,000 for
the third quarter of fiscal 2003, $350,000 for the fourth quarter of fiscal
2003; $520,000 for the first quarter of fiscal 2004; $1,220,000 for the second
quarter year to date of fiscal 2004; $1,730,000 for the third quarter year to
date of fiscal 2004 and $2,620,000 for the entire 2004 fiscal year.
A portion of the outstanding term loan, $12.0 million on July 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, $7.4 million on July 27, 2003, consists of a note which accrues
interest at the relevant LIBOR rate plus 3.5% (4.77% at July 27, 2003).
Cash Flow Information
On July 27, 2003, the Company had cash of $1.4 million compared to
$751,000 on October 27, 2002. For the first nine months of fiscal 2003, $3.3
million was provided by operating activities and $2.3 million was used in
financing activities to pay down long-term debt. For the first nine months of
fiscal 2002, $1.5 million was provided by operating activities and $3.3 million
was used in financing activities to pay down long-term debt. The $1.8 million
increase in cash provided from operating activities for the first nine months of
fiscal 2003 compared to the same period last year was due primarily to lower
levels of inventory on hand at July 27, 2003 compared to July 28, 2002. Capital
equipment purchases for the first nine months of fiscal 2003 was $322,000
compared to $369,000 in the first nine months of Fiscal 2002.
Working capital on July 27, 2003 was $9.8 million as compared to $9.5
million on October 27, 2002. This increase in working capital resulted from cash
flow from operations, principally generated through reductions in accounts
receivable and inventory balances, which decreased by $1.1 million and $1.4
million, respectively, due to lower sales in the first nine months of 2003
compared to the last nine months of 2002, offset by repayments of long term debt
which totaled $2.0 million. The Company believes that its available cash and
future cash flow from operations will be sufficient to fund operations over the
next twelve months.
Results of Operations
16
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% (4.61% on July 27, 2003)
and expires in January 2005. 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 ($3.5 million at July 27, 2003), as defined by the Amended
Credit Agreement. As of July 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.
A portion of the outstanding term loan ($12.0 million on July 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, $7.4 million on July 27, 2003, consists of a note which accrues
interest at the relevant LIBOR rate plus 3.5% (4.77% at July 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 $74,000.
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 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
At the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. During the third quarter of 2003, there
were no changes in the Company's internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II OTHER INFORMATION
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Seventh Amendment to Credit Agreement and Waiver, dated as of
September 5, 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)
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed Herewith)
31.2 Certification by Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed Herewith)
32.1 Certification by Chief Executive Officer and 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: September 10, 2003 By: /s/ Lawrence Butler
-------------------------------------
Lawrence Butler
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: September 10, 2003 By: /s/ James J. Polakiewicz
-------------------------------------
James J. Polakiewicz
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
EXHIBIT INDEX
Exhibit
- -------
4.1 Seventh Amendment to Credit Agreement and Waiver, dated as of
September 5, 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)
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed Herewith)
31.2 Certification by Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed Herewith)
32.1 Certification by Chief Executive Officer and 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)
20