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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 January 25, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-14365
ALPHA TECHNOLOGIES GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0079338
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11990 San Vicente Blvd, Los Angeles, CA 90049
---------------------------------------------
(Address of principal executive offices)
310-566-4005
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.03 par value 7,110,336
---------------------------- ---------
Class Outstanding at March 1, 2004
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 3
January 25, 2004 and October 26, 2003
Condensed Consolidated Statements of Operations 4
Three Months Ended January 25, 2004 and January 26, 2003
Condensed Consolidated Statements of Comprehensive Loss 5
Three Months Ended January 25, 2004 and January 26, 2003
Condensed Consolidated Statements of Cash Flows 6
Three Months Ended January 25, 2004 and January 26, 2003
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share-Related Data)
January 25, October 26,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 639 $ 1,677
Accounts receivable, net 6,318 5,745
Inventories, net 6,398 6,553
Prepaid expenses 1,533 1,364
----------- -----------
Total current assets 14,888 15,339
PROPERTY AND EQUIPMENT, net 11,436 12,103
DEFERRED INCOME TAXES 10,023 10,046
OTHER ASSETS, net 684 807
----------- ----------
TOTAL ASSETS $ 37,031 $ 38,295
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 3,177 $ 3,486
Accrued compensation and related benefits 680 612
Other accrued expenses 479 716
Current portion of long-term debt 5,750 1,000
----------- -----------
Total current liabilities 10,086 5,814
REVOLVING CREDIT FACILITY - 3,200
LONG-TERM DEBT 16,350 18,150
OTHER LONG-TERM LIABILITIES 478 470
----------- -----------
TOTAL LIABILITIES 26,914 27,634
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
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 January 25, 2004 and October 26, 2003. 256 256
Additional paid-in capital 47,504 47,504
Accumulated deficit (31,706) (31,128)
Accumulated other comprehensive loss (43) (77)
Treasury stock, at cost; 1,419,490 common shares at January 25, 2004
and October 26, 2003 (5,894) (5,894)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,117 10,661
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,031 $ 38,295
=========== ===========
See notes to condensed consolidated financial statements
3
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended
-------------------------
January 25, January 26,
2004 2003
----------- -----------
SALES $ 11,912 $ 11,421
COST OF SALES 10,627 10,233
----------- ----------
Gross profit 1,285 1,188
----------- ----------
OPERATING EXPENSES
Research and development 103 93
Selling, general and administrative 1,279 1,362
----------- ----------
Total operating expenses 1,382 1,455
----------- ----------
OPERATING LOSS (97) (267)
INTEREST EXPENSE (483) (522)
OTHER INCOME, net 2 4
----------- ----------
LOSS BEFORE BENEFIT FOR INCOME TAXES (578) (785)
BENEFIT FOR INCOME TAXES - (312)
----------- ----------
NET LOSS $ (578) $ (473)
=========== ==========
LOSS PER COMMON SHARE:
BASIC $ (0.08) $ (0.07)
DILUTED $ (0.08) $ (0.07)
=========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 7,110 7,110
DILUTED 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
-----------------------------
January 25, January 26,
2004 2003
----------- -----------
NET LOSS $ (578) $ (473)
OTHER COMPREHENSIVE INCOME
Change in value of interest rate swap (net of applicable taxes) 34 41
----------- -----------
COMPREHENSIVE LOSS $ (544) $ (432)
=========== ===========
See notes to condensed consolidated financial statements
5
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
---------------------------
January 25, January 26,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (578) $ (473)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 722 871
Amortization of financing fees 123 91
Deferreed stock compensation expense - 3
Deferred income taxes - (304)
Changes in operating assets and liabilities:
Accounts receivable (573) 1,390
Inventories 155 (45)
Prepaid expenses (169) (16)
Accounts payable (309) (175)
Accrued compensation and related benefits 68 (80)
Other liabilities (172) (39)
----------- -----------
Cash flows from operating activities (733) 1,223
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (55) (119)
(Decrease) increase in other assets - -
----------- -----------
Cash flows from investing activities (55) (119)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (250) (750)
----------- -----------
Cash flows from financing activities (250) (750)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,038) 354
CASH AND CASH EQUIVALENTS, beginning of period 1,677 751
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 639 $ 1,105
=========== ===========
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.
Accounting Periods
The Company follows a 4-5-4 week quarterly accounting period cycle
wherein each quarter consists of two four week months and one five week month.
The last day of the fiscal year is always the last Sunday in October.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Alpha Technologies Group, Inc. include the accounts of Alpha and its wholly
owned subsidiaries and have been prepared in accordance with accounting
principles generally accepted in the United States of America and with the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the Company's condensed
consolidated financial statements, have been included. The results for the three
months ended January 25, 2004 are not necessarily indicative of results for the
full year ending October 31, 2004. 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 26, 2003.
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.
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 risk management strategies include the use of an interest
rate swap (see Note 3) to hedge against
7
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 costed
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.
Property and Equipment
The cost of property and equipment is depreciated using the
straight-line method over the estimated useful lives of such assets, ranging
from three to fifteen years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or the estimated useful
lives of the leased assets.
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.
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.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income or loss, plus other
comprehensive income (loss). Other comprehensive loss in fiscal years 2004 and
2003 consists of fair value adjustments related to the interest rate swap
agreement, net of tax.
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.
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. The adoption of SFAS 150 has not materially impacted the Company's
results of operations or financial position.
8
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 December 15, 2003. The adoption of FIN
46 has not materially impacted the Company's results of operations or financial
position.
2. INVENTORIES
Inventories consisted of the following on:
January 25, October 26,
2004 2003
----------- -----------
(In thousands)
Raw materials and components $ 2,040 $ 2,281
Work in process 2,522 2,910
Finished goods 2,349 1,995
----------- -----------
6,911 7,186
Valuation allowance (513) (633)
----------- -----------
$ 6,398 $ 6,553
=========== ===========
3. DEBT AND REVOLVING CREDIT FACILITIES
Revolving Credit and Term Debt Facilities consisted of the following on
January 25, October 26,
2004 2003
----------- -----------
(In thousands)
Variable-rate revolving credit facility, interest payable monthly, $ 3,200 $ 3,200
Variable-rate term notes, interest is payable monthly,
principal is payable quarterly 6,900 7,150
Portion of variable-rate term note covered by swap agreement,
interest and principal is payable quarterly 12,000 12,000
----------- -----------
22,100 22,350
Less current portion (5,750) (1,000)
----------- -----------
$ 16,350 $ 21,350
=========== ===========
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
matures 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. Under the
Credit Agreement, the Company must meet certain covenants. The Credit Amendment
was last amended on September 5, 2003 (the "Amended Credit Agreement") 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. The margin over the applicable
base rate is determined by the Company using a sliding scale to the Company's
leverage ratio. Beginning April 1, 2004, the margin is at the maximum level
allowed per the Amended Credit Agreement, a 0.5% increase over the margin
applicable in the first quarter of fiscal 2004. Lastly, the September 5, 2003
amendment reduced the principal payments from $750,000 to $250,000 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.
Under the Amended Credit Agreement, the revolving credit facility
accrues interest on outstanding borrowings at LIBOR plus 3.5% (4.62% on January
25, 2004) and expires on January 2005. There is also an unused line fee equal to
9
..75% per annum. The Company may borrow up to the lesser of $5 million or 60% of
eligible accounts receivable ($3.6 million at January 25, 2004), as defined by
the Amended Credit Agreement. Prior to the amendments, the Company was allowed
to borrow up $15 million. As of January 25, 2004, $3.2 million has been drawn
and is outstanding on the revolving credit facility. A portion of the
outstanding term loan ($12.0 million on January 25, 2004) 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, $6.9 million on January 25, 2004, consists of a note which accrues
interest at the relevant LIBOR rate plus 3.5% (4.66% at January 25, 2004). 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 $72,000
and $129,000 at January 25, 2004 and October 26, 2003, respectively.
Future minimum principal payments on the revolving credit facilities
and the term loans are as follows:
In thousands
------------
2004 (balance of fiscal year)................................... $ 750
2005............................................................. 10,400
2006............................................................. 10,950
------------
$ 22,100
============
4. SEGMENT RELATED INFORMATION
The Company has one operating segment. We derive substantially all of
our operating revenue from the sale and support of one group of products and
services with similar characteristics such as the nature of the production
processes, the type and class of customers, and the methods of distribution.
Substantially all of our assets are located within the United States. In
addition, the Company's chief decision-maker and management make decisions based
on one product group. Net sales to one customer totaled approximately 10.4% and
10.6% of consolidated revenues for the three months ended January 25, 2004 and
January 26, 2003, 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 2,114,433 and 1,952,376 shares of common stock were
outstanding at January 25, 2004 and at January 26, 2003, respectively, and were
not included in the computation as their effect was antidilutive.
6. 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 4%, volatility of 104% and an
expected life of seven years.
10
Three Months Ended
---------------------------
January 25, January 26,
2004 2003
----------- -----------
Net loss as reported $ (578) $ (473)
After tax stock based compensation determined
using the intrinsic value method - 2
After tax stock based compensation determined
using the fair value method (601) (288)
----------- -----------
Pro forma net loss $ (1,179) $ (759)
=========== ===========
Basic and diluted net loss per share:
As reported $ (0.08) $ (0.07)
=========== ===========
Pro forma $ (0.17) $ (0.11)
=========== ===========
7. CONTINGENCIES
From time to time, the Company becomes involved in litigation
incidental to its business. Management, based on its understanding of the facts
and, where necessary advice of counsel, does not believe that matters currently
pending, either individually or in the aggregate, would have a material impact
on financial position or the results 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 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
11
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 Condensed Consolidated
Financial Statements.
RESULTS OF OPERATIONS
First Quarter 2004 Versus First Quarter 2003 Comparison
Net Loss. A net loss of $578,000 was reported in the first quarter of
fiscal 2004 compared loss of $473,000 in the first quarter of fiscal 2003. Loss
before benefit for income taxes was $578,000 in fiscal 2004 compared to a loss
before benefit for income taxes of $785,000 in fiscal 2003. The decrease in loss
before income taxes in fiscal 2004 is the result of increases in sales and gross
margin along with decreases in operating expenses and interest expense.
Sales. The Company's sales increased by $491,000 to $11.9 million for
first quarter of fiscal year 2004 compared to $11.4 million for the first
quarter of 2003. The increase is due to a slight improvement in the industries
that the Company serves, as well as, an increase in market share.
Gross Profit. The Company's gross profit margin for the first quarter
of fiscal year 2004 was 10.8% of revenue compared to 10.4% of revenue for first
quarter of fiscal year 2003. Gross profit increased primarily as a result of
revenues increasing while fixed costs such as depreciation, lease expense and
insurance remained relatively unchanged.
Research and Development. Research and development expenses for the
first quarter of fiscal year 2004 were $103,000 compared to $93,000 for the same
period last year.
Selling, General and Administrative. Selling, general and
administrative expenses totaled $1.3 million or 10.7% of sales for the first
quarter of fiscal 2004 compared to $1.4 million or 11.9% of sales reported for
the first quarter of fiscal 2003. Selling, general and administrative expenses
in absolute dollars decreased by $83,000. This decrease was the result of
headcount reductions and other expenses resulting from the Company's continued
efforts to contain costs.
Interest Expense. Interest expense was $483,000 for the first quarter
of fiscal 2004 compared to $522,000 for the First quarter of fiscal 2003. This
decrease was due to lower interest rates and lower average outstanding
borrowings.
Benefit for Income Taxes. Benefit for income taxes was $0 for the first
quarter of fiscal 2004 compared to $312,000 for the first quarter of fiscal
2003. The effective income tax rate for the first quarter of fiscal 2004 was 0%
compared to 39.8% for the first quarter of fiscal 2003. 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 $229,000 in the
first quarter of fiscal 2004 as management determined that it would be uncertain
that the Company will be able to realize any tax benefit related to the loss
incurred during the quarter. 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.
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. 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 approximately 258,000 shares of the Company's common stock to the
Lenders in connection with the amendments.
On September 5, 2003, the Company and its Lenders entered into a
Seventh Amendment to the Credit Agreement (the "Amended 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 spend on capital expenditures for
fiscal years 2003
12
and 2004 and eliminated the Minimum Net Worth requirement. The margin over the
applicable base rate is determined by the Company using a sliding scale to the
Company's leverage ratio. Beginning April 1, 2004, the margin is at the maximum
level allowed per the Amended Credit Agreement, a 0.5% increase over the margin
applicable in the first quarter of fiscal 2004. 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% (4.62% on January
25, 2004) 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 ($3.6 million at January 25, 2004), as defined by
the Amended Credit Agreement. As of January 25, 2004, $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 EBITDA minus Capital Expenditures by fixed charges, 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. The
Amended Credit Agreement does not permit the Company, or its subsidiaries, to
declare or pay dividends. At January 25, 2004, the Company was in compliance
with all covenants under the Amended Credit Agreements.
A portion of the outstanding term loan, $12.0 million on January 25,
2004, 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, $6.9 million on January 25, 2004, consists of a note which
accrues interest at the relevant LIBOR rate plus 3.5% (4.66% at January 25,
2004).
Cash Flow Information
On January 25, 2004, the Company had cash of $639,000 compared to
$1,677,000 on October 26, 2003. For the first three months of fiscal 2004,
$733,000 was used in operating activities and $250,000 was used in financing
activities to pay down long-term debt. For the first three months of fiscal
2003, $1.2 million was provided by operating activities and $750,000 was used in
financing activities to pay down long-term debt. The $2.0 million decrease in
cash provided from operating activities was due primarily to larger increases in
receivables and prepaid expenses along with larger decreases in accounts payable
and other liabilities during the first three months of fiscal 2004 compared to
the same period last year. Capital equipment purchases for the first three
months of fiscal 2004 was $55,000 compared to $119,000 in the first three months
of Fiscal 2003.
Working capital on January 25, 2004 was $4.8 million as compared to
$9.5 million on October 26, 2003. This decrease in working capital was primarily
the result of a $4.8 million increase in the current maturities of long-term
debt, primarily due to the revolving credit facility, due January 31, 2005,
being classified as current. Increases in accounts receivable and prepaid
expenses were offset by a decrease in inventory.
The Company believes that its available cash and future cash flows from
operations will be sufficient to fund at current levels operations over the next
twelve months. However, demand for our products increased in the first quarter
of 2004 and the limit on borrowing under our revolving credit agreement has
begun to adversely impact our ability to finance the resulting increased working
capital needs.
We are currently in compliance with all financial covenants contained
in the Credit Agreement, as amended, and believe we will continue to be in
compliance for the balance of 2004. However, we will need significant growth to
meet
13
principal payment obligations in fiscal 2005 and 2006, and to be in
compliance with the financial covenants, or we will need to re-negotiate for an
extension of the payment schedule and revisions to the covenants. There can be
no assurance that such growth will occur, or that our lenders will agree to any
such changes. In such event, we would be required to obtain alternative
financing. There is no assurance that we will be able to obtain such financing.
Results of Operations
The Company's results of operations have been adversely affected by the
economic downturn. In response, the Company has taken a number of steps to
improve operational efficiency and profitability, including reductions in head
count at several of our facilities.
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% (4.62% on January
25, 2004) 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 ($3.6 million at January 25, 2004), as defined by
the Amended Credit Agreement. As of January 25, 2004, $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 January 25,
2004) 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, $6.9 million on January 25, 2004, consists of a note, which
accrues interest at the relevant LIBOR rate plus 3.5% (4.66% at January 25,
2004). At current borrowing levels, a 1% increase in interest rates in our
variable rate term debt would increase annual interest expense by approximately
$69,000.
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 first quarter of 2004, 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.
14
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
On January 9, 2004, Alpha Technologies Group, Inc. furnished a Current
Report on Form 8-K including the press release issued in connection with 2003
fiscal year and fourth quarter results of operation.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alpha Technologies Group, Inc.
------------------------------
(Registrant)
Date: March 10, 2004 By: /s/ Lawrence Butler
----------------------
Lawrence Butler
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 10, 2004 By: /s/ James J. Polakiewicz
------------------------
James J. Polakiewicz
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
EXHIBIT INDEX
Exhibit
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)
17