Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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 incorporation (I.R.S. Employer
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 10, 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
July 25, 2004 and October 26, 2003 3
Condensed Consolidated Statements of Operations 4
Three Months and Nine Months Ended July 25, 2004 and July 27, 2003
Condensed Consolidated Statements of Comprehensive Loss 5
Three Months and Nine Months Ended July 25, 2004 and July 27, 2003
Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 25, 2004 and July 27, 2003 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23
2
ALPHA TECHNOLOGIES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share-Related Data)
July 25 October 26
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 775 $ 1,677
Accounts receivable, net 6,948 5,745
Inventories, net 6,554 6,553
Prepaid expenses 1,623 1,364
-------- --------
Total current assets 15,900 15,339
PROPERTY AND EQUIPMENT, net 10,250 12,103
DEFERRED INCOME TAXES 9,995 10,046
OTHER ASSETS, net 429 807
-------- --------
TOTAL ASSETS $ 36,574 $ 38,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,610 $ 3,486
Accrued compensation and related benefits 829 612
Other accrued expenses 373 716
Current portion of long-term debt 21,600 1,000
-------- --------
Total current liabilities 26,412 5,814
REVOLVING CREDIT FACILITY - 3,200
LONG-TERM DEBT, Net of current portion - 18,150
OTHER LONG-TERM LIABILITIES 464 470
-------- --------
TOTAL LIABILITIES 26,876 27,634
-------- --------
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 25, 2004 and October 26, 2003 256 256
Additional paid-in capital 47,504 47,504
Accumulated deficit (32,168) (31,128)
Accumulated other comprehensive (loss) - (77)
Treasury stock, at cost (1,419,490 common shares at July 25, 2004
and October 26, 2003) (5,894) (5,894)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,698 10,661
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,574 $ 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 Nine Months Ended
------------------ -----------------
July 25, July 27, July 25, July 27,
2004 2003 2004 2003
---- ---- ---- ----
SALES
Fabricated products $ 10,531 $ 9,106 $ 30,746 $ 27,885
Extruded products 4,017 2,552 10,237 7,403
-------- -------- -------- --------
Total sales 14,548 11,658 40,983 35,288
COST OF SALES 12,678 10,465 33,933 31,425
-------- -------- -------- --------
Gross profit 1,870 1,193 5,050 3,863
-------- -------- -------- --------
OPERATING EXPENSES
Research and development 108 97 334 292
Selling, general and administrative 1,532 1,509 4,379 4,379
Impairment of goodwill - 12,980 - 12,980
Impairment of other intangible asset - 323 - 323
-------- -------- -------- --------
Total operating expenses 1,640 14,909 4,713 17,921
-------- -------- -------- --------
OPERATING (LOSS) INCOME 230 (13,716) 337 (14,058)
INTEREST EXPENSE (443) (494) (1,380) (1,525)
OTHER INCOME, net - 3 3 8
-------- -------- -------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES (213) (14,207) (1,040) (15,575)
BENEFIT FOR INCOME TAXES - (336) - (883)
-------- -------- -------- --------
NET LOSS $ (213) $(13,871) $ (1,040) $(14,692)
======== ======== ======== ========
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.03) $ (1.95) $ (0.15) $ (2.07)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
BASIC AND DILUTED
7,110 7,110 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 25, July 27, July 25, July 27,
2004 2003 2004 2003
---- ---- ---- ----
NET LOSS $ (213) $(13,871) $ (1,040) $(14,692)
OTHER ITEMS OF COMPREHENSIVE INCOME:
Change in value of interest rate swap (net of applicable taxes) - 55 77 142
-------- -------- -------- --------
COMPREHENSIVE LOSS $ (213) $(13,816) $ (963) $(14,550)
======== ======== ======== ========
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 25, July 27,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,040) $(14,692)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization 2,103 2,508
Amortization of financing fees 381 285
Change in value of interest rate swap 77 -
Impairment of goodwill - 12,980
Impairment of other intangible asset - 323
Stock compensation - 4
Deferred income taxes 52 (572)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,203) 1,146
(Increase) decrease in inventories (1) 1,394
Increase in prepaid expenses (259) (8)
Increase (decrease) in accounts payable 124 (79)
Increase (decrease) in accrued compensation and related benefits 217 (102)
(Decrease) increase in other liabilities (349) 98
-------- --------
Cash flows from operating activities 102 3,285
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (250) (322)
Decrease in other assets (4) (58)
-------- --------
Cash flows from investing activities (254) (380)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit lines 900 -
Payments on revolving credit lines (900)
Payments on long-term debt (750) (2,250)
-------- --------
Cash flows from financing activities (750) (2,250)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (902) 655
CASH AND CASH EQUIVALENTS, beginning of period 1,677 751
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 775 $ 1,406
======== ========
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. For fiscal year
2004, this will result in a 4-5-5 week accounting period for the fourth fiscal
quarter and a 53 week fiscal year ending October 31, 2004.
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 nine
months ended July 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.
Certain current and prior year balances have been reclassified to conform to the
current income statement and statement of cash flows presentation.
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 shipped to the ultimate
customers, (3) the price is fixed or determinable, and (4) collectibility is
reasonably assured. The Company's shipping terms are FOB shipping point.
Allowances for doubtful accounts are provided for account receivables
considered uncollectible. The allowance for doubtful accounts 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 is adequate and that the judgment applied is
appropriate, if there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our previous experience, our estimates of the
recoverability of the amounts due us and our sales could be adversely affected.
Historically, losses in the aggregate have not exceeded management's
expectations.
Allowances for sales returns are provided in the period in which the
related sale is recognized. The allowance for sales returns is based on our
analysis of trends in product returns. While we believe that our allowance for
sales returns is adequate and that the judgment applied is appropriate, if the
historical data used to calculate these estimates do not properly reflect future
returns, additional provision for sales returns may be required, and revenues in
that period could be adversely
7
affected. Historically, sales returns have not been significant in any period
presented.
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. While we believe that
our reserves for returns of defective goods is adequate and that the judgment
applied is appropriate, if the historical data used to calculate these estimates
do not properly reflect future returns, additional provision for returns of
defective goods may be required, and revenues in that period could be adversely
affected. Claims for defective goods have not been significant in any period
presented.
Risk Management and Hedging Activity
The Company's risk management strategies included the use of an interest
rate swap to hedge against the impact on cash flows of changes in interest
rates. The interest rate swap was designated as a cash flow hedge of specific
variable rate debt and was carried on the balance sheets at fair value. The
interest rate swap expired on March 31, 2004, and the Company was not required
by the Lenders to renew the swap agreement. No other derivative instruments are
held.
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.
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. The following assumptions were used to estimate the fair value of the
options issued in 2004: risk free interest rate of 3.58%, expected volatility of
89% and an estimated life of the options of seven years. The following
assumptions were used to estimate the fair value of the options issued in 2003:
risk free interest rate of 4%, volatility of 104% and an expected life of seven
years.
Three Months Ended Nine Months Ended
July 25, July 27, July 25, July 27,
2004 2003 2004 2003
Net loss as reported $ (213) $ (13,871) $ (1,040) $ (14,692)
After tax stock based compensation
under fair value method (665) (277) (1,934) (831)
------- --------- -------- ---------
Pro forma net loss $ (878) $ (14,148) $ (2,974) $ (15,523)
======= ========= ======== =========
Basic and diluted net loss per share:
As reported $ (0.03) $ (1.95) $ (0.15) $ (2.07)
======= ========= ======== =========
Pro forma $ (0.12) $ (1.99) $ (0.42) $ (2.18)
======= ========= ======== =========
8
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.
2. INVENTORIES
July 25, October 26,
2004 2003
---- ----
(In thousands)
Inventories consisted of the following on:
Raw materials and components $ 2,029 $ 2,281
Work in process 2,557 2,910
Finished goods 2,381 1,995
------- -------
6,967 7,186
Valuation allowance (413) (633)
------- -------
$ 6,554 $ 6,553
======= =======
3. DEBT AND REVOLVING CREDIT FACILITIES
July 25, October 26,
2004 2003
---- ----
(In thousands)
Term Debt and Revolving Credit Facilities consisted of the following on
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 .......................................... 18,400 7,150
Variable-rate term note under swap agreement, interest and
principal is payable quarterly .......................................... - 12,000
------- -------
21,600 22,350
Less current portion......................................................... 21,600 (1,000)
------- -------
$ - $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 $10,950,000 will
9
be due.
Under the Amended Credit Agreement, the revolving credit facility accrued
interest on outstanding borrowings at LIBOR plus 3.5% (4.60% on March 31, 2004)
through March 31, 2004, and accrues interest at LIBOR plus 4.0% (5.65% on July
25, 2004) from April 1, 2004 and thereafter. The revolving credit facility
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 ($4.0 million at July 25, 2004), as defined by the Amended
Credit Agreement. Prior to the amendments, the Company was allowed to borrow up
$15 million. As of July 25, 2004, $3.2 million has been drawn and is outstanding
on the revolving credit facility.
The term loan consists of a note which accrues interest at the relevant
LIBOR rate plus 4.0% (5.38% at July 25, 2004). The term loan requires quarterly
principal payments through January 2006.
The Amended Credit Agreement requires the calculation of excess cash flow
at the end of each fiscal quarter. Excess cash flow is defined by the Amended
Credit Agreement as EBITDA, less interest expense, principal payments due on
long-term debt, taxes paid, and capital expenditures, and adjusted for increases
or decreases in net working capital. For any fiscal quarter for which this
calculation results in excess cash flow, payment is due within fifty-five days
from the end of that fiscal quarter, to be applied to the outstanding balance of
the term note. An excess cash flow payment of $895,000 is due on September 22,
2004 for the third fiscal quarter of 2004. Our request for a waiver was denied.
However, we are in discussions with our Lenders to restructure our loan
agreement including the excess cash flow payment.
The Company, as required by the Amended Credit Agreement, utilized an
interest rate swap (the "swap") to hedge against its interest rate risk. The
swap was designated as a cash flow hedge and was carried on the balance sheet at
fair value. The effect of the swap was to convert the interest rate on the
hedged loan ($12.0 million at March 31, 2004) from a variable rate as described
above to a fixed rate of 8.47%. The swap matured on March 31, 2004, and the
Company was not required by the Lender to renew the swap agreement. The carrying
value and fair value of the swap was a liability of $77,000 (net of applicable
income tax effect of $52,000) at October 26, 2003.
Future minimum principal payments on the revolving credit facilities and
the term loans are as follows:
In thousands
------------
2004 (balance of fiscal year)..................................... $ 250
2005 ............................................................. 10,400
2006 ............................................................. 10,950
---------
$ 21,600
=========
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 7.8% and 11.4% of consolidated revenues for the nine months ended
July 25, 2004 and July 27, 2003, respectively.
5. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed by dividing income
(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 2,381,433 and 21,000 shares of
common stock
10
were outstanding at July 25, 2004 and at July 27, 2003, respectively, and were
not included in the computation as their effect was antidilutive.
6. 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.
11
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, availability of aluminum raw
material, 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.
OVERVIEW
The Company's results of operations during the prior two fiscal years were
adversely affected by the severe downturn in the markets our products serve,
principally telecommunications, consumer electronics and networking equipment.
However, sales began to increase in the second quarter of fiscal 2004. For the
third fiscal quarter of 2004, sales increased to $14.5 million, compared to
$11.7 million in the third quarter of fiscal 2003. We attribute the improvement
to increased demand in the markets that we serve.
Harman International, Inc. ("Harman") accounted for 7.8% and 11.4% of our
revenues for the first nine months of fiscal 2004 and fiscal 2003, respectively.
In July 2004, we entered into a supply agreement with Harman which expires on
June 30, 2005. Under the terms of the agreement, Harman agreed to purchase
certain heat sinks exclusively from Alpha at agreed-upon contract pricing. Based
upon this agreement, we anticipate that sales to Harman for the twelve months
beginning July 1, 2004 will be approximately 40% (or approximately $2.0 million)
lower than sales to Harman for the twelve months ended June 30, 2004. We believe
that the anticipated reduced sales to Harman will be offset by increased sales
to new and existing customers.
Because of conditions in the aluminum markets, we used our excess cash to
pay aluminum suppliers in advance for deliveries. As a result, since the end of
the third fiscal quarter, our accounts payable have decreased by approximately
$900,000. As a result, we do not currently have the cash on hand to make an
excess cash flow payment of $895,000 to our lenders due on September 22, 2004.
Such payment arises from the Company's EBITDA for the third quarter. Our request
for a waiver was denied. However, we are in discussions with our Lenders to
restructure our loan agreement, including the excess cash flow payment.
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, revenue recognition, accounting for allowance for
doubtful accounts and sales returns, inventory reserves, and contingencies.
These estimates are based on historical experience and various assumptions that
we believe to be reasonable under the particular applicable facts and
circumstances. Actual results could differ from those estimates.
We consider our critical accounting policies to be those that (1) involve
significant judgements and uncertainties, (2) require estimates that are more
difficult for management to determine and (3) have the potential to result in
materially different outcomes under varying assumptions and conditions. Our
critical accounting policies include the following: revenue recognition
allowance for sales returns, provision for doubtful accounts, provision for
inventory reserves, impairment of long-lived assets, and accounting for income
taxes.
12
REVENUE RECOGNITION
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that
four basic criteria be met before revenue can be recognized: 1) there is
persuasive evidence that an arrangement exists; 2) shipment has occurred; 3) the
fee is fixed or determinable; and 4) collectibility is reasonably assured. We
recognize revenue upon determination that all criteria for revenue recognition
have been met, which is considered to have occurred upon shipment of the
finished product.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Alpha regularly analyzes its customer accounts and, when it becomes aware of a
specific customer's inability to meet its financial obligations to the Company,
records a specific provision for uncollectible accounts to reduce the related
receivable to the amount that is estimated to be collectible. The Company also
records and maintains a provision for doubtful accounts for customers based on a
variety of factors including the Company's historical experience, the length of
time the receivable has been outstanding and the financial condition of the
customer. If circumstances related to specific customers were to change, the
Company's estimates with respect to the collectibility of the related
receivables could be further adjusted. Historically, losses in the aggregate
have not exceeded management's expectations.
ALLOWANCE FOR SALES RETURNS
Allowances for sales returns are provided in the period in which the related
sale is recognized. The allowance for sales returns is based on our analysis of
trends in product returns. While we believe that our allowance for sales returns
is adequate and that the judgment applied is appropriate, if the historical data
used to calculate these estimates do not properly reflect future returns,
additional provision for sales returns may be required, and revenues in that
period could be adversely affected. Historically, sales returns have not been
significant in any period presented.
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 reserves have been established for excess
and obsolete items. Inventory purchases and commitments are based upon future
demand forecasts for our products and our current level of inventory. 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 impairment of long-lived assets, identifiable
intangible assets and goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Indicators of
impairment considered by management include damage or obsolescence, plans to
discontinue use or restructure, adverse changes in technology or in the market
place, and poor economic performance compared with original plans. If future
cash flows (undiscounted and without interest charges) expected to be generated
by an assets use or disposition 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.
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. We
record valuation allowances to reduce our deferred income tax assets to an
amount that we believe is more likely than not to be realized. We consider
estimated future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. If we were to
determine that we will not realize all or part of our deferred income tax assets
in the future, we would make an adjustment to the carrying value of the deferred
income tax asset, which would be reflected as an income tax expense. Conversely,
if we were to determine that we will realize a deferred income tax asset, which
currently has a valuation allowance, we would reverse the valuation allowance
which would be reflected as an income tax benefit in our financial statements.
13
RESULTS OF OPERATIONS
Third Quarter 2004 Versus Third Quarter 2003 Comparison
QUARTER ENDED QUARTER ENDED %
JULY 25, JULY 27, INCREASE
2004 2003 (DECREASE)
---- ---- ----------
Sales - Fabricated Products $ 10,531 $ 9,106 15.6%
Sales - Extruded Products 4,017 2,552 57.4%
-------- --------
Total Sales $ 14,548 $ 11,658 24.8%
======== ========
Gross Profit $ 1,870 $ 1,193 56.7%
Gross Profit as a % of Sales 12.9% 10.2% 25.6%
Research and Development $ 108 $ 97 11.3%
Selling, General and Administrative $ 1,532 $ 1,509 1.5%
SG&A as a % of Sales 10.5% 12.9% (18.6%)
Impairment of Goodwill - $ 12,980 -
Impairment of Other Asset - $ 323 -
Interest Expense $ 443 $ 494 (10.3%)
Loss Before Benefit for Income Taxes ($ 213) ($ 14,207) (98.5%)
Benefit for Income Taxes - ($ 336) -
Net Loss ($ 213) ($ 13,871) (98.5%)
Net Loss. A net loss of $213,000 was reported in the third quarter of
fiscal 2004 compared with a net loss of $13.9 million in the third quarter of
fiscal 2003. Loss before benefit for income taxes was $213,000 in fiscal 2004
compared to a loss before benefit for income taxes of $14.2 million in fiscal
2003. Last year's third quarter loss, excluding the goodwill impairment, was
$1.2 million. The decrease in loss before income taxes in fiscal 2004 was the
result of increases in sales and gross margin, along with a decrease in interest
expense and $13.3 million in non-recurring goodwill and other asset impairment
charges which occurred in the prior year. Gross margin increased primarily due
to increased revenues over relatively stable fixed costs.
Sales. The Company's total sales increased by $2.9 million (24.8%) to
$14.5 million for the third quarter of fiscal year 2004 compared to $11.7
million for the third quarter of 2003, principally as a result of improvements
in the markets we serve.
Sales-Fabricated Products. Sales of fabricated products increased by $1.4
million (15.6%) to $10.5 million for the third quarter of fiscal year 2004
compared to $9.1 million for the third quarter of fiscal 2003. The increase is
due to an improvement in the industries that the Company serves and sales to
several customers who previously purchased similar products from other
competitors.
Sales-Extruded Products. In the third quarter of fiscal 2004, sales of
aluminum extruded products increased $1.5 million (57.4%) to $4.0 million,
compared to $2.6 million for the third quarter of fiscal 2003. This increase was
due to improved economic conditions in the industries to which the Company
provides extruded aluminum products.
Gross Profit. The Company's gross profit margin for the third quarter of
fiscal year 2004 was 12.9% of revenue compared to 10.2% of revenue for third
quarter of fiscal year 2003. Gross profit increased primarily as a result of
revenues increasing while factory costs such as indirect labor remained constant
and fixed costs such as depreciation, lease expense and insurance remained
relatively unchanged.
Research and Development. Research and development expenses for the third
quarter of fiscal year 2004 were
14
$108,000 compared to $97,000 for the same period last year. This increase was a
result of increased salaries within our engineering department.
Selling, General and Administrative. Selling, general and administrative
expenses totaled $1.5 million or 10.5% of sales for the third quarter of fiscal
2004 compared to $1.5 million or 12.9% of sales reported for the third quarter
of fiscal 2003. Selling, general and administrative expenses as a percentage of
sales decreased 18.6%. This change was the result of sales increasing at a level
not requiring the Company to add significant sales, general, or administrative
expenses.
Impairment of Goodwill. The Company recorded a $13.0 million goodwill
impairment charge in the third quarter of fiscal 2003. As a result, the Company
no longer has any goodwill on its books.
Impairment of Other Asset. 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 $443,000 for the third quarter of
fiscal 2004 compared to $494,000 for the third quarter of fiscal 2003. This
decrease was due to lower average outstanding borrowings and the expiration of
the Swap agreement which covered a portion of the term note. The swap agreement
carried an annual interest rate of 8.47%, while the term note carries an
interest rate of 5.38% at July 25, 2004.
Benefit for Income Taxes. Benefit for income taxes was $0 for the third
quarter of fiscal 2004 compared to $336,000 for the third quarter of fiscal
2003. The effective income tax rate for the third quarter of fiscal 2004 was 0%
compared to 2.4% for the third 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 did not record a benefit for income taxes for the third
quarter of fiscal 2004 because management determined that, due to the Company's
recent losses, it was more likely than not that we would not have sufficient
earnings in the foreseeable future to fully utilize the Company's available net
operating loss carry-forward. 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 2004 Versus Nine Months 2003 Comparison
NINE MONTHS NINE MONTHS
ENDED ENDED %
JULY 25, JULY 27, INCREASE
2004 2003 (DECREASE)
---- ---- ----------
Sales - Fabricated Products $ 30,746 $ 27,885 10.3%
Sales - Extruded Products 10,237 7,403 38.3%
-------- --------
Total Sales $ 40,983 $ 35,288 16.1%
======== ========
Gross Profit $ 5,050 $ 3,863 30.7%
Gross Profit as a % of Sales 12.3% 10.9% 12.6%
Research and Development $ 334 $ 292 14.4%
Selling, General and Administrative $ 4,379 $ 4,326 1.2%
SG&A as a % of Sales 10.7% 12.3% (12.8%)
Impairment of Goodwill - $ 12,980 -
Impairment of Other Asset - $ 323 -
Interest Expense $ 1,380 $ 1,525 (9.5%)
Loss Before Benefit for Income Taxes ($ 1,040) ($ 15,575) (93.3%)
Benefit for Income Taxes - ($ 883) -
Net Loss ($ 1,040) ($ 14,692) (92.9%)
15
Net Loss. A net loss of $1.0 million was reported for the first nine
months of fiscal 2004 compared with a net loss of $14.7 million in the first
nine months of fiscal 2003. Loss before benefit for income taxes was $1.0
million in fiscal 2004 compared to a loss before benefit for income taxes of
$15.6 million in fiscal 2003. The decrease in loss before income taxes in fiscal
2004 is due to the write off of impaired goodwill and intangible assets in the
third quarter of fiscal 2003, as well as increases in sales and gross margin,
along with a decrease in interest expense. Gross margin increased primarily due
to increased revenues over relatively stable fixed costs.
Sales. The Company's sales increased by $5.7 million to $41.0 million for
the first nine months of fiscal year 2004 compared to $35.3 million for the
first nine months of 2003, principally as a result of improvements in the
markets we serve.
Sales-Fabricated Products. Sales of fabricated products increased by $2.9
million (10.3%) to $30.7 million for the first nine months of fiscal year 2004
compared to $27.9 million for the first nine months of fiscal 2003. The increase
is due to an improvement in the industries that the Company serves and sales to
several customers who previously purchased similar products from other
competitors.
Sales-Extruded Products. In the first nine months of fiscal 2004, sales of
aluminum extruded products increased $2.8 million (38.3%) to $10.2 million,
compared to $7.4 million for the first nine months of fiscal 2003. This increase
was due to improved economic conditions in the industries to which the Company
provides extruded aluminum products.
Gross Profit. The Company's gross profit margin for the fist nine months
of fiscal year 2004 was 12.3% of revenue compared to 10.9% of revenue for the
first nine months of fiscal year 2003. Gross profit increased primarily as a
result of revenues increasing while factory expenses such as indirect labor
remained constant and fixed costs such as depreciation, lease expense and
insurance remained relatively unchanged.
Research and Development. Research and development expenses for the first
nine months of fiscal year 2004 were $334,000 compared to $292,000 for the first
nine months of 2003. This increase was a result of increased salaries within our
engineering department.
Selling, General and Administrative. Selling, general and administrative
expenses totaled $4.4 million or 10.7% of sales for the first nine months of
fiscal 2004 compared to $4.3 million or 12.3% of sales reported for the first
nine months of fiscal 2003. Selling, general and administrative expenses as a
percentage of sales decreased 12.8%. This decrease was the result of increased
sales at a level not requiring the Company to add significant sales, general, or
administrative expenses.
Impairment of Goodwill. The Company recorded a $13.0 million goodwill
impairment charge in the first nine months of fiscal 2003. As a result, the
Company no longer has any goodwill on its books.
Impairment of Other Asset. The Company recorded a $323,000 impairment
charge in the first nine months of fiscal 2003 related to an intangible asset
which was determined to no longer have any value.
Interest Expense. Interest expense was $1.4 million for the first nine
months of fiscal 2004 compared to $1.5 million for the first nine months of
fiscal 2003. This decrease was due to lower average outstanding borrowings and
the expiration of the Swap agreement which covered a portion of the term note.
The swap agreement carried an annual interest rate of 8.47%, while the term note
carries an interest rate of 5.38% at July 25, 2004.
Benefit for Income Taxes. Benefit for income taxes was $0 for the first
nine months of fiscal 2004 compared to $883,000 for the first nine months of
fiscal 2003. The effective income tax rate for the first nine months of fiscal
2004 was 0% compared to 5.7% for the first nine months 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 did not record a benefit for income
taxes for the first six months of fiscal 2004 because management determined
that, due to the Company's recent losses, it was more likely than not that we
would not have sufficient earnings in the foreseeable future to fully utilize
the Company's available net operating loss carry-forward. 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.
16
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 the
Maximum Leverage Ratio and Fixed Charge Coverage Ratio 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. 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 4.0%, the maximum level allowed per
the Amended Credit Agreement. 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 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 $10,950,000 will be due.
Under the Amended Credit Agreement, the revolving credit facility accrued
interest on outstanding borrowings at LIBOR plus 3.5% (4.6% on March 31, 2004)
through March 31, 2004, and accrues interest at LIBOR plus 4.0% (5.65% on July
25, 2004) from April 1, 2004 and thereafter. The revolving credit facility
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 ($4.0 million at April 25, 2004), as defined by the Amended
Credit Agreement. As of July 25, 2004, $3.2 million has been drawn and is
outstanding on the revolving credit facility.
The term loan consists of a note which accrues interest at the relevant
LIBOR rate plus 4.0% (5.38% at July 25, 2004).
The Amended Credit Agreement contains the following financial and other
covenants with which the Company must comply:
MAXIMUM MINIMUM
QUARTER FINANCIAL FIXED CHARGE MINIMUM INTEREST MINIMUM
ENDING LEVERAGE RATIO (a) COVERAGE RATIO (a) COVERAGE RATIO (a) EBITDA (d)
------ ------------------ ------------------ ------------------ ----------
January 25, 2004 11.0:1 0.60:1 1.00:1 $ 520,000
April 25, 2004 11.0:1 0.70:1 1.20:1 1,220,000
July 25, 2004 10.3:1 0.70:1 1.20:1 1,730,000
October 31, 2004 8.1:1 0.85:1 1.50:1 2,620,000
Thereafter 1.75:1 0.85:1 - -
(a) The maximum financial leverage ratio is calculated by dividing
funded debt by a rolling 12-month EBITDA.
(b) The fixed charge coverage ratio is calculated by dividing fiscal
year-to-date EBITDA by fiscal year-to-date fixed charges.
(c) The interest coverage ratio is calculated by dividing EBITDA by
interest expense.
(d) Compliance with the Minimum EBITDA covenant is measured on a
cumulative basis for the fiscal year.
In addition, capital spending is limited to $300,000 for fiscal year 2004, $1.0
million for fiscal year 2005, and $1.0 million each year thereafter. The Amended
Credit Agreement does not permit the Company, or its subsidiaries, to declare or
pay dividends.
17
The following table presents the Company's compliance with financial covenants
at July 25, 2004:
COVENANT ACTUAL REQUIRED
-------- ------ --------
Maximum Financial Leverage Ratio 7.54:1 10.3:1
Minimum Fixed Charge Coverage Ratio 1.17:1 0.70:1
Minimum Interest Coverage Ratio 2.04:1 1.20:1
Minimum EBITDA $ 2,485,000 $ 1,730,000
Maximum Annual Capital Expenditures $ 250,000 $ 300,000
The Company was in compliance with all financial covenants under the Amended
Credit Agreements.
The Amended Credit Agreement requires the calculation of excess cash flow
at the end of each fiscal quarter. Excess cash flow is defined by the Amended
Credit Agreement as EBITDA, less interest expense, principal payments due on
long-term debt, taxes paid, and capital expenditures, and adjusted for increases
or decreases in net working capital. For any fiscal quarter for which this
calculation results in excess cash flow, payment is due within fifty-five days
from the end of that fiscal quarter, to be applied to the outstanding balance of
the term note. An excess cash flow payment of $895,000 is due on September 22,
2004 for the third fiscal quarter of 2004. Our request for a waiver was denied.
However, we are in discussions with our Lenders to restructure our loan
agreement, including the excess cash flow payment. Because the Company did not
make the excess cash flow payment, all balances outstanding under the Amended
Credit Agreement have been classified as current.
Cash Flow Information
On July 25, 2004, the Company had cash of $775,000 compared to $1,677,000
on October 26, 2003. For the first nine months of fiscal 2004, $102,000 was
provided by operating activities and $750,000 was used in financing activities
to pay down long-term debt. 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.
The decrease in the cash provided from operating activities was due
primarily to an increase in accounts receivable during the first nine months of
fiscal 2004 as compared to a decrease in accounts receivable and inventories in
the first nine months of fiscal 2003. The accounts receivable balance of $6.9
million at July 25, 2004 represents an increase of $896,000 (14.8%) over the
balance at July 27, 2003. Sales for the nine months ended July 25, 2004 were
$40.9 million as compared to $35.3 million for the nine months ended July 27,
2003, an increase of 16.1%. While sales and accounts receivable balances
increased during the first nine months of fiscal 2004 as compared to the same
period in fiscal 2003, the accounts receivable days sales outstanding ("DSO")
decreased to 46.1 days at July 25, 2004 from 48.8 days at July 27, 2003.
The decrease in cash used in financing activities was due to lower
required quarterly payments on the term note. Capital equipment purchases for
the first nine months of fiscal 2004 were $250,000 compared to $322,000 in the
first nine months of Fiscal 2003.
Working capital on July 25, 2004 was $2.2 million as compared to $9.5
million on October 26, 2003. This decrease in working capital was the result of
a $7.8 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 and the increased principal payments due in the first three quarters of
fiscal 2005.
The Company believes that its available cash, anticipated cash flows from
operations and borrowings under the revolving credit facility will be sufficient
to fund at operations at current levels through the remainder of fiscal 2004.
Demand for our products increased in the first nine months of 2004. While the
limit on borrowing under our revolving credit agreement may limit our ability to
finance our working capital needs as demand for our products increases, we
believe that we will have enough availability to finance those needs at
quarterly sales of between $15 - $16 million which represents an annualized rate
of revenues 25% higher than the our revenues for fiscal 2003.
We are in compliance with all financial covenants contained in the Credit
Agreement, as amended, but will be in default under the agreement due to our
inability to make the excess cash flow payment of $895,000 which is due on
September 22, 2004. We will need to achieve quarterly sales in fiscal 2005 and
2006 of approximately $19 million, a level which we do not currently believe to
be realistically achievable, in order to meet principal payment obligations in
fiscal 2005 and 2006. Our quarterly principal payment obligations on the term
debt over the next four fiscal quarters are $250,000 for the fourth fiscal
quarter of 2004 and $1.8 million for the first, second and third fiscal quarters
of 2005. The balance outstanding on the revolving credit agreement of $3.2
million is due in January 2005. We intend to negotiate with our lender to extend
the
18
Loan and revise the principal repayment schedule. In the event we cannot
negotiate an extension, we would be required to obtain alternative financing. We
anticipate that the Lenders will charge us amendment fees that will consist of
cash and/or warrants.
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 4.0% (5.65% on July 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 ($4.0 million at July 25, 2004), as defined by the Amended
Credit Agreement. As of July 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.
The term loan consists of a note which accrues interest at the relevant
LIBOR rate plus 4.0% (5.38% at July 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 $184,000.
The Company, as required by the Amended Credit Agreement, utilized an
interest rate swap (the "swap") to hedge against its interest rate risk. The
swap was designated as a cash flow hedge and was carried on the balance sheets
at fair value. The effect of the swap was 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 matured on March 31, 2004. The Company was not required by the Lender
to renew the swap agreement.
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. Historically, all raw materials have been available from our
established suppliers at competitive prices. Due to the increase in global
demand for aluminum, the limited capacity of the aluminum market, and a labor
strike at a major aluminum smelting plant which supplies several of our
established suppliers, the Company has sought additional sources of aluminum to
maintain current levels of production Purchases from these suppliers have
required payment in advance of delivery until the current aluminum shortage
eases and credit terms can be established, and the cost of the material has been
3% - 5% higher than purchases from our traditional sources of aluminum. Although
the Company has generally passed this increased materials cost on to customers,
there is no guarantee that future price increases can be recovered in this
manner. In addition, if the Company experiences growth in demand for its product
above current levels, it may not be able to meet the additional demand due to
the reduced supply of aluminum available in the marketplace and/or its inability
to obtain favorable credit terms from suppliers.
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 and sufficient to timely alert them to
material information required to be included in the Company's periodic SEC
filings and to ensure that the information required to be disclosed in the
reports the Company files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the SEC
rules and form.
19
During the third fiscal 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.
20
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
The Company filed a report on Form 8-K dated July 23, 2004 reporting under
Item 5 the receipt of a NASDAQ Staff Determination letter concerning the
potential de-listing of the Company's common stock from the NASDAQ
National Market.
21
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 13, 2004 By: /s/ Lawrence Butler
-------------------
Lawrence Butler
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: September 13, 2004 By: /s/ James J. Polakiewicz
------------------------
James J. Polakiewicz
Chief Financial Officer
(Principal Financial and Accounting
Officer)
22
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)
23