UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-9078
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THE ALPINE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1620387
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE MEADOWLANDS PLAZA 07073
EAST RUTHERFORD, NEW JERSEY (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code 201-549-4400
-----------
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 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|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 2004
Common Stock, $.10 Par Value 15,069,403
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 and, therefore, do not include all information and
footnotes required by accounting principles generally accepted in the United
States of America. However, in the opinion of management, all adjustments
necessary for a fair presentation of the results of operations for the relevant
periods have been made. Results for the interim periods are not necessarily
indicative of the results to be expected for the year. These financial
statements should be read in conjunction with the summary of significant
accounting policies and the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2003.
2
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------------------------
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 4,374 $ 465
------------------------
Marketable securities, at fair value ...................................................... 35,043 6,761
Accounts receivable (less allowance for doubtful accounts of $362 and $263 at
September 30, 2004 and December 31, 2003, respectively) ............................ 51,381 32,328
Inventories, net (Note 4) ................................................................. 26,912 37,169
Current assets of discontinued operations ................................................. -- 7,534
Other current assets ...................................................................... 2,746 3,577
------------------------
Total current assets ................................................................. 120,456 87,834
Property, plant and equipment, net ........................................................... 17,504 15,241
Assets of discontinued operations ............................................................ -- 1,766
Other long-term assets ....................................................................... 2,647 2,947
------------------------
Total assets ......................................................................... $ 140,607 $ 107,788
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 7) ........................................................ $ 36,411 $ 17,189
Current portion of long-term debt (Note 8) ................................................ 54 137
Accounts payable .......................................................................... 16,620 21,088
Accrued expenses .......................................................................... 10,849 11,247
Current liabilities of discontinued operations ............................................ -- 2,223
Deferred income taxes and income taxes payable ............................................ 17,392 7,691
------------------------
Total current liabilities ............................................................ 81,326 59,575
Long-term debt, less current portion (Note 8) ................................................ 3,422 3,777
Deferred income taxes ........................................................................ 16,782 17,595
Other long-term liabilities .................................................................. 1,408 1,475
Warrant ...................................................................................... 1,250 1,000
Minority interest in subsidiary .............................................................. 2,769 2,686
Liabilities of discontinued operations ....................................................... -- 157
Mandatorily redeemable series A cumulative preferred stock (18,264 shares issued; 17,083
and 18,174 outstanding at September 30, 2004 and December 31, 2003, respectively) (Note 9) 4,348 5,665
Commitments and contingencies
Stockholders' equity:
9% cumulative convertible preferred stock at liquidation value ............................ 177 427
Common stock, $.10 par value; (25,000,000 authorized; 24,658,986 and 22,146,884 shares
issued at September 30, 2004 and December 31, 2003, respectively) ................. 2,466 2,214
Capital in excess of par value ............................................................ 168,255 165,706
Accumulated other comprehensive income (loss) ............................................. (192) 57
Accumulated deficit ....................................................................... (47,298) (58,201)
Treasury stock, at cost (10,916,662 and 11,109,872 shares at September 30, 2004 and
December 31, 2003, respectively) ................................................... (93,674) (93,861)
Receivable from stockholders .............................................................. (432) (484)
------------------------
Total stockholders' equity ............................................................. 29,302 15,858
------------------------
Total liabilities and stockholders' equity ........................................... $ 140,607 $ 107,788
========================
The accompanying notes are an integral part of
these consolidated financial statements.
3
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
--------------------
Net sales ......................................................................... $ 80,354 $ 69,485
--------------------
Cost of goods sold ................................................................ 75,382 65,773
--------------------
Gross profit ................................................................... 4,972 3,712
Selling, general and administrative expenses ...................................... 7,432 6,483
Restructuring and other charges ................................................... 875 3,347
--------------------
Operating loss ................................................................. (3,335) (6,118)
Interest expense .................................................................. (770) (638)
Other income, net ................................................................ 3 1,803
--------------------
Loss before income taxes, minority interest, equity in earnings of affiliate and (4,102) (4,953)
discontinued operations
Income tax benefit ................................................................ 1,185 1,902
--------------------
Loss before minority interest, equity in earnings of affiliate and
discontinued operations .................................................... (2,917) (3,051)
Minority interest in loss of subsidiary .......................................... 80 --
Equity in losses of affiliate ..................................................... -- (353)
--------------------
Loss from continuing operations ................................................ (2,837) (3,404)
Discontinued operations (Note 12):
Income (loss) from discontinued operations, net of tax ......................... (93) 707
Gain on sale of DNE, net of tax of $10,278 ..................................... 19,088 --
--------------------
Net income (loss) ................................................................. 16,158 (2,697)
Preferred stock dividends (Note 13) ............................................... (1,641) (71)
--------------------
Net income (loss) applicable to common stock .................................. $ 14,517 $ (2,768)
====================
Net income (loss) per share of common stock:
Basic and diluted:
Loss from continuing operations ............................................. $ (0.21) $ (0.26)
Income (loss) from discontinued operations, net of tax ...................... (0.01) 0.05
Gain on sale of DNE, net of tax ............................................. 1.39 --
Preferred stock dividends ................................................... (0.12) --
--------------------
Net income (loss) per basic and diluted share of common stock ................ $ 1.05 $ (0.21)
====================
Weighted average shares outstanding:
Basic and diluted ............................................................. 13,745 13,023
The accompanying notes are an integral part of these
consolidated financial statements.
4
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
----------------------
Net sales ......................................................................... $ 238,373 $ 238,993
----------------------
Cost of goods sold ................................................................ 216,635 224,224
----------------------
Gross profit ................................................................... 21,738 14,769
Selling, general and administrative expenses ...................................... 19,536 23,871
Restructuring and other charges ................................................... 3,781 8,324
----------------------
Operating loss ................................................................. (1,579) (17,426)
Interest expense .................................................................. (2,056) (2,490)
Other income, net ................................................................. 148 1,903
----------------------
Loss before income taxes, minority interest, equity in earnings of affiliate and (3,487) (18,013)
discontinued operations
Income tax benefit ................................................................ 760 7,026
----------------------
Loss before minority interest, equity in earnings of affiliate and
discontinued operations .................................................. (2,727) (10,987)
Minority interest in income of subsidiary ......................................... (83) --
Equity in earnings of affiliate ................................................... -- (86)
----------------------
Loss from continuing operations ............................................... (2,810) (11,073)
Discontinued operations (Note 12):
Income from discontinued operations, net of tax ............................... 1,502 2,286
Gain on sale of DNE, net of tax of $10,278 .................................... 19,088 --
----------------------
Net income (loss) ................................................................. 17,780 (8,787)
Preferred stock dividends (Note 13) ............................................... (1,928) (90)
----------------------
Net income (loss) applicable to common stock ................................... $ 15,852 $ (8,877)
======================
Net income (loss) per share of common stock:
Basic and diluted:
Loss from continuing operations ............................................. $ (0.22) $ (0.77)
Income from discontinued operations, net of tax ............................. 0.12 0.16
Gain on sale of DNE, net of tax ............................................. 1.48 --
Preferred stock dividends ................................................... (0.15) (0.01)
----------------------
Net income (loss) per basic and diluted share of common stock ............... $ 1.23 $ (0.62)
======================
Weighted average shares outstanding:
Basic and diluted ........................................................... 12,893 14,354
The accompanying notes are an integral part of these
consolidated financial statements.
5
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 2004
--------------------------
SHARES AMOUNT
--------------------------
9% cumulative convertible preferred stock:
Balance at beginning of period .............................. 427 $ 427
Preferred stock redemption .................................. (250) (250)
--------------------------
Balance at end of period ................................. 177 177
--------------------------
Common stock:
Balance at beginning of period .............................. 22,146,884 2,215
Stock options exercised ..................................... 118,961 12
Shares issued pursuant to Series A Preferred Stock conversion 2,393,141 239
--------------------------
Balance at end of period ................................. 24,658,986 2,466
--------------------------
Capital in excess of par value:
Balance at beginning of period .............................. 165,706
Compensation expense related to grants and stock options .... 1,393
Shares issued pursuant to Series A Preferred Stock conversion 1,077
Stock options exercised ..................................... 79
------------
Balance at end of period ................................. 168,255
------------
Accumulated other comprehensive loss:
Balance at beginning of period .............................. 57
Change in unrealized losses on securities, net of tax ....... (249)
------------
Balance at end of period ................................. (192)
------------
Balance at beginning of period .............................. (58,201)
Net income .................................................. 17,780
Dividends on preferred stock ................................ (1,928)
Dividends on common stock ................................... (4,949)
------------
Balance at end of period ................................. (47,298)
------------
Treasury stock:
Balance at beginning of period .............................. (93,861)
Stock options and grants .................................... 187
------------
Balance at end of period ................................. (93,674)
------------
Receivable from stockholders:
Balance at beginning of period .............................. (484)
Forgiveness of officer loans ................................ 52
------------
Balance at end of period ................................. (432)
------------
Total stockholders' equity ..................................... $ 29,302
============
The accompanying notes are an integral part of these
consolidated financial statements.
6
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
--------------------
Cash flows from operating activities:
Net income (loss) ...................................................................... $ 17,780 $ (8,787)
--------------------
Adjustments to reconcile net income (loss) to net cash provided by (used for) continuing
operating activities:
Net income from discontinued operations ............................................. (1,502) (2,286)
Gain on sale of DNE ................................................................. (19,088) --
Depreciation and amortization ....................................................... 609 550
Amortization of deferred debt issuance costs and accretion of debt discount ......... 483 454
Compensation expense related to stock options and grants ............................ 1,446 36
Deferred income tax ................................................................. (814) (7,334)
Gain on sale of fixed assets ........................................................ (316) (1,634)
Minority interest in income of subsidiary ........................................... 83 86
Increase in fair value of warrant ................................................... 250 --
Change in assets and liabilities:
Accounts receivable ............................................................... (19,053) 23,908
Inventories ....................................................................... 10,257 41,382
Other current and non-current assets .............................................. 543 4,516
Accounts payable and accrued expenses ............................................. (4,750) (7,858)
Other, net ........................................................................ (302) 679
--------------------
Cash flows provided by (used for) continuing operating activities ......................... (14,374) 43,712
--------------------
Cash flows from investing activities:
Capital expenditures ................................................................... (3,641) (6,061)
Proceeds from sale of DNE, net of transaction costs .................................... 38,150 --
Purchase of marketable securities ...................................................... (38,071) --
Proceeds from sale of assets ........................................................... 680 6,429
Proceeds from sale of marketable securities ............................................ 9,776 1,296
--------------------
Cash flows provided by investing activities ............................................... 6,894 1,664
--------------------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit facility, net ........................... 19,222 (55,598)
Repayments of long-term borrowings ..................................................... (456) (2,160)
6% Junior Subordinated Notes redemptions ............................................... (161) --
Preferred stock redemptions ............................................................ (250) --
Dividends on preferred stock ........................................................... (1,928) (206)
Dividends on common stock .............................................................. (4,949) --
Issuance of preferred stock, net ....................................................... -- 3,149
Other, net ............................................................................. 273 (39)
--------------------
Cash flows provided by (used for) financing activities .................................... 11,751 (54,854)
--------------------
Cash flow provided by (used for) discontinued operations .................................. (362) 5,213
--------------------
Net increase (decrease) in cash and cash equivalents ...................................... 3,909 (4,265)
Cash and cash equivalents at beginning of period .......................................... 465 8,139
--------------------
Cash and cash equivalents at end of period ................................................ $ 4,374 $ 3,874
====================
Supplemental disclosures:
Cash paid for interest ................................................................. $ 1,521 $ 2,501
Cash paid (refunded) for income taxes, net ............................................. $ 1,501 $ (1,385)
The accompanying notes are an integral part of these
consolidated financial statements.
7
THE ALPINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. GENERAL
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited consolidated financial statements represent the
accounts of The Alpine Group, Inc. and the consolidation of all of its
majority-controlled subsidiaries (collectively "Alpine" or the "Company", unless
the context otherwise requires). The Company records all affiliate companies
with ownership of greater than 20%, but not majority-controlled, using the
equity method of accounting.
Prior to December 11, 2002, Alpine's operations include the consolidated
results of its then controlled subsidiary Superior TeleCom Inc. ("Superior") and
Superior's then majority-owned subsidiary Superior Cables Ltd. ("Superior
Israel"). As a result of the vesting of certain Superior restricted stock
arrangements in 2002, Alpine's common equity ownership in Superior declined from
50.2% at December 31, 2001 to 48.9%. Notwithstanding the decline in Alpine's
direct equity ownership in Superior through December 11, 2002, Alpine had a
controlling interest in Superior based on its additional indirect equity
ownership position (including certain common share voting interests controlled
by Alpine). In connection with Alpine's acquisition of Superior's electrical
wire business and DNE Systems Inc. (the "Electrical Acquisition")--(see Note 2),
certain changes were made with respect to Alpine's indirect voting interests
such that Alpine no longer controlled Superior. Additionally, Alpine acquired
approximately 47% of Superior Israel from Superior as part of the Electrical
Acquisition. Accordingly, effective for periods after December 11, 2002,
Superior and Superior Israel are accounted for under the equity method and are
no longer consolidated with Alpine.
On March 3, 2003, Superior and its U.S. subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code. On
October 22, 2003, Superior's Joint Plan of Reorganization, as amended and
related disclosure statement was confirmed by order of the United States
Bankruptcy Court for the District of Delaware and became effective on November
10, 2003 (the "Plan of Reorganization"). The Plan of Reorganization provided for
the cancellation of all equity and debt interests held in Superior by the
Company.
As a result of the accumulated net losses incurred by Superior, Alpine had
recorded losses in excess of its investment in Superior of $865.9 million at
December 11, 2002. This negative investment was required under accounting
principles generally accepted in the United States of America to be reflected in
Alpine's consolidated balance sheet, notwithstanding the fact that Alpine was
not obligated to fund any operating losses or deficits of Superior. Upon
implementation of the Plan of Reorganization, Alpine eliminated its negative
investment in Superior and recognized a corresponding gain of $865.9 million in
the fourth quarter of 2003. This gain was partially offset by the reversal of
$11.6 million of accumulated other comprehensive loss related to Superior
resulting in a net gain of $854.3 million.
Alpine was incorporated in New Jersey in 1957 and reincorporated in
Delaware in 1987. Alpine is a holding company which over the past five years has
held major investments in industrial manufacturing companies. Subsequent to the
Electrical Acquisition, Alpine's principal operations consisted of Essex
Electric Inc., engaged in the manufacture and sale of electrical wire and cable,
DNE Systems, Inc., a manufacturer of multiplexers and other communications and
electronic products and a 47% equity interest in Superior Israel. On June 18,
2004, Alpine entered into an agreement to sell DNE Systems, Inc. The transaction
was closed on July 29, 2004 (the "DNE Sale"). Accordingly, DNE Systems, Inc. has
been accounted for and classified as a discontinued operation in these financial
statements and prior year results have been reclassified as discontinued
operations. See note 12 for a description of the DNE Sale.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
STOCK-BASED COMPENSATION
The Company applies the intrinsic-value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25, issued in March 2000, to account for its stock-based compensation plans.
Under this method, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income (loss) if the fair value
based method had been applied to all outstanding and unvested awards in each
period.
8
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
--------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income (loss), as reported ...................................................... $ 16,158 $ (2,697)
--------------------
Add stock-based employee compensation expense included in reported net income (loss),
net of tax ...................................................................... 104 (253)
Deduct total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects ......................... (137) 172
--------------------
Pro forma net income (loss) ......................................................... 16,125 (2,778)
Preferred stock dividends ........................................................... (1,641) (71)
--------------------
Proforma net income (loss) - applicable to common stock ........................... $ 14,484 $ (2,849)
====================
Net income (loss) per share:
Basic and diluted - as reported .................................................. $ 1.05 $ (0.21)
Basic and diluted - pro forma .................................................... 1.05 (0.21)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
--------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income (loss), as reported ...................................................... $ 17,780 $ (8,787)
Add stock-based employee compensation expense included in reported net income (loss),
net of tax ...................................................................... 933 (10)
Deduct total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects ......................... (1,143) (155)
--------------------
Pro forma net income (loss) ......................................................... 17,570 (8,952)
Preferred stock dividends ........................................................... (1,928) (90)
--------------------
Proforma net income (loss) - applicable to common stock ........................... $ 15,642 $ (9,042)
====================
Net income (loss) per share:
Basic and diluted - as reported .................................................. $ 1.23 $ (0.62)
Basic and diluted - pro forma .................................................... 1.21 (0.63)
The effects of applying SFAS No. 123 in the pro forma disclosure are not
necessarily indicative of future amounts, since the estimated fair value of
stock options is amortized to expense over the vesting period and additional
options may be granted in future years. The fair value for these options was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions for the nine months ended September
30, 2004 and 2003, respectively: expected dividend yield of 0% for both periods;
expected volatility of 126% and 99%, risk-free interest rate of 3.2% and 2.7%,
and expected life of two years for both periods. The weighted average per share
fair value of options granted (using the Black-Scholes option-pricing model) for
the nine months ended September 30, 2004 and 2003 was $1.15 and $0.52,
respectively. A total of 157,967 stock options were granted, 118,340 cancelled
and 424,395 exercised during the nine month period ended September 30, 2004.
9
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee and consultant stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of such stock options.
The Company amortizes the value of the restricted stock grants, based upon
the market value of the stock as of the date of the grant, evenly over the
vesting periods.
2. ELECTRICAL ACQUISITION
On December 11, 2002, Alpine, through Alpine Holdco Inc. ("Alpine
Holdco"), a newly formed, wholly-owned subsidiary of Alpine, acquired the
following assets and securities from Superior: (1) substantially all of the
assets, subject to related accounts payable and accrued liabilities, of
Superior's electrical wire business, which is currently owned and operated by
Essex Electric Inc. ("Essex Electric"), a newly formed, then wholly-owned
subsidiary of Alpine Holdco; (2) all of the outstanding shares of capital stock
of DNE Systems, Inc. ("DNE Systems"), a manufacturer of multiplexers and other
communications and electronic products; and (3) all of the outstanding shares of
capital stock of Texas SUT Inc. and Superior Cable Holdings (1997) Ltd., which
together own approximately 47% of Superior Israel, the largest Israeli-based
producer of wire and cable products. This acquisition is referred to as the
"Electrical Acquisition." The aggregate purchase price was approximately $87.4
million in cash (including $2.5 million of out-of-pocket costs) plus the
issuance of a warrant to Superior to purchase 199 shares of the common stock of
Essex Electric. The warrant is recorded as a liability in the consolidated
balance sheet and is evaluated and adjusted to fair value on a quarterly basis,
with $0.0 and $0.3 million of expense recorded in other income (expense) for the
three and nine month periods ended September 30, 2004, respectively. The warrant
is only exercisable during the 30 day period prior to its expiration on December
11, 2007 or upon the earlier occurrence of certain specified transactions
generally involving a change in control of or a sale of the assets of Alpine
Holdco or Essex Electric.
In connection with the Electrical Acquisition, Alpine Holdco, Essex
Electric and Superior entered into a Supply and Transitional Services Agreement
(the "Transitional Agreement"). Under the Transitional Agreement, Essex
Electric, among other things, agreed to purchase from Superior certain specified
quantities of its overall requirements of copper rod. The specified quantities
represent a range of Essex Electric's estimated total annual copper rod
requirements for use in its wire manufacturing process. The purchase price for
copper rod specified in the Transitional Agreement was based on the COMEX price
plus an adder to reflect conversion to copper rod. The Transitional Agreement
also provided for Superior's provision of certain administrative services to
Alpine Holdco and Essex Electric. Charges for these services were generally
based on actual usage or an allocated portion of the total cost to Superior. On
November 7, 2003, the Transitional Agreement was replaced by a new supply and
services agreement between Superior Essex Inc. (the successor company to
Superior pursuant to the Plan of Reorganization) and Essex Electric (the "Supply
Agreement"). The Supply Agreement includes the supply by Superior Essex Inc. to
Essex Electric of copper rod, on similar pricing terms, for 2004 and the
provision of certain specified administrative services for a limited time in
2004. The Supply Agreement expires on December 31, 2004 but may be terminated at
any time prior to that by mutual consent of Superior Essex Inc. and Essex
Electric. Additionally, the parties may terminate various services provided for
under the agreement upon certain prior notice as provided therein. Superior
Essex Inc. may terminate its obligations to supply copper rod upon 30 days'
notice given any time after January 1, 2004 if Essex Electric has purchased less
than certain minimum quantities of copper rod, tested on a quarterly basis,
specified in the agreement. The total cost of copper rod purchased under the
Transitional Agreement and the Supply Agreement for the three and nine month
periods ending September 30, 2004 and 2003 was $22.0 and $59.5 million, and
$24.1 and $83.6 million, respectively. The cost for administrative services
under the Transitional Agreement and the Supply Agreement for the three and nine
month periods ending September 30, 2004 and 2003 was $0.2 and $1.3 million, and
$1.0 and $3.6 million, respectively.
3. ASSET SALES
In February 2003, the Company sold its plant in Lafayette, Indiana
together with the related equipment and inventory which comprised substantially
all of its industrial wire business. The total purchase price was approximately
$12.6 million in cash which approximated the book value of the assets sold.
Additionally, the Company is leasing its Orleans, Indiana plant to the purchaser
for an annual rental of $350,000. The original lease expired in February 2004
but has been extended on a month-to-month basis. The net carrying value of the
Orleans plant was $0.8 million at September 30, 2004.
10
In September 2003, the Company sold its plant in Anaheim, California
subject to a leaseback arrangement which, at the Company's option may extend
through December 31, 2004. The total gain on the sale was $2.6 million, $2.0
million of which was recognized in 2003, $0.2 million in both the first and
second quarters of 2004 and the remaining $0.2 was amortized in the third
quarter of 2004.
4. INVENTORIES
At September 30, 2004 and December 31, 2003, the components of inventories
were as follows:
SEPTEMBER DECEMBER 31,
30, 2003
2004
----------------------------
(IN THOUSANDS)
Raw materials .......................... $ 5,400 $ 15,358
----------------------------
Work in process ........................ 4,977 4.417
Finished goods ......................... 31,963 26,401
----------------------------
42,340 46,176
LIFO reserve ........................... (15,428) (9,007)
----------------------------
$ 26,912 $ 37,169
============================
The inventories shown above are all valued using the LIFO method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at the same time. Accordingly,
interim LIFO calculations must be based on management's estimates of expected
year-end inventory levels and costs. Because these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation. During the three and nine months ended September 30,
2004, the Company recorded an estimated decrement of $0.7 million and $1.5
million, respectively, to cost of goods sold.
5. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three months ended
September 30, 2004 and 2003 and the nine months ended September 30, 2004 and
2003 were as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
---- ----
(IN THOUSANDS)
Net income (loss) ...................................... $ 16,158 $ (2,698)
--------------------
Change in unrealized losses on securities, net of tax .. (155) --
--------------------
Comprehensive income (loss) ............................ $ 16,003 $ (2,698)
====================
11
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2004 2003
---- ----
(IN THOUSANDS)
Net income (loss) ...................................... $ 17,780 $ (8,786)
Foreign currency translation adjustment ................ -- (8)
Change in unrealized losses on securities, net of tax .. (249) (19)
--------------------
Comprehensive income (loss) ............................ $ 17,531 $ (8,813)
====================
6. RESTRUCTURING AND OTHER CHARGES
During the three and nine month periods ended September 30, 2004 and 2003,
the Company recorded $0.9 and $3.8 million for 2004, and $3.3 and $8.3 million
for 2003, respectively, of restructuring and other charges. The third quarter
2004 charges primarily include $0.2 million related to the relocation and
installation of certain equipment from closed facilities into the Florence,
Alabama manufacturing location, $0.2 million in costs to relocate the Essex
Electric administrative offices in Ft. Wayne and $0.2 million in facility costs
relating to idled warehousing space. For the nine month period ending September
30, 2004 the charges consisted primarily of $1.6 million related to the
relocation and installation of certain equipment from closed facilities into the
Florence, Alabama manufacturing location, $1.0 million for costs associated with
starting up the new manufacturing processes at Florence and freight to relocate
displaced products, $0.8 million in facility costs relating to idled warehousing
space and $0.1 in other costs and credits including the relocation of Essex
Electric administrative offices.
The following table illustrates the restructuring reserve and the 2004
related activities:
PAYMENTS
DECEMBER 31, AND SEPTEMBER 30,
2003 CHARGES WRITE-OFFS 2004
---- ------- ---------- ----
(IN THOUSANDS)
Employee severance ..................................... $ 972 $ 89 $1,012 $ 49
Facility exit costs .................................... 29 556 585 --
Equipment and inventory relocation costs and other costs -- 3,136 3,136 --
-------------------------------------------
$1,001 $3,781 $4,733 $ 49
===========================================
7. REVOLVING CREDIT FACILITY
In connection with the Electrical Acquisition (see Note 2), Alpine Holdco
entered into a Loan and Security Agreement (the "Revolving Credit Facility "),
dated as of December 11, 2002, by and among Alpine Holdco, Essex Electric, DNE
Manufacturing and Service Company ("DNE Manufacturing") and DNE Technologies,
Inc. ("DNE Technologies") as borrowers and DNE Systems as Credit Party (such
parties sometimes collectively are called "Companies") certain financial
institutions party thereto as lenders, Congress Financial Corporation, as
documentation agent, and Foothill Capital Corporation, as arranger and
administrative agent.
Effective concurrently with the consummation of the DNE Sale (see note 12)
on July 29, 2004, the lenders released each of DNE Systems, DNE Technologies,
and DNE Manufacturing from all of their obligations under the Revolving Credit
Facility (the "DNE Parties"), released all property of the DNE Parties from the
liens granted for the benefit of the lenders under the Revolving Credit Facility
and all of the outstanding and issued capital stock of the DNE Parties from the
pledge thereof delivered in connection with the Revolving Credit Facility, and
the DNE Parties no longer are "Borrowers" or a "Credit Party", as the case may
be, under the Revolving Credit Facility. Accordingly, from and after July 29,
2004, the DNE Parties are not included in the term "Companies". The Revolving
Credit Facility was amended on November 10, 2004 to reflect modifications agreed
to by the parties as a result of the DNE Sale and to establish revised financial
and other covenant provisions.
The terms of the Revolving Credit Facility provided for a maximum
committed amount of $100 million at its inception which, at the request of the
Companies, was reduced to $70 million on December 8, 2003. Borrowing
availability is determined by reference to a borrowing base which permits
advances to be made at various net valuation rates against various assets of the
Companies. Interest is payable monthly in cash in arrears and is based on, at
Alpine Holdco's option, LIBOR or prime rates plus a fixed margin. The weighted
average interest rate at September 30, 2004 and December 31, 2003 was 5.2% and
4.5%, respectively. The Revolving Credit Facility also provides for maintenance
of financial covenants and ratios relating to minimum EBITDA and tangible net
worth, and includes restrictions on capital expenditures, payment of cash
dividends and incurrence of indebtedness. Alpine Holdco was in compliance with
all applicable covenants at September 30, 2004. Outstanding obligations under
the Revolving Credit Facility are secured by a lien on all of the Companies'
tangible and intangible assets, other than the investment in Superior Israel.
The obligations under the Revolving Credit Facility are without recourse to
Alpine. Unless previously accelerated as a result of default, the Revolving
Credit Facility matures in December 2007. However, in accordance with Emerging
Issues Task Force Issue 95-22, Balance Sheet Classification of Borrowings
outstanding under Revolving Credit Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement, borrowings under the Revolving
Credit Facility have been classified as a current liability.
12
The Companies may terminate the Revolving Credit Facility at any time upon
45 days prior written notice and payment of all outstanding borrowings, together
with unpaid interest, and a termination fee equal to 0.75% of the maximum
committed amount. At any time after December 11, 2004, the Companies may, upon
30 days prior written notice, permanently reduce the maximum committed amount
without penalty or premium. At September 30, 2004 and December 31, 2003,
outstanding borrowings under the Revolving Credit Facility were $36.4 million
and $17.2 million, respectively. At September 30, 2004, the Companies had $22.9
million of borrowing availability. No dividends may be paid by Alpine Holdco
without prior consent of the lenders. On July 29, 2004 the lenders expressly
consented to the distribution by Alpine Holdco to Alpine of the sale proceeds
from the DNE Sale.
8. LONG-TERM DEBT
At September 30, 2004 and December 31, 2003, long-term debt consists of
the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------------
(IN THOUSANDS)
6% Junior Subordinated Notes, net of $1.2 million discount $3,076 $3,059
Other .................................................... 400 855
---------------------
3,476 3,914
Less current portion of long-term debt ................... 54 137
---------------------
$3,422 $3,777
=====================
On August 4, 2003, the Company completed an exchange offer whereby holders
of its common stock exchanged 3,479,656 shares for $4.3 million principal amount
of 6% Junior Subordinated Notes (the "Subordinated Notes") issued by the Company
plus a nominal amount of cash in lieu of fractional notes. The Subordinated
Notes were initially recorded at an amount equal to the fair value of the common
stock exchanged resulting in an initial discount of $1.4 million. The discount
is being accreted over the term of the Subordinated Notes using the effective
interest rate method. The Subordinated Notes accrue interest at 6% per annum
payable in cash semiannually each December 31 and June 30. The Subordinated
Notes are the Company's general unsecured obligations subordinated and subject
in right of payment to all of the Company's existing and future senior
indebtedness, which excludes trade payables incurred in the ordinary course of
business. The Company will be required to repay one-eighth of the outstanding
principal amount of the Subordinated Notes commencing on June 30, 2007 and
semiannually thereafter, so that all of the Subordinated Notes will be repaid by
December 31, 2010. The Subordinated Notes are redeemable, at the Company's
option, in whole at any time or in part from time to time, at the principal
amount to be redeemed plus accrued and unpaid interest thereon to the redemption
date, together with a premium if the Subordinated Notes are redeemed prior to
2007. In addition, the Company must offer to redeem all of the Subordinated
Notes at the redemption price then in effect in the event of a change of
control. The Subordinated Notes were issued under an indenture which does not
subject the Company to any financial covenants. During the three and nine month
periods ended September 30, 2004 the Company retired $0.2 million of its 6%
Junior Subordinated Notes.
The "Other" debt caption represents a loan established in 1999 with
Raytheon Aircraft Credit Corporation to finance the purchase of a 12.5% interest
in an aircraft. The loan is payable monthly through May 2011.
9. SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
On June 23, 2003 the Company completed a private placement of 8,287 shares
of a new issue of Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") to its directors and certain officers for a purchase price of
$380 per share, or an aggregate of approximately $3.1 million. Holders of the
Series A Preferred Stock are entitled to receive, when, as and if declared by
the board of directors out of funds legally available for payment, cash
dividends at an annual rate of $30.40 per share. During the three month period
ended September 30, 2004, special dividends were paid on each share of Series A
Preferred Stock and in respect of the common stock (see note 13). Prior to the
special dividend, each share of Series A Preferred Stock was convertible at the
option of the holder into 691 shares of Alpine common stock. As a result of the
special dividend in respect of the common stock, from and after September 14,
2004, each share of Series A Preferred Stock is convertible at the option of the
holder into 743.01 shares of Alpine common stock; provided that the purchasing
officers and directors have agreed not to convert until such time as they are
advised by the Company that it has a sufficient number of authorized but
unissued shares of common stock of the Company to permit such conversion. The
Company may cause conversion of the Series A Preferred Stock into common stock
after March 31, 2004, if the Company's common stock is then listed on the New
York Stock Exchange or the American Stock Exchange or is traded on the Nasdaq
National Market System and the average closing price of a share of the Company's
common stock for any 20 consecutive trading days equals or exceeds 300% of the
conversion price then in effect. The Series A Preferred Stock is subject to
mandatory redemption by the Company ratably on the last day of each quarter
during the three-year period commencing on December 31, 2009 at the liquidation
value of $380 per share, plus accrued and unpaid dividends. Additionally, if the
Company experiences a change in control it will, subject to certain limitations,
offer to redeem the Series A Preferred Stock at a cash price of $380 per share
plus (i) accrued and unpaid dividends and (ii) if the change of control occurs
prior to December 31, 2007, all dividends that would be payable from the
redemption date through December 31, 2007.
13
Holders of the Series A Preferred Stock are entitled to vote their shares
on an as-converted basis together with the Company's common stockholders. In
addition, the Company may not (a) enter into a merger, sale of all or
substantially all of its assets or similar transaction without the approval of
holders of at least a majority of the shares of Series A Preferred Stock, or (b)
alter or change the powers, preferences or special rights (including, without
limitation, those relating to dividends, redemption, conversion, liquidation
preference or voting) of the shares of Series A Preferred Stock so as to affect
them materially and adversely, or issue any senior stock, without the approval
of holders of at least a majority of the shares of Series A Preferred Stock. In
the event of any liquidation, dissolution or winding up of Alpine, after the
payment of the liquidation preference in respect of any senior stock, holders of
the Series A Preferred Stock will be entitled to receive the liquidation price
of $380 per share plus an amount equal to (a) if the liquidation, dissolution or
winding up occurs prior to December 31, 2007, all dividends that would be
payable on a share of Series A Preferred Stock from the date of liquidation,
dissolution or winding up through December 31, 2007 and (b) any accrued and
unpaid dividends to the payment date, before any payment is made to the holders
of common stock or any other junior securities, subject to certain exceptions.
On November 10, 2003, the Company completed the sale of 9,977 shares of
Series A Preferred Stock pursuant to a rights offering to holders of the
Company's common stock. Holders of the Company's common stock were offered a
right to purchase one share of Series A Preferred Stock at a price of $380 per
share for each 500 shares of common stock held on September 29, 2003. The terms
of the Series A Preferred Stock are the same as that purchased by the officers
and directors in the private placement discussed in the preceding paragraph
except that the purchased shares of Series A Preferred stock are currently
convertible. Total proceeds received from the sale were $3.8 million.
During the three and nine month periods ended September 30, 2004 there
were 2,372 and 3,463 shares of Series A Preferred Stock, respectively, converted
to 1,639,260 and 2,393,141 shares of the Company's common stock, respectively.
10. INCOME (LOSS) PER SHARE
The computation of basic and diluted income (loss) per share for the three
months ended September 30, 2004 and 2003 is as follows:
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
----------------------------------- ------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
---------- ------ ------ -------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Loss from continuing operations ............ $ (2,837) $ (0.21) $ (3,404) $ (0.26)
Income (loss) from discontinued operations . (93) (0.01) 707 0.05
Gain on sale of DNE ........................ 19,088 1.39 -- --
-------- -------- -------- --------
Net income (loss) .......................... 16,158 1.17 $ (2,697) (0.21)
Less: preferred stock dividends ............ (1,641) (0.12) (71) --
-------- -------- -------- --------
Basic and diluted income (loss) per common
share ................................... $ 14,517 13,745 $ 1.05 $ (2,768) 13,023 $ (0.21)
======== ======== ======== ========
14
The computation of basic and diluted income (loss) per share for the
nine months ended September 30, 2004 and 2003 is as follows:
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
------------------------------------- ------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
---------- ------ ------ -------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Loss from continuing operations .................. $ (2,810) $ (0.22) $(11,073) $ (0.77)
Income from discontinued operations .............. 1,502 0.12 2,286 0.16
Gain on sale of DNE .............................. 19,088 1.48 -- --
-------- -------- -------- --------
Net income (loss) ................................ $ 17,780 1.38 $ (8,787) (0.61)
Less: preferred stock dividends .................. (1,928) (0.15) (90) (0.01)
-------- -------- -------- --------
Basic and diluted income (loss) per common share . $ 15,852 12,893 $ 1.23 $ (8,877) 14,354 $ (0.62)
======== ======== ======== ========
The Company has excluded the assumed conversion of the Series A Preferred
Stock from the diluted earnings per share calculation for all periods as the
impact would be anti-dilutive. Stock options and unvested stock awards that may
be exercised in the future, with respect to 2.7 million and 2.9 million shares
of common stock outstanding at September 30, 2004 and 2003, respectively, have
been excluded from the computation of diluted earnings per share because to do
so would be antidilutive for all periods presented. The dilutive impact of the
warrant held by Superior (to acquire common shares of Essex Electric) is
excluded from the diluted earnings per share calculation as it is antidilutive
for all periods presented.
11. BUSINESS SEGMENTS
The Company's reportable segments prior to second quarter 2004 consisted
of electrical wire (Alpine's 90% owned subsidiary, Essex Electric Inc) and
communications and electronic products (DNE). During the second quarter 2004, we
classified the communications and electronic products segment as discontinued
operations and the business was sold during the third quarter of 2004. See Note
12 for additional information about our discontinued operations. Subsequent to
the sale of DNE the Company has only one business segment.
12. DISCONTINUED OPERATIONS
On June 21, 2004 the Company entered into an agreement to sell DNE
Systems, its wholly-owned defense electronics subsidiary, to ULTRA Electronics
Defense, Inc., a wholly-owned subsidiary of Ultra Electronics Holdings plc, a
United Kingdom-based company that is listed on the London Stock Exchange (the
"DNE Sale"). The purchase price was $40 million in cash at closing plus the
Company may receive an additional cash payment of up to $3 million if a certain
performance based measure is achieved in 2005. The sale was consummated on July
29, 2004 and a pretax book gain of approximately $29 million, net of expenses,
was recorded in the third quarter of 2004. The assets and liabilities of DNE
have been reclassified to discontinued operations in the December 31, 2003
balance sheet presented herein. Likewise, DNE's results of operations for the
three and nine month periods ended September 30, 2004 and 2003 have been
reclassified to income from discontinued operations.
15
The major components of DNE's assets and liabilities classified as
discontinued operations in the December 31, 2003 balance sheet herein are
presented below:
DECEMBER 31,
2003
--------------
(in thousands)
Accounts receivable ......................................... $2,232
Inventories ................................................. 5,118
Other current assets ........................................ 184
------
Total current assets ................................... 7,534
Property, plant and equipment, net .......................... 1,766
------
Total assets ............................................ 9,300
Accounts payable ............................................ 765
Accrued expenses ............................................ 1,458
------
Total current liabilities ............................... 2,223
Other long term liabilities ................................. 157
------
Total liabilities ........................................ 2,380
------
Total net assets ............................................ $6,920
======
The revenue and income before taxes of DNE that is classified in
discontinued operations for the three and nine month periods ended September 30,
2004 and 2003 are presented below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(IN THOUSANDS)
--------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues .................. $ 1,591 $ 6,719 $15,295 $22,016
Income before taxes ....... $ (152) $ 1,210 $ 2,616 $ 3,932
13. SPECIAL DIVIDEND
On August 24, 2004, Alpine declared a special dividend of up to $0.40 per share
of common stock and a special dividend of $103.65 per share of Series A
Preferred Stock to shareholders of record on September 14, 2004 (the "Record
Date"). The amount of the Special dividend in respect of the common stock was
reduced proportionately, to $0.36, to adjust for additional shares of common
stock issued by the Company between August 24, 2004 and the Record Date. This
resulted in special dividend payments of $4.9 million in respect of the common
stock and $1.5 million in respect of the Series A Preferred Stock.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Alpine Group, Inc. ("Alpine") is a holding company which over the past
five years has owned controlling equity interests in industrial businesses which
have been operated as subsidiaries. Alpine currently owns approximately 90% of
Essex Electric Inc. ("Essex Electric"), which is engaged in the manufacture and
sale of electrical wire.
On December 11, 2002, Alpine's wholly-owned subsidiary, Alpine Holdco Inc.
("Alpine Holdco") acquired the electrical wire business assets now operated as
Essex Electric, and DNE Systems, Inc. ("DNE Systems") from Superior TeleCom Inc.
("Superior") as well as all of the outstanding shares of capital stock of Texas
SUT Inc. and Superior Cable Holdings (1997) Ltd., which together own
approximately 47% of Superior Cables Ltd., the largest Israeli - based producer
of wire and cable products, which we sometimes refer to as "Superior Israel".
The purchase included the issuance of a warrant (the "Warrant") to Superior to
purchase 199 shares of the common stock of Essex Electric Inc. We sometimes
refer to this acquisition as the "Electrical Acquisition". In September 2003,
Alpine Holdco subscribed for and purchased 681 newly issued shares of common
stock of Essex Electric. In October 2003, Superior exercised its rights under a
securityholders agreement to subscribe for and purchase 169 shares of newly
issued common stock of Essex Electric. As a result Alpine Holdco and Superior
currently own approximately 90% and 10%, respectively, of the total outstanding
stock of Essex Electric. Superior's Warrant to purchase 199 shares of the
capital stock of Essex Electric currently represents approximately 9.9% of the
capital stock of Essex Electric. On June 18, 2004, Alpine entered into an
agreement to sell DNE Systems. The transaction closed on July 29, 2004.
Accordingly, DNE Systems has been accounted for and classified as a discontinued
operation in these financial statements. See note 12 for a description of this
transaction.
IMPACT OF COPPER PRICE FLUCTUATIONS ON OPERATING RESULTS
Copper is one of the principal raw materials used by the Company.
Fluctuations in the price of copper affect per unit product pricing and related
revenues. However, the cost of copper has not had a material impact on
profitability as the Company, in most cases, has the ability to adjust prices
billed for its products to properly match the copper cost component of its
inventory shipped.
17
RESULTS OF OPERATIONS--THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004 AS COMPARED
TO THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2003
Sales for the quarter ended September 30, 2004 were $80.4 million, an
increase of 15.6% compared to sales of $69.5 million for the quarter ended
September 30, 2003. The comparative sales increase was due to the net effect of
higher selling prices, which reflect higher copper prices, and lower sales
volume. The lower sales volume was due primarily to a decrease in shipments of
electrical wire by Essex Electric resulting from its consolidation of production
facilities and reduction of manufacturing capacity to reduce its exposure to
certain geographic markets, distribution channels and product lines during
implementation of its restructuring and repositioning strategy. After adjusting
for and eliminating the comparative difference in the market price of copper,
sales for the quarter ended September 30, 2004 declined 12.9% from the quarter
ended September 30, 2003 due primarily to the aforementioned decrease in the
volume of electrical wire shipped. The volume decline was anticipated and was
due largely to the impact of the restructuring and repositioning program being
implemented at Essex Electric.
Gross profit for the quarter ended September 30, 2004 was $5.0 million, an
increase of $1.3 million or 33.9%, as compared to gross profit of $3.7 million
for the quarter ended September 30, 2003. The gross profit margin for the
quarter ended September 30, 2004 was 6.2%, compared to a gross profit margin of
5.3% for the quarter ended September 30, 2003. The increased margin percentage
reflects slightly higher pricing and mix changes in products and markets in
which Essex Electric competes, partially offset by higher non-copper raw
material costs.
Selling, general and administrative expense ("SG&A expense") for the
quarter ended September 30, 2004 was $7.4 million, an increase of 14.6%, as
compared to SG&A expense of $6.5 million for the quarter ended September 30,
2003 due to an increase in corporate expenses, partially offsetting cost
reductions at Essex Electric resulting from implementation of its restructuring.
Restructuring and other charges at Essex Electric of $0.9 million for the
three months ended September 30, 2004 primarily include $0.2 million related to
the relocation and installation of certain equipment from closed facilities into
the Florence, Alabama manufacturing location, $0.2 million in costs to relocate
the Essex Electric administrative offices in Ft. Wayne and $0.2 million in
facility costs relating to idled warehousing space.
The Company's operating loss for the quarter ended September 30, 2004 was
$3.3 million compared to an operating loss of $6.1 million for the comparable
2003 quarter. The increase in operating income is due to slightly higher
pricing, product mix changes and SG&A expense reductions at Essex Electric,
partially offset by higher corporate expenses.
Interest expense for the quarter ended September 30, 2004 was $0.8
million, representing an increase of $0.1 million from the comparative 2003
quarter. The increase resulted primarily from an increase of approximately $12
million in average borrowings under the Revolving Credit Facility due primarily
to the impact of higher copper prices on working capital requirements.
18
RESULTS OF OPERATIONS--NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004 AS COMPARED TO
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003
Sales for the nine-month period ended September 30, 2004 were $238.4
million, virtually the same as the $239.0 million in sales achieved during the
nine-month period ended September 30, 2003. Although the sales levels are
comparable between during the two nine month periods, the sales for the
nine-month period ended September 30, 2004 reflect the net effect of decreased
sales volume and higher selling prices. The lower sales volume during this
period is due to a decrease in shipments of electrical wire by Essex Electric
resulting from its consolidation of production facilities and reduction of
manufacturing capacity to reduce its exposure to certain geographic markets,
distribution channels and product lines during the implementation of its
restructuring and repositioning initiatives. The sales decrease was also
impacted by the sale of the automotive and industrial wire product lines in the
first quarter of 2003, which contributed approximately $8.0 million in sales in
the first quarter of 2003. The sales decrease was partially offset by the
significant increase (57%) in the cost of copper, Essex Electric's principal
manufacturing cost item, in the first three quarters of 2004 compared to the
copper costs in the first three quarters of 2003. After adjusting for and
eliminating the comparative difference in the market price of copper, sales for
the nine month period ended September 30, 2004 declined 24.2% from the nine
month period ended September 30, 2003 due to a decline in the volume of copper
equivalent pounds shipped partially offset by an improvement in per unit
pricing. The volume decline was anticipated and due largely to the impact of the
restructuring and repositioning program being implemented at Essex Electric.
Gross profit for the nine-month period ended September 30, 2004 was $21.7
million, an increase of $7.0 million or 47.1%, as compared to gross profit of
$14.8 million for the nine-month period ended September 30, 2003. The gross
profit margin for the nine-month period ended September 30, 2004 was 9.1%,
compared to a gross profit margin of 6.2% for the nine-month period ended
September 30, 2003. The increased margin percentage reflects higher pricing and
mix changes in products and markets in which Essex Electric competes, partially
offset by higher non-copper raw material costs and higher manufacturing costs
due to the restructuring transition.
Selling, general and administrative expense ("SG&A expense") for the nine
month period ended September 30, 2004 was $19.5 million, a decrease of 18.1%, as
compared to SG&A expense of $23.9 million for the nine-month period ended
September 30, 2003 due primarily to cost reductions at Essex Electric in
connection with implementation of its restructuring, partially offset by higher
corporate expenses.
Restructuring and other charges at Essex Electric of $3.8 million for the
nine-month period ended September 30, 2004 consisted primarily of $1.6 million
related to the relocation and installation of certain equipment from closed
facilities into the Florence, Alabama manufacturing location, $1.0 million for
costs associated with starting up the new manufacturing processes at Florence
and freight to relocate displaced products, $0.8 million in facility costs
relating to idled warehousing space and $0.1 in other costs and credits
including the relocation of Essex Electric administrative offices.
The Company's operating loss for the nine-month period ended September 30,
2004 was $1.6 million compared to an operating loss of $17.4 million for the
comparable 2003 period. The increase in the operating income during the 2004
period is due to higher pricing, product mix changes and SG&A expense reductions
at Essex Electric.
Interest expense for the nine-month period ended September 30, 2004 was
$2.1 million, representing a decrease of $0.4 million from the prior year
nine-month period. The decrease during the 2004 period is due primarily to a
decrease of approximately $12 million in the average borrowings under the
Revolving Credit Facility offset partially by the interest expense on the 6%
Junior Subordinated Notes issued in August 2003.
19
LIQUIDITY AND CAPITAL RESOURCES
ALPINE HOLDCO
The Electrical Acquisition was financed by approximately $10 million of
Alpine's cash and cash equivalents and borrowings by Alpine Holdco under a Loan
and Security Agreement (the "Revolving Credit Facility"), dated as of December
11, 2002, by and among Alpine Holdco, Essex Electric, DNE Manufacturing Company
and DNE Technologies, Inc. as borrowers and DNE Systems as credit party (such
parties sometimes collectively are called the "Companies"), certain financial
institutions party thereto as lenders, Congress Financial Corporation, as
documentation agent, and Foothill Capital Corporation, as arranger and
administrative agent. Upon consummation of the acquisition, approximately $78
million was outstanding under the Revolving Credit Facility.
Effective concurrently with the consummation of the DNE Sale (see note 12)
on July 29, 2004, the lenders, released each of DNE Systems, DNE Technologies,
and DNE Manufacturing from all of their obligations under the Revolving Credit
Facility (the "DNE Parties"), released all property of the DNE Parties from the
liens granted for the benefit of the lenders under the Revolving Credit Facility
and all of the outstanding and issued capital stock of the DNE Parties from the
pledge thereof delivered in connection with the Revolving Credit Facility, and
the DNE Parties no longer are "Borrowers" or a "Credit Party", as the case may
be, under the Revolving Credit Facility. Accordingly, from and after July 29,
2004, the DNE Parties are not included in the term "Companies". The Revolving
Credit Facility was amended on November 10, 2004 to reflect modifications
approved by the parties as a result of the DNE Sale and to establish revised
financial and other covenant levels.
The terms of the Revolving Credit Facility provided for a maximum
committed amount of $100 million at its inception which, at the request of the
Companies, was reduced to $70 million on December 8, 2003. Borrowing
availability is determined by reference to a borrowing base which permits
advances to be made at various net valuation rates against various assets of the
Companies. Interest is payable monthly in cash in arrears and is based on, at
Alpine Holdco's option, LIBOR or prime rate plus a fixed margin. The weighted
average interest rate at September 30, 2004 was 5.2%. The Revolving Credit
Facility also provides for maintenance of financial covenants and ratios
relating to minimum EBITDA and tangible net worth, and includes restrictions on
capital expenditures, payment of cash dividends and incurrence of indebtedness.
Outstanding obligations under the Revolving Credit Facility are secured by a
lien on all of the Companies' tangible and intangible assets, other than the
investment in Superior Israel and the assets of DNE, as described above. The
obligations under the Revolving Credit Facility are without recourse to Alpine.
Unless previously accelerated as a result of default, the Revolving Credit
Facility matures in five years. However in accordance with Emerging Issues Task
Force Issue 95-22, Balance Sheet Classification of Borrowings outstanding under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement, borrowings under the Revolving Credit Facility have
been classified as a current liability. The Companies may terminate the
Revolving Credit Facility at any time upon 45 days prior written notice and
payment of all outstanding borrowings, together with unpaid interest, and a
termination fee equal to 0.75% of the maximum committed amount. At any time
after December 11, 2004, the Companies may, upon 30 days prior written notice,
permanently reduce the maximum committed amount without penalty or premium. At
September 30, 2004 and December 31, 2003, outstanding borrowings under the
Revolving Credit Facility were $36.4 million and $17.2 million, respectively. At
September 30, 2004 the Companies had $22.9 million of borrowing availability. No
dividends may be paid by Alpine Holdco without prior consent of the lenders. On
July 29, 2004 the lenders expressly consented to the distribution by Alpine
Holdco to Alpine of the sale proceeds from the DNE Sale. Alpine Holdco was in
compliance with all applicable covenants at September 30, 2004.
Capital expenditures for the nine-month period ended September 30, 2004
for Alpine Holdco (including its subsidiaries) were $3.6 million and the Company
estimates full year capital expenditures for 2004 will approximate between $5 to
$6 million. Essex Electric has implemented restructuring initiatives to
rationalize manufacturing capacity, lower expenditures and reduce working
capital, which are expected to result in costs of approximately $5 million
during 2004 ($4.4 million through nine-months ended September 30, 2004).
Incurrence of these costs is permissible under the terms of the Revolving Credit
Facility. Based upon the amended terms of the Revolving Credit Facility and the
current projected performance of the Companies, Alpine believes that the
Companies will be in compliance with the financial covenants provided for
thereunder. However, in the event of any noncompliance under the Revolving
Credit Facility, Alpine believes that it would be able to obtain the necessary
waivers from its lenders. Furthermore, if necessary, Alpine believes it could
obtain refinancing on terms and conditions generally consistent with or in the
aggregate, similar to those contained in the Revolving Credit Facility. However,
there can be no assurance that Alpine could obtain such waivers or that
alternate financing would be available. Alpine believes that existing cash and
cash equivalents and cash provided by operations together with borrowings
available under the Revolving Credit Facility will be sufficient to meet the
capital needs of the Companies over the next twelve months.
20
ALPINE CORPORATE
On August 4, 2003, the Company completed an exchange offer whereby holders
of its common stock exchanged 3,479,656 shares for $4.3 million principal amount
of 6% Junior Subordinated Notes (the "Subordinated Notes") issued by the Company
plus a nominal amount of cash in lieu of fractional notes. The Subordinated
Notes were initially recorded at an amount equal to the fair market value of the
common stock exchanged resulting in an initial discount of $1.4 million. The
discount is being accreted over the term of the Subordinated Notes using a level
interest method. The Subordinated Notes accrue interest at 6% per annum payable
in cash semiannually each December 31 and September 30. The Subordinated Notes
are the Company's general unsecured obligations, subordinated and subject in
right of payment to all of the Company's existing and future senior
indebtedness, which excludes trade payables incurred in the ordinary course of
business. The Company will be required to repay one-eighth of the outstanding
principal amount of the Subordinated Notes commencing on June 30, 2007 and
semiannually thereafter, so that all of the Subordinated Notes will be repaid by
December 31, 2010. Accordingly, there are no principal payments due in 2004. The
Company must offer to redeem all of the Subordinated Notes at the redemption
price then in effect in the event of a change of control. The Subordinated Notes
were issued under an indenture that does not subject the Company to any
financial covenants. During the three month period ended September 30, 2004, the
Company retired $0.2 million of its 6% junior subordinated notes.
On June 23, 2003, Alpine completed a private placement of 8,287 shares of
a new issue of Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") to its directors and certain officers for a purchase price of
$380 per share, or an aggregate of approximately $3.1 million. Holders of the
Series A Preferred Stock are entitled to receive, when, as and if declared by
the board of directors out of funds legally available for payment, cash
dividends at an annual rate of $30.40 per share. The Series A Preferred Stock,
originally was convertible into Alpine common stock, at the option of the
holder, at the rate of 691 shares of common stock per share of Series A
Preferred. As a result of a special dividend declared by the Company discussed
below, the conversion rate increased to 743.01. However, the officers and
directors have agreed not to exercise the conversion option until advised by the
Company that it has a sufficient number of authorized but unissued shares of
common stock to permit such conversion. Since the market price of the common
stock on the subscription date (June 23, 2003) was $0.76 per share and the
original conversion price was $0.55 per share, a beneficial conversion feature
of $1.2 million was recorded as a reduction to the Mandatory redeemable series A
cumulative preferred stock line of the balance sheet with the offset to capital
in excess of par. The conversion feature will be recorded as a dividend at the
time there are a sufficient number of authorized but unissued shares of common
stock to permit such conversion.
On November 10, 2003, the Company completed the sale of 9,977 shares of
Series A Preferred Stock pursuant to a rights offering to holders of the
Company's common stock. Holders of the Company's common stock were offered a
right to purchase one share of Series A Preferred Stock at a price of $380 per
share for each 500 shares of common stock held on September 29, 2003. The terms
of the Series A Preferred Stock are the same as that purchased by the officers
and directors in the private placement discussed above; however the Series A
Preferred Stock purchased through the rights offering are currently convertible.
Total proceeds received from the sale were $3.8 million. The recording of
dividends, if any, on the Series A Preferred Stock will reduce the Company's
earnings per share in the period recorded. Since the market price of the common
stock on the date of issuance (November 10, 2003) was $0.92 per share and the
original conversion price was $0.55 per share, a beneficial conversion feature
of $2.6 million was recorded. This was recorded as a dividend since the shares
were immediately convertible, offset with a credit to capital in excess of par.
The Company may cause conversion of the Series A Preferred Stock into
common stock if the Company's common stock is then listed on the New York Stock
Exchange or the American Stock Exchange or is traded on the Nasdaq National
Market System and the average closing price of a share of the Company's common
stock for any 20 consecutive trading days equals or exceeds 300% of the
conversion price then in effect. The Series A Preferred Stock is subject to
mandatory redemption by the Company ratably on the last day of each quarter
during the three-year period commencing on December 31, 2009 at the liquidation
value of $380 per share, plus accrued and unpaid dividends. Additionally, if the
Company experiences a change in control it will, subject to certain limitations,
offer to redeem the Series A Preferred Stock at a cash price of $380 per share
plus (i) accrued and unpaid dividends and (ii) if the change of control occurs
prior to December 31, 2007, all dividends that would be payable from the
redemption date through December 31, 2007.
Holders of the Series A Preferred Stock are entitled to vote their shares
on an as-converted basis together with the Company's common stockholders. In
addition, the Company may not (a) enter into a merger, sale of all or
substantially all of its assets or similar transaction without the approval of
holders of at least a majority of the shares of Series A Preferred Stock, or (b)
alter or change the powers, preferences or special rights (including, without
limitation, those relating to dividends, redemption, conversion, liquidation
preference or voting) of the shares of Series A Preferred Stock so as to affect
them materially and adversely, or issue any senior stock, without the approval
of holders of at least a majority of the shares of Series A Preferred Stock. In
the event of any liquidation, dissolution or winding up of Alpine, after the
payment of the liquidation preference in respect of any senior stock, holders of
the Series A Preferred Stock will be entitled to receive the liquidation price
of $380 per share plus an amount equal to (a) if the liquidation, dissolution or
winding up occurs prior to December 31, 2007, all dividends that would be
payable on a share of Series A Preferred Stock from the date of liquidation,
dissolution or winding up through December 31, 2007 and (b) any accrued and
unpaid dividends to the payment date, before any payment is made to the holders
of common stock or any other junior securities, subject to certain exceptions.
Proceeds from the sale of the Series A Preferred Stock were used to reduce
existing indebtedness and for general corporate purposes.
21
During the third quarter of 2004, Alpine Holdco distributed to Alpine the
proceeds from the DNE Sale, net of expenses, of approximately $37 million in
accordance with a consent from the lenders under the Revolving Credit Facility,
as previously discussed.
On August 24, 2004, Alpine declared a special dividend of up to $0.40
per share of common stock and a special dividend of $103.65 per share of Series
A Preferred Stock to shareholders of record on September 14, 2004 (the "Record
Date"). The amount of the Special dividend in respect of the common stock was
reduced proportionately, to $0.36, to adjust for additional shares of common
stock issued by the Company between August 24, 2004 and the Record Date. This
resulted in special dividend payments of $4.9 million in respect of the common
stock and $1.5 million in respect of the Series A Preferred Stock.
As of September 30, 2004 Alpine had unrestricted cash, cash equivalents
and marketable securities of approximately $39.4 million. Alpine's current and
anticipated sources of liquidity include existing cash and cash equivalents
(including the net proceeds from the DNE Sale), and management fees from Alpine
Holdco. Pursuant to a management agreement with Alpine Holdco dated December 11,
2002, so long as no event of default exists or is created by such payment under
the Revolving Credit Facility, Alpine is entitled to receive from Alpine Holdco
an annual management fee (together with any unpaid management fees from prior
years), which was increased from $1.0 million to $1.8 million, (effective
January 1, 2004) and be reimbursed for all direct costs incurred by it related
to the business of Alpine Holdco. Alpine's ability to receive distributions from
Alpine Holdco is restricted under the terms of the Revolving Credit Facility to
a maximum of $1.8 million of the aforementioned management fee, amounts
representing Alpine's tax liability in respect of the operations of Alpine
Holdco, plus $250,000 per year.
Since 1993, Alpine has been a party to a guaranty of Superior's lease
obligations relating to Superior's manufacturing facility in Brownwood, Texas.
The lease currently provides for monthly payments of $56,000 subject to
adjustments for changes in the consumer price index. The lease term expires in
2018 but may be extended through 2033. As such, the maximum potential amount of
future payments under the guaranty through 2018 would be approximately $10
million. Any further extensions would amount to a guarantee of approximately
$0.7 million per year. While Alpine's continuing obligations, if any, under the
guaranty are not free from doubt, the Company believes the facility and
underlying lease are valuable assets of Superior and expects that Superior will
perform as tenant thereunder and continue to pay its obligations. In addition,
Alpine would have a claim for indemnification and reimbursement from Superior in
respect of any amounts paid by Alpine as guarantor.
Superior Israel's operations are funded and financed separately, with
recourse to Superior Israel but otherwise on a non-recourse basis to Alpine.
CONTRACTUAL OBLIGATIONS
The aforementioned Revolving Credit facility had an outstanding balance
of $36.4 million at September 30, 2004, which was a $19.2 million increase since
December 31, 2003. The increase was due primarily to increased working capital
requirements as a result of higher copper prices and $3.6 million of capital
expenditures. Effective July 1, 2004 the Essex Electric operating lease for the
Ontario, California Regional Distribution Center was amended in order to reduce
the size of the premises and the length of the term demised thereunder. The
amended lease terms reduce future lease obligations for 2008 and beyond by $5.4
million.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk primarily relates to interest
rates on long-term debt and copper futures used to minimize the price risk
associated with copper prices. The cost of copper, the Company's most
significant raw material has been subject to significant volatility over the
past several years. At December 31, 2003, the Company had approximately $13
million of copper futures contracts, representing 12 million copper pounds,
outstanding as non-designated derivative instruments. These contracts were
entered into to hedge 12 million copper pounds of inventory purchased in
December 2003, for sale in the first quarter of 2004. These contracts were
recorded at fair value at December 31, 2003 with any price fluctuations
reflected in current earnings in 2003, and were liquidated in the first quarter
of 2004, when the underlying asset (i.e. inventory) was sold.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form
10-Q, an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures was carried out by the Company
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective at a
reasonable assurance level as of the end of the period covered by this quarterly
report on Form 10-Q. A system of controls, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the system of
controls are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. There have been no changes in the Company's internal control over
financial reporting that occurred during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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Except for the historical information herein, the matters discussed in
this Form 10-Q include forward-looking statements that may involve a number of
risks and uncertainties. Actual results may vary significantly based on a number
of factors, including, but not limited to, risks in product and technology
development, market acceptance of new products and continuing product demand,
prediction and timing of customer orders, the impact of competitive products and
pricing, changing economic conditions, including changes in short-term interest
rates and other risk factors detailed in the Company's most recent filings with
the Securities and Exchange Commission.
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(A) EXHIBITS
10(jj)* Amendment Number One to The Alpine Group, Inc. Stock
Compensation Plan for Non-Employee Directors, Dated July 1,
2004.
10(kk)* Amendment Number One to The Alpine Group, Inc. Deferred
Stock Account Plan, Dated July 30, 2004.
10(ll)* Fifth Amendment to Loan and Security Agreement, dated
November 10, 2004 by and among Alpine Holdco Inc. and Essex
Electric Inc. as borrowers and Wells Fargo, Foothill, Inc.,
as agent for the lenders and as a lender, Congress Financial
Corporation (Central), and the lenders from time to time
party thereto.
31.1* Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification of the Company's 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.
(B) REPORTS ON FORM 8-K
None
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* Filed herewith
24
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.
THE ALPINE GROUP, INC.
Date: November 12, 2004 By: /s/ David A. Owen
David A. Owen
Chief Financial Officer
(duly authorized officer and
principal financial and accounting
officer)
25