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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 March 31, 2005
|_| 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 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
incorporation or organization) Identification No.)
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
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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 April 29, 2005
----- -----------------------------
Common Stock, $.10 Par Value 15,816,733
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1
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, 2004.
2
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, December 31,
2005 2004
----------------------------
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 1,953 $ 611
Marketable securities, at fair value ..................................................... 24,427 35,827
Accounts receivable (less allowance for doubtful accounts of $341 and $387 at
March 31, 2005 and December 31, 2004 respectively) ................................ 52,065 41,091
Inventories, net (Note 2) ................................................................ 23,645 30,417
Other current assets ..................................................................... 5,288 4,992
----------------------------
Total current assets ................................................................ 107,378 112,938
Property, plant and equipment, net .......................................................... 17,598 16,927
Deferred income taxes ....................................................................... 427 264
Other long-term assets ...................................................................... 3,028 2,658
----------------------------
Total assets ........................................................................ $ 128,431 $ 132,787
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 5) ....................................................... $ 42,783 $ 40,250
Current portion of long-term debt (Note 6) ............................................... -- 386
Accounts payable ......................................................................... 16,512 14,010
Accrued expenses ......................................................................... 10,988 11,054
Deferred income taxes and income taxes payable ........................................... 6,174 13,429
----------------------------
Total current liabilities ........................................................... 76,457 79,129
Long-term debt, less current portion (Note 6) ............................................... 3,171 3,122
Other long-term liabilities ................................................................. 18,025 17,842
Warrant ..................................................................................... 561 936
Minority interest in subsidiary ............................................................. 3,945 2,218
Mandatorily redeemable series A cumulative preferred stock (18,264 shares issued; 14,152
and 14,697 outstanding at March 31, 2005 and December 31, 2004 respectively) (Note 7) ... 5,338 5,545
Stockholders' equity:
9% cumulative convertible preferred stock at liquidation value ........................... 177 177
Common stock, $.10 par value; (50,000,000 authorized; and 25,074,992 and 24,670,054 shares
issued at March 31, 2005 and December 31, 2004, respectively) .................... 2,507 2,467
Capital in excess of par value ........................................................... 168,712 168,446
Accumulated other comprehensive loss ..................................................... (24) (20)
Accumulated deficit ...................................................................... (56,327) (52,955)
Treasury stock, at cost (10,933,310 and 10,929,985 shares at March 31, 2005 and
December 31, 2004, respectively) .................................................. (93,714) (93,705)
Receivable from stockholders ............................................................. (397) (415)
----------------------------
Total stockholders' equity ............................................................ 20,934 23,995
----------------------------
Total liabilities and stockholders' equity .......................................... $ 128,431 $ 132,787
============================
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
March 31,
----------------------------
2005 2004
----------------------------
Net sales ............................................................... $ 89,833 $ 81,937
Cost of goods sold ...................................................... 87,916 71,750
----------------------------
Gross profit ......................................................... 1,917 10,187
Selling, general and administrative expenses ............................ 5,497 6,061
Restructuring and other charges ......................................... 1,069 1,748
----------------------------
Operating income (loss) .............................................. (4,649) 2,378
Interest expense ........................................................ (942) (613)
Other expense, net ..................................................... (255) (83)
----------------------------
Income (loss) before income taxes,
minority interest and discontinued operations ................... (5,846) 1,682
Income tax (provision) benefit .......................................... 2,127 (753)
----------------------------
Income (loss) before minority interest
and discontinued operations ..................................... (3,719) 929
Minority interest in (earnings) loss of subsidiary ..................... 459 (157)
----------------------------
Income (loss) from continuing operations ............................. (3,260) 772
Income from discontinued operations, net of tax of $502 (Note 1) ........ -- 703
----------------------------
Net income (loss) .................................................... (3,260) 1,475
Preferred stock dividends ............................................... (112) (147)
----------------------------
Net income (loss) applicable to common stock ......................... $ (3,372) $ 1,328
============================
Net income (loss) per share of common stock:
Basic:
Income (loss) from continuing operations applicable to common stock $ (0.22) $ 0.05
Income from discontinued operations, net of tax ................... -- 0.06
----------------------------
Net income (loss) .................................................. $ (0.22) $ 0.11
============================
Diluted:
Income (loss) from continuing operations applicable to common stock $ (0.22) $ 0.03
Income from discontinued operations ................................ -- 0.03
----------------------------
Net income (loss) .................................................. $ (0.22) $ 0.06
============================
Weighted average shares outstanding:
Basic ................................................................ 15,589 12,119
Diluted .............................................................. 15,589 25,572
The accompanying notes are an integral part of these
consolidated financial statements.
4
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
Three Months Ended
March 31, 2005
----------------------------
Shares Amount
----------------------------
9% cumulative convertible preferred stock:
Balance at beginning of period ................................... 177 $ 177
----------------------------
Balance at end of period ...................................... 177 177
----------------------------
Common stock:
Balance at beginning of period ................................... 24,670,054 2,467
Shares issued pursuant to Series A Preferred Stock conversion .... 404,938 40
----------------------------
Balance at end of period ...................................... 25,074,992 2,507
----------------------------
Capital in excess of par value:
Balance at beginning of period ................................... 168,446
Compensation expense related to restricted stock and certain stock
options, less vested shares released from Treasury ......... 99
Shares issued pursuant to Series A Preferred Stock conversion .... 167
------------
Balance at end of period ...................................... 168,712
------------
Accumulated other comprehensive loss:
Balance at beginning of period ................................... (20)
Change in unrealized losses on securities, net of tax ............ (4)
------------
Balance at end of period ...................................... (24)
------------
Accumulated deficit:
Balance at beginning of period ................................... (52,955)
Net loss ......................................................... (3,260)
Dividends on preferred stock ..................................... (112)
------------
Balance at end of period ...................................... (56,327)
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Treasury stock:
Balance at beginning of period ................................... (10,929,985) (93,705)
Stock options and grants ......................................... 4,644 7
Reversed forward stock split ..................................... (7,969) (16)
----------------------------
Balance at end of period ...................................... (10,933,310) (93,714)
----------------------------
Receivable from stockholders:
Balance at beginning of period ................................... (415)
Forgiveness of officer loans ..................................... 18
------------
Balance at end of period ...................................... (397)
------------
Total stockholders' equity .......................................... $ 20,934
============
The accompanying notes are an integral part of these
consolidated financial statements.
5
THE ALPINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
----------------------------
2005 2004
----------------------------
Cash flows from operating activities:
Net income (loss) ................................................................... $ (3,260) $ 1,475
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation ..................................................................... 336 252
Amortization of deferred debt issuance costs and accretion of debt discount ...... 155 156
Compensation expense related to stock options and grants ......................... 107 462
(Gain) loss on sale of fixed assets and subsidiary stock ......................... 923 (239)
Minority interest in income (loss) of subsidiary ................................. (459) 157
Increase (decrease) in fair value of warrant ..................................... (375) 200
Change in assets and liabilities:
Accounts receivable, net ....................................................... (10,974) (19,699)
Inventories, net ............................................................... 6,772 11,014
Other current and non-current assets ........................................... (661) 64
Accounts payable and accrued expenses .......................................... 2,436 (2,559)
Income taxes ................................................................ (7,416) 497
Other, net ..................................................................... 195 (33)
----------------------------
Cash flows used for operating activities ............................................... (12,221) (8,253)
----------------------------
Cash flows from investing activities:
Capital expenditures ................................................................ (1,018) (1,328)
Proceeds from sale of assets ........................................................ 403 68
Proceeds from sale of investments ................................................... 11,435 --
Purchase of marketable securities ................................................... (518) --
----------------------------
Cash flows provided by (used for) investing activities ................................. 10,302 (1,260)
----------------------------
Cash flows from financing activities:
Borrowings under revolving credit facilities, net ................................... 2,533 9,612
Repayments of long-term borrowings .................................................. (387) (31)
Other, net .......................................................................... (14) 209
Dividends on preferred stock ........................................................ (112) (147)
Proceeds from minority interest investment in subsidiary ............................ 1,241 --
----------------------------
Cash flows provided by financing activities ............................................ 3,261 9,643
----------------------------
Net increase in cash and cash equivalents .............................................. 1,342 130
Cash and cash equivalents at beginning of period ....................................... 611 465
----------------------------
Cash and cash equivalents at end of period ............................................. $ 1,953 $ 595
============================
Supplemental disclosures:
Cash paid for interest .............................................................. $ 706 $ 891
Cash paid for income taxes, net ..................................................... $ 5,101 $ 772
The accompanying notes are an integral part of these
consolidated financial statements.
6
THE ALPINE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(unaudited)
1. General
Basis of presentation and description of business
The accompanying 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 accounts for all affiliate
companies with ownership greater than 20%, but not majority-controlled, using
the equity method of accounting.
Alpine was incorporated in New Jersey in 1957 and reincorporated in
Delaware in 1987. Alpine is a holding company which over the recent past has
held major investments in industrial manufacturing companies. Currently,
Alpine's principal operations consist of Essex Electric Inc. ("Essex Electric"),
its 84% owned subsidiary engaged in the manufacture and sale of electrical wire
and cable, and a 46% equity interest in Superior Cables Ltd., the largest
Israeli based producer of wire and cable products.
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 TeleCom Inc. ("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 $0.4 million of income and $0.2 million of expense recorded in other income
(expense) for the three months ended March 31, 2005 and 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.
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. The sale was
consummated on July 29, 2004 and a pretax book gain of approximately $29.4
million, net of expenses, was recorded in the third quarter of 2004. DNE Systems
results of operations for the three month period ended March 31, 2004 are
presented as discontinued operations.
Marketable securities
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities, requires securities to be
classified as held to maturity, available for sale or trading. Only those
securities classified as held to maturity, which the Company intends and has the
ability to hold until maturity, are reported at amortized cost. Available for
sale and trading securities are reported at fair value with unrealized gains and
losses included in shareholders' equity or income net of related income taxes,
respectively. All of the Company's investment securities were classified as
available for sale at December 31, 2004. During the quarter ended March 31,
2005, $0.5 million of securities were classified as held to maturity as the
Company intends to hold these investments to maturity. Since the maturity date
is beyond one year from the date of the consolidated balance sheet these
securities are classified as long-term assets as of March 31, 2005. Since these
securities were previously classified as available for sale, the Company had
recorded a $60K unrealized loss to other comprehensive income that will be
amortized over the life of the bonds. All other securities held as of March 31,
2005 have been classified as available for sale.
7
The following table shows the unrealized gains (losses) and fair value of
the Company's investments aggregated by investment category as of March 31,
2005:
Cost Unrealized Unrealized Fair
Description of Securities Basis Gains Losses* Value
- ------------------------- ----- ----- ------ -----
Marketable equity securities $ 1,657 $ 26 $ (70) $ 1,613
Money market funds 3,475 3,475
Municipal bonds and notes 11,900 11,900
Mutual funds 7,083 106 7,189
Preferred securities 250 250
----------------------------------------------------------
Total $ 24,365 $ 132 $ (70) $ 24,427
==========================================================
* None of the gross unrealized losses have exceeded 12 months.
The gross unrealized losses related to short-term investments are
primarily due to a decrease in the fair value of equity securities due to
fluctuations in the stock market. Alpine has reviewed its securities in a loss
position and believes that the gross unrealized losses on its short-term
investments at March 31, 2005 are temporary in nature. Alpine reviews its
investment portfolio quarterly, to identify and evaluate investments that have
indications of possible impairment. Factors considered in determining whether a
loss is temporary include the length of time and extent to which fair value has
been less than the cost basis, the financial condition, credit quality and
near-term prospects of the investee and Alpine's ability to hold the investment
for a period of time sufficient to allow for any anticipated recovery in market
value.
Subsidiary stock transactions
The Company's ownership percentage in subsidiary stock is impacted by the
Company's purchase of additional subsidiary stock, as well as subsidiary stock
transactions, including the subsidiary's purchase of its own stock and the
subsidiary's issuance of its own stock. The Company accounts for subsidiary
stock transactions in accordance with Staff Accounting Bulletin No. 51,
"Accounting for sales of stock by a subsidiary" and records all gains and losses
related to subsidiary stock transactions through other income and expense.
In January 2005, Holdco purchased 1,792 shares of Essex Electric common
stock for a cash purchase price of $5.0 million and Superior purchased 445
shares of Essex Electric common stock for a cash purchase price of $1.2 million
resulting in Holdco and Superior owning 84.2% and 15.8% of Essex Electric,
respectively. In accordance with accounting principles generally accepted in the
United States of America, the Company accounted for the sale of stock of Essex
Electric as a loss on sale of subsidiary stock of approximately $0.9 million and
decreased the value of the warrant held by Superior to purchase 199 shares of
Essex Electric common stock by $0.4 million due to the dilutive impact of the
additional 2,237 shares issued.
Stock-Based Compensation Plans
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
March 31,
------------------------
2005 2004
------------------------
Net income (loss), as reported ...................................................... $ (3,260) $ 1,475
Add stock-based employee compensation expense included in reported net income (loss),
net of tax ....................................................................... 70 288
Deduct total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects .......................... (122) (376)
------------------------
Pro forma net income (loss) ......................................................... (3,312) 1,387
Preferred stock dividends ........................................................... (112) (147)
------------------------
Proforma net income (loss) - applicable to common stock .......................... $ (3,424) $ 1,240
========================
Net income (loss) per share:
Basic - as reported .............................................................. $ (0.22) $ 0.11
Basic - pro forma ................................................................ (0.22) 0.10
Diluted - as reported ............................................................ (0.22) 0.06
Diluted - pro forma .............................................................. (0.22) 0.05
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 three months ended March 31,
2005 and 2004, respectively: dividend yield of 0% for both periods; expected
volatility of 182% and 97%, risk-free interest rate of 4.1% and 2.6% for both
periods, 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 three months ended March 31, 2005 and 2004 was $1.88 and $0.92,
respectively. A total of 40,290 stock options were granted during the three
month period ended March 31, 2005.
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 its employee stock options.
The Company amortizes the value of restricted stock grants evenly over the
vesting periods, based upon the market value of the stock as of the date of the
grant.
9
Derivatives
All derivatives are recognized on the balance sheet at fair value. On the
date the derivative contract is entered, the Company designates the derivative
as either (i) a fair value hedge of a recognized asset or liability, (ii) a cash
flow hedge of a forecasted transaction, (iii) a hedge of a net investment in a
foreign operation, or (iv) a non-designated derivative instrument. The Company
has in the past engaged in certain derivatives that are classified as fair value
hedges, cash flow hedges and non-designated derivative instruments. Changes in
the fair value of derivatives that are designated as fair value hedges and the
underlying exposure being hedged are adjusted to fair value and are recorded in
the consolidated statements of operations in the same line item. Changes in the
fair value of cash flow hedges are recorded in accumulated other comprehensive
income with any ineffective portion immediately recognized in earnings. Changes
in the fair value of non-designated derivative contracts are reported in current
earnings.
At March 31, 2005 the Company had approximately $7 million of copper
futures contracts representing 5 million pounds, outstanding as non-designated
derivative investments. These contracts were entered into to hedge 5 million
copper pounds of future finished goods inventory purchases, totaling
approximately $12.5 million, scheduled for delivery during the last three
quarters of 2005 at a pre-established price. These contracts were recorded at
fair value at March 31, 2005 with any price fluctuations reflected in current
earnings in the period ended March 31, 2005, which fluctuations were
insignificant. There were no other derivatives outstanding at March 31, 2004.
At December 31, 2004, the Company had approximately $9 million of copper
futures contracts, representing 6 million copper pounds, outstanding as
non-designated derivative instruments. These contracts were entered into to
hedge 6 million copper pounds of copper rod inventory purchased in December
2004, for fabrication and sale in the first quarter of 2005. These contracts
were recorded at fair value at December 31, 2004 with any price fluctuations
reflected in current earnings in 2004 and were liquidated in the first quarter
of 2005, when the underlying asset (i.e. inventory) was sold. The net loss
recorded on the futures contracts when liquidated was minimal.
The Company does not currently utilize any hedging instruments that would
qualify for hedge accounting treatment. If such transactions were to arise, the
Company would formally document all relationships between hedging instruments
and hedged items, as well as the risk management objectives and strategy for
undertaking various hedge transactions.
2. Inventories
At March 31, 2005 and December 31, 2004, the components of inventories
were as follows:
March 31, December 31,
2005 2004
----------------------------
(in thousands)
Raw materials ................ $ 4,464 $ 15,169
Work in process .............. 5,693 5,476
Finished goods ............... 34,468 31,981
----------------------------
44,625 52,626
LIFO reserve ................. (20,980) (22,209)
----------------------------
$ 23,645 $ 30,417
============================
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 factors beyond management's control, interim results are subject to the
final year-end LIFO inventory valuation. During the three months ended March 31,
2005, the Company recorded an estimated LIFO decrement of $2.3 million to cost
of goods sold.
10
3. Comprehensive income (loss)
The components of comprehensive income (loss) for the three months ended
March 31, 2005 and 2004 were as follows:
Three Months Ended
March 31,
----------------------------
2005 2004
----------------------------
(in thousands)
Net income (loss) ................................... $ (3,260) $ 1,475
Change in unrealized losses on securities, net of tax (4) (60)
----------------------------
Comprehensive income (loss) ......................... $ (3,264) $ 1,415
============================
4. Restructuring and other charges
During the three month periods ended March 31, 2005 and 2004, the Company
recorded $1.1 and $1.7 million respectively, of restructuring and other charges.
The first quarter 2005 charges consisted primarily of $0.8 million of employee
related costs from the announced closing of Essex Electric's Anaheim, CA
operation. Additional costs associated with the Anaheim closure, such as
facility exit and transition costs, will be expensed as incurred during the
remainder of 2005. The remaining restructuring charges incurred during the first
quarter of 2005 were $0.3 million, consisting of cost related to the wind down
of other Essex Electric facilities previously closed, idled warehouse space
within existing distribution warehouses resulting from restructuring the
business, and other miscellaneous expense related to the Company's
restructuring.
The following table illustrates the restructuring reserve and the 2005
related activities:
December 31, March 31,
2004 Charges Payments 2005
---- ------- -------- ----
(in thousands)
Employee related costs ...................................... $ -- $ 800 $ -- $ 800
Facility exit costs ......................................... -- 240 240 --
Equipment and inventory relocation costs and other costs .... -- 29 29 --
-------------------------------------------------
$ -- $ 1,069 $ 269 $ 800
=================================================
5. Revolving Credit Facility
In connection with the Electrical Acquisition, Alpine Holdco entered into
a Loan and Security Agreement (the "Loan Agreement"), 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. The Revolving Credit Facility
was last amended on February 28, 2005 to revise certain covenants for 2005.
Effective concurrently with the consummation of the DNE Sale (see note 1)
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 March 31, 2005 and December 31, 2004 was 6.11% and
6.05%, 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 March 31, 2005. 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 Cable
Ltd.. The obligations under the Revolving Credit Facility are without recourse
to Alpine.
11
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.
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. The Companies may, upon 30 days' prior written notice,
permanently reduce the maximum committed amount without penalty or premium. At
March 31, 2005 and December 31, 2004, outstanding borrowings under the Revolving
Credit Facility were $42.8 million and $40.3 million, respectively. At March 31,
2005 the Companies had $17.2 million of borrowing availability. No dividends may
be paid by Alpine Holdco without prior consent of the lenders..
6. Long-term debt
At March 31, 2005 and December 31, 2004, long-term debt consists of
the following:
March 31, December 31,
2005 2004
---------------------------
(in thousands)
6% Junior Subordinated Notes, net of $1.0 and $1.1 million discount,
respectively ....................................................... $ 3,171 $ 3,122
Other .............................................................. -- 386
------------ ------------
3,171 3,508
Less current portion of long-term debt ............................. -- 386
------------ ------------
$ 3,171 $ 3,122
============ ============
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.
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 interest in this aircraft was sold during March 2005 and the
associated loan was repaid.
12
7. Series A Cumulative Convertible Preferred Stock
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 shares of Alpine common stock (par value $0.10
per share (the "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 on August 24, 2004, the conversion rate
increased to 743.01. 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 mandatorily redeemable series A
cumulative preferred stock line of the balance sheet with the offset to capital
in excess of par. The beneficial conversion feature was recorded as a dividend
as of December 29, 2004 when the privately placed Series A Preferred Stock
became convertible following the increase in authorized but unissued shares of
Common Stock from 25 million to 50 million shares.
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 Common
Stock. Common stockholders 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. 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 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 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
8. Income (loss) per share
The computation of basic and diluted income (loss) per share for the three
months ended March 31, 2005 and 2004 is as follows:
Three Months Ended March 31,
2005 2004
------------------------------------- -------------------------------------
Weighted Weighted
Average Per Share Average Per Share
Net Loss Shares Amount Net Loss Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic earnings (loss) per share
Income (loss) from continuing operations ... $ (3,260) 15,589 $ (0.21) $ 772 12,119 $ 0.06
Adjustments:
Preferred stock dividends .............. (112) 15,589 (0.01) (147) 12,119 (0.01)
---------- ----------
Income (loss) attributable to common stock
from continuing operations .............. $ (3,372) 15,589 $ (0.22) $ 625 12,119 $ 0.05
Income (loss) from discontinued operations . 703 12,119 0.06
---------- ---------- ---------- ----------
Net income (loss) applicable to common
stock per basic common share ............ $ (3,372) 15,589 $ (0.22) $ 1,328 12,119 $ 0.11
========== ========== ========== ==========
Diluted earnings (loss) per share
Income (loss) from continuing
operations -Basic ..................... $ (3,260) 15,589 $ (0.21) $ 772 12,119 $ 0.06
Effect of dilutive securities:
Restricted stock plans.................. 351
Stock option plans...................... 486
Convertible preferred stock............. -- 12,616
Adjustments:
Preferred stock dividends............... (112) (0.01)
---------- ------------------------
Income (loss) attributable to common stock
from continuing operations .............. $ (3,372) 15,589 $ (0.22) $ 772 25,572 $ 0.03
Income (loss) from discontinued operations . -- 15,589 -- 703 25,572 0.03
---------- ---------- ---------- ----------
Net income (loss) applicable to common
stock per basic common share ............ $ (3,372) 15,589 $ (0.22) $ 1,475 25,572 $ 0.06
========== ========== ========== ==========
The Company has excluded the assumed conversion of all stock options (1.5
million) and restricted stock grants (0.9 million) from the Company's earnings
per share calculation for the three month period ended March 31, 2005, as the
impact would be anti-dilutive due to the loss from continuing operations for
that period. Diluted earnings per share for the three month period ended March
31, 2004 excludes the effect of 0.2 million stock options and 0.3 million
restricted stock grants that may be exercised in the future, because such effect
would be anti-dilutive. The warrant issued in connection with the Electrical
Acquisition has not been included in the computation of diluted income (loss)
per share for the three month periods ended March 31, 2005 and 2004, as the
impact would be anti-dilutive.
9. Business segments
The Company's reportable segments prior to second quarter 2004 consisted
of electrical wire (Alpine's 84% owned subsidiary, Essex Electric) 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
1 for additional information about the Company's discontinued operations.
Subsequent to the DNE Sale the Company has only one business segment.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Alpine Group, Inc. (together with its majority owned subsidiaries
"Alpine" or the "Company" unless the context otherwise requires) is a holding
company which over the recent past has held major investments in industrial
manufacturing companies. Currently, Alpine's principal operations consist of
Essex Electric Inc. ("Essex Electric"), its 84% owned subsidiary engaged in the
manufacture and sale of electrical wire and cable, and a 46% equity interest in
Superior Cables Ltd., the largest Israeli based producer of wire and cable
products.
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. 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. In January 2005, Alpine Holdco purchased
an additional 1,792 newly issued shares of Essex Electric common stock for $5.0
million and Superior purchased 445 newly issued shares of Essex Electric common
stock for an aggregate purchase price of $1.2 million. Following the
aforementioned investments, Alpine Holdco and Superior owned 84.2% and 15.8% of
Essex Electric, respectively. The Company recorded a loss on sale of subsidiary
stock of approximately $0.9 million in January 2005 related to the investment by
Superior. In addition, the Company decreased the value of the Warrant by $0.4
million due to the dilution of the additional 2,237 shares issued during January
2005. Superior's Warrant to purchase 199 shares of the capital stock of Essex
Electric together with Superior's current ownership of 614 shares of common
stock of Essex Electric represent 19.9% of fully diluted 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 the financial
statements filed herein. See note 1 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. Historically, 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. However, in the first quarter of 2005 because of a more
competitive pricing environment in the building wire market, reduced demand,
uncertainty accompanying the volatility of market copper prices and increased
raw material costs for non-copper products, average unit selling prices did not
increase as much as needed to offset the higher copper prices and non-copper raw
material costs. Since the selling price to the customer is one all-inclusive
price and copper is not priced separately, it is not possible to quantify the
impact of copper and other non-copper raw material price fluctuations on selling
prices relative to the overall selling price of the product.
15
Results of Operations--Three Month Period Ended March 31, 2005 as Compared to
the Three Month period Ended March 31, 2004
Consolidated sales for the three month period ended March 31, 2005 were
$89.8 million, an increase of 9.6% compared to sales of $81.9 million for the
three month period ended March 31, 2004. The comparative sales increase was due
to increased shipments of electrical wire by Essex Electric at moderately higher
average selling prices. Although average selling prices increased moderately in
the first quarter of 2005 compared to the first quarter of 2004, average copper
prices increased 19% for the comparable time periods. The higher copper prices
were not fully recoverable because of increased competitive pressures in the
building wire markets.
Gross profit for the three month period ended March 31, 2005 was $1.9
million (a gross margin of 2.1% of sales), a decrease of $8.3 million as
compared to gross profit of $10.2 million (a gross margin of 12.4% of sales) for
the three month period ended March 31, 2004. The decreased margin is due
primarily to a more competitive pricing environment, reduced demand and
uncertainty accompanying the volatility of market copper prices. In addition,
polyvinyl chloride (PVC) resin and nylon costs increased approximately 30% and
50%, respectively, in the first quarter of 2005 compared with the first quarter
of 2004 due primarily to higher oil prices. These increased costs were not
passed on in higher selling prices, due to the aforementioned competitive
pricing pressures and were only partially offset by cost, productivity and
efficiency improvements.
Selling, general and administrative expense for the three month period
ended March 31, 2005 was $5.5 million, (a decrease of 9.3%), as compared to $6.1
million for the three months ended March 31, 2004. The decrease is due primarily
to reduced amortization of deferred stock compensation and variable stock option
expense, reduced operating costs and commission expense.
Restructuring and other charges at Essex Electric of $1.1 million for the
three month period ended March 31, 2005 consisted primarily of severance and
other employee related costs associated with the announced closure of Essex
Electric's Anaheim, California operation ($0.8 million) and other restructuring
related costs.
The Company's operating loss for the three month period ended March 31,
2005 was $4.7 compared to operating income of $2.4 million for the comparable
2004 period, due primarily to the comparative decline in prices and increased
non-copper raw material costs.
Interest expense for the three month period ended March 31, 2005 was $0.9
million, an increase of $0.3 million from the same prior year period. Average
borrowings increased $17.5 million in the first quarter of 2005 compared to the
first quarter of 2004, due primarily to the impact of higher copper prices on
working capital.
The effective tax rate for the first quarter of 2005 was 36.4% compared to
44.8% for the first quarter of 2004. The decrease in the effective rate was due
primarily to the impact of certain permanent tax expense items on the pre-tax
loss position for the first quarter of 2005 versus the pre-tax income position
for the first quarter of 2004.
Liquidity and Capital Resources
Alpine Holdco
As previously discussed, in December 2002, Alpine, through its newly
formed, wholly-owned subsidiary, Alpine Holdco, 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, a newly
formed, then wholly-owned subsidiary of Alpine Holdco; (2) all of the
outstanding shares of capital stock of DNE Systems, and (3) and approximately
47% of Superior Cables Ltd. for a total purchase price of approximately $85
million in cash and the issuance of a warrant to Superior to purchase 199 shares
of common stock of Essex Electric.
The 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 and DNE Technologies
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. The Revolving Credit Facility was amended on
November 10, 2004 and was last amended on February 28, 2005 to revise certain
covenants for 2005.
16
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 March 31, 2005 and December 31, 2004 was 6.11% and
6.05%, 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. 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 Cables
Ltd. 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. The
Companies may, upon 30 days' prior written notice, permanently reduce the
maximum committed amount without penalty or premium. At March 31, 2005 and
December 31, 2004, outstanding borrowings under the Revolving Credit Facility
were $42.8 million and $40.2 million, respectively. At March 31, 2005 the
Companies had $17.2 million of borrowing availability. No dividends may be paid
by Alpine Holdco without prior consent of the lenders.
Effective concurrently with the consummation of the DNE Sale (see note 1)
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.
Alpine believes that existing cash and cash equivalents, cash provided by
operations and working capital management of its Essex Electric subsidiary
together with borrowings available under the Revolving Credit Facility will be
sufficient to meet the capital needs of the Companies through 2005. Alpine
estimates that Alpine Holdco capital expenditures for 2005 will be approximately
$5 million. Alpine Holdco has implemented restructuring initiatives at its Essex
Electric subsidiary to rationalize manufacturing capacity, lower expenditures
and reduce working capital, which are expected to result in nonrecurring cash
expenses of approximately $2.5 to $3.0 million during 2005. Alpine believes that
Alpine Holdco will be in compliance with the financial covenants provided in the
Revolving Credit Facility. However, the persistence of negative market pricing
conditions experienced during the first quarter of 2005 may require Alpine
Holdco to seek additional amendments in or waivers of certain financial
covenants to remain in compliance under the Revolving Credit Facility.
Alpine Corporate
On August 4, 2003, the Company completed an exchange offer whereby holders
of its common stock, $0.10 par value per share (the "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 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.
Accordingly, there are no principal payments due in 2005. 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 periods ended March 31, 2005 and 2004, there were no note
redemptions.
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 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 shares of
17
Common Stock per share of Series A Preferred. 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 mandatorily
redeemable series A cumulative preferred stock line of the balance sheet with
the offset to capital in excess of par. The beneficial conversion feature was
recorded as a dividend as of December 29, 2004 when the privately placed Series
A Preferred Stock became convertible following the increase in authorized but
unissued shares of Common Stock from 25 million to 50 million shares.
The Company may cause conversion of the Series A Preferred Stock into
Common Stock if the Common Stock is then listed on the New York Stock Exchange
(NYSE) or the American Stock Exchange or is traded on the Nasdaq National Market
System and the average closing price per share of the 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.
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 Common
Stock. Common Stock holders 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. 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 during 2003 since the shares were immediately convertible, offset
with a credit to capital in excess of par.
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.
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 on its 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 to $0.36 per share, 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. Under the respective
terms of the stock based compensation plans of the Company, the Company is
required to allocate a deemed dividend in respect of shares of restricted Common
Stock granted and unvested and/or deposited and credited to participant accounts
under the Alpine Deferred Stock Account Plan in an amount equal to any cash
dividend paid in respect of the Common Stock. Accordingly, on September 30,
2004, the Company established, but did not yet pay, a total deemed dividend of
$0.9 million, $0.6 million of which was recorded to compensation expense during
2004. The remainder will be amortized over the vesting period of such unvested
or deferred shares of Common Stock. Any payment of future cash dividends and the
amounts thereof will be dependent upon the Company's earnings, financial
requirements and other factors, including contractual obligations.
During the three month period ended March 31, 2005, 545 shares of Series A
Preferred Stock were converted into approximately 0.4 million shares of Common
Stock.
As of March 31, 2005, Alpine had unrestricted cash, cash equivalents and
marketable securities of approximately $26.4 million. Alpine's current and
anticipated sources of liquidity include existing cash and cash equivalents, 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 (effective January 1, 2004)
was increased from $1.0 million to $1.8 million, and is 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. Alpine is
also entitled to be reimbursed for all direct costs incurred by it related to
the business of Holdco.
18
During 2001 and 2002, the Company entered into commercial transactions
intended to offset the potential impact of interest rate changes on the
Company's investments, including the investment of the net cash proceeds from
the sale of an equity investment and established a tax contingency reserve on
its balance sheet corresponding to the realized benefits. At March 31, 2005, the
Company has reserved $16.7 of the related benefit and interest and the amount
has been recorded under other long-term liabilities. The Company does not
anticipate that any portion of the tax contingency reserve will become payable
in the next twelve months.
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 $9
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.
The operations of Superior Cables Ltd. are funded and financed separately,
with recourse to Superior Cables Ltd. but otherwise on a non-recourse basis to
Alpine.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk primarily relates to interest rates
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 March 31, 2005 the Company had approximately $7 million of copper
futures contracts representing 5 million pounds, outstanding as non-designated
derivative investments. These contracts were entered into to hedge 5 million
copper pounds of future finished goods inventory purchases, totaling
approximately $12.5 million, scheduled for delivery during the last three
quarters of 2005 at a pre-established price. These contracts were recorded at
fair value at March 31, 2005 with any price fluctuations reflected in current
earnings in the period ended March 31, 2005, which fluctuations were
insignificant.
At December 31, 2004, the Company had approximately $9 million of copper
futures contracts, representing 6 million copper pounds, outstanding as
non-designated derivative instruments. These contracts were entered into to
hedge 6 million pounds of copper rod inventory purchased in December 2004, for
fabrication and sale in the first quarter of 2005. These contracts were recorded
at fair value at December 31, 2004 with any price fluctuations reflected in
current earnings in 2004, and were liquidated in the first quarter of 2005, when
the underlying asset (i.e. inventory) was sold.
Besides copper, other major raw materials used in Essex Electric's
manufacture of electrical wire include plastics such as polyethylene and
polyvinyl chloride (PVC), as well as nylon. These products, while not traded as
commodities themselves, are often times influenced by fluctuations in oil
prices, as they are oil-based. Historically, these costs have been largely
recovered in pricing to customers, since others in the industry are subject to
similar price fluctuations. However, since these costs are not priced separately
to the customer there can be no assurance that increases in such costs can be
fully recovered in pricing to the customer. The Company does not enter into any
futures trading or other hedge activities in an attempt to hedge such cost
fluctuations.
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
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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.
Except for the historical information herein, the matters discussed in
this annual report on form 10-K 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
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.
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* Filed herewith
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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: May 13, 2005 By:
/s/ David A. Owen
David A. Owen
Chief Financial Officer
(duly authorized officer and principal
financial and accounting officer)
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