<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 26, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 0-14365
ALPHA TECHNOLOGIES GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0079338
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9465 Wilshire Blvd., Suite 980, Beverly Hills, CA 90212
-------------------------------------------------------
(Address of principal executive offices)
(310) 385-1494
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.03 par value 6,784,014
---------------------------- ---------
Class Outstanding at August 31, 1998
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC.
FORM 10-Q
July 26, 1998
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION.................................................. 3
CONSOLIDATED BALANCE SHEETS - OCTOBER 26, 1997 AND JULY 26, 1998............. 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED
JULY 27, 1997 AND JULY 26, 1998............................................. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 27, 1997
AND JULY 26, 1998........................................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................... 9
PART II - OTHER INFORMATION...................................................15
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - OCTOBER 26, 1997 AND JULY 26, 1998
(In Thousands, Except Share and Per Share Data)
October 26, July 26,
1997 1998
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,707 $ 1,999
Accounts receivable, net 11,766 9,408
Inventories, net 9,781 11,143
Prepaid expenses 1,140 910
-------- --------
Total current assets 24,394 23,460
PROPERTY AND EQUIPMENT, at cost 17,341 20,757
Less -- Accumulated depreciation and amortization 5,656 7,582
-------- --------
Property and equipment, net 11,685 13,175
GOODWILL, net 2,878 2,695
OTHER ASSETS, net 2,421 2,401
-------- --------
$ 41,378 $ 41,731
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 6,179 $ 4,842
Accrued compensation and related benefits 1,810 1,752
Other accrued liabilities 4,580 2,953
Current portion of long-term debt 1,494 777
-------- --------
Total current liabilities 14,063 10,324
REVOLVING CREDIT FACILITY 5,198 8,400
LONG-TERM DEBT 2,865 3,201
OTHER LONG-TERM LIABILITIES 451 294
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value; shares
authorized 180,000 - -
Common stock, $.03 par value; shares authorized
17,000,000; issued 7,700,733 at October 26, 1997
and 7,784,567 at July 26, 1998 231 233
Additional paid -- in capital 43,523 43,750
Retained deficit (21,110) (20,657)
Cumulative translation adjustment, net of
income taxes (125) (96)
Treasury stock, at cost (1,008,553 common shares at
October 26, 1997 and July 26, 1998) (3,718) (3,718)
-------- --------
18,801 19,512
-------- --------
$ 41,378 $ 41,731
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED
JULY 27, 1997 AND JULY 26, 1998
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------- -----------------------
July 27, July 26 July 27, July 26,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SALES $ 19,313 $ 17,823 $ 56,026 $ 60,518
COST OF SALES 15,291 14,123 46,343 47,836
-------- -------- -------- --------
Gross profit 4,022 3,700 9,683 12,682
OPERATING EXPENSES
Research and development 396 565 1,131 1,741
Selling, general and administrative 3,255 3,241 9,646 9,808
Other 252 165 466 207
-------- -------- -------- --------
Total operating expenses 3,903 3,971 11,243 11,756
-------- -------- -------- --------
OPERATING INCOME 119 (271) (1,560 ) 926
INTEREST AND OTHER INCOME (EXPENSE), net (247) (182) (749 ) (473 )
-------- -------- -------- --------
INCOME (LOSS) BEFORE TAXES (128) (453) (2,309) 453
PROVISION (BENEFIT) FOR INCOME TAXES - - - -
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME FROM OPERATION
SOLD (128) (453) (2,309) 453
GAIN ON SALE OF DISCONTINUED OPERATION,
net of income tax 610 610
INCOME (LOSS) FROM OPERATION SOLD,
net of income tax taxes (30) - 54
-------- -------- -------- --------
NET INCOME (LOSS) $ 452 $ (453) $ (1,645) 453
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE
Income (loss) before discontinued operation $ (0.02) $ (0.07) $ (0.35) $ 0.07
Discontinued operation 0.09 - 0.10 -
-------- -------- -------- --------
Net income (loss) $ 0.07 $ (0.07) $ (0.25) $ 0.07
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Income (loss) before discontinued operation $ (0.02) $ (0.07) $ (0.35) $ 0.07
Discontinued operation $ 0.09 - 0.10 -
-------- -------- -------- --------
Net income (loss) $ 0.07 ($0.07) ($0.25 ) $ 0.07
======== ======== ======== ========
SHARES USED IN COMPUTING NET INCOME (LOSS)
PER SHARE
Basic 6,748 6,728 6,679 6,707
======== ======== ======== ========
Diluted 6,748 6,728 6,679 6,836
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
JULY 27, 1997 AND JULY 26, 1998
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
July 27, July 26,
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,645) $ 453
Adjustments to reconcile net income to net cash (used)
By operating activities:
Depreciation and amortization 2,238 2,338
Gain on sale of equipment - (70)
Gain on sale of discontinued operation 610
Income from discontinued operation (54)
Stock option compensation expense 22
Cumulative translation adjustment (65) 28
Changes in assets and liabilities:
Decrease in accounts receivable 193 2,358
(Increase) decrease in inventory 1,719 (1,362)
(Increase) decrease in prepaid expenses (44) 230
Increase (decrease) in accounts payable 109 (1,337)
(Decrease) in accrued compensation and related benefits (339) (58)
(Decrease) in other liabilities (1,126) (1,525)
-------- --------
Total adjustments 2,021 624
Net cash provided by continuing operations 376 1,077
Net cash provided by operations sold 313 -
-------- --------
Net cash provided by operating activities 689 1,077
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operation (Footnote 2) 2,100
Proceeds from sale of equipment - 88
Purchase of property and equipment, net (1,231) (3,889)
Change in goodwill (58) -
(Increase) decrease in other assets, net 40 (13)
-------- --------
Net cash provided (used) by investing activities 851 (3,814)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 36 208
Proceeds from revolving credit lines 48,870 47,549
Payments on revolving credit lines (52,170) (44,347)
Proceeds from term debt 2,171 920
Payments on term debt (1,388) (1,301)
-------- --------
Net cash provided (used) by financing activities (2,481) 3,029
NET INCREASE (DECREASE) IN CASH (941) 292
-------- --------
CASH, beginning of year 3,935 1,707
-------- --------
CASH, end of period $ 2,994 $ 1,999
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Alpha Technologies Group, Inc. ("Alpha" or the "Company") manufactures thermal
management products and electronic connectors, and assembles custom designed
subsystems.
The thermal management segment's products, principally heat sinks, serve the
microprocessor, computer, consumer electronics, transportation, power supply,
aerospace and defense industries. Heat sinks are primarily fabricated aluminum
extrusions that have high surface area to volume ratios and are engineered to
dissipate unwanted heat generated by electronic components. The connector
segment's products, the majority of which are custom manufactured to meet rigid
specifications, serve the aerospace, automotive, communications, defense,
factory automation, industrial controls, medical electronics, process
instrumentation and test/measurement industries. Connectors are electro-
mechanical devices that permit electronic subassemblies, such as printed circuit
boards, power supplies and input-output wire harnesses/cable assemblies to be
coupled and separated. The subsystem business serves the military,
telecommunications and certain commercial markets. Subsystems are operational
sub-units integrated into major networks for data transmission, retrieval and
transfer.
The thermal management business is conducted through the Company's wholly-owned
subsidiary, Wakefield Engineering, Inc. ("Wakefield") which includes the
Wakefield-Temecula division, Wakefield Extrusion Corp. ("Wakefield Extrusion")
and Lockhart Industries, Inc. ("Lockhart"). The connector business is conducted
through the Company's wholly-owned subsidiary, Uni-Star Industries, Inc. ("Uni-
Star"), which does business as Microdot Connectors, and its two foreign
subsidiaries: Microdot Connectors Europe, Ltd. (formerly: Malco Microdot UK
Ltd), and Malco Microdot France SARL. During July of 1998, management began the
consolidation of the connector segment's European operations. The connector
segment's manufacturing operations in France will be consolidated into its
operations in the United Kingdom. However, a sales office will be maintained in
France to service its European customers. During fiscal 1997, the Company's
electronics sub-systems business, which operates as Malco, was transferred from
Uni-Star to a newly formed Delaware corporation, Malco, Inc. See 4. "Business
Segment Information".
The Company was incorporated as Synercom Technology, Inc., in Texas in 1969 and
was reincorporated in Delaware in 1983. In 1993, the Company began its
transformation from a software company to its current businesses. Since October
1993, the Company has grown through a combination of acquisitions and internal
growth. In September of 1994, the Company sold the remaining aspects of its
software and related services business. In April 1995, the name of the
corporation was changed to Alpha Technologies Group, Inc.
6
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(2) CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of the Company, the accompanying interim unaudited consolidated
financial statements contain all material adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial condition, the
results of operations and the changes in cash flows of Alpha Technologies Group,
Inc. and subsidiaries for interim periods. The results for such interim periods
are not necessarily indicative of results for a full year. All material
intercompany transactions and balances have been eliminated.
Users of financial information produced for interim periods are encouraged to
refer to the footnotes contained in the Annual Report to Stockholders when
reviewing interim financial results.
(3) INVENTORIES
Inventories consisted of the following on October 26, July 26,
(in thousands): 1997 1998
------- -------
Raw materials and components $ 5,537 $ 4,656
Work in process 3,785 5,558
Finished goods 2,328 3,056
------- -------
11,650 13,270
Valuation reserve (1,869) (2,127)
------- -------
$ 9,781 $11,143
======= =======
7
<PAGE>
(4) BUSINESS SEGMENT INFORMATION
Summarized financial information by business segment (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
July 27, July 26, July 27, July 26,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales:
Thermal management products $14,890 $13,226 $43,465 $46,592
Connector products 3,272 3,127 8,410 9,617
Subsystems 1,151 1,470 4,151 4,309
------- ------- ------- -------
Total 19,313 17,823 56,026 60,518
======= ======= ======= =======
Operating income (loss):
Thermal management products 757 (350) 495 961
Connector products (85) 234 (900) 468
Subsystems (240) 126 (214) 386
Corporate (313) (281) (941) (889)
------- ------- ------- -------
Total 119 (271) (1,560) 926
======= ======= ======= =======
Interest expense:
Thermal management products 257 238 790 682
Connector products 48 3 146 9
Subsystems 0 14 0 22
------- ------- ------- -------
Total 305 255 936 713
======= ======= ======= =======
Total assets:
Thermal management products 28,692 28,701 28,692 28,701
Connector products 6,758 6,731 6,758 6,731
Subsystems 2,078 3,486 2,078 3,486
Corporate 4,836 2,813 4,836 2,813
------- ------- ------- -------
Total 42,364 41,731 42,364 41,731
======= ======= ======= =======
Depreciation and amortization:
Thermal management products 577 660 1,713 1,856
Connector products 121 116 394 351
Subsystems 39 39 116 113
Corporate 6 5 15 18
------- ------- ------- -------
Total 743 820 2,238 2,338
======= ======= ======= =======
Capital Expenditures:
Thermal management products 145 592 1,018 3,321
Connector products 28 289 250 482
Subsystems - 56 11 86
Corporate 10 - 49 -
------- ------- ------- -------
Total 183 937 1,328 3,889
======= ======= ======= =======
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Quarter to Quarter Comparison
Net Income/Loss. Net loss for the third quarter of fiscal 1998 was $453,000
which included a $165,000 restructuring charge related to severance payments
made at the Company's connector operations and restructuring expenses estimated
in connection with closing the connector company's manufacturing operation in
France. This compares to a net loss from continuing operations of $128,000 for
the 1997 quarter which included $252,000 in restructuring and other expenses.
The loss is primarily the result of reduced thermal management sales caused by a
slowdown in the computer industry and a decrease in prices and volume due to
additional competition from Asian manufacturers.
Net loss from thermal management operations for the third quarter of fiscal
1998, before the allocation of Alpha corporate expenses ("corporate
allocation"), was $608,000 compared to net income of $499,000 for the fiscal
1997 quarter. The decrease in the results from operations was due to the
aforementioned increase in competition from Asian manufacturers and a slow down
in the computer industry.
Net income from the connector products segment for the third quarter of
fiscal 1998, before corporate allocation, was $308,000 including the $165,000
restructuring charge described above. For the third quarter of fiscal 1997, net
loss from continuing operations for the connector products segment, before
corporate allocation, was $148,000 which included $132,000 in severance payments
and other expenses related to a management change at Uni-Star. The increase in
the results of operations in the fiscal 1998 quarter compared to the fiscal 1997
quarter was primarily due to higher gross profits and improved expense
management.
Net income from the Company's subsystems operation for the third quarter of
fiscal 1998, before corporate allocation, was $107,000 compared to a $240,000
loss for the third quarter of fiscal 1997. The loss for the 1997 quarter
included $120,000 related to the downsizing severance payments and the write off
of certain equipment. The increase in earnings for the fiscal 1998 quarter
compared to the fiscal 1997 quarter was primarily due to the effects of the
restructuring of this business, which included a reduction in headcount and the
outsourcing of many components. The subsystems business now designs and
assembles purchased components, which has resulted in higher gross profits and
lower operating expenses. Additionally, this segment raised prices for certain
products, which were previously being sold at lower than acceptable margins.
Sales. The Company's sales for the third quarter of fiscal 1998 decreased
$1,490,000, or 7.7%, to $17,823,000 from $19,313,000 for same period of fiscal
1997. Thermal management sales decreased 11.2%
9
<PAGE>
to $13,226,000 for the fiscal 1998 quarter from $14,890,000 the third quarter of
fiscal 1997 due to a decrease in sales of Penquin(TM) cooler heat sinks which
was partially offset by an increase in sales of extruded heat sinks. Sales of
Penquin (TM) cooler heat sinks, which serve the microprocessor market, decreased
due to an increase in competition from Asian manufacturers, which resulted in
lower unit sales prices and lower volumes. Sales of extruded heat sinks
increased due to better penetration of certain customer accounts, increased
capacity and growth in the market for these products.
During the third quarter, the Company experienced a substantial decrease in
bookings for Penquin (TM) cooler heat sinks. Management currently expects that
the decreased bookings will adversely effect the Company's fiscal 1998 fourth
quarter sales and profits. However, the Company has taken steps to reduce
operating expenses at its thermal management business to reflect the anticipated
reduction in sales. The Company is continuing to invest in its next generation
of thermal management products, which is based on convoluted fin technology. If
the new product line receives wide customer acceptance, the company will require
additional sources of financing to expand this product line.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for the third quarter of fiscal 1998 and
1997 was 20.8%. The thermal management segment's gross profit percentage
decreased to 16.0% from 21.1% for fiscal 1998 third quarter as a result of lower
sales volume and manufacturing inefficiencies at the company's Fall River plant.
However, the connector products segment's gross profit percentage increased to
34.7% for the third quarter of fiscal 1998 from 24.0% for the 1997 quarter. This
increase is attributable to a reduction in head count and operating expenses.
The gross profit percentage at the Company's subsystems operation increased
to 33.8% for the third quarter of fiscal 1998 from 8.9% for the 1997 quarter
primarily as a result of the shift in business strategy implemented in June 1997
and increased prices.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the quarter ended July 26, 1998 were $3,241,000, or
18.2% of sales, compared to $3,255,000, or 16.8% of sales, for the prior year
quarter. Selling, general and administrative expenses as a percentage of sales
increased due to lower sales volume without a proportionate decrease in these
expenses.
Restructuring and Other Expenses. During the third quarter of fiscal
1998, the Company incurred restructuring charges of $165,000 related to
downsizing severance payments made by the connector segments operation in South
Pasadena, California and severance payments and estimated expenses incurred in
connection with the closing of the Company's connector subsidiary in France.
During July of 1998, management began the consolidation of the connector
segment's European operations. The connector segment's manufacturing operations
in France will be consolidated into its operations in the United Kingdom.
However, a sales office will be maintained in France to service its European
customers. Other operating
10
<PAGE>
expenses for the 1997 quarter consisted of $120,000 related to the downsizing at
the Company's Malco facility including severance costs and the write off of net
book value of certain equipment. This facility now focuses on its subsystems
business and will outsource various manufacturing processes. In addition, during
the 1997 quarter the company recorded other operating expenses of $132,000
related to severance and other costs recorded in connection with a management
change at Uni-Star.
Interest and Other Income (Net). Interest expense was $255,000 and $305,000
for the fiscal 1998 and 1997 quarters, respectively. This decrease was due to a
lower average effective interest rate paid on the outstanding borrowing base.
Nine Months to Nine Months Comparison
Net Income/Loss. Net income for the first nine months of fiscal 1998 was
$453,000 which included restructuring charges of $207,000 related to downsizing
severance payments made at the Company's connector operations in South Pasadena,
California and estimated restructuring expenses in connection with closing the
connector company's manufacturing operation in France, a gain of $70,000 from
the sale of equipment and other income of $122,000. This compares to a net loss
from continuing operations of $2,309,000 for the 1997 period which included a
$466,000 restructuring charge related to severance payments and $588,000 in
additional inventory reserves. This improvement is primarily the result of
increases in gross profit and revenue growth.
Net income from thermal management operations for the first nine months of
fiscal 1998, before the allocation of Alpha corporate expenses ("corporate
allocation"), was $267,000 compared to a net loss of $302,000 for the 1997
period. The 1997 loss included a charge for severance payments of $172,000 and
additional inventory reserves of $588,000. The additional inventory reserves
recorded in the first nine months of fiscal 1997 were recognized to fully
reserve the cost of certain custom products, which were built in anticipation of
orders which were not received. Results from operations, excluding the
restructuring and inventory reserve charges, decreased primarily due to a
decrease in sales and gross profits in the third quarter.
Net income from the connector products segment for the first nine months of
fiscal 1998, before corporate allocation, was $662,000 which included $207,000
in restructuring charges related to severance payments and estimated expenses in
connection with the closure of the connector segment's operation in France and
$70,000 related to a gain on the sale of certain equipment. For the first nine
months of fiscal 1997, net loss from continuing operations of the connector
products segment, before corporate allocation, was $1,012,000 which included
$166,000 related to severance payments and other expenses incurred in connection
with a management change. The increase in the results of operations in the
first nine months of fiscal 1998 compared to the 1997 period was primarily due
to increased sales, higher gross profits and improved expense management.
11
<PAGE>
Net income from the Company's subsystems operation for the first nine
months of fiscal 1998, before corporate allocation, was $365,000 compared to a
$214,000 loss for the 1997 nine month period. The loss for the 1997 quarter
included $120,000 related to the downsizing severance payments and the write off
of certain equipment. The increase in earnings in the fiscal 1998 period
compared to the fiscal 1997 period was primarily due to the restructuring of
this business, which included a reduction in headcount and the outsourcing of
many components, in the third quarter of fiscal 1997. The subsystems business
now designs and assembles purchased components which has resulted in higher
gross profits and lower operating expenses. Additionally, this segment raised
prices for certain products, which were previously being sold at lower than
acceptable margins.
Sales. The Company's sales for the first nine months of fiscal 1998
increased $4,492,000, or 8.0%, to $60,518,000 from $56,026,000 for same period
of fiscal 1997. Thermal management sales increased 7.2% to $46,592,000 for the
fiscal 1998 period from $43,465,000 the first nine months of fiscal 1997
primarily due to an increase in sales of extruded heat sinks and an increase in
sales by the Company's Lockhart subsidiary which serves the active cooling
market. Sales of extruded heat sinks increased due to better penetration of
certain customer accounts, increased capacity and growth in the market for these
products.
During the third quarter, the Company experienced a substantial decrease in
bookings for Penquin (TM) cooler heat sinks. Management believes that its
bookings shortfall reflects the slowdown in the personal computer industry as
well as increased competition from Asian manufacturers. Management currently
expects that the decreased bookings will adversely affect the Company's fiscal
1998 fourth quarter sales and profit performance and has taken cost reduction
measures in the thermal management segment. The Company, however, is continuing
to invest in its next generation of thermal management products, which is based
on convoluted fin technology. If the new product line receives wide customer
acceptance, the company will require additional sources of financing to expand
this product line.
Connector sales were $9,617,000 during the first nine months of fiscal 1998
compared to $8,410,000 during the prior fiscal year period, a 14.4% increase.
Management believes that this increase was primarily caused by increased demand
and improved efforts (and replacement) of sales representative firms for
connector products.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for the first nine months of fiscal 1998
was 21.0% compared to 18.3% (excluding the effect of the $588,000 inventory
reserve taken) for the 1997 fiscal period. The thermal management segment's
gross profit percentage was 18.4% and 19.1% (excluding the effect of the
additional inventory reserve) for fiscal 1998 and 1997's first nine months,
respectively. This decrease was due to the aforementioned decrease in third
quarter sales and additional labor costs incurred as a result of manufacturing
inefficiencies at the Company's Fall River, MA manufacturing facility.
The connector products segment's gross profit percentage increased to 28.5%
for the first nine months of fiscal 1998 from 16.2% for the 1997 period. This
increase is attributable to higher sales volume
12
<PAGE>
and better production planning as a result of the improved backlog as well as a
decrease in operating expenses.
The gross profit percentage at the Company's subsystems operation increased
to 31.5% for the first nine months of fiscal 1998 from 14.4% for the 1997 period
primarily as a result of the shift in business strategy and increased prices.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the nine months ended July 26, 1998 were $9,808,000,
or 16.2% of sales, compared to $9,646,000, or 17.2% of sales, for the prior year
period. Selling, general and administrative expenses as a percentage of sales
decreased due to higher sales volume without a proportionate increase in
selling, general, and administrative expenses.
Restructuring and Other Expenses. The Company incurred a restructuring
charge of $207,000 which related to downsizing severance payments made by the
connector segment's operation in South Pasadena, California and severance
payments and estimated expenses incurred in connection with the closing of the
Company's connector subsidiary in France. During July of 1998, management began
the consolidation of the connector segment's European operations. The connector
segment's manufacturing operations in France will be consolidated into its
operations in the United Kingdom. However, a sales office will be maintained in
France to service its European customers. During the fiscal 1997 nine-month
period, the Company incurred restructuring charges of $466,000, which related to
downsizing throughout the company.
Interest and Other Income (Net). Interest expense was $936,000 and $713,000
for the first nine months of fiscal 1997 and 1998, respectively. This decrease
was due to a lower average outstanding borrowing base and a lower effective
interest rate. The Company recorded other income for the first nine months of
$192,000, which was primarily a result of a gain on the sale of equipment by the
connector segment's operation in South Pasadena, CA.
LIQUIDITY AND CAPITAL RESOURCES
On July 26, 1998, the Company had cash of approximately $1,999,000 compared
to $1,707,000 on October 26, 1997. Cash provided by operations and proceeds from
the Company's credit facilities were used for purchases of capital equipment.
For the nine months ended July 26, 1998, $1,077,000 was provided by
operating activities primarily from (i) net income and (ii) a decrease in
accounts receivable. Capital equipment purchases of $4,224,000 were made to
improve manufacturing capability, replace existing machinery which had reached
its end of life and to automate certain processes.
13
<PAGE>
The Company is technically in violation of the tangible capital base
covenant under its credit facility. However, the Company is working with the
lender to cure the violation.
Effective January 1, 1998, Wakefield, Wakefield Extrusion, Lockhart and
Malco (hereinafter referred to as "Borrowers")became parties to an amended loan
agreement (the "Agreement") with a commercial bank which provides for revolving
loans of up to $9,000,000, with the ability to increase upon request to
$12,000,000, and an equipment acquisition facility of $3.2 million. In May 1998,
the Company increased the amount available under the revolving loan to
$10,000,000. The advances on the revolving loans are based on the eligible
accounts receivable and inventories of Borrowers. The advances on the equipment
acquisition facility may be used for the purpose of funding capital equipment
purchases by the Borrowers. In addition, there are two term loans existing
under the Agreement in the original amounts of $2,250,000 and $1,900,000.
On July 26, 1998, $8,400,000 was drawn on the revolving credit facility.
Interest on $7,000,000 of the revolving credit facility accrues at the relevant
adjusted LIBOR rate plus 2.5% (7.95% per annum on July 26, 1998), and the
remainder of the revolving credit facility accrues interest at the bank's prime
rate plus .5% (9% per annum on July 26, 1998). There is an unused line fee equal
to .5% per annum on the difference between $10,000,000 (or $12,000,000 when
increased) and the average daily outstanding principal balance of Revolving
Loans during each of the Company's fiscal quarters payable quarterly in arrears
on the first day of each fiscal quarter. The $2,250,000 term note accrues
interest at 8.75% per annum and is payable in fifty-nine (59) equal monthly
installments of $37,500 beginning December 1, 1996 and a final installment equal
to all unpaid principal on October 11, 2001, together, in each instance, with
interest thereon to the date of payment. On July 26, 1998, $ 1,500,000 was
outstanding on the $2,250,000 term loan. The $1,900,000 term loan accrues
interest at 8.85%, and is payable in eighty-three (83) equal monthly
installments of $22,619 beginning December 1, 1996 and a final installment equal
to all unpaid principal on October 29, 2003, together, in each instance, with
interest thereon to the date of payment. On July 26, 1998, $1,438,000 was
outstanding on the $1,900,000 term note. As of July 26, 1998, $920,000 was
outstanding on the $3.2 million equipment acquisition facility. The obligations
under the Agreement are secured by a first lien on and assignment of all of the
assets of Borrowers which in aggregate total $32,187,000 on July 26, 1998.
Borrowers' credit facilities will expire on December 31, 1999.
The Company has entered into interest swap agreements as a means of
managing its interest rate exposure. The agreements effectively fixed the
interest rate on floating rate debt at a rate of 8.75% for a notional principal
amount of $2,250,000 through November 1, 2001, and at a rate of 8.85% for a
notional principal amount of $1,900,000 through October 29, 2003. On July 26,
1998, the carrying value of the related debt approximated the fair value of the
debt including the swap agreements. Net amounts paid or received are reflected
in interest expense.
14
<PAGE>
Working capital on July 26, 1998 was $13,136,000 compared to $10,331,000 on
October 26, 1997. The increase in working capital is attributable to an increase
in current assets funded by an increase in the Company's long term revolving
credit facility. The Company's principal source of cash is from borrowings under
its credit facilities and from operations. The Company believes that its
currently available cash, anticipated cash flow from operations, availability
under credit facilities and additional unpledged collateral is sufficient to
fund its operations in the near-term. As previously stated, if the Company's new
thermal management product line receives wide customer acceptance, the Company
will require additional sources of financing to expand this product line.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During 1997, Aerospace Aluminum Heat Treating, Inc. ("AAHT") instituted an
action in the United States District Court for the Central District of
California against Soco-Lynch Corporation and the Company's Lockhart subsidiary.
AAHT operates a facility neighboring Lockhart's facility in Paramount,
California. The complaint alleges that Lockhart released certain hazardous
chemicals into the ground, and that some of these chemicals have contaminated
the ground and/or groundwater below the AAHT facility and an adjoining property.
The compliant also alleges that Soco-Lynch is a supplier of industrial
chemicals, and that Soco-Lynch spilled certain chemicals at the AAHT facility.
Preliminary investigation indicates that the underground water flows in a
direction that would not support AAHT's claims. In addition, because of the
depth of the groundwater, even if AAHT's claim were supportable, the Company
believes that any release by Lockhart would predate the Company's ownership of
Lockhart. The former owner of Lockhart agreed to indemnify the Company against
such claims, and has been put on notice of AAHT's compliant. Some discovery has
been concluded and additional discovery may be taken. The Company cannot
evaluate the likelihood of an unfavorable outcome or estimate the amount or
range of potential loss, if any. Lockhart intends to vigorously defend this
action.
There are no material pending legal proceedings against the Company and, to
the Company's knowledge, no such proceedings are threatened.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re Computation of Per Share Earnings for the quarters
and nine months ended July 27, 1997 and July 26, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports for Form 8-K filed by the Company during the quarter
ended July 26, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alpha Technologies Group, Inc.
------------------------------------
(Registrant)
Date: September 9, 1998 By: /s/ Lawrence Butler
------------------------ --------------------------------
Lawrence Butler
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 9, 1998 By: /s/ Johnny J. Blanchard
------------------------ --------------------------------
Johnny J. Blanchard
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit Page No.
------- --------
11.1 Statement re Computation of Per Share Earnings for the quarters
and nine months ended July 27, 1997 and July 26, 1998.
27 Financial Data Schedule
17
<PAGE>
Exhibit 11.1
ALPHA TECHNOLOGIES GROUP, INC., AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
FOR THE QUARTERS AND NINE MONTHS ENDED JULY 27, 1997 AND JULY 26, 1998
(Unaudited)
(In Thousands, Except per Share Date)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------- ---------------------------
July 27, July 26, July 27, July 26,
1997 1998 1997 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Shares:
Weighted average common shares outstanding 6,687 6,728 6,679 6,707
Net common shares issuable on exercise of
stock options 61 -- -- 129
------- ------- ------- ------
Weighted average common and common equivalent
shares outstanding 6,748 6,728 6,679 6,836
======= ======= ======= ======
Income before income from discontinued operation (128) $ (453) $(2,309) $ 453
Gain on sale of discontinued operation 610 - 610 -
Income (loss) from discontinued operation (30) - 54 -
------- ------- ------- ------
Net income $ 452 $ (453) $(1,645) $ 453
======= ======= ======= ======
Basic net income per common and common equivalent
share:
Income before income from discontinued operation $ (0.02) $ (0.07) $ (0.35) $ 0.07
Gain on sale of discontinued operation 0.09 - 0.09 -
Income from discontinued operation - - 0.01 --
------- ------- ------- ------
Basic net income $ 0.07 $ (0.07) $ (0.25) $ 0.07
======= ======= ======= ======
Diluted net income per common and common
equivalent share:
Income before income from discontinued operation $ (0.02) $ (0.07) $ (0.35) $ 0.07
Gain on sale of discontinued operation 0.09 - 0.09 -
Income from discontinued operation - - 0.01 --
------- ------- ------- ------
Dilued net income $ 0.07 $ (0.07) $ (0.25) $ 0.07
======= ======= ======= ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET JULY 26, 1998 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED JULY 26, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-START> OCT-27-1997
<PERIOD-END> JUL-26-1998
<CASH> 1,999
<SECURITIES> 0
<RECEIVABLES> 9,408
<ALLOWANCES> 0
<INVENTORY> 11,143
<CURRENT-ASSETS> 23,460
<PP&E> 20,757
<DEPRECIATION> 7,582
<TOTAL-ASSETS> 41,731
<CURRENT-LIABILITIES> 10,324
<BONDS> 0
0
0
<COMMON> 233
<OTHER-SE> 19,279
<TOTAL-LIABILITY-AND-EQUITY> 41,731
<SALES> 60,518
<TOTAL-REVENUES> 60,518
<CGS> 47,836
<TOTAL-COSTS> 47,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 473
<INCOME-PRETAX> 453
<INCOME-TAX> 0
<INCOME-CONTINUING> 453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
