<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 26, 1997
COMMISSION FILE NUMBER 0-14365
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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 90212
BEVERLY HILLS, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 385-1494
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SECURITIES REGISTERED UNDER SECTION 12 (B) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12 (G) OF THE EXCHANGE ACT:
COMMON STOCK, $.03 PAR VALUE
(TITLE OF EACH CLASS)
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) had been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant.
$20,804,108 at January 20, 1998
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, 6,693,680 shares outstanding at January 20, 1998
----------------
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement to be filed on or about February
23, 1998 is incorporated by reference into Part III of this report.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Alpha Technologies Group, Inc. ("Alpha" or the "Company") and its
subsidiaries design, manufacture and sell thermal management products and
connector products. Thermal management products, principally 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. As systems become increasingly more powerful and packaging becomes
smaller, the need to dissipate heat becomes more important to the reliability
and functionality of electronic systems. The Company's thermal management
products serve the microprocessor, computer, consumer electronics,
transportation, automotive, industrial controls, factory automation, power
supply, aerospace and defense industries.
The Company's connector products include sub-miniature, micro-miniature and
ultra-miniature connectors and cable and/or wire harness connector assemblies,
the majority of which are custom manufactured to meet rigid specifications.
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 Company's
connector products serve the aerospace, communications, defense, factory
automation, industrial controls, medical electronics, scientific/process
instrumentation and test/measurement industries.
In addition, the Company operates a business that designs, fabricates and
tests custom designed electronic systems for the military, the
telecommunications industry and certain commercial markets.
The Company was incorporated as Synercom Technology, Inc., in Texas in 1969,
and was reincorporated in Delaware in 1983. In April 1995, it changed its name
to Alpha Technologies Group, Inc. In 1993, the Company began its
transformation from a software company to its current businesses. In September
of 1994, the Company sold the remaining aspects of its software and related
services business. Since October 1993, the Company has grown through a
combination of acquisitions and internal growth.
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, Inc. ("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: Malco Microdot UK Ltd, Malco Microdot France SARL. In
early fiscal 1998, the Company's electronics systems business, which operates
as Malco, was transferred from Uni-Star to a newly formed Delaware
corporation, Malco, Inc. See "Note 13. Business Segment Information" in Notes
to Consolidated Financial Statements.
Acquisitions
The following table sets forth the significant acquisitions made by the
Company since October 1993:
<TABLE>
<CAPTION>
MONTH ACQUIRED BUSINESS
-------------- ----------------------------------------------------------
<C> <S>
October 1993 Thermal management operations in Wakefield and Fall River,
Massachusetts (Wakefield)
June 1994 Connector and related product operations in South
Pasadena, California, Colmar, Pennsylvania and Cincinnati,
Ohio (Uni-Star)
August 1994 Thermal management operations in Temecula, California
(Wakefield-Temecula) formerly known as Aham Tor, Inc.
June 1995 Aluminum extrusion operations in Fullerton, California
(Wakefield Extrusion) formerly known as Specialty
Extrusion Ltd
August 1996 Manufacturer of sophisticated thermal management devices
in Paramount, California (Lockhart)
</TABLE>
2
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Disposition
On June 20, 1997, Uni-Star sold substantially all of the assets and business
of its hermetic connector business in Cincinnati, Ohio, which operated under
the trade name Connector Industries of America ("CIA"). The sale included
certain tangible and intangible assets used in the CIA business and the
agreement by Uni-Star and Alpha and certain of their affiliates not to engage
in the hermetic connector business for five years except that Uni-Star's
Microdot Connectors division may continue to sell certain families of custom
hermetic connectors.
The sales price was $2,100,000 plus the assumption by the purchaser of
certain payables and liabilities of the CIA business aggregating approximately
$120,000. The agreement provides for a potential additional payment to the
Company of up to $400,000 based on orders booked by the purchaser during the
1998 calendar year from customers of the CIA business.
THERMAL MANAGEMENT SEGMENT
Products
The Company designs, manufactures and sells thermal management products for
use in a variety of industries, including the microprocessor, computer,
consumer electronics, transportation, automotive, industrial controls, factory
automation, power supply, aerospace and defense industries.
The Company's principal thermal management products include:
Penguin(TM) Coolers Heat sinks specifically designed to solve
thermal problems for the latest high-speed
microprocessors offered by major manufacturers,
which include Intel's Pentium(R)II and other
Pentium products, AMD's K5 and K6, IBM's and
Cyrix's 6x86, and IBM's and Motorola's
PowerPC(TM) products. Other microprocessor-
specific products include fan heat sink
assemblies (electric fans attached to heat
sinks) and aluminum impregnated plastic heat
sinks, sold under the Deltem(TM) name. These
products are used in personal computers and
servers. Older versions of Penguin Coolers are
used in embedded microprocessor applications.
Extruded Heat Sinks Heat sinks and heat sink assemblies designed
for high power industrial applications,
including transportation equipment; automotive
and other stereo amplifiers; and bonded fin
heat sinks used by makers of power supplies,
transportation equipment and other industrial
equipment.
Stamped and Low Power Heat Heat sinks designed to dissipate heat generated
Sinks by power semiconductors, transistors,
rectifiers, diodes and other electronic
components used in electronic applications.
Typically, these are smaller components used on
printed circuit boards.
Active Cooling Components These products use air or liquid to dissipate
heat. Air-to-air heat exchangers use fans to
exchange heat with cooler air and are used in
high-performance telecommunications, military
and aerospace systems. These products also
include sophisticated precision formed
fin/fluxless vacuum brazed chassises, heat
exchangers and cold plates used to cool and
protect computer, radar and laser systems for
the aerospace, military and commercial markets.
Liquid cooling systems are used in applications
which require the removal of significantly
greater amounts of heat than can be achieved by
air cooling.
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Precision Compression These products are complete mounting clamp and
Mounting Clamp Systems heat sink assembly systems for proper
installation, compression and cooling of high-
power compression pack silicon-controlled
rectifiers. These products are used in
industrial welding, transportation and motor
control systems.
Accessory Products The Company's accessories include high-
performance thermal compounds, adhesives,
interface materials, and other accessories.
Customers
The Company's principal customers of thermal management products are leading
original equipment manufacturers ("OEM's") of electronic equipment. The
Company's thermal management customers include: Compaq Computer Corporation,
Hewlett-Packard Company, Apple Computer, Gateway 2000, Dell Computer
Corporation, Rockwell Automation, General Electric, Harman, Chrysler
Corporation, Applied Materials and Martin Marietta. The thermal management
business has over 3,000 customers. No single customer accounted for greater
than 10% of the Company's thermal management revenues during its fiscal year
1996 or 1997.
In addition, the Company establishes technical relationships with certain
key microprocessor and computer manufacturers, such as Intel and AMD, to focus
on new product designs and development of new product concepts in advance of
rapidly changing computer market requirements. Although these manufacturers
may not purchase substantial amounts of thermal management products, Wakefield
may appear on their recommended vendor list for the new products developed.
The recommendation is not exclusive.
The Company's thermal management products must meet its OEM customer's
exacting specifications. Some of the Company's thermal management OEM
customers require the Company to qualify as an approved supplier. In order to
so qualify, the Company must satisfy stringent quality control standards and
undergo extensive in-plant inspections of its manufacturing processes,
equipment and quality control systems. In addition, certain of the Company's
automotive customers are requiring that the Company's thermal management
business become QS9000 registered (the quality specification required by the
automotive industry) by the end of calendar 1998, which the Company plans to
achieve. Failure to attain such certification could have an adverse effect on
planned automotive business in the future in its facility servicing these
customers. Revenues from such customers have been immaterial through fiscal
1997.
Sales, Marketing, and Distribution
The Company designs, manufactures and sells both standard and customized
thermal management products. The Company seeks to become a strategic supplier
to its customers and to differentiate itself from its competitors by offering
a higher level of service and technical sales support to its customers. The
Company has a team of applications engineers and technicians who are dedicated
to providing ongoing technical support. These engineers and technicians
provide solutions to customers for their thermal management problems, answer
customers' questions on the use and application of the Company's products,
provide field support to customers and work with certain key microprocessor
and computer manufacturers to develop new thermal management solutions. The
Company believes the technical services provided by its engineers and
technicians are an important factor in its thermal management sales and
product development efforts.
The Company sells thermal management products through in-house sales
personnel and a network of independent manufacturers' representatives and
distributors. In North America, thermal management products are marketed
through a five-person direct sales force, 21 manufacturers' representatives
and 25 distributors. In international markets, the Company uses 17
manufacturers' representatives and 20 international distributors.
In general, the Company's thermal management manufacturers' representatives
and distributors have entered into agreements that allow for termination by
either party upon 30 to 90 days notice. Generally, distributors are permitted
to return a small portion of products purchased by them during the term of the
4
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agreements and to return all products (other than obsolete products) purchased
by them upon termination of the agreement by the Company. Historically, the
amount of returns has been insignificant to the Company's business. The
Company's distributors are generally not precluded from marketing competitive
products.
The Company has entered into a joint marketing relationship with Flomerics,
the developer of FLOtherm, a software program used by engineers to design new
thermal management products, to make joint presentations at trade shows, to
present jointly sponsored technical seminars and for Flomerics to feature
products developed by the Company in its demonstrations.
Research and Product Development
The Company's product development strategy primarily focuses on engineering
modifications of existing products to provide customers with higher
performance and lower cost products. In addition, the Company focuses some of
its research and development efforts on the development of entirely new
products or materials. During fiscal 1995, 1996 and 1997, the Company spent
$1,109,000, $1,448,000, and $1,506,000 respectively, on product research and
development with respect to its thermal management products. The Company
believes that its technical capabilities, in conjunction with collaborative
efforts with customers, will allow it to continue to introduce solutions to
new thermal management problems responsively. The Company is currently
developing standard and custom heat sink assemblies for next generation
microprocessors along with reviewing methods of using alternative materials to
achieve cost reduction and improved performance.
Competition
The thermal management market is highly competitive. There are many
companies which compete directly with the Company in the thermal management
business and offer products and services similar to those offered by the
Company. In the domestic thermal management market, the Company's three
principal competitors are Aavid Thermal Technologies, Inc., International
Electronics Research Corp., a division of Dynamics Corporation of America, and
Thermalloy, a division of Bowthorpe, plc. Two of the Company's thermal
management competitors are divisions of larger corporations and, as such, have
greater financial, marketing, and technical resources than the Company.
Additional competition comes from numerous small machine shops, aluminum
extruders, and other new thermal management companies which typically focus on
a single product and do not offer complete lines of thermal management
products.
Backlog
The thermal management business backlog was approximately $13.8 and $17.4
million on October 27, 1996 and October 26, 1997, respectively. Backlog
typically consists of purchase orders scheduled for shipment within 60 days
following the order date. The Company's backlog at any time is not indicative
of future revenue.
Proprietary Rights
The Company applies for patents with respect to its most significant
patentable developments. It owns 14 patents related to its thermal management
products which expire from 2010 to 2015, and it has five patents pending.
Management believes that its competitive position is not dependent on patents
and that patent expirations will not materially adversely affect the Company's
competitive position.
Raw Materials
The principal raw material used in thermal management products is aluminum.
Raw materials represent a significant portion of the cost of the Company's
thermal management products. Prices for raw materials are based upon market
prices at the time of purchase. Historically, the price of aluminum has
experienced substantial volatility. Although thermal management products are
generally shipped within 60 days following the order date, increases in raw
materials prices cannot always be reflected in product sales prices. All raw
materials are readily
5
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available from multiple suppliers at competitive prices. In addition,
Wakefield Extrusion supplies a portion of the Company's needs for extruded
aluminum, the primary raw material used to manufacture heat sinks. The Company
does not believe its risk in respect to raw material price volatility is
significant since the raw materials for an order are usually purchased within
a short period of time after the order is accepted.
Consolidation of Thermal Management Operations
During fiscal 1997, the Company began the consolidation of the thermal
management business. The Wakefield, Massachusetts facility will be closed and
consolidated into the Fall River, Massachusetts and Temecula, California
facilities. During the second quarter of fiscal 1998, the Company intends to
lease office space in the Wakefield area for the thermal management sales,
engineering and administrative staff and to sublease the Wakefield
manufacturing facility. In the event the manufacturing facility is not
subleased, the thermal management sales, engineering and administrative staff
will continue to office in the manufacturing facility. The (i) difference
between the rent payable and expected sublease rentals on the Wakefield
facility and (ii) the estimated costs that the Company expects to incur to
sublease this facility were included in the restructuring expense recorded in
fiscal 1997. There can be no assurance that this facility will be subleased.
Assuming the Wakefield facility is subleased, the consolidation of the thermal
management operations is expected to reduce operating costs by approximately
$1.6 million annually beginning in fiscal 1998. See "Item 2. Description of
Business."
CONNECTOR PRODUCTS SEGMENT
Products
The Company designs, manufactures and sells high-reliability sub-miniature,
micro-miniature and ultra-miniature connectors, including connectors sold as
value added cable and/or wire harness assemblies, used in aerospace, military
and high-performance commercial applications. The Company's connector products
are produced in small volumes and are highly customized to meet specific
requirements.
The Company's principal connector products include:
Rectangular Connectors Sub-Miniature, Micro-Miniature and Ultra-
Miniature low frequency signal connectors which
are configured in one to four rows with up to
400 contacts and designed for high reliability
aerospace, military and commercial
applications.
Coaxial Connectors Sub-Miniature, Micro-Miniature, Ultra-
Miniature, and industry standard low to high
frequency signal connectors which are
configured to work with 50, 70 and 93 ohm
coaxial, twin-axial and tri-axial cable,
including a new product line of radio frequency
connectors, Mu-Con. Coaxial connectors are
predominantly used in communication and
test/measurement instrumentation applications.
Circular Connectors The Company produces custom circular low
frequency signal connectors, including some
custom hermetic connectors.
Cable and Wire The Company manufactures and sells proprietary
and non proprietary wire and cable products
which are generally sold as a value added part
of connector assemblies, including custom
application specific cable and miniature low
noise coaxial cable.
Customers
The Company's principal customers of connector products are OEM's in a
diverse group of industries including: aerospace, communications, defense,
factory automation, industrial controls, medical electronics,
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scientific/process instrumentation and test/measurement. The Company's
connector business has over 400 customers including: Lockheed Martin, Raytheon
Company, March Electronics, Boeing North America, Space Systems/Loral and PCB
Piezotronics. No single customer accounted for greater than 10% of the
Company's connector products revenue during the 1996 or 1997 fiscal year.
The Company's connector products must meet OEM customers' exacting
specifications. In addition, many of the customers also require the Company to
qualify as an approved supplier. In order to so qualify, the connector
products segment must satisfy stringent quality control standards and undergo
extensive in-plant inspections of its manufacturing processes, equipment and
quality control systems.
Sales, Marketing, and Distribution
The Company designs, manufactures and sells both standard and customized
connector products. The Company seeks to become a value-added supplier to its
customers and to differentiate itself from its competitors by offering a
higher level of service and technical sales support to its customers. The
connector products segment has a dedicated team of applications engineers and
technicians providing ongoing technical support. These engineers and
technicians assist customers with their connector designs and problems, and
answer customers' questions on the use and application of the Company's
connector products. The Company believes the technical services provided by
its engineers and technicians are an important factor in its connector
products sales and product development efforts.
The Company sells connector products through its in-house sales personnel
and through its network of independent manufacturers' representatives and
distributors. In North America, the connector products segment's five-person
sales force supports fifteen manufacturer's representatives and three
distributors. In international markets, the connector products segment uses
five manufacturers' representatives to market its products in addition to in-
house sales personnel in its operations in England and France. These
operations market and assemble connector products for the European market.
In general, the Company's agreements with its connector products'
manufacturers' representatives and distributors allow either party to cancel
the agreement upon 30 to 90 days notice. Generally, the agreements allow
distributors to exchange a small portion of products purchased by them as part
of a stock rotation program and to return all products (other than obsolete
products) purchased by them upon termination of the agreement by the Company
within the first two years of its effective date. The agreements with the
Company's connector product distributors generally precluded them from
marketing competitive products.
Research and Product Development
The Company's connector product development strategy primarily focuses on
existing product engineering modifications in response to customer needs. The
Company believes that its technical capabilities, in conjunction with
collaborative efforts with customers, will allow it to continue to design
products responsively to meet its customers needs.
The Company intends to continue developing new connector products by
modifying and extending its current products and developing new product lines.
During 1997, the connector products segment completed the design, development,
prototyping and preproduction of a new line of products for use in
communications equipment, test/measurement equipment, digital signal
processing systems and medical equipment. This new product line, known as Mu-
Con, consists of a wide variety of radio frequency coaxial connectors. In
order to offer lower prices, the Company developed relationships with five
manufacturers in Taiwan who can build products to the required design
specifications much more cost effectively than domestic sources. Marketing of
the Mu-Con product line began in the fourth quarter of fiscal 1997. To date,
sales of this product line have not been significant.
Competition
The connector industry is highly fragmented with competition drawn along
very specific product lines. The Company's principal competition in its
connector operations, comes from smaller, niche-oriented companies which, like
the Company, focus on low volume customized products. Occasionally, the
Company competes with
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smaller divisions of larger firms. The Connector division's direct competitors
include ITT's Cannon division, Glenaire, Labinal's Cinch division, Amphenol
and Microtech.
Backlog
The Company's connector products backlog was approximately $3.6 million and
$4.4 million on October 27, 1996 and October 26, 1997. Backlog typically
consists of purchase orders scheduled for shipment within 90 days. The
Company's backlog at any time is not indicative of future revenue. The Company
has entered into supply agreements with several customers for its connector
products, including Lockheed Martin, Raytheon and Boeing North America
(previously known as Rockwell Aerospace). The agreements generally provide
that, for a term of eighteen months to two years such customer will purchase
all its requirements, if any, for a particular product from the Company for a
fixed price.
Proprietary Rights
The Company applies for patents with respect to its most significant
patentable developments. The Company owns 8 patents related to its connector
products. Management believes that its competitive position is not dependent
on patents and that patent expirations will not materially adversely affect
the Company's competitive position.
Raw Materials
The principal raw materials used in connector products are aluminum, copper,
stainless steel and steel alloy. The Company also uses gold, plating
chemicals, plastics, bar metal and wire in its production of connector
products. These raw materials are subject to market price fluctuation.
However, no single raw material is considered to be a major cost component of
the Company's connector products. All raw materials are readily available from
multiple suppliers at competitive prices.
ENVIRONMENTAL REGULATIONS
Several aspects of the Company's operations utilize hazardous materials, the
removal of which is subject to regulation. The Company contracts with licensed
third party waste haulers to remove such hazardous materials. While the
Company believes that it conducts its operations in substantial compliance
with applicable environmental laws and regulations and has all environmental
permits necessary to conduct its business, more stringent environmental
regulations may be enacted in the future, and there can be no assurance that
the Company will not incur significant costs in the future in complying with
such regulations. Local environmental agencies monitor the Company's
operations for ongoing compliance with environmental requirements, and the
Company is required to correct any violations revealed by such monitoring.
Although the Company is periodically subject to notices of violations with
respect to environmental requirements, it is not aware of any violations or
events that would require the Company to incur material cost, nor has the cost
of complying with environmental laws represented a material cost to the
Company.
EMPLOYEES
On October 26, 1997, the Company had 814 employees (796 of whom were full
time). Its thermal management segment had 552 employees (536 of whom were full
time), all in domestic operations, and its connector products segment had 227
employees in domestic operations (226 of whom were full time) and 27 employees
resident outside the United States (25 full time). In addition, the Company
had 8 corporate employees (all full time). Employees are not represented by a
labor union. Management believes that employee relations are excellent.
Product names mentioned herein are for identification purposes only and may be
trademarks or registered trademarks of their respective companies.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company has leases for manufacturing facilities at the following
locations:
<TABLE>
<CAPTION>
APPROXIMATE PRINCIPAL EXPIRATION
LOCATION SQUARE FEET FACILITY USE DATE
- -------- ----------- ------------ -------------
<S> <C> <C> <C>
South Pasadena, California.... 74,470 connector May, 2004
products
Temecula, California.......... 44,200 thermal management November 2004
products
Fullerton, California......... 15,000 aluminum extrusions for August 1998
thermal management
products
Wakefield, Massachusetts...... 56,500 thermal management November 2003
products
Fall River, Massachusetts..... 60,000 thermal management April 2000
products
Colmar, Pennsylvania.......... 37,000 electronic March 2000
systems
Paramount, California......... 36,700 thermal management October 1999
products
Paramount, California......... 25,000 thermal management October 1999
products
</TABLE>
Management feels that these facilities are in good condition suitable for
the purposes for which they are used. The Company plans to lease an additional
20,000 square feet at its Fall River facility and to sublease its Wakefield
facility. See "Consolidation of Thermal Management Operations" in Item 1.
Description of Business--Thermal Management Segment. The Company has office
space for its corporate staff in Houston, Texas, Beverly Hills, California and
New York, New York.
ITEM 3. 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 complaint 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 complaint. The case is in its initial stages and 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of fiscal 1997 to a vote
of the holders of the Company's common stock, through the solicitation of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
The Company's common stock is traded on The Nasdaq Stock Market, National
Market System (NMS) under the symbol ATGI. Through the facilities of the
NASDAQ/NMS reporting system, actual sales prices of the Company's common stock
are available.
The following table sets forth the high and low sales prices of the
Company's common stock as reported on the NASDAQ National Market System for
each full quarterly period within the Company's two most recent fiscal years:
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter.............................................. 11 3/8 6 7/8
Second Quarter............................................. 8 5/8 6 1/4
Third Quarter.............................................. 8 5/8 5
Fourth Quarter............................................. 5 3/4 4 1/4
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter.............................................. 5 3 5/8
Second Quarter............................................. 4 2 5/8
Third Quarter.............................................. 3 7/8 2 9/16
Fourth Quarter............................................. 5 5/8 3 1/2
</TABLE>
HOLDERS OF RECORD
On December 31, 1997, there were approximately 213 holders of record and
approximately 2000 beneficial owners of the Company's common stock.
DIVIDENDS
The Company has paid no cash dividends on its common stock during fiscal
years 1996 and 1997. The Board of Directors of the Company does not intend to
pay cash dividends on its common stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The Company entered its current business in October 1993 by acquiring a
thermal management business and has subsequently acquired several operations
in the thermal management and connector business. See "Acquisitions" in Item
1. Description of Business--General. The results of such acquired businesses
are reflected on the following table from the date of acquisition. In
September 1994, the Company sold its software business; and in June 1997, the
Company sold its hermetic connector business. The Results of Operations in the
following table does not include any information with respect to such
businesses sold.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 29, OCTOBER 27, OCTOBER 26,
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS(1)
Sales................... $ 258 $ 29,167 $ 61,451 $ 67,070 $ 75,665
Cost of sales........... 190 19,901 44,461 52,651 61,726
Gross profit............ 68 9,266 16,790 14,419 13,939
Income (loss) before
discontinued
operations(2).......... 228 2,812 3,692 (617) (4,016)
Per common and common
equivalent share income
(loss) from continuing
operations............. $ 0.04 $ 0.44 $ 0.56 $ (0.10) $ (0.60)
Shares used............. 6,017,543 6,343,604 6,605,147 6,277,585 6,682,106
BALANCE SHEET DATA(1)
Working capital......... $ 8,932 $ 15,947 $ 15,938 $ 6,744 $ 10,331
Total assets............ 16,079 31,478 42,101 46,847 41,378
Total debt.............. -- 3,902 9,943 13,909 9,557
Stockholders' equity.... 10,951 16,544 18,763 22,117 18,801
</TABLE>
- --------
(1) See Consolidated Financial Statements and Notes to Consolidated Financial
Statements on pages F-3 through F-16.
(2) See "Note 2. Acquisitions" and "Note 3. Discontinued Operation" in Notes
to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION.
OVERVIEW
In conjunction with the provisions of the "Safe Harbor" section of the
Private Securities Litigation Reform Act of 1995, this Annual Report on Form
10-K may contain forward-looking statements pertaining to future anticipated
projected plans, performance and developments, as well as other statements
relating to future operations. All such forward-looking statements are
necessarily only estimates of future results and there can be no assurance
that actual results will not materially differ from expectations. Further
information on potential factors which could affect the Company, including,
but not limited to, the impact of competitive products and pricing, product
demand and market acceptance, new product development, reliance on key
strategic alliances, availability of raw materials, fluctuations in operating
results and other risks is detailed in the Company's filings with the
Securities and Exchange Commission.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION--CONTINUED
The Company entered the thermal management business in October 1993 by
acquiring Wakefield and entered the connector products business in June 1994
by purchasing the Interconnect Systems Division of Microdot Inc. The following
table sets forth the significant acquisitions and dispositions made by the
Company during the last three fiscal years:
<TABLE>
<CAPTION>
DATE
ACQUIRED BUSINESS PREDECESSOR'S NAME
-------- -------- ------------------
<C> <S> <C>
June 1995 Aluminum extrusion operations in Specialty Extrusions Ltd
Fullerton, California (Wakefield
Extrusion)
August 1996 Thermal management operations in Lockhart Industries, Inc.
Paramount, California (Lockhart)
<CAPTION>
DATE SOLD BUSINESS TRADE NAME
--------- -------- ----------
<C> <S> <C>
June 1997 Hermetic connector operation in Connector Industries of America
Cincinnati, Ohio (CIA)
</TABLE>
The results of operations of the businesses acquired are included in the
Company's consolidated results of operations only since their respective
acquisition dates. In June 1997, the Company sold its hermetic connector
business which was located in Cincinnati, Ohio. The consolidated financial
statements appearing in this Form 10-K of the Company for the fiscal year
ended October 26, 1997 report separately the gain on the sale and the results
of operations of such discontinued operation. Such operation is not included
in the following discussion and prior year numbers have been restated to
exclude the effects of discontinued operations.
RESULTS OF OPERATIONS
Fiscal Year 1997 versus Fiscal Year 1996 Comparison
Net Income/Loss. The Company reported a net loss for the 1997 fiscal year of
$3,352,000 which included charges for restructuring and other non recurring
costs of $2,494,000, a charge for additional inventory reserves of $588,000,
and a gain of $610,000 from the sale of its hermetic connector business. This
compares to net loss of $299,000 for the 1996 fiscal year which included
$406,000 of other charges.
The $2,494,000 in restructuring and other charges reported in fiscal 1997
included (i) $2,028,000 related to the closing of the Company's manufacturing
facility in Wakefield, Massachusetts and the consolidation of the thermal
management operations into the Fall River, Massachusetts and Temecula,
California facilities, and (ii) $466,000 related to downsizing and management
changes throughout the Company. The additional inventory reserves were
recognized to fully reserve the costs of certain custom thermal management
products that were built in anticipation of orders that have not been
received. The $406,000 of other charges recorded in fiscal 1996 related to the
settlement of a cancelled purchase commitment, costs related to an acquisition
effort that was terminated and severance payments.
The net loss from thermal management operations for fiscal 1997, before the
allocation of Alpha corporate expenses ("corporate allocation"), was
$1,786,000, inclusive of $2,028,000 related to the closing of the Wakefield
facility and $172,000 related to downsizing of the thermal management
operations. Exclusive of these charges, the thermal management business would
have reported net income of $414,000, before corporate allocation. In fiscal
1996, the thermal management segment reported net income, before corporate
allocation, of $276,000 including a charge for severance payments of $140,000.
The results of operations, excluding the aforementioned charges, decrease
primarily due to a reduction in the gross profit margin, which is discussed
below.
The net loss from the connector products segment for fiscal 1997, before
corporate allocation, was $1,133,000 including $166,000 related to management
changes and downsizing. For fiscal 1996, net income from the connector
products segment, before corporate allocation, was $390,000. The decrease in
the results of
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION--CONTINUED
operations in fiscal 1997 compared to fiscal 1996 was primarily due to reduced
revenues and gross profit, which is discussed below.
Sales. The Company's sales for fiscal 1997 increased $8,595,000, or 12.8%,
to $75,665,000 from $67,070,000 for fiscal 1996. Thermal management sales
increased 19.0% to $58,294,000 for fiscal 1997 from $48,980,000 for fiscal
1996. The increase in thermal management sales was due to internal growth of
4.5% and the inclusion of $8,317,000 in sales by Lockhart, which was acquired
in August 1996. In fiscal 1996, the Company recorded revenues from Lockhart of
$1,133,000 for the 2 month period it owned this business. Internal thermal
management sales increased primarily due to higher sales of Penguin Cooler
Heat Sinks ("PGC"), which dissipate heat generated by microprocessors used in
personal computers. Sales of PGC increased approximately 15.3% in fiscal 1997
compared to fiscal 1996. The Company continues to invest in this product line
and believes that the demand for PGC products will continue to increase.
Connector sales were $11,880,000 during the 1997 fiscal year compared to
$13,087,000 during the prior fiscal year, a 9.2% decrease. This decrease was
primarily caused by low backlog at the beginning of the year causing
throughput and manufacturing scheduling problems at the South Pasadena
facility. During the year, the backlog at this facility has increased from
$2.5 million to $3.9 million and management has focused on improving
productivity. The increased backlog has enabled this facility to better plan
monthly production and increase monthly shipments during the year. The backlog
has increased due to the replacement of sales representative firms not meeting
their sales commitment, instituting detailed three-day training sessions for
all sales representatives and hiring three distributors.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for fiscal 1997 was 18.4% compared to
21.5% for 1996 fiscal year. The thermal management segment's gross profit
percentage was 18.8% and 20.6% for fiscal 1997 and 1996, respectively.
Excluding the aforementioned additional inventory reserves recorded in fiscal
1997, the company's thermal management gross profit percentage was 19.8% for
fiscal 1997. Thermal management gross profit percentage was further adversely
impacted by higher sales of PGC products, which carry a lower gross profit
margin than the average of other thermal management products, increased
aluminum costs and competitive pricing pressures.
The connector products segment's gross profit percentage decreased to 17.1%
for fiscal 1997 from 28.2% for fiscal 1996. This decrease is attributable to
the aforementioned manufacturing inefficiencies and decreased sales volume.
Research and Development Expense. Research and development expense includes
the cost of enhancing existing products and, to a lesser extent, the cost of
developing new products. Research and development expenses, wholly
attributable to the thermal management segment, were $1,506,000 and $1,448,000
for fiscal 1997 and 1996, respectively. Excluding Lockhart, research and
development expenses for the 1997 and 1996 fiscal years were $1,107,000 and
$1,423,000, respectively. The decrease of $316,000 in research and development
expenses was primarily due to a decrease in engineering staff as well as a
decrease in licensing fees for engineering software. For fiscal 1997, the
Company received a one-year waiver of licensing fees for a software
application used in engineering.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the year ended October 26, 1997 were $12,931,000,
or 17.1% of sales, compared to $12,344,000, or 18.4% of sales, for the year
ended October 27, 1996. SG&A expenses as a percentage of sales decreased due
to the inclusion of Lockhart which has a lower SG&A percentage of sales than
the overall Company's percentage.
Restructuring and Other Expenses. During fiscal 1997, the Company incurred
restructuring charges of $2,494,000, which consisted of $2,028,000 related to
the consolidation of the thermal management operations and $466,000 related to
management changes and downsizing. The consolidation of the thermal management
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION--CONTINUED
operations and related steps are expected to reduce operating costs by
approximately $1.6 million annually beginning in fiscal 1998. See
"Consolidation of Thermal Management Operations" in Item 1. Description of
Business--Thermal Management Segment.
Interest and Other Income (Net). Interest income, which was $125,000 in
fiscal 1997 and $213,000 in fiscal 1996, was earned on cash held at the parent
level. The decrease in interest income was primarily attributable to a
decrease in the average cash balance invested. Interest expense was $1,173,000
and $1,073,000 for fiscal 1997 and fiscal 1996, respectively. This increase
was due to a higher average borrowing base and an increase in the interest
rate paid on outstanding debt.
Discontinued Operation. On June 20, 1997, the Company sold substantially all
of the assets and business of its hermetic connector business in Cincinnati,
Ohio, which operated under the trade name Connector Industries of America
("CIA").
The sales price was $2,100,000 plus the assumption by the purchaser of
certain payables and liabilities of the CIA business aggregating approximately
$120,000. The agreement provides for a potential additional payment to the
Company of up to $400,000 based on orders booked by the buyer during the 1998
calendar year by customers of the CIA business. The company recognized a gain,
excluding the potential additional payment, on the sale of $610,000 during
fiscal 1997.
Fiscal Year 1996 versus Fiscal Year 1995 Comparison
Net Income/Loss. The Company reported a net loss for the 1996 fiscal year of
$299,000, which included $406,000 of other charges related to the settlement
of a cancelled purchase commitment, costs related to an acquisition effort
that was terminated and severance payments. The net income reported for the
1995 fiscal year was $3,748,000. The net income from thermal management
operations for fiscal 1996, before corporate allocation was $276,000,
including a charge for severance payments of $140,000, compared to net income
of $2,107,000 for fiscal 1995. The net income from the connector products
operations for fiscal 1996, before corporate allocation was $390,000, compared
to net income of $1,306,000 for fiscal 1995. The decreases in net income were
primarily attributable to a decrease in gross profit, an increase in research
and development costs and other operating expenses as discussed below.
Sales. The Company's total sales increased 9.1% in fiscal 1996 compared to
fiscal 1995. Thermal management sales increased to $48,980,000, or 11.6%, in
fiscal 1996 from $43,865,000 in fiscal 1995. The 11.6% increase in thermal
management sales in fiscal 1996 was primarily attributable to the inclusion of
sales by Wakefield Extrusion and Lockhart, along with higher sales of PGC,
which serve the microprocessor and personal computer markets. Wakefield
Extrusion (formerly Specialty Extrusion Corp.) was acquired in June 1995 and
Lockhart in August 1996. Sales of PGC increased 35.5% in fiscal 1996 compared
to fiscal 1995 although the increase was not as great as anticipated due to
elevated inventory levels throughout the personal computer industry. The
increase in thermal management revenues was partially offset by lower sales of
active cooling components. Without the addition of sales from Specialty and
Lockhart, thermal management sales increased 3.8% in fiscal 1996 compared to
fiscal 1995.
Connector sales were $13,087,000 in fiscal 1996 compared to $12,291,000
during fiscal 1995. The increase in fiscal 1996 compared to 1995 was primarily
due to the addition of the Company's international subsidiaries in France and
England which were established in June and July 1995. Sales by the connector
products segment's foreign subsidiaries accounted for 17.2% of total connector
sales in fiscal 1996 versus 1.8% in 1995. Excluding revenues generated in 1995
from a large contract that was completed in the 1995 fourth quarter, the
revenue increases in fiscal 1996 compared to fiscal 1995 would have been
greater.
Gross Profit. The Company's gross profit percentage for fiscal 1996 was
21.5% versus 27.3% in 1995. The thermal management segment's gross profit
percentage was 20.6% and 24.9% for fiscal 1996 and 1995,
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION--CONTINUED
respectively. The decrease for the thermal management business in 1996
compared to fiscal 1995 was the result of the following factors: inclusion of
Wakefield Extrusion sales which have lower gross margins than the Company's
other products, a change in the product mix sold, higher manufacturing costs
(indirect labor and depreciation on equipment purchased) incurred to add
capacity in anticipation of a substantial increase in demand for PGC products,
which did not fully materialize, and a $170,000 inventory write-down related
to products specifically built for two customers. Wakefield Extrusion sales,
other than to affiliates, are highly competitive commodity products sold to
the construction industry. These sales represented 6.3% of consolidated
revenue for fiscal 1996 with margins approximately 5.7% lower than the overall
Company average. Although the margins from these products are expected to
continue at this level, the effect on the consolidated results will be
lessened as the Company anticipates the sales from its other products will
increase at a higher rate than sales by Wakefield Extrusion to non affiliated
customers. Wakefield Extrusion is profitable at this margin level because its
business does not require substantial selling, general and administrative
expenditures. The gross profit percentage obtained from PGC products, which
sales of increased 35.5% in fiscal 1996 compared to fiscal 1995, was lower
than the gross profit obtained from other thermal management products.
The connector products segment's gross profit percentage was 28.2% and 39.9%
for fiscal 1996 and 1995, respectively. This decrease is primarily
attributable to certain manufacturing inefficiencies, which the Company has
taken steps to correct, and a change in the product mix sold. Through the
fourth quarter of fiscal 1995, the Company had a large contract to sell
circular connectors. The gross profit percentage obtained from these
connectors was higher than the overall connector products gross profit
percentage.
Research and Development Expense. Research and development expense, wholly
attributable to the thermal management segment, includes the cost of enhancing
existing products and, to a lesser extent, the cost of developing new
products. Research and development expenses were $1,448,000 in fiscal 1996
compared to $1,109,000 in fiscal 1995. The increase was due primarily to an
increase in engineering staff as well as increased licensing costs for
engineering software.
Selling, General and Administrative Expense. During fiscal 1996, selling,
general and administrative expenses were $12,344,000, or 18.4% of sales,
compared to $11,557,000, or 18.8% of sales during fiscal 1995. The decrease in
selling, general and administrative expenses as a percentage of sales was
primarily attributable to increased sales without a proportionate increase in
selling, general and administrative expenses.
Other Operating Expenses. Other operating expenses incurred during fiscal
1996 consisted of nonrecurring charges of $406,000, which included the
settlement of a cancelled purchase commitment, costs related to an acquisition
effort that was terminated and severance payments.
Investment Income. In fiscal year 1995, the Company held marketable
securities for both strategic and investment purposes. Securities held for
investment purposes were reflected at fair market value, and the gain or loss
was reflected in investment income. Securities held for strategic purposes
were reflected at fair market value with the unrealized gain or loss thereon
reflected in stockholders' equity. The gain or loss on such securities was
reflected as investment income only upon sale. Investment income for fiscal
1995 included $35,000 of investment security gains and $219,000 of gains on
sales of strategic investment securities. During fiscal 1996, the Company had
no material investment in marketable securities.
Interest and Other Income (Expense), net. Interest income, which was
$213,000 for fiscal 1996 and $263,000 for fiscal 1995 was earned on cash held
at the parent level. Interest expense was $1,073,000 and $775,000 for fiscal
1996 and 1995, respectively. The increase in interest expense in fiscal 1996
compared to fiscal 1995 was due to an increase in the average outstanding loan
balance during fiscal 1996.
Minority Interest. The Company purchased 80% of the outstanding stock of
Uni-Star in June 1994. In September 1996, the Company purchased the remaining
20% interest in exchange for 265,000 shares of its
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION--CONTINUED
common stock. Prior to the September 1996 transaction, the minority interest
related to the Uni-Star business was included in income before provision for
income taxes on the consolidated statement of operations and as a separate
item on the consolidated balance sheet and statement of cash flows.
Income Taxes
On October 26, 1997, the Company had, for tax purposes, remaining NOL
Carryforwards of approximately $16,475,000 available to offset future taxable
income, approximately $355,000 of unused investment and research and
development tax credits available to offset future Federal income taxes, and
approximately $230,000 of alternative minimum tax credits. The NOL
Carryforwards will expire from 2000 to 2012, the investment tax credit and
research and development tax credit carryforwards will expire from 1998 to
2005, and the alternative minimum tax credit has no expiration. All
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service. In addition, Section 382 of the Internal Revenue Code
significantly limits the amount of NOL Carryforwards usable by a corporation
following a more than 50% change in ownership of the corporation during a
three-year period. It is possible that subsequent transactions involving the
Company's capital stock could result in such a limitation. See "Note 11.
Income Taxes" in Notes to Consolidated Financial Statements.
Year 2000
The connector products segment's management is in the process of reviewing
manufacturing and accounting software packages for internal management and
information requirements. This review includes the packages' ability to
function beyond the Year 2000. In addition, the Company is using its existing
staff to comprehensively consider existing systems and equipment that need to
be changed as a result of the Year 2000 or "Millenium Bug". The Company's
staff has determined that some personal computer software will require
upgrading. Based on current estimates, the costs related to these upgrades are
immaterial. The Company is in contact with its vendors and customers and no
major problem has been discovered to date.
LIQUIDITY AND CAPITAL RESOURCES
On October 26, 1997, the Company had cash of approximately $1,707,000
compared to $3,935,000 on October 27, 1996. Existing cash, cash provided from
operating activities, and proceeds from the sale of CIA were used for
purchases of capital equipment and to reduce debt.
During fiscal 1997, $1,296,000 was provided from operating activities and
$2,100,000 from the sale of the Company's connector business in Cincinnati,
Ohio. Funds from operating activities were primarily from (i) a decrease in
inventories and accounts receivable and (ii) an increase in accounts payable,
accrued compensation and other liabilities. Capital equipment purchases of
$1,420,000 were made to improve manufacturing abilities and to replace
existing machinery which had reached its end of life.
Effective December 31, 1997, Wakefield, Wakefield Extrusion, Lockhart and
Malco (hereinafter referred to as "Borrowers") became parties to a loan
agreement, as amended (the "Agreement") with a commercial bank which provides
for revolving loans of up to $9,000,000, with the ability to automatically
increase upon request to $12,000,000, and an equipment acquisition facility of
$3.2 million. 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 only 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 October 26, 1997, $5,198,000 was drawn on the revolving credit facility
with interest accruing at the relevant adjusted LIBOR rate plus 2.5% (7.97%
per annum on October 26, 1997). There is an unused line fee
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION--CONTINUED
equal to .5% per annum on the difference between $9,000,000 (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 October 26,
1997, $1,837,500 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 October 26,
1997, $1,651,191 was outstanding on the $1,900,000 term note. The obligations
under the Loan Agreement are secured by a first lien on and assignment of all
of the assets of Borrowers which in aggregate total $31,488,000. 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 October 26, 1997,
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.
Working capital on October 26, 1997 was $10,331,000 compared to $6,744,000
on October 27, 1996. The increase in working capital is attributable to the
reclassification of the Company's revolving credit facility partially offset
by 1) a decrease in current assets due to the use of cash to decrease debt and
2) the sale of the net assets of the discontinued operation. The decrease in
debt was offset by an increase in other current liabilities primarily due to
the liability recorded for the consolidation of the thermal management
operations. The Company believes that its currently available cash,
anticipated cash flow from operations and availability under credit facilities
is sufficient to fund its operations, including the thermal management
consolidation, in the near-term.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data required pursuant to this Item
are presented on pages F-3 through F-16 and pages S-1 through S-5 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the twenty-four month period preceding October 26, 1997, the Company
has neither changed accountants nor had disagreements with its accountants on
any matter of accounting principles or practices, financial statement
disclosure or auditing scope and procedures.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT.
The information required by this Item will be contained in the Company's
definitive Proxy Statement, which will be filed on or about February 23, 1998,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement, which will be filed on or about February 23, 1998,
and is incorporated herein by reference.
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item will be contained in the Company's
definitive Proxy Statement, which will be filed on or about February 23, 1998,
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be contained in the Company's
definitive Proxy Statement, which will be filed on or about February 23, 1998,
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
3.1 --Certificate of Incorporation of the Company, as amended.(1)(2)(3)
3.2 --By-laws of the Company.(4)
10.1 --Registrant's 1984 Incentive Stock Option Plan, together with
amendments thereto.(2)
10.2 --Registrant's 1985 Stock Option Plan, together with amendments
thereto.(2)(5)(6)(7)(8)
10.3 --Registrant's 401-K Savings/Stock Purchase Plan.(9)
10.4 --Lease Agreement, dated October 7, 1987, between PIC Realty
Corporation and Registrant.(10)
10.5 --Lease dated as of October 29, 1993 by and between The Equitable
Life Assurance Society of the United States and Wakefield
Engineering, Inc.(11)
10.6 --Standard Industrial/Commercial Single-Tenant Lease dated as of
June 1, 1994 by and between Pasadena Industrial Associates and Uni-
Star Industries, Inc.(11)
10.7 --Lease dated as of November 29, 1994 by and between The Goldsmith
Properties Company and Uni-Star Industries, Inc.(11)
10.8 --Lease Agreement dated as of January 1995 by and between Robert L.
Byers and Joyce F. Byers and Uni-Star Industries, Inc.(11)
10.9 --Registrant's 1994 Stock Option Plan as amended and restated.(3)
10.10 --Loan and Security Agreement dated as of June 22, 1994 entered into
by and between Shawmut Bank, N.A. and Wakefield Engineering, Inc.
together with amendments thereto. (The exhibits and schedules to
the Loan and Security Agreement/Amendment are listed on the last
page of such documents. Such exhibits and schedules have not been
filed by the Issuer, who hereby undertakes to file such exhibits
upon request of the Commission.)(11)(12)(13)(14)(15)(16)
10.10(a) --Sixth Amendment to Loan and Security Agreement dated December 31,
1997 entered into by and between Fleet National Bank of
Massachusetts and Wakefield Engineering, Inc. (The exhibits and
schedules to the Loan and Security Agreement/Amendment are listed
on the last page of such documents. Such exhibits and schedules
have not been filed by the Registrant, who hereby undertakes to
file such exhibits upon request of the Commission.) (Filed
Herewith)
10.11 --Asset Purchase Agreement dated as of June 30, 1995 among Specialty
Extrusions Ltd., Walter Hastie and William Esparza, and Specialty
Acquisition Corp. (now known as Specialty Extrusion Corp.) and
Wakefield Engineering, Inc.(17)
10.12 --Lease dated September 1, 1993 between B&K Investment Corp. and
Specialty Extrusions, Ltd., together with assignment thereof dated
June 30, 1995 from Specialty Extrusions, Ltd., to Specialty
Acquisition Corp. (now known as Wakefield Extrusion Corp.)(3)
10.13 --Employment Agreement with Lawrence Butler dated September 29,
1995.(3)
</TABLE>
18
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K--CONTINUED
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.14 --Indenture of Lease Agreement dated as of December 20, 1994 by and
between Richard J. Tobin, as Trustee of JLN Realty Trust, under
Declaration of Trust dated June 15, 1981 and filed with Bristol
County Fall River District Registry of Deeds Land Court Records as
Document 12977, and Wakefield Engineering, Inc.(3)
10.15 --Industrial Space Lease dated as of September 29, 1995 by and
between Rancon Income Fund I and Wakefield Engineering, Inc.(3)
10.16 --Employment Agreement with Ernest C. Hartland, Jr. dated April 13,
1996. (The exhibit to the Employment Agreement is listed on the last
page of such Agreement. Such exhibit has not been filed by the
registrant, who hereby undertakes to file such exhibit upon request
of the Commission.)(14)
10.17 --Agreement and Plan of Merger dated as of August 14, 1996 by and
among Alpha Technologies Group, Inc., Lockie Acquisition Corp.,
Lockhart Industries, Inc., Eldon H. Lockhart and Marjorie D.
Lockhart. (The exhibits and schedules to the Agreement and Plan of
Merger and listed on page v of the Table of Contents of such
Agreement. Such exhibits and schedules have not been filed by the
Issuer, who hereby undertakes to file such exhibits upon request of
the Commission.)(15)
10.18 --Agreement dated August 15, 1996 between the Company and Neal
Castleman.(18)
10.19 --Lease dated October 31, 1979 by and between Landcee Investment Co.
and Lockhart Industries, Inc. together with addendum and amendments
thereto.(15)
10.20 --Lease dated August 29, 1984 by and between Garfield-Pacific
Development Co. and Lockhart Industries, Inc., together with
addendums and amendments thereto.(15)
10.21 --Employment Agreement with Michael A. Hoffman dated November 4,
1996.(15)
10.22 --International Swap Dealers Association, Inc. Master Agreement dated
as of October 23, 1996 between Fleet National Bank and Wakefield
Engineering, Inc.; Lockhart Industries, Inc.; Specialty Extrusion
Corp.(15)
10.23 --Asset Purchase Agreement dated as of June 20, 1997 by and between
Sealtron, Inc. and Uni-Star Industrial, Inc. (The exhibits and
schedules have not been filed by the Registrant, who hereby
undertakes to file such exhibits upon request of the
Commission.)(19)
11 --Computation of net income per share. (Filed Herewith)
21 --Subsidiaries of Registrant. (Filed Herewith)
23.1(a) --Consent of Arthur Andersen LLP. (Filed Herewith)
23.1(b) --Consent of Arthur Andersen LLP. (Filed Herewith)
27 --Financial Data Schedule. (Filed Herewith)
</TABLE>
- --------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-2979), which became effective March 7,
1986.
(2) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed September 28, 1987 (Reg. No. 33-17359).
(3) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended October 29, 1995.
(4) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended October 31, 1991.
(5) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed March 17, 1988 (Reg. No. 33-20706).
(6) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed June 30, 1989 (Reg. No. 33-29636).
19
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K--CONTINUED
(7) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended October 31, 1990.
(8) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed June 23, 1992 (Reg. No. 33-48663).
(9) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8, filed January 29, 1987 (Reg. No. 33-11627).
(10) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended October 31, 1987.
(11) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the year ended October 31, 1994.
(12) Incorporated herein by reference to the Company's Form 10-QSB for the
quarterly period ended April 30, 1995 on June 14, 1995.
(13) Incorporated herein by reference to the Company's Form 10-QSB for the
quarterly period ended January 28, 1996 filed on March 13, 1996.
(14) Incorporated herein by reference to the Company's Form 10-QSB for the
quarterly period ended April 28, 1996 filed on June 12, 1996.
(15) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended October 27, 1996 filed on January 27, 1997.
(16) Incorporated herein by reference to the Company's Form 10-Q for the
quarterly period ended July 27, 1997 filed on June 11, 1997.
(17) Incorporated herein by reference to the Company's Form 8-K dated June 30,
1995, filed on or about July 14, 1995.
(18) Incorporated herein by reference to the Company's Form S-3, filed on
August 16, 1996 (Reg. No. 333-10311).
(19) Incorporated herein by reference to the Company's Form 8-K dated June 20,
1997, filed on or about July 3, 1997.
REPORTS ON FORM 8-K
No report on Form 8-K was filed during the fourth quarter of the year ended
October 26, 1997.
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES
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.
Date: January 26, 1998 /s/ Lawrence Butler
By __________________________________
Lawrence Butler
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Marshall D. Butler Chairman of the Board
____________________________________
(Marshall D. Butler)
/s/ Lawrence Butler Chief Executive Officer and
____________________________________ Director (Principal
(Lawrence Butler) Executive Officer)
/s/ Johnny J. Blanchard Chief Financial Officer
____________________________________ (Principal Financial and
(Johnny J. Blanchard) Accounting Officer)
/s/ Donald K. Grierson Director
____________________________________
(Donald K. Grierson)
/s/ Frederic A. Heim Director January 26, 1998
____________________________________
(Frederic A. Heim)
/s/ Michael J. Konigsberg Director
____________________________________
(Michael J. Konigsberg)
/s/ Warren G. Lichtenstein Director
____________________________________
(Warren G. Lichtenstein)
/s/ Kenneth W. Rind Director
____________________________________
(Kenneth W. Rind)
</TABLE>
21
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements:
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets--October 27, 1996 and October 26, 1997....... F-3
Consolidated Statements of Operations--For the Years Ended October 29,
1995, October 27, 1996 and October 26, 1997............................. F-4
Consolidated Statements of Stockholders' Equity--For the Years Ended
October 29, 1995, October 27, 1996 and October 26, 1997................. F-5
Consolidated Statements of Cash Flows--For the Years Ended October 29,
1995, October 27, 1996 and October 26, 1997............................. F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedules:
Condensed Financial Information.......................................... S-1
Valuation and Qualifying Accounts........................................ S-5
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Alpha Technologies Group, Inc.
We have audited the accompanying consolidated balance sheets of Alpha
Technologies Group, Inc., (a Delaware corporation) and subsidiaries as of
October 27, 1996 and October 26, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the each of the three
years in the period ended October 26, 1997. These consolidated financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Alpha Technologies Group, Inc. and subsidiaries as of October 27, 1996 and
October 26, 1997, and the results of their operations and their cash flows for
each of the three years in the period ended October 26, 1997 in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The Financial Statement
Schedules listed in Part II--Item 8 are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not a required
part of the basic consolidated financial statements. The Financial Statement
Schedules have been subjected to the auditing procedures applied in our audits
of the basic consolidated financial statements and, in our opinion, fairly
states in all material respects the financial data required to set forth
therein in relation to the basic consolidated financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Houston, Texas
December 11, 1997, except
with respect to the matters
discussed in Note 6 and Note 9,
as to which the date is January 15, 1998.
F-2
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 26,
ASSETS 1996 1997
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ 3,935 $ 1,707
Accounts receivable, net of reserves of $280 and $328
(Note 6)............................................ 12,060 11,766
Inventories, net (Notes 4 and 6)..................... 10,566 9,781
Net assets of discontinued operation (Note 3)........ 1,198 --
Prepaid expenses (Note 6)............................ 1,111 1,140
-------- --------
Total current assets............................... 28,870 24,394
PROPERTY AND EQUIPMENT, at cost (Note 6):
Manufacturing equipment, leasehold improvements,
furniture, fixtures and other....................... 16,114 17,341
Less--Accumulated depreciation and amortization...... 3,129 5,656
-------- --------
Property and equipment, net.......................... 12,985 11,685
GOODWILL, net (Note 6)................................. 2,964 2,878
OTHER ASSETS, net (Notes 6 and 11)..................... 2,028 2,421
-------- --------
$46,847 $ 41,378
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade.............................. $ 5,456 $ 6,179
Accrued compensation and related benefits (Note 5)... 1,626 1,810
Current portion of other liabilities (Note 5)........ 3,342 4,580
Revolving credit facilities (Note 6)................. 11,023 --
Current portion of long-term debt (Note 6)........... 679 1,494
-------- --------
Total current liabilities.......................... 22,126 14,063
-------- --------
REVOLVING CREDIT FACILITY (Note 6)..................... -- 5,198
LONG-TERM DEBT (Note 6)................................ 2,207 2,865
OTHER LIABILITIES (Note 5)............................. 397 451
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Notes 7, 8, 9 and 10):
Preferred stock, $100 par value; shares authorized
180,000............................................. -- --
Common stock, $.03 par value; shares authorized
17,000,000; issued 7,681,733 at October 27, 1996 and
7,700,733 at October 26, 1997....................... 230 231
Additional paid-in capital........................... 43,474 43,523
Retained deficit..................................... (17,758) (21,110)
Other................................................ (32) (125)
Treasury stock, at cost (1,017,981 common shares at
October 27,1996 and 1,008,553 common shares at
October 26,1997).................................... (3,797) (3,718)
-------- --------
Total stockholders' equity......................... 22,117 18,801
-------- --------
$ 46,847 $ 41,378
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 29 1995, OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
SALES (Note 2, 3 and 13)................... $ 61,451 $ 67,070 $ 75,665
COST OF SALES.............................. 44,661 52,651 61,726
---------- ---------- ----------
Gross profit........................... 16,790 14,419 13,939
OPERATING EXPENSES:
Research and development................. 1,109 1,448 1,506
Selling, general and administrative...... 11,557 12,344 12,931
Restructuring and other.................. -- 406 2,494
---------- ---------- ----------
Total operating expenses............... 12,666 14,198 16,931
---------- ---------- ----------
OPERATING INCOME (LOSS) (Note 13).......... 4,124 221 (2,992)
INVESTMENT INCOME.......................... 258 -- --
INTEREST AND OTHER INCOME (EXPENSE), net
(Note 6 and 13)........................... (479) (778) (1,024)
---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES................. 3,903 (557) (4,016)
PROVISION (BENEFIT) FOR INCOME TAXES (Note
11):
Current.................................. 530 60 --
Deferred................................. (671) -- --
---------- ---------- ----------
Total provision (benefit) for income
taxes................................. (141) 60 --
---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATION.................... 4,044 (617) (4,016)
LESS: MINORITY INTEREST.................... (352) -- --
GAIN ON SALE OF DISCONTINUED OPERATION, net
of income tax effect (Note 3)............. -- -- 610
INCOME FROM DISCONTINUED OPERATION, net of
income tax effect (Note 3)................ 56 318 54
---------- ---------- ----------
NET INCOME (LOSS).......................... $ 3,748 $ (299) $ (3,352)
========== ========== ==========
PER COMMON AND COMMON EQUIVALENT SHARE (Notes 3 and 10)
Income (loss) before minority interest and
discontinued operation.................... $ 0.61 $ (0.10) $ (0.60)
Minority interest.......................... (0.05) -- --
Gain on sale of discontinued operation..... -- -- 0.09
Income from discontinued operation......... 0.01 0.05 0.01
---------- ---------- ----------
Net income (loss).......................... $ 0.57 $ (0.05) $ (0.50)
========== ========== ==========
SHARES USED IN COMPUTING NET INCOME (LOSS)
PER COMMON EQUIVALENT SHARE............... 6,605,147 6,277,585 6,682,106
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 29 1995, OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN ON TREASURY STOCK
---------------- PAID IN RETAINED MARKETABLE ------------------
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES OTHER SHARES AMOUNT
--------- ------ ---------- --------- ---------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31,
1994................... 6,727,345 $202 $38,670 $(21,207) $(138) $ -- 544,249 $ (983)
Net income.............. -- -- -- 3,748 -- -- -- --
Issuance pursuant to
stock option plans
(Note 9)............... 250,500 7 444 -- -- -- -- --
Unrealized gain on
marketable securities,
net of income taxes.... -- -- -- -- 138 -- -- --
Stock repurchase (Note
8)..................... -- -- -- -- -- -- 391,155 (2,118)
--------- ---- ------- -------- ----- ----- --------- -------
BALANCE, OCTOBER 29,
1995................... 6,977,845 209 39,114 (17,459) -- -- 935,404 (3,101)
--------- ---- ------- -------- ----- ----- --------- -------
Net (loss).............. -- -- -- (299) -- -- -- --
Issuance pursuant to
stock option plans
(Note 9)............... 158,332 5 336 -- -- -- -- --
Acquisition of Lockhart
Industries, Inc. (Note
2)..................... 280,556 8 2,355 -- -- -- 82,577 (696)
Purchase of Uni-Star
Industries, Inc.
minority interest (Note
2)..................... 265,000 8 1,669 -- -- -- -- --
Cumulative translation
adjustments............ -- -- -- -- -- (32) -- --
Stock repurchase (Note
8)..................... -- -- -- -- -- -- -- --
--------- ---- ------- -------- ----- ----- --------- -------
BALANCE, October 27,
1996................... 7,681,733 230 43,474 (17,758) -- (32) 1,017,981 (3,797)
--------- ---- ------- -------- ----- ----- --------- -------
Net (loss).............. -- -- -- (3,352) -- -- -- --
Issuance pursuant to
stock option plans
(Note 9)............... 19,000 1 53 -- -- -- -- --
Acquisition of Lockhart
Industries, Inc. (Note
2)..................... -- -- -- -- -- -- (9,428) 79
Purchase of Uni-Star
Industries, Inc.
minority interest (Note
2)..................... -- -- (4) -- -- -- -- --
Cumulative translation
adjustments............ -- -- -- -- -- (93) -- --
--------- ---- ------- -------- ----- ----- --------- -------
BALANCE, October 26,
1997................... 7,700,733 $231 $43,523 $(21,110) $ -- $(125) 1,008,553 $(3,718)
========= ==== ======= ======== ===== ===== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 29, 1995, OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 3,748 $ (299) $ (3,352)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Deferred income taxes (Note 11).......... (671) -- --
Gain on sale of marketable securities-
available-for-sale...................... (199) -- --
Depreciation and amortization (Note 13).. 1,256 2,172 2,829
Minority interest (Note 2)............... 352 -- --
Gain on sale of discontinued operation
(Note 3)................................ -- -- (610)
Income from discontinued operation (Note
3)...................................... (56) (318) (54)
Cumulative translation adjustments....... -- (32) (93)
Changes in assets and liabilities net of
effects from acquisitions:
Decrease in marketable securities--
trading securities...................... 27 -- --
(Increase) decrease in accounts
receivable.............................. (2,878) (9) 294
Decrease in notes receivable............. 2,000 -- --
(Increase) in prepaid expenses........... (378) (119) (29)
(Increase) decrease in inventories....... (2,301) (2,065) 785
Increase (decrease) in accounts payable,
trade................................... 696 (113) 706
Increase (decrease) in accrued
compensation and related benefits....... 959 (704) 174
Increase (decrease) in other liabilities. (710) (730) 333
-------- -------- --------
Total adjustments....................... (1,903) (1,918) 4,335
-------- -------- --------
Net cash provided (used) by continuing
operations............................. 1,845 (2,217) 983
Net cash provided (used) by discontinued
operation (Note 3)..................... (368) 237 313
-------- -------- --------
Net cash provided (used) by operating
activities............................. 1,477 (1,980) 1,296
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds (expenditures) for business
acquisitions and divestitures (Note 3).. (2,560) (479) 2,100
Change in goodwill....................... (952) (176) (83)
Purchase of marketable securities--
available-for-sale...................... (850) -- --
Proceeds from sale of marketable
securities-available-for-sale........... 2,097 -- --
Purchase of property and equipment, net
(Note 13)............................... (4,772) (3,770) (1,420)
(Increase) decrease in other assets, net. (162) (25) 181
-------- -------- --------
Net cash (used) by investing activities. (7,199) (4,450) 778
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to repurchase common stock...... (2,118) -- --
Proceeds from issuance of common stock
(Note 9)................................ 451 341 50
Proceeds from revolving credit lines
(Note 6)................................ 37,891 54,896 43,916
Payments on revolving credit lines (Note
6)...................................... (34,287) (50,977) (49,741)
Proceeds from term debt (Note 6)......... 9,518 2,574 2,770
Payments on term debt (Note 6)........... (7,081) (2,527) (1,297)
-------- -------- --------
Net cash provided (used) by financing
activities............................. 4,374 4,307 (4,302)
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (1,348) (2,123) (2,228)
-------- -------- --------
CASH AND CASH EQUIVALENTS, beginning of
year...................................... 7,406 6,058 3,935
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period... $ 6,058 $ 3,935 $ 1,707
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Alpha Technologies Group, Inc. ("Alpha" or the "Company") revenue is
primarily derived from two business segments: thermal management and
connectors. Thermal management products, principally heat sinks, which
dissipate heat generated by electronic components, serve the microprocessor,
computer, consumer electronics, transportation, automotive, industrial
controls, factory automation power supply, aerospace and defense industries.
Sub-miniature, micro-miniature and ultra-miniature connectors and cable and/or
wire harness connector assemblies, the majority of which are custom
manufactured to meet rigid specifications, serve the aerospace,
communications, defense, factory automation, industrial controls, medical
electronics, scientific/process instrumentation and test/measurement
industries. In addition, the Company operates a business that designs,
fabricates and tests custom designed electronic systems for the military,
telecommunications industry and certain commercial markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Alpha and its
wholly-owned subsidiaries. All material intercompany transactions and balances
have been eliminated. Certain prior year amounts have been reclassified to
conform to fiscal 1997 presentation. These changes had no impact on previously
reported results of operations or shareholders' equity. As more fully
described in Note 3--Discontinued Operation, prior years numbers have been
restated, through reclassification, to discontinue the hermetic connector
business sold in June 1997.
Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer.
Use of Estimates and Other Uncertainties
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of these
instruments are considered to be representative of their respective fair
values.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment
The cost of property and equipment is depreciated using the straight-line
method for financial reporting purposes over the estimated useful lives of
such assets, ranging from three to ten years. Leasehold improvements are
amortized on a straight-line basis over the related lease term.
F-7
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Goodwill
Goodwill represents the excess of cost over fair value of net assets
acquired and is being amortized over 15 years using the straight-line method.
The accumulated amortization on October 27, 1996 and October 26, 1997 was
approximately $371,000 and $632,000, respectively. Amortization expense of
approximately $156,500, $209,000 and $248,000 was recorded in fiscals 1995,
1996 and 1997, respectively.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock Based Compensation" during October 1995. The new standard establishes a
fair value approach to valuing stock options awarded to its employees as
compensation. The Company has elected, as permitted by the new standard, to
continue to follow its intrinsic value based method of accounting for stock
options consistent with Accounting Principals Board No. 25, "Accounting for
Stock Issued to Employees" (APB25). The intrinsic method measures compensation
cost for stock options as the excess, if any, of the quoted market price of
the Company's stock at the measurement date over the exercise price.
Income Taxes
The Company adopted SFAS No. 109, "Accounting for Income Taxes," ("Statement
109") on November 1, 1993. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using current enacted
tax rates. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are translated
into U. S. dollars at the current exchange rate in effect at the balance sheet
date, and revenues and expenses are translated at the average exchange rate
for the period in accordance with SFAS No. 52, "Foreign Currency Translation".
Resulting translation adjustments are reported as a separate component of
shareholders' equity.
Interest Rate Swap Agreement
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 October 26, 1997,
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.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") Number 128 ("SFAS 128")
"Earnings Per Share"; and in June 1997, FASB issued SFAS 130 "Reporting
Comprehensive Income" and SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information". The Company is required to adopt these
standards for its fiscal year 1999. Management believes that the adoption of
SFAS 128 and SFAS 130 in fiscal 1999 will not have a material adverse effect
on the preparation of and results of the Company's consolidated financial
statements. The Company adopted SFAS 131 in the current fiscal year.
F-8
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
On September 3, 1996, the Company purchased the 20% minority interest of
Uni-Star Industries, Inc. ("Uni-Star") for 265,000 shares of its common stock.
Uni-Star is now a wholly-owned subsidiary of the Company.
On August 21, 1996, the Company, through a newly-organized, wholly-owned
subsidiary, Lockie Acquisition Corp. ("LAC"), purchased all of the outstanding
stock of Lockhart Industries, Inc. ("LII"), a thermal management company,
pursuant to an Agreement and Plan of Merger dated as of August 14, 1996 (the
"Merger Agreement"). Pursuant to the Merger Agreement, the Company issued
280,556 shares of its common stock in exchange for all of the issued and
outstanding common stock of LII. Following the merger, the Company transferred
all of LAC's shares to Wakefield Engineering, Inc. ("Wakefield"), a wholly-
owned subsidiary of the Company, and changed LAC's name to Lockhart
Industries, Inc. ("Lockhart"). In addition, Wakefield paid off an aggregate of
$506,000 of LII's debt. Based upon decreases in LII's working capital and
collection of accounts receivable, the purchase price was reduced by 73,149
shares of the Company's common stock. In addition, the number of shares issued
is subject to increase in the event that the Company's common stock is not
trading at $9 or more two years from the date of closing. The acquisition was
accounted for as a purchase transaction, and accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed. The operating
results of Lockhart have been included in the Company's consolidated results
of operations since its acquisition.
3. DISCONTINUED OPERATION
In June 1997, substantially all of the assets and business of the Company's
hermetic connector business in Ohio were sold for $2,100,000, with a potential
additional payment of up to $400,000 based on orders booked by the buyer. The
sale resulted in a gain of approximately $610,000, net of income tax expense
of $12,000 and reserves primarily related to leased premises.
Summary operating results of the discontinued operation prior to the
sale are as follows for the fiscal years ended:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................ $2,665 $3,167 $2,031
Costs and expenses...................... 2,609 2,849 1,977
------ ------ ------
Net income (loss)....................... $ 56 $ 318 $ 54
====== ====== ======
</TABLE>
4. INVENTORIES
Inventories consisted of the following on:
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 26,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and components........................ $ 5,757 $5,537
Work in process..................................... 2,486 3,785
Finished goods...................................... 3,425 2,328
------- ------
11,668 11,650
Valuation reserve................................... (1,102) (1,869)
------- ------
$10,566 $9,781
======= ======
</TABLE>
F-9
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED COMPENSATION AND RELATED BENEFITS AND OTHER LIABILITIES
Accrued compensation and related benefits consisted of the following
on:
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 26,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries and wages.......................... $ 530 $ 711
Other............................................... 1,096 1,099
------ ------
$1,626 $1,810
====== ======
</TABLE>
Other liabilities consisted of the following on:
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 26,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accrued restructuring costs......................... $ -- $1,715
Accrued commissions................................. 961 1,013
Other............................................... 2,778 2,303
------ ------
3,739 5,031
Less: current portion............................... (3,342) (4,580)
------ ------
$ 397 $ 451
====== ======
</TABLE>
The accrued restructuring costs represent an estimate of the remaining costs
to close the manufacturing facility in Wakefield, Massachusetts and
consolidate production of its thermal management products in its other
existing facilities.
6. DEBT AND REVOLVING CREDIT FACILITIES
Debt and revolving credit facilities consisted of the following on:
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 26,
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Variable-rate revolving credit facility
(effective interest rates of 7.969% and 9% at
October 26, 1997), interest payable monthly,
principal is repaid and re-borrowed based on
cash requirements............................... $9,823 $5,198
Variable-rate revolving credit commitment........ 1,200 --
Variable-rate term notes (effective interest
rates of 8.75% to 8.85% at October 26, 1997),
payable in monthly installments ranging from
$22,619 to $37,500, plus accrued interest, with
maturities ranging from October of 2001 through
October of 2003................................. 2,886 3,489
Other............................................ -- 870
------- ------
13,909 9,557
Less current portion............................. (11,702) (1,494)
------- ------
$ 2,207 $8,063
======= ======
</TABLE>
As of December 31, 1997, Wakefield, Wakefield Extrusion, Lockhart and Malco
became parties to a loan agreement, as amended (the "Agreement") with a
commercial bank which provides for revolving loans of up to $9,000,000, with
the ability to automatically increase upon request to $12,000,000, and an
equipment acquisition facility of $3.2 million. In addition, there are two
term loans existing under the Agreement in the original
F-10
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT AND REVOLVING CREDIT FACILITIES--(CONTINUED)
amounts of $2,250,000 and $1,900,000. On October 26, 1997, $5,198,000 was
drawn on the revolving credit facility with interest accruing at the relevant
adjusted LIBOR rate plus 2.5% (7.97% per annum on October 26, 1997). There is
an unused line fee equal to .5% per annum on the difference between $9,000,000
(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 October 26, 1997, $1,837,500 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 October 26, 1997, $1,651,191 was outstanding on the $1,900,000
term note. The obligations under the Loan Agreement are secured by a first
lien on and assignment of all of the assets of Borrowers which in aggregate
total $31,338,000. Borrowers' credit facilities will expire on December 31,
1999.
Cash paid for interest on all outstanding debt amounted to approximately
$693,000 in fiscal year 1995, approximately $898,000 in fiscal year 1996 and
approximately $1,172,000 in fiscal year 1997.
Aggregate payments of debt and revolving credit facilities outstanding as of
October 26, 1997 for the next five years are summarized below:
<TABLE>
<CAPTION>
FISCAL YEARS AMOUNT
------------ --------------
(IN THOUSANDS)
<S> <C>
1998.................................................... $1,494
1999.................................................... 743
2000.................................................... 5,942
2001.................................................... 743
2002.................................................... 330
Thereafter.............................................. 305
------
$9,557
======
</TABLE>
Management intends to renew or refinance the revolving credit facility and
the revolving credit commitment at or prior to maturity.
7. PREFERRED STOCK
On October 27, 1996 and October 26, 1997, the Company had authorized 180,000
shares of unissued, preferred stock with a par value of $100 per share. The
Board of Directors has the authority to issue such preferred stock and to set
the terms thereof, including the dividend rate, conversion rights, redemption
rights, voting rights and liquidation preferences. There are no shares of
preferred stock outstanding as of October 26, 1997.
8. REPURCHASE OF COMMON STOCK
In September of 1994, the Board of Directors of the Company approved a plan
to purchase up to $2,500,000 of the Company's common stock. Pursuant to the
stock repurchase plan, the Company purchased 83,000 shares of common stock
during fiscal years 1994 at an aggregate price of $374,137. During fiscal year
1995, 391,155 shares of common stock were purchased at an aggregate price of
$2,118,173. This repurchase program has been completed.
F-11
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLANS
The Company has in effect nonqualified and incentive stock option plans
under which shares are available for exercise. As of October 26, 1997, the
Board of Directors has reserved 1,391,168 shares of common stock for issuance
under the plans. The prices at which substantially all stock options
outstanding have been granted have been equal to or in excess of the fair
market value of the Company's stock at the time of the grant. These options
vest over periods up to five years. On October 26, 1997, there were 167,668
shares available for future grants.
The following table summarizes activity and outstanding options
under the plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDER OPTION EXERCISE PRICE
------------ --------------
<S> <C> <C>
Outstanding on October 31, 1994................. 1,053,417 $2.90
Granted....................................... 457,000 5.48
Forfeited..................................... (10,000) 2.69
Exercised..................................... (250,500) 1.80
Expired....................................... (2,917) 4.50
--------- -----
Outstanding on October 29, 1995................. 1,247,000 4.23
Granted....................................... 373,000 6.98
Forfeited..................................... (283,334) 8.98
Exercised..................................... (158,332) 2.15
--------- -----
Outstanding on October 27, 1996................. 1,178,334 4.26
Granted....................................... 257,000 4.03
Forfeited..................................... (192,834) 4.58
Exercised..................................... (19,000) 2.84
--------- -----
Outstanding on October 26, 1997................. 1,223,500 $4.13
========= =====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------
WEIGHTED
RANGE OF OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
EXERCISE AS OF REMAINING AVERAGE AS OF AVERAGE
PRICES 10/27/97 CONTRACTUAL LIFE EXERCISE PRICE 10/27/97 EXERCISE PRICE
-------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00-
$2.00 28,640 3.1 Years $1.61 28,640 $1.61
$2.01-
$3.00 252,500 5.5 Years 2.63 230,000 2.63
$3.01-
$4.00 265,060 5.3 Years 3.60 135,060 3.51
$4.01-
$5.00 360,800 2.9 Years 4.51 196,482 4.48
$5.01-
$6.00 316,500 2.7 Years 5.58 204,333 5.58
--------- -------
1,223,500 3.9 Years 4.13 794,515 3.96
========= =======
</TABLE>
In October of 1996, the Board of Directors authorized a reduction in the
exercise price of each outstanding, unvested option to purchase shares of
common stock granted in fiscal 1996, to an amount equal to the fair market
value of the common stock on such date. The re-pricing has been treated as the
surrender and cancellation of outstanding stock options in conjunction with
the grant of replacement options with an exercise price of $4.56 per share.
On January 15, 1998, the Board of Directors of the Company authorized an
increase in the shares issuable under the 1994 Stock Option Plan by 400,000,
subject to shareholder approval.
F-12
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION PLANS--(CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company has accounted
for its employee stock options under the fair value method of that statement.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1996 and 1997: expected volatility 47.39%, risk free
interest rate of 6%, expected option life of 5 years, and no expected
dividends. In addition, adjustments were made for assumed cancellations.
The Black-Scholes option valuation 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 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
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. If the fair value based
method of accounting defined in SFAS 123 had been applied, the Company's net
loss and net loss per share would have been increased by approximately
$228,000, or $0.04 per share in fiscal 1996, and $325,000, or $0.05 per share
in fiscal 1997. The estimated weighted average fair value of options granted
during fiscal 1996 and fiscal 1997 was $4.16 and $1.97, respectively. This pro
forma information is not meant to be representative of the effects on reported
net income for future years, because as provided by SFAS 123, only the effects
of awards granted after the Company's 1995 fiscal year are considered in the
pro forma calculation.
10. NET INCOME (LOSS) PER SHARE
Net income (loss) per common and common equivalent share was computed using
the weighted average number of shares of common stock and common equivalent
shares outstanding during each year. Common equivalent shares included the
number of shares issuable upon exercise of options, less the number of shares
that could have been purchased with the exercise proceeds. For fiscal year
1996 and 1997, common equivalent shares were not considered in the computation
as their effect would have been antidilutive.
11. INCOME TAXES
On November 1, 1993, the Company adopted Statement 109 through a cumulative
catch-up adjustment. The implementation of this statement did not have a
material effect on the Company's balance sheet or results of operations. The
Company's profitable operations during the years ended October 31, 1994 and
October 29, 1995 resulted in the utilization of net operating loss
carryforwards, the tax benefit of which was fully reserved upon implementation
of Statement 109.
Income (loss) before income taxes was as follows for the fiscal
years ended:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic................................ $3,992 $(678) $(3,711)
Foreign................................. (89) 121 (305)
------ ----- -------
$3,903 $(557) $(4,016)
====== ===== =======
</TABLE>
F-13
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES--(CONTINUED)
The provision (benefit) for income taxes were as follows for the
fiscal years ended:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax...... $1,221 $(69) $(1,365)
State income tax........ 458 -- --
Foreign income tax ..... -- 60 --
------ ---- -------
1,679 (9) (1,365)
Valuation reserve pro-
vided (reversed)-
(Statement 109)........ (1,820) 69 1,365
------ ---- -------
$ (141) $ 60 $ --
====== ==== =======
</TABLE>
The differences in the income taxes provided for and the amounts
determined by applying the Federal statutory rate to income before
taxes of the Company are summarized as follows:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal income statutory rate.......... 34.0% (34.0%) (34.0%)
State income taxes, net of federal in-
come tax benefit...................... 7.6% -- --
Valuation reserve provided (reversed).. (46.0%) 34.0% 34.0%
Other.................................. .8% -- --
Foreign income taxes................... -- 29.4% --
Benefit of net operating loss
carryforwards......................... -- -- --
----- ----- -----
(3.6%) 29.4% --
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities and
their changes during the year ended October 26, 1997 were as
follows:
<TABLE>
<CAPTION>
DEFERRED
OCTOBER 27, (PROVISION) OCTOBER 26,
1996 BENEFIT 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards...... $5,231 $370 $5,601
Tax credits........................... 879 (294) 585
Accrued liabilities................... 545 448 993
Other................................. 1,030 158 1,188
------ ---- ------
Total gross deferred tax assets....... 7,685 682 8,367
Less: Valuation allowance............. (5,096) (559) (5,655)
------ ---- ------
Net deferred tax asset................ 2,589 123 2,712
====== ==== ======
Deferred Tax Liabilities:
Amortization and depreciation......... (882) 29 (853)
Other................................. (45) (102) (147)
------ ---- ------
Total deferred tax liabilities........ (927) (73) (1,000)
------ ---- ------
Net deferred tax asset................ $1,662 $ 50 $1,712
====== ==== ======
</TABLE>
F-14
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES--(CONTINUED)
Due to the Company's historical results of operations, a valuation allowance
was provided for the deferred tax assets upon adoption of Statement 109.
Because the Company generated taxable income and was able to utilize net
operating loss carryforwards during fiscal 1994 and 1995 and forecasted future
profitability which increased the likelihood of the future realization of the
net deferred tax asset, the Company reversed $1,360,000 and $1,820,000,
respectively, of the valuation allowance. During fiscal 1997 the increase in
the net deferred tax asset was the result of (a) $50,000 related to the
acquisition of Lockhart and (b) $559,000 related to the tax effects of
temporary differences which were entirely offset by an increase in the
valuation allowance.
On October 26, 1997, the Company had, for tax purposes, net operating loss
carryforwards of approximately $16,475,000, unused investment and research and
development tax credits of approximately $355,000, and $230,000 of alternative
minimum tax credits available to offset future taxable income and Federal
income taxes. The net operating loss carryforwards will expire from 2000 to
2012, the investment tax credit and research and development tax credit
carryforwards will expire from 1998 to 2005, and the alternative minimum tax
credit has no expiration.
All carryforwards are subject to review and possible adjustment by the
Internal Revenue Service. In compliance with the Tax Reform Act of 1986,
investment tax credits carried forward were reduced by 35%. The Company's
ability to utilize the net operating loss carryforwards to offset alternative
minimum taxable income is limited to 90% for tax years after fiscal 1987.
Additionally, Section 382 of the Internal Revenue Code limits the amounts of
net operating loss carryforwards usable by a corporation following a more than
50 percentage point change in ownership of the corporation during a three-year
period. It is possible that subsequent transactions involving the Company's
capital stock could result in such a limitation. As of October 26, 1997,
Management does not believes that a 50 percentage point change in ownership
has occurred during a three year period.
During fiscal year 1995 and 1996, cash paid for income taxes amounted to
approximately $996,000 and $194,000 respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company has operating lease commitments for certain office equipment and
manufacturing, administrative and support facilities. Minimum lease payments
under noncancellable leases on October 26, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING
FISCAL YEARS LEASES
------------ --------------
(IN THOUSANDS)
<S> <C>
1998.................................................... $2,271
1999.................................................... 1,842
2000.................................................... 1,385
2001.................................................... 1,186
2002.................................................... 1,182
Thereafter.............................................. 1,701
------
Minimum lease payments.................................. $9,567
======
</TABLE>
Rent expense (exclusive of operating expenses and net of sublease rents) for
all operating leases was approximately $1,339,000, $1,556,000 and 1,594,161 in
fiscal 1995, 1996 and 1997, respectively.
F-15
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. BUSINESS SEGMENT INFORMATION
Summarized financial information by business segment for the years
ended:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
Thermal management
products............... $43,865 $48,980 $58,294
Connector products...... 12,291 13,087 11,880
Other................... 5,295 5,003 5,491
------- ------- -------
$61,451 $67,070 $75,665
======= ======= =======
Operating income:
Thermal management
products............... $ 3,423 $ 1,363 $ (774)
Connector products...... 2,172 707 (933)
Other................... 137 (242) (48)
Corporate............... (1,608) (1,607) (1,237)
------- ------- -------
$ 4,124 $ 221 $(2,992)
======= ======= =======
Interest expense:
Thermal management
products............... $ 720 $ 858 $ 1,003
Connector products...... 55 215 170
------- ------- -------
$ 775 $ 1,073 $ 1,173
======= ======= =======
Total assets:
Thermal management
products............... $24,653 $30,678 $28,944
Connector products...... 6,129 7,382 6,653
Other................... 2,427 2,470 2,394
Corporate............... 7,777 5,119 3,387
Net assets of
discontinued operation. 1,115 1,198 --
------- ------- -------
$42,101 $46,847 $41,378
======= ======= =======
Depreciation and amortiza-
tion:
Thermal management
products............... $ 1,000 $ 1,627 $ 2,235
Connector products...... 166 377 429
Other................... 62 141 142
Corporate............... 28 27 23
------- ------- -------
$ 1,256 $ 2,172 $ 2,829
======= ======= =======
Capital Expenditures:
Thermal management
products............... $ 3,143 $ 2,587 $ 1,235
Connector products...... 1,178 1,115 162
Other................... 409 48 --
Corporate............... 42 20 23
------- ------- -------
$ 4,772 $ 3,770 $ 1,420
======= ======= =======
</TABLE>
F-16
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 27, OCTOBER 26,
ASSETS 1996 1997
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ 3,153 $ 1,406
Accounts receivable.................................. 30 55
Prepaid expenses..................................... 199 105
-------- --------
Total current assets............................... 3,382 1,566
INVESTMENT IN SUBSIDIARIES............................. 9,754 7,450
DUE FROM SUBSIDIARIES.................................. 8,394 8,784
OTHER ASSETS, net...................................... 1,737 1,804
-------- --------
$ 23,267 $ 19,604
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade.............................. $ 108 $ 21
Accrued compensation and related benefits............ 33 32
Other accrued liabilities............................ 921 750
-------- --------
Total current liabilities.......................... 1,062 803
OTHER LONG-TERM LIABILITIES............................ 88
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value, shares authorized
180,000.............................................
Common stock, $.03 par value, shares authorized
17,000,000; issued 7,681,733 at October 27, 1996 and
7,700,733 at October 26, 1997....................... 230 231
Additional paid-in capital........................... 43,474 43,523
Retained earnings.................................... (17,758) (21,110)
Other................................................ (32) (125)
Treasury stock, at cost (1,017,981 common shares at
October 27, 1996 and 1,008,553 common shares at
October 26, 1997)................................... (3,797) (3,718)
-------- --------
Total stockholders' equity......................... 22,117 18,801
-------- --------
$ 23,267 $ 19,604
======== ========
</TABLE>
S-1
<PAGE>
SCHEDULE I
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 29, 1995, OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
INCOME AND (EXPENSE)
Interest, investment and other income,
net..................................... $ 782 $ 209 $ 189
Equity in earning of subsidiaries, net of
taxes................................... 3,608 783 (2,304)
Corporate general and administrative..... (1,608) (1,201) (1,237)
Other operating expense.................. -- (256) --
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES....................... 2,782 (465) (3,352)
BENEFIT FOR INCOME TAXES................... 966 166 --
--------- --------- ---------
NET INCOME (LOSS).......................... $ 3,748 $ (299) $ (3,352)
========= ========= =========
PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss)........................ $0.57 $(0.05) $(0.50)
========= ========= =========
SHARES USED IN COMPUTING NET INCOME PER
SHARE..................................... 6,605,147 6,277,585 6,682,106
========= ========= =========
</TABLE>
S-2
<PAGE>
SCHEDULE I
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 29, 1995, OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
COMMON STOCK ADDITIONAL (LOSS) ON TREASURY STOCK
---------------- PAID-IN RETAINED MARKETABLE ------------------
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES OTHER SHARES AMOUNT
--------- ------ ---------- --------- ---------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31,
1994................... 6,727,345 $202 $38,670 $(21,207) $(138) $ -- 544,249 $ (983)
Net income............. -- -- -- 3,748 -- -- -- --
Issuance pursuant stock
option plans.......... 250,500 7 444 -- -- -- -- --
Unrealized gain on
marketable securities,
net of income taxes... -- -- -- -- 138 -- -- --
Stock repurchase....... -- -- -- -- -- -- 391,155 (2,118)
--------- ---- ------- -------- ----- ----- --------- -------
BALANCE, OCTOBER 29,
1995................... 6,977,845 209 39,114 (17,459) -- -- 935,404 (3,101)
--------- ---- ------- -------- ----- ----- --------- -------
Net (loss)............. -- -- -- (299) -- -- -- --
Issuance pursuant stock
option plans.......... 158,332 5 336 -- -- -- -- --
Acquisition of Lockhart
Industries, Inc. ..... 280,556 8 2,355 -- -- -- 82,577 (696)
Purchase of Uni-Star
Industries, Inc.
minority interest..... 265,000 8 1,669 -- -- -- -- --
Stock repurchase....... -- -- -- -- -- -- -- --
Other.................. -- -- -- -- -- (32) -- --
--------- ---- ------- -------- ----- ----- --------- -------
BALANCE, OCTOBER 27,
1996 7,681,733 230 43,474 (17,758) -- (32) 1,017,981 (3,797)
Net income (loss)...... -- -- -- (3,352) -- -- -- --
Issuance pursuant stock
option plans.......... 19,000 1 53 -- -- -- -- --
Acquisition of Lockhart
Industries, Inc. ..... -- -- -- -- -- -- (9,428) 79
Purchase of Uni-Star
Industries, Inc.
minority interest..... -- -- (4) -- -- -- -- --
Cumulative translation
adjustment............ -- -- -- -- -- (93) -- --
--------- ---- ------- -------- ----- ----- --------- -------
BALANCE, OCTOBER 26,
1997................... 7,700,733 $231 $43,523 $(21,110) $ -- $(125) 1,008,553 $(3,718)
--------- ---- ------- -------- ----- ----- --------- -------
</TABLE>
S-3
<PAGE>
SCHEDULE I
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 29, 1995, OCTOBER 27, 1996 AND OCTOBER 26, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES... $ 506 $(1,727) $(1,415)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities--
available for sale...................... (850) -- --
Proceeds from sale of marketable
securities--available for sale.......... 2,097 -- --
Advances to subsidiaries, net............ (1,663) (638) (315)
(Increase) decrease in other assets, net. 19 (15) (67)
------ ------- -------
Net cash (used) by investing
activities............................ (397) (653) (382)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock... 451 341 50
Payments to repurchase common stock...... (2,118) -- --
------ ------- -------
Net cash provided (used) by financing
activities............................ (1,667) 341 50
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (1,558) (2,039) (1,747)
------ ------- -------
CASH AND CASH EQUIVALENTS, beginning of
year...................................... 6,750 5,192 3,153
------ ------- -------
CASH AND CASH EQUIVALENTS, end of year..... $5,192 $ 3,153 $ 1,406
====== ======= =======
</TABLE>
S-4
<PAGE>
SCHEDULE II
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reserve for doubtful accounts
deducted from accounts
receivable in the balance
sheet--
1997......................... $ 279,665 $ 279,771 $ 231,548(1) $ 327,888
1996......................... 266,917 267,459 254,711(1) 279,665
1995......................... 110,598 180,540 24,221(1) 266,917
Reserve for obsolete inventory
deducted from inventories in
the balance sheet--
1997......................... $1,102,260 $2,122,091 $1,355,647(2) $1,868,704
1996......................... 419,855 964,767 282,362(2) 1,102,260
1995......................... 144,500 353,032 77,677(2) 419,855
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory written off at cost, net of value recovered.
S-5
<PAGE>
EXHIBIT 10.10(a)
WAKEFIELD ENGINEERING, INC.
60 Audubon Road
Wakefield, MA 01880
As of December 31, 1997
FLEET NATIONAL BANK
One Federal Street
Boston, MA 02110
Re: Sixth Amendment to Loan Agreement
Ladies and Gentlemen:
Reference is made to the Loan and Security Agreement dated June 22, 1994,
as amended by the First Amendment thereto dated May 5, 1995, a Second Amendment
thereto dated as of January 30, 1996, a Third Amendment thereto dated as of
March 29, 1996 and a Fourth Amendment thereto dated as of October 11, 1996 and a
Fifth Amendment thereto dated as of July 1, 1997 (together the "Loan Agreement")
and all promissory notes, agreements, documents and instruments entered into by
Wakefield Engineering, Inc. ("Wakefield"), Wakefield Extrusion Corp. ("WEC") and
Lockhart Industries, Inc. ("Lockhart") and any other person or obligor pursuant
thereto (collectively, the "Loan Documents") with or for the benefit of Fleet
National Bank ("Bank"). Except as otherwise defined herein, capitalized terms
used herein shall have the meanings given them in the Loan Agreement. This
Sixth Amendment to Loan Agreement is referred to as the "Sixth Amendment".
Background. Borrowers have requested that Bank agree to extend the
maturity date for the credit facilities provided under the Loan Agreement,
reinstitute an equipment acquisition loan facility, add Malco, Inc. ("Malco") as
a co-borrower and make certain other modifications to the Loan Agreement.
Lender has agreed to the request by the Borrowers subject to the terms and
conditions hereof.
1. Waiver of Covenant Non-Compliance. Subject to the terms and conditions
hereof, the Lender waives the Borrowers noncompliance with the financial
covenants in Sections 8(a) through (f) of the Loan Agreement at and prior to
December 31, 1997.
<PAGE>
2. Malco Designated as Additional Borrower. Malco is, and hereby shall be, a
Borrower under the Loan Agreement and other Loan Documents, jointly and
severally with Wakefield, WEC and Lockhart with respect to all now existing and
hereafter existing or created Obligations and all references to Borrower or
Borrowers in the Loan Agreement shall mean Wakefield, WEC, Lockhart and Malco,
jointly and severally.
3. Subject to the satisfaction of the terms and conditions hereof, Bank and
Borrower have agreed that the Loan Agreement shall be amended as follows:
(a) Amendment to Definition of Termination Date. The definition of
Termination Date is amended to delete "January 1, 1998" and to replace it with
"December 31, 1999".
(b) Amendment to Net Earnings Definition. The definition of Net Earnings
is amended to add the phrase "and Alpha corporate allocation in excess of
$150,000" after the word "items" and before the comma following the word
"items".
(c) Amendments to Section 2(c). Section 2(c) is amended to delete the
Section in its entirety and to substitute the following in place thereof:
(d) Equipment Credit Facility.
Bank shall, from time to time, at Borrowers' request, make Equipment
Facility Loans to Borrowers, subject to the terms and conditions contained in
this Agreement. All or any portion of the Equipment Facility Loans, once
repaid, may not be reborrowed. The aggregate amount of Equipment Facility Loans
to be made hereunder shall not exceed Three Million Two Hundred Thousand Dollars
($3,200,000) and all borrowings hereunder that Borrowers elect to make must be
borrowed on or before December 31, 1998 (the "Conversion Date"). The proceeds
of Equipment Facility Loans may be used only for the purpose of funding up to
eighty percent (80%) of the Hard Cost of Capital Equipment purchased by
Borrowers, as determined by Bank in its discretion. Equipment Facility Loan
proceeds may not be used to acquire furniture, fixtures or leasehold
improvements or to fund software costs, shipping, installation, setup, testing
or other "soft" costs associated with the purchase of such new equipment.
Borrowers may request Equipment Facility Loans under this Equipment Credit
Facility of not less than $50,000 for purchasers of equipment, with each such
acquisition to be evidenced by purchase orders, invoices, shipping receipts and
such other documentation as Bank may require. Bank reserves the right to make
or decline to make any Equipment Facility Loan, in its discretion, if the
equipment to be acquired or the documentation relating thereto is not
satisfactory to the Bank, in its discretion, or if an Event of Default or any
event which, with notice or lapse of time or both, might become an Event of
Default has occurred and is continuing. Each Equipment Facility Loan
outstanding shall be interest only until the Conversion Date at which time each
such Equipment Facility Loan will be converted to a term loan and the Borrowers
shall commence repayment of the principal balance owed on
<PAGE>
such Loans in equal monthly installments, each in an amount equal to one-eighty-
fourth (1/84th) of the aggregate unpaid principal balance of all Equipment Loans
made prior to the Conversion Date, together with all interest accrued thereon
payable on the first day of each month, commencing on the first day of the
calendar month following the Conversion Date with a final installment equal to
all unpaid principal, together with all interest accrued thereon (at the rate
specified below) on the first to occur of the Termination Date or December 31,
2003. The Equipment Facility Loans shall be evidenced by the Equipment Facility
Note, in the form of Exhibit B to the Sixth Amendment, or such other notes in
form satisfactory to Bank as Bank may require, and in the absence of such notes,
shall be conclusively evidenced by Bank's records of loans and repayments.
(e) Interest Rates Adjustment. Subsection 2(d)(i) of the Loan Agreement is
hereby amended to add the following to the end of said Section:
"Upon receipt in compliance with Section 5(e) of the Loan Agreement by
Bank of Alpha's consolidated audited financial statements with consolidating
schedules for each of the Borrowers for their fiscal year ending October 25,
1998 demonstrating to the satisfaction of the Bank that the Borrowers have and
continue to comply with the financial covenants set forth in Section 8 of the
Loan Agreement, the interest rates applicable to Loans outstanding shall be
reduced effective on the first day of the month following receipt of such
financial statements, to (A) for each Prime Rate Advance, the Prime Rate plus
one quarter of one percent (.25%) and (B) for each LIBOR Rate Advance, the
relevant Adjusted LIBOR Rate for the applicable Interest Period selected by
Borrowers in conformity with the Loan Agreement plus 225 basis points (2.25%).
The foregoing interest rates will be subject to further reduction after October
25, 1998 effective on the first day of the month following the receipt by Bank
of a Compliance Certificate furnished to Bank under Section 5(d) together with
the accompanying financial statements demonstrating to the Bank's satisfaction
that Borrowers' Senior Debt to Tangible Capital Base Ratio under Section 8(c) of
the Loan Agreement is less than or equal to 2:25 to 1:00 and continuing for so
long as such minimum ratio is maintained, to (A) for each Prime Rate Advance,
the Prime Rate, and (B) for each LIBOR Rate Advance, the Adjusted LIBOR Rate for
the applicable Interest Period selected by Borrowers in conformity with the Loan
Agreement plus 200 basis points (2.00%)."
(f) Unused Line Fee Adjustment. Section 2(h) is amended to add the
following sentence at the end thereof:
"The foregoing unused line fee shall be reduced to one quarter of one
percent (1/4%) per annum, upon the effective date of the first permitted
adjustment to interest rates under the last two sentences of Section 2(d)(i) of
the Loan Agreement."
<PAGE>
(f) Financial Covenants Amendments.
(1) Section 8(a) of the Loan Agreement is amended by deleting the
Section in its entirety and by substituting in place thereof the following:
"(a) Tangible Capital Base. Permit Borrowers' Tangible Capital Base
to be less than the following amounts at the end of the respective periods set
forth below:
Date Minimum Tangible
Capital Base
January 1 through January 25, 1998 $6,900,000
January 26 through April 26, 1998 $7,500,000
April 27 through July 26, 1998 $7,900,000
July 26, 1998 through October 26,
1998 and thereafter $8,800,000
For purposes of calculating Tangible Capital Base, all Subordinated
Indebtedness hereafter provided to the Borrowers by Alpha and subject to the
Subordination Agreement between Alpha and Bank shall be added to the Minimum
Tangible Capital Base amounts set forth above.
(2) Section 8(b) is amended by deleting the Section in its entirety
and inserting in place thereof the following:
"8(b) Debt Service and Unfinanced Capital Expenditures Coverage
Ratio. Permit the ratio of (A) the aggregate of (i) EBITDA minus (ii)
unfinanced capital expenditures, minus (iii) cash taxes, and minus (iv)
permitted payments on Subordinated Indebtedness and any permitted Dividends to
(B) the sum of (i) interest expense and (ii) CMLTD of the Borrowers to be less
than .25 to 1.00 for the fiscal year to date period ending January 25, 1998 and
1.25 to 1.00 for each fiscal quarter ending thereafter, for the remainder of
fiscal year 1998, the fiscal year to date period, and thereafter, at each fiscal
quarter end for the prior four fiscal quarters."
(3) Section 8(c) Senior Debt to Tangible Capital Base Ratio is
amended by inserting the following therein:
"(c) Senior Debt to Tangible Capital Base. Permit the ratio of
Borrowers' Senior Indebtedness to Tangible Capital Base to be more than 2:50 to
1:00 at Borrowers' 1998 fiscal year end and at the end of each fiscal quarter
thereafter."
(4) Section 8(d) of the Loan Agreement is deleted in its entirety.
(5) Section 8(e) of the Loan Agreement is deleted in its entirety
and the following is substituted in place thereof:
<PAGE>
(e) Current Ratio. Permit Borrowers' current ratio at any fiscal
quarter end to be less than 1.00 to 1.00.
(6) Section 8(f), Capital Expenditures, is deleted in its entirety
and the following is inserted in place thereof:
"(f) Capital Expenditures. Borrowers shall not incur Capital
Expenditures in excess of $5,500,000 in any fiscal year of the Borrowers."
(h) Section 8 of the Loan Agreement is amended to delete Section (p) and
to substitute in place thereof the following:
"(p) Subordinated Indebtedness. Borrowers shall not make, directly
or indirectly, any payment of principal, interest or other amounts on the
Subordinated Indebtedness due to Alpha; provided, however, that commencing in
the second fiscal quarter of the Borrowers' 1998 fiscal year so long as
Borrowers remain in compliance with the terms and conditions of the Loan
Agreement including, without limitation, Section 8 and maintain and continue to
maintain borrowing availability (as defined herein) of not less than $500,000
before and after giving effect to any payment, Borrowers may pay to Alpha
interest and not more than $250,000 of principal per fiscal quarter on the
Subordinated Debt due to Alpha. For purposes hereof, borrowing availability
means the difference at any time between the amount available to be borrowed as
Revolving Loans under the Loan Agreement and Borrowers' outstanding Revolving
Loans and Letters of Credit less all Borrowers' trade payables that are past
due. Notwithstanding the foregoing, upon the effectiveness of the Sixth
Amendment, Wakefield may make a loan repayment to Alpha in the amount of
$750,000, which payment shall not be subject to the foregoing limitations.
(i) Section 8 of the Loan Agreements is amended to add a new Section 8(q)
as follows:
(q) Reserve Policy. Borrowers shall not directly or indirectly
modify their reserve policy from the policy in effect on the date of the Sixth
Amendment without the prior written consent of the Bank.
4. Grant of Security Interest. As security for the prompt performance,
observance and payment in full of all Obligations, Malco hereby grants to Bank a
continuing security interest in and lien on and assigns, transfers, sets over
and pledges to the Bank all property of Malco whether now owned by Malco or
hereafter acquired or existing, and wherever located (collectively, the
"Collateral"), including without limitation:
(a) all Accounts;
(b) all Inventory;
(c) all Equipment;
<PAGE>
(d) all General Intangibles;
(e) all Instruments and Documents;
(f) all Related Collateral; and
(g) all accessions to and additions to, substitutions for, replacements,
products and Proceeds to any and all of the foregoing.
The term "Collateral" shall also refer to any other property in which Bank is
granted a Lien to secure any of the Obligations pursuant to an agreement
supplemental hereto or otherwise (whether or not such agreement makes reference
to the Loan agreement or the Obligations of Borrower thereunder).
5. Representations and Warranties.
To induce Bank to enter into this Sixth Amendment, each Borrower
jointly and severally warrants, represents and covenants to Bank that:
(a) Organization and Qualification. Each Borrower is a corporation
duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Each Borrower is duly qualified or is
authorized to do business and is in good standing as a foreign corporation in
all states and jurisdictions in which the failure of such Borrower to be so
qualified would have a material adverse effect on the financial condition,
business or properties of such Borrower.
(b) Corporate Power and Authority. Each Borrower is duly authorized
and empowered to enter into, execute, deliver and perform this Sixth Amendment,
and each of the Loan Documents to which it is a party. The execution, delivery
and performance of this Sixth Amendment and each of the other Loan Documents
have been duly authorized by all necessary corporate action and do not and will
not (i) require any consent or approval of the shareholders of any Borrower;
(ii) contravene any Borrower's charter or by-laws; (iii) violate, or cause any
Borrower to be in default under, any provision of any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award in effect
having applicability to such Borrower; (iv) result in a breach of or constitute
a default under any indenture or loan or credit agreement or any other
agreement, lease or instrument to which any Borrower is a party or by which such
Borrower's properties may be bound or affected; or (v) result in, or require,
the creation or imposition of any Lien (other than Permitted Liens) upon or with
respect to any of the properties now owned or hereafter acquired by any
Borrower.
(c) Legally Enforceable Agreement. This Sixth Amendment and each of
the other Loan Documents delivered under this Sixth Amendment will be, a legal,
valid and binding obligation of each Borrower, enforceable against each Borrower
in
<PAGE>
accordance with its respective terms subject to bankruptcy, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally.
(d) No Material Adverse Change. Since December 28, 1997, the date of
the last financial statements provided by the Borrowers to the Bank, there has
been no material adverse change in the condition, financial or otherwise, of
Borrowers as shown on the consolidated balance sheet thereof as of such date and
no change in the aggregate value of property and assets owned by Borrowers,
except changes in the ordinary course of business, none of which individually or
in the aggregate has been materially adverse.
(e) Continuous Nature of Representations and Warranties. Each
representation and warranty contained in the Loan Agreement and the other Loan
Documents remains accurate, complete and not misleading in any material respect
on the date of this Sixth Amendment, except for representations and warranties
that explicitly relate to an earlier date and changes in the nature of
Borrowers' business or operations that would render the information in any
exhibit attached thereto either inaccurate, incomplete or misleading, so long as
Bank has consented to such changes or such changes are expressly permitted by
the Loan Agreement.
7. Conditions Precedent.
Notwithstanding any other provision of this Sixth Amendment or any of
the other Loan Documents, and without affecting in any manner the rights of Bank
under the other sections of this Sixth Amendment, this Sixth Amendment shall not
be effective as to Bank unless and until each of the following conditions has
been and continues to be satisfied:
(a) Documentation. Bank shall have received, in form and substance
satisfactory to Bank and its counsel, a duly executed copy of this Sixth
Amendment, the Fourth Amended and Restated Revolving Credit Note in the form
attached as Exhibit A hereto, the $3,200,000 Equipment Facility Note in the form
attached as Exhibit B hereto, the Amendment to Subordination Agreement with
Alpha in the form attached as Exhibit C hereto, the Perfection Certificate of
Malco in the form of Exhibit D hereto, the Guaranty Agreement by Malco in the
form of Exhibit E hereto, together with such additional documents, instruments
and certificates as Bank and its counsel shall require in connection therewith,
all in form and substance satisfactory to Bank and its counsel.
(b) No Default. No Event of Default shall exist.
(c) No Litigation. Except as previously disclosed to and consented
to by Bank, no action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of the Loan
Agreement or this Sixth Amendment or the consummation of the transactions
contemplated thereby or hereby.
<PAGE>
6. Acknowledgment of Obligations.
Each Borrower hereby (1) reaffirms and ratifies all of the promises,
agreements, covenants and obligations to Bank under or in respect of the Loan
Agreement and other Loan Documents as amended hereby and (2) acknowledges that
it is unconditionally liable for the punctual and full payment of all
Obligations, including, without limitation, all charges, fees, expenses and
costs (including reasonable attorneys' fees and expenses) under the Loan
Documents, as amended hereby, and that it has no defenses, counterclaims or
setoffs with respect to full, complete and timely payment and performance of all
Obligations.
7. Confirmation of Liens.
Each Borrower acknowledges, confirms and agrees that the Loan
Documents, as amended hereby, are effective to grant to Bank duly perfected,
valid and enforceable first priority security interests and liens in the
Collateral described therein, except for Permitted Liens, and that the locations
for such Collateral specified in the Loan Documents have not changed except as
provided herein. Each Borrower further acknowledges and agrees that all
Obligations of Borrowers are and shall be secured by the Collateral.
8. Miscellaneous.
Except as set forth herein, the undersigned confirms and agrees that
the Loan Documents remain in full force and effect without amendment or
modification of any kind. The execution and delivery of this Sixth Amendment by
Bank shall not be construed as a waiver by Bank of any Default or Event of
Default under the Loan Documents. This Sixth Amendment, together with the Loan
Agreement and other Loan Documents, constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior
dealings, correspondence, conversations or communications between the parties
with respect to the subject matter hereof. This Sixth Amendment and the
transactions hereunder shall be deemed to be consummated in the Commonwealth of
Massachusetts and shall be governed by and interpreted in accordance with the
laws of that state. Any reference in any of the Loan Documents to Lender shall
be deemed to be a reference to the Bank. This Sixth Amendment and the
agreements, instruments and documents entered into pursuant hereto or in
connection herewith shall be "Loan Documents" under and as defined in the Loan
Agreement.
<PAGE>
Executed under seal on the date set forth above.
ATTEST: WAKEFIELD ENGINEERING, INC.
By: /s/ JAMES J. POLAKIEWICZ
Name:
Title: V. P. of Finance
ATTEST: WAKEFIELD EXTRUSION CORP.
By: /s/ JAMES J. POLAKIEWICZ
Name:
Title:
ATTEST: LOCKHART INDUSTRIES, INC.
By: /s/ JAMES J. POLAKIEWICZ
Name:
Title:
ATTEST: MALCO, INC.
By: /s/ JAMES J. POLAKIEWICZ
Name:
Title:
Accepted in Boston, Massachusetts
as of December 31, 1997
FLEET NATIONAL BANK
By:
Name:
Title:
<PAGE>
List of Exhibits
Exhibit A Fourth Amended and Restated Revolving Credit Note
Exhibit B Equipment Facility Note
Exhibit C Subordination Agreement
Exhibit D Perfection Certificate
Exhibit E Guaranty Agreement of Malco, Inc.
<PAGE>
EXHIBIT 11
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
OCTOBER 29, OCTOBER 27, OCTOBER 26,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Shares:
Weighted average common shares
outstanding............................ 5,984,584 6,277,585 6,682,106
Net common shares issuable on exercise
of stock options....................... 620,563 -- --
---------- --------- -----------
Weighted average common and common
equivalent shares outstanding............ 6,605,147 6,277,585 6,682,106
========== ========= ===========
Net income (loss)......................... $3,748,000 $(299,000) $(3,352,000)
========== ========= ===========
Per share amount.......................... $ 0.57 $ (0.05) $ (0.50)
========== ========= ===========
</TABLE>
- --------
(1) See Note 10 to the consolidated financial statements for further
information regarding the calculation of weighted average common and
common equivalent shares outstanding.
<PAGE>
EXHIBIT 21
ALPHA TECHNOLOGIES GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
Wakefield Engineering, Inc. (incorporated in Delaware)
Wakefield Extrusion, Inc. (incorporated in California)
Lockhart Industries, Inc. (incorporated in California)
Uni-Star Industries, Inc. (incorporated in Delaware, does business as
Microdot Connectors)
Malco Microdot UK Ltd. (organized in the United Kingdom)
Malco Microdot France SARL (organized in France)
Malco, Inc. (incorporated in Delaware)
<PAGE>
EXHIBIT 23.1(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this Form 10-K.
/s/ Arthur Andersen
Houston, Texas
January 26, 1998
<PAGE>
EXHIBIT 23.1(B)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into the Company's Form S-
8 Registration Statements filed on January 29, 1987 (Reg. No. 33-11627);
September 28, 1987 (Reg. No. 33-17359); March 17, 1988 (Reg. No. 33-20706);
June 30, 1989 (Reg. No. 33-29636); June 23, 1992 (Reg. No. 33-48663); and
April 30, 1996 (Reg. No. 333-03001); and S-3 Registration Statement filed on
August 16, 1996 (Reg. No. 333-10311).
/s/ Arthur Andersen
Houston, Texas
January 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AS OF OCTOBER 27, 1996 AND OCTOBER 27, 1997 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 29, 1995, OCTOBER 27, 1996,
AND OCTOBER 26, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-29-1995 OCT-27-1996 OCT-26-1997
<PERIOD-START> OCT-31-1994 OCT-30-1995 OCT-28-1996
<PERIOD-END> OCT-29-1995 OCT-27-1996 OCT-26-1997
<CASH> 0 3,935 1,707
<SECURITIES> 0 0 0
<RECEIVABLES> 0 12,060 11,766
<ALLOWANCES> 0 280 328
<INVENTORY> 0 10,566 9,781
<CURRENT-ASSETS> 0 28,870 24,394
<PP&E> 0 16,114 17,341
<DEPRECIATION> 0 3,129 5,656
<TOTAL-ASSETS> 0 46,847 41,378
<CURRENT-LIABILITIES> 0 22,126 14,063
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 230 231
<OTHER-SE> 0 21,887 18,570
<TOTAL-LIABILITY-AND-EQUITY> 0 46,847 41,378
<SALES> 61,451 67,070 75,665
<TOTAL-REVENUES> 61,451 67,070 75,665
<CGS> 44,661 52,651 61,726
<TOTAL-COSTS> 44,661 52,651 61,726
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 775 1,073 1,173
<INCOME-PRETAX> 3,903 (557) (4,016)
<INCOME-TAX> (141) 60 0
<INCOME-CONTINUING> 4,044 (617) (4,016)
<DISCONTINUED> 56 318 664
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,748 (299) (3,352)
<EPS-PRIMARY> 0.57 (0.05) (0.50)
<EPS-DILUTED> 0.57 (0.05) (0.50)
</TABLE>
