<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 31, 1999
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)
306 Pasadena Avenue 91030
South Pasadena, CA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: 626.799.9171
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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. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant.
$25,958,596 at January 21, 2000
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, 6,591,255 shares outstanding at January 21, 2000
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
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, ability to retain and attract personnel including management and
other risks are detailed herein and in the Company's other filings with the
Securities and Exchange Commission.
PART I
Item 1. Description of Business.
General
Alpha Technologies Group, Inc. ("Alpha" or the "Company") manufactures
thermal management products, electronic connectors, and custom designed
subsystems.
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, automotive, telecommunication,
industrial controls, transportation, power supply, factory automation,
consumer electronics, aerospace and defense industries.
Connectors are electro-mechanical devices that permit electronic
subassemblies such as printed circuit boards, power supplies and input-output
wire harnesses/cable assemblies to be coupled and separated. The 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. The Company's
connector products serve the aerospace, communications, defense, factory
automation, industrial controls, medical electronics, scientific/process
instrumentation and test/measurement industries.
Custom designed subsystems are operational sub-units integrated into major
networks for data transmission, retrieval and transfer. The Company designs,
fabricates and tests custom designed subsystems for the defense industry, 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.
The thermal management business is conducted through the Company's wholly-
owned subsidiary, Wakefield Engineering, Inc. ("Wakefield") which includes the
Wakefield-Fall River and Wakefield-Temecula divisions, Specialty Extrusion
Corp. ("Specialty", formerly known as Wakefield Extrusion Corp.) 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 Microdot Connectors Europe
Ltd, its foreign subsidiary. The Company's electronics systems business
operates as Malco Technologies, Incorporated, which is a wholly owned
subsidiary of Alpha.
See "Business Segment Information" in Notes to Consolidated Financial
Statements.
<PAGE>
Thermal Management Segment
General
During fiscal 1999, the Company's thermal management segment operated
profitably and experienced quarterly increases in revenues and gross margin
percentage. In the second half of fiscal 1998, the thermal management segment
revenues decreased substantially compared to the first half of fiscal 1998.
Management believes the decrease was primarily the result of increased
competition from Asian manufacturers which resulted in lower volumes and sales
prices for products serving the personal computer industry. In response to the
decreased revenues, the Company substantially reduced costs to bring them in
line with existing sales levels, primarily by workforce reductions. See
"Business Segment Information" in Notes to Consolidated Financial Statements.
Products
The Company designs, manufactures and sells thermal management products for
use in a variety of industries, including the microprocessor, computer,
automotive, telecommunication, industrial controls, transportation, power
supply, factory automation, consumer electronics, 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.
These products are used in personal computers
and servers. Older versions of Penguin Coolers
are used in embedded microprocessor
applications. In addition, these products solve
thermal problems for ASICs, ball grid arrays
("BGA") and multichip modules.
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.
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.
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Customers
The principal customers for the Company's thermal management products are
leading original equipment manufacturers ("OEM's") of electronic equipment,
including: Harman, Hewlett-Packard, Rockwell, Martin Marietta, General
Electric, Delco, SCI, Gateway, Chrysler Corporation, and Motorola. The thermal
management business has over 3,000 customers. No single customer accounted for
greater than 10% of the Company's revenues during its 1998 or 1999 fiscal
years.
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, as required by certain of
the Company's automotive customers, the Company's Wakefield-Temecula division
became QS9000 registered (the quality specification required by the automotive
industry).
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 to its customers. The Company has applications
engineers who are dedicated to providing ongoing technical support. These
engineers 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 customers to develop new thermal management solutions. The Company
believes the technical services provided by its engineers are an important
factor in its thermal management sales.
The Company sells thermal management products through its in-house sales
personnel and a network of independent manufacturers' representatives and
distributors. In North America, thermal management products sales are
supported by an internal sales support staff of 17 individuals, 21
manufacturers' representatives and 16 distributors. In international markets,
the Company's thermal management products are sold by: 9 companies functioning
both as manufacturers' representatives and distributors, 2 manufacturers'
representatives and 5 distributors.
In general, the Company's thermal management manufacturers' representatives
and distributors enter 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
agreements and to return all products (other than obsolete or custom 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.
Research and Product Development
The Company's product development strategy continues to focus on engineering
modifications of existing products to provide customers with higher
performance and lower cost products. The Company maintains technical
relationships with certain key customers in order to understand future thermal
management requirements and focuses on developing new or modifying existing
products to meet such requirements. The Company strives to be included on the
recommended vendor list of its customers, however, such recommendation is
typically not exclusive.
During fiscal 1997, 1998 and 1999, the Company spent $1,506,000, $1,903,000
and $738,000, respectively, on product research and development with respect
to its thermal management products. The Company believes that its technical
capabilities, in conjunction with its relationships with customers, will allow
it to continue to introduce solutions to new thermal management problems
responsively. The reduction in research and
3
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development expenses resulted from the Company's decision to primarily focus
its efforts on solving customer's current thermal management problems rather
than the development of next generation solutions.
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 this market, the Company's three principal competitors are Aavid
Thermal Technologies, Inc. (including its recent purchase of Thermalloy),
Foxconn/Foxflow Thermal Technology, Inc. and National Northeast Corp., a
subsidiary of Mestek, Inc. Additional competition comes from numerous small
machine shops and aluminum extruders 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 $9.1 and $10.0
million on October 25, 1998 and October 31, 1999, 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 18 patents related to its thermal management
products which expire from 2002 to 2016. 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 the Company's thermal management products
is extruded 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 available from multiple suppliers
at competitive prices. In addition, Specialty, a wholly-owned subsidiary of
Wakefield Engineering, supplies a portion of the Company's needs for extruded
aluminum. The Company does not believe the price volatility for aluminum
represents a significant risk because the raw materials for an order are
usually purchased within a short time after the order is accepted.
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.
4
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The Company's principal connector products include:
Rectangular Connectors 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.
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 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 principal customers for the Company's connector products are OEM's in a
diverse group of industries including: aerospace, communications, defense,
factory automation, industrial controls, medical electronics,
scientific/process instrumentation and test/measurement. The Company's
connector business has over 400 customers including: Rockwell Collins, March
Electronics, Boeing North America, PCB Piezotronics, Lockheed Martin, Space
Systems/Loral, and Raytheon Company. No single customer accounted for greater
than 10% of the Company's revenue during its 1998 and 1999 fiscal year.
Typically, 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's connector products include 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 four-person
sales force supports 16 manufacturer's representatives and two distributors.
In international markets, the connector products segment uses one distributor
in addition to in-house sales personnel in England which market the Company's
products to 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. In certain cases, the Company allows
its distributors to exchange a small portion of products they have purchased
for new products as part of a
5
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stock rotation program. Additionally, a distributor can return all products it
has purchased and not resold, excluding custom and obsolete products (if any),
if the Company terminates its distribution agreement, or for a substantial
restocking fee if the distributor cancels the agreement. Historically, the
amount of returns has been insignificant to the Company's business. The
agreements with the Company's connector product distributors generally do not
preclude them from marketing competitive products.
Research and Product Development
The Company's connector product development strategy primarily focuses on
modifying existing products in response to customer needs. Many of the
connector products are modified in close consultation with its customers and
sales representatives. 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 customer's needs. The
Company intends to continue developing new connector products by modifying and
extending its current products.
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 smaller divisions of larger firms. The Company's
connector competitors include ITT's Cannon division, Glenaire, Labinal's Cinch
division, Microtech, Molex, Cristek, AirBorn, Inc. and Min-e-Con.
Backlog
The Company's connector products backlog was approximately $4.0 and $3.1
million on October 25, 1998 and October 31, 1999, respectively. 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, or provided quotes with
extended validity dates for several customers for its connector products,
including Endevco, Lockheed Martin, Raytheon and Rockwell Collins. 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 3 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,
copper alloy, 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 government 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
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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.
See "Legal Proceedings".
Employees
On October 31, 1999, the Company had 611 employees (604 of whom were full
time). Its thermal management segment had 431 employees (427 of whom were full
time), all in domestic operations, and its connector products segment had 109
employees in domestic operations (all full time) and 15 employees resident
outside the United States (12 full time). In addition, the Company had 48
employees (all full time) in its subsystem business and 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.
Item 2. Description of Property.
The Company has leases for manufacturing facilities at the following
locations:
<TABLE>
<CAPTION>
Approximate Expiration
Location Square Feet Principal 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 August 2002
for thermal
management products
Fall River, Massachusetts..... 81,000 thermal management July 2008
products
Colmar, Pennsylvania.......... 52,000 electronic March 2005
subsystems
Paramount, California......... 36,700 thermal management October 2004
products
Paramount, California......... 25,000 thermal management October 2004
products
</TABLE>
Management believes that these facilities are in good condition suitable for
the purposes for which they are used. The Company has office space for its
thermal management sales, engineering and administrative functions in Beverly,
Massachusetts and 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 indicated that the underground water
flows in a direction that would not support AAHT's claims.
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Some discovery has been concluded and a non-binding mediation was held on
January 21, 1999. No resolution was reached, but the parties agreed to further
testing and to attempt to negotiate a settlement thereafter. The testing was
conducted and led to results that, in the opinion of Lockhart's expert
consultants, suggest that contamination flowed from the AAHT property to the
Lockhart property, rather than the other way around. The parties are now in
final stages of negotiating a settlement under which the suit would be
dismissed without prejudice, with no payments from Lockhart to AAHT and no
payments from AAHT to Lockhart.
On August 5, 1998, an attorney for a group called California Community
Health Advocates wrote a letter to Lockhart Industries alleging that Lockhart
was in violation of the California Safe Drinking Water Act, California Health
and Safety Code secs. 25249 et seq. (commonly known as Proposition 65) because
of its alleged failure to post certain notices and to provide certain warnings
to neighboring businesses and residents. If all of these allegations were
true, Lockhart could be subjected to penalties of up to $2,500 per day. The
parties have just concluded a settlement under which Lockhart will pay
$45,000, install certain new equipment, and publish warnings.
Other than as set forth above, 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 1999 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>
1998 High Low
---- ---- ---
<S> <C> <C>
First Quarter............................................. 4 3/4 3 1/2
Second Quarter............................................ 5 1/2 3 3/4
Third Quarter............................................. 5 1/4 3 5/16
Fourth Quarter............................................ 3 1/4 1 1/2
<CAPTION>
1999 High Low
---- ---- ---
<S> <C> <C>
First Quarter............................................. 2 1 1/4
Second Quarter............................................ 3 1/2 1 11/16
Third Quarter............................................. 5 3 5/16
Fourth Quarter............................................ 5 3/4 3 7/8
</TABLE>
Holders of Record
On December 31, 1999, there were approximately 174 holders of record and
approximately 2,000 beneficial owners of the Company's common stock.
Dividends
The Company has paid no cash dividends on its common stock during fiscal
years 1998 and 1999. The Board of Directors of the Company does not intend to
pay cash dividends on its common stock in the foreseeable future.
9
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Item 6. Selected Financial Data.
In June 1997, the Company sold its hermetic connector business. The Results
of Operations in the following table do not include any information with
respect to such business sold.
<TABLE>
<CAPTION>
For the Years Ended
-----------------------------------------------------------
October 29, October 27, October 26, October 25, October 31,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(In Thousands Except per Share Data)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS(1)
Sales................... $ 61,451 $ 67,070 $ 75,665 $ 77,045 $ 65,220
Cost of sales........... 44,461 52,651 61,726 63,773 47,955
Gross profit............ 16,790 14,419 13,939 13,272 17,265
Income (loss) before
discontinued
operations(2).......... 3,692 (617) (4,016) (2,783) 4,154
Income (loss) per share
from continuing
operations:
Basic................. $ 0.62 $ (0.10) $ (0.60) $ (0.41) $ 0.60
Diluted............... $ 0.56 $ (0.10) $ (0.60) $ (0.41) $ 0.58
Shares used:
Basic................. 5,984,584 6,277,585 6,682,106 6,753,752 6,935,778
Diluted............... 6,605,147 6,277,585 6,682,106 6,753,752 7,134,382
BALANCE SHEET DATA(1)
Working capital......... $ 15,938 $ 6,744 $ 10,331 $ 9,099 $ 9,098
Total assets............ 42,101 46,847 41,378 38,675 34,849
Total debt.............. 9,943 13,909 9,557 11,974 7,979
Stockholders' equity.... 18,763 22,117 18,801 16,317 18,502
</TABLE>
- --------
(1) See Consolidated Financial Statements and Notes to Consolidated Financial
Statements on pages F-1 through F-20.
(2) See "Discontinued Operation" in Notes to Consolidated Financial
Statements.
Item 7. Management's Discussion and Analysis of Operations and Financial
Condition.
Forward Looking Statements
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, ability to retain and attract personnel including management and
other risks are detailed herein and in the Company's other filings with the
Securities and Exchange Commission.
Results of Operations
Fiscal Year 1999 versus Fiscal Year 1998 Comparison
Net Income/Loss. The Company reported net income for fiscal 1999 of
$4,154,000 compared to a net loss of $2,783,000 for fiscal 1998. The net loss
reported for 1998 included $127,000 of net charges for restructuring and other
non-recurring costs, a charge for additional inventory reserves of $926,000,
and a $269,000 charge to
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Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--continued
write off toolings used in the manufacturing of certain products within the
thermal management segment's stamping product line. The additional charges
recorded in fiscal 1998 are detailed further below. The improvement in net
income is primarily the result of improved gross profit and control of
operating expenses. See "Gross Profit, Research and Development and Selling,
General and Administrative Expense" below.
Net income from thermal management operations for fiscal 1999, before the
allocation of Alpha corporate expenses ("corporate allocation"), was
$4,455,000 compared to a net loss of $3,160,000 for the 1998 period. The loss
in fiscal 1998 included a charge for additional inventory reserves of
$926,000, a $269,000 charge to write off toolings used in the manufacturing of
certain products within the stamping product line, severance payments of
$263,000 and the net reversal of $362,000 accrued in connection with the
consolidation of the thermal management operations begun in the fourth quarter
of 1997. Results from operations improved primarily due to an increase in
gross profit margin and a decrease in operating expenses resulting from the
changes implemented at the end of fiscal 1998.
Net income from connector operations for fiscal 1999, before corporate
allocation, was $887,000 compared to $889,000, for fiscal 1998. The 1998
period included $150,000 in estimated expenses accrued for the closure of the
French manufacturing facility and $76,000 in severance payments at the
connector operation in South Pasadena, CA. The decrease in net income, without
the restructuring charges, was primarily due to lower sales volume.
Net income from the Company's subsystems operation for fiscal 1999, before
corporate allocation, was $510,000 compared to $573,000 for fiscal 1998. The
decrease in net income is primarily attributable to an increase in sales and
marketing expenses.
Sales. The Company's sales for fiscal 1999 decreased to $65,220,000 from
$77,045,000 for fiscal 1998. Thermal management sales decreased to $48,429,000
for fiscal 1999 from $58,495,000 for fiscal 1998. The decrease in thermal
management sales primarily resulted from the Company's decision to no longer
pursue certain low margin sales opportunities. Consequently, the Company is
focusing its efforts on serving thermal management customers who typically
purchase highly customized products, including products serving the personal
computer industry. These customers typically utilize the Company's expertise
in developing solutions to their thermal management problems.
For fiscal 1999, connector sales were $10,623,000 compared to $12,579,000
during the prior fiscal year. Management believes that the decrease during
fiscal 1999 was due to the weakness in the military/aerospace and commercial
aircraft markets. Subsystems sales increased to $6,168,000 during fiscal 1999
from $5,971,000 during the prior fiscal year.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for fiscal 1999 was 26.5% compared to
17.1% for the 1998 period. The thermal management segment's gross profit
percentage was 25.4% and 13.9% for fiscal 1999 and 1998, respectively.
Excluding the aforementioned additional inventory reserves recorded in fiscal
1998 and the write off of toolings, the Company's thermal management gross
profit percentage was 16.0% for fiscal 1998. The increase in the gross profit
percentage was due to the effects of programs to forego lower margin sales,
enhance productivity and lower costs. During the fourth quarter of fiscal
1998, the Company implemented cost reduction measures, primarily a reduction
in workforce, to bring expenses in line with current sales levels. In
addition, the Company has increased its focus on manufacturing efficiencies.
The connector products segment's gross profit percentage increased to 31.1%
for fiscal 1999 from 28.7% for the 1998 period. This increase is attributable
to the reductions in operating expenses, primarily workforce reductions, which
primarily occurred during the second quarter of fiscal 1998. The gross profit
percentage at the Company's subsystems operation increased to 26.8% for fiscal
1999 from 25.3% for the 1998 period.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--continued
Research and Development Expense. Research and development expenses for
fiscal 1999 were $738,000, or 1.1% of sales, compared to $1,903,000, or 2.5%
of sales, for fiscal 1998. The reduction in research and development expenses
resulted from the Company's decision to primarily focus its research and
development efforts on solving customer's current thermal management problems
rather than the development of next generation solutions.
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $11,421,000, or 17.5% of sales. This compares to
$13,219,000, or 17.2% of sales for the prior year period. The $1,798,000
decrease in SG&A expenses for fiscal 1999, compared to the same period of
1998, is attributable to a reduction in operating expenses, primarily
workforce reductions which occurred during the fourth quarter of fiscal 1998.
SG&A expenses, as a percentage of sales, increased due to lower sales volume
in fiscal 1999 as compared to the prior year.
Restructuring and Other Expenses. For fiscal 1998, the Company recorded
$127,000, in net restructuring and other expenses which include $339,000 in
downsizing severance payments, $150,000 in estimated costs to close the
Company's connector operation in France, and the net reversal of $362,000
accrued in connection with the consolidation of the thermal management
operations. During the third quarter of fiscal 1998, management began the
consolidation of the connector segment's European operations. The Company's
connector operation in England now manufactures connectors for its European
customers.
The Company reached an agreement, during fiscal 1998, with the landlord of
the Wakefield facility to transfer its remaining lease commitment on this
facility to a lease for office space owned by the same landlord in Beverly,
Massachusetts. As part of the charge for the consolidation of its Wakefield
and Fall River, Massachusetts plants, the Company had previously provided for
the sublease of this facility at less than the Company's lease commitment. Due
to the agreement with the landlord, the Company reversed $362,000 of this
accrual. The Company does not expect to incur any additional material charges
related to this consolidation.
Interest and Other Income (Net). Interest expense was $924,000 and
$1,011,000 for fiscal 1999 and 1998, respectively. The decrease in interest
expense is due to the decrease in the average borrowing base partially offset
by an increase in the average interest rate paid on outstanding debt. See
"Liquidity" for discussion of refinancing.
Fiscal Year 1998 versus Fiscal Year 1997 Comparison
Net Income/Loss. The Company reported a net loss for the 1998 fiscal year of
$2,783,000 which included net charges for restructuring and other non
recurring costs of $127,000, a charge for additional inventory reserves of
$926,000, and a $269,000 charge to write off toolings used in the
manufacturing of certain products within the thermal management segment's
stamping product line. This compares to 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.
During the second half of fiscal 1998, thermal management revenues decreased
substantially compared to the first half of fiscal 1998. In response to the
decrease in revenues, the Company reduced costs to bring them in line with
existing sales levels primarily by workforce reductions.
The net restructuring and other costs incurred in fiscal 1998 include
$339,000 in reduction in workforce severance payments, $150,000 in estimated
costs to close the Company's connector operation in France, and the net
reversal of $362,000 accrued in connection with the consolidation of the
thermal management operations begun in the fourth quarter of 1997. 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
12
<PAGE>
Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--continued
and Temecula, California facilities, and (ii) $466,000 related to downsizing
and management changes throughout the Company.
The additional inventory reserves recorded in fiscal 1998 were recognized
primarily to reserve the costs of certain slow moving products within the
thermal management business's stamping product line and to reserve for
products purchased for an order which was canceled. The Company continues to
market other products in the stamping product line. The Company has
implemented policies and procedures to reduce its risk of loss on cancellation
of orders and, since implemented, has not experienced any material loss. The
additional inventory reserves recorded in fiscal 1997 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.
In fiscal 1998, the thermal management segment reported a net loss, before
the allocation of Alpha corporate expenses ("corporate allocation"), of
$3,160,000 including a charge for additional inventory reserves of $926,000, a
$269,000 charge to write off toolings used in the manufacturing of certain
products within the stamping product line, severance payments of $263,000 and
the net reversal of $362,000 accrued in connection with the consolidation of
the thermal management operations begun in the fourth quarter of 1997. The net
loss from thermal management operations for fiscal 1997, before 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. The results of operations, excluding the aforementioned
charges, decreased primarily due to a reduction in the gross profit margin,
which is discussed below.
For fiscal 1998, net income from the connector products segment, before
corporate allocation, was $889,000 inclusive of $150,000 in estimated expenses
accrued for the closure of the French manufacturing facility and $76,000 in
severance payments at the connector operation in South Pasadena, CA. 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. The increase in the results of operations in fiscal 1998
compared to fiscal 1997 was primarily due to an increase in gross profit,
which is discussed below.
Net income from the subsystems segment, before corporate allocation, was
$573,000 for fiscal 1998. The net loss from the subsystems segment for fiscal
1997, before corporate allocation, was $49,000 including $120,000 related to
restructuring. The increase in the results of operations in fiscal 1998
compared to fiscal 1997 was primarily due to an increase in gross profit,
which improved due to the shift to outsourcing various manufacturing
processes.
Sales. The Company's sales for fiscal 1998 increased $1,380,000, or 1.8%, to
$77,045,000 from $75,665,000 for fiscal 1997. Thermal management sales were
$58,495,000 and $58,294,000 for fiscal 1998 and 1997, respectively. During the
third and fourth quarter of fiscal 1998, the Company experienced a substantial
decrease in bookings and sales for Penguin(TM) cooler ("PGC") heat sinks and
extruded heat sinks. For fiscal 1998, PGC product sales decreased by 16.6%.
Management believes that the decrease in thermal management sales was due to
increased competition from Asian manufacturers resulting in lower quantities
and prices. During the last quarter of fiscal 1998, the Company implemented
cost reduction measures, primarily a reduction in workforce, to bring expenses
in line with current thermal management sales levels.
Connector sales were $12,579,000 during the 1998 fiscal year compared to
$11,880,000 during the prior fiscal year, a 5.9% increase. Management believes
that this increase was primarily caused by increased demand and improved
selling efforts by its independent representatives and distributors.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for fiscal 1998 was 17.1% compared to
18.4% for 1997 fiscal year. The thermal management segment's gross profit
percentage was 13.9% and 18.8% for fiscal 1998 and 1997, respectively.
Excluding the aforementioned additional inventory reserves recorded in fiscal
1997 and 1998 and the write off of toolings, the
13
<PAGE>
Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--continued
Company's thermal management gross profit percentage was 16.0% and 19.8% for
fiscal 1998 and 1997, respectively. Thermal management gross profit percentage
was adversely impacted by the aforementioned substantial reduction in third
and fourth quarter sales and margins on PGC and extruded heat sink products
without a corresponding decrease in overhead. The Company implemented
significant cost reduction measures, primarily workforce reductions, in the
fourth quarter of fiscal 1998 to reduce its operating costs and bring expenses
in line with current sales levels.
The connector products segment's gross profit percentage increased to 28.7%
for fiscal 1998 from 17.2% for fiscal 1997. This increase is attributable to
an increase in manufacturing efficiencies due to more consistent monthly sales
levels and a decrease in operating expenses.
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 $1,903,000 and $1,506,000
for fiscal 1998 and 1997, respectively. The increase of $397,000 in research
and development expenses was primarily due to an increase in engineering staff
as well as an increase 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.
Restructuring and Other Expenses. For fiscal 1998, the Company recorded
$127,000, in net restructuring and other expenses. The restructuring costs
incurred in fiscal 1998 include $339,000 in downsizing severance payments,
$150,000 in estimated costs to close the Company's connector operation in
France, and the net reversal of $362,000 accrued in connection with the
consolidation of the thermal management operations.
During the third quarter of fiscal 1998, management began the consolidation
of the connector segment's European operations. The Company's connector
operation in England will now manufacture connectors for its European
customers.
The Company reached an agreement, during fiscal 1998, with the landlord of
the Wakefield facility to transfer its remaining lease commitment on this
facility to a lease for office space owned by the same landlord in Beverly,
Massachusetts. As part of the charge for the consolidation of its Wakefield
and Fall River, Massachusetts plants, the Company had previously provided for
the sublease of this facility at less than the Company's lease commitment. Due
to the agreement with the landlord, the Company reversed $362,000 of this
accrual. The Company does not expect to incur any additional material charges
related to this consolidation. 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.
Interest and Other Income (Net). Interest income, which was $67,000 in
fiscal 1998 and $125,000 in fiscal 1997, was earned on cash held by the
Company. The decrease in interest income was primarily attributable to a
decrease in the average cash balance invested. Interest expense was $1,011,000
and $1,173,000 for fiscal 1998 and fiscal 1997, respectively. This decrease
was due to a lower average borrowing base and a decrease in the average
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.
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, due in February, 1999, based on orders booked by
the buyer during the 1998 calendar year by customers of the CIA business. No
contingent payment was due to the Company. The Company recognized a gain,
excluding the potential additional payment, on the sale of $610,000 during
fiscal 1997.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--continued
Income Taxes
On October 31, 1999, the Company had, for tax purposes, remaining NOL
Carryforwards of approximately $16,776,000 available to offset future taxable
income, approximately $288,000 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 2002 to 2018, the investment tax credit and
research and development tax credit carryforwards will expire from 2002 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 "Income Taxes"
in Notes to Consolidated Financial Statements.
Year 2000
The Company used its existing staff to comprehensively review existing
systems and equipment that needed to be updated or changed as a result of the
Year 2000. The cost related to these upgrades was immaterial. As of the date
of this filing, the Company has not incurred any material "Y2K" problem. In
addition, 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 31, 1999, the Company had cash of approximately $354,000 compared
to $1,387,000 on October 25, 1998. For the fiscal year ended October 31, 1999,
$6,058,000 was provided by operating activities primarily from net income.
Cash provided by operations includes a $1,756,000 decrease in inventory, a
$1,290,000 decrease in accounts payable and a $1,039,000 decrease in other
liabilities. During fiscal 1999, $1,100,000 was used in investing activities
including capital equipment purchases of $1,215,000 which were made to improve
manufacturing capabilities and to refurbish and upgrade existing machinery.
The Company used $5,991,000 in financing activities in fiscal year 1999 to
reduce debt by $3,995,000, to fund debt issue costs of $393,000 and to
repurchase 385,800 shares of the Company's common stock for $1,637,000.
Effective April 16, 1999, the Company and its subsidiaries (hereinafter
referred to as "Borrowers") became parties to a loan and security agreement
(the "Agreement") with a commercial lender. The Agreement provides for
revolving loans of up to $10,500,000, a $5,400,000 term note payable monthly
over five years, and an equipment acquisition facility of up to $1,000,000 for
fiscal 1999. An additional $2,000,000 of Equipment Loans will be made
available to Borrowers if the Borrower's earnings before provision for income
taxes, excluding all extraordinary and nonrecurring items, equals or exceeds
$1.00 for the fiscal year ending October 31, 1999, or for any fiscal year
thereafter. The advances on the revolving loans are based on the eligible
accounts receivable and inventories and the advances on the equipment
acquisition facility may be used only for the purpose of funding capital
equipment purchases by the Borrowers. The maturity date of the Agreement is
April 15, 2004.
On October 31, 1999, $2,799,000 was outstanding on the revolving credit
facility with interest accruing at the prime rate announced by First Union
National Bank plus .5% (8.75% per annum on October 31, 1999). There is an
unused line fee equal to .5% per annum on the difference between $10,500,000
and the average daily outstanding principal balance of Revolving Loans during
each month payable monthly in arrears on the first day of each month. The
$5,400,000 term note accrues interest at the prime rate announced by First
Union National Bank plus .5% (8.75% per annum on October 31, 1999) and is
payable in fifty-nine (59) equal monthly installments of $90,000 beginning
April 30, 1999 and a final installment equal to all unpaid principal on March
31, 2004, together, in each instance, with interest thereon to the date of
payment. On October 31, 1999, $4,860,000 was outstanding on the term loan and
no borrowings on the equipment acquisition facility. The obligations under the
Agreement are secured by a first lien on and assignment of all of the assets
of the Borrowers which in aggregate total $34,849,000 on October 31, 1999.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Operations and Financial
Condition--continued
Working capital (which excludes amounts due under the revolving credit
facility) on October 31, 1999 was $9,098,000 compared to $9,099,000 on October
25, 1998. The Company believes that its currently available cash, anticipated
cash flow from operations and availability under credit facilities is
sufficient to fund its operations in the near-term.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
In April 1999, the Company and its subsidiaries entered into a loan and
security agreement with a commercial lender. Currently, interest accrues at
the prime rate announced by First Union National Bank plus .5% (8.75% per
annum on October 31, 1999). Based on the results of operations experienced in
fiscal 1999, effective February 1, 2000, interest will accrue at the prime
rate announced by First Union National Bank plus .25%. The average interest
rate experienced on outstanding debt subsequent to this agreement was 8.75%.
The Company is not currently engaged in any derivative financial instrument to
manage its interest rate risk.
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-20 and page S-1 of this report.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
Effective October 8, 1999, the Company engaged Grant Thornton LLP as the
principal accountant to audit the Company's financial statements for the
fiscal year ending October 31, 1999. The decision to change accountants was
approved by the Board of Directors of the Company. The Company's previous
certifying accountant was Arthur Andersen, LLP.
The Report of Arthur Andersen LLP on the financial statements of the Company
for either of the past two fiscal years did not contain an adverse opinion or
disclaimer of opinion nor was it modified as to uncertainty, audit scope or
accounting principles. There were no disagreements with Arthur Andersen LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, during the past two fiscal years
ending October 26, 1997 and October 25, 1998, and the subsequent interim
period through October 8, 1999 which, if not resolved to Arthur Andersen LLP's
satisfaction, would have caused Arthur Andersen LLP to make reference to the
subject matter of the disagreements(s) in connection with its Reports. Arthur
Andersen has confirmed the foregoing.
Prior to its engagement as the Company's independent accountant, Grant
Thornton LLP had not been consulted by the Company either with respect to the
application of accounting principles to a specific transaction or the type of
audit opinion that might be rendered on the Company's financial statements.
Grant Thornton has confirmed the foregoing.
During the twenty-four month period preceding October 31, 1999, the Company
did not have any disagreements with its accountants on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures.
16
<PAGE>
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 28, 2000,
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 28, 2000,
and is incorporated herein by reference.
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 28, 2000,
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 28, 2000,
and is incorporated herein by reference.
17
<PAGE>
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 Plan as amended.(9)(14)
10.4 --Standard Industrial/Commercial Single-Tenant Lease dated as of June
1, 1994 by and between Pasadena Industrial Associates and Uni-Star
Industries, Inc.(11)
10.5 --Lease Agreement dated as of January 1995 by and between Robert L.
Byers and Joyce F. Byers and Uni-Star Industries, Inc.(11)
10.6(a) --Assignment and Assumption Agreement dated November 4, 1998 by and
among Malco division of Uni-Star Industries, Inc., Malco, Inc., and
Robert L. Byers and Joyce F. Byers.(17)
10.6(b) --Second Lease Amendment Agreement dated November 5, 1998 by and
between Malco, Inc., and Robert L. Byers and Joyce F. Byers.(17)
10.7 --Registrant's 1994 Stock Option Plan as amended and
restated.(3)(15)(18)
10.8 --Loan and Security Agreement by and between Congress Financial
Corporation as Lender and Alpha Technologies Group, Inc., Wakefield
Engineering, Inc., Lockhart Industries, Inc., Malco Technologies,
Inc., Wakefield Extrusion Corp., and Uni-Star Industries, Inc. as
Borrowers dated April 16, 1999.(16)
10.9 --Employment Agreement with Lawrence Butler dated September 29,
1995.(3)
10.10 --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)
10.10(a) --Lease modification and extension agreement date February 4, 1998 by
and between Richard J. Tobin as Trustee u/d/t dated June 15, 1981
and entitled "J L N Realty Trust" and Wakefield Engineering,
Inc.(14)
10.11 --Industrial Space Lease dated as of September 29, 1995 by and
between Rancon Income Fund I and Wakefield Engineering, Inc.(3)
10.12 --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.)(12)
10.13 --Employment agreement dated March 23, 1999 between Robert Streiter
and Alpha Techmologies Group, Inc.(16)
10.14 --Lease dated October 31, 1979 by and between Landcee Investment Co.
and Lockhart Industries, Inc. together with addendum and amendments
thereto.(12)
10.14(a) --Letter Agreement--Lease Extension dated August 8, 1999 between
Landcee Investment Company and Lockhart Industries, Inc. (Filed
Herewith)
</TABLE>
18
<PAGE>
Item 14. Exhibits and Reports on Form 8-K--continued
<TABLE>
<CAPTION>
Exhibit
No.
--------
<C> <S>
10.15 --Lease dated August 29, 1984 by and between Garfield-Pacific
Development Co. and Lockhart Industries, Inc., together with
addendums and amendments thereto.(12)
10.15(a) --Letter Agreement--Lease Extension dated August 8, 1999 between
Garfield Pacific Development Co. and Lockhart Industries, Inc.
(Filed Herewith)
10.16 --Lease dated April 30, 1998 between Cummings Properties Management,
Inc. and Wakefield Engineering, Inc.(14)
10.17 --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 Specialty Extrusion Corp.) (10)
10.17(a) --First Amendment of Lease dated September 28, 1999 between B&K
Investment Company and Wakefield Extrusion Company (now known as
Specialty Extrusion Corp.) (Filed Herewith)
10.18 --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.)(13)
21 --Subsidiaries of Registrant. (Filed Herewith)
23.1 --Consent of Grant Thornton LLP. (Filed Herewith)
23.2 --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).
(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 29, 1995.
(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 Annual Report on Form
10-K for the year ended October 27, 1996 filed on January 27, 1997.
19
<PAGE>
Item 14. Exhibits and Reports on Form 8-K--continued
(13) Incorporated herein by reference to the Company's Form 8-K dated June 20,
1997, filed on or about July 3, 1997.
(14) Incorporated herein by reference to the Company's Form 10-Q for the
quarterly period ended April 26, 1998 filed on June 10, 1998.
(15) Incorporated herein by reference to the Company's Proxy Statement filed
February 23, 1998
(16) Incorporated herein by reference to the Company's Form 10-Q for the
quarterly period ended May 2, 1999 filed on June 15, 1999.
(17) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended October 25, 1998 filed on February 9, 1999.
(18) Incorporated herein by reference to the Company's Proxy Statement filed
April 29, 1999
Reports on Form 8-K
The Company filed a Form 8-K, dated October 8, 1999 reporting that the
Company engaged Grant Thornton LLP as the principal accountant to audit the
Company's financial statements for the fiscal year ending October 31, 1999.
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 31, 2000 /s/ Lawrence Butler
By:__________________________________
(Lawrence Butler)
Chairman 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/ Lawrence Butler Chairman, Chief Executive
____________________________________ Officer and Director
(Lawrence Butler) (Principal Executive
Officer)
/s/ Robert C. Streiter Chief Operating Officer,
____________________________________ President and Director
(Robert C. Streiter)
/s/ Johnny J. Blanchard Chief Financial Officer
____________________________________ (Principal Financial and
(Johnny J. Blanchard) Accounting Officer) January 31, 2000
/s/ Marshall D. Butler Director
____________________________________
(Marshall D. Butler)
/s/ Donald K. Grierson Director
____________________________________
(Donald K. Grierson)
/s/ Frederic A. Heim Director
____________________________________
(Frederic A. Heim)
/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 Certified Public Accountants....................... F-2
Report of Independent Public Accountants................................. F-3
Consolidated Balance Sheets--October 25, 1998 and October 31, 1999....... F-4
Consolidated Statements of Operations--For the Years Ended October 26,
1997, October 25, 1998 and October 31, 1999............................. F-5
Consolidated Statements of Stockholders' Equity--For the Years Ended
October 26, 1997, October 25, 1998 and October 31, 1999................. F-6
Consolidated Statements of Cash Flows--For the Years Ended October 26,
1997, October 25, 1998 and October 31, 1999............................. F-7
Notes to Consolidated Financial Statements............................... F-8
Financial Statement Schedules:
Valuation and Qualifying Accounts........................................ S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Alpha Technologies Group, Inc.
We have audited the accompanying consolidated balance sheet of Alpha
Technologies Group, Inc. (a Delaware corporation) and Subsidiaries as of
October 31, 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 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 31, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting
principles.
We have also audited Schedule II for the year ended October 31, 1999. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
Houston, Texas
December 15, 1999
F-2
<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 sheet of Alpha
Technologies Group, Inc. (a Delaware corporation) and subsidiaries as of
October 25, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended October 25, 1998. 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 25, 1998, and
the results of their operations and their cash flows for each of the two years
in the period ended October 25, 1998 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 be set forth
therein in relation to the basic consolidated financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Houston, Texas
December 4, 1998, except
with respect to the matters
discussed in Note 8 as to which
the date is February 8, 1999.
F-3
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 25, 1998 and October 31, 1999
(In Thousands, Except Share and per Share Data)
<TABLE>
<CAPTION>
October 25, October 31,
ASSETS 1998 1998
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................. $ 1,387 $ 354
Accounts receivable, net of allowance of $524 and
$424................................................ 8,671 9,482
Inventories, net..................................... 9,546 7,790
Prepaid expenses..................................... 623 863
------- -------
Total current assets............................... 20,227 18,489
PROPERTY AND EQUIPMENT, net:........................... 13,355 11,462
GOODWILL, net.......................................... 2,714 2,559
OTHER ASSETS, net...................................... 2,379 2,339
------- -------
TOTAL ASSETS....................................... $38,675 $34,849
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade.............................. $ 5,808 $ 4,518
Accrued compensation and related benefits............ 1,777 1,670
Current portion of other liabilities................. 2,582 1,983
Current portion of long-term debt.................... 961 1,220
------- -------
Total current liabilities.......................... 11,128 9,391
REVOLVING CREDIT FACILITY.............................. 8,180 2,799
LONG-TERM DEBT......................................... 2,833 3,960
OTHER LIABILITIES...................................... 217 197
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 7,940,838 at October 25, 1998 and
7,959,007 at October 31, 1999....................... 238 239
Additional paid-in capital........................... 43,781 43,828
Retained deficit..................................... (23,893) (19,739)
Accumulated other comprehensive income (loss)........ (91) (22)
Treasury stock, at cost (1,008,553 common shares at
October 25, 1998 and 1,394,353 at October 31,
1999)............................................... (3,718) (5,804)
------- -------
Total stockholders' equity......................... 16,317 18,502
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $38,675 $34,849
======= =======
</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 OPERATIONS
For the Years Ended October 26, 1997, October 25, 1998 and October 31, 1999
(In Thousands, Except Share and per Share Data)
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
SALES................................... $ 75,665 $ 77,045 $ 65,220
COST OF SALES........................... 61,726 63,773 47,955
---------- ---------- ----------
Gross profit........................ 13,939 13,272 17,265
OPERATING EXPENSES:
Research and development.............. 1,506 1,903 738
Selling, general and administrative... 12,931 13,219 11,421
Restructuring and other............... 2,494 127 --
---------- ---------- ----------
Total operating expenses............ 16,931 15,249 12,159
---------- ---------- ----------
OPERATING INCOME (LOSS)................. (2,992) (1,977) 5,106
INTEREST INCOME......................... 125 67 17
OTHER INCOME (EXPENSE), net............. 24 138 (45)
INTEREST EXPENSE........................ (1,173) (1,011) (924)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (4,016) (2,783) 4,154
PROVISION FOR (BENEFIT FROM) INCOME
TAXES:
Current............................... -- -- 34
Deferred.............................. -- -- (34)
---------- ---------- ----------
Total provision for income taxes.... -- -- --
---------- ---------- ----------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATION.............................. (4,016) (2,783) 4,154
GAIN ON SALE OF DISCONTINUED OPERATION,
net of income tax effect............... 610 -- --
INCOME FROM DISCONTINUED OPERATION, net
of income tax effect................... 54 -- --
---------- ---------- ----------
NET INCOME (LOSS)....................... $ (3,352) $ (2,783) $ 4,154
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE
BASIC
Income(loss) before discontinued
operation.............................. $ (0.60) $ (0.41) $ 0.60
Gain on sale of discontinued
operation.............................. 0.09 -- --
Income from discontinued operation...... 0.01 -- --
---------- ---------- ----------
Net income (loss)....................... $ (0.50) $ (0.41) $ 0.60
========== ========== ==========
DILUTED
Income(loss) before discontinued
operation.............................. $ (0.60) $ (0.41) $ 0.58
Gain on sale of discontinued
operation.............................. 0.09 -- --
Income from discontinued operation...... 0.01 -- --
---------- ---------- ----------
Net income (loss)....................... $ (0.50) $ (0.41) $ 0.58
========== ========== ==========
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER COMMON SHARE
BASIC................................. 6,682,106 6,753,752 6,935,778
========== ========== ==========
DILUTED............................... 6,682,106 6,753,752 7,134,382
========== ========== ==========
</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 STOCKHOLDERS' EQUITY
For the Years Ended October 26, 1997, October 25, 1998 and October 31, 1999
(In Thousands, Except Shares)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock Total
---------------- Paid In Retained Comprehensive ------------------ Stockholder's
Shares Amount Capital (Deficit) Income (Loss) Shares Amount Equity
--------- ------ ---------- --------- ------------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 27,
1996................... 7,681,733 $230 $43,474 $(17,758) $(32) 1,017,981 $(3,797) $22,117
Comprehensive income
(loss):
Net loss................ (3,352) (3,352)
Cumulative translation
adjustments............ -- -- -- -- (93) -- -- (93)
-------
Comprehensive income
(loss)................. -- -- -- -- -- -- -- (3,445)
Issuance to employees
pursuant to stock
option plans........... 19,000 1 53 -- -- -- -- 54
Acquisition of Lockhart
Industries, Inc........ -- -- -- -- -- (9,428) 79 79
Purchase of Uni-Star
Industries, Inc.
minority interest...... -- -- (4) -- -- -- -- (4)
--------- ---- ------- -------- ---- --------- ------- -------
BALANCE, October 26,
1997................... 7,700,733 231 43,523 (21,110) (125) 1,008,553 (3,718) 18,801
Comprehensive income
(loss):
Net loss................ (2,783) (2,783)
Cumulative translation
adjustments............ -- -- -- -- 34 -- -- 34
-------
Comprehensive income
(loss)................. -- -- -- -- -- -- -- (2,749)
Issuance to employees
pursuant to stock
option plans........... 91,834 3 215 -- -- -- -- 218
Acquisition of Lockhart
Industries, Inc........ 148,271 4 (4) -- -- -- -- --
Compensation associated
with stock options..... 47 47
--------- ---- ------- -------- ---- --------- ------- -------
BALANCE, October 25,
1998................... 7,940,838 238 43,781 (23,893) (91) 1,008,553 (3,718) 16,317
Comprehensive income
(loss):
Net income.............. 4,154 4,154
Cumulative translation
adjustments............ -- -- -- -- 69 -- -- 69
-------
Comprehensive income
(loss)................. -- -- -- -- -- -- -- 4,223
Issuance to employees
pursuant to stock
option plans........... 18,169 1 33 -- -- -- -- 34
Stock repurchases....... -- -- -- -- -- 385,800 (2,086) (2,086)
Compensation associated
with stock options..... 14 14
--------- ---- ------- -------- ---- --------- ------- -------
BALANCE, October 31,
1999................... 7,959,007 $239 $43,828 $(19,739) $(22) 1,394,353 $(5,804) $18,502
========= ==== ======= ======== ==== ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 26, 1997, October 25, 1998 and October 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $(3,352) $(2,783) $ 4,154
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization........... 2,829 3,163 3,269
Loss on sale/disposal of equipment...... -- 252 --
Gain on sale of discontinued operation.. (610) -- --
Cumulative translation adjustments...... (93) 34 (7)
Stock option compensation expense....... -- 47 14
Deferred income taxes................... -- -- (34)
Net cash provided by discontinued
operation................................ 259 -- --
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................. 294 3,095 (811)
Decrease in inventories................. 785 235 1,756
(Increase) decrease in prepaid
expenses............................... (29) 517 153
Increase (decrease) in accounts payable,
trade.................................. 706 (371) (1,290)
Increase (decrease) in accrued
compensation and related benefits...... 174 (33) (107)
Increase (decrease) in other
liabilities............................ 333 (2,112) (1,039)
------- ------- -------
Net cash provided by operating
activities........................... 1,296 2,044 6,058
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from business divestitures..... 2,100 -- --
Change in goodwill...................... (83) (67) --
Purchase of property and equipment...... (1,420) (5,079) (1,215)
Proceeds from sale of property and
equipment.............................. -- 155 96
(Increase) decrease in other assets,
net.................................... 181 (8) 19
------- ------- -------
Net cash provided by (used in)
investing activities................. 778 (4,999) (1,100)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.. 50 218 34
Payments to repurchase common stock..... -- -- (1,637)
Payments for debt issue cost............ -- -- (393)
Proceeds from revolving credit lines.... 43,916 70,917 59,426
Payments on revolving credit lines...... (49,741) (67,935) (64,806)
Proceeds from term debt................. 2,770 920 5,836
Payments on term debt................... (1,297) (1,485) (4,451)
------- ------- -------
Net cash provided by (used in)
financing activities................. (4,302) 2,635 (5,991)
------- ------- -------
NET DECREASE IN CASH...................... (2,228) (320) (1,033)
CASH AT BEGINNING OF YEAR................. 3,935 1,707 1,387
------- ------- -------
CASH AT END OF YEAR....................... $ 1,707 $ 1,387 $ 354
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Alpha Technologies Group, Inc. ("Alpha" or the "Company") primarily derives
its revenues 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,
automotive, telecommunication, industrial controls, transportation, power
supply, factory automation, consumer electronics, 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.
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.
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 25, 1998 and October 31, 1999 was
approximately $863,000 and $1,105,000, respectively. Amortization expense of
approximately $248,000, $231,000 and $249,000 was recorded in fiscals 1997,
1998 and 1999, respectively.
F-8
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(Continued)
Long-Lived Assets
The Company reviews the valuation of long lived assets whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and/or its
disposition is less than its carrying amount. The Company has not identified
any such impairment loss.
Comprehensive Income
Effective October 26, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
an entity to report and display comprehensive income and its components.
Comprehensive income includes net earnings, plus other comprehensive income.
The Company's other comprehensive income consists of foreign currency
translation adjustments.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting for
Stock Based Compensation" during October 1995. The 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 accounts for income taxes under the asset and liability method.
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. 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. Resulting translation adjustments are reported as other
comprehensive income (loss).
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") and in July 1999 issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133, and Amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delayed
the effective date for SFAS 133 to fiscal years beginning after June 15, 2000.
The Company is required to adopt this for its fiscal year 2001. Management
believes that the adoption of these pronouncements will not have a material
effect on the Company's consolidated financial position or results of
operations.
F-9
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
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. Based upon decreases in LII's working capital
prior to the acquisition and collection of accounts receivable, the purchase
price was reduced by 73,149 shares of the Company's common stock. The number
of shares issued was subject to increase in the event that the Company's
common stock was not trading at $9 or more two years from the date of closing.
Accordingly, on September 23, 1998, the Company issued an additional 148,271
shares of its common stock. 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. The acquisition was accounted for as a purchase transaction, as
such, 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. On October 29, 1999,
pursuant to a Stock Purchase Agreement, the Company acquired 350,000 shares of
its common stock from the former owners of its Lockhart subsidiary for
$1,476,096. The acquired shares were issued as consideration for the purchase
of the Lockhart subsidiary in August 1996. As part of the Agreement, the
Company released the former owners from the indemnification provisions related
to the purchase of the Lockhart business.
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 on February 15, 1999 of up to $400,000 based on orders
booked by the buyer. No contingent payment was due. 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. The results of operations for
the Company's hermetic connector business are reflected in the accompanying
consolidated financial statements as a discontinued operation. Prior to the
sale, for the fiscal year ended October 26, 1997, the discontinued operation
had revenues of $2,031,000, costs and expenses of $1,977,000 and net income of
$54,000.
4. Inventories
Inventories consisted of the following on:
<TABLE>
<CAPTION>
October 25, October 31,
1998 1999
----------- -----------
(In Thousands)
<S> <C> <C>
Raw materials and components........................ $ 6,187 $ 5,439
Work in process..................................... 3,194 2,548
Finished goods...................................... 2,564 2,194
------- -------
11,945 10,181
Valuation reserve................................... (2,399) (2,391)
------- -------
$ 9,546 $ 7,790
======= =======
</TABLE>
F-10
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property and Equipment
Property and equipment consisted of the following on:
<TABLE>
<CAPTION>
October 25, October 31,
1998 1999
----------- -----------
(In Thousands)
<S> <C> <C>
Machinery & equipment............................... $19,580 $ 20,368
Leasehold improvements.............................. 1,780 1,932
------- --------
21,360 22,300
Accumulated depreciation and amortization........... (8,005) (10,838)
------- --------
$13,335 $ 11,462
======= ========
</TABLE>
6. Accrued Compensation and Related Benefits
Accrued compensation and related benefits consisted of the following on:
<TABLE>
<CAPTION>
October 25, October 31,
1998 1999
----------- -----------
(In Thousands)
<S> <C> <C>
Accrued compensation................................ $ 950 $1,008
Other............................................... 827 662
------ ------
$1,777 $1,670
====== ======
</TABLE>
7. Other Liabilities
Other liabilities consisted of the following on:
<TABLE>
<CAPTION>
October 25, October 31,
1998 1999
----------- -----------
(In Thousands)
<S> <C> <C>
Accrued commissions................................. 787 422
Other............................................... 2,012 1,758
------- -------
2,799 2,180
Less: current portion............................... (2,582) (1,983)
------- -------
$ 217 $ 197
======= =======
</TABLE>
F-11
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Debt and Revolving Credit Facilities
Debt and revolving credit facilities consisted of the following on:
<TABLE>
<CAPTION>
October 25, October 31,
1998 1999
----------- -----------
(In Thousands)
<S> <C> <C>
Variable-rate revolving credit facility (effective
interest rates of 8.188% and 8.5% at October 25,
1998), interest payable monthly, principal is
repaid and re-borrowed based on cash
requirements..................................... $ 8,180 $ --
Variable-rate term notes (effective interest rates
of 8.75% to 8.85% at October 25, 1998), payable
in monthly installments ranging from $22,619 to
$37,500, plus accrued interest .................. 2,766 --
Equipment acquisition facility (effective interest
rate of 8.75% on October 25, 1998, payable in 84
monthly installments of $10,952, plus accrued
interest......................................... 920 --
Variable-rate revolving credit facility (effective
interest rate of 8.75% on October 31, 1999),
interest payable monthly, principal is repaid and
re-borrowed based on cash requirements -- 2,800
Variable-rate term note (effective interest rate
of 8.75% on October 31, 1999), payable in monthly
installments of $90,000 plus accrued interest.... -- 4,860
Other............................................. 108 319
------- ------
11,974 7,979
Less current portion.............................. (961) (1,220)
------- ------
$11,013 $6,759
======= ======
</TABLE>
Effective April 16, 1999, the Company and its subsidiaries (hereinafter
referred to as "Borrowers") became parties to a loan and security agreement
(the "Agreement") with a commercial lender. The Agreement provides for
revolving loans of up to $10,500,000, a $5,400,000 term note payable monthly
over five years, and an equipment acquisition facility of up to $1,000,000 for
fiscal 1999. An additional $2,000,000 of equipment loans will be made
available to Borrowers if the Borrower's earnings before provision for income
taxes, excluding all extraordinary and nonrecurring items, equals or exceeds
$1.00 for the fiscal year ending October 31, 1999, or for any fiscal year
thereafter. The advances on the revolving loans are based on the eligible
accounts receivable and inventories and the advances on the equipment
acquisition facility may be used only for the purpose of funding capital
equipment purchases by the Borrowers. The maturity date of the Agreement is
April 15, 2004.
On October 31, 1999, $2,800,000 was outstanding on the revolving credit
facility with interest accruing at the prime rate announced by First Union
National Bank plus .5% (8.75% per annum on October 31, 1999). There is an
unused line fee equal to .5% per annum on the difference between $10,500,000
and the average daily outstanding principal balance of Revolving Loans during
each month payable monthly in arrears on the first day of each month. The
$5,400,000 term note accrues interest at the prime rate announced by First
Union National Bank plus .5% (8.75% per annum on October 31, 1999) and is
payable in fifty-nine (59) equal monthly installments of $90,000 beginning
April 30, 1999 and a final installment equal to all unpaid principal on March
31, 2004, together, in each instance, with interest thereon to the date of
payment. On October 31, 1999, $4,860,000 was outstanding on the term loan and
no borrowings on the equipment acquisition facility. The obligations under the
Agreement are secured by a first lien on and assignment of all of the assets
of the Borrowers which in aggregate total $34,849,000 on October 31, 1999.
F-12
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Debt and Revolving Credit Facilities--(Continued)
Cash paid for interest on all outstanding debt amounted to approximately
$1,172,000 in fiscal year 1997, approximately $1,011,000 in fiscal year 1998,
and approximately $1,275,000 in fiscal 1999. The amount paid in fiscal 1999
includes $393,000 in debt issue costs, including origination fees, incurred in
connection with the refinancing of the Company's credit facilities. These fees
will be expensed over the term of the agreement.
Aggregate payments of debt and revolving credit facilities outstanding as of
October 31, 1999 for the next five years are summarized below:
<TABLE>
<CAPTION>
Fiscal Years Amount
------------ --------------
(In Thousands)
<S> <C>
2000.......................................................... $1,220
2001.......................................................... 1,235
2002.......................................................... 1,105
2003.......................................................... 1,080
2004.......................................................... 3,339
------
$7,979
======
</TABLE>
9. Preferred Stock
On October 25, 1998 and October 31, 1999, 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 31, 1999.
10. Repurchase of Common Stock
In October 1999, the Board of Directors of the Company approved a plan to
purchase up to $500,000 of the Company's common stock in the open market.
Pursuant to the stock repurchase plan, the Company purchased 35,800 shares of
common stock during fiscal year 1999 at an aggregate price of $161,011.
On October 29, 1999, pursuant to a Stock Purchase Agreement, the Company
acquired 350,000 shares of its common stock from the former owners of its
Lockhart subsidiary. The acquired shares were issued as consideration for the
purchase of the Lockhart subsidiary in August 1996. As part of the Agreement,
the Company released the former owners from the indemnification provisions
related to the purchase of the Lockhart business. A $449,000 indemnification
liability was established representing the difference between the market value
of the shares repurchased of $1,975,000 and the consideration paid of
$1,476,000 to the former owners.
11. Stock Option Plans
The Company has in effect nonqualified and incentive stock option plans
under which shares are available for exercise. As of October 31, 1999, the
Board of Directors has reserved 1,758,099 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 31, 1999, there were 416,949
shares available for future grants.
F-13
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stock Option Plans--(Continued)
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 27, 1996.................. 1,178,334 $4.26
Granted-Option Price=FMV....................... 240,305 4.03
Granted-Option Price>FMV....................... 16,695 4.03
Forfeited...................................... (192,834) 4.58
Exercised...................................... (19,000) 2.84
--------- -----
Outstanding on October 26, 1997.................. 1,223,500 4.13
Granted-Option Price=FMV....................... 393,720 3.34
Granted-Option Price>FMV....................... 54,780 4.26
Forfeited...................................... (318,785) 4.14
Exercised...................................... (91,815) 2.66
--------- -----
Outstanding on October 25, 1998.................. 1,261,400 3.50
Granted-Option Price=FMV....................... 581,276 3.09
Granted-Option Price>FMV....................... 26,274 4.95
Forfeited...................................... (509,631) 3.99
Exercised...................................... (18,169) 1.88
--------- -----
Outstanding on October 31, 1999.................. 1,341,150 $3.66
========= =====
Exercisable as of:
October 31, 1999................................. 780,640 $3.77
October 25, 1998................................. 735,733 $4.03
October 26, 1997................................. 794,515 $3.96
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- --------------------------
Range of Outstanding Weighted Average Weighted Exercisable Weighted
Exercise As of Remaining Average as of Average
Prices 10/31/99 Contractual Life Exercise Price 10/31/99 Exercise Price
- ----------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00-$2.00 372,900 3.9 Years $1.85 187,308 $1.85
$2.01-$3.00 195,750 3.9 Years $2.55 150,000 $2.61
$3.01-$4.00 160,220 3.8 Years $3.69 102,672 $3.62
$4.01-$5.00 244,780 4.0 Years $4.54 70,660 $4.66
$5.01-$6.00 367,500 1.8 Years $5.48 270,000 $5.57
--------- -------
1,341,150 3.3 Years $3.66 780,640 $3.77
========= =======
</TABLE>
In October 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 October 21, 1998, the Board of Directors granted replacement options for
certain outstanding options issued to employees, who were not executive
officers or directors of the Company. The replacement options will have an
exercise price equal to the fair market value of the common stock on such date
and would vest 1/3 immediately and the remainder over two years. The
replacement has been treated as the surrender and cancellation of the original
outstanding stock options in conjunction with the grant of replacement
options.
F-14
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stock Option Plans--(Continued)
On March 30, 1999, the Board of Directors of the Company authorized an
increase in the shares issuable under the 1994 Stock Option Plan by 300,000
which was subsequently approved by shareholder vote. In addition, on April 21,
1998, the shareholders approved an amendment to the 1994 Stock Option Plan to
provide for an automatic grant of 10,000 options to each non-employee director
at the annual meetings held in 1998, 1999 and 2000. Such options will be
exercisable at the fair market value of the shares on the date of grant, will
vest in one year, and will be exercisable for five years from the date of
grant.
For fiscal 1998 and 1999, $47,000 and $14,000, respectively, was recognized
as expense for options issued to non-employees under the Company's stock
option plans. 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 options issued to employees 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 1997: expected volatility 47.39%, risk free
interest rate of 6%, expected option life of 5 years, and no expected
dividends. The weighted average assumptions used for fiscal 1998 were:
expected volatility 51.72%, risk free interest rate of 5.11%, expected option
life of 4.5 years, and no expected dividends. The weighted average assumptions
used for fiscal 1999 were: expected volatility 74.5%, risk free interest rate
of 5.78%, expected option life of 4.0 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
$325,000, or $0.05 per basic and diluted share, in fiscal 1997, $472,000, or
$0.07 per basic and diluted share, in fiscal 1998, and $516,000 or $0.07 per
basic and diluted share, in fiscal 1999. The estimated weighted average fair
value of options granted during fiscal 1997, 1998 and fiscal 1999 was $1.97,
$1.36, and $2.32, 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.
F-15
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing income
(loss) available to common shareholders by the weighted average number of
shares of common stock outstanding during each year. Diluted earnings per
common share are calculated to give effect to stock options outstanding during
the period. The treasury stock method is used to calculate dilutive shares and
reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised. For
fiscal year 1997 and 1998, potentially dilutive shares were not considered in
the computation as their effect would have been antidilutive. The amounts used
in calculating basic and dilutive earnings per share and the amounts that
would have been used in fiscal 1997 and 1998 were:
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Income(loss) used in basic and diluted
EPS:
Income (loss) from continuing
operations........................... $(4,016) $(2,783) $4,154
Gain on sale of discontinued
operation............................ 610 -- --
Income from discontinued operation.... 54 -- --
------- ------- ------
Net income (loss) available to common
share holders........................ $(3,352) $(2,783) $4,154
======= ======= ======
Shares:
Weighted average common shares
outstanding--used in basic EPS....... 6,682 6,754 6,936
Net dilutive potential common shares
issuable on exercise of stock
options.............................. 98 106 198
------- ------- ------
Weighted average common shares and
dilutive potential common shares--
used in dilutive EPS ................ 6,780 6,860 7,134
======= ======= ======
</TABLE>
13. Income Taxes
Income (loss) before income taxes was as follows for the fiscal years ended:
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Domestic................................. $(3,711) $(2,527) $4,489
Foreign.................................. (305) (256) (335)
------- ------- ------
$(4,016) $(2,783) $4,154
======= ======= ======
</TABLE>
The provision (benefit) for income taxes was as follows for the fiscal years
ended:
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Federal income tax....................... $(1,365) $(946) $ 1,526
State income tax......................... -- -- 267
Foreign income tax....................... -- -- --
======= ===== =======
(1,365) (946) 1,793
Valuation allowance provided............. 1,365 946 (1,793)
------- ----- -------
$ -- $ -- $ --
======= ===== =======
</TABLE>
F-16
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Income Taxes--(Continued)
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 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Federal income statutory rate.......... (34.0)% (34.0)% 34.0 %
State income taxes, net of federal
income tax benefit.................... -- -- 5.9 %
Valuation allowance provided........... 34.0 % 34.0 % (39.9)%
Foreign income taxes................... -- -- --
----- ----- -----
-- -- --
===== ===== =====
</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 31, 1999 were as follows:
<TABLE>
<CAPTION>
Deferred
October 25, (Provision) October 31,
1998 Benefit 1999
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards...... $6,876 $(1,172) $5,704
Tax credits........................... 542 (24) 518
Accrued liabilities................... 357 (252) 105
Other................................. 1,452 (183) 1,269
------ ------- ------
Total gross deferred tax assets....... 9,227 (1,631) 7,596
Less: Valuation allowance............. (6,474) 1,682 (4,792)
------ ------- ------
Net deferred tax asset................ 2,753 51 2,804
====== ======= ======
Deferred Tax Liabilities:
Amortization and depreciation......... (1,013) (45) (1,058)
Other................................. (28) 28 --
------ ------- ------
Total deferred tax liabilities........ (1,041) (17) (1,058)
------ ------- ------
Net deferred tax asset................ $1,712 $ 34 $1,746
====== ======= ======
</TABLE>
Due to the Company's historical results of operations, a valuation allowance
has been provided for the deferred tax assets. The valuation allowance
increased by $559,000 in fiscal 1997, increased by $819,000 in fiscal 1998,
and decreased by $1,682,000 in fiscal 1999. During fiscal 1999, the net
deferred tax asset decreased by $1,682,000 due to the utilization of prior net
operating loss carryforwards.
On October 31, 1999, the Company had, for tax purposes, net operating loss
carryforwards of approximately $16,776,000, unused investment and research and
development tax credits of approximately $288,000, 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 2002 to
2018, the investment tax credit and research and development tax credit
carryforwards will expire from 2002 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
F-17
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Income Taxes--(Continued)
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 31, 1999,
management does not believe that a 50 percentage point change in ownership has
occurred during a three year period.
Cash paid for income taxes was approximately $146,000 during 1999, $28,000
during 1998, and none during 1997.
14. 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 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating
Fiscal Years Leases
------------ --------------
(In Thousands)
<S> <C>
2000......................................................... $ 2,163
2001......................................................... 2,066
2002......................................................... 1,981
2003......................................................... 1,828
2004......................................................... 1,552
Thereafter................................................... 1,827
-------
Minimum lease payments........................................ $11,417
=======
</TABLE>
Rent expense (exclusive of operating expenses and net of sublease rents) for
all operating leases was approximately $1,594,000, $1,584,000 and $1,487,000
in fiscal 1997, 1998 and 1999, respectively.
The Company is engaged in various lawsuits, the outcome of which cannot
presently be determined. In the opinion of management, losses, if any,
resulting from these lawsuits will not have a material effect on the Company's
consolidated financial statements.
15. Retirement Plans
The Company sponsors a defined contribution plan which is available to all
domestic employees. This plan provides for employer contributions based on
employee participation. The total expense under the plan was $441,000,
$452,000, and $344,000 in 1997, 1998, and 1999, respectively.
F-18
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Business Segment Information
The Company's business segments and accounting policies for its business
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on profit or loss
from operations not including non-recurring gains and losses and foreign
exchange gains and losses. Summarized financial information by business
segment for the years ended:
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Net sales by business segment:
Thermal management products.............. $58,294 $58,495 $48,429
Connector products....................... 11,880 12,579 10,623
Subsystems............................... 5,491 5,971 6,168
------- ------- -------
$75,665 $77,045 $65,220
======= ======= =======
Net sales by geographic area:
Sales to Customers Within the Continental
US...................................... $68,237 $68,450 $59,040
Exports From the US to Unaffiliated
Customers............................... 5,508 6,836 4,825
Non-US Sales by Foreign Operations....... 1,920 1,759 1,355
------- ------- -------
$75,665 $77,045 $65,220
======= ======= =======
Transfers to international operations
from US:................................ $ 483 $ 296 $ 521
======= ======= =======
Operating income (loss):
Thermal management products.............. $ (774) $(2,096) $ 5,340
Connector products....................... (933) 666 928
Subsystems............................... (48) 586 542
Corporate................................ (1,237) (1,133) (1,704)
------- ------- -------
$(2,992) $(1,977) $ 5,106
======= ======= =======
Interest expense:
Thermal management products.............. $ 1,003 $ 970 $ 864
Connector products....................... 170 15 21
Subsystems............................... -- 26 39
------- ------- -------
$ 1,173 $ 1,011 $ 924
======= ======= =======
Total assets:
Thermal management products.............. $28,944 $26,535 $25,127
Connector products....................... 6,653 6,046 4,971
Subsystems............................... 2,394 3,428 2,977
Corporate................................ 3,387 2,666 1,774
------- ------- -------
$41,378 $38,675 $34,849
======= ======= =======
Total assets:
Within the US............................ $39,862 37,508 $33,590
Within France and England................ 1,516 1,167 1,259
------- ------- -------
$41,378 $38,675 $34,849
======= ======= =======
</TABLE>
F-19
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Business Segment Information--(Continued)
<TABLE>
<CAPTION>
October 26, October 25, October 31,
1997 1998 1999
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Depreciation and amortization:
Thermal management products $2,235 $2,501 $2,578
Connector products.................... 429 488 488
Subsystems............................ 142 150 181
Corporate............................. 23 24 22
------ ------ ------
$2,829 $3,163 $3,269
====== ====== ======
Capital Expenditures:
Thermal management products........... $1,235 $4,231 $ 983
Connector products.................... 162 585 194
Subsystems............................ -- 258 35
Corporate............................. 23 5 3
------ ------ ------
$1,420 $5,079 $1,215
====== ====== ======
</TABLE>
F-20
<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>
Allowance for doubtful
accounts deducted from
accounts receivable in the
balance sheet--
1999........................ $ 524,226 $ -- $ 100,260(1) $ 423,966
1998........................ 327,888 208,178 11,840(1) 524,226
1997........................ 279,665 279,771 231,548(1) 327,888
Allowance for obsolete
inventory deducted from
inventories in the balance
sheet--
1999........................ $2,398,173 $ 502,309 $ 510,447(2) $2,390,035
1998........................ 1,868,704 1,815,095 1,285,626(2) 2,398,173
1997........................ 1,102,260 2,122,091 1,355,647(2) 1,868,704
Allowance for Wakefield
facility consolidation
1999........................ $ 105,064 $ -- $ 98,028 $ 7,036
1998........................ $1,749,983 $ (362,000) $1,282,919(3) $ 105,064
Allowance for European
consolidation
1999........................ $ 35,490 $ -- $ 35,490 $ --
1998........................ -- 150,000 114,510 35,490
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory written off at cost, net of value recovered.
(3) Primarily severance and equipment write offs.
S-1
<PAGE>
Exhibit 10.14(a)
August 6, 1999
Lockhart Industries, Inc.
c/o Alpha Technologies
1155 Dairy Ashford, Suite 216
Houston, Texas 77079
Attn: Johnny J. Blanchard
Re: Letter Agreement - Lease Extension
15555 and 15557 Texaco Avenue
Paramount, California
Reference is hereby made to that certain Lease dated October 31, 1979, and Lease
Extensions dated July 13, 1989 and February 8, 1994, by and between Landcee
Investment Co.("Lessor") and Lockhart Industries, Inc. ("Lessee") for the
Premises commonly known as 15555 and 15557 Texaco Avenue, Paramount, California.
The parties do hereby agree that said Lease shall be extended for an additional
period of five (5) years commencing November 1, 1999 and ending October 31,
2004. All terms, provisions and conditions of the original Lease shall remain in
full force and effect during the extension period, except as provided as
follows:
1. For the period November 1, 1999 through October 31, 2000 the monthly rent
shall be $11,370.50.
2. For the period November 1, 2000 through April 30, 2002 the monthly rent
shall be $11,737.28.
3. For the period May 1, 2002 through October 31, 2003 the monthly rent
shall be determined as follows: The monthly rent payable for April 2002
($11,737.28) shall be multiplied by a fraction, and the numerator of which
shall be Consumer Price Index (C.P.I.) of the Bureau of Labor Statistics
of the United States Department of Labor for Urban wage Earners and
Clerical Workers, Los Angeles-Anaheim-Riverside, California (1967=100),
"All Items", for the month of March, 2002, and the denominator of which
shall be the C.P.I. for the month of September, 1999. The sum so calculated
shall establish the new monthly rent for the period May 1, 2002 through
October 31, 2003. However in no event shall said monthly rent be less than
$12,324.14 or greater than $13,145.75.
<PAGE>
Lockhart Industries, Inc.
August 6, 1999
Page Two
4. For the period November 1, 2003 through October 31, 2004 the monthly rent
shall be that monthly rent which has been calculated in Paragraph 3 above
(for the period May 1, 2002 through October 31, 2003) plus 366.79 per
month.
Please have two authorized officers sign both originals of this Letter
Agreement-Lease Extension indicating your approval of the extension and
return one original to our office at 1176 Main Street, Suite 100, Irvine,
CA 92614.
On behalf of Landcee Investment Company we are delighted that you have decided
to renew your Lease and look forward to a continued relationship with
Lockhart Industries in the coming years.
Sincerely,
LANDCEE INVESTMENT
COMPANY
/s/ Robert D. Bendetti
-------------------------------
By: Robert D. Bendetti
Authorized Representative
RDB:sl
cc: John Wenckus
Jean Zamboni-Hoisington
AGREED & ACCEPTED:
Dated: September 15, 1999
--------
By Lockhart Industries, Inc.
By: /s/Johnny J. Blanchard
----------------------
Name: Johnny J. Blanchard
-------------------
Title: Secretary & Treasurer
------------------------
By: Lockhart Industries, Inc.
By: /s/ John Wenckus
----------------
Name: John Wenckus
------------
Title: Vice President & General Manager
--------------------------------
<PAGE>
Exhibit 10.15(a)
August 6, 1999
Lockhart Industries, Inc.
c./o Alpha Technologies
1155 Dairy Ashford, Suite 216
Houston, Texas 77079
Attn: Johnny J. Blanchard
Re: Letter Agreement - Lease Extension
15707 Texaco Avenue
Paramount, California
Reference is hereby made to that certain Lease dated August 29, 1984 and Lease
Extensions dated February 1, 1991 and June 1996 by and between Garfield-Pacific
Development Co. ("Lessor") and Lockhart Industries, Inc. ("Lessee") for the
Premises commonly known as 15707 Texaco Avenue, Paramount, California.
The parties do hereby agree that said Lease shall be extended for an additional
period of five (5) years commencing November 1, 1999 and ending October 31,
2004. All terms, provisions and conditions of the original Lease shall remain in
full force and effect during the extension period, except as provided as
follows:
1. For the period November 1, 1999 through October 31, 2000 the monthly rent
shall be $9,500.00.
2. For the period November 1, 2000 through April 30, 2002 the monthly rent
shall be $9,750.00.
3. For the period May 1, 2002 through October 31, 2003 the monthly rent shall be
determined as follows: The monthly rent payable for April 2002 ($9,750.00) shall
be multiplied by a fraction and the numerator of which shall be the Consumer
Price Index (C.P.I.) of the Bureau of Labor Statistics of the United States
Department of Labor for Urban wage Earners and Clerical Workers, Los Angeles-
Anaheim-Riverside, California (1967=100), "All Items", for the month of March,
2002 and the denominator of which shall be the C.P.I. for the month of
September, 1999. The sum so calculated shall establish the new monthly rent for
the period May 1, 2002 through October 31, 2003. However, in no event shall said
monthly rent be less than $10,237.50 or greater than $10,920.00.
<PAGE>
Lockhart Industries, Inc.
August 6, 1999
Page Two
4. For the period November 1, 2003 through October 31, 2004 the monthly rent
shall be that monthly rent which has been calculated in Paragraph 3 above (for
the period May 1, 2002 through October 31, 2003) plus $250.00 per month.
Please have two authorized officers sign both originals of this letter
Agreement-Lease Extension indicating your approval of the extension and return
on original to our office at 1176 Main Street, Suite 100, Irvine, CA 92614.
We are delighted that you have decided to renew your Lease and look forward to a
continued relationship with Lockhart Industries in the coming years.
Sincerely,
GARFIELD-PACIFIC
DEVELOPMENT CO.
/s/ Robert D. Bendetti
-----------------------------
By: Robert D. Bendetti
Authorized Representative
RDB:sl
Cc. John Wenckus
AGREED & ACCEPTED:
Dated: September 15, 1999
By: Lockhart Industries, Inc.
By: /s/Johnny J. Blanchard
----------------------
Name: Johnny Blanchard
-----------------
Title Secretary & Treasurer
----------------------
By: Lockhart Industries, Inc.
By: /s/John Wenckus
---------------
Name: John Wenckus
------------
Title: Vice President & General Manager
--------------------------------
<PAGE>
Exhibit 10.17(a)
FIRST AMENDMENT OF LEASE
This Amendment of Lease made on September 28, 1999, for Lease dated September 1,
1993 between B & K INVESTMENT COMPANY (herein called "Lessor") and SPECIALTY
EXTRUSIONS LIMITED (herein called "Lessee"), who agree as follows:
1. Paragraph 1 - PARTIES - Shall be modified and inserted in lieu thereof
is the following:
This lease, dated for reference purposes only, September 1, 1993, is
made by and between B & K Investment Company (herein called "Lessor")
and Wakefield Extrusion Company, (herein called "Lessee").
2. Paragraph 3.1 - TERM - Shall be modified and inserted in lieu thereof
is the following:
The term of this lease shall be for three (3) years commencing on
September 1, 1999 and ending on August 31, 2002 unless terminated
pursuant to any provision hereof.
3. Paragraph 4 - RENT - Shall be deleted in its entirety and inserted in
lieu thereof is the following new paragraph:
Lessee shall pay to Lessor as rent for the Premises, monthly payments
of $7,717.00 in advance, on the first day of each month of the term
hereof.. Rent for any period during the term hereof which is for less
than one month shall be a pro rata portion of the monthly installment.
Rent shall be payable in lawful money of the United States to Lessor
or other persons as Lessor may designate in writing.
4. Paragraph 15 - BROKER'S FEE - Shall be deleted in its entirety.
5. Addendum 1 - RENT ESCALATIONS - Shall be deleted in its entirety.
6 Addendum 2 - OPTION TO EXTEND - Shall be deleted in its entirety.
7. Addendum 3 - OPTION FOR NEW OWNER TO EXTEND - Shall be deleted in
its entirety.
8. Effectiveness of Lease - Except as set forth in this Amendment of Lease,
all provisions of the Lease shall remain unchanged and in full force and
effect.
LESSOR: LESSEE:
B & K INVESTMENTS COMPANY WAKEFIELD EXTRUSION CORP.
By: /s/ Gordon Bagne By: /s/ George G. Wright
---------------- ----------------------
Gordon Bagne,
General Partner
Date: 10-26-99 Date: 10-26-99
-------- --------
By: /s/ Robert A. Klinger
---------------------
Robert A. Klinger,
General Partner
Date: 11-29-99
--------
<PAGE>
Exhibit 21
Alpha Technologies Group, Inc
Subsidiaries of the Registrant
Wakefield Engineering, Inc. (Incorporated in Delaware)
Specialty Extrusion Corp. (formerly: Wakefield Extrusion
Corp. (Incorporated in California)
Lockhart Industries, Inc. (Incorporated in California)
Uni-Star Industries, Inc. (Incorporated in Delaware, does business as Microdot
Connectors
Microdot Connectors Europe, Ltd (Organized in the United Kingdom)
Malco Technologies, Inc. (Incorporated in Delaware)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated December 15, 1999, accompanying the
consolidated financial statements and schedule included in the Annual Report of
Alpha Technologies Group, Inc. on Form 10-K for the year ended October 31, 1999.
We hereby consent to the incorporation by reference of said report in the
Registration Statements of Alpha Technologies Group, Inc. on Forms S-8 (File No.
33-06695, effective June 23, 1986, File No. 33-11627, effective January 29,
1987, File No. 33-17359, effective September 28, 1987, File No. 33-20706,
effective March 17, 1988, File No. 33-29636, effective June 30, 1989, File No.
33-48663, effective June 23, 1992 and File No. 333-03001, effective April 30,
1996) and on Form S-3 (File No. 333-10311) which became effective August 16,
1996.
GRANT THORNTON LLP
/s/ Grant Thornton LLP
- -----------------------
Houston, Texas
January 31, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated December 4, 1998, except with respect to the matters discussed in
Note 6 as to which the date is February 8, 1999 included in Registration
Statement File No. 0-14365 in this Form 10-K. It should be noted that we have
not audited any financial statements of the company subsequent to October 25,
1998 or performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
- ------------------------
Arthur Andersen LLP
Houston, Texas
January 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF OCTOBER 31, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> OCT-26-1998
<PERIOD-END> OCT-31-1999
<CASH> 354
<SECURITIES> 0
<RECEIVABLES> 9,482
<ALLOWANCES> 424
<INVENTORY> 7,790
<CURRENT-ASSETS> 18,489
<PP&E> 22,300
<DEPRECIATION> 10,838
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0
0
<COMMON> 239
<OTHER-SE> 18,263
<TOTAL-LIABILITY-AND-EQUITY> 34,849
<SALES> 65,220
<TOTAL-REVENUES> 65,220
<CGS> 47,955
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