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, consumer electronics, transportation, automotive, industrial controls, factory automation, power supply, 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 1993, the Company began its transformation from a software company to its current businesses. Since October 1993, the Company has grown through a combination of acquisitions and internal growth. In September of 1994, the Company sold the remaining aspects of its software and related services business. In April 1995, 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, Wakefield Extrusion Corp. ("Wakefield Extrusion") and Lockhart Industries, Inc. ("Lockhart"). The connector business is conducted through the Company's wholly-owned subsidiary, Uni-Star Industries, Inc. ("Uni-Star"), which does business as Microdot Connectors, and its foreign subsidiary, Microdot Connectors Europe Ltd. The manufacturing operation in France, Malco Microdot France SARL, has been consolidated into the operation in the United Kingdom. However, a sales office is maintained in France to service its European operations. In early fiscal 1998, the Company's electronics systems business, which operates as Malco, was transferred from Uni-Star to a newly formed Delaware corporation, Malco Technologies, Incorporated; which is a wholly owned subsidiary of Alpha. See "Note 13. Business Segment Information" in Notes to Consolidated Financial Statements.
Acquisitions
The following table sets forth the significant acquisitions made by the Company since October 1993:
Disposition
On June 20, 1997, Uni-Star sold substantially all of the assets and business of its hermetic connector business in Cincinnati, Ohio, which operated under the trade name Connector Industries of America ("CIA"). The sale included certain tangible and intangible assets used in the CIA business and the agreement by Uni-Star and Alpha and certain of their affiliates not to engage in the hermetic connector business for five years except that Uni-Star's Microdot Connectors division may continue to sell certain families of custom hermetic connectors.
The sales price was $2,100,000 plus the assumption by the purchaser of certain payables and liabilities of the CIA business aggregating approximately $120,000. The agreement provides for a potential additional payment to the Company of up to $400,000, due in February, 1999, based on orders booked by the buyer during the 1998 calendar year by customers of the CIA business. In January 1999, the purchaser advised the Company that no contingent payment will be due. The company recognized a gain, excluding the potential additional payment, on the sale of $610,000 during fiscal 1997.
Thermal Management Segment
General
During 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 a slowdown in the electronics industry as well as 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. In addition during September 1998, the President of the Company's connector subsidiary assumed the additional responsibilities of the Presidency of the thermal management group.
In the first half of fiscal 1998, the Company completed the consolidation of the thermal management business. The Wakefield, Massachusetts facility was closed and consolidated into the Fall River, Massachusetts and Temecula, California facilities. The Company leased office space in Beverly, Massachusetts for the thermal management sales, engineering and administrative staff. In addition, the Company reached an agreement with the landlord of the Wakefield facility to transfer its remaining lease commitment on the Wakefield facility to a lease for office space at a building owned by the landlord in Beverly, Massachusetts. See "Item 2.
Item 2. Description of Property.
The Company has leases for manufacturing facilities at the following locations:
- -------- ** This lease expired in August 1998. Management is currently negotiating a new lease with the landlord.
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.
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. The plaintiff has claimed that its damages are between $200,000 and $750,000. To date, the Company has incurred $160,000 in the defense of this litigation. Preliminary investigation indicates that the underground water flows in a direction that would not support AAHT's claims. In addition, because of the depth of the groundwater, even if AAHT's claim were supportable, the Company believes that any release by Lockhart would predate the Company's ownership of Lockhart. The former owner of Lockhart agreed to indemnify the Company against such claims, and has been put on notice of AAHT's complaint. Such
indemnification obligations are payable in shares of the Company's common stock, which are currently held in escrow, and are to be valued at $9 per share. Some discovery has been concluded and additional discovery may be taken. 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. If the parties are unable to resolve the litigation through negotiation, additional discovery and a trial may be necessary. The Company cannot evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss, if any. Lockhart intends to vigorously defend this action.
On August 5, 1998, an attorney for a group called California Community Health Advocates wrote a letter to Lockhart Industries alleging that the 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. In response, Lockhart has agreed to undertake efforts to reduce or eliminate its use of certain chemicals, and to provide appropriate warnings for past and current usage of such chemicals, as a way of shielding itself from such claims in the future. The Company cannot predict the future cost or liability, if any, with respect to these allegations.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of fiscal 1998 to a vote of the holders of the Company's common stock, through the solicitation of proxies or otherwise.
PART II
Item 5.
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:
Holders of Record
On December 31, 1998, there were approximately 196 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 1997 and 1998. The Board of Directors of the Company does not intend to pay cash dividends on its common stock in the foreseeable future.
Item 6.
Item 6. Selected Financial Data.
The Company entered its current business in October 1993 by acquiring a thermal management business and has subsequently acquired several operations in the thermal management and connector business. See "Acquisitions" in Item 1. Description of Business--General. The results of such acquired businesses are reflected on the following table from the date of acquisition. In September 1994, the Company sold its software business; and in June 1997, the Company sold its hermetic connector business. The Results of Operations in the following table do not include any information with respect to such businesses sold.
- -------- (1) See Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages through. (2) See "Note 2. Acquisitions" and "Note 3. Discontinued Operation" in Notes to Consolidated Financial Statements.
Item 7.
Item 7. Management's Discussion and Analysis of Operations and Financial Condition.
Forward Leading 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 detailed herein and in the Company's other filings with the Securities and Exchange Commission.
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
Overview
The Company entered the thermal management business in October 1993 by acquiring Wakefield and entered the connector products business in June 1994 by purchasing the Interconnect Systems Division of Microdot Inc. The following table sets forth the significant acquisitions and dispositions made by the Company during the last three fiscal years:
The results of operations of the businesses acquired are included in the Company's consolidated results of operations only since their respective acquisition dates. In June 1997, the Company sold its hermetic connector business which was located in Cincinnati, Ohio. The consolidated financial statements of the Company for the fiscal year ended October 26, 1997 report separately the gain on the sale and the results of operations of such discontinued operation. Such operation is not included in the following discussion and prior year numbers have been restated to exclude the effects of discontinued operations.
Results of Operations
Fiscal Year 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. As a result, the thermal management business was profitable in the first quarter of fiscal 1999.
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 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 cancelled. 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. 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.
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
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 the slowdown in the electronics industry and 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 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.
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
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.
During fiscal 1998, the Company focused some of its research and development efforts to develop a new product line for the microprocessor market based on convoluted fin technology. These products are smaller, lighter and thermally more efficient than current generation heat sinks. While the Company believes that this product family will gain market acceptance in the future, to date, the Company's orders for this product have not been significant.
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. However, a sales office will be maintained in France.
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. See "Consolidation of Thermal Management Operations" in Item 1. Description of Business--Thermal Management Segment.
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. In January 1999, the purchaser advised the Company that no contingent payment will be due. The Company recognized a gain, excluding the potential additional payment, on the sale of $610,000 during fiscal 1997.
Fiscal Year 1997 versus Fiscal Year 1996 Comparison
Net Income/Loss. The Company reported a net loss for the 1997 fiscal year of $3,352,000 which included charges for restructuring and other non recurring costs of $2,494,000, a charge for additional inventory reserves
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
of $588,000, and a gain of $610,000 from the sale of its hermetic connector business. This compares to net loss of $299,000 for the 1996 fiscal year which included $406,000 of other charges.
The $2,494,000 in restructuring and other charges reported in fiscal 1997 included (i) $2,028,000 related to the closing of the Company's manufacturing facility in Wakefield, Massachusetts and the consolidation of the thermal management operations into the Fall River, Massachusetts and Temecula, California facilities, and (ii) $466,000 related to downsizing and management changes throughout the Company. The additional inventory reserves were recognized to fully reserve the costs of certain custom thermal management products that were built in anticipation of orders that have not been received. The $406,000 of other charges recorded in fiscal 1996 related to the settlement of a cancelled purchase commitment, costs related to an acquisition effort that was terminated and severance payments.
The net loss from thermal management operations for fiscal 1997, before the allocation of Alpha corporate expenses ("corporate allocation"), was $1,786,000, inclusive of $2,028,000 related to the closing of the Wakefield facility and $172,000 related to downsizing of the thermal management operations. Exclusive of these charges, the thermal management business would have reported net income of $414,000, before corporate allocation. In fiscal 1996, the thermal management segment reported net income, before corporate allocation, of $276,000 including a charge for severance payments of $140,000. The results of operations, excluding the aforementioned charges, decreased primarily due to a reduction in the gross profit margin, which is discussed below.
The net loss from the connector products segment for fiscal 1997, before corporate allocation, was $1,133,000 including $166,000 related to management changes and downsizing. For fiscal 1996, net income from the connector products segment, before corporate allocation, was $390,000. The decrease in the results of operations in fiscal 1997 compared to fiscal 1996 was primarily due to reduced revenues and gross profit, which is discussed below.
Sales. The Company's sales for fiscal 1997 increased $8,595,000, or 12.8%, to $75,665,000 from $67,070,000 for fiscal 1996. Thermal management sales increased 19.0% to $58,294,000 for fiscal 1997 from $48,980,000 for fiscal 1996. The increase in thermal management sales was due to internal growth of 4.5% and the inclusion of $8,317,000 in sales by Lockhart, which was acquired in August 1996. In fiscal 1996, the Company recorded revenues from Lockhart of $1,133,000 for the 2 month period it owned this business. Internal thermal management sales increased primarily due to higher sales of Penguin Cooler Heat Sinks ("PGC"), which dissipate heat generated by microprocessors used in personal computers. Sales of PGC increased approximately 15.3% in fiscal 1997 compared to fiscal 1996.
Connector sales were $11,880,000 during the 1997 fiscal year compared to $13,087,000 during the prior fiscal year, a 9.2% decrease. This decrease was primarily caused by low backlog at the beginning of the year causing throughput and manufacturing scheduling problems at the South Pasadena facility. During the year, the backlog at this facility has increased from $2.5 million to $3.9 million and management has focused on improving productivity. The increased backlog has enabled this facility to better plan monthly production and increase monthly shipments during the year. The backlog has increased due to the replacement of sales representative firms not meeting their sales commitment, instituting detailed three-day training sessions for all sales representatives and hiring three distributors.
Gross Profit. The Company's overall gross profit as a percentage of total revenues ("gross profit percentage") for fiscal 1997 was 18.4% compared to 21.5% for 1996 fiscal year. The thermal management segment's gross profit percentage was 18.8% and 20.6% for fiscal 1997 and 1996, respectively. Excluding the aforementioned additional inventory reserves recorded in fiscal 1997, the company's thermal management gross profit percentage was 19.8% for fiscal 1997. Thermal management gross profit percentage was further adversely impacted by higher sales of PGC products, which carry a lower gross profit margin than the average of other thermal management products, increased aluminum costs and competitive pricing pressures.
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
The connector products segment's gross profit percentage decreased to 17.2% for fiscal 1997 from 28.2% for fiscal 1996. This decrease is attributable to the aforementioned manufacturing inefficiencies and decreased sales volume.
Research and Development Expense. Research and development expense includes the cost of enhancing existing products and, to a lesser extent, the cost of developing new products. Research and development expenses, wholly attributable to the thermal management segment, were $1,506,000 and $1,448,000 for fiscal 1997 and 1996, respectively. Excluding Lockhart, research and development expenses for the 1997 and 1996 fiscal years were $1,107,000 and $1,423,000, respectively. The decrease of $316,000 in research and development expenses was primarily due to a decrease in engineering staff as well as a decrease in licensing fees for engineering software. For fiscal 1997, the Company received a one-year waiver of licensing fees for a software application used in engineering.
Selling, General and Administrative Expense. Selling, general and administrative expenses for the year ended October 26, 1997 were $12,931,000, or 17.1% of sales, compared to $12,344,000, or 18.4% of sales, for the year ended October 27, 1996. SG&A expenses as a percentage of sales decreased due to the inclusion of Lockhart which has a lower SG&A percentage of sales than the overall Company's percentage.
Restructuring and Other Expenses. During fiscal 1997, the Company incurred restructuring charges of $2,494,000, which consisted of $2,028,000 related to the consolidation of the thermal management operations and $466,000 related to management changes and downsizing. See "Consolidation of Thermal Management Operations" in Item 1. Description of Business--Thermal Management Segment.
Interest and Other Income (Net). Interest income, which was $125,000 in fiscal 1997 and $213,000 in fiscal 1996, was earned on cash held at the parent level. The decrease in interest income was primarily attributable to a decrease in the average cash balance invested. Interest expense was $1,173,000 and $1,073,000 for fiscal 1997 and fiscal 1996, respectively. This increase was due to a higher average borrowing base and an increase in the interest rate paid on outstanding debt.
Discontinued Operation. On June 20, 1997, the Company sold substantially all of the assets and business of its hermetic connector business in Cincinnati, Ohio, which operated under the trade name Connector Industries of America ("CIA").
The sales price was $2,100,000 plus the assumption by the purchaser of certain payables and liabilities of the CIA business aggregating approximately $120,000. The agreement provides for a potential additional payment to the Company of up to $400,000 based on orders booked by the buyer during the 1998 calendar year by customers of the CIA business. In January 1999, the purchaser advised the Company that no contingent payment was due. The company recognized a gain, excluding the potential additional payment, on the sale of $610,000 during fiscal 1997.
Income Taxes
On October 25, 1998, the Company had, for tax purposes, remaining NOL Carryforwards of approximately $20,223,000 available to offset future taxable income, approximately $312,000 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 1999 to 2018, the investment tax credit and research and development tax credit carryforwards will expire from 1999 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
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
corporation during a three-year period. It is possible that subsequent transactions involving the Company's capital stock could result in such a limitation. See "Note 11. Income Taxes" in Notes to Consolidated Financial Statements.
Year 2000
The Company continues to use its existing staff to comprehensively review existing systems and equipment that need to be updated or changed as a result of the Year 2000. To date, the Company's staff has determined that some personal computer software requires upgrading and has begun the process of making its systems year 2000 compliant. Based on current estimates, the costs related to these upgrades are immaterial. The Company's computerized production equipment is also being systematically evaluated for compliance. The Company is in contact with its vendors and customers and no major problem has been discovered to date. In fiscal 1999, the Company will prepare a contingency plan.
Liquidity and Capital Resources
On October 25, 1998, the Company had cash of approximately $1,387,000 compared to $1,707,000 on October 26, 1997. Existing cash, cash provided from operating activities, and borrowings under the Company's credit facilities were used for purchases of capital equipment.
During fiscal 1998, $2,044,000 was provided from operating activities. Cash was primarily provided from a decrease in accounts receivable, partially offset by a decrease in accounts payable, accrued compensation and other liabilities. Capital equipment purchases of $5,079,000 were made to improve manufacturing capabilities, to replace existing machinery which had reached its end of life, and to upgrade manufacturing computer systems.
Effective December 31, 1997, Wakefield, Wakefield Extrusion, Lockhart and Malco (hereinafter referred to as "Borrowers") became parties to a loan agreement, as amended (the "Agreement") with a commercial bank which provided for revolving loans of up to $9,000,000, with the ability to increase upon request to $12,000,000, and an equipment acquisition facility of $3.2 million. The advances on the revolving loans were based on the eligible accounts receivable and inventories of Borrowers. The advances on the equipment acquisition facility may be used only for the purpose of funding capital equipment purchases by the Borrowers. In addition, there are two term loans existing under the Agreement in the original amounts of $2,250,000 and $1,900,000. The original maturity date on this Agreement was December 31, 1999.
On October 25, 1998, $8,180,000 was drawn on the revolving credit facility with interest accruing on $7,000,000 at the relevant adjusted LIBOR rate plus 2.5% (8.188% per annum on October 25, 1998) and the remainder at the banks prime rate plus .5% (prime plus 1% after November 12, 1998) or 8.5% per annum on October 25, 1998. There is an unused line fee equal to .5% per annum on the difference between $10,000,000, or $9,000,000 after January 31, 1999, and the average daily outstanding principal balance of Revolving Loans during each of the Company's fiscal quarters payable quarterly in arrears on the first day of each fiscal quarter. The $2,250,000 term note accrues interest at 8.75% per annum and is payable in fifty-nine (59) equal monthly installments of $37,500 beginning December 1, 1996 and a final installment equal to all unpaid principal on October 11, 2001, together, in each instance, with interest thereon to the date of payment. On October 25, 1998, $1,387,500 was outstanding on the $2,250,000 term loan. The $1,900,000 term loan accrues interest at 8.85%, and is payable in eighty-three (83) equal monthly installments of $22,619 beginning December 1, 1996 and a final installment equal to all unpaid principal on October 29, 2003, together, in each instance, with interest thereon to the date of payment. On October 25, 1998, $1,379,763 was outstanding on the $1,900,000 term note. The equipment acquisition facility accrues interest at the banks prime rate plus .75% (8.75% per annum on October 25, 1998) and is payable in 84 equal monthly installments of $10,952 beginning January 1999. On October 25, 1998, $920,000 was outstanding on the equipment acquisition facility. The obligations under the Loan Agreement are secured by a first lien on and assignment of all of the assets of Borrowers which in aggregate total $36,010,000.
Item 7. Management's Discussion and Analysis of Operations and Financial Condition--continued
As a result of the fourth quarter net loss, the Company was not in compliance with the financial convenants included in the Agreement. In November 1998, the Company and the commercial bank reached an agreement whereby the Company pledged the assets of its connector subsidiary, Uni-Star, to provide additional collateral under the Agreement. In February 1999, the Company and the commercial bank agreed to reduce the revolving loan commitment to $9,000,000, reduced the percentage advanced on accounts receivable and inventory, and agreed to new covenants. The Company does not believe that these reductions will have a material adverse effect on its business. The Company is reviewing proposals from several lenders and is in receipt of a commitment from one lender. The Company intends to evaluate each of the proposals and negotiate the most favorable relationship it can obtain to replace its current commercial lender.
The Company has entered into interest swap agreements as a means of managing its interest rate exposure. The agreements effectively fixed the interest rate on floating rate debt at a rate of 8.75% for a notional principal amount of $2,250,000 through November 1, 2001, and at a rate of 8.85% for a notional principal amount of $1,900,000 through October 29, 2003. On October 25, 1998, the carrying value of the related debt approximated the fair value of the debt including the swap agreements. Net amounts paid or received are reflected in interest expense.
Working capital on October 25, 1998 was $9,099,000 compared to $10,331,000 on October 26, 1997. The Company believes that it will be able to replace its current commercial lender prior to the credit facilities maturity date. With its currently available cash, anticipated cash flow from operations and availability under a new credit facility, the Company believes it will be able to fund its operations in the near-term.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data required pursuant to this Item are presented on pages through and pages S-1 through S-5 of this report.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
During the twenty-four month period preceding October 25, 1998, the Company has neither changed accountants nor had disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope and procedures.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant.
The current members of the Board of Directors were most recently elected at the 1998 Shareholder Meeting of Stockholders for a term of one year, and until their successors are duly elected and qualified or until their earlier death, resignation or removal. The members, their ages and certain other information about each of them are set forth below.
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant--continued
The current executive officers of the Company are as follows:
Each officer of the Company holds office until his successor shall be duly elected and qualified or until his earlier death, resignation or removal.
Mr. Blanchard has been Chief Financial Officer of the Company since September 1994; from December 1989, he was Controller of the Company; and from October 1988, he was General Accounting Manager of the Company. Mr. Blanchard is a Certified Public Accountant.
Mr. Streiter joined Uni-Star, as President on March 23, 1998 and assumed the additional responsibility as President of Wakefield Engineering, Inc. on September 21, 1998. Prior to joining Alpha, Mr. Streiter served in various management capacities for the past ten years at AVX Filters Corporation, Sun Valley, California.
Item 11.
Item 11. Executive Compensation
The following table sets forth the compensation paid or accrued for services rendered in all capacities on behalf of the Company during the last three fiscal years to the Company's "Named Executive Officers", the only executive officers who received compensation in excess of $100,000 during the fiscal year ended October 25, 1998.
- -------- (1) On April 19, 1995, Lawrence Butler became President and Chief Executive Officer of the Company with a salary of $180,000 per annum. In September 1995, Mr. Butler entered into a three-year employment agreement with the Company. Effective September 1, 1997, Mr. L. Butler's salary increased to $215,000 per annum. See "Employment Agreements". (2) On August 19, 1997, Mr. L. Butler was granted 16,695 incentive stock options which are exercisable at $3.9875 per share and 8,305 non-qualified stock options which are exercisable at $3.625 per share. All options were granted under the Company's stock option plan. On the date of the grant, the fair market value of the shares was $3.625. On January 15, 1998, Mr. L. Butler was granted 25,220 incentive stock options which are exercisable at $3.875 per share and 54,780 non-qualified stock options which are exercisable at $4.2625 per share. All options were granted under the Company's stock option plan. On the date of the grant, the fair market value of the shares was $3.875. (3) Represents car allowance of $7,200; employer 401(k) matching contribution of $4,500 for 1998; represents car allowance of $6,900; employer 401(k) matching contribution of $4,500 for 1997, and a 401(k) matching contribution of $4,050 for 1996. (4) Mr. Streiter joined Uni-Star as President on March 23, 1998 and assumed the additional responsibility of President of Wakefield on September 21, 1998. (5) On April 14, 1998 Mr. Streiter was granted 15,000 incentive stock options which are exercisable at the fair market value on such date, $4.5938. On October 21, 1998 Mr. Streiter was granted 85,000 incentive stock options which are exercisable at the fair market value on such date, $1.8750. (6) Represents 401(k) matching contributions. (7) Mr. Hoffman ceased serving as President of Wakefield in September, 1998. (8) These options have been canceled as Mr. Hoffman ceased being employed by the Company on October 31, 1998. (9) Represents car allowance of $4,571, employer 401(k) matching contribution of $5,455, and severance payments of $34,904 including unused accrued vacation time for 1998. Represents car allowance of $4,490 and employer 401(k) matching contribution of $3,375 for 1997.
Item 11. Executive Compensation--continued
Option/SAR Grants in Last Fiscal Year
The following table sets forth information regarding grants of stock options to the Named Executive Officers during the last fiscal year. No SARs were granted during the last fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year Ended October 25, 1998 and FY-End Option Values
The following table sets forth information regarding each exercise of stock options during the fiscal year ended October 25, 1998 by the Named Executive Officers and the fiscal year-end value of unexercised options held by such persons.
Employment Agreements
On September 29, 1995, the Company and Mr. L. Butler entered into a three year employment agreement (the "Agreement"). Under the Agreement, Mr. Butler is entitled to a base annual salary of $180,000 for the first year of the term with annual reviews of such base salary by the Board of Directors. In addition, the Agreement provides for an annual bonus based on the Company's earnings from continuing operations, less minority interest and before provision for income taxes.
Effective March 23, 1998, the Company's Uni-Star subsidiary entered into a one year employment agreement with Robert C. Streiter, pursuant to which Mr. Streiter is to serve as Uni-Star's president. Under the agreement, Mr. Streiter is to receive an annual salary of $125,000, participate in the Company's bonus plan, and receive options to purchase 15,000 shares of the Company's common stock pursuant to the Company's 1994 Stock Option Plan.
Retirement Plans
The Company has adopted a 401-K Savings/Stock Purchase Plan (the "401-K Plan") pursuant to which employees of the Company, including officers and directors who are full-time employees, may elect to contribute up to 6% of their salaries with the Company contributing an amount equal to one-half the employee's contribution. The amounts contributed by the Company vest over the first five (5) years of a person's employment with the Company. Employees may also contribute certain additional amounts of their salaries to the 401-K Plan without matching contributions by the Company. Income on the amounts held in the 401-K Plan is not subject to Federal income tax until withdrawal. Amounts held in the 401-K Plan are generally distributable to an employee upon normal retirement at age 59 or upon the death or disability of the employee. The Company does not maintain any pension plans.
Item 11. Executive Compensation--continued
Stock Option Plans and Agreement
While the Company currently has stock options outstanding under four plans: 1981 and 1984 Incentive Stock Option Plans and the 1985 and 1994 Stock Option Plans (collectively, the "Stock Option Plans"), options may only be granted under the 1994 Plan.
As of October 25, 1998, the number of shares available for future grant under the 1994 Plan was 299,500, and as of such date the Company had outstanding options to acquire an aggregate of 1,560,900 shares of Common Stock under all Stock Option Plans.
Compensation of Directors
On January 15, 1998, the Company's Board of Directors approved an amendment to the Company's 1994 Stock Option Plan to provide for the annual grant (for the next three years) of options to purchase 10,000 shares to each director who is not an employee of the Company. Directors who are officers of or consultants to the Company will not receive any additional compensation for serving on the Board of Directors or its committees. Previously, the compensation plan provided for payment to directors who are not officers of or consultants to the Company of $1,000 for each meeting of the Board of Directors or any of its committees attended in person (plus reimbursement of travel expenses) and $250 for each telephonic meeting in which a Director participates.
Compensation Committee Interlocks and Insider Participation
The Board has a Compensation Committee, which currently consists of Marshall D. Butler and Frederic A. Heim. For services as Chairman of the Board of Directors, Marshall Butler received compensation of $59,375 during the last fiscal year.
Compensation Committee Report
The compensation paid to Lawrence Butler for the fiscal year ended October 25, 1998 was determined pursuant to his employment agreement which was entered into on September 29, 1995. The agreement provides for a base annual salary, subject to annual review, of $180,000, plus a bonus based on the Company achieving certain approved targeted earnings. Prior to determining Mr. Butler's salary, the Committee reviewed available surveys of compensation packages for chief executives in the electronics components manufacturing industry. The Committee recommended an increase to Mr. L. Butler's salary of $35,000 for effective beginning in fiscal 1997. Mr. L. Butler was not entitled to, and did not receive, a bonus for fiscal 1998. Mr. L. Butler was granted options to purchase 80,000 shares of the Company's common stock during the year ended October 25, 1998.
It is the Committee's policy to provide its executive officers with a moderately competitive salary and for incentives in the form of a stock options and cash bonuses tied to targeted earnings. The Committee believes that Mr. L. Butler's employment agreement reflects these policies.
Marshall D. Butler Frederic A. Heim
Performance Graph
The graph below compares the cumulative total shareholder's return of the common stock of the Company for the last five years with the NASDAQ Composite Index and the Standard & Poor's Electronic Components and Parts Manufacturers. The graph assumes the value of the fixed investment was $100 on October 31, 1993, and that all dividends were reinvested.
[GRAPH APPEARS HERE]
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of January 31, 1999, the number and percentage of outstanding shares of Common Stock of the Company owned beneficially, within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), by (i) each stockholder known by the Company to own more than 5% of the outstanding shares of Common Stock; (ii) each director and nominee of the Company; (iii) each named executive officer; and (iv) all directors, nominees and executive officers, as a group. Except as otherwise specified, the named beneficial owner has sole voting and investment power.
- -------- * Constitutes less than 1% (1) Unless otherwise indicated, the address of each beneficial owner is c/o Alpha Technologies Group, Inc., 9465 Wilshire Blvd. Suite 980, Beverly Hills, CA 90212. (2) Includes shares deemed to be beneficially owned by such persons or entities pursuant to Rule 13d-3 promulgated under the Exchange Act because they have the right to acquire such shares within 60 days upon the exercise of options or similar rights or because such persons or entities have or share investment or voting power. (3) Does not include shares owned by Dot.Com of which Mr. M. Butler and Mr. Heim are each limited partners. Messrs. Butler and Heim disclaim beneficial ownership of such shares. (4) Includes 125,000 shares which Mr. M. Butler has the right to acquire upon the exercise of stock options within 60 days. (5) Includes 850,060 shares owned by Dot.Com, 15,000 shares owned by a Trust of which Mr. L. Butler is trustee and 329,999 shares which Mr. L. Butler has the right to acquire upon the exercise of stock options within 60 days. (6) Includes 10,000 shares which Mr. Grierson has the right to acquire upon the exercise of stock options within 60 days. (7) Includes 35,000 shares which Mr. Heim has the right to acquire upon the exercise of stock options within 60 days. (8) Includes 70,000 shares which Mr. Rind has the right to acquire upon the exercise of stock options within sixty days. (9) Shares owned by Dot.Com are also included in the number of shares reported as beneficially owned by Mr. L. Butler.
Item 12. Security Ownership of Certain Beneficial Owners and Management-- continued
(10) Address is c/o Uni-Star Industries, Inc., 306 Pasadena Ave, South Pasadena, CA 91030. Includes 5,000 shares that Mr. Streiter has the right to acquire upon exercise of stock options within sixty days. Includes 10,000 shares owned by Mr. Streiter's spouse, Mr. Streiter disclaims beneficial ownership of such shares. (11) Dimensional Fund Advisors Inc. ownership as reported on Nasdaq-online.com as of February 1, 1999. (12) Wellington Management Company, LLP ownership as reported on Nasdaq- online.com as of February 1, 1999. (13) Lockhart Family Trust Ownership as shown on the Company's stock ledger as maintained by American Stock Transfer & Trust Company, the Company's transfer agent. (14) Includes 622,99 shares which individuals in the group have the right to acquire upon the exercise of stock options which are exercisable within 60 days, 850,060 shares held by Dot.Com, 15,000 shares owned by a trust of which Mr. L. Butler is trustee.
Item 13.
Item 13. Certain Relationships and Related Transactions.
There were no transactions since the beginning of the Company's last fiscal year requiring disclosure pursuant to Item 404 of Regulation S-K.
PART IV
Item 14.
Item 14. Exhibits and Reports on Form 8-K
Item 14. Exhibits and Reports on Form 8-K--continued
- -------- (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).
Item 14. Exhibits and Reports on Form 8-K--continued
(10) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended October 26, 1997. (11) Incorporated herein by reference to the Company's Annual Report on Form 10-KSB for the year ended October 31, 1994. (12) Incorporated herein by reference to the Company's Form 10-QSB for the quarterly period ended April 30, 1995 filed on June 14, 1995. (13) Incorporated herein by reference to the Company's Form 10-QSB for the quarterly period ended January 28, 1996 filed on March 13, 1996. (14) Incorporated herein by reference to the Company's Form 10-QSB for the quarterly period ended April 28, 1996 filed on June 12, 1996. (15) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended October 27, 1996 filed on January 27, 1997. (16) Incorporated herein by reference to the Company's Form 10-Q for the quarterly period ended July 27, 1997 filed on June 11, 1997. (17) Incorporated herein by reference to the Company's Form 8-K dated June 20, 1997, filed on or about July 3, 1997. (18) Incorporated herein by reference to the Company's Form 10-Q for the quarterly period ended April 26, 1998 filed on June 10, 1998. (19) Incorporated herein by reference to the Company's Proxy Statement filed February 23, 1998
Reports on Form 8-K
No report on Form 8-K was filed during the fourth quarter of the year ended October 25, 1998.
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: February 8, 1999 By: /s/ Lawrence Butler ---------------------------------- Lawrence Butler President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Marshall D. Butler Chairman of the - ----------------------------------- Board (Marshall D. Butler)
/s/ Lawrence Butler Chief Executive - ----------------------------------- Officer and (Lawrence Butler) Director (Principal Executive Officer)
/s/ Johnny J. Blanchard Chief Financial February 8, - ----------------------------------- Officer (Principal 1999 (Johnny J. Blanchard) Financial and Accounting Officer)
/s/ Donald K. Grierson Director - ----------------------------------- (Donald K. Grierson)
/s/ Frederic A. Heim Director - ----------------------------------- (Frederic A. Heim)
/s/ Kenneth W. Rind Director - -----------------------------------
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Alpha Technologies Group, Inc.
We have audited the accompanying consolidated balance sheets of Alpha Technologies Group, Inc. (a Delaware corporation) and subsidiaries as of October 26, 1997 and October 25, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three 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 26, 1997 and October 25, 1998, and the results of their operations and their cash flows for each of the three 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 6 as to which the date is February 8, 1999.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 26, 1997 and October 25, 1998
(In Thousands, Except Share and per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 27 1996, October 26, 1997 and October 25, 1998
(In Thousands, Except Share and per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended October 27 1996, October 26, 1997 and October 25, 1998
(In Thousands, Except Shares)
The accompanying notes are an integral part of these consolidated financial statements.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 27, 1996, October 26, 1997 and October 25, 1998
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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, consumer electronics, transportation, automotive, industrial controls, factory automation power supply, aerospace and defense industries. Sub-miniature, micro-miniature and ultra-miniature connectors and cable and/or wire harness connector assemblies, the majority of which are custom manufactured to meet rigid specifications, serve the aerospace, communications, defense, factory automation, industrial controls, medical electronics, scientific/process instrumentation and test/measurement industries. In addition, the Company operates a business that designs, fabricates and tests custom designed electronic systems for the military, telecommunications industry and certain commercial markets.
Principles of Consolidation
The consolidated financial statements include the accounts of Alpha and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. These changes had no impact on previously reported results of operations or stockholders' equity. As more fully described in Note 3--Discontinued Operation, prior years numbers have been restated, through reclassification, to discontinue the hermetic connector business sold in June 1997.
Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer.
Use of Estimates and Other Uncertainties
The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade receivables, trade payables and debt instruments. The book values of these instruments are considered to be representative of their respective fair values.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
Property and Equipment
The cost of property and equipment is depreciated using the straight-line method for financial reporting purposes over the estimated useful lives of such assets, ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over the related lease term.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(Continued)
Goodwill
Goodwill represents the excess of cost over fair value of net assets acquired and is being amortized over 15 years using the straight-line method. The accumulated amortization on October 26, 1997 and October 25, 1998 was approximately $632,000 and $863,000, respectively. Amortization expense of approximately $209,000, $248,000 and $231,000 was recorded in fiscals 1996, 1997 and 1998, respectively.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock Based Compensation" during October 1995. The new standard establishes a fair value approach to valuing stock options awarded to its employees as compensation. The Company has elected, as permitted by the new standard, to continue to follow its intrinsic value based method of accounting for stock options consistent with Accounting Principals Board No. 25, "Accounting for Stock Issued to Employees" (APB25). The intrinsic method measures compensation cost for stock options as the excess, if any, of the quoted market price of the Company's stock at the measurement date over the exercise price.
Income Taxes
The Company adopted SFAS No. 109, "Accounting for Income Taxes," ("Statement 109") on November 1, 1993. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are translated into U. S. dollars at the current exchange rate in effect at the balance sheet date, and revenues and expenses are translated at the average exchange rate for the period in accordance with SFAS No. 52, "Foreign Currency Translation". Resulting translation adjustments are reported as a separate component of stockholders' equity.
Interest Rate Swap Agreement
The Company has entered into interest swap agreements as a means of managing its interest rate exposure. The agreements effectively fixed the interest rate on floating rate debt at a rate of 8.75% for a notional principal amount of $2,250,000 through November 1, 2001, and at a rate of 8.85% for a notional principal amount of $1,900,000 through October 29, 2003. On October 25, 1998, the carrying value of the related debt approximated the fair value of the debt including the swap agreements. Net amounts paid or received are reflected in interest expense.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") Number 130 ("SFAS 130") "Reporting Comprehensive Income"; and in February 1998, FASB issued SFAS 132 "Employers' Disclosures about Pensions and Other Post Retirement Benefits". The Company is required to adopt these standards for its fiscal year 1999. Management believes that the adoption of SFAS 130 and SFAS 132 in fiscal 1999 will not have a material effect on the preparation of and results of the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Company is required to adopt this for fiscal its year 2000. Management believes that the adoption of SFAS 133 will not have a material effect on the preparation of and the results of the Company's consolidated financial statements.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions
On September 3, 1996, the Company purchased the 20% minority interest of Uni-Star Industries, Inc. ("Uni-Star") for 265,000 shares of its common stock. Uni-Star is now a wholly-owned subsidiary of the Company.
On August 21, 1996, the Company, through a newly-organized, wholly-owned subsidiary, Lockie Acquisition Corp. ("LAC"), purchased all of the outstanding stock of Lockhart Industries, Inc. ("LII"), a thermal management company, pursuant to an Agreement and Plan of Merger dated as of August 14, 1996 (the "Merger Agreement"). Pursuant to the Merger Agreement, the Company issued 280,556 shares of its common stock in exchange for all of the issued and outstanding common stock of LII. 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.
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. In January 1999, the purchaser advised the Company that no contingent payment will be 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 discontinued operation.
Summary operating results of the discontinued operation prior to the sale are as follows for the fiscal years ended:
4. Inventories
Inventories consisted of the following on:
ALPHA TECHNOLOGIES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Accrued Compensation and Related Benefits and Other Liabilities
Accrued compensation and related benefits consisted of the following on:
Other liabilities consisted of the following on:
The accrued restructuring costs represent an estimate of the remaining costs to close the manufacturing facility in Wakefield, Massachusetts and consolidate production of its thermal management products in its other existing facilities.
6. Debt and Revolving Credit Facilities
Debt and revolving credit facilities consisted of the following on:
- -------- * The Debt and revolving credit facilities all mature on December 31, 1999.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Debt and Revolving Credit Facilities--(Continued)
Effective December 31, 1997, Wakefield, Wakefield Extrusion, Lockhart and Malco (hereinafter referred to as "Borrowers") became parties to a loan agreement, as amended (the "Agreement") with a commercial bank which provided for revolving loans of up to $9,000,000, with the ability to increase upon request to $12,000,000, and an equipment acquisition facility of $3.2 million. The advances on the revolving loans were based on the eligible accounts receivable and inventories of Borrowers. The advances on the equipment acquisition facility may be used only for the purpose of funding capital equipment purchases by the Borrowers. In addition, there are two term loans existing under the Agreement in the original amounts of $2,250,000 and $1,900,000. The original maturity date on this Agreement was December 31, 1999.
On October 25, 1998, $8,180,000 was drawn on the revolving credit facility with interest accruing on $7,000,000 at the relevant adjusted LIBOR rate plus 2.5% (8.188% per annum on October 25, 1998) and the remainder at the banks prime rate plus .5% (prime plus 1% after November 12, 1998) 8.5% per annum on October 25, 1998. There is an unused line fee equal to .5% per annum on the difference between $10,000,000, or $9,000,000 after January 31, 1999, and the average daily outstanding principal balance of Revolving Loans during each of the Company's fiscal quarters payable quarterly in arrears on the first day of each fiscal quarter. The $2,250,000 term note accrues interest at 8.75% per annum and is payable in fifty-nine (59) equal monthly installments of $37,500 beginning December 1, 1996 and a final installment equal to all unpaid principal on October 11, 2001, together, in each instance, with interest thereon to the date of payment. On October 25, 1998, $1,387,500 was outstanding on the $2,250,000 term loan. The $1,900,000 term loan accrues interest at 8.85%, and is payable in eighty-three (83) equal monthly installments of $22,619 beginning December 1, 1996 and a final installment equal to all unpaid principal on October 29, 2003, together, in each instance, with interest thereon to the date of payment. On October 25, 1998, $1,379,763 was outstanding on the $1,900,000 term note. The equipment acquisition facility accrues interest at the banks prime rate plus .75% (8.75% per annum on October 25, 1998) and is payable in 84 equal monthly installments of $10,952 beginning January 1999. On October 25, 1998, $920,000 was outstanding on the equipment acquisition facility. The obligations under the Loan Agreement are secured by a first lien on and assignment of all of the assets of Borrowers which in aggregate total $36,010,000.
As a result of the fourth quarter net loss, the Company was not in compliance with the financial covenants included in the Agreement. In November 1998, the Company and the commercial bank reached an agreement whereby the Company pledged the assets of its connector subsidiary, Uni-Star, to provide additional collateral under the Agreement. In February 1999, the Company and the commercial bank agreed to reduce the revolving loan commitment to $9,000,000, to reduce the percentage advanced on accounts receivable and inventory, and agreed to new covenants. The Company does not believe that these reductions will have a material adverse effect on its business. The Company is reviewing proposals from several lenders and is in receipt of a commitment from one lender. The Company intends to evaluate each of the proposals and negotiate the most favorable relationship it can obtain to replace its current commercial lender.
Cash paid for interest on all outstanding debt amounted to approximately $898,000 in fiscal year 1996, approximately $1,172,000 in fiscal year 1997 and approximately $1,011,000 in fiscal year 1998.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Debt and Revolving Credit Facilities--(Continued)
Aggregate payments of debt and revolving credit facilities outstanding as of October 25, 1998 for the next five years are summarized below:
Management intends to refinance the revolving credit facility and the revolving credit commitment at or prior to December 31, 1999.
7. Preferred Stock
On October 26, 1997 and October 25, 1998, 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 25, 1998.
8. Repurchase of Common Stock
In September of 1994, the Board of Directors of the Company approved a plan to purchase up to $2,500,000 of the Company's common stock. Pursuant to the stock repurchase plan, the Company purchased 83,000 shares of common stock during fiscal year 1994 at an aggregate price of $374,137. During fiscal year 1995, 391,155 shares of common stock were purchased at an aggregate price of $2,118,173. This repurchase program has been completed.
9. Stock Option Plans
The Company has in effect nonqualified and incentive stock option plans under which shares are available for exercise. As of October 25, 1998, the Board of Directors has reserved 1,560,900 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 25, 1998, there were 299,500 shares available for future grants.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Option Plans--(Continued)
The following table summarizes activity and outstanding options under the plans:
In October of 1996, the Board of Directors authorized a reduction in the exercise price of each outstanding, unvested option to purchase shares of common stock granted in fiscal 1996, to an amount equal to the fair market value of the common stock on such date. The re-pricing has been treated as the surrender and cancellation of outstanding stock options in conjunction with the grant of replacement options with an exercise price of $4.56 per share.
On October 21, 1998, the Board of Directors authorized the replacement of options for certain outstanding options issued to employees, who were not executive officers or directors of the Company, subject to the election by the employee. 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. Since the replacement requires an election by the optionee, the above tables and accompanying information do not reflect any replacements during fiscal year 1998. The replacements will be reflected at the time the optionee's election is received by the Company.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Option Plans--(Continued)
On January 15, 1998, the Board of Directors of the Company authorized an increase in the shares issuable under the 1994 Stock Option Plan by 325,000 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, $47,000 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 1996 and 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. In addition, adjustments were made for assumed cancellations.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. If the fair value based method of accounting defined in SFAS 123 had been applied, the Company's net loss and net loss per share would have been increased by approximately $228,000, or $0.04 per share, in fiscal 1996, $325,000, or $0.05 per share, in fiscal 1997, and $472,000, or $0.07 per share, in fiscal 1998. The estimated weighted average fair value of options granted during fiscal 1996, 1997 and fiscal 1998 was $4.16, $1.97, and $1.63, respectively. This pro forma information is not meant to be representative of the effects on reported net income for future years, because as provided by SFAS 123, only the effects of awards granted after the Company's 1995 fiscal year are considered in the pro forma calculation.
10. Net Loss Per Share
Net loss per common share was computed using the weighted average number of shares of common stock outstanding during each year. For fiscal year 1996, 1997 and 1998, common equivalent shares were not considered in the computation as their effect would have been antidilutive.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
Loss before income taxes was as follows for the fiscal years ended:
The provision (benefit) for income taxes were as follows for the fiscal years ended:
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:
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes--(Continued)
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 25, 1998 were as follows:
Due to the Company's historical results of operations, a valuation allowance has been provided for the deferred tax assets. Because the Company generated taxable income and was able to utilize net operating loss carryforwards during fiscal 1994 and 1995 and forecasted future profitability which increased the likelihood of the future realization of the net deferred tax asset, the Company reversed $1,360,000 and $1,820,000, respectively, of the valuation allowance. During fiscal 1998 the increase in the net deferred tax asset was the result of $819,000 related to the tax effects of temporary differences which were entirely offset by an increase in the valuation allowance.
On October 25, 1998, the Company had, for tax purposes, net operating loss carryforwards of approximately $20,223,000, unused investment and research and development tax credits of approximately $312,000, 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 1999 to 2018, the investment tax credit and research and development tax credit carryforwards will expire from 1999 to 2005, and the alternative minimum tax credit has no expiration.
All carryforwards are subject to review and possible adjustment by the Internal Revenue Service. In compliance with the Tax Reform Act of 1986, investment tax credits carried forward were reduced by 35%. The Company's ability to utilize the net operating loss carryforwards to offset alternative minimum taxable income is limited to 90% for tax years after fiscal 1987.
Additionally, Section 382 of the Internal Revenue Code limits the amounts of net operating loss carryforwards usable by a corporation following a more than 50 percentage point change in ownership of the corporation during a three-year period. It is possible that subsequent transactions involving the Company's capital stock could result in such a limitation. As of October 25, 1998, Management does not believe that a 50 percentage point change in ownership has occurred during a three year period.
During fiscal year 1996, cash paid for income taxes amounted to approximately $194,000.
ALPHA TECHNOLOGIES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Commitments and Contingencies
The Company has operating lease commitments for certain office equipment and manufacturing, administrative and support facilities. Minimum lease payments under noncancellable leases on October 25, 1998 are as follows:
Rent expense (exclusive of operating expenses and net of sublease rents) for all operating leases was approximately $1,556,000, $1,594,161 and $1,584,000 in fiscal 1996, 1997 and 1998, respectively.
13. Business Segment Information
Summarized financial information by business segment for the years ended:
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Business Segment Information--(Continued)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC. (Parent Company Only)
CONDENSED BALANCE SHEETS--OCTOBER 26, 1997 AND OCTOBER 25, 1998
(In Thousands, Except Share and Per Share Data)
S-1
SCHEDULE I (continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC. (Parent Company Only)
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended October 27, 1996, October 26, 1997 and October 25, 1998
(In Thousands, Except Share and Per Share Data)
S-2
SCHEDULE I (continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC. (Parent Company Only)
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended October 27, 1996, October 26, 1997 and October 25, 1998
(In Thousands, Except Shares)
S-3
SCHEDULE I (continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
ALPHA TECHNOLOGIES GROUP, INC. (Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended October 27, 1996, October 26, 1997 and October 25, 1998
(In Thousands)
S-4
SCHEDULE II
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- -------- (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-5