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.
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.
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
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.
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
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
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.
Item 2. Description of Property.
The Company has leases for manufacturing facilities at the following locations:
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. Preliminary investigation indicated that the underground water flows in a direction that would not support AAHT's claims.
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.
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.
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, 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.
Item 6.
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.
- -------- (1) See Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages through. (2) See "Discontinued Operation" in Notes to Consolidated Financial Statements.
Item 7.
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
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.
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
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
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.
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.
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.
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.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data required pursuant to this Item are presented on pages through and page S-1 of this report.
Item 9.
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.
PART III
Item 10.
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.
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.
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.
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.
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). (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.
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.
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.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
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
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.
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 25, 1998 and October 31, 1999
(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 26, 1997, October 25, 1998 and October 31, 1999
(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 26, 1997, October 25, 1998 and October 31, 1999
(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 26, 1997, October 25, 1998 and October 31, 1999
(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, 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.
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.
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:
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property and Equipment
Property and equipment consisted of the following on:
6. Accrued Compensation and Related Benefits
Accrued compensation and related benefits consisted of the following on:
7. Other Liabilities
Other liabilities consisted of the following on:
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:
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.
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:
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.
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:
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.
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.
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:
13. Income Taxes
Income (loss) before income taxes was as follows for the fiscal years ended:
The provision (benefit) for income taxes was as follows for the fiscal years ended:
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:
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:
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
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:
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.
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:
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Business Segment Information--(Continued)
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.
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