10-Q 1 b51790ate10vq.txt ALPHA TECHNOLOGIES GROUP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 25, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _______________ Commission File Number 0-14365 ALPHA TECHNOLOGIES GROUP, INC. ------------------------------ (Exact name of registrant as specified in its charter) Delaware 76-0079338 -------------------------------------------- ------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 11990 San Vicente Blvd, Los Angeles, CA 90049 --------------------------------------------- (Address of principal executive offices) 310-566-4005 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.03 par value 7,110,336 ---------------------------- --------- Class Outstanding at September 10, 2004 ALPHA TECHNOLOGIES GROUP, INC. FORM 10-Q TABLE OF CONTENTS

2 ALPHA TECHNOLOGIES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share-Related Data)

See notes to condensed consolidated financial statements 3 ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)

See notes to condensed consolidated financial statements 4 ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In Thousands, Except Per Share Data)

See notes to condensed consolidated financial statements 5 ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)

See notes to condensed consolidated financial statements 6 ALPHA TECHNOLOGIES GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Business Alpha Technologies Group, Inc. ("Alpha" or the "Company") designs, extrudes, fabricates and sells thermal management and non-thermal fabricated products for use in a variety of industries including automotive, telecommunication, industrial controls, transportation, power supply, factory automation, consumer electronics, aerospace, defense, microprocessor and computer industries. The Company extrudes aluminum for its use in the production of thermal management and non-thermal fabricated products and sells aluminum extrusions to a variety of industries including the construction, sporting goods and other leisure activity markets. Accounting Periods The Company follows a 4-5-4 week quarterly accounting period cycle wherein each quarter consists of two four week months and one five week month. The last day of the fiscal year is always the last Sunday in October. For fiscal year 2004, this will result in a 4-5-5 week accounting period for the fourth fiscal quarter and a 53 week fiscal year ending October 31, 2004. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Alpha Technologies Group, Inc. include the accounts of Alpha and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the Company's condensed consolidated financial statements, have been included. The results for the nine months ended July 25, 2004 are not necessarily indicative of results for the full year ending October 31, 2004. The reader is encouraged to read our annual financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended October 26, 2003. Certain current and prior year balances have been reclassified to conform to the current income statement and statement of cash flows presentation. Use of Estimates and Other Uncertainties The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. Revenue Recognition and Allowances for Sales Returns, Doubtful Accounts and Warranties The Company recognizes revenue when (1) persuasive evidence of an arrangement exists, (2) products and services have been shipped to the ultimate customers, (3) the price is fixed or determinable, and (4) collectibility is reasonably assured. The Company's shipping terms are FOB shipping point. Allowances for doubtful accounts are provided for account receivables considered uncollectible. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product returns. While we believe that our allowance for doubtful accounts is adequate and that the judgment applied is appropriate, if there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our previous experience, our estimates of the recoverability of the amounts due us and our sales could be adversely affected. Historically, losses in the aggregate have not exceeded management's expectations. Allowances for sales returns are provided in the period in which the related sale is recognized. The allowance for sales returns is based on our analysis of trends in product returns. While we believe that our allowance for sales returns is adequate and that the judgment applied is appropriate, if the historical data used to calculate these estimates do not properly reflect future returns, additional provision for sales returns may be required, and revenues in that period could be adversely 7 affected. Historically, sales returns have not been significant in any period presented. The Company does not generally provide a warranty on the goods that it sells. However, customers do have the right to return merchandise deemed defective when received. These returns generally occur at the point of delivery when the goods are subject to customer inspections. Reserves for these potential returns are provided when the related sale is recognized. While we believe that our reserves for returns of defective goods is adequate and that the judgment applied is appropriate, if the historical data used to calculate these estimates do not properly reflect future returns, additional provision for returns of defective goods may be required, and revenues in that period could be adversely affected. Claims for defective goods have not been significant in any period presented. Risk Management and Hedging Activity The Company's risk management strategies included the use of an interest rate swap to hedge against the impact on cash flows of changes in interest rates. The interest rate swap was designated as a cash flow hedge of specific variable rate debt and was carried on the balance sheets at fair value. The interest rate swap expired on March 31, 2004, and the Company was not required by the Lenders to renew the swap agreement. No other derivative instruments are held. Impairment of Long-Lived Assets The Company assesses the recoverability of long-lived assets, including intangible assets, held and used whenever events or changes in circumstances indicate that future cash flows (undiscounted and without interest charges) expected to be generated by an asset's disposition or use may not be sufficient to support its carrying amount. If such undiscounted cash flows are not sufficient to support the recorded value of assets, an impairment loss is recognized to reduce the carrying value of long-lived assets to their estimated fair value. Loss Contingencies The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. Stock Option Plans The Company applies the intrinsic value method of accounting for stock based compensation granted to employees and expects to continue to do so, unless required to change by accounting principles generally accepted in the United States. The table below discloses the effect on stock based compensation had such compensation been measured using the fair value method. The Company has computed the pro forma disclosures below using the Black-Scholes option-pricing model. The following assumptions were used to estimate the fair value of the options issued in 2004: risk free interest rate of 3.58%, expected volatility of 89% and an estimated life of the options of seven years. The following assumptions were used to estimate the fair value of the options issued in 2003: risk free interest rate of 4%, volatility of 104% and an expected life of seven years.

8 Income Taxes The Company provides for income tax expense or benefit in interim periods using the rate expected to be in effect for the entire year. Changes in the estimated tax rate for a fiscal year are recorded in the period in which they occur. The Company reassesses the recoverability of its deferred tax assets each quarter by evaluating all available evidence and assessing whether it is more likely than not that all or some portion of its recorded assets may not be recoverable. 2. INVENTORIES

3. DEBT AND REVOLVING CREDIT FACILITIES

On January 9, 2001, the Company and its subsidiaries, as guarantors, entered into a Credit Agreement (the "Credit Agreement") with several banks and other financial institutions ("the Lenders"). The Credit Agreement consists of a revolving credit facility which expires in January 2005 and a term loan which matures in January 2006. Borrowings under the Credit Agreement are secured by a first lien on and the assignment of all of the Company's assets. Under the Credit Agreement, the Company must meet certain covenants. The Credit Amendment was last amended on September 5, 2003 (the "Amended Credit Agreement") to revise the Maximum Leverage Ratio and Fixed Charge Coverage Ratio for the balance of the fiscal year 2003 and fiscal year 2004 to levels that management believes the Company will be able to achieve. The Lenders waived the events of non-compliance with certain covenants at July 27, 2003. In addition, the September 5, 2003 amendment added new Minimum EBITDA and Interest Coverage covenants for the remainder of fiscal year 2003 and fiscal year 2004, revised the allowable amounts to be spent on capital expenditures for fiscal years 2003 and 2004 and eliminated the Minimum Net Worth requirement. The margin over the applicable base rate is determined by the Company using a sliding scale to the Company's leverage ratio. Beginning April 1, 2004, the margin is at the maximum level allowed per the Amended Credit Agreement, a 0.5% increase over the margin applicable in the first quarter of fiscal 2004. Lastly, the September 5, 2003 amendment reduced the principal payments from $750,000 to $250,000 per quarter for the remainder of fiscal year 2003 and from $1,500,000 to $250,000 per quarter fiscal year 2004. The maturity date of the revolver was extended from June 2004 to January 2005. The term debt continues to mature on January 2006 at which time a final balloon payment of $10,950,000 will 9 be due. Under the Amended Credit Agreement, the revolving credit facility accrued interest on outstanding borrowings at LIBOR plus 3.5% (4.60% on March 31, 2004) through March 31, 2004, and accrues interest at LIBOR plus 4.0% (5.65% on July 25, 2004) from April 1, 2004 and thereafter. The revolving credit facility expires in January 2005. There is also an unused line fee equal to .75% per annum. The Company may borrow up to the lesser of $5 million or 60% of eligible accounts receivable ($4.0 million at July 25, 2004), as defined by the Amended Credit Agreement. Prior to the amendments, the Company was allowed to borrow up $15 million. As of July 25, 2004, $3.2 million has been drawn and is outstanding on the revolving credit facility. The term loan consists of a note which accrues interest at the relevant LIBOR rate plus 4.0% (5.38% at July 25, 2004). The term loan requires quarterly principal payments through January 2006. The Amended Credit Agreement requires the calculation of excess cash flow at the end of each fiscal quarter. Excess cash flow is defined by the Amended Credit Agreement as EBITDA, less interest expense, principal payments due on long-term debt, taxes paid, and capital expenditures, and adjusted for increases or decreases in net working capital. For any fiscal quarter for which this calculation results in excess cash flow, payment is due within fifty-five days from the end of that fiscal quarter, to be applied to the outstanding balance of the term note. An excess cash flow payment of $895,000 is due on September 22, 2004 for the third fiscal quarter of 2004. Our request for a waiver was denied. However, we are in discussions with our Lenders to restructure our loan agreement including the excess cash flow payment. The Company, as required by the Amended Credit Agreement, utilized an interest rate swap (the "swap") to hedge against its interest rate risk. The swap was designated as a cash flow hedge and was carried on the balance sheet at fair value. The effect of the swap was to convert the interest rate on the hedged loan ($12.0 million at March 31, 2004) from a variable rate as described above to a fixed rate of 8.47%. The swap matured on March 31, 2004, and the Company was not required by the Lender to renew the swap agreement. The carrying value and fair value of the swap was a liability of $77,000 (net of applicable income tax effect of $52,000) at October 26, 2003. Future minimum principal payments on the revolving credit facilities and the term loans are as follows:

4. SEGMENT RELATED INFORMATION The Company has one operating segment, thermal management products. We derive substantially all of our operating revenue from the sale and support of one group of products and services with similar characteristics such as the nature of the production processes, the type and class of customers, and the methods of distribution. Substantially all of our assets are located within the United States. In addition, the Company's chief decision-maker and management make decisions based on one product group. Net sales to one customer totaled approximately 7.8% and 11.4% of consolidated revenues for the nine months ended July 25, 2004 and July 27, 2003, respectively. 5. 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 quarter year. Diluted earnings per common share are calculated to give effect to stock options and warrants outstanding during the period when such items are dilutive to basic earnings per share. Stock options and warrants to purchase 2,381,433 and 21,000 shares of common stock 10 were outstanding at July 25, 2004 and at July 27, 2003, respectively, and were not included in the computation as their effect was antidilutive. 6. CONTINGENCIES From time to time, the Company becomes involved in litigation incidental to its business. Management, based on its understanding of the facts and, where necessary advice of counsel, does not believe that matters currently pending, either individually or in the aggregate, would have a material impact on financial position or the results of operations. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about the Company's business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including the following: changes in demand for the Company's products, product mix, the timing of customer orders and deliveries, the impact of competitive products and pricing, excess or shortage of production capacity, availability of aluminum raw material, compliance with covenants in the Company's loan documents, ability to meet principal payments under those loan documents and other risks discussed from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. Such forward looking statements speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances which may take place after the date of this report. OVERVIEW The Company's results of operations during the prior two fiscal years were adversely affected by the severe downturn in the markets our products serve, principally telecommunications, consumer electronics and networking equipment. However, sales began to increase in the second quarter of fiscal 2004. For the third fiscal quarter of 2004, sales increased to $14.5 million, compared to $11.7 million in the third quarter of fiscal 2003. We attribute the improvement to increased demand in the markets that we serve. Harman International, Inc. ("Harman") accounted for 7.8% and 11.4% of our revenues for the first nine months of fiscal 2004 and fiscal 2003, respectively. In July 2004, we entered into a supply agreement with Harman which expires on June 30, 2005. Under the terms of the agreement, Harman agreed to purchase certain heat sinks exclusively from Alpha at agreed-upon contract pricing. Based upon this agreement, we anticipate that sales to Harman for the twelve months beginning July 1, 2004 will be approximately 40% (or approximately $2.0 million) lower than sales to Harman for the twelve months ended June 30, 2004. We believe that the anticipated reduced sales to Harman will be offset by increased sales to new and existing customers. Because of conditions in the aluminum markets, we used our excess cash to pay aluminum suppliers in advance for deliveries. As a result, since the end of the third fiscal quarter, our accounts payable have decreased by approximately $900,000. As a result, we do not currently have the cash on hand to make an excess cash flow payment of $895,000 to our lenders due on September 22, 2004. Such payment arises from the Company's EBITDA for the third quarter. Our request for a waiver was denied. However, we are in discussions with our Lenders to restructure our loan agreement, including the excess cash flow payment. CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgements estimates and assumptions in certain circumstances that affect the amounts reported in the consolidated financial statements and related footnotes. We regularly evaluate the accounting policies and estimates we use to prepare our financial statements. Estimates are used for, but not limited to, revenue recognition, accounting for allowance for doubtful accounts and sales returns, inventory reserves, and contingencies. These estimates are based on historical experience and various assumptions that we believe to be reasonable under the particular applicable facts and circumstances. Actual results could differ from those estimates. We consider our critical accounting policies to be those that (1) involve significant judgements and uncertainties, (2) require estimates that are more difficult for management to determine and (3) have the potential to result in materially different outcomes under varying assumptions and conditions. Our critical accounting policies include the following: revenue recognition allowance for sales returns, provision for doubtful accounts, provision for inventory reserves, impairment of long-lived assets, and accounting for income taxes. 12 REVENUE RECOGNITION We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is persuasive evidence that an arrangement exists; 2) shipment has occurred; 3) the fee is fixed or determinable; and 4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met, which is considered to have occurred upon shipment of the finished product. ALLOWANCE FOR DOUBTFUL ACCOUNTS Alpha regularly analyzes its customer accounts and, when it becomes aware of a specific customer's inability to meet its financial obligations to the Company, records a specific provision for uncollectible accounts to reduce the related receivable to the amount that is estimated to be collectible. The Company also records and maintains a provision for doubtful accounts for customers based on a variety of factors including the Company's historical experience, the length of time the receivable has been outstanding and the financial condition of the customer. If circumstances related to specific customers were to change, the Company's estimates with respect to the collectibility of the related receivables could be further adjusted. Historically, losses in the aggregate have not exceeded management's expectations. ALLOWANCE FOR SALES RETURNS Allowances for sales returns are provided in the period in which the related sale is recognized. The allowance for sales returns is based on our analysis of trends in product returns. While we believe that our allowance for sales returns is adequate and that the judgment applied is appropriate, if the historical data used to calculate these estimates do not properly reflect future returns, additional provision for sales returns may be required, and revenues in that period could be adversely affected. Historically, sales returns have not been significant in any period presented. INVENTORIES AND INVENTORY RESERVES Inventories are stated at the lower of cost or market and are costed using the first-in, first-out method. Inventory reserves have been established for excess and obsolete items. Inventory purchases and commitments are based upon future demand forecasts for our products and our current level of inventory. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, we may be required to increase our inventory reserve and as a result, our gross profit margin could be adversely affected. IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the impairment of long-lived assets, identifiable intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Indicators of impairment considered by management include damage or obsolescence, plans to discontinue use or restructure, adverse changes in technology or in the market place, and poor economic performance compared with original plans. If future cash flows (undiscounted and without interest charges) expected to be generated by an assets use or disposition are not sufficient to support the recorded value of assets, an impairment loss is recognized to reduce the carrying value of long-lived assets to their estimated fair value. INCOME TAXES The Company provides for income tax expense or benefit in interim periods using the rate expected to be in effect for the entire year. Changes in the estimated tax rate for a fiscal year are recorded in the period in which they occur. We record valuation allowances to reduce our deferred income tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we were to determine that we will not realize all or part of our deferred income tax assets in the future, we would make an adjustment to the carrying value of the deferred income tax asset, which would be reflected as an income tax expense. Conversely, if we were to determine that we will realize a deferred income tax asset, which currently has a valuation allowance, we would reverse the valuation allowance which would be reflected as an income tax benefit in our financial statements. 13 RESULTS OF OPERATIONS Third Quarter 2004 Versus Third Quarter 2003 Comparison

Net Loss. A net loss of $213,000 was reported in the third quarter of fiscal 2004 compared with a net loss of $13.9 million in the third quarter of fiscal 2003. Loss before benefit for income taxes was $213,000 in fiscal 2004 compared to a loss before benefit for income taxes of $14.2 million in fiscal 2003. Last year's third quarter loss, excluding the goodwill impairment, was $1.2 million. The decrease in loss before income taxes in fiscal 2004 was the result of increases in sales and gross margin, along with a decrease in interest expense and $13.3 million in non-recurring goodwill and other asset impairment charges which occurred in the prior year. Gross margin increased primarily due to increased revenues over relatively stable fixed costs. Sales. The Company's total sales increased by $2.9 million (24.8%) to $14.5 million for the third quarter of fiscal year 2004 compared to $11.7 million for the third quarter of 2003, principally as a result of improvements in the markets we serve. Sales-Fabricated Products. Sales of fabricated products increased by $1.4 million (15.6%) to $10.5 million for the third quarter of fiscal year 2004 compared to $9.1 million for the third quarter of fiscal 2003. The increase is due to an improvement in the industries that the Company serves and sales to several customers who previously purchased similar products from other competitors. Sales-Extruded Products. In the third quarter of fiscal 2004, sales of aluminum extruded products increased $1.5 million (57.4%) to $4.0 million, compared to $2.6 million for the third quarter of fiscal 2003. This increase was due to improved economic conditions in the industries to which the Company provides extruded aluminum products. Gross Profit. The Company's gross profit margin for the third quarter of fiscal year 2004 was 12.9% of revenue compared to 10.2% of revenue for third quarter of fiscal year 2003. Gross profit increased primarily as a result of revenues increasing while factory costs such as indirect labor remained constant and fixed costs such as depreciation, lease expense and insurance remained relatively unchanged. Research and Development. Research and development expenses for the third quarter of fiscal year 2004 were 14 $108,000 compared to $97,000 for the same period last year. This increase was a result of increased salaries within our engineering department. Selling, General and Administrative. Selling, general and administrative expenses totaled $1.5 million or 10.5% of sales for the third quarter of fiscal 2004 compared to $1.5 million or 12.9% of sales reported for the third quarter of fiscal 2003. Selling, general and administrative expenses as a percentage of sales decreased 18.6%. This change was the result of sales increasing at a level not requiring the Company to add significant sales, general, or administrative expenses. Impairment of Goodwill. The Company recorded a $13.0 million goodwill impairment charge in the third quarter of fiscal 2003. As a result, the Company no longer has any goodwill on its books. Impairment of Other Asset. The Company recorded a $323,000 impairment charge in the third quarter of fiscal 2003 related to an intangible asset which was determined to no longer have any value. Interest Expense. Interest expense was $443,000 for the third quarter of fiscal 2004 compared to $494,000 for the third quarter of fiscal 2003. This decrease was due to lower average outstanding borrowings and the expiration of the Swap agreement which covered a portion of the term note. The swap agreement carried an annual interest rate of 8.47%, while the term note carries an interest rate of 5.38% at July 25, 2004. Benefit for Income Taxes. Benefit for income taxes was $0 for the third quarter of fiscal 2004 compared to $336,000 for the third quarter of fiscal 2003. The effective income tax rate for the third quarter of fiscal 2004 was 0% compared to 2.4% for the third quarter of fiscal 2003. The Company evaluates the recoverability of its recorded deferred tax assets each reporting period and provides valuation allowances where necessary for assets not likely to be recovered. The Company did not record a benefit for income taxes for the third quarter of fiscal 2004 because management determined that, due to the Company's recent losses, it was more likely than not that we would not have sufficient earnings in the foreseeable future to fully utilize the Company's available net operating loss carry-forward. To the extent that the Company does not return to profitability in the near future, additional valuation allowances may be required against tax assets generated in future periods or against currently recognized tax assets. Nine Months 2004 Versus Nine Months 2003 Comparison

15 Net Loss. A net loss of $1.0 million was reported for the first nine months of fiscal 2004 compared with a net loss of $14.7 million in the first nine months of fiscal 2003. Loss before benefit for income taxes was $1.0 million in fiscal 2004 compared to a loss before benefit for income taxes of $15.6 million in fiscal 2003. The decrease in loss before income taxes in fiscal 2004 is due to the write off of impaired goodwill and intangible assets in the third quarter of fiscal 2003, as well as increases in sales and gross margin, along with a decrease in interest expense. Gross margin increased primarily due to increased revenues over relatively stable fixed costs. Sales. The Company's sales increased by $5.7 million to $41.0 million for the first nine months of fiscal year 2004 compared to $35.3 million for the first nine months of 2003, principally as a result of improvements in the markets we serve. Sales-Fabricated Products. Sales of fabricated products increased by $2.9 million (10.3%) to $30.7 million for the first nine months of fiscal year 2004 compared to $27.9 million for the first nine months of fiscal 2003. The increase is due to an improvement in the industries that the Company serves and sales to several customers who previously purchased similar products from other competitors. Sales-Extruded Products. In the first nine months of fiscal 2004, sales of aluminum extruded products increased $2.8 million (38.3%) to $10.2 million, compared to $7.4 million for the first nine months of fiscal 2003. This increase was due to improved economic conditions in the industries to which the Company provides extruded aluminum products. Gross Profit. The Company's gross profit margin for the fist nine months of fiscal year 2004 was 12.3% of revenue compared to 10.9% of revenue for the first nine months of fiscal year 2003. Gross profit increased primarily as a result of revenues increasing while factory expenses such as indirect labor remained constant and fixed costs such as depreciation, lease expense and insurance remained relatively unchanged. Research and Development. Research and development expenses for the first nine months of fiscal year 2004 were $334,000 compared to $292,000 for the first nine months of 2003. This increase was a result of increased salaries within our engineering department. Selling, General and Administrative. Selling, general and administrative expenses totaled $4.4 million or 10.7% of sales for the first nine months of fiscal 2004 compared to $4.3 million or 12.3% of sales reported for the first nine months of fiscal 2003. Selling, general and administrative expenses as a percentage of sales decreased 12.8%. This decrease was the result of increased sales at a level not requiring the Company to add significant sales, general, or administrative expenses. Impairment of Goodwill. The Company recorded a $13.0 million goodwill impairment charge in the first nine months of fiscal 2003. As a result, the Company no longer has any goodwill on its books. Impairment of Other Asset. The Company recorded a $323,000 impairment charge in the first nine months of fiscal 2003 related to an intangible asset which was determined to no longer have any value. Interest Expense. Interest expense was $1.4 million for the first nine months of fiscal 2004 compared to $1.5 million for the first nine months of fiscal 2003. This decrease was due to lower average outstanding borrowings and the expiration of the Swap agreement which covered a portion of the term note. The swap agreement carried an annual interest rate of 8.47%, while the term note carries an interest rate of 5.38% at July 25, 2004. Benefit for Income Taxes. Benefit for income taxes was $0 for the first nine months of fiscal 2004 compared to $883,000 for the first nine months of fiscal 2003. The effective income tax rate for the first nine months of fiscal 2004 was 0% compared to 5.7% for the first nine months of fiscal 2003. The Company evaluates the recoverability of its recorded deferred tax assets each reporting period and provides valuation allowances where necessary for assets not likely to be recovered. The Company did not record a benefit for income taxes for the first six months of fiscal 2004 because management determined that, due to the Company's recent losses, it was more likely than not that we would not have sufficient earnings in the foreseeable future to fully utilize the Company's available net operating loss carry-forward. To the extent that the Company does not return to profitability in the near future, additional valuation allowances may be required against tax assets generated in future periods or against currently recognized tax assets. 16 LIQUIDITY AND CAPITAL RESOURCES Credit Facilities On January 9, 2001, the Company and its subsidiaries, as guarantors, entered into a Credit Agreement (the "Credit Agreement") with several banks and other financial institutions ("the Lenders"). Loans under the Credit Agreement consist of a revolving credit facility and a term loan, and are secured by a first lien on and the assignment of all of the Company's assets. The Credit Agreement has been amended seven times to revise various financial covenants, revise principal payment schedules and to waive certain events of covenant non-compliance. The Company has paid various cash fees and has issued warrants to purchase approximately 258,000 shares of the Company's common stock to the Lenders in connection with the amendments. On September 5, 2003, the Company and its Lenders entered into a Seventh Amendment to the Credit Agreement (the "Amended Credit Agreement") which revised the Maximum Leverage Ratio and Fixed Charge Coverage Ratio for the balance of fiscal year 2003 and fiscal year 2004 to levels that management believes the Company will be able to achieve. The Lenders waived the non-compliance with the Maximum Leverage Ratio and Fixed Charge Coverage Ratio covenants at July 27, 2003, added new Minimum EBITDA and Interest Coverage covenants for the remainder of fiscal year 2003 and fiscal year 2004, revised the allowable amounts to be spent on capital expenditures for fiscal years 2003 and 2004 and eliminated the Minimum Net Worth requirement. The margin over the applicable base rate is determined by the Company using a sliding scale to the Company's leverage ratio. Beginning April 1, 2004, the margin is at 4.0%, the maximum level allowed per the Amended Credit Agreement. Lastly, the September 5, 2003 amendment reduced the principal payments from $750,000 to $250,000 per quarter for the remainder of fiscal year 2003 and from $1,500,000 to $250,000 per quarter for fiscal year 2004. The maturity date of the revolver was extended from June 2004 to January 2005. The term debt continues to mature on January 2006 at which time a final balloon payment of $10,950,000 will be due. Under the Amended Credit Agreement, the revolving credit facility accrued interest on outstanding borrowings at LIBOR plus 3.5% (4.6% on March 31, 2004) through March 31, 2004, and accrues interest at LIBOR plus 4.0% (5.65% on July 25, 2004) from April 1, 2004 and thereafter. The revolving credit facility expires in January 2005. There is also an unused line fee equal to .75% per annum. The Company may borrow up to the lesser of $5 million or 60% of eligible accounts receivable ($4.0 million at April 25, 2004), as defined by the Amended Credit Agreement. As of July 25, 2004, $3.2 million has been drawn and is outstanding on the revolving credit facility. The term loan consists of a note which accrues interest at the relevant LIBOR rate plus 4.0% (5.38% at July 25, 2004). The Amended Credit Agreement contains the following financial and other covenants with which the Company must comply:

(a) The maximum financial leverage ratio is calculated by dividing funded debt by a rolling 12-month EBITDA. (b) The fixed charge coverage ratio is calculated by dividing fiscal year-to-date EBITDA by fiscal year-to-date fixed charges. (c) The interest coverage ratio is calculated by dividing EBITDA by interest expense. (d) Compliance with the Minimum EBITDA covenant is measured on a cumulative basis for the fiscal year. In addition, capital spending is limited to $300,000 for fiscal year 2004, $1.0 million for fiscal year 2005, and $1.0 million each year thereafter. The Amended Credit Agreement does not permit the Company, or its subsidiaries, to declare or pay dividends. 17 The following table presents the Company's compliance with financial covenants at July 25, 2004:

The Company was in compliance with all financial covenants under the Amended Credit Agreements. The Amended Credit Agreement requires the calculation of excess cash flow at the end of each fiscal quarter. Excess cash flow is defined by the Amended Credit Agreement as EBITDA, less interest expense, principal payments due on long-term debt, taxes paid, and capital expenditures, and adjusted for increases or decreases in net working capital. For any fiscal quarter for which this calculation results in excess cash flow, payment is due within fifty-five days from the end of that fiscal quarter, to be applied to the outstanding balance of the term note. An excess cash flow payment of $895,000 is due on September 22, 2004 for the third fiscal quarter of 2004. Our request for a waiver was denied. However, we are in discussions with our Lenders to restructure our loan agreement, including the excess cash flow payment. Because the Company did not make the excess cash flow payment, all balances outstanding under the Amended Credit Agreement have been classified as current. Cash Flow Information On July 25, 2004, the Company had cash of $775,000 compared to $1,677,000 on October 26, 2003. For the first nine months of fiscal 2004, $102,000 was provided by operating activities and $750,000 was used in financing activities to pay down long-term debt. For the first nine months of fiscal 2003, $3.3 million was provided by operating activities, and $2.3 million was used in financing activities to pay down long-term debt. The decrease in the cash provided from operating activities was due primarily to an increase in accounts receivable during the first nine months of fiscal 2004 as compared to a decrease in accounts receivable and inventories in the first nine months of fiscal 2003. The accounts receivable balance of $6.9 million at July 25, 2004 represents an increase of $896,000 (14.8%) over the balance at July 27, 2003. Sales for the nine months ended July 25, 2004 were $40.9 million as compared to $35.3 million for the nine months ended July 27, 2003, an increase of 16.1%. While sales and accounts receivable balances increased during the first nine months of fiscal 2004 as compared to the same period in fiscal 2003, the accounts receivable days sales outstanding ("DSO") decreased to 46.1 days at July 25, 2004 from 48.8 days at July 27, 2003. The decrease in cash used in financing activities was due to lower required quarterly payments on the term note. Capital equipment purchases for the first nine months of fiscal 2004 were $250,000 compared to $322,000 in the first nine months of Fiscal 2003. Working capital on July 25, 2004 was $2.2 million as compared to $9.5 million on October 26, 2003. This decrease in working capital was the result of a $7.8 million increase in the current maturities of long-term debt, primarily due to the revolving credit facility, due January 31, 2005, being classified as current and the increased principal payments due in the first three quarters of fiscal 2005. The Company believes that its available cash, anticipated cash flows from operations and borrowings under the revolving credit facility will be sufficient to fund at operations at current levels through the remainder of fiscal 2004. Demand for our products increased in the first nine months of 2004. While the limit on borrowing under our revolving credit agreement may limit our ability to finance our working capital needs as demand for our products increases, we believe that we will have enough availability to finance those needs at quarterly sales of between $15 - $16 million which represents an annualized rate of revenues 25% higher than the our revenues for fiscal 2003. We are in compliance with all financial covenants contained in the Credit Agreement, as amended, but will be in default under the agreement due to our inability to make the excess cash flow payment of $895,000 which is due on September 22, 2004. We will need to achieve quarterly sales in fiscal 2005 and 2006 of approximately $19 million, a level which we do not currently believe to be realistically achievable, in order to meet principal payment obligations in fiscal 2005 and 2006. Our quarterly principal payment obligations on the term debt over the next four fiscal quarters are $250,000 for the fourth fiscal quarter of 2004 and $1.8 million for the first, second and third fiscal quarters of 2005. The balance outstanding on the revolving credit agreement of $3.2 million is due in January 2005. We intend to negotiate with our lender to extend the 18 Loan and revise the principal repayment schedule. In the event we cannot negotiate an extension, we would be required to obtain alternative financing. We anticipate that the Lenders will charge us amendment fees that will consist of cash and/or warrants. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Under the Amended Credit Agreement, the revolving credit facility accrues interest on outstanding borrowings at LIBOR plus 4.0% (5.65% on July 25, 2004) and expires in January 2005. There is also an unused line fee equal to .75% per annum. The Company may borrow up to the lesser of $5 million or 60% of eligible accounts receivable ($4.0 million at July 25, 2004), as defined by the Amended Credit Agreement. As of July 25, 2004, $3.2 million has been drawn and is outstanding on the revolving credit facility. At current borrowing levels, a 1% increase in interest rates in our variable rate revolving credit facility would increase annual interest expense by approximately $32,000. The term loan consists of a note which accrues interest at the relevant LIBOR rate plus 4.0% (5.38% at July 25, 2004). At current borrowing levels, a 1% increase in interest rates in our variable rate term debt would increase annual interest expense by approximately $184,000. The Company, as required by the Amended Credit Agreement, utilized an interest rate swap (the "swap") to hedge against its interest rate risk. The swap was designated as a cash flow hedge and was carried on the balance sheets at fair value. The effect of the swap was to convert the interest rate on the hedged loan from a variable rate as described above to a fixed rate of 8.47%. The swap matured on March 31, 2004. The Company was not required by the Lender to renew the swap agreement. The principal raw material used in thermal management and non-thermal fabricated products is aluminum. Raw materials represent a significant portion of the cost of the Company's products. Prices for raw materials are based on market prices at the time of purchase. Historically, the price of aluminum has experienced substantial volatility. Although thermal management and non-thermal fabricated products are generally shipped within 60 days following the order date, increases in raw materials prices cannot always be reflected in product sales prices. Historically, all raw materials have been available from our established suppliers at competitive prices. Due to the increase in global demand for aluminum, the limited capacity of the aluminum market, and a labor strike at a major aluminum smelting plant which supplies several of our established suppliers, the Company has sought additional sources of aluminum to maintain current levels of production Purchases from these suppliers have required payment in advance of delivery until the current aluminum shortage eases and credit terms can be established, and the cost of the material has been 3% - 5% higher than purchases from our traditional sources of aluminum. Although the Company has generally passed this increased materials cost on to customers, there is no guarantee that future price increases can be recovered in this manner. In addition, if the Company experiences growth in demand for its product above current levels, it may not be able to meet the additional demand due to the reduced supply of aluminum available in the marketplace and/or its inability to obtain favorable credit terms from suppliers. ITEM 4. CONTROLS AND PROCEDURES At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective and sufficient to timely alert them to material information required to be included in the Company's periodic SEC filings and to ensure that the information required to be disclosed in the reports the Company files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and form. 19 During the third fiscal quarter of 2004, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed Herewith) 31.2 Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed Herewith) 32.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed Herewith) (b) Reports on Form 8 - K The Company filed a report on Form 8-K dated July 23, 2004 reporting under Item 5 the receipt of a NASDAQ Staff Determination letter concerning the potential de-listing of the Company's common stock from the NASDAQ National Market. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Alpha Technologies Group, Inc. (Registrant) Date: September 13, 2004 By: /s/ Lawrence Butler ------------------- Lawrence Butler Chairman and Chief Executive Officer (Principal Executive Officer) Date: September 13, 2004 By: /s/ James J. Polakiewicz ------------------------ James J. Polakiewicz Chief Financial Officer (Principal Financial and Accounting Officer) 22 EXHIBIT INDEX Exhibit 31.1 Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed Herewith) 31.2 Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed Herewith) 32.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed Herewith) 23

ALPHA TECHNOLOGIES GROUP INC 10-Q