U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission File No. 0-49694
ALFA UTILITY SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 30-0057068
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
396 Chrislea Road, Woodbridge, Ontario, Canada L4L 8A8
(Address of principal executive offices)
(905) 850-2220, Fax (905) 850-9152
(Issuer's telephone numbers)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Check whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At August 21, 2002, there were
22,803,058 shares of common stock outstanding.
FORM 10-QSB
ALFA UTILITY SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item I-1. FINANCIAL STATEMENTS 3/F-1
Independent Accountant's Report 5/F-3
Consolidated Balance Sheet at June 30, 2002 (Unaudited) 6/F-5
and December 31, 2001
Consolidated Statement of Changes in Stockholders' Equity 7/F-5
for the Six Months Ended June 30, 2002 and 2001
(Unaudited)
Consolidated Statement of Operations and Comprehensive
Income for the Three and Six Months Ended June 30, 2002
and 2001 (Unaudited) 8/F-6
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (Unaudited) 9/F-8
Notes to Consolidated Financial Statements 10/F-8
Item I-2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR 11
PLAN OF OPERATION
PART II. OTHER INFORMATION 12
Item II-1. LEGAL PROCEEDINGS - NOT APPLICABLE 12
Item II-2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- NOT APPLICABLE 12
Item II-3. DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE 12
Item II-4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- NOT APPLICABLE 12
Item II-5. OTHER INFORMATION - NOT APPLICABLE 12
Item II-6. EXHIBITS AND REPORTS ON FORM 8-K - NOT APPLICABLE 12
SIGNATURES 12
PART I. FINANCIAL INFORMATION
ITEM I-1. FINANCIAL STATEMENTS (REG. S-B ITEM 310(B))
ITEM I-2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(REG. S-B ITEM 303)
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
----------------------------------------------------
FINANCIAL REPORTS
AT
JUNE 30, 2002
----------------------------------------------------
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Independent Accountant's Report F-1
Consolidated Balance Sheet at June 30, 2002 (Unaudited)
and December 31, 2001 F-2
Consolidated Statement of Changes in Stockholders' Equity for the
Six Months Ended June 30, 2002 and 2001 (Unaudited) F-3
Consolidated Statement of Operations and Comprehensive Income for the
Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) F-4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 (Unaudited) F-5
Notes to Consolidated Financial Statements F-6
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Alfa Utility Services, Inc.
Woodbridge, Ontario Canada
We have reviewed the accompanying consolidated balance sheet of Alfa
Utility Services, Inc. (A Delaware Corporation) as of June 30, 2002, and the
related consolidated statements of operations and comprehensive income for the
three and six months ended June 30, 2002 and 2001, and the consolidated
statements of changes in stockholders' equity, and cash flows for the six months
ended June 30, 2002 and 2001. All information included in these financial
statements is the responsibility of the management of Alfa Utility Services,
Inc.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying financial statements in order for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet (presented herein) of Alfa Utility Services, Inc. as of December 31, 2001,
and the related consolidated statements of operations and comprehensive income,
changes in stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report, dated March 29, 2002, except for Note M,
as to which the date is August 14, 2002, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 2001 is
fairly stated, in all material respects. No auditing procedures have been
performed subsequent to the date of our report.
/s/ Rotenberg & Co., LLP
- -------------------------
Rotenberg & Co., LLP
Rochester, New York
August 7, 2002
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
CONSOLIDATED BALANCE SHEET
====================================================================================================
(UNAUDITED)
JUNE 30, December 31,
2002 2001
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 5,857 $ --
Accounts Receivable - Net of Allowances 2,274,333 2,773,513
Inventories 471,692 410,890
Income Taxes Receivable -- 28
Prepaid Expenses, Deposits and Other Current Assets 98,489 106,828
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,850,371 3,291,259
PROPERTY AND EQUIPMENT - NET OF ACCUMULATED DEPRECIATION 534,546 1,083,854
OTHER ASSETS
Due from Related Parties 214,743 204,960
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,599,660 $ 4,580,073
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Demand Loan $ 349,111 $ 257,865
Capital Lease Payable - Due Within One Year -- 53,061
Long-Term Debt - Due Within One Year 65,345 160,528
Deferred Income Taxes - Due Within One Year 169,573 174,628
Accounts Payable and Other Accrued Expenses 2,241,240 2,693,201
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,825,269 3,339,283
OTHER LIABILITIES
Capital Lease Payable - Due After One Year -- 83,808
Long-Term Debt - Due After One Year 106,119 372,056
Deferred Income Taxes - Due After One Year 59,282 87,154
Other Liabilities 10,458 12,246
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,001,128 3,894,547
- ----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock - $4.00 Par; 1,000 Shares Authorized, Issued and
Outstanding (Liquidation Value of $1,250,000) 4,000 4,000
Common Stock - $.001 Par; 50,000,000 Shares Authorized;
22,803,058 Issued and Outstanding 22,803 22,803
Additional Paid-In Capital 107,169 107,169
Retained Earnings 582,678 698,189
Accumulated Other Comprehensive Loss (118,118) (146,635)
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 598,532 685,526
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,599,660 $ 4,580,073
====================================================================================================
The accompanying notes are an integral part of this financial statement.
See Accountants Review Report
F-2
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
------------------- -------------------
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS -
NUMBER $4.00 NUMBER $.001 ADDITIONAL CUMULATIVE TOTAL
OF PAR OF PAR PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL EARNINGS ADJUSTMENTS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2001 1,000 $ 4,000 12,000,000 $ 12,000 $ -- $ 937,929 $ (100,494) $ 853,435
May 31, 2001 - Recapitalization as
Alfa Utility Services, Inc. -- -- 10,802,058 10,803 107,169 (117,972) -- --
Net Loss for the Period -- -- -- -- -- (198,116) -- (198,116)
Foreign Currency Translation -- -- -- -- -- -- (7,828) (7,828)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 2001 1,000 4,000 22,802,058 22,803 107,169 621,841 (108,322) 647,491
Net Income for the Period -- -- -- -- -- 76,348 -- 76,348
Foreign Currency Translation -- -- -- -- -- -- (38,313) (38,313)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2001 1,000 4,000 22,802,058 22,803 107,169 698,189 (146,635) 685,526
Net Loss for the Period
(Unaudited) -- -- -- -- -- (115,511) -- (115,511)
Foreign Currency Translation
(Unaudited) -- -- -- -- -- -- 28,517 28,517
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 2002 (Unaudited) 1,000 $ 4,000 22,802,058 $ 22,803 $107,169 $ 582,678 $ (118,118) $ 598,532
====================================================================================================================================
The accompanying notes are an integral part of this financial statement.
See Accountants Review Report
F-3
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME - UNAUDITED
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
SALES $ 2,780,087 $ 2,618,760 $ 5,556,298 $ 4,743,233
- ----------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD
Subdivision Material 1,139,008 1,187,720 2,548,493 2,367,280
Wages 787,732 664,888 1,580,781 1,259,869
Other 329,744 390,071 739,552 702,483
- ----------------------------------------------------------------------------------------------------------
TOTAL COST OF GOODS SOLD 2,256,484 2,242,679 4,868,826 4,329,632
- ----------------------------------------------------------------------------------------------------------
GROSS PROFIT 523,603 376,081 687,472 413,601
- ----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
General and Administrative 411,226 270,961 793,631 486,581
Depreciation and Amortization 9,914 9,616 23,395 16,101
- ----------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 421,140 280,577 817,026 502,682
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 102,463 95,504 (129,554) (89,081)
OTHER INCOME (EXPENSE)
Interest Expense - Net (13,163) (21,565) (29,786) (51,440)
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 89,300 73,939 (159,340) (140,521)
Provision for (Recovery of) Income Taxes (46,455) (103,357) 43,829 (57,595)
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 42,845 (29,418) (115,511) (198,116)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation, net of
Income tax of $0 in 2002 and 2001 28,386 26,236 28,517 (7,828)
- ----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD $ 71,231 $ (3,182) $ (86,994) $ (205,944)
=========================================================================================================
INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.00 $ 0.00 $ (0.01) $ (0.01)
INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.00 $ 0.00 $ (0.01) $ (0.01)
=========================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 22,802,058 15,679,822 22,802,058 13,850,076
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTED 26,802,058 15,679,822 22,802,058 13,850,076
=========================================================================================================
The accompanying notes are an integral part of this financial statement.
See Accountants Review Report
F-4
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(115,511) $(198,116)
NON-CASH ADJUSTMENTS
Depreciation and Amortization 98,767 134,365
Loss on Sale of Equipment 27,214 --
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts Receivable 609,393 (158,371)
Inventories (39,743) 235,080
Income Taxes Receivable 28 641
Prepaid Expenses, Deposits and Other Current Assets 12,966 (54,207)
Accounts Payable and Other Accrued Expenses (560,137) (87,778)
Deferred Income Taxes (43,828) 57,595
Other Liabilities (2,289) --
- -------------------------------------------------------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (13,140) (70,791)
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property, Plant and Equipment (32,283) (141,462)
Proceeds from Sale of Property, Plant and Equipment 358,592 --
- -------------------------------------------------------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES 326,309 (141,462)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Demand Loan 241,517 224,517
Repayment of Demand Loan (165,351) --
Repayment of Long Term Debt (372,969) --
Repayments of Capital Lease Obligation (10,717) (12,264)
- -------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES (307,520) 212,253
- -------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 208 --
- -------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 5,857 --
Cash and Cash Equivalents - Beginning of Period -- --
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 5,857 $ --
===============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Period for Income Taxes $ -- $ --
Cash Paid During the Period for Interest - Net $ 29,786 $ 51,440
===============================================================================
NON-CASH INVESTING ACTIVITIES
Termination of Capital Leases - Equipment $ 126,004 $ --
===============================================================================
The accompanying notes are an integral part of this financial statement.
See Accountants Review Report
F-5
ALFA UTILITY SERVICES, INC.
(A DELAWARE CORPORATION)
WOODBRIDGE, ONTARIO CANADA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements of Alfa Utility
Services, Inc. (the "Company") included herein have been prepared
by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in
financial statements prepared in conjunction with accounting
principles generally accepted in the United States of America have
been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction
with the annual audited financial statements and the notes thereto,
included in the Company's Form 10-SB Registration Statement, Form
SB-2 Registration Statement, and other filings with the SEC.
The accompanying unaudited interim consolidated financial
statements reflect all adjustments of a normal and recurring nature
which are, in the opinion of management, necessary to present
fairly the financial position, results of operations and cash flows
of the Company for the interim periods presented. The results of
operations for these periods are not necessarily comparable to, or
indicative of, results of any other interim period of or for the
fiscal year taken as a whole. Factors that affect the comparability
of financial data from year to year and for comparable interim
periods include non-recurring expenses associated with the
Company's registrations with the SEC and the seasonal fluctuations
of the business. Certain financial information that is not required
for interim financial reporting purposes has been omitted.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year presentation.
F-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements in this Form 10-QSB which are not historical facts,
nonexclusively including statements below, may contain forward-looking
statements that are subject to important factors that could cause actual results
to differ materially from those in the forward-looking statement. Such factors
nonexclusively include product demand; the effect of economic conditions; the
impact of competitive services, products, and pricing; product developments;
supply restraints or difficulties; industry regulation; the continued
availability of capital resources and financing; acts of terrorism, war or civil
unrest; and other risks set forth or incorporated herein and in Alfa's other
Securities and Exchange Commission filings. Alfa does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of Alfa.
Alfa has not released and does not presently intend to release any
projections of revenues or net income, or other forward-looking statements,
without complying with the requirements for such statements.
INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Effective between the close of business on May 31, 2001 and the
opening of business on June 1, 2001, pursuant to the terms and condition of an
Amended Assignment of Stock and Amended Option Agreements and Amended Consents
of Directors and Shareholders, Alfa Utility Services Inc. (a Canadian
Corporation) and its wholly owned subsidiary Ontario Power Contracting Limited,
became wholly owned subsidiaries of Alfa Utility Services, Inc. (a Delaware
Corporation, the registrant herein, referred to as "Alfa"). That transaction has
been accounted for as a recapitalization, resulting in the historical operations
of Ontario Power Contracting Limited being the historical operations of Alfa
Utility Services, Inc. (a Delaware Corporation). Prior to the recapitalization,
Alfa Utility Services, Inc. (a Delaware Corporation) had not engaged in any form
of business activity and as a result, has no operating history. Accordingly, the
following discussion and analysis of financial conditions and results of
operations is a discussion of the historical financial performance of Ontario
Power Contracting Limited.
Alfa generates revenue by:
o Installation of the joint use underground primary, secondary and
streetlight distribution systems for residential developments
o Reconstruction and rehabilitation of parts of a Public Utility's
primary and secondary distribution systems
o General civil/electrical and maintenance work for existing power
producers and energy service providers
o Installation of new underground communications distribution systems
o Installation of natural gas, waterworks, and sewer distribution
systems
o Design and installation of electrical utilities, communications,
natural gas pipelines, sewer and waterworks systems in new development
sites for developers and municipalities
The following discussion and analysis of Alfa's financial condition
and results of operations should be read in conjunction with the financial
statements appearing in Item 1 of this Form 10-QSB.
-2-
RESULTS OF OPERATIONS
The following table sets forth a statement of operations and
comprehensive income data of Alfa expressed as a percentage of sales for the
periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------------------------------------------------------
PERCENTAGES PERCENTAGES
Total Sales 100.0 100.0 100.0 100.0
Total Cost of Goods Sold 81.1 85.6 87.6 91.3
----------------------------------------------------------
Gross Profit 18.9 14.4 12.4 8.7
Total Operating Expenses 15.2 10.7 14.7 10.6
----------------------------------------------------------
Income (Loss) From Operations 3.7 3.7 -2.3 -1.9
Interest Expense, Net -0.5 -0.8 -0.6 -1.1
----------------------------------------------------------
Income (Loss) Before Income Taxes 3.2 2.9 -2.9 -3.0
Provision for (Recovery of) Income Tax 1.7 -4.0 -0.8 -1.2
----------------------------------------------------------
Net Income (Loss) 1.5 -1.1 -2.1 -4.2
Other Comprehensive Income (Loss),
Net of Income Tax 1.1 -1.0 0.5 -0.1
----------------------------------------------------------
Comprehensive Income (Loss) 2.6 -0.1 -1.6 -4.3
==========================================================
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
SALES
Sales for the three months ended June 30, 2002 increased $161,000 or
6% to $2,780,000 from $2,619,000 for the three months ended June 30, 2001.
COST OF GOODS SOLD
Cost of Goods Sold for the three months ended June 30, 2002 was
$2,257,000 or 81.1% of sales as compared to $2,243,000 or 85.6% of sales for the
three months ended June 30, 2001.
The decrease in cost of goods sold as a percentage of sales is due to
better purchasing of materials and increased efficiency. In addition, Alfa is
taking advantage of just-in-time inventory as much as possible which is helping
to reduce the materials costs. In addition, there has been a change in the mix
of Alfa's business toward Natural Gas which has lower material costs and a
resulting higher gross profit.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the three months ended June
30, 2002 increased $140,000 or 52% to $411,000 from $271,000 for the three
months ended June 30, 2001.
This increase in general and administrative expense is mainly a
result of increased spending in a number of areas. Administrative salaries
increased $28,000 primarily due to the hiring of a Chief Financial Officer
during the second quarter of 2001. Office salaries increased $31,000 to
accommodate the growth in sales which occurred during 2001. In conjunction with
that, related office expenses related to the increased staffing increased
$10,000. Insurance expense increased $10,000 due to the need for more insurance
to cover the growth of Alfa since the prior year. Professional service fees
increased $59,000 due to the costs associated with the registration of Alfa's
securities with the Securities and Exchange Commission.
-3-
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2002 decreased
$8,000 or 39% to $13,000 from $22,000 for the three months ended June 30, 2001.
This decrease is a product of three factors; the improved management
of operating debt, the repayment of term debt and the increased use of operating
leases to finance the acquisition of equipment.
Alfa has implemented cash flow forecasting models along with other
cash management practices that have reduced Alfa's dependence on bank operating
debt. These practices have permitted Alfa to finance increased revenues and
accounts receivable with reduced dependence on bank lines of credit.
PROVISION FOR INCOME TAXES
The provision for income taxes has decreased $57,000 to $46,000 for
the three months ended June 30, 2002 from $103,000 for the three months ended
June 30, 2001 due to the adjustment of deferred taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", for the higher tax rate that Alfa will be required to pay due to
becoming a "public" reporting company which was required in the second quarter
of 2001. Previously, Alfa was able to take advantage of the Canadian controlled
small corporation tax incentive whereby all income under $200,000 (CDN) is taxed
at a rate of 20%. Alfa's acquisition of Ontario Power resulted in a loss of
Alfa's ability to use this preferred tax rate.
NET INCOME
The net income for the three months ended June 30, 2002 was $43,000
compared to a net loss of $29,000 for the three months ended June 30, 2001. The
main factors contributing to this was an increase in gross profit of $148,000
and a decrease in the provision for income taxes of $57,000 offset by an
increase in general and administrative expenses of $140,000.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
SALES
Sales for the six months ended June 30, 2002 increased $813,000 or
17% to $5,556,000 from $4,743,000 for the six months ended June 30, 2001.
Sales growth was driven by increased activities in the Residential
Subdivision-Servicing group with an increase in revenue of $200,000 in 2002 over
2001. The growth is attributed to management's focus on quality service. This
focus on quality has strengthened relationships in the client community which in
turn has resulted in increased business for Alfa. In addition to improved volume
generated by the aforementioned group, the Natural Gas group increased capacity
in the second quarter of 2001 to allow for the complete internal fulfillment of
gas infrastructure requirements. Historically, Ontario Power had jointly bid on
projects and contracted out the natural gas portion. Management expects the
volume of revenue obtained from the Natural Gas group to grow in importance and
represent 10% of Alfa's gross volume by the end of 2002. Previously, this group
represented less than 3% of Alfa's volumes as the natural gas portion was
contracted out to other companies. This group had an increase in revenue of
$400,000 in 2002 over 2001.
-4-
COST OF GOODS SOLD
Cost of Goods Sold for the six months ended June 30, 2002 was
$4,869,000 or 87.6% of sales as compared to $4,330,000 or 91.3% of sales for the
six months ended June 30, 2001.
The decrease in cost of goods sold as a percentage of sales is due to
better purchasing of materials and increased efficiency. In addition, Alfa is
taking advantage of just-in-time inventory as much as possible which is helping
to reduce the materials costs. In addition, there has been a change in the mix
of Alfa's business toward Natural Gas which has lower material costs and a
resulting higher gross profit.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the six months ended June 30,
2002 increased $307,000 or 63% to $794,000 from $487,000 for the six months
ended June 30, 2001.
This increase in general and administrative expense is mainly a
result of increased spending in a number of areas. Office salaries increased
$70,000 to accommodate the growth in sales which occurred during 2001. In
conjunction with that, related office expenses related to the increased staffing
increased $35,000. Insurance expense increased $21,000 due to the need for more
insurance to cover the growth of Alfa since the prior year. Management fees paid
to Alfa's President were $48,000 in 2002 and there was no fees paid in the first
six months of 2001. Professional service fees increased $95,000 due to the costs
associated with the registration of Alfa's securities with the Securities and
Exchange Commission.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2002 decreased
$21,000 or 42% to $30,000 from $51,000 for the six months ended June 30, 2001.
This decrease is a product of three factors; the improved management of
operating debt, the repayment of term debt and the increased use of operating
leases to finance the acquisition of debt.
Alfa has implemented cash flow forecasting models along with other
cash management practices that have reduced Alfa's dependence on bank operating
debt. These practices have permitted Alfa to finance increased revenues and
accounts receivable with reduced dependence on bank lines of credit.
PROVISION FOR INCOME TAXES
The provision for income taxes has decreased $102,000 to a recovery
of $44,000 for the six months ended June 30, 2002 from a provision for income
taxes of $58,000 for the six months ended June 30, 2001 due to the adjustment of
deferred taxes in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", for the higher tax rate that Alfa will
be required to pay due to becoming a "public" reporting company. Previously,
Alfa was able to take advantage of the Canadian controlled small corporation tax
incentive whereby all income under $200,000 (CDN) is taxed at a rate of 20%.
Alfa's acquisition of Ontario Power resulted in a loss of Alfa's ability to use
this preferred tax rate.
-5-
NET LOSS
The net loss for the six months ended June 30, 2002 decreased $82,000
to $116,000 from $198,000 for the six months ended June 30, 2001. The main
factors contributing to this increase was an increase in gross profit of
$274,000, a decrease in interest expense of $22,000, a decrease in income tax
expense of $101,000 offset by an increase in general and administrative expenses
of $307,000.
CAPITAL RESOURCES AND LIQUIDITY
Alfa's cash flow used in operations was $13,000 and $71,000 for the
six months ended June 30, 2002 and 2001, respectively. The increase is due to a
decrease in the net loss and a decrease in accounts receivable due to better
collection efforts and a shift in the mix of business. This was offset by an
increase in inventories of $40,000 as compared to a decrease in inventories in
the prior year of $235,000. This change is due to the management of inventory
which was occurring during the prior year. Inventory is now at its ideal amount
and could not be reduced any further. Also offsetting the cash inflows was a
decrease in accounts payable.
Cash provided by investing activities was $326,000 for the six months
ended June 30, 2002. Cash used in investing activities was $141,000 for the six
months ended June 30, 2001. The increase in cash provided is due to the fact
that there were lower purchases of property, plant and equipment and proceeds
from sales of property, plant and equipment in 2002.
Cash used in financing activities was $308,000 for the six months
ended June 30, 2002. Cash provided by financing activities was $212,000 for the
six months ended June 30, 2001. The change is due to net repayment on borrowings
in the six months ended June 30, 2002 and net borrowings in the six months ended
June 30, 2001.
The decrease in accounts receivable of $0.5 million from December 31,
2001 to June 30, 2002 is due to an increase in sales of $0.2 million in the
second quarter ended June 30, 2002 compared to an increase in sales of $1.1
million in the fourth quarter ended December 31, 2001.
Property, plant and equipment, net has decreased from $1.1 million at
December 31, 2001 to $0.5 million at June 30, 2002 and long-term debt has
decreased from $0.5 million at December 31, 2001 to $0.2 million at June 30,
2002 due to the sale-leaseback of equipment during the six months ended June 30,
2002.
Alfa generally does not maintain cash balances as all funds are
currently being reinvested into Alfa to continue to grow the Company. Alfa
currently has a Revolving Demand Loan in the amount of the lesser of $1 million
(CDN) or 80% of the receivables value, as defined in the credit agreement (of
which $349,111 was outstanding as of June 30, 2002). The loan bears interest at
the prime rate plus 1%. Alfa also must pay an administration fee of $50 monthly.
The demand loan is renewable yearly. Interest only is payable monthly
on the demand loan. The demand loan is secured by all assets of Alfa, various
insurance policies and a personal guarantee of one of the directors of Alfa.
The demand loan contains various covenants pertaining to the
maintenance of net worth, direct borrowings, leverage and liquidity
requirements. At June 30, 2002, Alfa was not in compliance with the net worth,
leverage and liquidity ratios. Under the terms of the agreement, the bank may
call the loan if Alfa is in violation of any restrictive covenant. Alfa has not
obtained a waiver from the bank. The management of Alfa has the means and the
willingness to refinance the debt should demand for payment be made through
collateralizing its fixed assets. As of August 14, 2002, the bank has not called
the loan and continues to allow Alfa to borrow under the original terms of the
agreement, having renewed it twice while out of compliance with one or more
ratio maintenance provisions.
The continued availability of the demand loan is necessary in
order for management to continue to grow the business. If the demand loan or
similar financing was not available, Alfa would be required to slow growth in
order to have the necessary cash to meet its obligations.
-6-
INFLATION
Alfa does not believe its operations have been materially affected by
inflation. Inflation is not expected to have a material future effect.
-7-
PART II. OTHER INFORMATION
ITEM II-1. LEGAL PROCEEDINGS (REG. S-B ITEM 103) - NOT APPLICABLE
ITEM II-2. CHANGES IN SECURITIES AND USE OF PROCEEDS (10-QSB ITEM II-2,
REG. S-B ITEM 701, RULE 463) - NOT APPLICABLE
ITEM II-3. DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE
ITEM II-4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
NOT APPLICABLE
ITEM II-5. OTHER INFORMATION (FORM 8-K) - NOT APPLICABLE
ITEM II-6. EXHIBITS AND REPORTS ON FORM 8-K - NOT APPLICABLE
(A) EXHIBITS:
SEC Ref. No. Title of Document Location
NOT APPLICABLE (Previously reported, and no contracts entered into during the
quarter are deemed by management to be material in the light of the registrant's
operating results, financial conditions and other factors.)
(B) REPORTS ON FORM 8-K: None in this quarter.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALFA UTILITY SERVICES, INC.
/S/ JOSEPH ALFANO
------------------------------------------
Date: August 21, 2002 Joseph Alfano, President
Date: August 21, 2002 /S/ ROBERT SIMONE
------------------------------------------
Robert Simone, CFO, Vice President Finance
(Principal Financial and Chief
Accounting Officer)