ARS 1 american_locker-annualrpt.txt ANNUAL REPORT AMERICAN LOCKER GROUP INCORPORATED 2003 Annual Report [ALGI Logo] Letter to Stockholders TO OUR STOCKHOLDERS: The Company's sales and earnings in 2003 were down from the previous year. Sales of $39.3 million were down 3.5% and net income of $2,147,132 was down 29%. Earnings per basic share were $1.41 in 2003 versus $1.57 per basic share in 2002. In a challenging year sales were generally down across our product line with the exception of postal products at our subsidiary, Security Manufacturing Corporation, where sales increased by $1,140,000. New products in our locker line which were rolled out in the latter part of 2003 as part of our long term strategy to improve and diversify our product line did not significantly impact sales and earnings in 2003. We will continue to develop and market new products in 2004. Our full product line is illustrated and described in our two principal websites: www.americanlocker.com and www.securitymanufacturing.com. After tax income in 2003, however, did continue to contribute to shareholders' equity which increased from $11.9 million at December 31, 2002 to $14.2 million at December 31, 2003, an increase of 19.3%. The book value per share at year end 2003 was $9.23 compared to $7.83 the previous year, an increase of 17.9%. The following table summarizes the increase in book value per share over the last five years: 2003 2002 2001 2000 1999 ------------------------------------ Stockholders' equity (millions) $14.2 11.9 14.6 11.7 10.1 Outstanding shares (millions) 1.5 1.5 2.0 2.0 2.3 Book value per share 9.23 7.83 7.12 5.68 4.44 The Company's acquisition of Security Manufacturing Corporation in July of 2001 was funded with term loan borrowing of approximately $12 million. As of year end 2003 the Company's long term debt (including the current portion) stood at $8.3 million, or 59 % of stockholders' equity compared to 84 % the previous year. Interest expense declined to $530,000 in 2003 due to the reduced outstanding balance, down from $670,000 in 2002. The following table summarizes the ratio of long term debt to equity at the end of the last three years: 2003 2002 2001 ------------------------------ Total long term debt (millions) $8.3 9.9 11.6 Stockholders' equity (millions) 14.2 11.9 14.6 LTD/Equity Ratio 59 % 84.7% 80 % The Company continues its long term and constructive relationship with the United States Postal Service (USPS) by supplying Cluster Box Units and Outdoor Parcel lockers, the former in both polycarbonate and aluminum. These and other postal products, approved by the USPS, are sold either directly to the USPS or to the private market through distributor channels. The composition of our Board of Directors has been modified with the resignation of Lawrence J. Goldstein who is responding to the pressing demands on his time as General Partner of Santa Monica Partners, L.P. as regards setting up additional Santa Monica Partners Management investment partnerships. On behalf of the Board, I wish to thank Larry for his service this past year and for his advice and insights throughout the year. The Board has nominated Anthony J. Crisafio, a new director to be elected along with the returning directors from the previous year. Mr. Crisafio, CPA, brings his considerable accounting, auditing, and general business experience to the Board, and we look forward to working with him and tapping his talents for the benefit of the shareholders upon his election. We thank the directors, employees and staff members of American Locker Group Incorporated who helped to make us a continuously better company. Our gratitude is also extended to the Company's customers, suppliers and shareholders for their continuing encouragement and support. /s/ Edward F. Ruttenberg Edward F. Ruttenberg Chairman and Chief Executive Officer /s/ Roy J. Glosser Roy J. Glosser President, Chief Operating Officer and Treasurer Notice of Annual Meeting The Annual Meeting of Stockholders of American Locker Group Incorporated will be held on Tuesday, May 11, 2004, at 10:00 a.m. at the offices of Kirkpatrick & Lockhart LLP, Oliver Building (2nd Floor), 535 Smithfield Street, Pittsburgh, Pennsylvania. A copy of American Locker Group Incorporated's Annual Report to the Securities and Exchange Commission (Form 10-K) may be obtained at no charge to any stockholder by writing to: Secretary American Locker Group Incorporated 608 Allen Street Jamestown, New York 14702 [ALGI Logo] [ALGI Nasdaq Logo] U. S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-K [X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2003 [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. Commission file number 0-439 American Locker Group Incorporated ------------------------------------------------------------------------------- (Exact Name of registrant as specified in its charter) Delaware 16-0338330 ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 608 Allen Street, Jamestown, New York 14701-3966 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) 1-716-664-9600 ------------------------- Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None ------------------- ----------------------------------------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock Par Value $1.00 Per Share ------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the exchange Act). Yes [ ] No [X] As of June 30, 2003, 1,517,146 shares of Common Stock, $1.00 par value per share, were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $15,695,662 based on the closing price per share of Common Stock on this date of $14.05 as reported on the NASDAQ. Shares of Common Stock known by the Registrant to be beneficially owned by directors of the Registrant and officers of the Registrant and other persons reporting beneficial ownership of 5% or more of Common Stock pursuant to the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are not included in the computation. The Registrant, however, has made no determination that such persons are "affiliates" within the meaning of Rule 12b-2 under the Exchange Act. At March 16, 2004, the Registrant had outstanding 1,534,146 shares of its Common Stock. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the definitive Proxy Statement for the Annual Stockholders' Meeting to be held May 11, 2004, are incorporated by reference into Part III. - 2 - PART I ------ Item 1. Description of Business American Locker Group Incorporated (the "Company") is engaged primarily in the sale of lockers. This includes coin, key-only, and electronically controlled checking lockers and related locks and plastic and aluminum centralized mail and parcel distribution lockers. The key controlled checking lockers are sold to the recreational and transportation industries, bookstores, military posts, law enforcement agencies, libraries and for export. The electronically controlled lockers are sold for use as secure storage in the business environment and the electronically controlled, coin operated lockers are sold for use in transportation industry and other uses. The plastic and aluminum centralized mail and parcel distribution lockers are sold to the United States Postal Service ("USPS"), directly to end users, and to distributors and resellers for use in centralized mail and parcel delivery in new housing and industrial developments, inside postal lobbies and apartment buildings and for replacement of older style lockers in existing locations. The Company is an engineering, assembling, manufacturing and marketing enterprise. The Company was incorporated on December 15, 1958, as a subsidiary of its former publicly owned parent. In April 1964, the Company's shares were distributed to the stockholders of its former parent, and it became a publicly held corporation. From 1965 to 1989, the Company acquired and disposed of a number of businesses including the disposition of its original voting machine business. On July 6, 2001, the Company acquired Security Manufacturing Corporation (SMC). SMC manufactures aluminum cluster box units, which are sold to the USPS and private markets, as well as other mail delivery receptacles. The Company made this acquisition to increase its product offerings to existing customers, provide additional products to attract new customers and to increase its share in the postal market. One of the Company's subsidiaries is a party to a Manufacturing Agreement dated October 1, 2000 with Signore, Inc., formerly a wholly owned subsidiary of the Company, to furnish fabricating, assembly and shipping services. The Agreement, which replaced a similar agreement dated January 1, 1990, has been amended and restated to provide for a term which expires August 31, 2006, subject to automatic renewal for a one year period on September 1, 2006, and subject to termination by either party on one years notice to the other party. The Agreement provides that the cost to the Company for these services be equal to Signore's standard cost divided by 80%. Business Segment Information ---------------------------- The Company, including its foreign subsidiary, is engaged primarily in one business: sale of lockers, including coin, key-only and electronically controlled checking lockers and locks and the sale of plastic and aluminum centralized mail and parcel distribution lockers. - 3 - The Company has developed a range of products to support the United States Postal Service (USPS) Centralized Delivery program. Outdoor Parcel Lockers (OPLs) are used by the USPS for delivery of parcels. Since March 1989, the Company has shipped over 171,000 plastic OPLs to the USPS. Cluster Box Units (CBUs) are used by the USPS for delivery of letters and parcels and for the collection of outgoing mail. In November 1994, the Company negotiated a contract to sell Type Three plastic CBUs in quantity to the United States Postal Service. The Company, including SMC, is approved to ship Type One, Two, Three and Four plastic CBUs, and Type Two, Three and Four aluminum CBUs. As of March 16, 2004, plastic Cluster Box Units with aggregate invoice prices in excess of $183 million have been shipped to the United States Postal Service pursuant to the 1994 contract and subsequent contracts. Components of these units are made by outside vendors and the units are assembled by the Company's wholly owned subsidiary, American Locker Security Systems, Inc. (ALSSI). The units are sold directly by ALSSI to the USPS and private markets. Aluminum CBUs are manufactured by SMC and sold directly to the USPS and private markets. The checking lockers are fabricated by Signore, Inc. and are marketed in the United States by ALSSI. Lockers for the Canadian market are manufactured by Signore, Inc. with locks supplied from ALSSI. Lockers are marketed in Canada by the Canadian Locker Company, Ltd. ("Canadian Locker"), a wholly-owned subsidiary. Sales of checking lockers are made outright, through salaried employees and distributors, to customers who need storage facilities requiring a key controlled lock system in the recreational, governmental and institutional type industries. Canadian Locker also owns and operates coin operated lockers in air, bus and rail terminals and retail locations in Canada. ALSSI manufactures the lock system, which is coin or key controlled and operated, for use in lockers sold by ALSSI and Canadian Locker. ALSSI also provides nationwide and Canadian maintenance and repair services with respect to coin operated lockers previously sold by ALSSI and Canadian Locker. The Company developed an electronic cash and credit card operated baggage cart system that has been sold to several U.S. airports and also to third-party operators for use in two major U.S. airports. The Company also sells this vending system to shopping centers for the rental of shopping carts. Additional information with respect to business segment data, including significant customers, is disclosed in Note 13 of the financial statements included in Item 8 of this Form 10-K. Competition ----------- While the Company is not aware of any reliable trade statistics, it believes that its subsidiaries, ALSSI and Canadian Locker are the dominant suppliers of key controlled checking lockers in the United States and Canada. The Company faces active competition from several manufacturers of locker products sold to the United States Postal Service and other purchasers. Raw Materials ------------- Present sources of supplies and raw materials incorporated into the Company's metal, aluminum and plastic lockers and locks are generally considered to be adequate and are currently available in the market place. The Company's supplier of polycarbonate plastic which is used in the parcel lockers and CBUs entered this market in March 1992 and is presently supplying this raw material which meets strict specifications imposed by the United States Postal Service. In the event the - 4 - present supplier declines to continue to supply this material, the Company would be required to seek an alternate source of supply. The Company's metal coin operated and electronic lockers are manufactured by Signore, Inc. pursuant to the Manufacturing Agreement, except for the locks, which are manufactured by ALSSI. The Company's aluminum CBUs and mailboxes are manufactured and sold by the Company's subsidiary, Security Manufacturing Corporation. Patents ------- The Company owns a number of patents, none of which it considers material to the conduct of its business. Employees --------- The Company and its subsidiaries actively employed 154 individuals on a full-time basis as of December 31, 2003, in its businesses, 12 of whom are in Canada. The Company considers its relations with its employees to be satisfactory. None of the Company's employees are represented by a union. Dependence on Material Customer ------------------------------- During 2003, 2002 and 2001, one customer, the United States Postal Service, accounted for 52.7%, 56.4%, and 63.1% of net sales, respectively. The loss of this customer, or a reduction in its orders, could adversely affect the Company's operations and financial results. Research and Development ------------------------ The Company engages in research and development activities relating to new and improved products. It expended $431,000, $174,000, and $91,000 in 2003, 2002 and 2001, respectively, for such activity in its continuing businesses. Compliance with Environmental Laws and Regulations -------------------------------------------------- Based on the information available to it, the Company believes that it is in compliance with present federal, state and local environmental laws and regulations. As previously reported, in December 1998, the Company was named as a defendant in a lawsuit titled Roberta Raiport, et al. v. Gowanda Electronics Corp. And American Locker Group, Inc. pending in the State of New York Supreme Court, County of Cattaraugus. The suit involves property located in Gowanda, New York, which was sold by the Company to Gowanda Electronics Corp. prior to 1980. The plaintiffs, current or former property owners in Gowanda, New York, assert that defendants each operated machine shops at the site during their respective periods of ownership and that as a result of such operation, soil and groundwater contamination occurred which has adversely affected the plaintiffs and the value of plaintiffs' properties. The plaintiffs assert a number of causes of action and seek compensatory damages of $5,000,000 - 5 - related to alleged diminution of property values, $3,000,000 for economic losses and "disruption to plaintiffs' lives," $10,000,000 for "nuisance, inconveniences and disruption to plaintiffs' lives," $25,000,000 in punitive damages, and $15,000,000 to establish a "trust account" for monitoring indoor air quality and other remedies." In June 2003, Gowanda Electronics Corp. filed a motion for summary judgment seeking to be dismissed from the suit. The plaintiffs and the Company have filed objections to such motion and the court has yet to rule on the motion. The Company believes that its potential liability with respect to this site, if any, is not material. Therefore, based on the information currently available, management does not believe the outcome of this suit will have a material adverse impact on the Company's operations or financial condition. Defense of this case has been assumed by the Company's insurance carrier, subject to a reservation of rights. As previously reported, on July 30, 2001, the Company received a letter from the New York State Department of Environmental Conservation (the NYSDEC) advising the Company that it is a potentially responsible party (PRP) with respect to environmental contamination at the site mentioned above located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corp. prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it sets forth a remedy which includes continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet intended to intercept any contaminates and implementation of an on-going monitoring system. The NYSDEC has estimated that the remediation plan selected by NYSDEC will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a thirty-year period after completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate. This matter has not been litigated and at the present time the Company has only been identified as a PRP. The Company also believes other parties may have been identified by the NYSDEC as PRPs and the allocation of financial responsibility of such parties has not been litigated. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The NYSDEC has not commenced construction of the remedial plan and has not indicated when construction will start, if ever. The Company's primary insurance carrier has assumed the cost of the Company's defense in this matter, subject to a reservation of rights, and to date the Company has not experienced any cost associated with this matter. Backlog ------- Backlog of orders is not significant in the Company's business as shipments usually are made shortly after orders are received. The Company's sales do not have marked seasonal variations. - 6 - Executive Officers of the Company --------------------------------- Year First Assumed Name Age Office Held with Company Position ------------------------------------------------------------------------------- Edward F. Ruttenberg 57 Chairman of the Board and 1998 Chief Executive Officer Roy J. Glosser 43 President, Chief Operating 1996 Officer and Treasurer Mr. E.F. Ruttenberg has been employed in his positions since September, 1998. Prior to that date he served as Vice Chairman of the Company. Mr. Glosser assumed his position as President and Chief Operating Officer in May 1996 and became Treasurer in September 1998. Prior to that date, Mr. Glosser served as Vice President - Operations of the Company since 1995 and has been employed by the Company since 1992 in operations and product development. There are no arrangements or understandings pursuant to which any of the officers were elected as officers, except for an employment contract between the Company and Roy J. Glosser and an employment contract between the Company and Edward F. Ruttenberg. Except as provided in such employment contracts, all officers hold office for one year and until their successors are elected and qualified; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of the majority of the Board of Directors. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. Available Information --------------------- The Company files with the U.S. Securities and Exchange Commission quarterly and annual reports on Forms 10-Q and 10-K, respectively, current reports on Form 8-K, and proxy statements pursuant to the Securities Exchange Act of 1934, in addition to other information as required. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 (800) SEC-0330. The Company files this information with the SEC electronically, and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company also maintains a web site at http://www.americanlocker.com. Our code of ethics is available free of charge at our website http://www.americanlocker.com. Also, copies of our annual report will be made available, free of charge, upon written request to American Locker Group, Inc., Attn: Investor Relations, 608 Allen Street, Jamestown, NY 14701-3966. - 7 - Item 2. Description of Property The location and approximate floor space of the Company's principal plants, warehouses and office facilities are as follows ( * indicates leased facility):
Approximate Floor Space Location Subsidiary In Sq. Ft. Use -------- --------- ----------- -------- Jamestown, NY Principal Executive Office 37,000* Office space/ American Locker Company, Inc. Assembly and and American Locker Security Warehouse Systems, Inc. Jamestown, NY American Locker Security 30,200* Assembly and Systems, Inc. Warehouse Pittsburgh, PA Executive Office 200* Office space Ellicottville, NY American Locker Security 12,800 Lock manufactur- Systems, Inc. - Lock Shop ing service and repair Toronto, Canadian Locker Company, Ltd. 4,000* Coin- Ontario operated lockers and locks Toronto, Ontario Canadian Locker Company, Ltd. 3,000* Warehouse Grapevine, TX Altreco, Inc (Operated by Security 70,000 Manufacturing Manufacturing Corporation) and office ------- TOTAL 157,200 =======
The Company believes that its facilities, which are of varying ages and types of construction and the machinery and equipment utilized in such facilities, are in good condition and are adequate for its presently contemplated needs. All facilities are leased except for the Ellicottville, New York and Grapevine, Texas facilities. The leases on these properties terminate at various times from 2004 through 2011. - 8 - Item 3. Legal Proceedings In September 1998 and subsequent months, the Company was named as an additional defendant in approximately 140 cases pending in state court in Massachusetts. The plaintiffs in each case assert that a division of the Company manufactured and furnished to various shipyards components containing asbestos during the period from 1948 to 1972 and that injuries resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced which indicate that the Company appears to have been included in the chain of title for certain wall panels which contained asbestos and which were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company's insurance carrier, subject to a reservation of rights. As of February 19, 2004, settlement agreements have been entered in 15 cases with funds authorized and provided by the Company's insurance carrier. Further, over 90 cases originally filed in 1995 through 2000 against other defendants to which the Company was joined as an additional defendant have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of February 19, 2004 is approximately 35 cases originally filed against other defendants in 2001 through 2003. While the Company cannot predict what the ultimate resolution of these asbestos cases may be because the discovery proceedings on the cases are not complete, based upon the Company's experience to date with similar cases, as well as the assumption that insurance coverage will continue to be provided with respect to these cases, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company's operations or financial condition. See "Item 1. Business - Compliance with Environmental Laws and Regulations." Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of the security holders, by means of solicitation of proxies or otherwise, during the fourth quarter of 2003. - 9 - PART II ------- Item 5. Market for Common Equity and Related Stockholder Matters The Company's shares of Common Stock (Par Value $1.00 per share) are not listed on any exchange, but are traded on the over-the-counter market and quotations are reported by the National Association of Security Dealers, Inc. through their Automated Quotation System (NASDAQ) on the National Market System. The trading symbol is ALGI. The following table shows the range of the low and high sale prices for each of the calendar quarters indicated. Per Common Share ---------------- Market Price ------------
Dividend 2003 High Low Declared ----------------------------------------------------------------------- First Quarter $ 14.87 $ 11.85 $ 0.00 Second Quarter 16.22 12.00 0.00 Third Quarter 15.35 11.80 0.00 Fourth Quarter 13.00 10.25 0.00 ----- Total $ 0.00 ======== Dividend 2002 High Low Declared ----------------------------------------------------------------------- First Quarter $ 17.50 $ 10.50 $ 0.00 Second Quarter 14.00 10.53 0.00 Third Quarter 13.99 9.52 0.00 Fourth Quarter 14.00 10.00 0.00 ----- Total $ 0.00 ========
As of March 16, 2004, the Company had 1,046 security holders of record. By agreement with its principal lender, the Company's ability to declare future dividends is restricted. See Note 4 to the financial statements included in Item 8 of this Form 10-K. - 10 - Item 6. Selected Financial Data The following table sets forth selected historical financial data of the Company as of, and for the years ended December 31, 2003, 2002, 2001, 2000, and 1999. For a more detailed discussion of 2001 through 2003, refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 Financial Statements and Supplementary Data of this Form 10-K. The below amounts include the results of Security Manufacturing Corporation since its acquisition by the Company on July 6, 2001.
2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Sales $39,256,438 $40,670,721 $39,627,216 $37,662,140 $34,950,104 Income before income taxes 3,545,379 4,972,307 4,939,946 4,840,632 4,395,208 Income taxes 1,398,247 1,949,479 1,879,585 1,891,419 1,771,407 Net income 2,147,132 3,022,828 3,060,361 2,949,213 2,623,801 Earnings per share - basic 1.41 1.57 1.49 1.33 1.11 Earnings per share - diluted 1.38 1.54 1.47 1.32 1.09 Weighted average common shares outstanding - basic 1,523,429 1,921,612 2,053,838 2,214,406 2,363,338 Weighted average common shares outstanding - diluted 1,554,328 1,957,561 2,083,484 2,230,785 2,402,108 Dividends declared 0.00 0.00 0.00 0.00 0.00 Interest expense 529,642 670,144 441,773 140,920 153,861 Depreciation and amortization expense 893,236 974,165 956,430 796,140 630,047 Expenditures for property, plant and 543,146 316,180 801,009 206,604 1,915,139 equipment YEAR-END POSITION Total assets 25,873,480 25,034,616 29,735,420 15,582,599 15,179,069 Long-term debt, including current portion 8,305,487 9,933,813 11,578,687 333,320 2,034,324 Stockholders' equity 14,162,140 11,874,709 14,553,876 11,723,825 10,107,210 Stockholders' equity per share (1) 9.23 7.83 7.12 5.68 4.44 Common shares outstanding at year-end 1,534,146 1,517,146 2,043,046 2,062,540 2,277,118 Number of employees 154 161 198 144 137 (1) Based on shares outstanding at year-end.
- 11 - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies And Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and the accompanying notes. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, pensions and other post-retirement benefits, and contingencies and litigation. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition The Company recognizes revenue at the point of passage of title, which is at the time of shipment to the customer. The Company derived approximately 20% of its revenue in 2003 from sales to distributors. These distributors do not have a right to return unsold products, however returns may be permitted in specific situations. Historically returns have not been significant. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management uses judgmental factors such as customer's payment history and the general economic climate, as well as considering the age of and past due status of invoices in assessing collectiblity and establishing allowances for doubtful accounts. If the financial condition of the Company's customers were to deteriorate, resulting in an inability to make payments, additional allowances would be required. Inventory The Company records reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions and management's review of existing inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory reserves resulting in a charge to expense would be required. Legal Matters The Company is subject to certain legal proceedings as discussed in Note 16 of the consolidated financial statements. Currently, the Company does not believe that these matters will have a material impact on its financial results or financial position. This conclusion is based primarily on the Company's insurance coverage for these matters. It is possible, however, that future results of operations for any particular quarter or annual period could be materially affected by - 12 - changes in assumptions or other circumstances involving these legal matters. Historically the Company has not incurred significant costs for litigation matters. Goodwill As described in Note 2 to the consolidated financial statements, the Company has recorded goodwill of $6,155,000 in connection with its acquisition of SMC in 2001. Beginning in 2002, the Company, in accordance with the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, performed the required goodwill impairment tests. Based upon these tests no impairment was determined to exist. The annual required goodwill impairment test is performed at the beginning of the fourth calendar quarter. In assessing impairment the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective net assets. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment charge for the recorded goodwill. Pension Assumptions The Company maintains a defined benefit plan covering its U.S. employees. The accounting for the plan is based in part on certain assumptions that are uncertain and that could have a material impact on the financial statements if different reasonable assumptions were used. The assumption for return on assets reflects the rate of earnings expected on funds invested or to be invested to provide for benefits included in the projected benefit obligation. The assumed rate of return of 7% used in 2003 was determined based on a forecasted rate of return for a portfolio invested 50% in equities and 50% in bonds. In addition to the return on assets assumption, assumptions for the rate of compensation increase and discount rate were made. The rate of compensation increase used in determining the 2003 pension cost was 5.5%, and was determined using a projection of inflation and real wage increase assumptions. The discount rate used in determining the 2003 pension cost was 6.75%. Consistent with prior years, the Company uses a discount rate that approximates the average AA corporate bond rate. The discount rate used to value the projected benefit obligation at December 31, 2003 was 6% due to the decrease during 2003 of the average AA corporate bond rates. A 0.25% change in the expected return on plan assets or the discount rate would not have a significant impact on the Company's annual pension expense. Deferred Income Tax Assets The Company has net deferred tax assets of approximately $783,000 at December 31, 2003. This balance relates to timing differences between the financial reporting and tax reporting of certain expenses. The ultimate realization of the deferred income tax assets is primarily dependent on generating sufficient future taxable income or being able to carryback any taxable losses and claim refunds against previously paid income taxes. The Company has historically had taxable income and believes its net deferred income tax assets at December 31, 2003, are realizable. If future operating results lead to taxable losses it may be necessary to provide valuation allowances to reduce the amount of the deferred income tax assets to realizable value. - 13 - Results of Operations - 2003 Compared to 2002 Overall Results and Outlook --------------------------- 2003 results were impacted by various factors, which are provided in more detail below. Net income decreased by $875,000 in 2003 versus 2002. This was due primarily to lower sales volume with the USPS and increases in certain expenses, especially employee related costs. The Company continues to expand its product offerings and believes that it is maintaining its market share with the USPS regarding both plastic and aluminum products. The Company believes that the long-term outlook for sales of Cluster Box Units (CBUs) volume remains favorable in light of the continued USPS commitment to the CBU program and its resulting operating cost reduction benefits. In April 2003, the Company's contract with the USPS was renewed for a one-year term expiring on April 15, 2004. The Company has been advised by the USPS that this contract will likely be extended on a short term basis and that the USPS will, as in past years, seek bids with respect to this contract later this year. The current contract covers all four types of plastic CBUs, aluminum CBUs and the OPL. The contract contained price reductions ranging from zero to approximately 2% depending on the CBU or OPL type. As previously disclosed, total CBU demand is influenced by a number of factors over which the Company has no control, including but not limited to: USPS budgets, policies and financial performance, domestic new housing starts, postal rate increases, postal purchasing practices and the weather, as these units are installed outdoors. The Company believes its CBU product line, including the acquired line of aluminum CBUs made by the Company's new subsidiary, SMC, continues to represent the best value when all factors including price, quality of design and construction, long-term durability and service are considered. Net Sales --------- Consolidated sales in 2003 totaled $39,256,000, a 3% decrease from sales of $40,671,000 in 2002. Plastic locker sales to the United States Postal Service (USPS) totaled $21,967,000 in 2003 compared to $23,580,000 in 2002. Sales of plastic Cluster Box Units (CBUs) to the USPS decreased 6% to $21,223,000 in 2003 from $22,649,000 in 2002. Sales of plastic Outdoor Parcel Lockers (OPLs) were $744,000 in 2003 compared to $931,000 in 2002. The decrease in CBU sales in 2003 compared to 2002 was the result primarily of decreased purchases from the USPS. Price reductions that became effective in April 2003 resulted in a reduction of revenue of approximately $90,000 in 2003 versus 2002. The Company also believes that the decline in its sales of CBUs is the result of changes in purchasing practices by the USPS from district level purchasing to purchasing at the local post office level. Sales from the Company's other locker products, primarily the sale of metal, coin and key-only and electronically controlled lockers, and aluminum CBUs were $17,135,000 in 2003 compared to $16,512,000 in 2002, an increase of $623,000. This increase consists of an increase of $1,140,000 in SMC's sales, offset by a decrease of $517,000 relating to other locker products. The increase in SMC sales is due primarily to increases in aluminum mailbox sales. Revenues from the luggage cart business for airport terminals were $154,000 in 2003 versus $578,000 in 2002. The decline in the luggage cart business revenues is primarily due to the expiration of the service contract with the Toronto International Airport in November 2002 and - 14 - continued decline in revenue at the Detroit International Airport. Effective in January 2004, the Company has terminated the luggage cart services in Detroit. As such the Company does not presently provide any luggage cart rental services. Cost of Sales ------------- Consolidated cost of sales as a percentage of sales was 69.7% in 2003 compared to 68.9% in 2002. The slight increase in 2003 is the result of lower sales volume in general, price reductions to the USPS for CBUs, as well as the elimination of the Toronto airport operations, where margins were higher than certain other Company operations. Selling, Administrative and General Expenses -------------------------------------------- Selling, administrative and general expenses were $8,086,000 during 2003, an increase of 9% from $7,400,000 in 2002. This increase of $686,000 is partially due to a one-time reduction of $319,000 in 2002 as the result of the reversal in 2002 of a liability, which existed under the Supplemental Executive Retirement Plan due to the death in the first quarter of 2002 of the only current beneficiary under the Plan. The increase was also impacted by an increase in pension costs of $155,000 in 2003 versus 2002, a 2003 charge of $65,000 for a severance agreement relating to a terminated management employee at SMC, as well as increased engineering costs in 2003 relating to product development. Higher health and liability insurance premiums also contributed to the increase. Interest Income and Expense --------------------------- Interest income decreased by $58,000 in 2003 compared to 2002 as a result of lower interest rates earned on cash deposits during 2003 versus 2002. Interest expense decreased in 2003 as a result of lower outstanding debt as the Company continues to make scheduled payments on its outstanding debt. No new debt was incurred in 2003. Other Income - net ------------------ Other income - net consists primarily of cash discounts earned, which were $121,000 in 2003 and $132,000 in 2002 and service maintenance revenue, which were $53,000 in 2003 and $143,000 in 2002. The service maintenance revenue results from the Company providing maintenance to customers of previously sold products. Other income - net in 2003 also includes a gain on the disposal of assets of $28,000. Income Taxes ------------ Income taxes decreased in 2003 versus 2002 as a result of the decrease in income before income taxes. The effective tax rate was 39% in 2003 and 2002. - 15 - Results of Operations - 2002 Compared to 2001 Net Sales --------- Consolidated sales in 2002 totaled $40,671,000, a 3% increase from sales of $39,627,000 in 2001. Plastic locker sales to the United States Postal Service (USPS) totaled $23,580,000 in 2002 compared to $25,166,000 in 2001. Plastic Cluster Box Units (CBUs) to the United States Postal Service (USPS) decreased 5% to $22,649,000 in 2002 from $23,864,000 in 2001. Sales of plastic Outdoor Parcel Lockers (OPLs) were $931,000 in 2002 compared to $1,302,000 in 2001. The decrease in sales of plastic CBUs is the result of overall declines in volume, changes in product mix as a lower priced plastic CBU was introduced in mid 2001, and to a lesser extent price reductions of 3% to 5% that became effective in April 2001 on existing plastic CBU models. The decrease in sales of OPLs is primarily the result of lower volume. The declines in CBU and OPL volume are due to decreased purchases made by the USPS as a result of USPS budget constraints. Revenues from the Company's other locker products, primarily the sale of metal, coin and key-only and electronically controlled lockers, were $16,512,000 in 2002 compared to $13,382,000 in 2001, an increase of $3,130,000. This increase of $3,130,000 consists of increased sales from the Company's subsidiary, Security Manufacturing Corporation (SMC), which was acquired July 6, 2001, offset by a decrease from other products and services. SMC sales were $7,708,000 in 2002, compared to $3,137,000 in 2001, beginning from the date of acquisition, July 6, 2001. Decreases in sales in 2002 for other locker products and services relate to declines in locker sales to amusement parks and others as a result of current economic conditions. Revenues from the luggage cart business for airport terminals were $578,000 in 2002, a decrease of $502,000 compared to 2001 revenues of $1,080,000. This decrease is primarily due to decreased air passenger volume during 2002 compared to 2001. Also in November 2002, the Company's agreement to provide luggage cart services at the Toronto International Airport expired. Revenue from luggage cart and other services at this airport were approximately $332,000 in 2002 and $556,000 in 2001. Cost of Sales ------------- Consolidated cost of sales as a percentage of sales was 68.9% in 2002 compared to 70.8% in 2001. The improvement in 2002 is due to higher margins obtained from SMC and stable margins for other products. Selling, Administrative and General Expenses -------------------------------------------- Selling, administrative and general expenses were $7,400,000 during 2002, an increase of $711,000 or 11% over the 2001 amount of $6,689,000. This increase is primarily from SMC, since its 2002 amounts include a full year whereas 2001 amounts only include the period from the July 6, 2001 acquisition date to December 31, 2001. The increase at SMC was approximately $954,000, whereas there was a one time reduction of $319,000 as the result of the reversal of a liability which existed under the Supplemental Executive Retirement Plan due to the death in March of 2002, of the only current beneficiary under the Plan. This one time reduction, which was recorded in the first quarter of 2002, increased basic and diluted earnings per share by $.09 for 2002. Remaining selling, administrative and general expenses increased modestly during - 16 - 2002 compared to 2001. Selling, administrative and general expenses were 18% and 17% of sales in 2002 and 2001, respectively. Interest Income and Expense --------------------------- Interest income decreased by $68,000 in 2002 compared to 2001 as a result of lower cash deposits, primarily due to the repurchase of the Company's common stock during 2002. Interest expense increased in 2002 compared to 2001 due to the outstanding debt in connection with the acquisition of SMC being outstanding for all of 2002, whereas in 2001 the debt was outstanding only subsequent to the July 6, 2001 acquisition date. Other Income - net ------------------ Other income - net consists primarily of cash discounts earned, which were $132,000 in 2002 and $155,000 in 2001 and service maintenance revenue, which were $143,000 in 2002 and $85,000 in 2001. The service maintenance revenue results from the Company providing maintenance to customers of previously sold products. Income Taxes ------------ Income taxes increased by $70,000 in 2002 versus 2001, this was the result of additional income before income taxes as well as an increase in permanent tax differences, which results in an increase in the effective tax rate from 38% in 2001 to 39% in 2002. Liquidity and Sources of Capital The Company's liquidity is reflected in the ratio of current assets to current liabilities or current ratio and its working capital. The current ratio was 3.1 to 1 and 2.8 to 1 at December 31, 2003 and 2002, respectively. Working capital, or the excess of current assets over current liabilities was $9,853,000 and $8,370,000 at December 31, 2003 and 2002, respectively. The increase in working capital resulted primarily from the retention of cash generated from operations. The Company's policy is to maintain modern equipment and adequate capacity. During 2003, 2002, and 2001 the Company expended $543,000, $316,000, and $801,000, respectively, for capital additions. Capital expenditures in all three years were financed principally from operations. The Company expects capital expenditures during 2004 to fall within the range of expenditures made in the last three years. It is expected that capital expenditures will be funded from cash on hand or cash generated from operations in 2004. During 2001, the Company acquired B.L.L. Corporation, d/b/a Security Manufacturing Corporation (SMC) and related real estate for approximately $12,100,000, excluding cash received. This acquisition was funded with term loan borrowings of approximately $11,000,000, a $960,000 note payable to the former owners and $140,000 of cash. These borrowings require principal payments of approximately $1,630,000 during 2004. During 2002, the Company expended $5,679,000 for the repurchase of its common stock. This was funded through cash generated from operations and cash on hand in 2002. The Company - 17 - does not have any current agreement or requirements to repurchase its common stock, though it maintains the ability, subject to approval by the Company's lender, to repurchase its common stock if market or other conditions warrant such action. The Company expects that cash generated from operations in 2004 will be adequate to fund the needs for working capital, capital expenditures and debt payments. However, if necessary, the Company has a $3,000,000 revolving bank line-of-credit available to assist in satisfying future operating cash needs, $0 of which was outstanding at December 31, 2003. Currently the Company does not have any long-term capital commitments or obligations. Contractual Obligations ----------------------- The Company has contractual obligations at December 31, 2003, relating to long-term debt and operating lease arrangements. The Company does not have any significant purchase obligations or commitments at December 31, 2003. The Company does not guarantee the debt of any third parties. All of the Company's subsidiaries are 100% owned by the Company and are included in its consolidated financial statements. Total payments to be made under long-term debt and operating leases are listed below: Long-Term Debt Operating Leases Total -------------- ---------------- ----- 2004 $1,641,000 $ 260,000 $ 1,901,000 2005 1,331,000 157,000 1,488,000 2006 3,508,000 146,000 3,654,000 2007 1,200,000 134,000 1,334,000 2008 625,000 - 625,000 The above amounts for long-term debt do not include interest. The increase in 2006 long-term debt repayment is the result of a balloon payment due on the Company's mortgage payable. The Company expects to refinance the mortgage payable prior to its scheduled maturity in 2006. The Company also has obligations under its defined benefit pension plan. This is a funded plan, under which the Company is required to make contributions to meet ERISA funding requirements. The Company contributions to the plan have ranged from approximately $200,000 to $340,000 over the last four years. The required funding is based on actuarial calculations that take into account various actual results and certain assumptions. It is expected that the funding requirement in 2004 will approximate $300,000. The Company does not have any off balance sheet arrangements with unconsolidated entities or other persons. Other Agreements ---------------- During 2002, the Company entered into agreements to become 5% members of two limited liability corporations (LLCs). Third parties formed the LLCs in order to provide luggage cart services at two U.S. airports. The Company has sold, or expects to sell luggage cart products to the LLCs. The governing documents of the LLCs provide that the Company does not share in the distribution of cash flow or profits and losses of the LLCs through 2007, nor is the Company required to make any capital contribution to the LLCs. Ownership by the Company of a minority - 18 - interest in the LLCs had no impact on the Company's 2003 or 2002 operating results or financial position, and are not expected to have any material impact in the future. Impact of Inflation and Changing Prices Although inflation has been low in recent years, it is still a factor in the economy and the Company continues to seek ways to mitigate its impact. To the extent permitted by competition, the Company passes increased costs on to its customers by increasing sales prices over time. Specifically, the Company does have the ability to modify its contract with the USPS regarding sales prices in the event of a significant price increase for materials subject however to competitive situations. In respect to its other products, which use steel, aluminum and plastic, the Company expects that any raw material price changes would be reflected in adjusted sales prices. The Company intends to seek additional ways to control the administrative overhead necessary to successfully run the business. By controlling these costs, the Company can continue to competitively price its products with other top quality locker manufacturers and distributors. The Company has used the LIFO method of accounting for its inventories since 1974. This method matches current costs with current revenues and during an inflationary period, reduces reported income but improves cash flow due to a reduction of taxes based on income. Reliance on Signore, Inc. Certain of the Company's non-plastic lockers are manufactured or fabricated by Signore, Inc., with locks supplied by the Company. The Company has a manufacturing agreement with Signore, Inc. as described in Item 1. Description of Business. A significant portion of the Company's non-plastic locker revenues is reliant on Signore fulfilling its obligation under the manufacturing agreement. In the event that Signore, Inc. was unable to fulfill its obligation the Company would be required to find alternative sources of manufacturing, fabricating and assembly for certain of its products. Such a situation could have a material adverse impact on the Company's revenues and operations. - 19 - Market Risks Raw Materials ------------- The Company does not have any long-term commitments for the purchase of raw materials. As explained previously under "Impact of Inflation and Changing Prices," the Company does have the ability to modify its contract with the USPS regarding sales prices in the event of a significant price increase for materials subject however to competitive situations. In respect to its other products, which use steel, aluminum and plastic, the Company expects that any raw material price changes would be reflected in adjusted sales prices. The Company believes that the risk of supply interruptions due to such matters as strikes at the source of supply or to logistics systems is limited. Foreign Currency ---------------- The Company's Canadian operation subjects the Company to foreign currency risk, though it is not considered a significant risk since the Canadian operation's net assets represent less than 10% of the Company's aggregate net assets at December 31, 2003. Presently, management does not hedge its foreign currency risk as it plans to indefinitely reinvest the Canadian net assets in the Canadian operation. Interest Rate Risks ------------------- The Company has fixed interest rates on $4,255,000 of its long-term debt at December 31, 2003 and variable interest rates based on three month LIBOR on $4,050,000 of its long-term debt at December 31, 2003. Based upon the Company's outstanding long-term debt subject to variable interest rates at December 31, 2003, a 1% increase in the LIBOR rate would result in an annual increase to interest expense of approximately $40,000. Effect of New Accounting Pronouncement There are no recently issued accounting standards that the Company believes will have a material impact on its financial position or results of operations. Safe Harbor Statement under the Private Securities Litigation Reform Act Of 1995 Forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations, and intentions are subject to change at any time at the discretion of the Company, (ii) the Company's plans and results of operations will be affected by the Company's ability to manage its growth and inventory, (iii) the risk that the Company's contract with the USPS will not be renewed or that orders placed by the USPS under such contract will be substantially reduced, and (iv) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. - 20 - Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required is reported under "Impact of Inflation and Changing Prices" and "Market Risks" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - 21 - Item 8. Financial Statements and Supplementary Data Report of Independent Auditors Board of Directors and Stockholders American Locker Group Incorporated and Subsidiaries We have audited the accompanying consolidated balance sheets of American Locker Group Incorporated and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits provide 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 American Locker Group Incorporated and Subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Buffalo, New York February 24, 2004 - 22 -
American Locker Group Incorporated and Subsidiaries Consolidated Balance Sheets December 31 2003 2002 ----------------------------------------- Assets Current assets: Cash and cash equivalents $ 3,597,990 $ 2,002,225 Accounts and notes receivable, less allowance for doubtful accounts of $371,000 in 2003 and $333,000 in 2002 4,682,946 4,166,972 Inventories 5,458,865 6,020,966 Prepaid expenses 118,819 104,115 Prepaid income taxes - 234,008 Deferred income taxes 729,546 579,137 ------------------------------------ Total current assets 14,588,166 13,107,423 Property, plant and equipment: Land 500,500 500,500 Buildings 3,456,766 3,444,688 Machinery and equipment 12,137,813 11,611,883 ------------------------------------ 16,095,079 15,557,071 Less allowance for depreciation (11,092,999) (10,296,881) ------------------------------------ 5,002,080 5,260,190 Deferred income taxes 53,756 18,152 Goodwill 6,155,204 6,155,204 Other assets 74,274 192,447 Notes receivable, long-term portion - 301,200 ------------------------------------ Total assets $ 25,873,480 $ 25,034,616 ====================================
- 23 -
December 31 2003 2002 --------------------------------- Liabilities and stockholders' equity Current liabilities: Line of credit $ - $ 25,000 Accounts payable 1,713,010 1,740,763 Commissions, salaries, wages and taxes thereon 573,762 602,792 Other accrued expenses and current liabilities 658,405 739,309 Income taxes payable 148,218 - Current portion of long-term debt 1,641,316 1,630,000 ----------------------------------- Total current liabilities 4,734,711 44,737,864 Long-term liabilities: Long-term debt 6,664,171 8,303,813 Pension and other benefits 312,458 118,230 ----------------------------------- 6,976,629 8,422,043 Stockholders' equity: Common stock, $1 par value: Authorized shares - 4,000,000 Issued shares -1,726,146 in 2003, 1,709,146 in 2002 Outstanding shares - 1,534,146 in 2003, 1,517,146 in 2002 1,726,146 1,709,146 Other capital 97,812 - Retained earnings 14,818,080 12,670,948 Treasury stock at cost (192,000 shares in 2003 and 2002) (2,112,000) (2,112,000) Accumulated other comprehensive loss (367,898) (393,385) ----------------------------------- Total stockholders' equity 14,162,140 11,874,709 ----------------------------------- Total liabilities and stockholders' equity $ 25,873,480 $ 25,034,616 =================================== See accompanying notes.
- 24 - American Locker Group Incorporated and Subsidiaries Consolidated Statements of Income
Year ended December 31 2003 2002 2001 -------------------------------------------------------------- Net sales $ 39,256,438 $ 40,670,721 $39,627,216 Cost of products sold 27,362,405 28,030,169 28,061,281 -------------------------------------------------------------- 11,894,033 12,640,552 11,565,935 Selling, administrative and general expenses 8,086,610 7,399,754 6,688,676 -------------------------------------------------------------- 3,807,423 5,240,798 4,877,259 Interest income 36,908 94,826 163,497 Other income - net 230,690 306,827 340,963 Interest expense (529,642) (670,144) (441,773) -------------------------------------------------------------- Income before income taxes 3,545,379 4,972,307 4,939,946 Income taxes 1,398,247 1,949,479 1,879,585 -------------------------------------------------------------- Net income $ 2,147,132 $ 3,022,828 $ 3,060,361 ============================================================== Earnings per share of common stock: Basic $1.41 $1.57 $1.49 ============================================================== Diluted $1.38 $1.54 $1.47 ============================================================== Dividends per share of common stock: $0.00 $0.00 $0.00 ============================================================== See accompanying notes.
- 25 - American Locker Group Incorporated and Subsidiaries Consolidated Statements of Stockholders' Equity
Accumulated Other Compre- Total Common Other Retained Treasury hensive Stockholders' Stock Capital Earnings Stock Income (Loss) Equity ----------------------------------------------------------------------------------------- Balance at January 1, 2001 $ 2,511,550 $ 565,331 $ 12,550,001 $ (3,717,603) $ (185,454) $ 11,723,825 Comprehensive income: Net income - - 3,060,361 - - 3,060,361 Other comprehensive income Foreign currency transaction - - - - (55,733) (55,733) ---------------- Total comprehensive income 3,004,628 Common stock purchased for treasury (12,470 shares) - - - (98,930) - (98,930) Common stock purchased and retired (7,024 shares) (7,024) (68,623) - - - (75,647) ----------------------------------------------------------------------------------------- Balance at December 31, 2001 2,504,526 496,708 15,610,362 (3,816,533) (241,187) 14,553,876 Comprehensive income: Net income - - 3,022,828 - - 3,022,828 Other comprehensive income: Foreign currency translation - - - - 7,081 7,081 Minimum pension liability adjustment, net of tax benefit of $106,186 - - - - (159,279) (159,279) ---------------- Total comprehensive income 2,870,630 Common stock issued (18,000 shares) 18,000 43,688 - - - 61,688 Tax benefit of exercised stock options - 67,300 - - - 67,300 Common stock purchased for treasury (163,000 shares) - - - (1,793,000) - (1,793,000) Common stock purchased and retired (380,900 shares) (380,900) (607,696) (2,897,189) - - (3,885,785) Retirement of treasury stock (432,480 shares) (432,480) - (3,065,053) 3,497,533 - - ----------------------------------------------------------------------------------------- Balance at December 31, 2002 1,709,146 - 12,670,948 (2,112,000) (393,385) 11,874,709 Comprehensive income: Net income - - 2,147,132 - - 2,147,132 Other comprehensive income: Foreign currency translation - - - - 182,290 182,290 Minimum pension liability adjustment, net of tax benefit of $104,536 - - - - (156,803) (156,803) ---------------- Total comprehensive income 2,172,619 Common stock issued (17,000 shares) 17,000 30,812 - - - 47,812 Tax benefit of exercised stock options - 67,000 - - - 67,000 ----------------------------------------------------------------------------------------- Balance at December 31, 2003 $1,726,146 $ 97,812 $14,818,080 $(2,112,000) $(367,898) $14,162,140 ========================================================================================= See accompanying notes.
- 26 - American Locker Group Incorporated and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31 2003 2002 2001 ----------------------------------------------------- Operating activities Net income $ 2,147,132 $ 3,022,828 $ 3,060,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 893,236 974,165 956,430 Provision for uncollectible accounts 94,000 111,000 248,895 Gain on disposal of assets (28,523) - - Deferred income taxes (credits) (81,476) 153,021 (93,678) Changes in assets and liabilities: Accounts and notes receivable (267,144) 465,338 32,567 Inventories 595,975 792,736 (601,363) Prepaid expenses (13,144) 21,771 (52,698) Accounts payable and accrued expenses (172,265) 429,795 (423,235) Income taxes 328,411 (560,984) (236,924) Pension and other benefits 32,863 (469,336) (60,295) ----------------------------------------------------- Net cash provided by operating activities 3,529,065 4,940,334 2,830,060 Investing activities Purchase of property, plant and equipment (543,146) (316,180) (801,009) Purchase of business and related real estate, net of cash acquired - - (12,084,711) Payment for other assets - - (100,000) Proceeds from sale of property, plant and equipment 28,523 31,915 - ----------------------------------------------------- Net cash used in investing activities (514,623) (284,265) (12,985,720) Financing activities Long-term debt payments (1,628,326) (1,644,874) (681,315) (Repayments ) borrowings on line of credit (25,000) 25,000 - Long-term debt borrowings - - 11,926,682 Common stock issued 47,812 61,688 - Common stock purchased for treasury - (1,793,000) (98,930) Common stock purchased and retired - (3,885,785) (75,647) ----------------------------------------------------- Net cash (used in) provided by financing activities (1,605,514) (7,236,971) 11,070,790 Effect of exchange rate changes on cash 186,837 4,093 (32,455) ----------------------------------------------------- Net (decrease) increase in cash 1,595,765 (2,576,809) 882,675 Cash and cash equivalents at beginning of year 2,002,225 4,579,034 3,696,359 ----------------------------------------------------- Cash and cash equivalents at end of year $ 3,597,990 $ 2,002,225 $ 4,579,034 ===================================================== Supplemental cash flow information: Cash paid during the year for: Interest $ 546,273 $ 731,198 $ 325,351 ===================================================== Income taxes $ 1,030,497 $ 2,347,283 $ 2,215,000 ===================================================== See accompanying notes.
- 27 - Notes to Consolidated Financial Statements American Locker Group Incorporated and Subsidiaries December 31, 2003 1. Basis of Presentation Consolidation and Business Description The consolidated financial statements include the accounts of American Locker Group Incorporated and its subsidiaries (the Company), all of which are wholly owned. Intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements include the accounts and results of Security Manufacturing Corporation since its acquisition by the Company on July 6, 2001. The Company is primarily engaged in one business, sale of lockers. This includes coin, key-only and electronically controlled checking lockers and locks and sale of plastic and aluminum centralized mail and parcel distribution lockers. The Company sells to customers throughout North America as well as internationally. 2. Summary of Significant Accounting Policies Cash and Cash Equivalents Cash includes currency on hand and demand deposits with financial institutions. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Accounts and Notes Receivable The Company grants credit to its customers and generally does not require collateral. Accounts receivable are reported at net realizable value and do not accrue interest. The Company has secured, interest-bearing notes receivable from certain customers under time payment arrangements of approximately $344,000 and $521,000, net of reserves, at December 31, 2003 and 2002, respectively. The amounts not scheduled to be repaid within one year have been recorded as long-term on the accompanying balance sheet. Management uses judgmental factors such as customer's payment history and the general economic climate, as well as considering the age of and past due status of invoices in assessing collectibility and establishing allowances for doubtful accounts. Accounts receivable are written off after all collection efforts have been exhausted. Inventories Inventories are valued principally at the lower of cost or market, cost determined by the last-in, first-out method (LIFO) for approximately 79% of the Company's inventories at December 31, 2003 (76% at December 31, 2002). For the remaining inventories, cost is determined by the first-in, first out method (FIFO). - 28 - 2. Summary of Significant Accounting Policies (continued) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed by the straight-line and declining-balance methods for financial reporting purposes and by accelerated methods for income tax purposes. Estimated useful lives for financial reporting purposes are 30 years for buildings and 3 to 12 years for machinery and equipment. Expenditures for repairs and maintenance are expensed as incurred. Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss using discounted cash flows. Acquisition On July 6, 2001, the Company purchased 100% of the outstanding capital stock of B.L.L. Corporation, d/b/a Security Manufacturing Corporation (SMC), a privately held Texas corporation, for $9,100,000. SMC is engaged in the manufacture and sale of postal unit lockers. The Company also purchased related real estate from the owners of SMC for cash consideration of $3,500,000. The purchase price of the stock and the related real estate was funded with cash on hand, a three-year note payable to the sellers of $960,000 and the proceeds of additional term loan borrowings of approximately $11,000,000. Goodwill of approximately $6,155,000 has been recorded in connection with the acquisition. The operating results of SMC have been included in the accompanying consolidated statements of income from the July 6, 2001 acquisition date. Goodwill and Other Intangible Assets The Company has adopted the provision of Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (SFAS 142), which prohibits the amortization of goodwill associated with acquisitions made after June 30, 2001. SFAS 142 also requires an impairment test for goodwill be performed annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment test consists of comparing the fair value of a reporting unit with its carrying amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss is recognized for the carrying amount of goodwill in excess of its implied fair value. The Company performed the required annual goodwill tests during 2002 and 2003; no impairment of goodwill was calculated. The Company has one reporting unit for purposes of the goodwill impairment test. The fair value of the Company was estimated based on earnings multiples and market analysis. Since the Company did not have any goodwill recorded prior to the SMC acquisition, on July 6, 2001, the provision of SFAS 142 requiring companies to stop amortizing goodwill had no impact on the ongoing operating results of the Company or the comparability of such results with prior periods. - 29 - 2. Summary of Significant Accounting Policies (continued) Other intangible assets consist of a covenant not-to-compete in connection with the SMC acquisition and an intangible pension asset. The asset related to the covenant not-to-compete is being amortized over the three-year term of the agreement. The covenant not-to-compete is recorded at $58,333 at December 31, 2003 which consists of its original value of $350,000 less accumulated amortization of $291,667. Amortization expense was $116,667 during 2003 and 2002 and will be $58,333 in 2004. Revenue Recognition Revenue is recognized at the point of passage of title, which is at the time of shipment to the customer. The Company does derive revenue from sales to distributors, however no distributor has the right to return product to the Company. Shipping and Handling Costs Shipping and handling costs are expensed as incurred and are included in selling, administrative and general expenses in the accompanying consolidated statements of income. These costs were approximately $538,000, $370,000, and $276,000 during 2003, 2002, and 2001, respectively. Advertising Expense The cost of advertising is expensed as incurred. The Company incurred $239,000, $333,000, and $215,000 in advertising costs during 2003, 2002, and 2001, respectively. Income Taxes The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Research and Development The Company engages in research and development activities relating to new and improved products. It expended $431,000, $174,000, and $91,000 in 2003, 2002 and 2001, respectively, for such activity in its continuing businesses. Earnings Per Share The Company reports earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). Under SFAS 128 basic earnings per share excludes any dilutive effects of stock options, whereas diluted earnings per share assumes exercise of stock options, when dilutive, resulting in an increase in outstanding shares. - 30 - 2. Summary of Significant Accounting Policies (continued) Foreign Currency The assets and liabilities of the Company's Canadian subsidiary are translated to U.S. dollars at current exchange rates. Income statement amounts are translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. The effect on the statements of income of transaction gains and losses is insignificant for all years presented. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amount of notes receivable approximates fair value since these are interest bearing notes. The fair value of the Company's long-term debt has been estimated using cash flow methods and applying current interest rates for similar term instruments in place of the actual fixed interest rates. Based on these calculations the fair value of long-term debt is approximately $8,480,000 and the carrying value is $8,305,487 at December 31, 2003. Stock-Based Compensation In accordance with the provisions of SFAS No. 123 the Company has elected to continue applying the provisions of Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, the Company does not recognize compensation expense for stock options when the stock option price at the grant date is equal to or greater than the fair market value of the stock at that date. No stock options were granted in 2003, 2002, or 2001. All options granted in 2000 or in prior years were fully vested as of December 31, 2000, as such there was no pro forma impact in 2003, 2002, or 2001 for stock options. Comprehensive Income Comprehensive income consists of net income, foreign currency translation and minimum pension liability adjustments and is reported in the consolidated statements of stockholders' equity. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. - 31 - 2. Summary of Significant Accounting Policies (continued) New Accounting Pronouncements There are no recently issued accounting pronouncements not yet adopted that are expected to have a material impact on the Company's financial position or results of operations. 3. Inventories Inventories consist of the following:
December 31 2003 2002 -------------------------------- Finished products $ 1,760,657 $ 1,572,946 Work-in-process 1,689,774 1,901,263 Raw materials 2,271,930 2,965,023 ---------------------------------- 5,722,361 6,439,232 Less allowance to reduce to LIFO basis (263,496) (418,266) ---------------------------------- Net inventories $ 5,458,865 $ 6,020,966 ==================================
4. Debt Long-term debt consists of the following:
December 31 2003 2002 ---------------------------------- Bank note payable through July 6, 2008 at $225,000 quarterly plus interest at the 3-month LIBOR rate plus 2% (3.15% at December 31, 2003) $ 4,050,000 $ 4,950,000 Bank note payable through July 6, 2008 at $25,000 monthly plus interest at 8.07% 1,375,000 1,675,000 Mortgage payable to bank through July 2006 at $26,823 monthly including interest at 8.04% with payment for remaining balance due August 1, 2006 2,560,487 2,668,813 Note payable in annual installments of $320,000 through July 6, 2004 plus interest at 6.50% 320,000 640,000 ----------------------------------- Total long-term debt 8,305,487 9,933,813 Less current portion 1,641,316 1,630,000 ----------------------------------- Long-term portion $ 6,664,171 $ 8,303,813 ===================================
The bank notes are secured by all equipment, accounts receivable, inventories and general intangibles. The credit agreement underlying the bank notes payable requires compliance with certain covenants and has restrictions on the payment of dividends. The Company was in compliance with the terms of the agreement in connection with the notes payable at December 31, 2003. - 32 - 4. Debt (continued) Based upon the outstanding balances at December 31, 2003, the required principal payments on long-term obligations for the next five years are as follows: 2004 $ 1,641,316 2005 1,331,438 2006 3,507,733 2007 1,200,000 2008 625,000 ------------------- $ 8,305,487 =================== The Company has a $3,000,000 unsecured line of credit agreement with a bank with interest at the prime rate (4.0% at December 31, 2003). There was $0 outstanding under the line of credit at December 31, 2003. 5. Operating Leases The Company leases several operating facilities and vehicles under noncancelable operating leases. Future minimum lease payments consist of the following at December 31, 2003: 2004 $ 259,741 2005 156,835 2006 146,100 2007 133,925 Rent expense amounted to approximately $340,000, $368,000, and $340,000 in 2003, 2002, and 2001, respectively. 6. Income Taxes For financial reporting purposes, income before income taxes includes the following:
2003 2002 2001 ------------------------------------------------------ United States $ 3,592,061 $ 4,925,308 $ 4,845,146 Foreign income (loss) (48,682) 46,999 94,800 ------------------------------------------------------ $ 3,543,379 $ 4,972,307 $ 4,939,946 ======================================================
- 33 - 6. Income Taxes (continued) Significant components of the provision for income taxes are as follows:
2003 2002 2001 ----------------------------------------------------- Current: Federal $ 1,273,089 $ 1,517,532 $ 1,624,225 State 221,690 255,669 304,028 Foreign (15,056) 23,257 45,010 ----------------------------------------------------- Total current 1,479,723 1,796,458 1,973,263 Deferred: Federal (69,256) 130,068 (79,626) State (12,220) 22,953 (14,052) ----------------------------------------------------- (81,476) 153,021 (93,678) ----------------------------------------------------- $ 1,398,247 $ 1,949,479 $ 1,879,585 =====================================================
The differences between the federal statutory rate and the effective tax rate as a percentage of income before taxes are as follows: 2003 2002 2001 -------------------------------------- Statutory income tax rate 34% 34% 34% State and foreign income taxes, net of federal benefit 4 4 4 Other permanent differences 1 1 - -------------------------------------- 39% 39% 38% ====================================== - 34 - 6. Income Taxes (continued) Differences between accounting rules and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities. Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows:
2003 2002 ---------------------------- Deferred tax liabilities: Property, plant and equipment $ 16,869 $ 41,807 Prepaid expenses and other 111,737 127,435 ---------------------------- Total deferred tax liabilities 128,606 169,242 Deferred tax assets: Postretirement benefits 47,292 47,292 Pension costs 156,132 63,158 Allowance for doubtful accounts 148,569 111,038 Other assets 23,333 12,667 Accrued expenses 90,821 119,810 Other employee benefits 54,343 37,148 Inventory costs 391,418 375,418 ---------------------------- Total deferred tax assets 911,908 766,531 ---------------------------- Net deferred tax assets $ 783,302 $ 597,289 ============================ Current deferred tax asset $ 729,546 $ 579,137 Long-term deferred tax asset 53,756 18,152 ---------------------------- $ 783,302 $ 597,289 ============================
The Company does not provide deferred taxes for taxes that could result from the remittance of undistributed earnings of the Company's foreign subsidiary since it is generally the Company's intention to reinvest these earnings indefinitely. Undistributed earnings that could be subject to additional income taxes if remitted were approximately $1,000,000 at December 31, 2003. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however unrecognized foreign tax credits would be available to reduce some portion of the U.S. tax liability. 7. Pension and Other Postretirement Benefits The Company and its subsidiaries have a defined benefit pension plan covering substantially all employees. Benefits for the salaried employees are based on specified percentages of the employees annual compensation. The benefits for hourly employees are based on stated amounts for each year of service. - 35 - 7. Pension and Other Postretirement Benefits (continued) The plan's assets were invested in fixed interest rate group annuity contracts with an insurance company during 2001 and 2002, but were transferred into a balanced index fund (the Fund) during 2003. The principal investment objective of the Fund is to provide an incremental risk adjusted return compared to a portfolio invested 50% in stocks and 50% in bonds over a full market cycle. Under normal market conditions, the average asset allocation for the Fund is expected to be approximately 50% in stocks and 50% in bonds. This benchmark allocation may be adjusted by up to 20% based on economic or market conditions and liquidity needs. Therefore, the stock allocation may fluctuate from 30% to 70% of the total portfolio, with a corresponding bond allocation of from 70% to 30%. Fund reallocation may take place at any time. The following table sets forth the changes in benefit obligation, changes in plan assets, the funded status, the accrued benefit cost recognized in the consolidated balance sheets at December 31, 2003 and 2002, and the net periodic cost and assumptions. The measurement date for all presented assets and liabilities is December 31. Contributions to be made to the plan in 2004 are expected to approximate $300,000.
Pension Benefits 2003 2002 ---------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 3,119,222 $ 2,482,076 Service cost 247,315 220,751 Interest cost 206,350 183,742 Actuarial loss 406,001 294,643 Plan amendments - 17,530 Benefits and expenses paid (77,957) (79,520) ---------------------------------- Benefit obligation at end of year 3,900,931 3,119,222 Change in plan assets Fair value of plan assets as beginning of year 2,476,487 2,113,406 Actual return on plan assets 196,019 102,955 Employer contribution 335,428 339,646 Benefits and expenses paid (77,957) (79,520) ---------------------------------- Fair value of plan assets at end of year 2,929,977 2,476,487 ---------------------------------- Funded status (970,954) (642,735) Unrecognized net actuarial loss 1,091,487 733,012 Unrecognized prior service cost 15,941 17,447 ---------------------------------- Net amount recognized - prepaid benefit cost $ 136,474 $ 107,724 ==================================
- 36 - 7. Pension and Other Postretirement Benefits (continued) Amounts are recognized in the consolidated balance sheet as follows: December 31 2003 2002 -------------------------- Intangible asset $ 15,941 $ 17,447 Other accrued expenses - current (275,162) (175,188) Other long-term liabilities (131,109) - Accumulated other comprehensive income (loss) 526,804 265,465 -------------------------- $ 136,474 $ 107,724 ==========================
Pension Benefits 2003 2002 2001 ------------------------------------------- Components of net periodic benefit cost Service cost $ 247,315 $ 220,751 $ 182,135 Interest cost 206,350 183,742 172,969 Expected return on plan assets (181,164) (159,462) (149,779) Amortization of unrecognized net transition asset - (104,892) (106,041) Net actuarial loss 32,671 10,516 1,869 Amortization of prior service cost 1,506 1,506 425 ------------------------------------------ Net periodic benefit cost $ 306,678 $ 152,161 $ 101,578 ==========================================
Pension Benefits 2003 2002 ----------------------- Weighted average assumptions as of December 31 Discount rate 6.0% 6.75% Expected return on plan assets 7.0% 7.0% Rate of compensation increase 5.5% 5.5% The expected return on plan assets is based upon anticipated returns generated by the investment vehicle. Any shortfall in the actual return has the effect of increasing the benefit obligation. The benefit obligation represents the actuarial present value of benefits attributed to employee service rendered, assuming future compensation levels are used to measure the obligation. FASB Statement No. 87 Employers' Accounting for Pensions, requires the Company to recognize a minimum pension liability equal to the actuarial present value of the accumulated benefit obligation in excess of plan assets. The accumulated benefit obligation was $3,336,248 and $2,651,675 at December 31, 2003 and 2002, respectively. An intangible asset is required and has been recorded to the extent that the excess of the accumulated benefit obligation over the plan assets relates to prior service costs. - 37 - 7. Pension and Other Postretirement Benefits (continued) The Company also provides a life insurance benefit for retired former employees of the Company. Effective in 2000, the Company discontinued this benefit for active employees. The life insurance benefit is not a funded plan. The Company pays the benefit upon the death of the retiree. The Company has fully recorded its liability in connection with this plan. The liability was approximately $118,000 at December 31, 2003 and 2002, and is recorded as long-term pension and other benefits in the accompanying balance sheets. No expense was recorded in 2003, 2002, or 2001, related to the life insurance benefit. Effective January 1, 1998, the Company implemented a Supplemental Executive Retirement Plan. The Plan provides for retirement benefits for select executives and spouses. During 2002, as a result of the death of the only current beneficiary under the Plan, the Company removed the recorded liability of $319,000. This was recorded as a reduction to administrative expenses. There are no participants accruing or receiving benefits under the Plan at December 31, 2002. During 1999, the Company established a 401(k) plan for the benefit of its full-time employees. Under the plan, employees may contribute a portion of their salary up to IRS limits. The Company matches a portion of the employees' contribution. The Company recorded expense of approximately $21,000, $15,000, and $15,000 in connection with its contribution to the plan during 2003, 2002, and 2001, respectively. 8. Capital Stock The Certificate of Incorporation, as amended, authorizes 4,000,000 shares of common stock and 1,000,000 shares of preferred stock, 200,000 shares of which have been designated as Series A Junior Participating Preferred Stock. 9. Stock Options In 1999, the Company adopted the American Locker Group Incorporated Stock Incentive Plan, permitting the Company to provide incentive compensation of the types commonly known as incentive stock options, stock options and stock appreciation rights. The price of option shares or appreciation rights granted under the plan shall not be less than the fair market value of common stock on the date of grant, and the term of the stock option or appreciation right shall not exceed ten years from date of grant. Upon exercise of a stock appreciation right granted in connection with a stock option, the optionee shall surrender the option and receive payment from the Company of an amount equal to the difference between the option price and the fair market value of the shares applicable to the options surrendered on the date of surrender. Such payment may be in shares, cash or both at the discretion of the Company's Stock Option-Executive Compensation Committee. Prior to 1999, the Company issued stock options and stock appreciation rights under a 1988 plan. The 1988 plan expired in 1999, as such no further options can be granted under the 1988 plan. Options with respect to 12,000 shares remain outstanding under the 1988 plan. - 38 - 9. Stock Options (continued) At December 31, 2003 and 2002, there were no stock appreciation rights outstanding. The following table sets forth the activity related to the Company's stock options for the years ended December 31:
2003 2002 2001 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------------------------------------------------------------------------------- Outstanding - beginning of year 97,600 $ 5.72 120,600 $ 5.41 120,600 $ 5.41 Exercised (17,000) 2.81 (18,000) 3.43 - - Granted - - - - - - Expired or forfeited - - (5,000) 6.50 - - -------------- ------------- ------------- ------------ ------------- ------------- Outstanding - end of year 80,600 $ 6.34 97,600 $ 5.72 120,600 $ 5.41 ============== ============= ============= ============ ============= ============= Exercisable - end of year 80,600 97,600 120,600 ============== ============= =============
The exercise prices for options outstanding as of December 31, 2003 were as follows: $2.81 - 12,000 shares, $6.50 - 48,600 shares, $ 7.25 - 10,000 shares and $8.88 - 10,000 shares. The weighted-average remaining contractual life of those options is 5.6 years. At December 31, 2003, 73,000 options remain available for future issuance under the 1999 plan. 10. Shareholder Rights Plan In November 1999, the Company adopted a Shareholder Rights Agreement and declared a dividend distribution of one Right for each outstanding share of common stock. Under certain conditions, each right may be exercised to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $40 (Purchase Price), subject to adjustment. The Right will be exercisable only if a person or group (an Acquiring Person) has acquired beneficial ownership of 20% or more of the outstanding common stock, or following the commencement of a tender or exchange offer for 20% or more of such outstanding common stock. The Rights Plan includes certain exceptions from the definitions of Acquiring Person and beneficial ownership to take into account the existing ownership of common shares by members of one family. If any person becomes an Acquiring Person, each Right will entitle its holder to receive, upon exercise of the Right, such number of common shares determined by (A) multiplying the current purchase price by the number of one one-hundredths of a preferred share for which a right is now exercisable and dividing that product by (B) 50% of the current market price of the common shares. - 39 - 10. Shareholder Rights Plan (continued) In addition, if the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to receive, upon exercise, that number of the acquiring Company's common shares having a market value of twice the exercise price of the Right. The Company will be entitled to redeem the Rights at $.01 per Right at any time prior to the earlier of the expiration of the Rights in November 2009 or the time that a person becomes an Acquiring Person. The Rights do not have voting or dividend rights, and until they become exercisable, have no dilutive effect on the Company's earnings. 11. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:
2003 2002 2001 --------------------------------------------- Numerator: Net income $ 2,147,132 $ 3,022,828 $ 3,060,361 Denominator: Denominator for basic earnings per share - weighted average shares outstanding 1,523,429 1,921,612 2,053,838 Effect of dilutive securities: Employee stock options 30,899 35,949 29,646 ---------------------------------------------- Denominator for diluted earnings per share - weighted average shares out- standing and assumed conversions 1,554,328 1,957,561 2,083,484 ============================================== Basic earnings per share $ 1.41 $ 1.57 $ 1.49 ============================================== Diluted earnings per share $ 1.38 $ 1.54 $ 1.47 ==============================================
12. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows:
December 31 2003 2002 ------------------------------- Foreign currency translation adjustment $ (51,816) $ (234,106) Minimum pension liability adjustment, net of tax (316,082) (159,279) ------------------------------- $ (367,898) $ (393,385) ===============================
- 40 - 13. Geographic and Customer Concentration Data The Company is primarily engaged in one business, sale and rental of lockers. This includes coin, key-only and electronically controlled checking lockers and related locks and sale of plastic centralized mail and parcel distribution lockers. The Company sells to customers in the United States, Canada and other foreign locations. Net sales to external customers are as follows:
2003 2002 2001 ---------------- ----------------- ---------------- United States customers $ 37,557,289 $ 38,242,845 $ 36,742,001 Foreign customers 1,699,149 2,427,876 2,885,215 ---------------- ----------------- ---------------- $ 39,256,438 $ 40,670,721 $ 39,627,216 ================ ================= ================
Sales to the U.S. Postal Service represented 52.7%, 56.4%, and 63.1% of net sales in 2003, 2002, and 2001, respectively. At December 31, 2003 and 2002, the Company had unsecured trade receivables from governmental agencies of $1,648,000 and $1,867,000, respectively. At December 31, 2003 and 2002, the Company had secured notes receivable totaling $515,000 and $694,000, respectively and trade receivables from customers considered to be distributors of $1,642,000 and $1,125,000, respectively. Other concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the Company's customer base and their dispersion across many industries. - 41 - 14. Quarterly Results of Operations (Unaudited) The following is a tabulation of the unaudited quarterly results of operations for the years ended December 31, 2003 and 2002:
2003 ----------------------------------------------------------------------- Three Months Ended March 31 June 30 September 30 December 31 ----------------------------------------------------------------------- Net sales $ 8,831,748 $ 9,831,534 $ 9,514,300 $ 11,078,856 ======================================================================= Gross profit $ 2,742,336 $ 2,920,419 $ 2,854,473 $ 3,376,805 ======================================================================= Net income $ 429,060 $ 548,409 $ 459,502 $ 710,161 ======================================================================= Earnings per share - Basic $ .28 $ .36 $ .30 $ .46 ======================================================================= Earnings per share - Diluted $ .28 $ .35 $ .30 $ .46 ======================================================================= 2002 ----------------------------------------------------------------------- Three Months Ended March 31 June 30 September 30 December 31 ----------------------------------------------------------------------- Net sales $ 9,254,050 $ 11,008,835 $ 9,975,928 $ 10,431,908 ======================================================================= Gross profit $ 2,858,113 $ 3,432,768 $ 3,138,508 $ 3,211,163 ======================================================================= Net income $ 776,797 $ 847,201 $ 766,987 $ 631,843 ======================================================================= Earnings per share - Basic $ 0.38 $ 0.42 $ 0.40 $ .37 ======================================================================= Earnings per share - Diluted $ 0.37 $ 0.42 $ 0.39 $ .36 =======================================================================
The Company's accounting practice for interim periods provides for possible accounting adjustments in the fourth quarter or at year-end. In 2003, such adjustments resulted in increasing fourth quarter pretax income by $36,000 for inventory costs and decreasing fourth quarter pretax income by $43,000 for employee related and administrative expense accruals. In 2002, such adjustments resulted in increasing fourth quarter pretax income by $57,000 for inventory costs and decreasing fourth quarter pretax income by $87,000 for bad debt expense. 15. Related Parties The Chairman and Chief Executive Officer of the Company is a stockholder and director of Rollform of Jamestown Inc., a rollforming company. One of the Company's subsidiaries purchased $151,000, $183,000, and $215,000 of fabricated parts from Rollform of Jamestown, Inc. in 2003, 2002, and 2001, respectively, at prices that the Company believes are at arms length. During 2002, the Company purchased 425,000 shares of its common stock for $4,342,000 from the estate of its former chief executive officer and his spouse. The purchases were made at prices the Company believes represent fair value of the common stock. - 42 - 16. Contingencies As previously reported, in December 1998, the Company was named as a defendant in a lawsuit titled Roberta Raiport, et al. v. Gowanda Electronics Corp. And American Locker Group, Inc. pending in the State of New York Supreme Court, County of Cattaraugus. The suit involves property located in Gowanda, New York, which was sold by the Company to Gowanda Electronics Corp. prior to 1980. The plaintiffs, current or former property owners in Gowanda, New York, assert that defendants each operated machine shops at the site during their respective periods of ownership and that as a result of such operation, soil and groundwater contamination occurred which has adversely affected the plaintiffs and the value of plaintiffs' properties. The plaintiffs assert a number of causes of action and seek compensatory damages of $5,000,000 related to alleged diminution of property values, $3,000,000 for economic losses and "disruption to plaintiffs' lives," $10,000,000 for "nuisance, inconveniences and disruption to plaintiffs' lives," $25,000,000 in punitive damages, and $15,000,000 to establish a "trust account" for monitoring indoor air quality and other remedies." In June 2003, Gowanda Electronics Corp. filed a motion for summary judgment seeking to be dismissed from the suit. The plaintiffs and the Company have filed objections to such motion and the court has yet to rule on the motion. The Company believes that its potential liability with respect to this site, if any, is not material. Therefore, based on the information currently available, management does not believe the outcome of this suit will have a material adverse impact on the Company's operations or financial condition. Defense of this case has been assumed by the Company's insurance carrier, subject to a reservation of rights. As previously reported, on July 30, 2001, the Company received a letter from the New York State Department of Environmental Conservation (the NYSDEC) advising the Company that it is a potentially responsible party (PRP) with respect to environmental contamination at the site mentioned above located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corp. prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it sets forth a remedy which includes continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet intended to intercept any contaminates and implementation of an on-going monitoring system. The NYSDEC has estimated that the remediation plan selected by NYSDEC will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a thirty-year period after completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate. This matter has not been litigated and at the present time the Company has only been identified as a PRP. The Company also believes other parties may have been identified by the NYSDEC as PRPs and the allocation of financial responsibility of such parties has not been litigated. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The NYSDEC has not commenced construction of the remedial plan and has not indicated when construction will start, if ever. The Company's primary insurance carrier has assumed the cost of the Company's defense in this matter, subject to a reservation of rights, and to date the Company has not experienced any cost associated with this matter. - 43 - 16. Contingencies (continued) In September 1998 and subsequent months, the Company was named as an additional defendant in approximately 140 cases pending in state court in Massachusetts. The plaintiffs in each case assert that a division of the Company manufactured and furnished to various shipyards components containing asbestos during the period from 1948 to 1972 and that injuries resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced which indicate that the Company appears to have been included in the chain of title for certain wall panels which contained asbestos and which were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company's insurance carrier, subject to a reservation of rights. As of February 19, 2004, settlement agreements have been entered in 15 cases with funds authorized and provided by the Company's insurance carrier. Further, over 90 cases originally filed in 1995 through 2000 against other defendants to which the Company was joined as an additional defendant have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of February 19, 2004 is approximately 35 cases originally filed against other defendants in 2001 through 2003. While the Company cannot predict what the ultimate resolution of these asbestos cases may be because the discovery proceedings on the cases are not complete, based upon the Company's experience to date with similar cases, as well as the assumption that insurance coverage will continue to be provided with respect to these case, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company's operations or financial condition. The Company is involved in other claims and litigation from time to time in the normal course of business. The Company does not believe these matters will have a significant adverse impact on the Company's operations or financial condition. - 44 - Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures The Company's management, with the participation of the Company's chief executive officer and principal accounting officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2003. Based on that evaluation, the Company's chief executive officer and principal accounting officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2003. There were no material changes in the Company's internal control over financial reporting during the fourth quarter of 2003. PART III -------- Item 10, 11, 12, 13 and 14 will be contained in American Locker Group Incorporated's Annual Proxy Statement, incorporated herein by reference, which will be filed within 120 days after year-end. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The documents filed as part of this report are as follows: 1. Financial Statements 2. Financial Statement Schedules See Index to Financial Statements and Financial Statement Schedules All other consolidated financial schedules are omitted because they are inapplicable, not required or the information is included elsewhere in the consolidated financial statements or the notes thereto. 3. Exhibits (a) Exhibits required by Item 601 of Regulation S-K are submitted as a separate section herein immediately following the "Exhibit Index". (b) Reports on Form 8-K filed in the fourth quarter of 2003. (i) None - 45 - American Locker Group Incorporated Index to Financial Statements and Financial Statement Schedules The financial statements together with the report of Ernst & Young LLP dated February 24, 2004, is included in Item 8 Financial Statements and Supplementary Data in the Annual Report on Form 10-K. Financial Schedules for the years 2003, 2002, and 2001: Valuation and Qualifying Accounts Schedule II American Locker Group Incorporated Valuation and Qualifying Accounts ---------------------------------
Additions Balance at the Charged to Beginning of Costs and Balance at Year Description Year Expense Deductions End of Year ------------------------------------------------------------------------------------------------------- Year ended 2003 Allowance for Doubtful Accounts $333,000 $ 94,000 $ (56,000) $ 371,000 Reserve for Inventory Valuation 357,000 100,000 - 457,000 Year ended 2002 Allowance for Doubtful Accounts $249,000 $ 111,000 $ (27,000) $ 333,000 Reserve for Inventory Valuation 406,000 (49,000) - 357,000 Year ended 2001 Allowance for Doubtful Accounts $324,000 $ 15,000 $ (90,000) $ 249,000 Reserve for Inventory Valuation 252,000 154,000 - 406,000
- 46 - Pursuant to the requirements of Section 13 or 15(d) 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. AMERICAN LOCKER GROUP INCORPORATED /s/Edward F. Ruttenberg ----------------------------------------------------- Edward F. Ruttenberg Chairman and Chief Executive Officer /s/Wayne L. Nelson ----------------------------------------------------- Wayne L. Nelson Principal Accounting Officer and Assistant Secretary March 26, 2004 ----------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/Edward F. Ruttenberg Chairman, Chief Executive March 26, 2004 --------------------------- Officer and Director Edward F. Ruttenberg /s/Roy J. Glosser President, Chief Operating March 26, 2004 --------------------------- Officer, Treasurer and Roy J. Glosser Director /s/Alan H. Finegold Director March 26, 2004 --------------------------- Alan H. Finegold /s/Thomas Lynch, IV Director March 26, 2004 --------------------------- Thomas Lynch, IV /s/Jeffrey C. Swoveland Director March 26, 2004 --------------------------- Jeffrey C. Swoveland /s/Donald I. Dussing, Jr. Director March 26, 2004 --------------------------- Donald I. Dussing, Jr. - 47 - EXHIBIT INDEX
Prior Filing or Sequential Exhibit No. Page No. Herein ----------- ------------------------------- 3.1 Certificate of Incorporation of Exhibits to Form 10-K for Year American Locker Group Incorporated ended December 31, 1980 3.2 Amendment to Certificate of Incorporation Form 10-C filed May 6, 1985 changing name of company 3.3 Amendment to Certificate of Incorporation Exhibit to Form 10-K for year ended limiting liability of Directors and Officers December 31, 1987 3.4 By-laws of American Locker Group Incorporated Exhibit to Form 10-K for year ended as amended and restated December 31, 1985 3.5 Certificate of Designations of Series Exhibit to Form 10-K for year ended A Junior Participating Preferred Stock December 31, 1999 3.6 Amendment to By-laws of American Locker Group Exhibit to Form 10-K for year ended Incorporated dated January 15, 1992 December 31, 1991 3.7 Amendment to Bylaws dated March 3, 1999 Exhibit to Form 10-K for year ended December 31, 1998 3.8 Amendment to Bylaws dated November 19, 1999 Exhibit to Form 10-K for year ended December 31, 1999 10.1 American Locker Group Incorporated 1988 Stock Exhibit to Form 10-K for year ended Incentive Plan December 31, 1988 10.2 First Amendment dated March 28, 1990 to American Exhibit to Form 10-K for year ended Locker Group Incorporated 1988 Stock Incentive December 31, 1989 Plan 10.3 Form of Indemnification Agreement between American Exhibit to Form 10-K for year ended Locker Group Incorporated and its directors and December 31, 1987 officers - 48 - 10.4 Corporate Term Loan Agreement between American Exhibit to Form 10-K for year ended Locker Group Incorporated and Manufacturers and December 31, 1991 Traders Trust Company covering $2,400,000 loan 10.5 Approved Line of Credit from Manufacturers and Exhibit to Form 10-K for year ended Traders Trust Company to American Locker Group December 31, 1990 Incorporated in the amount of $1,000,000 10.6 Amendment Agreement dated May 1, 1994 between Exhibit to Form 10-KSB for year Manufacturing and Traders Trust Company and ended December 31, 1994 American Locker Group Incorporated [Increase in Term Loan to $1,850,000] 10.7 Amendment Agreement dated March 12, 1996 between Exhibit to Form 10-KSB for year Manufacturing and Traders Trust Company and ended December 31, 1995 American Locker Group Incorporated [Increase in Term Loan to $1,800,000] 10.8 Employment Agreement between American Locker Group Exhibit to Form 10-QSB for quarter Incorporated and Roy J. Glosser ended June 30, 1996 10.9 Amendment dated as of March 3, 1999 to Employment Exhibit to Form 10-KSB for year Agreement between American Locker Group ended December 31, 1998 Incorporated and Roy J. Glosser 10.10 Second Amendment dated May 20, 2002 to Employment Exhibit to Form 10Q for quarter Agreement between American Locker Group ended June 30, 2002 Incorporated and Roy J. Glosser 10.11 Manufacturing Agreement dated as of October 1, Exhibit to Form 10-K for year ended 2000 between American Locker Security Systems Inc. December 31, 2000 and Signore, Inc. 10.12 Second Amendment dated as of May 13, 2004 to Exhibit to Form 10-Q for the Manufacturing Agreement dated as of October 1, quarter ended June 30, 2003 2000 between American Locker Security Systems Inc. and Signore Inc. 10.13 Contract dated March 27, 1996 between the U.S. Exhibit to Form 10-QSB for the Postal Service and American Locker Security quarter ended March 31, 1996 Systems, Inc. - 49 - 10.14 Modification #MO3 to USPS Contract Exhibits to Form 10-QSB for the #072368-96-B-0741 dated April 16, 1997 quarter ended March 31, 1997 10.15 Amendment dated August 22, 1997 to Corporate Term Exhibit to Form 10-QSB for the Loan Agreement dated August 30, 1991 between quarter ended September 30, 1997 American Locker Group Incorporated and Manufacturers and Traders Trust Company 10.16 Modification M05 to USPS Contract Exhibit to Form 10-QSB for the #072368-96-B-0741, dated October 9, 1997, which quarter ended September 30, 1997 replaces steel pedestals with aluminum pedestals for American Locker Outdoor Parcel Lockers 10.17 Modification M06 to USPS Contract Exhibit to Form 10-QSB for the #072368-96-B-0741, dated October 23, 1997 quarter ended September 30, 1997 regarding prices and minimum quantities through April 14, 1998 10.18 Modification M07 to USPS Contract Exhibit to Form 10-QSB for quarter #072368-96-B-0741, dated April 14, 1998 regarding ended March 31, 1998 prices and minimum quantities 10.219 Modification #M010 to USPS Contract Exhibit to Form 10-QSB for the #072368-96-B-0741, dated May 6, 1999 quarter ended March 31, 1999 10.20 American Locker Group Incorporated 1999 Stock Exhibit to Form 10-QSB for the Incentive Plan quarter ended June 30, 1999 10.21 Amendment dated June 9, 1999 between American Exhibit to Form 10-QSB for the Locker Group Incorporated and Manufacturers and quarter ended June 30, 1999 Traders Trust Company 10.22 Rights Agreement dated November 19, 1999 between Exhibit to Form 8-K dated American Locker Group Incorporated and Chase November 18, 1999 Mellon Shareholder Services LLC 10.23 Form of American Locker Group Incorporated Exhibit to Form 10-QSB for year Supplemental Executive Retirement Benefit Plan ending December 31, 1998 - 50 - 10.24 Employment Agreement dated November 19, 1999 Exhibit to Form 10-K for year between American Locker Group Incorporated and ended December 31, 1999 Edward F. Ruttenberg 10.25 Amendment dated May 20, 2002 to Employment Exhibit to Form 10Q for quarter Agreement between American Locker Group ending June 30, 2002 Incorporated and Edward F. Ruttenberg 10.26 Form of Option Agreement under 1999 Stock Exhibit to Form 10-K for Incentive Plan year ended December 31, 1999 10.27 Promissory Note dated July 6, 2001 made by Exhibit to Form 8-K filed American Locker Group Incorporated in favor of July 12, 2001 Janie D'Addio 10.28 Amendment Agreement dated as of July 5, 2001 Exhibit to Form 8-K filed between American Locker Group Incorporated and July 12, 2001 Manufacturers and Traders Trust Company 10.29 Deed of Trust Note dated as of July 5, 2001 made Exhibit to Form 8-K filed by ALTRECO, Incorporated in favor of M&T Real July 12, 2001 Estate, Inc. 14.1 Code of Ethics Page ____ 22.1 List of Subsidiaries Page ____ 23.1 Consent of Ernst & Young LLP Page ____ 31.1 Certification of Chief Executive Officer pursuant Page ____ to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 31.2 Certification of Principal Accounting Officer Page ____ pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32 Certification of Chief Executive Officer and Chief Page ____ Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- 51 - Exhibit 14.1 Code of Ethics AMERICAN LOCKER GROUP INCORPORATED Code of Business Conduct and Ethics Introduction This Code of Business Conduct and Ethics (this "Code") is designed to give employees, officers and directors of the Company (collectively, "Participants") guidance in recognizing and dealing with ethical issues, provide mechanisms for reporting unethical conduct and foster a culture of honesty and accountability. All Participants must conduct themselves in accordance with this Code, and violators will be subject to disciplinary action. 1. Conflicts of interest. --------------------- A "Conflict of Interest" occurs when an individual's private interest improperly interferes with the interests of the Company. A Conflict of Interest may arise when (a) a Participant takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively, (b) a Participant, or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company, (c) a Participant, or a member of his or her family, serves as a director, officer, employee or agent for a competitor of the Company, or (d) a Participant, or a member of his or her family, receives a loan (or guarantee of an obligation) from the Company. Conflicts of Interest are prohibited by this Code, except as provided in guidelines approved by the Board of Directors. It is impossible to list all situations or relationships that might create a Conflict of Interest. If a Participant is unsure whether a particular set of circumstances creates a Conflict of Interest, he or she should follow the procedures outlined in Section 9(a) below. 2. Corporate Opportunities. ----------------------- Participants are prohibited from taking for themselves personally business opportunities discovered through the use of corporate property, information or position without the consent of the Board of Directors. Participants may not use corporate property, information, or position for improper personal gain. Employees are prohibited from directly or indirectly competing with the Company. Participants owe a general duty to the Company to advance its interests when the opportunity to do so arises. 3. Confidentiality. --------------- Participants must maintain the confidentiality of confidential information entrusted to them by the Company or its customers, except when disclosure is authorized by the Company's Chairman or President or mandated by applicable laws, rules or regulations. Confidential information includes non-public information that might be of use to competitors, or whose disclosure might be harmful to the Company or its customers, if disclosed. - 52 - 4. Fair dealing. ------------ The Company strives to outperform its competition with superior performance and without the use of unethical or illegal practices. Accordingly, Participants should endeavor to respect the rights of and deal fairly with the Company's customers, suppliers, competitors and employees. For example, Participants should not (a) give cash (or cash equivalent) gifts to any person or entity in the course of Company duty, (b) spread rumors about competitors, customers or suppliers that the Participant knows are false, (c) intentionally misrepresent the nature or quality of the Company's products and services, or (d) otherwise take unfair advantage of anyone through unfair-dealing practices. 5. Protection and proper use of company assets. ------------------------------------------- Participants should endeavor to protect the Company's assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company's profitability. Company assets should not be used for non-Company business, except that incidental personal use may be permitted. The obligation of Participants to protect the Company's assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil or even criminal penalties. 6. Compliance with laws, rules and regulations (including insider trading laws). ---------------------------------------------------------------------- Participants must obey the laws, rules and regulations of the cities, states and countries in which the Company operates, including insider trading laws. Participants must seek advice from supervisors, the Company's Chairman or President or other appropriate personnel when unsure about what is required by applicable laws, rules and regulations. 7. Special Ethical Obligations of the Chief Executive and Senior Financial Officers. --------------------------------------------------------------------------- It is Company policy to make full, fair, accurate, timely and understandable disclosure in compliance with all applicable laws, rules and regulations in all reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in all other public communications made by the Company. The Company's Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer (or persons performing similar functions) (together, "Senior Officers") are each required to abide by this policy and to promote compliance with this policy by all employees. Each Senior Officer also has the following specific responsibilities: o Exercise leadership in creating a culture of high ethical standards and commitment to compliance, maintain a work environment that encourages employees to raise concerns, promptly address employee compliance concerns, and act in an honest and ethical manner. o Promptly bring to the attention of the Company's Board of Directors any material information of which he or she becomes aware that affects the disclosures made by the Company in its public filings. - 53 - o Promptly bring to the attention of the Company's Board of Directors and Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls that could adversely affect the Company's ability to record, process, summarize and report financial data and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. o Promptly bring to the attention of the Company's Chairman or President any information he or she may have concerning any violation of this Code by any member of management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. o Promptly bring to the attention of the Company's Chairman or President and Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof. 8. Waivers. ------- Any waiver of this Code for executive officers or directors may be made only by the Board of Directors or a committee thereof and will be promptly disclosed as required by applicable laws or stock exchange regulations. 9. Compliance Procedures. --------------------- Participants should endeavor to promote ethical behavior and prompt and consistent action against violations of this Code. (a) Questions Under the Policy. If a Participant is unsure whether a situation might involve a violation of this Code, he or she should seek guidance before acting. If in doubt, Participants should take the following steps: o Gather sufficient facts to evaluate the situation, and use common sense to determine whether unethical or illegal behavior might be involved. o Discuss the situation with a supervisor. o Discuss the situation with the Company's Chairman or President if (i) the Participant believes that the supervisor is not an appropriate person with whom to discuss the situation or (ii) the Participant considers the supervisor's response inadequate. (b) Reporting Violations. Participants have a duty to report violations or suspected violations of this Code or any violation, of laws, rules or regulations to the Company's Chairman or President. If a Participant's situation requires that his or her identity be kept secret, the Participant's anonymity will be protected to the extent permitted by law. It is the policy of the Company to not permit retaliation against Participants for such reports that are made in good faith. - 54 - 10. No Rights Created ----------------- This Code of Business Conduct and Ethics is a statement of certain fundamental principles, policies and procedures that govern the Company's employees, officers and directors in the conduct of the Company's business. It is not intended to and does not create any rights in any employee, customer, client, supplier, competitor, shareholder or any other person or entity. - 55 - Exhibit 22.1 List of Subsidiaries The following companies are subsidiaries of the Company and are included in the consolidated financial statements of the Company:
Percentage of Voting NAME Jurisdiction of Organization Securities Owned ---- ---------------------------- ---------------- American Locker Security Systems, Inc. Delaware 100% American Locker Company, Inc. Delaware 100% American Locker Company of Canada, Ltd. Dominion of Canada 100% (1) Canadian Locker Company, Ltd. Dominion of Canada 100% (2) American Locker Security Systems International Virgin Islands 100% (1) Security Manufacturing Corporation Delaware 100% ALTRECO, Incorporated Delaware 100% (1) Owned by American Locker Security Systems, Inc. (2) Owned by American Locker Company of Canada, Ltd.
- 56 - Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 333-86494) pertaining to the American Locker Group Incorporated 1999 Stock Incentive Plan of our report dated February 24, 2004, with respect to the consolidated financial statements and schedule of American Locker Group Incorporated included in its Annual Report (Form 10-K) for the year ended December 31, 2003, filed with the Securities and Exchange Commission. /s/Ernst & Young LLP Buffalo, New York March 26, 2004 - 57 - Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended I, Edward F. Ruttenberg, Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of American Locker Group Incorporated (the "Registrant"): 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 26, 2004 By: /s/Edward F. Ruttenberg --------------------------- Edward F. Ruttenberg Chief Executive Officer - 58 - Exhibit 31.2 Certification of Principal Accounting Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended I, Wayne L. Nelson, Principal Accounting Officer, certify that: 1. I have reviewed this annual report on Form 10-K of American Locker Group Incorporated (the "Registrant"): 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 26, 2004 By: /s/Wayne L. Nelson ---------------------- Wayne L. Nelson Principal Accounting Officer - 59 - Exhibit 32 Certification of Chief Executive Officer and Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned officers of American Locker Group Incorporated (the "Company"), in such capacities and on the dates indicated below, does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 26, 2004 /s/Edward F. Ruttenberg -------------------------- Edward F. Ruttenberg Chief Executive Officer /s/Wayne L. Nelson -------------------------- Wayne L. Nelson Principal Accounting Officer - 60 - Corporate Directory Officers -------- Edward F. Ruttenberg Chairman and Chief Executive Officer Roy J. Glosser President, Chief Operating Officer and Treasurer Charles E. Harris Secretary Directors --------- (1) Edward F. Ruttenberg Chairman and Chief Executive Officer (1) Roy J. Glosser President, Chief Operating Officer and Treasurer (1) Alan H. Finegold Attorney, Law Offices of Alan H. Finegold, LLC Pittsburgh, Pennsylvania (2)(3) Thomas Lynch IV First Vice President Janney, Montgomery & Scott Pittsburgh, Pennsylvania (2)(3) Jeffrey C. Swoveland Chief Financial Officer BodyMedia Pittsburgh, Pennsylvania (2)(3) Donald I. Dussing, Jr. President - Buffalo Division Manufacturers and Traders Trust Company Buffalo, New York (1) Member Executive Committee (2) Member Audit Committee (3) Member Stock Option-Executive Compensation Committee Counsel ------- Kirkpatrick & Lockhart LLP Pittsburgh, Pennsylvania Registrar and Transfer Agent ---------------------------- Mellon Investor Shareholder Services LLP Pittsburgh, Pennsylvania Independent Auditors -------------------- Ernst & Young LLP Buffalo, New York Stock Traded ------------ Over the Counter NASDAQ National Market System Trading Symbol -- ALGI [ALGI Logo] American Locker Group Incorporated 608 Allen Street Jamestown, NY 14702 Phone: 716/664-9600 Fax: 716/483-2822 Edward F. Ruttenberg Chairman's Office 5864 Aylesboro Avenue Pittsburgh, PA 15217 Phone: 412/422-2377 Fax: 412/422-2378