-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1EfXx/5Nv5s1Y+O04hnawpzEAWeJ+CkLMxXAOk6uh+7QMlqGy4JXc8etJkQRM7A NJUrB68+EvWJimjMw2TVog== 0000898431-05-000142.txt : 20051122 0000898431-05-000142.hdr.sgml : 20051122 20051122120403 ACCESSION NUMBER: 0000898431-05-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051122 DATE AS OF CHANGE: 20051122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN LOCKER GROUP INC CENTRAL INDEX KEY: 0000008855 STANDARD INDUSTRIAL CLASSIFICATION: PARTITIONS, SHELVING, LOCKERS & OFFICE AND STORE FIXTURES [2540] IRS NUMBER: 160338330 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00439 FILM NUMBER: 051220390 BUSINESS ADDRESS: STREET 1: 608 ALLEN STREET CITY: JAMESTOWN STATE: NY ZIP: 14701 BUSINESS PHONE: 7166649600 MAIL ADDRESS: STREET 1: 608 ALLEN STREET CITY: JAMESTOWN STATE: NY ZIP: 14701 FORMER COMPANY: FORMER CONFORMED NAME: AVM CORP DATE OF NAME CHANGE: 19850520 10-Q 1 form10q.txt FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2005 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM TO --------- Commission file number 0-439 ----- American Locker Group Incorporated ---------------------------------- (Exact name of business issuer as specified in its charter) Delaware 16-0338330 - ------------------------------- ------------------------------------ (State of other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 815 South Main Street, Grapevine, Texas 76051 --------------------------------------------- (Address of principal executive offices) (817) 329-1600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of November 21, 2005 there were outstanding 1,546,146 shares of the registrant's Common Stock, $1 par value. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 2,403,023 $ 5,780,215 Accounts and notes receivable, less allowance for doubtful accounts of $242,000 in 2005 and $232,000 in 2004 3,543,813 4,402,840 Inventories 4,259,011 6,463,496 Prepaid expenses 183,516 136,316 Prepaid income taxes 734,731 --- Deferred income taxes 1,302,230 1,300,230 ------------------------------------------ Total current assets 12,426,324 18,083,097 Property, plant and equipment: Land 500,500 500,500 Buildings 3,491,131 3,463,205 Machinery and equipment 11,943,853 11,775,088 ------------------------------------------ 15,935,484 15,738,793 Less allowance for depreciation (11,475,454) (11,154,157) ------------------------------------------ Property, plant and equipment, net 4,460,030 4,584,636 Goodwill --- 6,155,204 Deferred income taxes 24,558 24,558 Other assets --- 14,435 ------------------------------------------ Total assets $ 16,910,912 $28,861,930 ==========================================
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Long-term debt in default and due on demand $ 3,349,158 $ 6,668,596 Accounts payable 1,671,174 1,974,460 Commissions, salaries, wages and taxes 195,584 602,803 Other accrued expenses 878,801 565,477 Accrued environmental settlement --- 1,102,500 Income taxes payable --- 454,059 ------------------------------------------ Total current liabilities 6,094,717 11,367,895 Long-term liabilities: Pension, benefits and other long-term liabilities 647,716 707,465 Stockholders' equity: Common stock, $1.00 par value: Authorized shares - 4,000,000 Issued shares - 1,738,146 in 2005 and 1,726,146 in 2004, Outstanding shares - 1,546,146 in 2005 and 1,534,146 in 2004 1,738,146 1,726,146 Other capital 132,562 97,812 Retained earnings 10,909,152 17,521,028 Treasury stock at cost (192,000 shares in 2005 and 2004) (2,112,000) (2,112,000) Accumulated other comprehensive loss (499,381) (446,416) ------------------------------------------ Total stockholders' equity 10,168,479 16,786,570 ------------------------------------------ Total liabilities and stockholders' equity $ 16,910,912 $ 28,861,930 ==========================================
See accompanying notes. AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ------------------------------------------ Net Sales $ 24,758,791 $ 37,882,548 Cost of products sold 17,870,227 26,454,940 Asset impairment - goodwill 6,155,204 --- Selling, general and administrative expenses 5,550,330 6,482,940 Restructuring costs 1,953,000 --- ------------------------------------------- (6,769,970) 4,944,668 Other income (expense): Interest income 62,061 22,966 Other income - net 44,231 166,936 Interest expense (280,339) (364,578) ------------------------------------------- Total other income (expense) (174,047) (174,676) ------------------------------------------- (Loss) income before income taxes (6,944,017) 4,769,992 Income tax benefit (expense) 332,141 (1,862,256) ------------------------------------------- Net (loss) income $ (6,611,876) $ 2,907,736 =========================================== (Loss) earnings per share of common stock: Basic $ (4.30) $ 1.89 =========================================== Diluted $ (4.30) $ 1.86 =========================================== Dividends per share of common stock $ 0.00 $ 0.00 ===========================================
See accompanying notes. AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 ------------------------------------------- Net Sales $ 6,612,149 $ 18,074,076 Cost of products sold 5,134,719 12,836,134 Selling, general and administrative expenses 1,826,015 2,201,480 Restructuring costs 523,000 --- ------------------------------------------- (871,585) 3,036,462 Other income (expense): Interest income 18,346 13,376 Other income - net 15,327 87,673 Interest expense (86,204) (135,169) ------------------------------------------- Total other income (expense) (52,531) (34,177) ------------------------------------------- (Loss) income before income taxes (924,116) 3,002,342 Income tax benefit (expense) (384,798) (1,175,591) ------------------------------------------- Net (loss) income $ (539,318) $ 1,826,751 =========================================== (Loss) earnings per share of common stock: Basic $ (0.35) $ 1.19 =========================================== Diluted $ (0.35) $ 1.17 =========================================== Dividends per share of common stock $ 0.00 $ 0.00 ===========================================
See accompanying notes. AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ------------------------------------------- OPERATING ACTIVITIES Net (loss) income $ (6,611,876) $ 2,907,736 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 513,151 565,704 Asset impairment charge - goodwill 6,155,204 --- Deferred income taxes (2,000) --- Loss on disposal of assets (374) --- Change in assets and liabilities: Accounts and notes receivable 869,725 (889,664) Inventories 2,204,688 (28,682) Prepaid expenses (46,245) (29,708) Accounts payable and accrued expenses (1,502,059) 18,556 Pension and other benefits (45,314) 61,135 Income taxes (1,175,206) 888,468 ------------------------------------------- Net cash provided by operating activities 359,694 3,493,545 INVESTING ACTIVITIES Purchase of property, plant and equipment (387,688) (161,460) ------------------------------------------- Net cash used in investing activities (387,688) (161,460) FINANCING ACTIVITIES Debt repayment (3,319,438) (1,306,497) Issuance of common stock 33,750 --- ------------------------------------------- Net cash used in financing activities (3,285,688) (1,306,497) Effect of exchange rate changes on cash (63,510) 12,087 ------------------------------------------- Net (decrease) increase in cash (3,377,192) 2,037,675 Cash and cash equivalents at beginning of period 5,780,215 3,597,990 ------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,403,023 $ 5,635,665 ===========================================
See accompanying notes. Notes to Consolidated Financial Statements American Locker Group Incorporated and Subsidiaries 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of such condensed financial statements have been included. Operating results for the nine-month and three-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company's consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. On February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (USPS) for polycarbonate and aluminum cluster box units (CBUs) would not be renewed, and the contract expired on May 31, 2005. During 2004, 2003 and 2002, sales to the USPS accounted for 53.9%, 52.7 and 56.4%, respectively, of the Company's net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 18.6%, 14.6% and 10.2% of the Company's sales in 2004, 2003 and 2002, respectively. Since May 31, 2005, the Company has experienced continuing sales of its current CBU models to the private market, and it is unclear when such sales will begin to decline as the new 1118F CBU specification described below is introduced to the private market and purchasers begin to purchase these units rather than the Company's current model CBUs. The Company does not expect any significant change in sales of its other postal and locker products. The loss of over 50% of the Company's revenues resulting from the non-renewal of the Company's CBU contract with the USPS, the potential loss of sales of CBUs in the private market during the transition to the 1118F design and the status of the 1118 CBU design and drawing package make the Company's future uncertain. On May 18, 2005, after the USPS notification of non-renewal of the CBU contract, the Company's Board of Directors announced a restructuring plan to significantly reduce annual selling, general and administrative expenses. Most of these savings will be achieved by relocating Company headquarters from leased facilities in Jamestown, NY to company-owned facilities in Grapevine, TX. As part of this restructuring the Company has not renewed its building leases in Jamestown upon their respective expiration dates in September 2005 and November 2005 and has relocated its headquarters to Grapevine, TX. Further the Company has discontinued its Jamestown based assembly operations, eliminated many of thirty-seven salaried and hourly positions in Jamestown, and froze benefits under its current pension plan. Due to the non-renewal of the CBU contract, all polycarbonate CBU assembly operations in Jamestown ceased in the Fall of 2005. Should the Company become an 1118F CBU supplier to the private market, such CBU planning and execution will take place in Grapevine, TX at its company-owned manufacturing facility. As discussed in Note 4 of the Company's consolidated financial statements included in the 2004 Annual Report on Form 10-K, the Company has received a notice of default and reservation of rights letter from its lender regarding its term loan as a result of the non-renewal of the Company's CBU contract with the USPS. The Company also has been verbally advised by this lender that its revolving line of credit is no longer available. The Company is in discussions with the lender regarding the timing of final payment on its outstanding term and mortgage loans. The Company is seeking a new lender in Texas, where the Company has relocated its headquarters. In addition, after discussions with its lender following the notice of the non-renewal of the USPS contract, the Company agreed to accelerate repayment of its term loan by making two additional payments, the first of which was a $1,000,000 payment made in May 2005 and the second of which was a $1,350,000 payment in September 2005. If the Company is unable to restructure its term and revolving debt with its current lender or to refinance its mortgage loan and obtain financing from a new lender on terms acceptable to the Company, the financial position of the Company would be materially adversely affected. Additional risks and uncertainties not presently known or that the Company currently deems immaterial may also impair its business operations. Should one or more of these risks or uncertainties materialize, the Company's business, financial condition or results of operations could be materially adversely affected. The restructuring plan adopted by the Company's Board of Directors assumes that certain material changes in the operations of the Company will be sufficient to allow the Company to continue in operation despite the loss of its CBU contract with the USPS, which provided over 50% of the Company's annual sales revenues in 2004, 2003 and 2002. Further, the Company's prospects for continuous operations depend in part on its ability to restructure its long-term debt and obtain short-term financing. If the restructuring plan, as it may be modified by the Company's Board of Directors from time to time to reflect changing conditions and circumstances, does not adequately reduce expenses and the Company is not able to obtain new financing, the Company's ability to remain in business would be adversely affected and the Company may not be able to continue operations. In addition, the restructuring plan assumes that the cost reductions would occur in accordance with the time line set forth in the restructuring plan. A failure by the Company to adhere to the time line or to incur greater than anticipated restructuring expenses as set forth in the restructuring plan also would adversely affect the Company. 2. Provision for income taxes is based upon the estimated annual effective tax rate. The impairment charge of $6,155,204 related to goodwill is a charge to earnings for financial reporting purposes and is non-deductible for income tax reporting purposes. The goodwill was originally recorded as part of a stock acquisition and a tax free exchange for income tax reporting purposes. 3. The Company reports earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The following table sets forth the computation of basic and diluted earnings per common share:
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ---------------------------------------------------- Numerator: Net (loss) income $ (6,611,876) $ 2,907,736 ==================================================== Denominator: Denominator for basic earnings per share - weighted average shares 1,538,234 1,534,146 Effect of Dilutive Securities: Stock options --- 28,664 ---------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 1,538,234 1,562,810 ==================================================== Basic (loss) earnings per common share: Net (loss) income $ (4.30) $ 1.89 ==================================================== Diluted (loss) earnings per common share: Net (loss) income $ (4.30) $ 1.86 ====================================================
THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 ----------------------------------------------------- Numerator: Net (loss) income $ (539,318) $ 1,826,751 ===================================================== Denominator Denominator for basic earnings per share - weighted average shares 1,546,146 1,534,146 Effect of Dilutive Securities: Stock options --- 21,317 ----------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 1,546,146 1,555,463 ===================================================== Basic (loss) earnings per common share: Net (loss) income $ (0.35) $ 1.19 ===================================================== Diluted (loss) earnings per common share: Net (loss) income $ (0.35) $ 1.17 =====================================================
The Company had 53,600 stock options outstanding at September 30, 2005, which were not included in the common share computation for earnings (loss) per share, as the common stock equivalents were anti-dilutive. 4. Inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out method for over 75% of the inventories.
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------ Finished goods $ 531,660 $ 913,415 Work-in-process 1,579,562 2,388,049 Raw materials 2,815,040 3,628,651 ------------------------------------ 4,926,262 6,930,115 Less allowance to reduce to LIFO basis (667,251) (466,619) ------------------------------------ $ 4,259,011 $ 6,463,496 ====================================
5. Changes in stockholders' equity were due to the exercise of stock options and changes in comprehensive income. On June 29, 2005, 12,000 options were exercised at a price of $2.81 per share. In addition to the $33,750 of proceeds received by the Company upon exercise of those options, the Company also increased other capital by $13,000, representing the estimated tax benefit to be received. Total comprehensive (loss) income consisting of net (loss) income and foreign currency translation adjustment was $(6,664,841) and $2,923,500 for the nine months ended September 30, 2005 and 2004, respectively and $(524,453) and $1,917,243 for the three months ended September 30, 2005 and September 30, 2004, respectively. 6. The following sets forth the components of net periodic employee benefit cost of the Company's defined benefit pension plan for the nine month and three month periods ended September 30, 2005 and 2004:
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 -------------------------------------------------------- Service cost $ 250,365 $ 219,447 Interest cost 195,843 173,970 Expected return on plan assets (188,091) (163,110) Net actuarial loss 47,094 40,464 Amortization of prior service cost 14,812 1,131 -------------------------------------------------------- Net periodic benefit cost $ 320,023 $ 271,902 ======================================================== THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 -------------------------------------------------------- Service cost $ 83,455 $ 73,149 Interest cost 65,281 57,990 Expected return on plan assets (62,697) (54,370) Net actuarial loss 15,698 13,488 Amortization of prior service cost 377 377 -------------------------------------------------------- Net periodic benefit cost $ 102,114 $ 90,634 ========================================================
For additional information on the defined benefit pension plan, please refer to Note 7 of the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The Company has frozen the accrual of any additional benefits under the defined benefit pension plan effective July 15, 2005. Accordingly, the intangible asset of $14,435 was written-off and included in the amortization of prior service costs during the second quarter of 2005. 7. Due to the significance of the reduction in business volume resulting from the loss of the USPS contract, which expired May 31, 2005, management determined that the fair value of the Company had declined significantly. In accordance with FAS No. 142, "Goodwill and Other Tangible Assets", the carrying value of goodwill is tested for impairment when such events occur and a charge to earnings is required for any identified impairments. This charge to earnings is to be recorded in the period in which the events causing impairment occurred. Based on management's recent analysis, the fair value of the Company, after learning of the loss of the USPS contract on February 8, 2005, is no longer in excess of the carrying value of the net underlying assets, including goodwill. The second step of the Company's test for impairment indicated that no goodwill exists. Accordingly, the Company recorded an impairment charge of $6,155,204 in the quarter ended March 31, 2005. The Company also evaluated its inventory for impairment in accordance with ARB No. 43, "Accounting for Inventory", and expected losses related to committed purchase orders. As a result, the Company recorded an inventory impairment charge of $147,000 and accrued $125,000 for an anticipated loss on committed purchase orders. The expense was included in cost of sales for the quarter ended March 31, 2005. 8. As discussed in Note 4 of the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2004, on March 18, 2005, the Company received a default and reservation of rights letter from its lender regarding its term loan. The Company has also been verbally advised by this lender that its revolving line of credit is no longer available. As a result, the Company's debt may be due in full if called by the lender and is therefore classified as a current liability. The Company is in discussions with the lender regarding the timing of final payment on its outstanding term and mortgage loans. The Company is seeking a new lender in Texas, where the Company has relocated its headquarters. In addition, after discussions with its lender following the Company's receipt of notice of the non-renewal of the USPS contract, the Company agreed to accelerate repayment of its term loan by making two additional payments, the first of which was a $1,000,000 payment made in May 2005 and the second was a $1,350,000 payment made in September 2005. 9. As disclosed in Note 16 of the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, the Company accrued for an environmental settlement of $1,102,000, net of anticipated insurance proceeds. During the three months ended September 30, 2005, the final installment of $200,000 was paid. 10. In May 2005, the Company announced that it would undertake restructuring initiatives to realign its organization in response to the loss of its CBU contract with the USPS. The Company's plan calls for significant reductions in selling, general and administrative costs. A majority of the cost reductions will be realized by relocating the Company's headquarters, from leased facilities in Jamestown, NY to a Company-owned facility on Grapevine, TX. In addition, savings will be realized by eliminating certain corporate level staff and several satellite sales offices. To implement the restructuring plan, management anticipates incurring aggregate impairment charges (exclusive of goodwill impairment) and costs of approximately $2,505,000. In accordance with Financial Accounting Standards (FAS) No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", costs associated with an exit or disposal activity are recognized when the associated liabilities are incurred. The following table summarizes restructuring and related costs incurred by the Company in the three and nine-month periods ended September 30:
Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 -------------- --------------- ---------------- ---------------- COST OF SALES: Equipment depreciation $ 17,000 --- $ 92,000 --- Inventory impairment --- --- 147,000 --- Purchase order commitments --- --- 125,000 --- -------------- --------------- ---------------- ---------------- Subtotal 17,000 364,000 SALES, GENERAL AND ADMINISTRATIVE: Severance 27,000 --- 500,000 --- Leases --- 30,000 --- Professional fees 479,000 --- 1,059,000 --- -------------- --------------- ---------------- ---------------- Subtotal 506,000 --- 1,589,000 --- -------------- --------------- ---------------- ---------------- $ 523,000 $ --- $1,953,000 $ --- ============== =============== ================ ================
The following table analyzes the changes in the Company's reserve with respect to the restructuring plan from December 31, 2004 to September 30, 2005:
December 31, Payments/ September 30, 2004 Expense Charges 2005 ------------------ -------------- -------------- ------------------ Purchase order commitments $ 125,000 $ 70,000 $ 55,000 Severance --- 500,000 152,000 348,000 Other --- 1,089,000 1,059,000 30,000 ------------------ -------------- -------------- ------------------ TOTAL $ --- $ 1,714,000 $ 1,281,000 $ 433,000 ================== ============== ============== ==================
The balance of the costs to be incurred as the Company implements the restructuring plan substantially include professional services, outside consulting fees and compensation, the total of which is expected to be approximately $500,000. 11. In May 2005, the Company received a dividend from its Canadian operations of CDN$800,000, an amount equivalent to US$604,000. This amount is net of Canadian withholding taxes of CDN$40,000. The Company is evaluating the impact of the American Jobs Creation Act of 2004, which allows, if elected, a reduction in the amount of the dividend taxable for U.S. federal income tax purposes. The potential tax consequence of the dividend from the Canadian operations is expected to be less than US$60,000. ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND As more fully set forth in the Annual Report on Form 10-K filed by the Company for its fiscal year ended December 31, 2004, on February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (USPS) for polycarbonate and aluminum Cluster Box Units (CBUs) would not be renewed, and the contract expired on May 31, 2005. During 2004, 2003 and 2002, sales to the USPS accounted for 53.9%, 52.7% and 56.4%, respectively, of the Company's net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 18.9%, 14.6% and 10.2% of the Company's sales in 2004, 2003 and 2002, respectively. As a result, the Board of Directors of the Company adopted a restructuring plan to reduce annual selling, general and administrative expenses by at least $3,000,000. In addition, during the first three months of 2005, the Company recorded an impairment charge of $6,155,000 to recognize impairment of goodwill and a charge of approximately $272,000 for inventory losses. During the second and third quarters of 2005, the Company recorded charges of $1,681,000 related to the restructuring, including professional fees of $1,059,000. See Note 10 in Item 1 of this Quarterly Report. Since May 31, 2005, the Company has experienced continuing sales of its current CBU models to the private market, and it is unclear when such sales will begin to decline as the new 1118F CBU specification described below is introduced to the private market and purchasers begin to purchase such units rather than the Company's current model units. The USPS has advised the Company it may continue with its current model CBU program of supplying the private market through December 31, 2005. The Company has received no notice from the USPS regarding the status of any official decertification date that would apply to the Company's current CBU model. Because private purchasers will have an inventory of current model CBUs after that date and because of uncertainty, in the Company's view, as to the supply of the new 1118F model CBUs available to the private market, the impact of the December 31, 2005 date is unclear. So long as local postal authorities are willing to install postal locks on the current model CBUs installed in their local area, private purchasers may be willing to purchase and arrange for installation of these CBUs. The Company does not expect any significant change in sales of its other postal and locker products. The USPS has advised the Company that the new specification and design that will apply to the 1118F CBU will be available soon, although the Company has been given similar indications from the USPS in the past. The Company intends to review this new specification and design, as well as strategic pricing considerations, to determine whether the Company will pursue the development and manufacture of CBUs meeting this new specification for sale in the private market. RESTRUCTURING PLAN AND RELATED RISKS As described more fully in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2004, the Company's Board of Directors has adopted a restructuring plan to reduce annual selling, general and administrative expenses by at least $3,000,000. Most of the planned savings would be achieved by personnel reductions in Jamestown, New York, and by the relocation of the Company headquarters from leased facilities in Jamestown, New York, to company-owned facilities in Grapevine, Texas. The Company has not renewed leases for its Jamestown, NY facilities, which expired in September 2005 and November 2005 and has relocated its headquarters to Grapevine, Texas. To date, the personnel downsizing has included a reduction in the executive, administrative and sales staff in Jamestown and the elimination of three satellite sales offices. The planned personnel reductions are scheduled to be completed by the end of 2005. The Company believes that its non-postal locker sales can be adequately handled by the remaining four satellite sales offices located strategically across the country. Although some uncertainty exists, management believes that it will be able to continue as a going concern if it successfully implements its restructuring plan, a component of which is the development and commencement of sales of the new model 1118F CBUs to the private market in the second quarter of 2006. If the restructuring plan, as it may be modified by the Company's Board of Directors from time to time to reflect changing conditions and circumstances, does not adequately reduce the Company's expenses, the Company's ability to remain in business would be adversely affected. A failure by the Company to adhere to the time line or the incurrence of greater than anticipated restructuring expenses as set forth in the restructuring plan also would adversely affect the Company. Restructuring costs, now estimated to total $2,505,000, are substantially greater than originally estimated at the time the restructuring plan was adopted by the Board of Directors. The increased restructuring costs relate primarily to additional employee termination costs due to larger employee cuts than originally planned and professional costs in excess of the original plan. Through September 30, 2005, the Company incurred restructuring costs of $1,953,000. RESULTS OF OPERATIONS FIRST NINE MONTHS 2005 VERSUS FIRST NINE MONTHS 2004 OVERALL RESULTS AND OUTLOOK The first nine months of 2005 reflect a 34.6% drop in net sales when compared to the same period in 2004, a decline from $37,883,000 in 2004 to $24,759,000 in 2005. A net loss of $6.6 million was reported for the period, which included an impairment charge of $6.1 million representing the write-down of goodwill, restructuring charges of $1,953,000, of which $1,059,000 represents professional fees related to the restructuring plan, $894,000 representing fixed asset impairment, inventory losses, severance costs associated with the restructuring plan. Further, the Company recorded charges totaling $680,000 related to the disposition of certain inventory associated with a discontinued product. NET SALES Net sales for the first nine months of 2005 were $24,759,000, a decrease of 34.6% compared to the same period in 2004. The reported decrease is due primarily to reduced volume of plastic postal products sold after the termination of the Company's CBU contract with the USPS on May 31, 2005. Total plastic sales for the nine months ended September 30, 2005, including both CBUs and Outdoor Parcel Lockers, were $8,970,000 compared to $22,021,000 during the same period in 2004, a decrease of 59.3%. Sales of Metal Locker Products, which include metal lockers and metal postal products including the aluminum CBUs sold to the private market, totaled $15,789,000 for the first nine months of 2005 compared to $15,862,000 during the same period a year ago, a decrease of less than one percent. In addition, net sales for the first nine months of 2004 included a one-time sale to the USPS in the third quarter of 2004 of approximately $7,000,000. Nine Months Ended September 30, Increase 2005 2004 (decrease) ---------------------------------------------- Plastic Locker Sales $8,970,000 $ 22,021,000 (59.3%) Metal Locker Products 15,789,000 15,862,000 ( 0.5%) COST OF PRODUCTS SOLD Cost of products sold as a percentage of net sales was 72.2% during the first nine months of 2005 compared to 69.8% during the same period of 2004. The increased percentage relates to inventory reserves which were increased by $200,000 to reflect additional expected obsolescence and by $200,000 to adjust LIFO reserves related to significant reduction in Plastic CBU inventory on hand as of September 30, 2005. In addition, in the third quarter of 2005, the Company took a charge of $580,000 to write-off inventory on hand that supported the Retrofit Electronic Locker (REL) product, which was discontinued. Excluding one-time charges and adjustments, cost of products sold as a percentage of net sales would have been 68.2%, compared to 69.8% during the same period in 2004. ASSET IMPAIRMENT CHARGE - GOODWILL Due to the loss of the Company's CBU contract with the USPS (see Note 7 in Item 1 of this Quarterly Report), management has determined that the fair value of the Company has declined significantly. Therefore, the Company, in accordance with the provisions of Financial Accounting Standards Board Statement No. 142, "Goodwill and Other Intangible Assets", recorded a goodwill impairment charge against 2005 first quarter operating results in the amount of $6,155,000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses during the first nine months of 2005 totaled $5,550,000, or 22.4% of net sales, compared to $6,483,000, or 17.1% of net sales, during the same period in 2004, a decrease of $933,000, or 3.8% of net sales in the first nine months of 2005. This decrease primarily reflects a reduction of approximately $200,000 in outside research and development engineering costs, the elimination of $370,000 of bonuses for salaried employees, the reduction of executive salaries of approximately $58,000, the reduction of $58,000 in amortization expense related to a non-compete agreement, and the savings of approximately $144,000 resulting from the decision not to replace four individuals who are no longer employed by the Company due to retirement and other reasons. RESTRUCTURING COSTS Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for detail related to restructuring costs incurred during the first nine months of 2005. INTEREST EXPENSE Interest expense for the first nine months of 2005 was $280,000 compared to $365,000 during the same period in the prior year. The decrease results from lower average outstanding debt during the first nine months of 2005 compared to the same period in 2004 as the Company continues to make payments on its outstanding debt. No new long-term debt was incurred during 2005 or 2004. The Company reduced its outstanding debt by $3,319,000 during the first nine months of 2005 by making its scheduled debt payments of $969,000 and paying down an additional $1 million on its term loan in May 2005 and $1,350,000 in September 2005. INCOME TAXES The Company's effective tax rate on earnings was approximately 42% in 2005 and 39% in 2004, excluding a 2005 asset impairment charge associated with goodwill. The ratio of income taxes to loss before income taxes in 2005 does not bear a normal relationship, as the impairment charge related to the write-off of goodwill in the amount of $6,155,204 is not deductible for income tax reporting purposes because the goodwill was originally recorded as part of a tax-free exchange. THIRD QUARTER 2005 VERSUS THIRD QUARTER 2004 NET SALES Net sales were $6,612,000 during the third quarter of 2005 compared to $18,074,000 for the same period in 2004, a decrease of 63.4%. The decreased volume was due primarily to lower sales of plastic CBUs to the USPS as the Company's contract with the USPS expired May 31, 2005. Plastic postal products, now discontinued products, amounted to no sales in the third quarter of 2005 compared to $12,179,000 in the third quarter of 2004. In addition, net sales for the third quarter of 2004 included a one-time sale to the USPS of approximately $7,000,000. Three Months Ended September 30, Increase 2005 2004 (decrease) ---------------------- ---------------- ------------------ Plastic Locker Sales $ 988,000 $12,179,000 (91.9%) Metal Locker Products 5,624,000 5,895,000 ( 4.6%) COST OF PRODUCTS SOLD Cost of products sold as a percentage of net sales was 77.7% during the third quarter of 2005 compared to 71.0% during the same period a year ago. The increased percentage is due principally to a $580,000 write-off of inventory associated with discontinuing the REL product and a provision of $100,000 to increase the reserve for potentially obsolete inventory. Excluding these adjustments, cost of products sold during the third quarter of 2005 would have been $4,472,000, or 67.4% of net sales, compare to 71.0% for the same period a year ago. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased $375,000 from the $2,201,000 incurred during the third quarter of 2004 to $1,826,000 during the third quarter of 2005. The decrease was due in large part to savings resulting from cost cutting measures put in place during the quarter ended September 30, 2005. RESTRUCTURING COSTS Refer to Note 10 in Item 1 of this Quarterly Report on Form 10-Q for detail related to restructuring costs incurred during the three months ended September 30, 2005. INTEREST EXPENSE Interest expenses during the third quarter of 2005 of $86,000 decreased from $135,000 during the same period in 2004. This decrease is a result of lower average outstanding debt balances during the third quarter of 2005 compared to 2004. 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 2.04 to 1 at September 30, 2005 compared 1.59 to 1 at December 31, 2004. Working capital, the excess of current assets over current liabilities, was $6,332,000 at September 30, 2005, a decrease of $383,000 (5.7%) over reported working capital of $6,715,000 at December 31, 2004. On March 18, 2005, the Company received a notice of default and reservation of rights letter from its lender regarding the Company's term loan as a result of the non-renewal of its CBU contract with the USPS. To date, the Company has made all scheduled payments on its term loan and its outstanding mortgage loan. In addition, the lender has verbally advised the Company that its revolving line of credit is not available. The Company has no long-term capital commitments or obligations, although this situation may require re-evaluation upon receipt of the USPS drawing and design package for the new 1118F CBU. The Company is in discussions with the lender regarding the timing of final payment on its outstanding term and mortgage loans. The Company is seeking a new lender in Texas, where the Company has relocated its headquarters. The initial proposal by the current lender provided that the Company (i) pay down the remaining balance of its term loan, which is approximately $1,050,000 at September 30, 2005, (ii) maintain its mortgage loan due in 2006, which has an outstanding balance of approximately $2,300,000, and (iii) have available a revolving line of credit of $1,000,000, subject to terms and conditions to be negotiated. The real property and building which secures the Company's mortgage loan have been appraised by the lender at a value of approximately $3,000,000. The Company expects to have sufficient cash on hand to pay off its term loan and further expects to be able to refinance its mortgage loan with a new lender in Texas. If the Company is unable to restructure its term and revolving debt with its current lender or to refinance its mortgage loan and obtain financing from a new lender on terms acceptable to the Company, the financial position of the Company would be materially adversely affected. Cash provided by operating activities was $360,000 during the first nine months of 2005, due in large part to a decrease in reported inventories of $2,205,000. Exclusive of the increases in inventory valuation reserves and the write-off of the REL inventory, the reduced inventory results primarily from a decrease in the level of raw materials and stock product being kept on hand in anticipation of the expected volume decline in CBU sales as a result of the expired USPS contract. Offsetting the reduction in inventory during the first nine months of 2005 were payments against an environmental settlement totaling approximately $1,102,000 and payments of income taxes which were accrued for at December 31, 2004. Capital expenditures of $388,000 during the first nine months of 2005 represented, for the most part, the purchase of needed equipment for Security Manufacturing Corporation, a subsidiary of the Company. Cash used in financing activities during the first nine months of 2005 included scheduled debt repayments of $969,000 and an accelerated pay down of outstanding debt to the bank of $2,350,000. Also, in June of 2005, 12,000 shares of the Company's common stock were issued under the Company's stock option plan at a price of $2.81 per share, generating proceeds of $33,750. In May 2005, the Company announced the freezing of its defined benefit pension plan, effective July 15, 2005. Unrecognized prior service costs in the amount of $13,556 were written off in the second quarter of 2005. EFFECT OF NEW ACCOUNTING GUIDANCE The Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) - "Share Based Payment" during December 2004. SFAS 123(R) is effective for fiscal years beginning after June 15, 2005 and will require the Company to recognize compensation expense in an amount equal to the fair value of share based payments. The impact of SFAS 123(R) does not have a material impact on stock options currently issued, but may in the future if additional stock options are issued. The FASB has also issued SFAS No. 151 - "Inventory Costs - An Amendment to ARB No. 43, Chapter 4" effective for fiscal years beginning after June 15, 2005. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The Company is in the process of evaluating the impact of implementing SFAS 151. FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in Item 1, "Business," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". When used in this Quarterly Report on Form 10-Q, the words "anticipates," "plans," "believes," "estimates," "intends," "expects," "projects," "will" and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company's statements regarding business strategy, implementation of its restructuring plan, competition, new product development and liquidity and capital resources are based on management's beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond the Company's control. The Company's actual results could differ materially from those expressed in any forward-looking statement made by or on the Company's behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. The Company has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal accounting officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of September 30, 2005. These disclosure controls and procedures are designed to provide reasonable assurance to the Company's management and board of directors that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to its management, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, including consideration of the existence of the material weaknesses discussed below, the principal executive officer and principal accounting officer of the Company have concluded that the Company's disclosure controls and procedures as of September 30, 2005 were not effective, at the reasonable assurance level, to ensure that (a) material information relating to the Company is accumulated and made known to the Company's management, including its principal executive officer and principal accounting officer, to allow timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in SEC's rules and forms. In connection with the preparation of the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2004, which was filed late with the SEC on July 27, 2005 as a result of the previously disclosed restructuring plan approved after the loss of the Company's contract with the USPS, a number of material weaknesses in the Company's internal control over financial reporting were identified. These material weaknesses were identified in Item 9A of that Form 10-K and in Item 4 of both the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended March 31, 2005, which was filed late with the SEC on August 1, 2005 for the same reason, and the Company's Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2005, which was filed with the SEC on August 15, 2005. During the third quarter of 2005, the Company commenced the implementation of procedures to provide a more thorough and detailed review of financial information commenced by centralizing and relocating many financial reporting functions and all administrative functions to the Company's new headquarters in Grapevine, Texas. The Company also hired a corporate controller during the third quarter of 2005, and this individual likely will become the Company's Chief Financial Officer in the near future. There were no other changes in the Company's internal control over financial reporting during the third quarter of 2005. Management has endeavored to address the material weaknesses discussed above and is committed to effectively remediating known weaknesses. Although the Company's remediation efforts with respect to the material weaknesses discussed above are currently on-going, the Company will not consider control weaknesses to be remediated until new internal controls over financial reporting are implemented and operational for a period of time and are tested, and management concludes that the new controls are operating effectively. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (b) Exhibits. 31.1 Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32.1 Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. S I G N A T U R E ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN LOCKER GROUP INCORPORATED /s/Edward F. Ruttenberg -------------------------------------- Edward F. Ruttenberg Chairman, Chief Executive Officer, Chief Operating Officer and Treasurer November 22, 2005 -------------------- EX-31 2 exhibit31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) AND 15D-14(A) OF THE SECURITIES EXCHANGE ACT, AS AMENDED I, Edward F. Ruttenberg, certify that: 1 I have reviewed this quarterly report on Form 10-Q of American Locker Group Incorporated; 2 Based on my knowledge, this 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 report; 3 Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4 The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 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 of 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer 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 function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably like 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 control over financial reporting. Date: November 22, 2005 By /s/ Edward F. Ruttenberg ----------------------------------- Edward F. Ruttenberg Chief Executive Officer and Principal Financial Officer EX-32 3 exhibit32_1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of American Locker Group Incorporated (the "Company") on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the respective capacities and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; 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: November 22, 2005 /s/ Edward F. Ruttenberg -------------------------------- Edward F. Ruttenberg Chief Executive Officer and Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----