-----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, CQuJOqNlLngSdJnn6Ok6An2tzF0Z1pmgFgqDzxE7dQIdDqGobf7L9hzFAb56tg6A HqiaInFswaTAOEBAOMBpbg== 0000898431-99-000047.txt : 19990319 0000898431-99-000047.hdr.sgml : 19990319 ACCESSION NUMBER: 0000898431-99-000047 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-00439 FILM NUMBER: 99568033 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 10KSB 1 FORM 10-KSB U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to __________ Commission file number 0-439 American Locker Group Incorporated - -------------------------------------------------------------------------------- (Name of small business issuer 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) Issuer's telephone number 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) Check whether the issuer (1) 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 / /. - 1 - Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $45,011,327. Issuers aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of March 11, 1999: $19,020,798. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 2,498,772 shares common stock ($1.00 par value) as of March 11, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Annual Stockholders' Meeting to be held May 13, 1999, are incorporated by reference into Part III. Transitional Small Business Disclosure Form (check one): / / Yes /X/ No - 2 - PART I ITEM 1. DESCRIPTION OF BUSINESS American Locker Group Incorporated (the "Company") is engaged primarily in the sale and rental of lockers. This includes coin, key and electronically controlled checking lockers and related locks and plastic 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 centralized mail and parcel distribution lockers are sold to the United States Postal Service ("USPS") for use in centralized mail and parcel delivery in new housing and industrial developments, as well as replacement of older style lockers in existing locations. The Company is an engineering, assembling and marketing enterprise which also manufactures its own mechanical locks for use in its products. 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. One of the Company's subsidiaries is a party to a Manufacturing Agreement with Signore, Inc., formerly a wholly owned subsidiary of the Company, to furnish fabricating, assembly and shipping services. The Agreement, which became effective January 1, 1990, has been extended and now is for a term expiring June 30, 2000. 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 in one business: sale and rental of coin and key or electronically controlled checking lockers and locks and the sale of plastic centralized mail and parcel distribution lockers. The Company has developed a polycarbonate all-weather parcel locker for the United States Postal Service, and has shipped over 151,000 of the units from March 1989 through March 5, 1999. Cluster Box Units, i.e. (combination letter box - CBU), are plastic parcel and letter units for the United States Postal Service which have been approved and field tested. In November 1994, the Company negotiated a contract to sell Type Three CBUs in quantity to the United States Postal Service. Type One and Type Two CBUs are approved and included in the current contract. As of March 5, 1999, Cluster Box Units with aggregate invoice prices in excess of $70,000,000 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 United States Postal Service. - 3 - 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. These sales 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. The Company has developed a coin operated baggage cart system and is operating the system at one major Canadian airport, and has sold several cart systems for use in American airports. Additional information with respect to business segment data, including significant customers, is disclosed in Note 10 of the financial statements included in Item 7 of this Form 10-KSB. 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. However, the Company faces more active competition from several other 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 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 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 lockers are manufactured by Signore Inc. pursuant to the Manufacturing Agreement, except for the locks which are manufactured by ALSSI. PATENTS The Company owns a number of patents, none of which it considers material to the conduct of its business. - 4 - EMPLOYEES The Company actively employed 135 individuals as of December 31, 1998, in its businesses of whom 47 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. RESEARCH AND DEVELOPMENT The Company engages in research and development activities relating to new and improved products as an incident of its normal manufacturing operations in conjunction with the continuing operations. It expended $17,081, $48,735, and $44,634 in 1998, 1997 and 1996, respectively, for such activity in its continuing businesses, which does not include new product development costs. 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. 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 Cattaragus. 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." The Company believes that its potential liability with respect to this site, if any, is diminimus. Therefore, based on the information currently available, management does not believe the outcome of this suit will have a substantial 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 customary reservation of rights. GENERAL 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. During 1998, 1997 and 1996, one customer, the United States Postal Service, accounted for 76.9%, 69.2% and 61.8% 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. - 5 - EXECUTIVE OFFICERS OF THE COMPANY YEAR FIRST ASSUMED NAME AGE OFFICE HELD WITH COMPANY POSITION - -------------------------------------------------------------------------------- Edward F. Ruttenberg 52 Chairman of the Board and 1998 Chief Executive Officer Roy J. Glosser 38 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. Except as provided in such employment contract, 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. - 6 - 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. PRODUCTS - -------- --------- ----------- -------- 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 500* Office space Ellicottville, NY American Locker Security 12,800 Lock manufactur- Systems, Inc. - Lock Shop ing service and repair Toronto, Ontario Canadian Locker Company, Ltd. 4,000* Coin-operated lockers and locks Toronto, Ontario Canadian Locker Company, Ltd. 3,000* Warehouse ------ TOTAL 87,500 ======
The Company believes that its facilities which are of varying ages and types of construction and the machinery and equipment utilized in such plants are in good condition and are adequate for its presently contemplated needs. All facilities are leased except for the Ellicottville facility. The leases on these properties terminate at various times from 1999 through 2001. ITEM 3. LEGAL PROCEEDINGS As previously reported, four female former employees of the Company alleged in suits entitled Derr et al. v. American Locker Group, Inc., 94-CV-0515S(M), (US District Court for Western District of New York) that they were the victims of sex discrimination in their terminations - 7 - and/or compensation and sought unspecified damages. As previously disclosed, the Court granted summary judgement in favor of the Company and dismissed the claims of three of the four plaintiffs on March 25, 1998. On June 4, 1998, the Company entered into a settlement with the remaining plaintiff whereby the Company paid a monetary sum of $400,000 in full settlement of all claims of the remaining plaintiff. The amount of the settlement had previously been accrued on the books of the Company In September 1998 and subsequent months, the Company was named as an additional defendant in 32 cases pending in state court in Massachusetts. The plaintiffs in each such case assert that 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. Based upon investigations conducted by the Company to date, the Company has discovered no evidence that the former division manufactured or supplied any products containing asbestos. Therefore, barring the discovery of contrary evidence, the Company does not anticipate that these actions will have any substantial impact on the Company's operations or financial condition. Defense of these cases has been assumed by the Company's insurance carrier, subject to a customary reservation of rights. 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 1998. - 8 - 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 1997 HIGH LOW DECLARED ---- ---- ---- -------- First Quarter $ 3.50 $ 3.25 $0.00 Second Quarter 3.56 2.8125 0.00 Third Quarter 6.00 3.00 0.00 Fourth Quarter 7.00 4.57 0.00 ----- Total $0.00 ====== DIVIDEND 1998 HIGH LOW DECLARED ---- ---- ---- -------- First Quarter $12.75 $ 6.188 $0.00 Second Quarter 39.00 11.50 0.00 Third Quarter 37.75 10.50 0.00 Fourth Quarter 30.75 18.00 0.00 ----- Total $0.00 ======
As of March 12, 1999, the Company had 1,386 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 7 of this Form 10-KSB. - 9 - ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - 1998 COMPARED TO 1997 In 1998, consolidated sales of $45,011,327 increased 54% over 1997 sales of $29,295,327. Income before income taxes rose 106% to $7,103,364 compared to $3,454,508 in 1997. Sales of the Company's plastic lockers to the United States Postal Service (USPS) increased 76% from $19,112,209 in 1997 to $33,610,788 in 1998. Revenues from the Company's other non-plastic locker products increased 12% from $10,183,324 in 1997 to $11,400,539 in 1998. Consolidated cost of sales as percentage of sales remained at 70.0% in 1998 compared to 70.0% in 1997. Gross margin gains due to higher volume efficiencies on Cluster Box Units (CBUs) were offset by price concessions to the USPS. The Company's present contract with the USPS covers all three types of CBUs and the Outdoor Parcel Locker (OPL). The contract was originally awarded March 27, 1996, for a period of one year. The USPS exercised two one-year options to extend the contract to mid-April 1998 and mid-April 1999 respectively. During 1998 the Company delivered approximately 34,000 CBUs (all three types combined) and approximately 8,000 OPLs. The USPS has instituted and maintained a procurement policy since October 1997 that strictly limits purchase of NDCBUs (the steel predecessor to plastic or aluminum CBUs) in relation to the new CBUs. Shipments of CBUs increased dramatically in 1998 due to execution of this policy and the Company's ability to maintain its market share position. The USPS has advised the Company that it will exercise the third of four one year options extending the contract to mid-April 2000. Prices and quantities under the contract renewal have not been finalized and are subject to negotiation. The USPS has also notified its procurement offices nationwide that effective mid-September 1999 all NDCBUs will be decertified. This policy when instituted will eliminate the purchase and installation of NDCBUs. This notice was also sent to all three CBU vendors, including our two competitors, both of whom produce NDCBUs and CBUs. The Company does not produce NDCBUs. The Company believes its CBU product line continues to represent the best value when all factors including price, quality of design and construction, long-term durability and service are considered. Selling, administrative and general expenses of $6,608,376 during 1998 increased 29% from the $5,119,905 in 1997. Two unusual items accounted for approximately $727,000 of the $1,488,471 increase in selling, administrative and general expenses. On July 1, 1998, Roy J. Glosser, President and Chief Operating Officer was granted and exercised stock appreciation rights (SARs) which resulted in $327,000 of additional compensation expense. The Company also expensed $400,000 to provide for the full valuation of the supplemental executive retirement program (SERP) for Harold J. Ruttenberg, former Chairman and Chief Executive Officer. The remainder of the increase in selling, administrative and general expense includes increased costs for compensation, selling expenses, freight, and legal expenses. The previously disclosed settlement with the remaining plaintiff of Derr et al v. American Locker Group Inc., 94-CV-05155(M), for a monetary sum of $400,000 was fully reserved and had no effect on the Company's results of operations in 1998. - 10 - Interest income increased to $102,826 in 1998 compared to $51,270 in 1997 due to improvements in daily cash management procedures and higher balances available for overnight investment. Total other income was $322,742 in 1998 as compared to other expense of $56,762 in 1997. Interest expense increased to $231,875 in 1998 from $181,678 recorded in 1997. The increase in interest expense relates to higher average outstanding debt in 1998. However, in October 1998 the Company retired $1,813,421 of debt related to the repurchase of a large block of Company stock in 1997. RESULTS OF OPERATIONS - 1997 COMPARED TO 1996 In 1997 consolidated sales of $29,295,533 increased 30% over 1996 sales of $22,517,589. Income before income taxes rose 90% to $3,454,508 compared to $1,819,184 in 1996. Sales of the Company's plastic lockers to the United States Postal Service (USPS) increased 51% from $12,658,767 in 1996 to $19,112,209 in 1997. Revenues from the Company's other non-plastic locker products increased 3% from $9,858,822 in 1996 to $10,183,324 in 1997. Consolidated cost of sales as a percentage of sales decreased slightly to 70.0% in 1997 from 70.1% in 1996. Gross margin gains due to higher volume efficiencies on Cluster Box Units (CBUs) were mostly offset by price concessions to the USPS. As stated earlier, the Company's present contract with the USPS covers all three types of CBUs and the Outdoor Parcel Locker (OPL). The contract was awarded March 27, 1996 for a period of one year expiring April 14, 1997. On April 16, 1997 the USPS exercised the first of four one-year options to extend the contract to April 14, 1998. During 1997 the Company delivered approximately 16,000 CBUs (all three types combined) and approximately 16,000 OPLs. As previously announced, the USPS instituted procurement policy that strictly limits purchase of NDCBUs (the steel predecessor to plastic or aluminum CBUs) in relation to the new CBUs. Fourth quarter 1997 CBU shipments increased dramatically due to execution of this policy and the Company's ability to maintain its dominant market share position. Selling, administrative and general expenses of $5,119,905 during 1997 increased 2.6% from the $4,989,497 in 1996. The increase in selling, administrative and general expenses relates to increased freight and selling expenses associated with the increased shipment volume. Interest income increased to $51,270 in 1997 compared to $43,270 in 1996 due to improvements in daily cash management procedures and higher balances available for overnight investment. Total other expense was $56,762 in 1997 as compared to other income of $248,605 in 1996. Interest expense decreased to $181,678 in 1997 from $208,827 recorded in 1996. - 11 - 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 3.94 to 1 and 2.90 to 1 at the end of 1998 and 1997, respectively. Working capital, or the excess of current assets over current liabilities, was $9,117,071 at December 1998 and $6,558,095 at December 31, 1997. The increase in working capital resulted primarily from the increased business activity with the USPS. In 1998 the Company's operations generated $3,787,098 of cash. Principally, operating cash was utilized, to retire long-term debt of $1,813,421, to meet scheduled debt payments, to pay down the line of credit and to purchase equipment. The Company also has a $3,000,000 line-of-credit available to assist in satisfying future operating cash needs, if required. However, the Company anticipates that it will generate positive cash flow from operations in 1999. At December 31, 1998, the outstanding balance of the remaining term loan was $733,333, payable at $16,667 per month plus interest. The Company's policy is to maintain modern equipment and adequate capacity. During 1998, 1997 and 1996, the Company expended $537,000, $520,000, and $234,000, respectively, for capital additions. Capital expenditures in all three years were financed principally from operations. In addition, 1999 capital expenditures are also expected to be financed from operations. IMPACT OF INFLATION AND CHANGING PRICES Although inflation has slowed 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. The Company will continue to find ways to control the administrative overhead necessary to successfully run the business. By controlling these costs, the Company can continue to be competitively priced 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. EFFECT OF NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The intended use of the derivative and its designation as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (a fair value hedge), (2) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge), or (3) a hedge of the foreign currency exposure of a net investment in a foreign operation (a foreign currency hedge), will determine when the gains - 12 - or losses on the derivatives are to be reported in earnings and when they are to be reported as a component of other comprehensive income. This new standard must be adopted for year 2000 financial reporting. At this time, management does not believe that the pronouncement will impact the Company's financial statements. YEAR 2000 PROJECT UPDATE The Year 2000 (Y2K) issue relates to the fact that many computers, computer programs, and embedded microchips support only two digits to specify a year in the date field. Therefore, if not corrected, these systems may fail or create erroneous results in dealing with matters which refer to dates after December 31, 1999. The Company is aware of the issues and has actively pursued corrective action since late 1996. Following is a project status update as of December 31, 1998. A. Assessment Assessment of the Company's Information Technology (IT) systems was completed in 1997. Based on results of the assessment, the Company determined that complete replacement of its IT system was the best course of action. Assessment of the Company's non-IT systems with embedded microchips (security systems, telephones, etc.) began in the first quarter of 1998 and is now complete. No systems required renovation and none are critical to the Company's production process. B. Renovation Renovation by replacement of the Company's IT system is proceeding on schedule. New IT software that is certified Y2K compliant has been purchased, installed, and modeled using actual Company data. The new IT system is running on a new Novell network of personal computers that is also certified Y2K compliant. Total project expenditures through December 31, 1998 were $150,000 for hardware, software, and implementation consulting fees. This represents over 60% of the total projected project cost. C. Validation Validation and final testing of the new IT system has commenced with full-scale Company data starting January 1, 1999 and will continue through the first quarter of 1999. D. Implementation Final implementation of the new IT system is scheduled for the second quarter 1999, depending on validation results. However, our current IT system will run parallel until the new system is completely validated. - 13 - E. Third Party Assessment The Company surveyed its entire vendor base during the third quarter of 1998. Final results were compiled during the fourth quarter 1998. The Company has verified that its major vendors are working towards Y2K compliance and that reasonable contingency plans are in place to allow the Company's production of its products to continue. Also, the Company as normal policy, maintains adequate inventory of all but the most expensive components (those supplied by vendors noted above) to safeguard against short term interruptions. The Company has also built and will maintain a large inventory of completed CBUs in order to ensure on-time deliveries to the USPS in spite of any Y2K related interruptions in production. No single customer's failure to address the Y2K issue, other than the United States Postal Service (USPS), would have a material effect on the Company. WORST CASE RISKS AND CONTINGENCY PLANS In 1998, the Company's contract with the United States Postal Service (USPS) accounted for over 70% of the Company's revenues. Any interruption or slowing of USPS orders or payments as a result of Y2K related issues would have a material adverse effect on the Company's results of operations, liquidity, and/or financial condition. However, through communication with the USPS and assessment of USPS representations related to their Y2K project status, the Company does not anticipate Y2K related interruptions in USPS orders or payments. In the event that a Y2K related slowdown or stoppage in USPS orders does occur, the Company has a contingency plan whereby CBU inventory levels would be reduced and orders for incoming materials would be delayed or cancelled in order to free working cash. The Company's $3,000,000 line of credit, as well as other financial instruments, may be utilized if necessary. The forward looking statements contained in the Year 2000 Project Update should be read in conjunction with the Company's disclosures under the heading "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." 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, and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. - 14 - ITEM 7. 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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Ernst & Young, LLP Buffalo, New York February 17, 1999 - 15 - American Locker Group Incorporated and Subsidiaries Consolidated Balance Sheets
DECEMBER 31, 1998 1997 ------------------------------ ASSETS Current assets: Cash and cash equivalents $ 1,188,007 $ 1,154,045 Accounts and notes receivable, less allowance for doubtful accounts of $216,062 in 1998 and $438,784 in 1997 4,062,802 4,519,710 Inventories 6,312,131 3,636,528 Prepaid expenses 150,808 89,656 Prepaid federal, state and foreign 0 32,515 income taxes Deferred income taxes 501,477 576,861 ----------- ----------- Total current assets 12,215,225 10,009,315 Property, plant and equipment: Land 500 500 Buildings 388,795 511,649 Machinery and equipment 8,408,983 8,004,338 ----------- ----------- 8,798,278 8,516,487 Less allowances for depreciation and amortization 7,681,632 7,267,199 ----------- ----------- 1,116,646 1,249,288 Deferred income taxes 137,645 5,122 ----------- ----------- Total assets $ 13,469,516 $ 11,263,725 =========== ===========
- 16 -
DECEMBER 31 1998 1997 ------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Demand note payable $ 0 $ 850,000 Accounts payable 1,574,809 1,172,032 Commissions, salaries, wages and taxes thereon 639,822 330,956 Other accrued expenses 600,582 435,232 Federal, state and foreign income taxes payable 82,941 0 Current portion of long-term debt 200,000 663,000 ------------ ------------ Total current liabilities 3,098,154 3,451,220 Long-term obligations: Long-term debt 533,333 2,431,000 Pension and other benefits 573,973 462,360 ------------ ------------ 1,107,306 2,893,360 Stockholders' equity: Common stock, $1 par value: Authorized shares --- 4,000,000 Issued and outstanding shares --- 2,422,772 in 1998 and 2,405,780 in 1997 2,422,772 2,405,780 Other capital 74,867 0 Retained earnings 6,976,987 2,662,445 Foreign currency translation adjustment (210,570) (149,080) ------------ ------------ Total stockholders' equity 9,264,056 4,919,145 ------------ ------------ Total liabilities and stockholders' equity $ 13,469,516 $ 11,263,725 ============ ============ SEE ACCOMPANYING NOTES.
- 17 - American Locker Group Incorporated and Subsidiaries Consolidated Statements of Income
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Net sales $ 45,011,327 $ 29,295,533 $ 22,517,589 Cost of products sold 31,493,280 20,533,950 15,791,956 ----------------------------------------------- 13,518,047 8,761,583 6,725,633 Selling, administrative and general expenses 6,608,376 5,119,905 4,989,497 ----------------------------------------------- 6,909,671 3,641,678 1,736,136 Interest income 102,826 51,270 43,270 Other (expense) income - net 322,742 (56,762) 248,605 Interest expense (231,875) (181,678) (208,827) ----------------------------------------------- Income before income taxes 7,103,364 3,454,508 1,819,184 Income taxes 2,788,822 1,342,033 674,352 ----------------------------------------------- Net income $ 4,314,542 $ 2,112,475 $ 1,144,832 =============================================== Earnings per share of common stock: Basic $ 1.78 $ .72 $ .35 ============================================== Diluted $ 1.70 $ .70 $ .35 ============================================== Dividends per share of common stock: $ 0.00 $ 0.00 $ 0.00 ============================================== SEE ACCOMPANYING NOTES.
- 18 - American Locker Group Incorporated and Subsidiaries Consolidated Statements of Stockholders' Equity
ACCUMULATED OTHER TOTAL COMMON OTHER RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL EARNINGS INCOME EQUITY ---------------------------------------------------------------------------------- Balance at January 1, 1996 $ 3,274,500 $ 1,258,805 $ 44,476 $ (113,715) $ 4,464,066 Comprehensive income: Net income - 1,144,832 - 1,144,832 Other comprehensive income: Foreign currency translation - - (872) (872) ---------- Total comprehensive income 1,143,960 Common stock purchased and retired (74,404 shares) (74,404) (175,475) - - (249,879) -------------------------------------------------------------------------------- Balance at December 31, 1996 3,200,096 1,083,330 1,189,308 (114,587) 5,358,147 Comprehensive income: Net income - - 2,112,475 - 2,112,475 Other comprehensive income: Foreign currency translation (34,493) (34,493) ---------- Total comprehensive income 2,077,982 Common stock purchased and retired (794,316 shares) (794,316) (1,083,330) (639,338) - (2,516,984) -------------------------------------------------------------------------------- Balance at December 31, 1997 2,405,780 - 2,662,445 (149,080) 4,919,145 Comprehensive income: Net income - - 4,314,542 - 4,314,542 Other comprehensive income: Foreign currency translation - - - (61,490) (61,490) ---------- Total comprehensive income 4,253,052 Common stock issued (17,000 shares) 17,000 8,063 - - 25,063 Tax benefit of exercised stock options - 66,894 - - 66,894 Common stock purchased and retired (8 shares) (8) (90) - - (98) -------------------------------------------------------------------------------- Balance at December 31, 1998 $ 2,422,772 $ 74,867 $ 6,976,987 $ (210,570) $ 9,264,056 ================================================================================ SEE ACCOMPANYING NOTES.
- 19 - American Locker Group Incorporated and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- OPERATING ACTIVITIES Net income $ 4,314,542 $ 2,112,475 $ 1,144,832 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 646,379 600,632 622,392 Loss (gain) on disposition of property, plant and equipment 1,265 490 (20,224) Deferred income tax credits (57,139) (7,467) (124,245) Pension and other benefits 311,613 58,040 46,106 Change in assets and liabilities: Accounts and notes receivable 438,478 (1,164,644) 461,028 Inventories (2,675,794) (296,860) (564,015) Prepaid expenses (62,058) 7,603 46,090 Accounts payable and accrued expenses 687,462 154,526 (280,424) Income taxes 182,350 (3,529) (859,005) ----------------------------------------------- Net cash provided by operating activities 3,787,098 1,461,266 472,535 INVESTING ACTIVITIES Purchase of property, plant and equipment (536,819) (520,358) (234,621) Proceeds from sale of property, plant and equipment 9,426 3,702 43,104 ----------------------------------------------- Net cash used in investing activities (527,393) (516,656) (191,517) FINANCING ACTIVITIES Net repayment under line of credit (850,000) (275,000) (275,000) Long-term debt borrowings - 3,315,000 1,000,000 Long-term debt repayments (2,360,667) (600,000) Common stock issued 25,063 - - Common stock purchased and retired (98) (249,879) ----------------------------------------------- Net cash used in financing activities (3,185,702) (997,984) (124,879) Effect of exchange rate changes on cash (40,041) (21,803) (7,404) ----------------------------------------------- Net (decrease) increase in cash 33,962 (75,177) 148,735 Cash and cash equivalents at beginning of year 1,154,045 1,229,222 1,080,487 ----------------------------------------------- Cash and cash equivalents at end of year $ 1,188,007 $ 1,154,045 $ 1,229,222 =============================================== Supplemental cash flow information: Cash paid during the year for: Interest $ 240,600 $ 172,953 $ 208,827 =============================================== Income taxes paid $ 2,665,587 $ 1,345,562 $ 1,650,823 =============================================== SEE ACCOMPANYING NOTES.
- 20 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial December 31, 1998 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 Company is engaged in one business: coin and key or electronically controlled metal and plastic centralized mail and parcel distribution lockers and locks. The Company sells to customers throughout North America as well as internationally. The Company instituted a four-for-one stock distribution whereby three new shares were distributed on June 25, 1998 for every one share outstanding on the June 4, 1998 record date. All share and per-share amounts in the accompanying unaudited consolidated financial statements have been retroactively adjusted to reflect this distribution as have the total shares now outstanding and subject to option. 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. INVENTORIES Inventories are valued principally at the lower of cost or market, cost determined by the last-in, first-out method. PROPERTIES AND DEPRECIATION Property, plant and equipment are stated at cost. Provisions for depreciation have been computed for accounting purposes by the straight-line and declining-balance methods based on estimated useful lives. Provisions for depreciation have been computed for tax purposes under accelerated tax methods. - 21 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenue is recognized at the point of passage of title, which is at the time of shipment to the customer. Less than five percent of the Company's revenues are derived from sales to distributors. No distributor stocks a material inventory of the Company's products and no distributor has the right of return. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect of a change in tax rates is recognized in the period that includes the enactment date. EARNINGS PER SHARE The Company reports earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, under SFAS 128 basic earnings per share excludes any dilutive effects of stock options, whereas diluted earnings per share assumes exercise of stock options resulting in an increase in outstanding shares. FOREIGN CURRENCY The assets and liabilities of the Company's foreign subsidiary are translated to U.S. dollars at current exchange rates. Revenue and expense accounts are translated at weighted average exchange rates prevailing during 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 and notes receivable, accounts payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The interest rates on the Company's bank borrowings are adjusted regularly - 22 - to reflect current market rates. Accordingly, the carrying amounts of the Company's borrowings also approximate fair value. American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for stock options granted under its stock-based compensation plan in accordance with the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as allowed under Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no compensation cost for stock options is recognized because the exercise price of the stock options equals the market price of the underlying stock on the date of the grant. 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. RECLASSIFICATION Certain items in the December 31, 1997 financial statements have been reclassified to conform to the December 31, 1998 presentation. 3. INVENTORIES Inventories consist of the following:
DECEMBER 31 1998 1997 -------------------------- Finished products $ 1,763,210 $ 1,041,732 Work-in-process 2,023,542 1,559,037 Raw materials 2,985,888 1,869,576 -------------------------- 6,772,640 4,470,345 Less allowance to reduce to LIFO basis (460,509) (833,817) -------------------------- Net inventories $ 6,312,131 $ 3,636,528 ==========================
- 23 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 4. DEBT Long-term debt consists of the following:
DECEMBER 31 1998 1997 -------------------------- Note payable to bank, unsecured, payable through August 31, 2002 at $16,667 per month plus interest at prime plus .15% (7.90% at December 31, 1998) $ 733,333 $ 933,333 Note payable to bank, unsecured, with interest at prime plus .25% - 2,160,667 -------------------------- Total long-term debt 733,333 3,094,000 Less current portion 200,000 663,000 -------------------------- Long-term portion $ 533,333 $2,431,000 ==========================
The credit agreement underlying the note payable to bank requires the maintenance of certain levels of net worth and working capital and requires the maintenance of a certain current ratio and ratio of liabilities to net worth. In addition, the credit agreement has restrictions on the payment of dividends. The Company was in compliance with these covenants at December 31, 1998. Required principal payments on long-term obligations in each of the years through final maturity are as follows: 1999 $ 200,000 2000 200,000 2001 200,000 2002 133,333 The Company has a $3,000,000 unsecured line of credit agreement with a bank with interest at the prime rate. There were no borrowings outstanding under the line of credit at December 31, 1998. The weighted average interest rate on short-term borrowings outstanding during the year was 8.5%, 8.5%, and 8.3%, in 1998, 1997 and 1996, respectively. 5. OPERATING LEASES The Company leases several operating facilities and vehicles under non-cancelable operating leases. Future minimum lease payments consist of the following at December 31, 1998: 1999 $ 291,000 2000 282,000 2001 254,000 ---------- $ 827,000 ========== - 24 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 5. OPERATING LEASES (CONTINUED) Rent expense amounted to approximately $252,000, $360,000, and $351,000, in 1998, 1997 and 1996, respectively. 6. INCOME TAXES For financial reporting purposes, income before income taxes includes the following components:
1998 1997 1996 -------------------------------------------- United States $ 7,055,116 $ 3,475,062 $ 1,802,858 Foreign income (loss) 48,248 (20,554) 16,326 -------------------------------------------- $ 7,103,364 $ 3,454,508 $ 1,819,184 ============================================
Significant components of the provision for income taxes are as follows:
1998 1997 1996 -------------------------------------------- Current: Federal $ 2,431,419 $ 1,162,327 $ 670,960 State 390,548 199,227 118,437 Foreign 23,954 (12,054) 9,200 -------------------------------------------- Total current $ 2,845,921 1,349,500 798,597 Deferred: Federal (48,569) (6,347) (105,608) State (8,570) (1,120) (18,637) -------------------------------------------- (57,139) (7,467) (124,245) ============================================ $ 2,788,782 $ 1,342,033 $ 674,352 ============================================
The differences between the federal statutory rate and the effective tax rate as a percentage of income before taxes are as follows:
1998 1997 1996 ------------------------------------ Statutory income tax rate 34% 34% 34% State and foreign income taxes 4 3 4 Other permanent differences 1 2 (1) ------------------------------------ 39% 39% 37% ====================================
- 25 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 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:
1998 1997 ---------------------- Deferred tax liabilities: Property, plant and equipment $ 139,422 $ 161,203 Prepaid expenses and other 91,036 28,899 ---------------------- Total deferred tax liabilities 230,458 190,102 Deferred tax assets: Postretirement benefits 61,936 62,336 Pension costs 253,654 129,009 Allowance for doubtful accounts 84,360 173,278 Accrued expenses 105,102 71,094 Other employee benefits 34,256 47,205 Inventory costs 330,272 274,303 Other - 14,860 ---------------------- Total deferred tax assets 869,580 772,085 ---------------------- Net deferred tax assets $ 639,122 $ 581,983 ====================== Current deferred tax asset $ 501,477 $ 576,861 Long-term deferred tax asset (liability) 137,645 5,122 ---------------------- $ 639,122 $ 581,983 ======================
The Company does not provide deferred taxes for amounts 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 was approximately $750,000 at December 31, 1998. If such dividends were to be remitted, foreign tax credits available under present law would reduce the amount of U.S. taxes payable. - 26 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 7. PENSION PLAN 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. The plan's assets are invested in fixed interest rate group annuity contracts with an insurance company. In addition to the Company's defined benefit plan, the Company provides a life insurance benefit to substantially all employees upon retirement. Retirees eligible to participate in this plan have their life insurance premiums paid on their behalf by the Company. The insurance premiums related to this plan are paid annually. The following table sets forth the changes in benefit obligation, changes in net assets, and the funded status recognized in the consolidated balance sheet at December 1998 and 1997.
PENSION BENEFITS OTHER BENEFITS 1998 1997 1998 1997 -------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 2,089,481 $ 1,764,414 $ 133,302 $ 126,430 Service cost 142,888 155,750 1,332 1,517 Interest cost 134,961 129,881 4,594 7,180 Actuarial loss (gain) 92,463 135,313 (61,644) 1,825 Benefits paid (336,007) (95,877) (5,300) (3,650) -------------------------------------------------------- Benefit obligation at end of year 2,123,786 2,089,481 72,284 133,302 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 1,911,849 1,876,393 - - Actual return on plan assets 126,330 131,333 - - Employer contribution 123,037 - 5,300 3,650 Benefits paid (336,007) (95,877) (5,300) (3,650) -------------------------------------------------------- Fair value of plan assets at end of year 1,825,209 1,911,849 - - Funded status (298,577) (177,632) (72,284) (133,302) Unrecognized net transition asset (423,015) (529,056) - - Unrecognized net actuarial loss (gain) 457,665 381,049 (64,350) (6,537) Unrecognized prior service cost 2,693 3,118 - - -------------------------------------------------------- Accrued benefit cost $ (261,234) $ (322,521) $ (136,634) $ (139,839) ========================================================
- 27 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 7. PENSION PLAN (CONTINUED) COMPONENTS OF NET PERIODIC BENEFIT COST
PENSION BENEFITS OTHER BENEFITS 1998 1997 1998 1997 --------------------------------------------------- Service cost $ 142,888 $ 155,750 $ 1,332 $ 1,517 Interest cost 134,961 129,881 4,594 7,180 Expected return on plan assets (121,896) (133,645) - - Amortization of unrecognized net transition asset (106,041) (106,041) - - Net actuarial loss (gain) 11,413 4,461 (3,830) (1,488) Amortization of prior service cost 425 425 - - --------------------------------------------------- Net periodic benefit cost $ 61,750 $ 50,831 $ 2,096 $ 7,209 =================================================== WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.75% 7.00% 6.75% 7.00% Expected return on plan assets 7.00% 7.25% 7.00% 7.25% Rate of compensation increase 4.75% 5.00% 4.75% 8.00%
The changes in the actuarial assumptions in 1998 resulted in an increase of approximately $80,000 to the benefit obligation at December 31, 1998. Effective January 1, 1998, the Company implemented a Supplemental Executive Retirement Plan. During 1998, the Company, as a result of the death of its chief executive officer, recorded expense of approximately $400,000 in accordance with the plan provisions, which provides for monthly payments to the former executive's widow for the remainder of her life. Based upon actuarial calculations, the projected liability under the plan is approximately $376,000 at December 31, 1998 and is recorded as other accrued expenses and pension and other benefits in the consolidated balance sheets. 8. CAPITAL STOCK AND STOCK OPTIONS The Certificate of Incorporation authorizes 4,000,000 shares of common stock and 1,000,000 shares of convertible preferred stock. - 28 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 8. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED) In 1988, the Company adopted the American Locker Group Incorporated 1988 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 be not 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 option, the option price shall be payable to the Company in cash, or at the discretion of the committee, in shares of common stock valued at the fair market value on the date of payment, or a combination thereof. 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. During 1998, the Company recorded approximately $327,000 of expense related to stock appreciation rights that were granted and exercised. At December 31, 1998, 1997 and 1996, there were no stock appreciation rights outstanding under this plan. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 6.0%; dividend yields of 0.0; volatility factors of the expected market price of the Company's common stock of .37; and a weighted-average expected life of the option of 5 years. If the fair value based method accounting provisions of Statement 123 had been adopted, net income for 1997 would have been $2,069,635 and basic and diluted earnings per share would have been $.71 and $.69, respectively per share. The 1998 and 1996 net income and earnings per share would not have been impacted, since no stock options were granted in either of those years, and the options granted in 1997, vested immediately. The per share fair value of the options granted in 1997 using these assumptions was $1.19. A summary of the activity in the Company's Employee Option Plan and related information for the years ended December 31 follows: - 29 - American Locker Group Incorporated and Subsidiaries Notes to Consolidate Financial Statements (Continued) 8. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
1998 1997 1996 --------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------------------------------------------------------- Outstanding - beginning of year 162,000 $1.55 102,000 $ .81 102,000 $ .81 Exercised and Surrendered (29,000) 2.03 - - - - Granted - - 60,000 2.81 - - ========================================================= Outstanding - end of year 133,000 $1.45 162,000 $1.55 102,000 $ .81 =========================================================
The exercise prices for options outstanding as of December 31, 1998 were as follows: $0.719 - 76,000 shares, $1.063 - 13,000 shares, and $2.813 - 44,000 shares. The weighted-average remaining contractual life of those options is 3.19 years. 9. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:
1998 1997 1996 ----------------------------------------- Numerator: Net income $4,314,542 $ 2,112,475 $ 1,144,832 Denominator: Denominator for basic earnings per share - weighted average shares outstanding 2,420,078 2,909,788 3,232,408 Effect of dilutive securities: Employee stock options 122,606 90,340 75,468 ----------------------------------------- Denominator for diluted earnings per share - weighted average shares out- standing and assumed conversions 2,542,684 3,000,128 3,307,876 ========================================= Basic earnings per share $ 1.78 3,000,128 3,307.876 ========================================= Diluted earnings per share $ 1.70 $ .70 $ .35 =========================================
- 30 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 10. GEOGRAPHIC AND CUSTOMER CONCENTRATION DATA The Company adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," ("SFAS No. 131") in 1998. In accordance with SFAS No. 131, the Company operates in one line of business, sale and rental of lockers. This includes coin and key electronically controlled checking lockers and 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 from external customers are as follows: 1998 1997 1996 ------------------------------------------------------ United States customers $41,735,153 $26,170,616 $19,707,039 Foreign customers 3,276,174 3,124,917 2,810,550 ------------------------------------------------------ $45,011,327 $29,295,533 $22,517,589 ====================================================== Sales to the U.S. Postal Service represented 76.9%, 69.2% and 61.8% of net sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the Company had secured receivables from customers under time payment arrangements totaling $76,000 and $181,000, respectively. At December 31, 1998, the Company had unsecured trade receivables from customers considered to be distributors of $330,000 (including a United Kingdom distributor of $231,000) and from governmental agencies of $2,290,000. At December 31, 1997, the Company had unsecured trade receivables from customers considered to be distributors of $311,000 (including a United Kingdom distributor of $188,000) and from governmental agencies of $2,381,000. 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 different industries. - 31 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations for the years ended December 31, 1998 and 1997:
1998 -------------------------------------------------- THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER DECEMBER 31 30 -------------------------------------------------- Net sales $9,789,657 $11,604,876 $15,422,935 $8,913,859 ================================================== Gross profit $3,046,600 $ 3,646,128 $ 4,105,444 $2,719,875 ================================================== Net income $ 9 29,896 $ 1,246,408 $ 1,233,507 $ 904,536 ================================================== Earnings per share - Basic $ .38 $ .52 $ .51 $ .37 ================================================== Earnings per share - Diluted $ .37 $ .49 $ .48 $ .36 ==================================================
1997 -------------------------------------------------- THREE MONTHS ENDED MARCH 31 JUNE 30 SEPTEMBER DECEMBER 31 30 -------------------------------------------------- Net sales $5,283,597 $7,722,976 $6,906,402 $9,382,558 ================================================== Gross profit $1,617,925 $2,333,741 $2,044,312 $2,765,545 ================================================== Net income $ 223,806 $ 553,973 $ 423,887 $ 910,809 ================================================== Earnings per share - Basic $ .07 $ .17 $ .15 $ .33 ================================================== Earnings per share - Diluted $ .07 $ .17 $ .14 $ .32 ==================================================
The Company's accounting practice for interim periods provides for possible accounting adjustments at year end. In 1998 such adjustments resulted in increasing fourth quarter pretax income by $240,000 for inventory costs, decreasing fourth quarter pretax income by $150,000 for accounts receivable allowances, increasing fourth quarter pretax income by $74,000 for liability reserves and decreasing net income by $98,000 for income tax expense. In 1997 such adjustments resulted in increasing fourth quarter pretax income by $177,000 for inventory costs, increasing net income by $58,000 for income tax expense, and decreasing fourth quarter pretax income by $58,000 for pension costs. In 1996 such adjustments resulted in increasing fourth quarter pretax income by $104,000 for inventory costs, increasing net income by $159,000 for income tax expense, and decreasing fourth quarter pretax income by $48,000 for pension costs and receivable reserves. - 32 - American Locker Group Incorporated and Subsidiaries Notes to Consolidated Financial Statements (Continued) 12. RELATED PARTIES One Director of the Company is a Stockholder and Director of Rollform of Jamestown Inc., a rollforming company. One of the Company's subsidiaries purchased $235,000, $114,000 and $90,000 of fabricated parts from Rollform of Jamestown, Inc. in 1998, 1997 and 1996, respectively, at prices that the Company believes are at arms length. 13. CONTINGENCIES During 1998, the Company was named a defendant in two separate legal proceedings. 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 Cattaragus. 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." The Company believes that its potential liability with respect to this site, if any, is diminimus. Therefore, based on the information currently available, management does not believe the outcome of this suit will have a substantial 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 customary reservation of rights. In September 1998 and subsequent months, the Company was named as an additional defendant in 32 cases pending in state court in Massachusetts. The plaintiffs in each such case assert that 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. Based upon investigations conducted by the Company to date, the Company has discovered no evidence that the former division manufactured or supplied any products containing asbestos. Therefore, barring the discovery of contrary evidence, the Company does not anticipate that these actions will have any substantial impact on the Company's operations or financial condition. Defense of these cases has been assumed by the Company's insurance carrier, subject to a customary reservation of rights. - 33 - ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosures during 1998 or 1997. PART III Item 9, 10, 11, and 12 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 13. EXHIBITS AND REPORTS ON FORM 8-KSB (a) Exhibits - Exhibits required by Item 601 of Regulation S-B are submitted as a separate section herein immediately following the "Exhibit Index". (b) Reports on Form 8-KSB filed in the fourth quarter of 1998 - None. - 34 - In accordance with Section 13 or 15(d) of the Exchange Act, the registrant 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 18, 1999 In accordance with the Exchange Act, 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 March 18, 1999 - ----------------------------- Executive Officer and Edward F. Ruttenber Director /s/Roy J. Glosser President, Chief March 18, 1999 - ----------------------------- Operating Officer, Roy J. Glosser Treasurer and Director /s/Alan H. Finegold Director March 18, 1999 - ----------------------------- Alan H. Finegold /s/Thomas Lynch IV Director March 18, 1999 - ----------------------------- Thomas Lynch, IV /s/James E. ruttenberg Director March 18, 1999 - ----------------------------- James E. Ruttenberg /s/Jeffrey C. Swoveland Director March 18, 1999 - ----------------------------- Jeffrey C. Swoveland /s/Donald I. Dussing, Jr. Director March 18, 1999 - ---------------------------- Donald I. Dussing, Jr. - 35 - EXHIBIT INDEX PRIOR FILING OR SEQUENTIAL PAGE EXHIBIT NO. NO. HEREIN - ----------- ---------------- 3.1 Certificate of Incorporation of Exhibits to Form 10-K American Locker Group Incorporated for Year ended December 31, 1980 3.2 Amendment to Certificate of Form 10-C filed May 6, Incorporation changing name of 1985 company 3.3 Amendment to Certificate of Exhibit to Form 10-K for Incorporation limiting liability year ended December 31, of Directors and Officers 1987 3.4 By-laws of American Locker Group Exhibit to Form 10-K for Incorporated as amended and year ended December 31, restated 1985 3.5 Amendment to By-laws of American Exhibit to Form 10-K for Locker Group Incorporated dated year ended December 31, January 15, 1992 1991 3.6 Amendment to Bylaws dated Page March 3, 1999 ------- 10.1 American Locker Group Exhibit to Form 10-K for Incorporated 1988 Stock Incentive year ended December 31, Plan 1988 10.2 First Amendment dated March 28, Exhibit to Form 10-K for 1990 to American Locker Group year ended December 31, Incorporated 1988 Stock 1989 Incentive Plan 10.3 Form of Indemnification Agreement Exhibit to Form 10-K for between American Locker Group year ended December 31, Incorporated and its directors 1987 and officers 10.4 Corporate Term Loan Agreement Exhibit to Form 10-K for between American Locker Group year ended December 31, Incorporated and Manufacturers 1991 and Traders Trust Company covering $2,400,000 loan 10.5 Approved Line of Credit from Exhibit to Form 10-K for Manufacturers and Traders Trust year ended December 31, Company to American Locker Group 1990 Incorporated in the amount of $1,000,000 - 36 - 10.6 Amendment Agreement dated May 1, Exhibit to Form 10-KSB 1994 between Manufacturing and for year ended Traders Trust Company and December 31, 1994 American Locker Group Incorporated [Increase in Term Loan to $1,850,000] 10.7 Amendment Agreement dated Exhibit to Form 10-KSB March 12, 1996 between for year ended Manufacturing and Traders Trust December 31, 1995 Company and American Locker Group Incorporated [Increase in Term Loan to $1,800,000] 10.8 Employment Agreement between Exhibit to Form 10-GSB American Locker Group for quarter ended June Incorporated and Roy J. Glosser 30, 1996 10.8 Amendment dated as of March 3, Page 1999 to Employment Agreement ----- between American Locker Group Incorporated and Roy J. Glosser 10.9 Manufacturing Agreement dated as Exhibit to Form 8-K of December 29, 1989 between dated January 11, 1990 American Locker Security Systems Inc. and Signore, Inc. 10.10 First Amendment dated May 3, 1995 Exhibit to Form 10-KSB to Manufacturing Agreement dated for year ended December as of December 29, 1989 between 31, 1995 American Locker Security Systems Inc. and Signore Inc. 10.11 Second Amendment dated March 15, Exhibit to Form 10-KSB 1996 to Manufacturing Agreement for the year ended dated as of December 29, 1989 December 31, 1995 between American Locker Security Systems Inc. and Signore Inc. 10.12 Third Amendment dated May 21, Exhibit to Form 10-QSB 1996 to Manufacturing Agreement for the quarter ended dated as of December 29, 1989 June 30, 1996 between American Locker Security Systems Inc. and Signore Inc. 10.14 Contract dated March 27, 1996 Exhibit to Form 10-QSB between the U.S. Postal Service for the quarter ended and American Locker Security March 31, 1996 Systems, Inc. - 37 - 10.15 Modification #MO3 to USPS Exhibits to Form 10QSB Contract #072368-96-B-0741 dated for the quarter ended April 16, 1997 March 31, 1997 10.17 Fourth Amendment to Manufacturing Exhibits to Form 10QSB Agreement dated as of May 20, for the quarter ended 1997 between American Locker June 30, 1997 Security Systems, Inc. and Signore, Inc. 10.18 Fifth Amendment to Manufacturing Exhibit to Form 10-QSB Agreement dated May 19, 1998 for quarter ended between American Locker Security June 30, 1998 Systems, Inc. and Signore, Inc. 10.18 Amendment dated August 22, 1997 Exhibit to Form 10QSB to Corporate Term Loan Agreement for the quarter ended dated August 30, 1991 between September 30, 1997 American Locker Group Incorporated and Manufacturers and Traders Trust Company 10.19 Modification M05 to USPS Contract Exhibit to Form 10QSB #072368-96-B-0741, dated for the quarter ended October 9, 1997, which replaces September 30, 1997 steel pedestals with aluminum pedestals for American Locker Outdoor Parcel Lockers 10.20 Modification M06 to USPS Contract Exhibit to Form 10QSB #072368-96-B-0741, dated for the quarter ended October 23, 1997 regarding prices September 30, 1997 and minimum quantities through April 14, 1998 10.20 Modification MO7 to USPS Contract Exhibit to Form 10-QSB #072368-96-B-0741, dated for quarter ended April 14, 1998 regarding prices March 31, 1998 and minimum quantities 10.21 Form of American Locker Group Exhibit 10.21 to Form Incorporated Supplemental 10QSB for year ending Executive Retirement Benefit Plan December 31, 1998 22.1 List of Subsidiaries Page ------ 27.1 1998 Financial Data Schedule Page ------ 27.2 1997 Financial Data Schedule Page (Restated) ------ 27.3 1996 Financial Data Schedule Page (Restated) ------ - 38 - EXHIBIT 3.6 Article II, Section 2 of the Bylaws of the Company is has been amended and restated as follows: Section 2. The Annual Meetings of Stockholders shall be held on a date in May each year designated by the Board of Directors, at which they shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. - 39 - EXHIBIT 10.6 FIRST AMENDMENT TO AGREEMENT This First Amendment made as of this 3rd day of March, 1999, to Employment Agreement dated May 21, 1996, is made between American Locker Group Incorporated, a Delaware corporation (the "Company") and ROY J. GLOSSER, an individual residing in Jamestown, New York (the "Executive"). WITNESSETH: WHEREAS, the Company and the Executive are parties to an Employment Agreement dated May 21, 1996 (the "Agreement"). WHEREAS, the parties hereto wish to amend the Agreement to extend the term of the Agreement and to make certain other changes as set forth herein. NOW THEREFORE, for good and valuable consideration and intending to be bound hereby, the parties hereto agree as follows: 1. Section 2 of the Agreement is amended to delete "June 30, 1999" and to insert in lieu thereof "June 30, 2002"; 2. Section 3(a) is amended to delete "$8,334" and to insert in lieu thereof "$13,125"; 3. Section 9 of the Agreement is amended to add the following sentence at the end of Section 9: For purposes of the immediately preceding sentence, transfers by the Estate of Harold J. Ruttenberg to members of Mr. Harold J. Ruttenberg's family or trusts for the benefit of Mr. Harold J. Ruttenberg's family shall not be considered in determining if a sale or exchange of a majority of the outstanding shares of the Company entitled to vote in the election of directors has occurred. 4. Except as expressly set forth herein, the Agreement shall remain unamended and in full force and effect. - 40 - WITNESS the due execution hereof. COMPANY: AMERICAN LOCKER GROUP INCORPORATED By: /s/Edward F. Ruttenberg --------------------------------------- Title: Chairman and Chief Executive Officer EXECUTIVE: /s/Roy J. Glosser ----------------------------- Roy J. Glosser - 41 - 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 NAME JURISDICTION OF Voting SECURITIES ORGANIZATION OWNED - ---- --------------- ----------------- American Locker Security Systems, Delaware 100% Inc. American Locker Company, Inc. Delaware 100% American Locker Company of Canada, Dominion of Canada 100% (1) Ltd. Canadian Locker Company, Ltd. Dominion of Canada 100% (2) American Locker Security Systems Virgin Islands 100% (1) International (1) Owned by American Locker Security Systems, Inc. (2) Owned by American Locker Company of Canada, Ltd. - 42 - EX-27 2 FDS AMERICAN LOCKER GROUP INCORPORATED 12/31/98
5 EXHIBIT 27.1 AMERICAN LOCKER GROUP INCORPORATED FINANCIAL DATA SCHEDULE DECEMBER 31, 1998 This schedule contains summary financial information extracted from SEC Form 10-KSB and is qualified in its entirety by reference to such financial statements. 0000008855 AMERICAN LOCKER GROUP INCORPORATED 1 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.0000 1,188,007 0 4,062,802 216,062 6,312,131 12,215,225 8,798,278 7,681,632 13,469,516 3,098,154 533,333 0 0 2,422,772 6,841,284 13,469,516 45,011,327 45,436,895 31,493,280 31,493,280 0 0 231,875 7,103,364 2,788,822 4,314,542 0 0 0 4,314,542 1.78 1.70
EX-27 3 FDS AMERICAN LOCKER GROUP INCORPORATED 12/31/97
5 EXHIBIT 27.2 AMERICAN LOCKER GROUP INCORPORATED FINANCIAL DATA SCHEDULE DECEMBER 31, 1997 (RESTATED) This schedule contains summary financial information extracted from SEC Form 10-KSB and is qualified in its entirety by reference to such financial statements. 0000008855 AMERICAN LOCKER GROUP INCORPORATED 1 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1.0000 1,154,045 0 4,519,710 438,784 3,636,528 10,009,315 8,516,487 7,267,199 11,263,725 3,451,220 2,431,000 0 0 2,405,780 2,513,365 11,263,725 29,295,533 29,290,041 20,533,950 20,533,950 0 0 181,678 3,454,508 1,342,033 2,112,475 0 0 0 2,112,475 .72 .70
EX-27 4 FDS AMERICAN LOCKER GROUP INCORPORATED 12/31/96
5 EXHIBIT 27.3 AMERICAN LOCKER GROUP INCORPORATED FINANCIAL DATA SCHEDULE DECEMBER 31, 1996 (RESTATED) This schedule contains summary financial information extracted from SEC Form 10-KSB and is qualified in its entirety by reference to such financial statements. 0000008855 AMERICAN LOCKER GROUP INCORPORATED 1 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1.0000 1,229,222 0 3,363,277 386,309 3,339,668 8,678,166 8,124,341 6,782,429 10,020,078 3,513,031 700,000 0 0 3,200,096 2,158,051 10,020,078 22,517,589 22,809,464 15,791,956 15,791,956 0 0 208,827 1,819,184 674,352 1,144,832 0 0 0 1,144,832 .35 .35
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