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