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