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, 2004
[ ] 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
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 [ ] No [X].
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 July 1, 2005, 1,546,146 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 as of June 30, 2005 was approximately $5,211,336, based on the
closing price per share of Common Stock on that date of $5.11 as reported on the
NASDAQ Stock Market. Shares of Common Stock known by the Registrant to be
beneficially owned by directors and officers of the Registrant and other persons
known the Registrant to have beneficial ownership of 5% or more of the
outstanding Common Stock 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 Securities Exchange Act of 1934, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
American Locker Group Incorporated (the "Company") is an engineering,
assembling, manufacturing and marketing enterprise 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
recreation industry, 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 or leased for use in the recreation industry and
other uses. The plastic and aluminum centralized mail and parcel distribution
lockers historically have been 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.
As more fully set forth in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", on February 8, 2005, the Company
announced that it was notified that its contract with the USPS for polycarbonate
and aluminum Cluster Box Units (CBUs) would not be renewed, and the contract
expired on May 31, 2005. In each of 2004, 2003 and 2002, sales under that
contract with the USPS constituted in excess of 50% of the Company's sales
revenues. As a result, the Board of Directors of the Company has adopted a
restructuring plan to significantly cut operating expenses, and the Company
expects to record an impairment charge of approximately $6,155,000 in the first
quarter of 2005 to recognize impairment of goodwill. See Note 17 - Subsequent
Events to the Company's consolidated financial statements.
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.
In July 2001, the Company acquired Security Manufacturing Corporation (SMC). SMC
manufactures aluminum cluster box units, which historically have been 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.
Business Segment Information
The Company, including its foreign subsidiary, is engaged primarily in one
business: the sale of lockers, including coin, key-only and electronically
controlled checking lockers and related locks and plastic and aluminum
centralized mail and parcel distribution lockers.
As further discussed in Item 7, Management's Discussion and Analysis of
Financial Condition
1
and Results of Operations, in February 2005, the Company was notified that its
contract with the USPS for polycarbonate and aluminum Cluster Box Units (CBUs)
would not be renewed, and the contract expired on May 31, 2005. Since May 31,
2005, the Company has experienced continuing sales of its current CBU models to
the private market. The USPS has advised the Company that it may receive by the
end of July 2005 a new specification and design that will apply to CBUs sold in
the private market as early as Fall 2005. 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 the new specification for sale in the private market.
The Company has developed a range of products to support the 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. 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 USPS.
Under the terms of the contract, the Company, including SMC, was approved to
ship Type One, Two, Three and Four plastic CBUs, and Type Two, Three and Four
aluminum CBUs. Plastic CBUs with aggregate invoice prices in excess of $190
million were shipped to the USPS pursuant to the 1994 contract and subsequent
contracts. Components of these units were made by outside vendors, and the units
were assembled by the Company's wholly owned subsidiary, American Locker
Security Systems, Inc. (ALSSI). The units historically have been sold directly
by ALSSI to the USPS and to private markets. Aluminum CBUs are manufactured by
SMC and historically have been sold directly by SMC to the USPS and to private
markets.
The checking lockers are fabricated by Signore, Inc. ("Signore") and are
marketed in the United States by ALSSI. Lockers for the Canadian market are
manufactured primarily by Signore with locks supplied from ALSSI. On May 24,
2005, ALSSI delivered to Signore a one-year advance written notice of
termination of its manufacturing agreement with Signore, with such termination
to be effective May 24, 2006, in accordance with the termination provisions
contained in the manufacturing agreement. Lockers are marketed in Canada by the
Canadian Locker Company, Ltd. ("Canadian Locker"), a wholly-owned subsidiary of
the Company. 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 maintenance and
repair parts 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.
Competition
While the Company is not aware of any reliable trade statistics, it believes
that its subsidiaries, ALSSI and Canadian Locker, are the dominant suppliers of
key controlled checking lockers in
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the United States and Canada. As a result of the introduction of the new
specification and design for CBUs, the Company faces active competition from one
or more manufacturers of postal locker products sold in the private market.
Raw Materials
Present sources of supplies and raw materials incorporated into the Company's
metal, aluminum and plastic lockers and locks are generally considered to be
adequate and are currently available in the market place. The Company's supplier
of polycarbonate plastic, which is used in the parcel lockers and CBUs, entered
this market in March 1992 and is presently supplying this raw material, which
meets strict specifications imposed by the USPS. Due to the phase out of
polycarbonate CBUs by the USPS, the availability of this component is no longer
critical.
The Company's metal coin operated and electronic lockers are manufactured by
Signore pursuant to a manufacturing agreement that will terminate effective May
24, 2006, 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, SMC.
Patents
The Company owns a number of patents, none of which it considers to be material
to the conduct of its business.
Employees
The Company and its subsidiaries actively employed 149 individuals on a full-
time basis as of December 31, 2004, 12 of whom are based in Canada. The Company
considers its relations with its employees to be satisfactory. None of the
Company's employees are represented by a union.
As a result of the Board of Directors of the Company adopting a restructuring
plan to significantly cut operating expenses, the Company expects a significant
reduction in its number of employees. See Note 17 - Subsequent Events to the
Company's consolidated financial statements.
Dependence on Material Customer
During 2004, 2003 and 2002, sales to one customer, the USPS, accounted for
53.9%, 52.7%, and 56.4%, respectively, of 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. In February 2005, the Company was notified that its
contract with the USPS for polycarbonate and aluminum CBUs would not be renewed,
and the contract expired on May 31, 2005. The loss of this customer is expected
to adversely affect the Company's operations and financial results subsequent to
May 31, 2005.
Research and Development
The Company engages in research and development activities relating to new and
improved products. It expended $153,000, $431,000, and $174,000, in 2004, 2003,
and 2002, respectively, for such activity in its continuing businesses.
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Compliance with Environmental Laws and Regulations
The Company's facilities and operations are subject to various federal, state
and local laws and regulations relating to environmental protection and human
health and safety. Some of these laws and regulations may impose strict, joint
and several liability on certain persons for the cost of investigation or
remediation of contaminated properties. These persons may include former,
current or future owners or operators of properties and persons who arranged for
the disposal of hazardous substances. The Company's owned and leased real
property may give rise to such investigation, remediation and monitoring
liabilities under applicable environmental laws. In addition, anyone disposing
of hazardous substances on such sites must comply with applicable environmental
laws. Based on the information available to it, the Company believes that, with
respect to its currently owned and leased properties, it is in material
compliance with applicable federal, state and local environmental laws and
regulations. See Item 3, Legal Proceedings, and Note 16 - Contingencies to the
Company's consolidated financial statements for further discussion with respect
to the settlement of certain environmental litigation.
Backlog and Seasonality
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.
Forward-Looking Information
This Annual Report on Form 10-K 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 Annual Report on Form 10-K, 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.
Available Information
The Company files with the U.S. Securities and Exchange Commission quarterly and
annual reports on Forms 10-Q and 10-K, respectively, current reports on Form
8-K, and proxy statements pursuant to the Securities Exchange Act of 1934, in
addition to other information as required. The public may read and copy any
materials that the Company files with the SEC at the
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SEC's Public Reference Room at 100 F Street, N.E., Room 1580 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. The
contents of the Company's website are not part of this Annual Report on Form
10-K.
Also, copies of the Company's annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act will be made
available, free of charge, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC upon
written request.
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 American Locker Security and
Systems, Inc. Warehouse
Jamestown, NY American Locker Security 30,200* Assembly
Systems, Inc. and
Warehouse
Ellicottville, NY American Locker Security 12,800 Lock
Systems, Inc. - Lock Shop manufactur-
ing service
and repair
Toronto, Canadian Locker Company, Ltd. 4,000* Coin-
Ontario operated
lockers
and
locks
Toronto,
Ontario Canadian Locker Company, Ltd. 3,000* Warehouse
Grapevine, TX Altreco, Inc (Operated by Security 70,000 Manufacturing
Manufacturing Corporation) and office
TOTAL 157,000
=======
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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 the Company's presently contemplated
needs. The leases on the leased properties terminate at various times in 2005.
The leases on the Jamestown, New York, facilities will expire in September 2005
with respect to its assembly and warehouse space and November 2005 with respect
to its principal office space, and the Company will relocate its headquarters to
its facilities in Grapevine, Texas by the end of 2005. Accordingly, the Company
does not intend to exercise its options to renew the Jamestown leases.
ITEM 3. LEGAL PROCEEDINGS
In April 2005, the Company entered into a settlement with plaintiffs in a
lawsuit titled Roberta Raiport, et al. v. Gowanda Electronics Corp. and American
Locker Group, Inc. which was pending in the State of New York Supreme Court,
County of Cattaraugus. The suit involved property located in Gowanda, New York,
which was sold by the Company to Gowanda Electronics Corp. prior to 1980. The
plaintiffs, who are current or former property owners in Gowanda, New York,
asserted that the defendants each operated machine shops at the site during
their respective periods of ownership and that, as a result of such operations,
soil and groundwater contamination occurred which has adversely affected the
plaintiffs and the value of the plaintiffs' properties. According to the terms
of the settlement agreement, the Company will pay an aggregate of $1,225,000 to
the plaintiffs who own property adjacent to the site and to the current owner of
the property, Gowanda Electronics Corporation. Of this amount, $825,000 was paid
in April 2005, $200,000 was paid in June 2005, and $200,000 will be paid in
August 2005. The Company's primary insurance carrier during the period of the
ownership of the Gowanda property has agreed to reimburse the Company in the
amount of $122,500 in return for a release of coverage against the underlying
lawsuit. This settlement, less of anticipated insurance proceeds, resulted in a
charge to pre-tax operating results in the fourth quarter of 2004 of $1,102,500.
This settlement does not resolve the Company's potential liability described
below with respect to remediation of offsite contamination which allegedly
migrated from this site.
In July 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 and alleged migration from the site located in Gowanda, New York which was
sold by the Company to Gowanda Electronics Corporation prior to 1980. In March
2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in
which it set forth a remedy including 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,
which is intended to intercept any contaminates and implementation of an on-
going monitoring system. The NYSDEC has estimated that its selected remediation
plan 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
30-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 plan. This matter has not been litigated, and at the
present time the Company has only been
6
identified as a PRP. The Company also believes that 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 implementation 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.
In September 1998 and subsequent months, the Company was named as an additional
defendant in approximately 150 cases pending in state court in Massachusetts.
The plaintiffs in each case assert that a division of the Company manufactured
and furnished to a shipyard 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. Settlement agreements have been entered in approximately 15 cases with
funds authorized and provided by the Company's insurance carrier. Further, over
95 cases originally filed in 1995 through 2001 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 April 1,
2005 is approximately 20 cases originally filed against other defendants in 2002
through 2004.
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.
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 2004.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $1.00 per share, is not listed on any
exchange, but is 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 for the Company's common stock was changed from "ALGI" to "ALGIE"
effective as of the opening of business on April 21, 2005 as a result of
delisting proceedings commenced by NASDAQ relating to the Company's failure to
timely file this Annual Report on Form 10-K and the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2005. On May 26, 2005, the Company
had an oral hearing before a Nasdaq Listing Qualifications Panel to appeal the
decision of Nasdaq to delist the Company's common stock as a result of its
non-compliance with Marketplace Rule 4310(c)(14). The Nasdaq Listing
Qualifications Panel advised the Company on July 6, 2005 that it had granted the
Company's request for continued listing, subject to the Company filing this
Annual Report on Form 10-K and the late Quarterly Report on Form 10-Q on or
before July 31, 2005. The following table shows the range of the low and high
sale prices for the Company's common stock in each of the calendar quarters
indicated.
PER COMMON SHARE
MARKET PRICE
2005 HIGH LOW
- -------------------------------------- -------- ----------
First Quarter $14.99 $ 5.13
Second Quarter 6.50 3.62
Third Quarter (through July 26, 2005) 6.50 4.50
2004 HIGH LOW
- -------------------------------------- -------- ----------
First Quarter $12.00 $ 10.26
Second Quarter 12.17 10.63
Third Quarter 10.00 9.48
Fourth Quarter 16.37 10.00
2003 HIGH LOW
- -------------------------------------- -------- ----------
First Quarter $14.87 $ 11.85
Second Quarter 16.22 12.00
Third Quarter 15.35 11.80
Fourth Quarter 13.00 10.25
As of July 1, 2005, the Company had 950 security holders of record.
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The Company has not paid dividends on its common stock in the two most recent
fiscal years and does not presently plan to pay dividends in the foreseeable
future. The Company currently expects that earnings will be retained and
reinvested to support either business growth or debt reduction. In addition, by
agreement with its principal lender, the Company's ability to declare future
dividends is restricted.
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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, 2004, 2003, 2002, 2001 and 2000. The
historical selected financial information derived from the Company's audited
financial information may not be indicative of the Company's future performance
and should be read in conjunction with the information contained in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Item 8, Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K. The below amounts include the results of SMC since
its acquisition by the Company on July 6, 2001.
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Sales $49,023,417 $39,256,438 $40,670,721 $39,627,216 $37,662,140
Income before income taxes 4,500,938 3,545,379 4,972,307 4,939,946 4,840,632
Income taxes 1,797,990 1,398,247 1,949,479 1,879,585 1,891,419
Net income 2,702,948 2,147,132 3,022,828 3,060,361 2,949,213
Earnings per share - basic
1.76 1.41 1.57 1.49 1.33
Earnings per share - diluted
1.73 1.38 1.54 1.47 1.32
Weighted average common shares outstanding - basic
1,534,146 1,523,429 1,921,612 2,053,838 2,214,406
Weighted average common shares outstanding -
diluted 1,557,931 1,554,328 1,957,561 2,083,484 2,230,785
Dividends declared
0.00 0.00 0.00 0.00 0.00
Interest expense 456,865 529,642 670,144 441,773 140,920
Depreciation and amortization expense 706,929 893,236 974,165 956,430 796,140
Expenditures for property, plant and equipment
280,562 543,146 316,180 801,009 206,604
YEAR-END POSITION
Total assets 28,861,930 25,873,480 25,034,616 29,735,420 15,582,599
Long-term debt, including current portion(1) 6,668,596 8,305,487 9,933,813 11,578,687 333,320
Stockholders' equity 16,786,570 14,162,140 11,874,709 14,553,876 11,723,825
Stockholders' equity per share (2)
10.94 9.23 7.83 7.12 5.68
Common shares outstanding at year-end 1,534,146 1,534,146 1,517,146 2,043,046 2,062,540
Number of employees
149 154 161 198 144
(1) Including long-term debt in default and due upon demand at December 31,
2004.
(2) Based on shares outstanding at December 31, 2004.
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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 that 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 2004 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 an allowance 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 the allowance for
doubtful accounts. If the financial condition of the Company's customers were to
deteriorate, resulting in an inability to make payments, an increase in the
allowance resulting in a charge to expense 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.
As a result of the loss of the USPS contract, the Company will record additional
inventory reserves in the amount of $272,000 during the first quarter of 2005.
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Goodwill
As discussed in Note 2 - Summary of Significant Accounting Policies to the
Company's consolidated financial statements, the Company has recorded goodwill
of approximately $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 Tangible 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.
As discussed in Note 17 - Subsequent Events to the Company's consolidated
financial statements, subsequent to December 31, 2004, the Company was notified
that its contract with the USPS for polycarbonate and aluminum CBUs would not be
renewed, and the contract expired on May 31, 2005. Due to the significant
reduction in business resulting from the loss of the USPS contract, the Company
has determined that the fair value of the Company has declined significantly.
Management estimates that the fair value of the Company, after the loss of the
USPS business, is not in excess of the carrying value of the net underlying
assets, including goodwill. The second step of the Company's test for impairment
indicates that there is no longer value attributable to goodwill. Accordingly,
the Company will record an impairment charge of approximately $6,155,204 against
its operating results in the first quarter of 2005.
Property, Plant and Equipment
Property, plant and equipment is 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 three to 12 years
for machinery and equipment. Expenditures for repairs and maintenance are
expensed as incurred. Gains and losses resulting from the sale or disposal of
property and equipment are included in other income.
In accordance with Financial Accounting Standards Board Statement No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," 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. There is no impairment recorded with respect to property, plant and
equipment as of December 31, 2004 and 2003.
As discussed in Note 17 - Subsequent Events to the Company's consolidated
financial statements, subsequent to December 31, 2004, the Company implemented a
restructuring plan as a result of the loss of the USPS contract discussed above.
As part of the restructuring plan adopted in 2005, the Company will record an
impairment charge against the first and second quarter 2005 operating results of
approximately $150,000.
12
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 7.5% used in 2004 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 2004 pension cost was 4% and was determined using a projection
of inflation and real wage increase assumptions. The discount rate used in
determining the 2004 pension cost was 6%. 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, 2004 was 5.75% due to a decrease during 2004 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 significant impact on the Company's annual
pension expense.
Deferred Income Tax Assets
The Company has net deferred tax assets of approximately $1,325,000 at December
31, 2004. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. 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,
2004, 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.
RESULTS OF OPERATIONS- 2004 COMPARED TO 2003
Overall Results and Outlook
The Company recorded its largest sales volume ever in 2004, with consolidated
net sales of $49,023,417, an increase of $9,766,979, or 24.9%, over the prior
year. This increase was attributable primarily to an approximately $7,000,000
bulk order of CBUs from the USPS delivered in the third quarter of 2004. As a
result, pre-tax income rose from $3,545,379 in 2003 to $4,500,938 in 2004, an
increase of 27.0%, after accounting for a one-time charge of $1,102,500 for an
environmental settlement. Net income rose from $2,147,132 in 2003 to $2,702,948
in 2004, an increase of 25.9%. Earnings per share on a diluted basis were $1.73
per share, up $0.35 from the previous year, an increase of 25.4%. The Company,
however, expects that its CBU sales will decline substantially in 2005 compared
to 2004 since, after May 31, 2005, it will no longer have a contract to sell
CBUs directly to the USPS.
13
Non-Renewal of USPS Contract
On February 8, 2005, the Company announced that it was notified that its
contract with the USPS for polycarbonate and aluminum 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. 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 that it intends to phase out
approval of the current model CBUs in the private market by September 30, 2005.
Because private purchasers will have an inventory of current model CBUs on that
date and because of uncertainty as to the size of supply of the new 1118F model
CBUs available to the private market prior to that date, the impact of the
September 30, 2005 date is unclear. So long as local postal authorities are
willing to install postal locks on the current model CBUs being installed in
their local area, private purchasers may be willing to continue to purchase and
install current model CBUs. The Company does not expect any significant change
in sales of its other postal and locker products.
The USPS awarded a new seven-year CBU contract to a competitor on a sole
supplier basis for supply of CBUs after May 31, 2005. That contract will require
a new specification (1118F) and design that will also apply to CBUs sold to the
private market as early as Fall 2005, although such timing may be subject to
interpretation and implementation by local postmasters. The new CBU is the
design submitted by the competitor as part of the bid solicitation submitted in
December 2004. The 1118F design package, now the property of the USPS, will be
made available to interested manufacturers, including but not limited to the
Company, on terms yet to be disclosed by the USPS, with such terms applying
equally to the competitor that was awarded the CBU contract. The USPS has
advised the Company that it may receive by the end of July 2005 a new
specification and design that will apply to the new CBUs. While the winning
bidder has the design information and is in a position to build and sell the new
1118F design to the USPS and private market, the Company must first gain access
to the necessary drawings, then go through a period of engineering and cost
evaluation, sourcing and building in order to obtain USPS approval, a period of
time which the Company estimates may be between three to six months. Prior to
having access to and having an opportunity to evaluate the design and drawing
package and to review strategic price considerations for private market sales,
the Company is not in a position to determine definitively if it will pursue the
manufacture of the 1118F CBU, and, if so, how long it will take to obtain
approval from the USPS for eventual sale to the private market.
Restructuring Plan
The Board of Directors formed a Restructuring Committee for the purposes of
selecting a financial advisor and evaluating a restructuring plan. On March 17,
2005, following Board approval, the Company announced that it had retained
Compass Advisory Partners, LLC
14
("Compass") to provide strategic consulting services to the Company with respect
to potential restructuring and cost reductions necessitated by the non-renewal
of the USPS CBU contract. The Restructuring Committee, in consultation with
Compass, undertook a review of the Company's financial position and business and
operations. In particular, the Restructuring Committee and Compass reviewed (i)
the financial impact of the loss of the Company's CBU contract with the USPS;
(ii) the economics of the Signore manufacturing agreement; (iii) the prospects
for new product development, including emphasis on the 1118F series aluminum
CBUs and development of laptop lockers; (iii) the potential impact of the
restructuring plan on the Company's financial position, with an emphasis on cash
generation and retention.
The loss of over 50% of the Company's revenues and the status of the 1118F CBU
design and drawing package make the Company's future uncertain. After the USPS
notification of non-renewal of the CBU contract, the Company's Board of
Directors, on May 18, 2005, announced a restructuring plan to reduce annual
selling, general and administrative expenses by at least $3,000,000. Most of
these savings would be achieved by personnel reductions in Jamestown, New York,
and by subsequently relocating Company headquarters from leased facilities in
Jamestown, New York, to company-owned facilities in Grapevine, Texas, by the end
of 2005. As part of this restructuring, the Company expects to terminate
existing building leases in Jamestown, discontinue Jamestown-based assembly
operations, eliminate many of the 37 salaried and hourly positions in Jamestown,
and freeze its current pension plan. Due to the non-renewal of the CBU contract,
all polycarbonate CBU assembly operations in Jamestown will cease by Fall 2005.
Should the Company determine that it will pursue the manufacture of 1118F CBUs
supplier to the private market, such CBU planning and execution is expected to
take place at the Company-owned manufacturing facility in Grapevine, Texas.
By reducing selling, general and administrative expenses by at least $3,000,000
on an annualized basis going forward and successfully refinancing its term and
revolving debt with its current lender, the Company expects to have adequate
cash to meet its debt obligations and have sufficient working capital to meet
its operational needs, contingent upon successful development and sale by the
Company to the private market of the new 1118F CBU. The Company expects to incur
aggregate impairment charges (exclusive of the goodwill impairment) and costs of
$2,290,000 in 2005 and 2006 to implement the restructuring plan.
Risks Relating to Implementation of Restructuring Plan and Continuing Operations
The Company's results from continuing operations and its financial position
could be adversely affected in the future by known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control. Some of these factors are described in more detail in this Annual
Report on Form 10-K and in the Company's filings with the Securities and
Exchange Commission. Additional risks and uncertainties not presently known to
the Company or that the Company currently deems immaterial may also impair its
business operations. Should one or more of any 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
15
Company to continue in operation despite the loss of its CBU
contract with the USPS, which provided over 50% of the Company's
sales revenues in each of 2004, 2003 and 2002. 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. 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 the incurrence
of greater than anticipated restructuring expenses as set forth in
the restructuring plan also would adversely affect the Company.
Restructuring costs are currently anticipated to be substantially
greater in 2005 than originally estimated at the time the
restructuring plan was adopted by the Board of Directors.
- The Company's restructuring plan contemplates that it will develop
and commence sales of 1118F CBUs to the private market in the first
quarter of 2006. Sales to the private market accounted for 18.9%,
14.6% and 10.2% of the Company's sales in 2004, 2003 and 2002,
respectively. If the Company is not able to timely obtain the total
design and drawing package for the 1118F CBU from the USPS,
determines not to pursue the manufacture of 1118F CBUs or otherwise
experiences a delay that prevents it from being able to develop and
commence sales of an 1118F CBU in the first quarter of 2006, the
Company's results of operations and its business and financial
condition could be materially adversely affected. In particular, a
further round of cost-cutting measures may become necessary if the
Company determines not to pursue the manufacture of 1118F CBUs or
the Company's development and commencement of sales of 1118F CBUs
are significantly delayed beyond the currently contemplated
estimates.
- 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 is in discussions with the
lender to restructure its term and revolving debt with a new loan
agreement to be in effect for approximately one year, during which
time the Company expects to seek a new lender in Texas, where the
Company will be relocating its headquarters by the end of 2005. The
initial proposal by the lender provides that the Company (i) pay
down the remaining balance of its term loan, which is approximately
$2,700,000, in 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.
16
- As part of the Company's restructuring plan, it expects to cease
manufacturing activities in Jamestown, New York, and to eliminate
many of the 37 salaried and hourly positions in Jamestown. Should
the Company determine that it will pursue the manufacture of 1118F
CBUs and it becomes an 1118F CBU supplier to the private market,
such CBU planning and execution will take place in Grapevine, Texas,
at its company-owned manufacturing facility. The Company cannot
provide any assurance that it will be able to identify, train and
retain appropriate staff members in Texas. Additionally, the Company
cannot provide any assurance that it will be able to retain any of
the current employees who are expected to move to Texas. A failure
to attract and retain key employees could materially adversely
affect the Company's results of operations and its business and
financial condition, particularly its ability to timely develop and
commence sales of the 1118F CBU.
- The Company has identified weaknesses in its internal controls and
accounting systems and has proposed remedies, including changes in
its accounting systems and the hiring of qualified accounting
personnel to implement such remedies (see Item 9A, Controls and
Procedures). If the Company is not able to effectively implement
such remedies or hire such personnel, the Company may be subject to
regulatory scrutiny and a loss of public confidence in its internal
controls.
- In addition to the foregoing risks and uncertainties, the Company
faces additional risks and uncertainties relating to its business,
including but not limited to the following:
- The Company may seek to mitigate some of the adverse impact of
rising costs of sales through price increases. The Company's
ability to implement price increases is dependent on market
conditions, economic factors, raw material costs and
availability, competitive factors, operating costs and other
factors, some of which are beyond the Company's control.
Further, the benefits of any implemented price increases may
be delayed due to manufacturing lead times and the terms of
existing contracts.
- Any decline in general economic conditions in the United
States or any heightened threat of terrorist and military
actions could adversely affect the Company's ability and the
ability of its suppliers and customers to accurately forecast
and plan future business activities. These conditions
particularly impact customers operating theme parks, resorts
and other travel-related businesses. As a result, customers
could reduce their purchases of the Company's products or
delay the timing of their purchases from the Company, either
of which may have a material adverse effect on the Company's
results of operations and business and financial condition.
- The Company believes that its future success will depend in
part upon its ability to develop, manufacture and successfully
introduce new products, particularly 1118F CBUs. The Company's
ability to successfully develop, introduce and sell new
products depends upon a variety of factors, including new
product selection,
17
timely and efficient completion of product design and
development, timely and efficient implementation of
manufacturing and assembly processes and effective sales and
marketing initiatives related to the new products. Given the
Company's current financial position, no assurances can be
given that it will have enough capital on hand to develop,
manufacture and successfully introduce new products, and a
failure to do so would have a material adverse effect on the
Company.
- As a public company, the Company is subject to greater
regulatory scrutiny than it would be if it were
privately-held. In particular, the Company must adhere to
various legal and auditing rules and procedures, the
compliance with which is expensive and time-consuming. A
failure on the part of the Company to comply with such rules
and procedures would subject the Company to criminal and civil
penalties. In addition, a significant portion of the Company's
resources may need to be devoted to compliance matters,
preventing the use of such resources for business expansion
purposes.
- The Company's future success will depend, to a substantial
degree, upon the continued service of the key members of the
Company's management team. Except for Edward F. Ruttenberg,
the Company's Chairman, Chief Executive Officer, Chief
Operating Officer and Treasurer, the Company does not
currently have employment agreements with any of the key
members of its management team. Although the Company is not
aware that any key personnel is planning to retire or leave in
the near future, the loss of the services of any key member of
the Company's management team, or their inability to perform
services on the Company's behalf, could have a material
adverse effect on the Company's results of operations and
business and financial condition.
Net Sales
Consolidated sales in 2004 amounted to $49,023,417, of which 56.9% were
polycarbonate (or plastic) CBUs and OPLs sold to the USPS and the private
market. Consolidated sales for 2004 include the results of an approximately $7
million bulk order for CBUs delivered to the USPS in the third quarter of 2004.
The remainder of the Company's consolidated sales consisted primarily of sales
of lockers (coin-op, temporary storage, electronic keyless and service) and
metal postal products (aluminum CBUs, indoor mailboxes and collection boxes).
This metal product group amounted to 43.1% of total consolidated sales in 2004;
its increase in sales of $3,987,000 was due primarily to increased sales of
aluminum CBUs at SMC and locker sales at Canadian Locker Company offset by a
decrease of $955,000 in sales at ALSSI. Sales by general product group for the
last two years were as follows:
Percentage
2004 2003 Increase (Decrease)
----------- ----------- -------------------
CBU (Plastic).......... $27,218,000 $21,223,000 28.2%
OPL (Plastic).......... 684,000 744,000 (8.1%)
Metal Product Group.... 21,122,000 17,135,000 23.3%
18
Cost of Sales
Consolidated cost of sales as a percentage of sales was 70.7% in 2004 compared
to 69.4% in 2003. The increase in 2004 was the result of raw material price
increases for steel and aluminum, depending on the type and grade, which were
offset by increased overhead absorption resulting from the higher volume in USPS
shipments.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $377,000 in 2004 over
2003, due primarily to increases in freight charges of $175,000 for fuel
surcharges, pension expenses of $70,000 and bad debt expenses of $50,000, as
well as sales activity.
Interest Expense
Interest expense decreased by $73,000 in 2004 over 2003 as a result of lower
outstanding debt as the Company continued to make scheduled payments on its
outstanding debt. No new debt was incurred in 2004. After discussions with
Manufacturers and Traders Trust Company 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
being a $1,000,000 payment made in May 2005 and the second being a payment later
in 2005 of an amount to be determined in the course of the Company's discussions
with its lender regarding the restructuring of its debt, which is expected to
further reduce interest expense in 2005.
Income Taxes
Income taxes increased by $400,000 in 2004 over 2003 due to an increase in
income before taxes. The effective tax rates in 2004 and 2003 were 40% and 39%,
respectively.
RESULTS OF OPERATIONS - 2003 COMPARED TO 2002
Net Sales
Consolidated sales in 2003 amounted to $39,256,000, of which 56.0% were
polycarbonate (or plastic) CBUs and OPLs sold to the USPS and the private
market. The remainder of the Company's consolidated sales consisted primarily of
sales of lockers (coin-op, temporary storage, electronic keyless and service)
and metal postal products (aluminum CBUs, indoor mailboxes and collection
boxes). This metal product group amounted to 43.6% of total consolidated sales
in 2003; its increase in sales of $623,000 was due primarily to increased sales
of aluminum mailboxes at SMC, offset by a decrease of $517,000 relating to other
locker products. Total sales declined 3.5% in 2003, from $40,671,000 in 2002.
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
was primarily due to the expiration of the service contract with the Toronto
International Airport in November 2002 and continued decline in revenue at the
Detroit International Airport. Effective in January 2004, the Company terminated
the luggage cart services in Detroit. As such, the Company no longer provides
any luggage cart rental services.
19
Sales by general product group for 2003 and 2002 were as follows:
Percentage
2003 2002 Increase (Decrease)
----------- ----------- -------------------
CBU (Plastic) .................... $21,223,000 $22,649,000 (6.3)%
OPL (Plastic) .................... 744,000 931,000 (20.1%)
Metal Product Group .............. 17,135,000 16,512,000 3.8%
Luggage Cart Business ............ 154,000 578,000 (73.4%)
Cost of Sales
Consolidated cost of sales as a percentage of sales was 69.4% in 2003 compared
to 68.6% in 2002. The slight increase in 2003 was 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 increased by $687,000 in 2003 over
2002, due partially 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 by $141,000 in 2003 compared to 2002 as a result of
lower outstanding debt as the Company continued to make scheduled payments on
its outstanding debt. No new debt was incurred in 2003.
Other Income - Net
Other income - net, which consisted primarily of revenue related to maintenance
of previously sold products, remained flat. Other income - net in 2003 also
included a gain on the disposal of assets of $28,000.
Income Taxes
Income taxes decreased by $551,000 in 2003 versus 2002 as a result of the
decrease in income before income taxes. The effective tax rate was 39% in both
2003 and 2002.
20
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity is reflected by its current ratio, which is the ratio of
current assets to current liabilities, and its working capital, which the excess
of current assets over current liabilities. These measures of liquidity were as
follows:
As of December 31,
------------------------------
2004 2003
----------- ------------
Current Ratio.... 1.6 to 1 3.1 to 1
Working Capital.. $ 6,715,202 $ 9,853,455
The decrease in working capital primarily resulted from the necessary
reclassification of the Company's $6,668,596 term loan as a current liability at
December 31, 2004 as a result of the Company's receipt on March 18, 2005 of a
notice of default and reservation of rights letter from its lender with respect
to the Company's term loan as a result of the non-renewal of the Company's CBU
contract with the USPS.
The Company's policy is to maintain modern equipment and adequate capacity.
During 2004, 2003, and 2002 the Company expended $281,000, $543,000 and
$316,000, respectively, for capital additions. Capital expenditures in all three
years were financed principally from operations. The Company expects capital
expenditures in 2005 to fall within the range of expenditures made in the last
three years. It is expected that capital expenditures, other than potential
expenses related to the development and sale of 1118F CBUs should the Company
determine that it will pursue the manufacture of 1118F CBUs, will be funded from
cash on hand. Because of uncertainties related to the 1118F CBU, the Company is
unable to predict capital costs related to the development and manufacture of
that product if the Company ultimately decides to develop and manufacture that
product.
During 2001 the Company acquired B.L.L. Corporation, d/b/a Security
Manufacturing Corporation, and related real estate for approximately
$12,000,000, 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, which was paid in full in 2004, and $140,000 of cash. The original terms
of the borrowings to fund the acquisition require principal payments of
approximately $1,321,316 during 2005. After discussions with Manufacturers and
Traders Trust Company 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 being a
$1,000,000 payment made in May 2005 and the second being a payment later in 2005
of an amount to be determined in the course of the Company's discussions with
its lender regarding the restructuring of its debt. On March 18, 2005, the
Company received a notice of default and reservation of rights letter from its
lender regarding the term loan as a result of the non- renewal of the Company's
CBU contract with the USPS.
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
21
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 to restructure
its term and revolving debt with a new loan agreement to be in effect for
approximately one year, during which time the Company expects to seek a new
lender in Texas, where the Company will be relocating its headquarters by the
end of 2005. The initial proposal by the lender provides that the Company (i)
pay down the remaining balance of its term loan, which is approximately
$2,700,000, in 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.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations as of December 31, 2004 relating to
long-term debt, operating lease arrangements and purchase obligations. 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, operating
leases and purchase obligations are as follows:
Payments due by period
-----------------------------------------------------------
More
Less than 1 than 5
Total year 1-3 3-5 years
years years
-------------- --------------- --------- ----- ------
Long-term debt obligations,
in default.................... $ 6,668,596 $ 6,668,596 -- -- --
Operating lease
obligations .................. 341,000 255,000 86,000 -- --
Purchase obligations .......... 3,317,000 3,317,000 -- -- --
-------------- --------------- --------- ----- -----
Total ....................... $ 10,326,596 $ 10,240,596 $ 86,000 $ -- $ --
============== =============== ========= ===== =====
The above amounts for long-term debt do not include interest. The Company
expects to refinance its mortgage payable prior to its scheduled maturity in
2006.
The Company has had continuing 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's contributions to
the plan have ranged from approximately $100,000 to $400,000 over the last four
years. The required funding is based on actuarial calculations that take into
account various actuarial results and certain assumptions.
22
As part of its restructuring plan necessitated by the non-renewal of the USPS
contract discussed above, the Company decided in May 2005 to freeze its
obligations under the defined benefit plan such that after July 15, 2005 no
benefits will accrue under this plan and has notified the plan's participants of
this decision. The Company is awaiting the results of an actuarial study to
determine if further funding of the plan is required.
The Company does not have any off-balance sheet arrangements with unconsolidated
entities or other persons.
RELATED PARTY TRANSACTIONS
Donald I. Dussing, Jr., a director of the Company, is Vice-President of
Manufacturers and Traders Trust Company, which has loaned money to the Company
under a term loan and revolving credit facility.
ALSSI currently has a manufacturing agreement with Signore, which formerly was a
wholly owned subsidiary of the Company, to furnish fabricating, assembly and
shipping services. The manufacturing agreement 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 with one-year's notice to the other party. On May 24, 2005, ALSSI
delivered to Signore a one-year advance written notice of termination of the
manufacturing agreement, with such termination to be effective May 24, 2006, as
per the terms for termination in the manufacturing agreement. The agreement
provides that the cost to the Company for these services be equal to Signore's
cost divided by 80%. Pursuant to the manufacturing agreement, the Company
purchased $2,990,000, $2,751,000 and $3,109,000 of material from Signore during
2004, 2003 and 2002, respectively, at prices that the Company believes are at
arm's length. Alexander Ditonto serves as Chairman of Signore and is the
father-in-law of Roy J. Glosser, a director of the Company. The Company does not
preclude reaching a new manufacturing agreement with Signore. The Company is,
however, actively engaged in finding potential alternate sources of
manufacturing, fabricating and assembly for certain of its products.
One of the Company's subsidiaries purchases fabricated parts from Rollform of
Jamestown, Inc., a rollforming company owned and managed by Edward F.
Ruttenberg, his wife and family, and other relatives of Mr. Ruttenberg. Pursuant
to this arrangement, the Company purchased $245,000, $151,100 and $183,000 of
materials from Rollform of Jamestown, Inc. in 2004, 2003 and 2002, respectively.
OTHER AGREEMENTS
During 2002, the Company entered into agreements to become 5% members of two
limited liability companies (LLCs). Third parties formed the LLCs in order to
provide luggage cart services at two U.S. airports. The Company has sold luggage
cart products to these LLCs. The Company contemplates a sale of its luggage cart
assets and may not be in a position to make further sales to these 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 interest in the LLCs had no impact on the Company's
2004 operating results or financial position, and is not expected to have any
material impact in the future.
23
RELIANCE ON SIGNORE, INC.
Certain of the Company's non-plastic lockers are manufactured or fabricated by
Signore with proprietary locks supplied by the Company. ALSSI currently has a
manufacturing agreement with Signore, which formerly was a wholly owned
subsidiary of the Company, to furnish fabricating, assembly and shipping
services. The manufacturing agreement 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
with one-year's notice to the other party. The manufacturing agreement provides
that the cost to the Company for these services will be equal to Signore's
standard cost divided by 80%.
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 were unable to fulfill its obligation, the Company's revenues
and operations could be materially and adversely impacted. On May 24, 2005,
ALSSI delivered to Signore a one-year advance written notice of termination of
the manufacturing agreement, with such termination to be effective May 24, 2006,
as per the terms for termination in the manufacturing agreement. The Company
does not preclude reaching a new manufacturing agreement with Signore. The
Company is, however, actively engaged in finding potential alternate sources of
manufacturing, fabricating and assembly for certain of its products.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation in raw material and other prices has become an increasing factor in
the general economy, and the Company continues to seek ways to mitigate its
impact. For example, the Company has experienced significant increases in steel
and aluminum prices in 2004. To the extent permitted by competition, the Company
passes increased costs on to its customers by increasing sales prices over time.
The Company intends to seek additional ways to control the administrative costs
necessary to successfully run the business. By controlling these costs such as
pension costs discussed above, the Company can continue to competitively price
its products with other top quality locker manufacturers and distributors.
The Company uses the LIFO method of accounting for over 75% of its inventory.
This method tends to match current costs with current revenues. During
inflationary periods, it reduces reported income, thereby reducing taxes, which
improves cash flow.
MARKET RISKS
Raw Materials
The Company does not have any long-term commitments for the purchase of raw
materials. In respect to its 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
24
logistics systems is limited. Present sources of supplies and raw materials
incorporated into the Company's products are generally considered to be adequate
and are currently available in the marketplace.
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, 2004, and subsequent to that date, the Company received a dividend
of CDN$800,000, net of Canadian withholding taxes of CDN$40,000, from its
Canadian operations, further reducing the net assets of its Canadian operations
(see Note 17 - Subsequent Events). Presently, management does not hedge its
foreign currency risk.
Interest Rate Risks
The Company has fixed interest rates on $3,518,596 of its long-term debt at
December 31, 2004 and variable interest rates based on three-month LIBOR on
$3,150,000 of its long-term debt at December 31, 2004. Based upon the Company's
outstanding long-term debt subject to variable interest rates at December 31,
2004, a 1% increase in the LIBOR rate would result in an annual increase to
interest expense of approximately $28,000. As noted above, the Company is in
discussions with its primary lender to restructure its term and revolving debt
with a new loan agreement to be in effect for approximately one year, during
which time the Company expects to seek a new lender in Texas, where it will be
relocating its headquarters by the end 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 (See Note 9 - Stock Options).
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.
NASDAQ LISTING
On April 19, 2005, the Company received notice from The Nasdaq Stock Market
(Nasdaq) indicating that the Company was not in compliance with Nasdaq's
requirement for continued listing set forth in Marketplace Rule 4310(c)(14) as a
result of the Company's failure to timely file this Annual Report on Form 10-K.
As a result, the trading symbol for the Company's
25
common stock was changed from "ALGI" to "ALGIE" effective as of the opening of
business on April 21, 2005. The Company received a similar notice from Nasdaq on
May 24, 2005 with respect to its Quarterly Report on Form 10-Q for its fiscal
quarter ended March 31, 2005. On May 26, 2005, the Company had an oral hearing
before a Nasdaq Listing Qualifications Panel to appeal the decision of Nasdaq to
delist the Company's common stock as a result of its non-compliance with
Marketplace Rule 4310(c)(14). The Nasdaq Listing Qualifications Panel informed
the Company on July 6, 2005 that it had granted the Company's request for
continued listing, subject to the Company filing this Annual Report on Form 10-K
and the late Quarterly Report on Form 10-Q on or before July 31, 2005. Further,
the Nasdaq Listing Qualifications Panel indicated that the fifth character "E"
will remain appended to the Company's trading symbol pending a determination
that the Company is fully compliant with Nasdaq's filing requirement and has
evidenced compliance with all other requirements for continued listing on
Nasdaq. The Company is working diligently to file its Quarterly Report on Form
10-Q for its fiscal quarter ended March 31, 2005 as soon as possible and
believes that it will do so on or before July 31, 2005, but there can be no
assurance that the Company will be able to avoid delisting.
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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
American Locker Group Incorporated
We have audited the accompanying consolidated balance sheet of American Locker
Group Incorporated and Subsidiaries as of December 31, 2004, and the related
consolidated statements of income, stockholder's equity, and cash flows for the
year then ended. Our audit also included the financial statement schedule listed
in the index at Item 15(a). These consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Locker
Group Incorporated and Subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1, 4 and 17 to
the financial statements, on February 8, 2005, the Company was informed that its
contract with the US Postal Service, which represented over 50% of the Company's
2004 revenue, would not be renewed. As a result of the loss of the contract, the
Company has received from its lender a notice of default and reservation of
rights letter with respect to its term loans and has been advised orally by its
lender that its line of credit is not available. These circumstances raise
substantial doubt about the Company's
27
ability to continue as a going concern. Management's plans in regard to these
matters are described in Notes 1 and 17. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Schneider Downs & Co., Inc.
Pittsburgh, Pennsylvania
March 18, 2005, except for Note 1, paragraphs 2 through 9, and Note 17, as to
which the date is May 12, 2005
28
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
American Locker Group Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheet of American Locker
Group Incorporated and Subsidiaries as of December 31, 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended December 31, 2003 and 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statement
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 the consolidated
results of their operations and their cash flows for the years ended December
31, 2003 and 2002, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Buffalo, New York
February 24, 2004
29
American Locker Group Incorporated and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,780,215 $ 3,597,990
Accounts and notes receivable, less allowance
for doubtful accounts of $232,000 in 2004
and $371,000 in 2003 4,402,840 4,682,946
Inventories 6,463,496 5,458,865
Prepaid expenses 136,316 118,819
Deferred income taxes 1,300,230 729,546
--------------- ---------------
Total current assets 18,083,097 14,588,166
Property, plant and equipment:
Land 500,500 500,500
Buildings 3,463,205 3,456,766
Machinery and equipment 11,775,088 12,137,813
--------------- ---------------
15,738,793 16,095,079
Less allowance for depreciation (11,154,157) (11,092,999)
--------------- ---------------
4,584,636 5,002,080
Deferred income taxes 24,558 53,756
Goodwill 6,155,204 6,155,204
Other assets 14,435 74,274
--------------- ---------------
Total assets $ 28,861,930 $ 25,873,480
=============== ===============
30
DECEMBER 31
2004 2003
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ --- $ ---
Long-term debt in default and due on demand 6,668,596 ---
Accounts payable 1,974,460 1,713,010
Commissions, salaries, wages and taxes thereon 602,803 573,762
Accrued environmental settlement 1,102,500 ---
Other accrued expenses and current liabilities 565,477 658,405
Income taxes payable 454,059 148,218
Current portion of long-term debt --- 1,641,316
-------------- ---------------
Total current liabilities 11,367,895 4,734,711
Long-term liabilities:
Long-term debt --- 6,664,171
Pension and other benefits 707,465 312,458
-------------- ---------------
707,465 6,976,629
Stockholders' equity:
Common stock, $1 par value:
Authorized shares - 4,000,000
Issued shares - 1,726,146
Outstanding shares - 1,534,146 1,726,146 1,726,146
Other capital 97,812 97,812
Retained earnings 17,521,028 14,818,080
Treasury stock at cost (192,000) shares (2,112,000) (2,112,000)
Accumulated other comprehensive loss (446,416) (367,898)
-------------- ---------------
Total stockholders' equity 16,786,570 14,162,140
-------------- ---------------
Total liabilities and stockholders' equity $ 28,861,930 $ 25,873,480
============== ===============
See accompanying notes.
31
American Locker Group Incorporated and Subsidiaries
Consolidated Statements of Income
YEAR ENDED DECEMBER 31
2004 2003 2002
------------- -------------- -------------
Net sales $ 49,023,417 $ 39,256,438 $ 40,670,721
Cost of products sold 34,667,796 27,241,066 27,898,060
Selling, administrative and general expenses 8,463,819 8,086,610 7,399,754
Environmental settlement 1,102,500 --- ---
------------- -------------- -------------
4,789,302 3,928,762 5,372,907
Interest income 48,277 36,908 94,826
Other income - net 120,224 109,351 174,718
Interest expense (456,865) (529,642) (670,144)
------------- -------------- -------------
Income before income taxes 4,500,938 3,545,379 4,972,307
Income taxes 1,797,990 1,398,247 1,949,479
------------- -------------- -------------
Net income $ 2,702,948 $ 2,147,132 $ 3,022,828
============= ============== =============
Earnings per share of common stock:
Basic $ 1.76 $ 1.41 $ 1.57
============= ============== =============
Diluted $ 1.73 $ 1.38 $ 1.54
============= ============== =============
Dividends per share of common stock: $ 0.00 $ 0.00 $ 0.00
============= ============== =============
See accompanying notes.
32
American Locker Group Incorporated and Subsidiaries
Consolidated Statements of Stockholders' Equity
COMMON OTHER RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------------ ----------- -------------- --------------
Balance at January 1, 2002 $ 2,504,526 $ 496,708 $ 15,610,362 $ (3,816,533)
Comprehensive income:
Net income - - 3,022,828 -
Other comprehensive income:
Foreign currency translation - - - -
Minimum pension liability adjustment, net of tax
benefit of $106,186 - - - -
Total comprehensive income
Common stock issued (18,000 shares) 18,000 43,688 - -
Tax benefit of exercised stock options - 67,300 - -
Common stock purchased for treasury (163,000 shares)
- - - (1,793,000)
Common stock purchased and retired (380,900 shares)
(380,900) (607,696) ( 2,897,189) -
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)
Comprehensive income:
Net income - - 2,147,132 -
Other comprehensive income:
Foreign currency translation - - - -
Minimum pension liability adjustment, net of tax
benefit of $104,536 - - - -
Total comprehensive income
Common stock issued (17,000 shares) 17,000 30,812 - -
Tax benefit of exercised stock options - 67,000 - -
------------ ----------- -------------- --------------
Balance at December 31, 2003 1,726,146 97,812 14,818,080 (2,112,000)
Comprehensive income:
Net income - - 2,702,948 -
Other comprehensive income:
Foreign currency translation - - - -
Minimum pension liability adjustment, net of tax
benefit of $98,876 - - - -
Total comprehensive income
------------ ----------- -------------- --------------
Balance at December 31, 2004 $ 1,726,146 $ 97,812 $ 17,521,028 $ (2,112,000)
============ =========== ============== ==============
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) EQUITY
------------- ------------
Balance at January 1, 2002 $ (241,187) $14,553,876
Comprehensive income:
Net income - 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) - 61,688
Tax benefit of exercised stock options - 67,300
Common stock purchased for treasury (163,000 shares)
- (1,793,000)
Common stock purchased and retired (380,900 shares)
- (3,885,785)
Retirement of treasury stock (432,480 shares) - -
------------ -----------
Balance at December 31, 2002 (393,385) 11,874,709
Comprehensive income:
Net income - 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) - 47,812
Tax benefit of exercised stock options - 67,000
------------ -----------
Balance at December 31, 2003 (367,898) 14,162,140
Comprehensive income:
Net income - 2,702,948
Other comprehensive income:
Foreign currency translation 69,795 69,795
Minimum pension liability adjustment, net of tax
benefit of $98,876 (148,313) (148,313)
-----------
Total comprehensive income 2,624,430
--------- -----------
Balance at December 31, 2004 $(446,416) $16,786,570
========= ===========
See accompanying notes.
33
American Locker Group Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
2004 2003 2002
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 2,702,948 $ 2,147,132 $ 3,022,828
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 706,929 893,236 974,165
Provision for uncollectible accounts (139,000) 94,000 111,000
Gain on disposal of assets - (28,523) -
Deferred income taxes (credits) (442,610) (81,476) 153,021
Changes in assets and liabilities:
Accounts and notes receivable 437,628 (267,144) 465,338
Inventories (950,650) 595,975 792,736
Prepaid expenses (17,081) (13,144) 21,771
Accounts payable and accrued expenses 1,306,926 (172,265) 429,795
Income taxes 303,275 328,411 (560,984)
Pension and other benefits 149,324 32,863 (469,336)
----------- ----------- -----------
Net cash provided by operating activities 4,057,689 3,529,065 4,940,334
INVESTING ACTIVITIES
Purchase of property, plant and equipment (280,562) (543,146) (316,180)
Proceeds from sale of property, plant and equipment - 28,523 31,915
----------- ----------- -----------
Net cash used in investing activities (280,562) (514,623) (284,265)
FINANCING ACTIVITIES
Long-term debt payments (1,636,891) (1,628,326) (1,644,874)
(Repayments ) borrowings on line of credit - (25,000) 25,000
Common stock issued - 47,812 61,688
Common stock purchased for treasury - - (1,793,000)
Common stock purchased and retired - - (3,885,785)
----------- ----------- -----------
Net cash used in financing activities (1,636,891) (1,605,514) (7,236,971)
Effect of exchange rate changes on cash 41,989 186,837 4,093
----------- ----------- -----------
Net increase (decrease) in cash 2,182,225 1,595,765 (2,576,809)
Cash and cash equivalents at beginning of year 3,597,990 2,002,225 4,579,034
----------- ----------- -----------
Cash and cash equivalents at end of year $ 5,780,215 $ 3,597,990 $ 2,002,225
=========== =========== ===========
Supplemental cash flow information: Cash paid during the year for:
Interest $ 458,122 $ 546,273 $ 731,198
=========== =========== ===========
Income taxes $ 1,932,868 $ 1,030,497 $ 2,347,283
=========== =========== ===========
See accompanying notes.
34
Notes to Consolidated Financial Statements
American Locker Group Incorporated and Subsidiaries
December 31, 2004
1. BASIS OF PRESENTATION
CONSOLIDATION, BUSINESS DESCRIPTION AND CURRENT OPERATING CONDITION
The consolidated financial statements include the accounts of American Locker
Group Incorporated and its subsidiaries (the Company), all of which are wholly
owned. Intercompany accounts and transactions have been eliminated in
consolidation. The Company is 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.
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. 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 that it intends to phase out approval of the
current model CBUs in the private market by September 30, 2005. Because private
purchasers will have an inventory of current model CBUs on that date and because
of uncertainty as to the size of supply of the new 1118F model CBUs available to
the private market prior to that date, the impact of the September 30, 2005 date
is unclear. So long as local postal authorities are willing to install postal
locks on the current model CBUs being installed in their local area, private
purchasers may be willing to continue to purchase and install current model
CBUs. The Company does not expect any significant change in sales of its other
postal and locker products.
The USPS awarded a new seven-year CBU contract to a competitor on a sole
supplier basis for supply of CBUs after May 31, 2005. That contract will require
a new specification (1118F) and design that will also apply to CBUs sold to the
private market as early as Fall 2005, although such timing may be subject to
interpretation and implementation by local postmasters. The new CBU is the
design submitted by the competitor as part of the bid solicitation submitted in
December 2004. The 1118F design package, now the property of the USPS, will be
made available to interested manufacturers, including but not limited to the
Company, on terms yet to be disclosed by the USPS, with such terms applying
equally to the competitor that was awarded the CBU contract. The USPS has
advised the Company that it may receive by the end of July 2005 a new
specification and design that will apply to the new CBUs. While the winning
bidder has the design information and is in a position to build and sell the new
1118F design to the USPS and private market, the Company must first gain access
to the necessary drawings, then go
35
1. BASIS OF PRESENTATION (CONTINUED)
CONSOLIDATION, BUSINESS DESCRIPTION AND CURRENT OPERATING CONDITION (CONTINUED)
through a period of engineering and cost evaluation, sourcing and building in
order to obtain USPS approval, a period of time which the Company estimates may
be between three to six months. Prior to having access to and having an
opportunity to evaluate the design and drawing package and to review strategic
price considerations for private market sales, the Company is not in a position
to determine definitively if it will pursue the manufacture of the 1118F CBU,
and, if so, how long it will take to obtain approval from the USPS for eventual
sale to the private market.
On March 17, 2005 the Company announced that it had retained Compass Advisory
Partners, LLC ("Compass") to provide strategic consulting services to the
Company with respect to potential restructuring and cost reductions necessitated
by the non-renewal of the United States Postal Service CBU contract. The Board
of Directors formed a Restructuring Committee for the purpose of evaluating a
restructuring plan to be recommended by Compass for eventual approval by the
full Board. The Restructuring Committee, in consultation with Compass, undertook
a review of the Company's financial position and business and operations. See
Note 17 - Subsequent Events for additional information regarding the
restructuring plan.
The loss of over 50% of the Company's revenues resulting from the nonrenewal 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 1118F CBU design and drawing package make the Company's future uncertain.
After the USPS notification of non-renewal of the CBU contract, the Company's
Board of Directors on May 18, 2005 announced a restructuring plan to
significantly reduce annual selling, general and administrative expenses. Most
of these savings would be achieved by relocating Company headquarters from
leased facilities in Jamestown, NY to company-owned facilities in Grapevine, TX
by the end of 2005. As part of this restructuring the Company expects to not
renew its existing building leases in Jamestown upon their respective expiration
dates in September 2005 and November 2005, discontinue Jamestown based assembly
operations, eliminate many of the thirty-seven salaried and hourly positions in
Jamestown, and freeze its current pension plan. Due to the non-renewal of the
CBU contract, all polycarbonate CBU assembly operations in Jamestown will cease
by Fall 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.
36
1. BASIS OF PRESENTATION (CONTINUED)
CONSOLIDATION, BUSINESS DESCRIPTION AND CURRENT OPERATING CONDITION (CONTINUED)
As discussed in Note 4 - Debt, 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
not available. The Company is in discussions with the lender to restructure its
term and revolving debt with a new loan agreement to be in effect for
approximately one year, during which time the Company expects to seek a new
lender in Texas, where the Company will be relocating its headquarters by the
end of 2005. 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 being a $1,000,000 payment made in May 2005 and the
second being a payment later in 2005 of an amount to be determined in the course
of the Company's discussions with its lender regarding the restructuring of its
debt. 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 to the Company or that
the Company currently deems immaterial may also impair its business operations.
Should one or more of any 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 sales revenues in each
of 2004, 2003 and 2002, and that the Company is able 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 the Company's
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 to operate. 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.
37
1. BASIS OF PRESENTATION (CONTINUED)
CONSOLIDATION, BUSINESS DESCRIPTION AND CURRENT OPERATING CONDITION (CONTINUED)
The Company's restructuring plan contemplates that it will develop and commence
sales of 1118F CBUs to the private market in the first quarter of 2006. Sales to
the private market accounted for 18.9%, 14.6% and 10.2% of the Company's sales
in 2004, 2003 and 2002, respectively. If the Company is not able to timely
obtain the total design and drawing package for the 1118F CBU from the USPS or
if it determines not to pursue the manufacture of 1118F CBUs or otherwise
experiences a delay that prevents it from being able to develop and commence
sales of an 1118F CBU in the first quarter of 2006, the Company's results of
operations and its business and financial condition could be materially
adversely affected. In particular, a further round of cost-cutting measures may
become necessary if the Company determines not to pursue the manufacture of
1118F CBUs or if its development and commencement of sales of 1118F CBUs are
significantly delayed beyond the currently contemplated estimates.
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. The Company maintains cash and cash
equivalents on deposit in amounts in excess of federally insured limits.
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. At December 31, 2003, the Company had secured interest-bearing
notes receivable under time payment arrangements from certain customers which
totaled approximately $344,000, net of allowance for doubtful accounts. Payment
of approximately $241,000 was received during 2004, and the balance was charged
to the allowance.
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.
38
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued principally at the lower of cost or market. Cost is
determined by the last-in, first-out method (LIFO) for approximately 78% of the
Company's inventories at December 31, 2004 (79% at December 31, 2003). For the
remaining inventories, cost is determined by the first-in, first out method
(FIFO). The replacement value of the inventories accounted for by the LIFO
method approximates their value under the FIFO method of $5,373,000 and
$4,420,000 as of December 31, 2004 and 2003, respectively. See also Note 17 -
Subsequent Events.
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 three to 12 years
for machinery and equipment. Expenditures for repairs and maintenance are
expensed as incurred. Gains and losses resulting from the sale or disposal of
property and equipment are included in other income.
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. There is no impairment recorded with respect to property,
plant and equipment as of December 31, 2004 and 2003.
See also Note 17- Subsequent Events.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of approximately $6,155,000 has been recorded in connection with the
2001 acquisition of Security Manufacturing Corporation (SMC). 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 2004 and 2003; no impairment
of goodwill was calculated at that time (see Note 17 - Subsequent Events). 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.
39
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS (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 original value of the covenant not-to-compete of $350,000 is
completely amortized as of December 31, 2004. Amortization expense was $58,333
during 2004 and $116,667 during 2003 and 2002.
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 $566,000, $538,000, and
$370,000 during 2004, 2003, and 2002, respectively.
ADVERTISING EXPENSE
The cost of advertising is generally expensed as incurred. The cost of catalogs
and brochures are recorded as a prepaid cost and expensed over their useful
lives, generally one year. The Company incurred $253,000, $239,000, and $333,000
in advertising costs during 2004, 2003, and 2002, 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). Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
RESEARCH AND DEVELOPMENT
The Company engages in research and development activities relating to new and
improved products. It expended $153,000, $431,000, and $174,000 in 2004, 2003
and 2002, respectively, for such activity in its continuing businesses. Research
and development costs are included in selling, general and administrative
expenses.
40
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 in default is approximately $6,815,300, and the carrying
value is $6,668,596 at December 31, 2004.
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 have been granted since 2000. 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 2004, 2003, or 2002 for stock options as required by SFAS No.
123.
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.
41
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial statements to
conform to the current year presentation.
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 (See Note 9 - Stock Options).
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.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31
2004 2003
---------- ----------
Finished products $ 913,415 $1,760,657
Work-in-process 2,388,049 1,689,774
Raw materials 3,628,651 2,271,930
---------- ----------
6,930,115 5,722,361
Less allowance to reduce to LIFO basis (466,619) (263,496)
---------- ----------
Net inventories $6,463,496 $5,458,865
========== ==========
See also Note 17 - Subsequent Events.
42
4. DEBT
Debt consists of the following:
DECEMBER 31
2004 2003
---------- ----------
Bank note payable through July 6, 2008 at $225,000
quarterly plus interest at the 3-month LIBOR rate plus
2% (4.03% at December 31, 2003), in default $3,150,000 $4,050,000
Bank note payable through July 6, 2008 at $25,000
monthly plus interest at 8.07%, in default 1,075,000 1,375,000
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, in default 2,443,596 2,560,487
Note payable in annual installments of $320,000 through
July 6, 2004 plus interest at 6.50% --- 320,000
---------- ----------
Total long-term debt 6,668,596 8,305,487
---------- ----------
Less long-term debt in default and due on demand 6,668,596 ---
Less current portion --- 1,641,316
---------- ----------
Long-term portion $ --- $6,664,171
========== ==========
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.
On March 18, 2005, the Company 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 its CBU contract with the USPS (See Note 17 - Subsequent Events). To
date, the Company has made all scheduled payments on its term loan and its
outstanding mortgage loan. The Company, after discussions with Manufacturers and
Traders Trust Company (M&T) following the non-renewal of the USPS contract in
February 2005, agreed to accelerate repayment of the loan by making two
additional payments, the first of which being a $1,000,000 payment made in May
2005 and the second being a payment later in 2005 in an amount to be determined
in the course of the Company's discussions with its lender regarding the
restructuring of its debt. M&T has the unilateral right to require payment on
demand if it exercises its rights under the term loan. Although M&T has not yet
exercised its right to require payment on demand, the Company's long-term debt,
including debt under its mortgage loan due August 1, 2006, is classified as a
current liability as a result of the Company's receipt of the notice of default
and reservation of rights letter.
The Company has a $3,000,000 unsecured line of credit agreement with M&T with
interest at the prime rate (5.25% at December 31, 2004). There was no borrowing
outstanding under the line of credit at December 31, 2004 and 2003. The Company
also has been verbally advised by M&T that its revolving line of credit is not
available.
43
4. DEBT (CONTINUED)
The Company is in discussions with M&T to restructure the Company's term and
revolving debt with a new loan agreement to be in effect for approximately one
year, during which time the Company expects to seek a new lender in Texas, where
the Company will be relocating its headquarters by the end of 2005.
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, 2004:
2005 $255,000
2006 46,000
2007 35,000
2008 5,000
Rent expense amounted to approximately $326,000, $340,000, and $368,000 in 2004,
2003, and 2002, respectively.
6. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following:
2004 2003 2002
United States $ 4,547,237 $ 3,594,061 $ 4,925,308
Foreign income (loss) (46,299) (48,682) 46,999
----------- ----------- -----------
$ 4,500,938 $ 3,545,379 $ 4,972,307
=========== =========== ===========
Significant components of the provision for income taxes are as follows:
2004 2003 2002
----------- ----------- -----------
Current:
Federal $ 1,897,403 $ 1,273,089 $ 1,517,532
State 323,340 221,690 255,669
Foreign 19,857 (15,056) 23,257
----------- ----------- -----------
Total current 2,240,600 1,479,723 1,796,458
Deferred:
Federal (376,219) (69,256) 130,068
State (66,391) (12,220) 22,953
----------- ----------- -----------
(442,610) (81,476) 153,021
----------- ----------- -----------
$ 1,797,990 $ 1,398,247 $ 1,949,479
=========== =========== ===========
The differences between the federal statutory rate and the effective tax rate as
a percentage of income before taxes are as follows:
44
6. INCOME TAXES (CONTINUED)
2004 2003 2002
---- ---- ----
Statutory income tax rate 34% 34% 34%
State and foreign income taxes, net of federal benefit
4 4 4
Other permanent differences 2 1 1
---- ---- ----
40% 39% 39%
==== ==== ====
Differences between the application of accounting principles 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:
2004 2003
---------- --------
Deferred tax liabilities:
Property, plant and equipment $ 33,266 $ 16,869
Prepaid expenses and other 113,661 111,737
---------- --------
Total deferred tax liabilities 146,927 128,606
Deferred tax assets:
Postretirement benefits 30,492 47,292
Pension costs 400,192 156,132
Allowance for doubtful accounts 70,556 148,569
Other assets 27,333 23,333
Accrued expenses 477,347 90,821
Other employee benefits 61,712 54,343
Inventory costs 404,083 391,418
---------- --------
Total deferred tax assets 1,471,715 911,908
---------- --------
Net deferred tax assets $1,324,788 $783,302
========== ========
Current deferred tax asset $1,300,230 $729,546
Long-term deferred tax asset 24,558 53,756
---------- --------
$1,324,788 $783,302
========== ========
The Company has not provided deferred taxes for taxes that could result from the
remittance of undistributed earnings of the Company's foreign subsidiary since
it has generally been the Company's intention to reinvest these earnings
indefinitely. Undistributed earnings that could be subject to additional income
taxes if remitted were approximately $979,000 at December 31, 2004.
45
6. INCOME TAXES (CONTINUED)
The Company has not completed its evaluation of the American Jobs Creation Act
of 2004 and its impact on undistributed earnings of its foreign subsidiary.
Potentially, the Company may be allowed an 85% dividend received deduction
related to the undistributed earnings of the foreign subsidiary. After the Act
has been evaluated and the Company has developed a plan to implement, the
Company will determine the effect on current and deferred income taxes.
See Note 17- Subsequent Events.
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company and its subsidiaries have a noncontributory defined benefit pension
plan covering substantially all employees. Benefits for the salaried employees
are based on specified percentages of the employees' annual compensation. The
benefits for hourly employees are based on stated amounts for each year of
service.
The plan's assets were invested in fixed interest rate group annuity contracts
with an insurance company during 2002, but were transferred into a balanced
index fund (the Fund) where the assets were invested during 2003 and 2004. 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 the projected benefit obligation,
changes in plan assets, the funded status, the accrued benefit cost recognized
in the consolidated balance sheets at December 31, 2004 and 2003, 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 2005 are
expected to approximate $275,000.
46
7. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
PENSION BENEFITS
2004 2003
----------- -----------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $ 3,900,931 $ 3,119,222
Service cost 308,605 247,315
Interest cost 235,894 206,350
Actuarial loss 255,271 406,001
Benefits and expenses paid (121,747) (77,957)
----------- -----------
Projected benefit obligation at end of year 4,578,954 3,900,931
CHANGE IN PLAN ASSETS
Fair value of plan assets as beginning of year 2,929,977 2,476,487
Actual return on plan assets 237,674 196,019
Employer contribution 126,590 335,428
Benefits and expenses paid (121,747) (77,957)
----------- -----------
Fair value of plan assets at end of year 3,172,494 2,929,977
----------- -----------
Funded status (1,406,460) (970,954)
Unrecognized net actuarial loss 1,274,210 1,091,487
Intangible pension asset recognized 14,435 15,941
----------- -----------
Net amount recognized - (accrued) prepaid benefit cost $ (117,815) $ 136,474
=========== ===========
As part of its restructuring plan necessitated by the non-renewal of the USPS
contract discussed above, the Company decided in May 2005 to freeze its
obligations under the defined benefit plan such that after July 15, 2005 no
benefits will accrue under this plan, and the Company has notified the plan's
participants of this decision. The Company is awaiting the results of an
actuarial study to determine if further funding of the plan is required.
Amounts are recognized in the consolidated balance sheet as follows:
DECEMBER 31
2004 2003
------------ ------------
Intangible asset $ 14,435 $ 15,941
Other accrued expenses - current (275,008) (275,162)
Other long-term liabilities (631,235) (131,109)
Accumulated other comprehensive loss 773,993 526,804
------------ ------------
$ (117,815) $ 136,474
============ ============
47
7. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
PENSION BENEFITS
2004 2003 2002
-------- --------- ----------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 308,605 $ 247,315 $ 220,751
Interest cost 235,894 206,350 183,742
Expected return on plan assets (218,519) (181,164) (159,462)
Amortization of unrecognized net transition asset --- - (104,892)
Net actuarial loss 53,393 32,671 10,516
Amortization of prior service cost 1,506 1,506 1,506
--------- --------- ---------
Net periodic benefit cost $ 380,879 $ 306,678 $ 152,161
========= ========= =========
Expected benefits to be paid by the plan during the next five years and in the
aggregate for the five fiscal years thereafter, are as follows:
2005 $ 76,000
2006 78,000
2007 140,000
2008 168,000
2009 205,000
2010 through 2014 $1,455,000
PENSION BENEFITS
2004 2003
----- ----
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 5.75% 6.0%
Expected return on plan assets 7.5% 7.0%
Rate of compensation increase 4.0% 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 $4,064,302 and $3,336,248 at December 31, 2004 and 2003,
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.
48
7. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The Company also provides a death benefit for retired former employees of the
Company. Effective in 2000, the Company discontinued this benefit for active
employees. The death 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 $76,000 and $118,000
at December 31, 2004 and 2003, respectively, and is recorded as long-term
pension and other benefits in the accompanying balance sheets. No expense was
recorded in 2003 or 2002 related to the death benefit as the Plan is closed to
new participants. The decrease in the calculated liability for benefits under
this plan in 2004 is as a result of the increasing age of the participants, in
accordance with the provisions of the plan.
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 last remaining
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,
2004.
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, $21,000,
and $15,000 in connection with its contribution to the plan during 2004, 2003,
and 2002, respectively.
See also Note 17 - Subsequent Events.
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.
49
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 as of
December 31, 2004
At December 31, 2004 and 2003, 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:
2004 2003 2002
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ---------- ------- ---------- ----------- ----------
Outstanding - beginning
of year 80,600 $ 6.34 97,600 $ 5.72 120,600 $ 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 80,600 $ 6.34 97,600 $ 5.72
====== ========== ======= ========= ======= ========
Exercisable - end of year 80,600 80,600 97,600
====== ======= =======
The exercise prices for options outstanding as of December 31, 2004 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 4.5 years.
At December 31, 2004, 73,000 options remain available for future issuance under
the 1999 Plan.
The Company has elected to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued Employees", in accounting for stock based employee
compensation arrangements whereby no compensation cost related to stock options
was recognized in determining net income. The effect of calculating compensation
expense in accordance with SFAS 123, "Accounting for Stock Based Compensation"
is immaterial to the financial statements.
50
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.
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:
2004 2003 2002
------------ ---------- ----------
Numerator:
Net income $2,702,948 $2,147,132 $3,022,828
Denominator:
Denominator for basic earnings per share - weighted
average shares outstanding 1,534,146 1,523,429 1,921,612
Effect of dilutive securities:
Employee stock options 23,785 30,899 35,949
---------- ---------- ----------
Denominator for diluted earnings per share -
weighted average shares outstanding and assumed
conversions 1,557,931 1,554,328 1,957,561
========== ========== ==========
Basic earnings per share $ 1.76 $ 1.41 $ 1.57
========== ========== ==========
Diluted earnings per share $ 1.73 $ 1.38 $ 1.54
========== ========== ==========
51
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows:
DECEMBER 31
2004 2003
---------- ----------
Foreign currency translation adjustment $ 17,979 $ (51,816)
Minimum pension liability adjustment, net of tax (464,395) (316,082)
--------- ---------
$(446,416) $(367,898)
========= =========
13. GEOGRAPHICAL 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:
2004 2003 2002
----------- ----------- -----------
United States customers $46,876,461 $37,557,289 $38,242,845
Foreign customers 2,146,956 1,699,149 2,427,876
----------- ----------- -----------
$49,023,417 $39,256,438 $40,670,721
=========== =========== ===========
Sales to the U.S. Postal Service represented 53.9%, 52.7%, and 56.4% of net
sales in 2004, 2003, and 2002, respectively. See also Note 17 - Subsequent
Events.
At December 31, 2004 and 2003, the Company had unsecured trade receivables from
governmental agencies of $1,692,000 and $1,648,000, respectively. At December
31, 2004 and 2003, the Company had secured notes receivable totaling $-0- and
$515,000, respectively and trade receivables from customers considered to be
distributors of $2,179,000 and $1,642,000, 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.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the years ended December 31, 2004 and 2003:
52
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
2004
-------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30
(RESTATED) (RESTATED) (RESTATED) DECEMBER 31
------------------ ------------------- ------------------ ------------
Net sales $ 9,554,307 $ 10,254,164 $ 18,074,076 $ 11,140,870
================== =================== ================== ============
Gross profit $ 3,141,838 $ 3,047,827 $ 5,237,642 $ 2,928,314
================== =================== ================== ============
Net income (loss) $ 630,820 $ 450,165 $ 1,826,751 $ (204,788)
================== =================== ================== ============
Earnings (loss) per share - Basic $ .41 $ .29 $ 1.19 $ (.13)
================== =================== ================== ============
Earnings (loss) per share - Diluted $ .40 $ .29 $ 1.17 $ (.13)
================== =================== ================== ============
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 $ 2,765,364 $ 2,952,751 $ 2,888,431 $ 3,408,826
================== =================== ================== ============
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
================== =================== ================== ============
The Company's accounting practice for interim periods provides for possible
accounting adjustments in the fourth quarter or at year-end. The net loss for
the quarter ended December 31, 2004, includes a pre-tax charge against operating
results of $1,102,500 as the result of a settlement agreement related to certain
environmental claims against the Company (See Note 16 - Contingencies). In 2004,
adjustments to inventory resulted in an increase to the fourth quarter pre-tax
loss of approximately $200,000. 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 2004, certain errors in inventory costing related to the first, second and
third quarters of 2004 were identified. These errors were adjusted and the
unaudited quarterly results above were restated. A summary of the 2004 quarterly
information as previously reported, and as restated follows:
53
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
EARNINGS PER SHARE
-------------------------
NET SALES GROSS PROFIT NET INCOME BASIC DILUTED
----------- ------------ ---------- ----------- -----------
2004
March 31, 2004
As previously reported $ 9,554,307 $2,952,973 $ 538,420 $ .35 $ .35
=========== ========== ========== =========== ===========
As restated $ 9,554,307 $3,141,838 $ 630,820 $ .41 $ .40
=========== ========== ========== =========== ===========
June 30, 2004
As previously reported $10,254,164 $2,833,782 $ 336,765 $ .22 $ .21
=========== ========== ========== =========== ===========
As restated $10,254,164 $3,047,827 $ 450,165 $ .29 $ .29
=========== ========== ========== =========== ===========
September 30, 2004
As previously reported $18,074,076 $4,941,460 $1,683,351 $ 1.10 $ 1.08
=========== ========== ========== =========== ===========
As restated $18,074,076 $5,237,642 $1,826,751 $ 1.19 $ 1.17
=========== ========== ========== =========== ===========
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, and is actively
involved in its management. One of the Company's subsidiaries purchased
$245,000, $151,000 and $183,000 of fabricated parts from Rollform of Jamestown,
Inc. in 2004, 2003 and 2002, respectively.
A Director (and former President and Chief Operating Officer) of the Company has
a relative who is the Chairman of the Board of Signore, Inc., a vendor that
supplies metal lockers. Purchases from Signore, Inc. totaled $2,990,000,
$2,751,000 and $3,109,000 in 2004, 2003 and 2002, respectively. Amounts due
Signore, Inc. and included in accounts payable at December 31, 2004 and 2003
totaled $230,000 and $380,000, respectively.
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.
54
16. CONTINGENCIES
In April 2005, the Company entered into a settlement with plaintiffs in a
lawsuit titled Roberta Raiport, et al. v. Gowanda Electronics Corp. and American
Locker Group, Inc. which was pending in the State of New York Supreme Court,
County of Cattaraugus. The suit involved property located in Gowanda, New York,
which was sold by the Company to Gowanda Electronics Corp. prior to 1980. The
plaintiffs, who are current or former property owners in Gowanda, New York,
asserted that the defendants each operated machine shops at the site during
their respective periods of ownership and that, as a result of such operations,
soil and groundwater contamination occurred which has adversely affected the
plaintiffs and the value of the plaintiffs' properties. According to the terms
of the settlement agreement, the Company will pay an aggregate of $1,225,000 to
the plaintiffs who own property adjacent to the site and to the current owner of
the property, Gowanda Electronics Corporation. Of this amount, $825,000 was paid
in April 2005, $200,000 was paid in June 2005, and $200,000 will be paid in
August 2005. The Company's primary insurance carrier during the period of the
ownership of the Gowanda property has agreed to reimburse the Company in the
amount of $122,500 in return for a release of coverage against the underlying
lawsuit. This settlement, less of anticipated insurance proceeds, resulting in a
charge to pre-tax operating results in the fourth quarter of 2004 of $1,102,500.
This settlement does not resolve the Company's potential liability described
below with respect to remediation of offsite contamination which allegedly
migrated from this site.
In July 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 and alleged migration from the site located in Gowanda, New York which was
sold by the Company to Gowanda Electronics Corporation prior to 1980. In March
2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in
which it set forth a remedy including 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,
which is intended to intercept any contaminates and implementation of an on-
going monitoring system. The NYSDEC has estimated that its selected remediation
plan 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
30-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 plan. This matter has not been litigated, and at the
present time the Company has only been identified as a PRP. The Company also
believes that 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 implementation 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.
55
16. CONTINGENCIES (CONTINUED)
In September 1998 and subsequent months, the Company was named as an additional
defendant in approximately 150 cases pending in state court in Massachusetts.
The plaintiffs in each case assert that a division of the Company manufactured
and furnished to a shipyard 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. Settlement agreements have been entered in approximately 15 cases with
funds authorized and provided by the Company's insurance carrier. Further, over
95 cases originally filed in 1995 through 2001 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 April 1,
2005 is approximately 20 cases originally filed against other defendants in 2002
through 2004.
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.
56
17. SUBSEQUENT EVENTS
On February 8, 2005, the Company announced that it was notified that its
contract with the USPS for polycarbonate and aluminum 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 such units rather than the Company's current
model units. The USPS has advised the Company that it intends to phase out
approval of the current model CBUs in the private market by September 30, 2005.
Because private purchasers will have an inventory of current model CBUs on that
date and because of uncertainty as to the size of supply of the new 1118F model
CBUs available to the private market prior to that date, the impact of the
September 30, 2005 date is unclear. So long as local postal authorities are
willing to install postal locks on the current model CBUs being installed in
their local area, private purchasers may be willing to continue to purchase and
install current model CBUs. The Company does not expect any significant change
in sales of its other postal and locker products.
Due to the significance of the reduction in business volume resulting from the
loss of the USPS contract on February 8, 2005, management determined that the
fair value of the Company had declined significantly. In accordance with FAS No.
142, "Goodwill and Other Intangible 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 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 indicates that no goodwill exists. Accordingly, an
impairment charge of $6,155,204 will be reported in the first quarter of 2005.
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 in 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
$2,290,000. 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 anticipated impairment charges and costs include a
charge to pre-tax operating results in 2005 of $945,000 for the following:
57
17. SUBSEQUENT EVENTS (CONTINUED)
Impairment of machinery and equipment $ 150,000
Inventory losses 272,000
Severance pay for displaced employees 473,000
Other costs 50,000
---------
$ 945,000
=========
The balance of the costs to be incurred as the Company implements the
restructuring plan include professional services and outside consulting fees.
A condensed proforma consolidated balance sheet displaying the impairment of
goodwill of $6,155,204 and the impact of the anticipated impairment charges and
costs of $945,000 net of applicable taxes on the December 31, 2004 consolidated
balance sheet, follows:
December 31, 2004
------------------------------
Proforma Actual
------------ ------------
ASSETS
Current assets $ 18,129,097 $ 18,083,097
Property, plant and equipment, net 4,434,636 4,584,636
Deferred income taxes 84,558 24,558
Goodwill --- 6,155,204
Intangible pension asset 14,435 14,435
------------ ------------
Total assets $ 22,662,726 $ 28,861,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 11,890,895 $ 11,367,895
Pension and other benefits 707,465 707,465
Stockholders' equity 10,064,366 16,786,570
------------ ------------
Total liabilities and stockholders' equity $ 22,662,726 $ 28,861,930
============ ============
As discussed in Note 4 - Debt, 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
not available. The Company is in discussions with the lender to restructure its
term and revolving debt with a new loan agreement to be in effect for
approximately one year, during which time the Company expects to seek a new
lender in Texas, where the Company will be relocating its headquarters by the
end of 2005. 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 being a $1,000,000 payment made in May 2005 and the
second being a payment later in 2005 of an amount to be determined in the course
of the Company's discussions with its lender regarding the restructuring of its
debt.
58
17. SUBSEQUENT EVENTS (CONTINUED)
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.
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 2004. 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 all matters discussed in the
paragraphs below, the principal executive officer and principal accounting
officer of the Company have concluded that the Company's disclosure controls and
procedures as of December 31, 2004 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. There were no changes in the Company's internal control over financial
reporting during the fourth quarter of 2004.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Taking into account the communications dated May 11, 2005 and June
28, 2005 by the Company's independent registered public accounting firm to the
Audit Committee of the Board of Directors, management has identified the
following material weaknesses in the Company's internal control over financial
reporting:
- Lack of a Chief Financial Officer possessing necessary experience
and expertise to oversee the financial accounting and reporting
responsibilities of an SEC registrant.
- Inadequate internal control over financial accounting and reporting
to produce financial statements in accordance with U.S. generally
accepted accounting principles.
- Proposal by the Company's independent registered public accounting
firm of several adjustments of material amounts as a result of its
audit procedures, including as a result of an adjustment by the
Company to SMC's inventory in excess of $900,000 without sufficient
analysis to evaluate all of the underlying reasons for the
adjustment.
- Provision of untimely and insufficiently detailed financial
information to management and the Board of Directors to facilitate
adequate over-sight.
60
- Untimely reconciliations of bank accounts and failure of the
Company's management to monitor the timeliness of the reconciliation
process.
- Quantifications of Company inventory maintained offsite with
reasonable precision only annually.
- Inadequate procedures in place to ensure that purchases or sale
transactions are recorded in the appropriate accounting period.
- Failure to routinely maintain the Company's perpetual inventory
system.
- Incomplete reconciliations of subsidiary ledger systems to the
general ledger.
- Insufficient entity level controls, as defined by COSO, to ensure
that the Company meets its disclosure and reporting obligations.
Management has endeavored to address the material weaknesses noted above and is
committed to effectively remediating known weaknesses. Although the Company's
remediation efforts are currently on-going, control weaknesses will not be
considered remediated until new internal controls over financial reporting are
implemented and operational for a period of time and are tested, and management
concludes that these controls are operating effectively. In particular,
management is in the process of making the following significant changes in the
Company's internal controls over financial reporting that would materially
affect, or are reasonably likely to materially affect, its internal control over
financial reporting:
- Actively conducting a search for an individual to serve as Chief
Financial Officer.
- Implementing more thorough and detailed reviews of financial
information.
- Developing a reporting package that includes interim financial
statements, gross margin analysis, sales reports and material non-
financial data by company.
- Implementing a prescribed time table for the prompt, regular
reconciliations of bank accounts, with the bank reconciliations
reviewed by management.
- Conducting regular physical inventories of the Company's offsite
inventory.
- Implementation of additional procedures to ensure that purchase or
sale transactions are recorded in the appropriate accounting
periods.
- Regularly updating and reconciling the Company's perpetual inventory
records and increasing the information regarding inventory that is
readily available for analysis.
- Investigating the reasons for the number of immaterial
reconciliation discrepancies between the general ledger and the
subsidiary ledgers for accounts receivable, accounts
payable and equipment.
61
- Implementing entity level controls such as (i) a detailed policy and
procedures manual; (ii) a strategic plan and business model; (iii) a
budgeting/forecasting control activity; (iv) formalize and enhance
management reporting procedures, including those to the audit
committee; and (v) implement formal self-monitoring procedures.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following sets forth certain information concerning the Company's directors
and executive officers. There are no family relationships between any directors
and executive officers.
Edward F. Ruttenberg. Mr. Ruttenberg, 58, has been a director since 1996 and has
been the Company's Chairman and Chief Executive Officer since September 1998 and
Chief Operating Officer and Treasurer since May 2005.
Steven Bregman. Mr. Bregman, 46, has been a director since June 2005 and is a
member of the Audit Committee. Mr. Bregman has served as the President and Chief
Operating Officer of FRMO Corp., an intellectual capital firm, since January
2001. Mr. Bregman also has served as President of Horizon Asset Management, a
registered investment advisor, from 1994 to the present and was a co-founder of
Horizon Research Group, an independent research firm, in 1995.
Anthony J. Crisafio. Mr. Crisafio, 51, has been a director since May 2004 and is
the Chairman of the Audit Committee. Mr. Crisafio has been an independent
business consultant, providing financial and operational advice and services to
businesses, and a small business owner for more than five years. In addition,
Mr. Crisafio is a certified public accountant licensed in the Commonwealth of
Pennsylvania.
Donald I. Dussing, Jr. Mr. Dussing, 63, has been a director since 1998 and is a
member of the Executive Compensation Committee and the Audit Committee. Mr.
Dussing has served as Senior Vice-President/Consultant of Manufacturers and
Traders Trust Company since May 2003. Prior to that time, Mr. Dussing served as
President - Buffalo Division, Manufacturers and Traders Trust Company since
April 1999. Mr. Dussing also serves as a director of Niacet Corporation.
Alan H. Finegold. Mr. Finegold, 62, has been a director since 1994 and is a
member of the Executive Committee. Mr. Finegold has been affiliated with the Law
Offices of Alan H. Finegold, LLC, a law firm, and the Alan H. Finegold Company,
which provides estate planning services, for more than five years.
62
Roy J. Glosser. Mr. Glosser, 44, has been a director since 1996. Mr. Glosser
served as the Company's President, Chief Operating Officer and Treasurer until
May 2005.
Thomas Lynch, IV. Mr. Lynch, 61, has been a director since 1994 and is a member
of the Executive Compensation Committee and the Audit Committee. Mr. Lynch has
served as a First Vice President of Janney, Montgomery and Scott, a brokerage
firm, for more than five years.
Jeffrey C. Swoveland. Mr. Swoveland, 49, has been a director since 1997 and is a
member of the Executive Compensation Committee and the Audit Committee. Mr.
Swoveland serves as Chief Financial Officer of Body Media, a life-science
company specializing in non-invasive recording and translation of multi-
parameter physiologic and lifestyle data. Prior to September 2000, Mr. Swoveland
served as Vice President - Finance and Treasurer of Equitable Resources, Inc. In
addition, Mr. Swoveland served as Interim Chief Financial Officer of Equitable
Resources, Inc. from October 1997 to July 1999. Mr. Swoveland also serves as a
director of Petroleum Development Corporation.
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.
The Company expects that changes in the composition of the Board of Directors
will occur in the near future. The Company has commenced efforts to recruit
qualified candidates to fill the expected vacancies.
Audit Committee
The Company has a standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The Audit Committee consists of five
directors: Messrs. Bregman, Crisafio, Dussing, Lynch and Swoveland. The
Company's Board of Directors has determined that Mr. Crisafio, Chairman of the
Audit Committee, qualifies as an "audit committee financial expert" as defined
by SEC regulations.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon the Company's review of the reports and representations
provide to it by persons required to file reports under Section 16(a), the
Company believes that all of the Section 16(a) filing requirements applicable to
the Company's reporting officers and directors were properly and timely
satisfied during 2004.
Code of Ethics
The Company has adopted a Code of Ethics which is applicable to all employees,
officers and Directors of the Company. The Code of Ethics is intended to address
conflicts of interest, corporate opportunities, confidentiality, fair dealing,
protection and proper use of Company assets and compliance with laws, rules and
regulations (including inside trading and reporting requirements). The Code of
Ethics establishes special ethical rules with respect to the Chief Executive
Officer and senior financial officials of the Company. It also establishes
compliance procedures and mechanisms for reporting suspected violations. The
Code of Ethics is available on the Company's website (www.americanlocker.com).
The Company intends to disclose amendments to, or waivers from, provisions of
the Code of Ethics that apply to the Chief Executive Officer and senior
financial officials by posting such information on its website. The contents of
the Company's website are not part of this Annual Report on Form 10-K.
63
ITEM 11. EXECUTIVE COMPENSATION
The following information is given for 2004, 2003 and 2002 with respect to the
compensation which was paid or accrued for services in such years, or which was
paid in such years for services in prior years but not included in the
remuneration table in prior years, proxy statements, for each of the executive
officers of the Company as of December 31, 2004.
ANNUAL COMPENSATION
----------------------------------------------
OTHER
ANNUAL
NAME AND SALARY COMPEN-
PRINCIPAL POSITIONS YEAR ($) BONUS ($) SATION ($)
- ------------------------------------------------------ ---- ------- --------- ----------
Edward F. Ruttenberg 2002 187,440 160,000 --
Chairman and Chief Executive Officer(2) 2003 196,812 120,000 --
2004 196,812 140,000 --
Roy J. Glosser 2002 168,720 130,000 --
President, Chief Operating Officer and Treasurer(2) 2003 177,156 97,500 --
2004 177,156 115,000 --
LONG-TERM COMPENSATION
------------------------------------------
AWARDS PAYOUTS
--------------------------- -----------
SECURITIES
RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND STOCK OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITIONS AWARD($) (SHARES) ($) ($)(1)
- ------------------------------------------------------ --------- ----------- ---------- ----------------
Edward F. Ruttenberg - - - -
Chairman and Chief Executive Officer(2) - - - -
- - - -
Roy J. Glosser - - - -
President, Chief Operating Officer and Treasurer(2) - - - -
- - - -
(1) In accordance with applicable regulations, the amounts do not include
perquisites and other personal benefits received by the named officers because
the aggregate value of such benefits did not exceed the lesser of $50,000 or 10
percent of the total salary and bonus for the named officers.
(2) Effective May 12, 2005, the Board of Directors of the Company determined
that Mr. Ruttenberg would assume the duties of the positions of President, Chief
Operating Officer and Treasurer of the Company.
STOCK OPTIONS
1988 Plan
In May 1988, the stockholders of the Company approved the American Locker Group
Incorporated 1988 Stock Incentive Plan (the "1988 Plan"). Grants under the 1988
Plan were to be granted to certain officers and directors of the Company by the
Executive Compensation Committee of the Board of Directors (the "Committee"),
which is comprised of at least two persons, in its discretion. Under terms of
the 1988 Plan, no new options can be granted after February 29, 1998. During
2004, no options were exercised with respect to shares under the 1988 Plan.
The 1988 Plan provides for the grant of rights to receive cash and/or Company
Common Stock, including options intended to qualify as incentive stock options
under Section 422A of the Internal Revenue Code of 1986, as amended, and options
not intended so to qualify. The 1988 Plan provides that the exercise price of
stock options must be no less than the fair market value on the date of grant of
the shares of Company Common Stock subject thereto and no stock option granted
under the 1988 Plan may be exercisable more than ten years after its grant. In
the case of a holder of 10% or more of the Company Common Stock, options
intended to be incentive stock options must have an exercise price of at least
110% of the fair market value of the underlying shares of Company Common Stock
on the date of grant and such options must expire within five years of the date
of grant.
64
Upon exercise of a stock option, the option price is required to be paid in
cash, or at the discretion of the Committee, in shares of Company Common Stock,
valued at the fair market value thereof on the date of payment, or in a
combination of cash and shares of Company Common Stock. The 1988 Plan authorizes
the Committee, in the event of any tender offer or exchange offer (other than an
offer by the Company) for shares of Company Common Stock, to take such action as
it may deem appropriate to enable the recipients of outstanding awards to avail
themselves of the benefits of such offer, including acceleration of payment or
exercise dates and purchase outstanding stock options.
1999 Plan
In May 1999, the stockholders of the Company approved the American Locker Group
Incorporated 1999 Stock Incentive Plan (the "1999 Plan").
Administration. The 1999 Plan is administered by the Committee. The Committee
has the sole discretion to interpret the 1999 Plan, establish and modify
administrative rules, impose conditions and restrictions on awards, and take
such other actions as it deems necessary or advisable. In addition, the full
Board of Directors of the Company can perform any of the functions of the
Committee under the 1999 Plan.
Amount of Stock. The 1999 Plan provides for awards of up to 150,000 shares of
Common Stock. The number and kind of shares subject to outstanding awards, the
purchase price for such shares and the number and kind of shares available for
issuance under the 1999 Plan is subject to adjustments, in the sole discretion
of the Committee, in connection with the occurrence of mergers,
recapitalizations and other significant corporate events involving the Company.
The shares to be offered under the 1999 Plan will be either authorized and
unissued shares or issued shares which have been reacquired by the Company.
Eligibility and Participation. The participants under the 1999 Plan will be
those employees and consultants of the Company or any subsidiary who are
selected by the Committee to receive awards, including officers who are also
directors of the Company or its subsidiaries. Approximately five persons will
initially be eligible to participate. No participant can receive awards under
the 1999 Plan in any calendar year in respect of more than 15,000 shares of
Common Stock.
Amendment or Termination. The 1999 Plan has no fixed expiration date. The
Committee will establish expiration and exercise dates on an award-by-award
basis. However, for the purpose of awarding incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
("incentive stock options"), the 1999 Plan will expire ten years from its
effective date of May 13, 1999.
Stock Options. The Committee may grant to a participant incentive stock options,
options which do not qualify as incentive stock options ("non- qualified stock
options") or a combination thereof. The terms and conditions of stock option
grants including the quantity, price, vesting
65
periods, and other conditions on exercise will be determined by the Committee.
Incentive stock option grants shall be made in accordance with Section 422 of
the Code.
The exercise price for stock options will be determined by the Committee at its
discretion, provided that the exercise price per share for each stock option
shall be at least equal to 100% of the fair market value of one share of Common
Stock on the date when the stock option is granted.
Upon a participant's termination of employment for any reason, any stock options
which were not exercisable on the participant's termination date will expire,
unless otherwise determined by the Committee.
Upon a participant's termination of employment for reasons other than death,
disability or retirement, the participant's stock options will expire on the
date of termination, unless the right to exercise the options is extended by the
Committee at its discretion. In general, upon a participant's termination by
reason of death or disability, stock options which were exercisable on the
participant's termination date (or which are otherwise determined to be
exercisable by the Committee) may continue to be exercised by the participant
(or the participant's beneficiary) for a period of twelve months from the date
of the participant's termination of employment, unless extended by the
Committee. Upon a participant's termination by reason of retirement, stock
options which were exercisable upon the participant's termination date (or which
are otherwise determined to be exercisable by the Committee) may continue to be
exercised by the participant for a period of three months from the date of the
participant's termination of employment, unless extended by the Committee. If
upon the disability or retirement of the participant, the participant's age plus
years of continuous service with the company and its affiliates and predecessors
(as combined and rounded to the nearest month) equals 65 or more, then all of
the participant's options will be exercisable on the date of such disability or
retirement for the exercise period stated above. In no event, however, may the
options be exercised after the scheduled expiration date of the options.
Subject to the Committee's discretion, payment for shares of Common Stock on the
exercise of stock options may be made in cash, by the delivery (actually or by
attestation) of shares of Common Stock held by the participant for at least six
months prior to the date of exercise, a combination of cash and shares of Common
Stock, or in any other form of consideration acceptable to the Committee
(including one or more "cashless" exercise forms).
Stock Appreciation Rights. Stock appreciation rights ("SARs") may be granted by
the Committee to a participant either separate from or in tandem with non-
qualified stock options or incentive stock options. SARs may be granted at the
time of the stock option grant or, with respect to non-qualified stock options,
at any time prior to the exercise of the stock option. A SAR entitled the
participant to receive, upon its exercise, a payment equal to (i) the excess of
the fair market value of a share of Common Stock on the exercise date over the
SAR exercise price, times (ii) the number of shares of Common Stock with respect
to which the SAR is exercised.
The exercise price of a SAR is determined by the Committee, but in the case of
SARs granted in tandem with stock options, may not be less than the exercise
price of the related stock option.
66
Upon exercise of a SAR, payment will be made in cash or shares of Common Stock,
or a combination thereof, as determined at the discretion of the Committee.
Change in Control. In the event of a change in control of the Company, all stock
options and SARs will immediately vest and become exercisable. In general,
events which constitute a change in control include: (i) acquisition by a person
of beneficial ownership of shares representing 30% or more of the voting power
of all classes of stock of the Company; (ii) during any year or period of two
consecutive years, the individuals who at the beginning of such period
constitute the Board no longer constitute at least a majority of the Board;
(iii) a reorganization, merger or consolidation; or (iv) approval by the
stockholders of the Company of a plan of complete liquidation of the Company.
No options were granted or exercised in 2004 under the 1999 Plan. The following
table sets forth information with respect to the persons named in the Executive
Compensation Table concerning the exercise of options during the last fiscal
year and unexercised options held as of December 31, 2004. Share data reflects
the four-for-one stock distribution which was distributed on June 25, 1998.
Aggregated Option/SAR Exercises in Last Fiscal Year
And Fiscal Year-End Option/SAR Values
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/04 (#) OPTIONS AT 12/31/04 ($)(1)
ACQUIRED VALUE ------------------------------- ----------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------------- ------------ ----------- ------------- ----------- -------------
Edward F. Ruttenberg -- -- 25,000 -- 368,750 --
Roy J. Glosser -- -- 22,000 -- 324,500
(1) Calculated on the basis of the closing price of the underlying securities at
the closing of the market on December 31, 2004 ($14.75 per share) minus the
applicable exercise price.
ESTIMATED RETIREMENT BENEFITS
The Company's pension plan for salaried employees provides for an annual pension
upon normal retirement computed under a career average formula, presently equal
to 2% of an employee's eligible lifetime earnings, which includes salaries,
commissions and bonuses. The following table sets forth the approximate annual
benefits payable on normal retirement pursuant to the provisions of the pension
plan for salaried employees to persons in specified lifetime average annual
earnings categories and years-of-service classifications. Edward F. Ruttenberg
is credited with six years of service under this plan. See Note 17 - Subsequent
Events for additional information about the Company's decision in May 2005 to
freeze its obligations under the defined benefit plan such that after July 15,
2005 no benefits will accrue under this plan.
ANNUAL PENSION BENEFITS FOR YEARS OF
CREDITED SERVICE SHOWN (1)
------------------------------------
LIFETIME AVERAGE
ANNUAL EARNINGS 10 YEARS 20 YEARS 30 YEARS
--------------- -------- -------- --------
50,000 10,000 20,000 30,000
67
75,000 15,000 30,000 45,000
100,000 20,000 40,000 60,000
125,000 25,000 50,000 75,000
150,000 30,000 60,000 90,000
(1) Pension benefit amounts listed in the table are not subject to deduction for
Social Security benefits.
Effective February 1, 1999, the Company has established a 401(K) Plan under
which it matches employee contributions at the rate of $.10 per $1.00 of
employee contributions up to 10% of employee's wages.
SUPPLEMENTAL RETIREMENT PLAN
In December 1997, the Board of Directors of the Company adopted the American
Locker Group Incorporated Supplemental Executive Retirement Plan (the
"Supplemental Plan"), effective January 1, 1998. The Supplemental Plan provides
for supplemental retirement benefits to certain executive level employees of the
Company as established by the Executive Compensation Committee of the Board of
Directors from time to time. No director of the Company may be the beneficiary
of the Supplemental Plan unless such director also serves as an employee of the
Company.
The Supplemental Plan provides for payment by the Company to the participant of
a specified monthly benefit and the provision by the Company of supplemental
medical benefits for the benefit of the participant and his dependents (the
"Health Benefit"). The obligations of the Company under the Supplemental Plan
are triggered by the actual retirement of the participant (defined as the date
on which the participant ceases, for reasons other than death, all active
employment with the Company) or upon a change of control. For purposes of the
Supplemental Plan, "Change of Control" is defined as a change in ownership or
control of the Company such that (i) any person, as defined in Section 13(d) or
14(d) of the Securities and Exchange Act of 1934 becomes beneficial owner of
more than 50% of the Company; (ii) during any two year period (including periods
prior to the adoption of the Supplemental Plan) there shall cease to be a
majority of the Board of the Company comprised of individuals who at the
beginning of such period were on the Board and any new members whose election
was approved by a vote of the majority of the directors who were then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved; or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
(other than merger or consolidation, which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent at
least 80% of the combined voting power of the surviving entity after the merger
or consolidation), the approval by the stockholders of the Company of a complete
liquidation of the Company, or the Company enters into a plan to sell all or
substantially all of the Company's assets, in a single transaction or series of
related transactions.
The Supplemental Plan also provides that upon the death of a participant, the
Company shall continue to pay to the participant's spouse for the remainder of
such spouse's life an amount equal to one-half of the benefit paid to the
participant and to continue to provide the Health Benefit for the benefit of
such spouse.
As of December 31, 2004, no eligible employees or spouses are designated to
receive benefits under the Supplemental Plan.
68
REPORT ON EXECUTIVE COMPENSATION
This Report on Executive Compensation is furnished by the Stock Option-
Executive Compensation Committee of the Board of Directors (referred to as the
"Committee").
In accordance with the rules of the Securities and Exchange Commission, this
report is not incorporated by reference into any of the Company's registration
statements under the Securities Act of 1933.
The Committee consists of four members, Thomas Lynch IV, Jeffrey C. Swoveland,
Donald I. Dussing, Jr. and Anthony J. Crisafio, all of whom are independent
non-employee directors.
The Committee is responsible for all aspects of executive compensation of the
Company. It determines levels of executive compensation for each of the two
principal executive officers of the Company and administers the Company's 1999
Stock Incentive Plan, the Company's 1988 Stock Incentive Plan, and the
Supplemental Retirement Plan. Following its deliberations, the Executive
Committee makes periodic reports to the entire Board of Directors.
COMPENSATION PHILOSOPHY - The Company's overall executive compensation objective
is to attract and retain qualified executive officers by compensating them at
levels comparable to those at similar businesses. The Company's compensation
program for executive officers consists of five components:
(1) base salary;
(2) participation in bonus distributions;
(3) participation in other welfare and benefit plans available to
employees of the Company and its subsidiaries generally;
(4) participation in the 1999 Stock Incentive Plan;
(5) participation in the Supplemental Retirement Plan.
SALARY - The Committee reviews and, if appropriate, revises salary levels for
the two principal executive officers of the Company annually. Salary adjustments
made by the Committee generally become effective January 1 of each fiscal year.
Executive officer salaries are determined in light of individual performance and
how their performance compares to the objectives and goals set forth at the
beginning of each year, corporate performance and corporate salaries of
executives at comparable companies. In fixing the Chief Executive Officer's
salary, the Committee also considers his effectiveness in achieving expansion
and growth objectives of the Company.
BONUS DISTRIBUTION - The executive officers, on an annual basis at the end of
each fiscal year, allocate discretionary bonuses to key employees of the
Company. These bonuses are drawn from a pool established at the time by the
executive officers based on factors including the operating results of the
Company for such fiscal year. The Chief Executive Officer and the President make
their determinations known to the Committee for all eligible employees.
Decisions as to the amount of any such bonus to the two principal executive
officers is
69
determined by the Committee based on data submitted to it regarding individual
performance and how their performance compares to the objectives and goals set
forth at the beginning of each year. The bonuses are paid in cash.
1999 STOCK INCENTIVE PLAN - The Stockholders of the Company adopted the 1999
Stock Incentive Plan in May 1999 to recruit and retain highly qualified
managers, consultants and staff. The Committee administers the Plan which
includes directing the amount of stock options awarded, selecting the persons to
receive stock option awards, determining the terms, provisions and exercise
prices for the stock options. The actual amount earned by any individual who
receives stock options is determined by the performance of the Company's stock.
The Committee uses the level of responsibility of an individual as a guideline
to establish the size of stock option awards.
OTHER PLANS - The Company maintains other pension benefit and welfare plans for
employees of the Company and its subsidiaries, including a defined benefit plan,
a 401(k) plan, medical, disability and life insurance plans. Executive officers
participate in these plans on a non-preferential basis.
SUPPLEMENTAL RETIREMENT PLAN - Certain executive officers are eligible to
participate in the Company's Supplemental Retirement Plan which provides for
supplemental retirement benefits to certain executive level employees of
Company. The Supplemental Retirement Plan is administered by the Committee. As
of December 31, 2004, no present officer or employee of the Company has been
granted rights under the Supplemental Retirement Plan.
COMPENSATION OF EXECUTIVE OFFICERS IN 2005 - In light of the non-renewal of the
cluster box unit contract between the Company and the United States Postal
Service in February 2005, the Committee recommended that 2005 base compensation
be reduced, effective March 1, 2005, by 25% from 2004 base compensation with
respect to Mr. Glosser and Mr. Ruttenberg for calendar year 2005 as compared to
calendar year 2004. Each of Mr. Glosser and Mr. Ruttenberg agreed to these
reductions and have executed amendments to their respective employment
agreements to reflect this reduction.
The Committee believes that executive compensation fairly reflects the benefits
received by the Company stockholders.
COMPENSATION OF CHIEF EXECUTIVE OFFICER - Mr. Ruttenberg's compensation is based
on the same philosophy and policies for all executive officers and includes the
same components as the executive officers. In November 1999, to assure Mr.
Ruttenberg's continued service to the Company, he and the Company entered into a
three year employment agreement. In 2002, the term of this employment agreement
was extended to November 18, 2005. The Committee believes that Mr. Ruttenberg's
compensation is reasonable, competitive and fair.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION - Section 162(a) of the Internal Revenue
Code imposes limits on tax deductions for annual compensation paid to a chief
executive officer and other highly compensated officers unless the compensation
qualifies as "performance-based" or is otherwise exempt under the law. The
current levels of compensation of the executive officers
70
of the Company are substantially below the levels at which the limitations of
Section 162 are applicable. In the event that levels of compensation rise such
that Section 162 should become applicable, the Committee intends to comply with
the limitations of Section 162 unless such compliance is determined by the
Committee not to be in the best interest of the Company at such time.
THE STOCK OPTION-EXECUTIVE
COMPENSATION COMMITTEE
Thomas Lynch IV, Chairman
Jeffrey C. Swoveland
Donald I. Dussing, Jr.
Anthony F. Crisafio
COMPENSATION OF DIRECTORS
Each director, other than the Chair of the Audit Committee, who is not a
salaried employee of the Company is paid a base director fee of $2,000 per
calendar quarter and a fee of $500 for each meeting of the Board of Directors or
of a Committee of the Board which he attends. In recognition of the additional
responsibilities and time commitment associated with the position, the Chair of
the Audit Committee instead receives a base director fee of $4,000 per calendar
quarter and a fee of $500 for each meeting of the Board of Directors or of a
Committee of the Board which he attends. All payments of compensation to
directors are payable on a monthly basis.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Executive Compensation-Stock Option Committee is an officer or
employee of the Company. No other member of the Committee has a current or prior
relationship, and no officer who is a statutory insider of the company has a
relationship to any other company, required to be described under the Securities
and Exchange Commission rules relating to disclosure of executive compensation.
EMPLOYMENT CONTRACT
In November 1999, the Company entered into an employment agreement with Edward
F. Ruttenberg, effective November 18, 1999 and as amended on May 15, 2002 and
March 1, 2005 (the "Ruttenberg Agreement"). The Ruttenberg Agreement provides,
among other things, (i) that the term of employment will expire on November 18,
2005, (ii) that base salary will be $12,301 per month, plus any increase in base
salary and any incentive compensation as determined by the Board of Directors of
the Company, and (iii) that upon the occurrence of a "Trigger Event," Mr.
Ruttenberg will be entitled to receive as a special bonus an amount equal to two
times his annual base salary at the rate in effect on the closing of such
Trigger Event plus the annual bonus, if any, received with respect to the most
recently completed fiscal year of the Company. For purposes of the Ruttenberg
Agreement, a Trigger Event shall mean the occurrence of the event described in
subsection (i) below and one or more of the events described in subsection (ii)
71
below; (i) any Rights issued under the American Locker Group Incorporated Stock
Rights Agreement dated November 18, 1999 become exercisable under terms of such
Rights Agreement, as amended and in effect from time to time, and (ii) the
occurrence of any of the following: (a) a substantial reduction in the base
salary, benefits or perquisites provided Mr. Ruttenberg; (b) a relocation of the
Company's principal place of business to a location which is more than 50 miles
from its current location in Jamestown, New York; or (c) the assignment to Mr.
Ruttenberg of any duties inconsistent in any respect with Mr. Ruttenberg's
current position with the Company (including status, offices, titles and
reporting requirements), or any action by the Company which results in
diminution in such position, or Mr. Ruttenberg's current authority, duties or
responsibilities, but excluding for this purpose any isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company.
Mr. Ruttenberg has agreed that the relocation of the Company's headquarters to
Grapevine, Texas, does not constitute a "relocation" of the Company's
headquarters for purposes of the Ruttenberg Agreement. The Ruttenberg Agreement
also provides that in the event of a sale of the Company, Mr. Ruttenberg will be
entitled to receive an incentive bonus equal to one year's base salary as in
effect on the date of the sale. The Ruttenberg Agreement defines "sale of the
Company" as any merger or sale of substantially all assets of the Company or the
sale or exchange to or with one entity or group acting in concert or more than a
majority of the outstanding shares if the Company entitled to vote upon the
election of directors. The Ruttenberg Agreement also provides that (a) if a
Trigger Event and the sale of the Company occur at the same time, only the
payment required to be made as a result of the occurrence of the Trigger Event
shall be payable; and (b) if a payment is made as a result of the sale of the
Company, any payment made as a result of the subsequent occurrence of a Trigger
Event shall be reduced by the amount of such prior payment.
The Ruttenberg Agreement also provides that in the event of permanent
disability, the Company shall pay the employee 100% of his base salary at the
rate then in effect for a period of six months from the date of disability and
at the rate of 60% thereafter for the balance of the term of the agreement. The
Ruttenberg Agreement also provides that such payments shall be reduced by any
payments to which Mr. Ruttenberg is entitled under any disability plan then
maintained by the Company and by any payments to which Mr. Ruttenberg is
entitled under the Federal Social Security disability program.
CUMULATIVE TOTAL STOCKHOLDER RETURN
The graph set forth below shows the cumulative total stockholder return (i.e.,
price change plus reinvestment of dividends) on the Common Stock from the first
day of trading in the Common Stock for the past five calendar years as compared
to the Russell 2000 Index and a peer group consisting of a group of business
equipment manufacturers, including Hon Industries, Inc., Herman Miller, Inc.,
Xerox Corporation, Steelcase Inc. and Pitney Bowes, Inc. The graph assumes that
$100 was invested on January 1, 1999.
In accordance with the rules of the Securities and Exchange Commission, this
presentation is not incorporated by reference into any of the Company's
registration statements under the Securities Act of 1933.
72
COMPARE 6-YEAR CUMULATIVE TOTAL RETURN
AMONG AMERICAN LOCKER GROUP INC.
RUSSEL 2000 INDEX AND COREDATA GROUP INDEX
[PERFORMANCE GRAPH]
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
AMERICAN LOCKER GROUP INC. 100.00 97.78 302.22 237.33 198.40 262.20
COREDATA GROUP INDEX 100.00 60.90 81.51 70.22 102.81 117.26
RUSSELL 2000 INDEX 100.00 95.68 96.66 75.80 110.19 129.47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of July 1, 2005, the directors and executive officers of the Company owned
the following shares of Common Stock of the Company:
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER(1) OWNERSHIP OF CLASS
- ------------------ ------------------ ---------
Edward F. Ruttenberg 76,821(2) 4.9%
Steven Bregman 0 *
Anthony J. Crisafio 0 *
Donald I. Dussing, Jr. 6,000 *
Alan H. Finegold 10,000(3) *
Roy J. Glosser 23,300(4) 1.5%
Thomas Lynch, IV 0 *
Jeffrey C. Swoveland 0 *
All 8 directors and executive officers as a group(5) 116,121 7.4%
73
(*) Less than 1%
(1) The address of each listed individual is c/o American Locker Group
Incorporated, 608 Allen Street, Jamestown, New York 14701-3966.
(2) Includes 25,000 shares which Edward F. Ruttenberg has the right to obtain
under stock options. Also includes 44,489 shares held by Edward F.
Ruttenberg, 2,000 shares held jointly by Edward F. Ruttenberg and Sara
Ruttenberg and 5,332 shares held by Rollform of Jamestown, Inc., a company
in which Edward F. Ruttenberg and his immediate family own a 97% interest.
(3) Includes 3,000 shares which Mr. Finegold has the right to acquire under
stock options.
(4) Includes 800 shares owned by Mr. Glosser's wife with respect to which Mr.
Glosser disclaims beneficial ownership.
(5) 28,000 shares subject to stock options held by such persons are included
in the number of shares held and the total number of shares outstanding
for purposes of calculating the amount of beneficial ownership and the
percentage of class.
EQUITY COMPENSATION PLAN INFORMATION
Information about its equity compensation plans at December 31, 2004 was as
follows:
Number of
securities
to be issued
upon Number of securities
exercise of Weighted-average remaining
outstanding exercise price of available for
options, outstanding future issuance
warrants and options,warrants under equity
rights and rights compensation plans
Equity compensation plans
approved
by security holders......................... 80,600 $6.34 73,000
Equity compensation plans not
approved by security holders ............... -- -- --
------ ----- ------
Total....................................... 80,600 $6.34 73,000
====== ===== ======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Donald I. Dussing, Jr., a director of the Company, is Vice-President of
Manufacturers and Traders Trust Company, which has loaned money to the Company
under a term loan and revolving credit facility.
ALSSI currently has a manufacturing agreement with Signore, which formerly was a
wholly owned subsidiary of the Company, to furnish fabricating, assembly and
shipping services. The manufacturing agreement 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
74
subject to termination by either party with one-year's notice to the other
party. On May 24, 2005, ALSSI delivered to Signore a one-year advance written
notice of termination of the manufacturing agreement, with such termination to
be effective May 24, 2006, as per the terms for termination in the manufacturing
agreement. The agreement provides that the cost to the Company for these
services be equal to Signore's cost divided by 80%. Pursuant to the
manufacturing agreement, the Company purchased $2,990,000, $2,751,000 and
$3,109,000 of material from Signore during 2004, 2003 and 2002, respectively.
Alexander Ditonto serves as Chairman of Signore and is the father-in-law of Roy
J. Glosser, a director of the Company. The Company does not preclude reaching a
new manufacturing agreement with Signore. The Company is, however, actively
engaged in finding potential alternate sources of manufacturing, fabricating and
assembly for certain of its products.
One of the Company's subsidiaries purchases fabricated parts from Rollform of
Jamestown, Inc., a rollforming company owned and managed by Edward F.
Ruttenberg, his wife and family, and other relatives of Mr. Ruttenberg. Pursuant
to this arrangement, the Company purchased $245,000, $151,100 and $183,000 of
materials from Rollform of Jamestown, Inc. in 2004, 2003 and 2002, respectively.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 9(e)
The Audit Committee of the Board of Directors of the Company has appointed
Schneider Downs & Co., Inc. as the independent registered public accounting firm
to audit the financial statements of the Company and its subsidiaries for the
fiscal year ended December 31, 2004. Previously, the Company engaged Ernst &
Young LLP as the independent registered public accounting firm to audit the
financial statements of the Company and its subsidiaries for the fiscal year
ended December 31, 2003.
The following table presents fees and other expenses for professional audit
services rendered by (i) Schneider Downs & Co., Inc. for the audit of the
Company's annual financial statements for the year ended December 31, 2004 and
fees and other expenses for other services rendered during that period and (ii)
Ernst & Young LLP for the audit of the Company's annual financial statements for
the year ended December 31, 2003 and fees and other expenses for other services
rendered during that period.
75
2004 2003
-------- --------
Audit fees............................... $185,000 $121,390
Audit-related fees....................... 0 8,850
Tax fees................................. 2,600 47,611
All other fees........................... 500 0
-------- --------
Total.................................. $188,100 $177,851
======== ========
AUDIT FEES
Audit fees in 2004 relate to services rendered in connection with the audit of
the Company's consolidated financial statements and the quarterly review of the
financial statements included in the Company's Form 10-Q for its third fiscal
quarter.
AUDIT-RELATED FEES
Audit-related fees in 2004 include fees for assurance and related services that
are reasonably related to the performance of the audit or review of the
Company's financial statements and that are not reported under the caption
"Audit Fees" above.
TAX FEES
Tax fees in 2004 include fees for services with respect to tax compliance, tax
advice and tax planning.
OTHER FEES
Other fees in 2004 include fees for the provision of market information relating
to executive compensation matters at the request of the Company's Executive
Compensation Committee.
The Audit Committee considered whether the provision of all services described
above was compatible with maintaining the auditor's independence, and has
determined that such services for 2004 and 2003 were compatible with maintaining
the auditor's independence. All services described above were pre- approved by
the Audit Committee pursuant to Rule 2-01(c)(u)(i)(C) of Regulation S-X
promulgated by the Securities and Exchange Commission.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
76
included elsewhere in the consolidated financial
statements or the notes thereto.
3. Exhibits
Exhibits required by Item 601 of Regulation S-K are
submitted as a separate section herein immediately
following the "Exhibit Index".
77
American Locker Group Incorporated
Index to Financial Statements and Financial Statement Schedules
The financial statements together with the report of Schneider Downs and Co.,
Inc. dated March 18, 2005 and May 12, 2005, is included in Item 8 Financial
Statements and Supplementary Data in the Annual Report on Form 10-K.
Financial Schedules for the years 2004, 2003, and 2002:
Valuation and Qualifying Accounts
SCHEDULE II
American Locker Group Incorporated
Valuation and Qualifying Accounts
BALANCE AT THE ADDITIONS CHARGED TO BALANCE AT
YEAR DESCRIPTION BEGINNING OF YEAR COSTS AND EXPENSE DEDUCTIONS END OF YEAR
- ---- ----------- ----------------- ----------------- ---------- -----------
Year ended 2004
Allowance for Doubtful
Accounts $ 371,000 $ 155,000 $ (294,000) $ 232,000
Reserve for Inventory
Valuation 457,000 123,000 (194,000) 386,000
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
78
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, Chief Executive Officer,
Chief Operating Officer and Treasurer
July 27, 2005
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 Officer,
- ------------------------- Chief Operating Officer and Treasurer July 27, 2005
Edward F. Ruttenber
/s/ Wayne L. Nelson Principal Accounting Officer July 27, 2005
- -------------------------
Wayne L. Nelson
/s/ Steven Bregman Director July 27, 2005
- -------------------------
Steven Bregman
/s/ Anthony J. Crisafio Director July 27, 2005
- -------------------------
Anthony J. Crisafio
/s/ Donald I. Dussing, Jr. Director July 27, 2005
- -------------------------
Donald I. Dussing, Jr.
/s/ Roy J. Glosser Director July 27, 2005
- -------------------------
Roy J. Glosser
/s/ Alan H. Finegold Director July 27, 2005
- -------------------------
Alan H. Finegold
/s/ Thomas Lynch, IV Director July 27, 2005
- -------------------------
Thomas Lynch, IV
/s/ Jeffrey C. Swoveland Director July 27, 2005
- -------------------------
Jeffrey C. Swoveland
EXHIBIT INDEX
-------------
PRIOR FILING OR SEQUENTIAL PAGE NO.
EXHIBIT NO. HEREIN
- ---------- -----------------------------------
3.1 Certificate of Incorporation of American Locker Exhibit to Form 10-K for Year ended
Group Incorporated December 31, 1980
3.2 Amendment to Certificate of Incorporation changing Form 10-C filed May 6, 1985
name of company
3.3 Amendment to Certificate of Incorporation limiting Exhibit to Form 10-K for year ended
liability of Directors and Officers December 31, 1987
3.4 By-laws of American Locker Group Incorporated as Exhibit to Form 10-K for year ended
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 8-K filed May 18,
Locker Group Incorporated and its directors and 2005
officers
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 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.
10.9 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.
10.10 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.
10.11 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
10.12 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
10.13 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
10.14 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
10.15 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
10.16 Amendment of Solicitation/Modification of Exhibit to Form 8-K filed March 4,
Contract between American Locker Security Systems, 2005
Inc. and the United States Postal Service dated
February 28, 2005
10.17 Amendment of Solicitation/Modification of Exhibit to Form 8-K filed March 4,
Contract between Security Manufacturing 2005
Corporation and the United States Postal Service
dated February 28, 2005
10.18 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
10.19 American Locker Group Incorporated 1999 Stock Exhibit to Form 10-QSB for the
Incentive Plan quarter ended June 30, 1999
10.20 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
10.21 Rights Agreement dated November 19, 1999 between Exhibit to Form 8-K filed November
American Locker Group Incorporated and Chase 18, 1999
Mellon Shareholder Services LLC
10.22 Form of American Locker Group Incorporated Exhibit to Form 10-QSB for year
Supplemental Executive Retirement Benefit Plan ending December 31, 1998
10.23 Employment Agreement dated November 19, 1999 Exhibit to Form 10-K for year ended
between American Locker Group Incorporated and December 31, 1999
Edward F. Ruttenberg
10.24 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
10.25 Amendment dated March 1, 2005 to Employment Exhibit to Form 8-K filed March 4,
Agreement between American Locker Group 2005
Incorporated and Edward F. Ruttenberg
10.26 Employment Agreement between American Locker Group Exhibit to Form 10-QSB for quarter
Incorporated and Roy J. Glosser ended June 30, 1996
10.27 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
10.28 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
10.29 Third Amendment dated March 1, 2005 to Employment Exhibit to Form 8-K filed March 4,
Agreement between American Locker Group 2005
Incorporated and Roy J. Glosser.
10.30 Form of Option Agreement under 1999 Stock Exhibit to Form 10-K for year ended
Incentive Plan December 31, 1999
10.31 Promissory Note dated July 6, 2001 made by Exhibit to Form 8-K filed July 12,
American Locker Group Incorporated in favor of 2001
Janie D'Addio
10.32 Amendment Agreement dated as of July 5, 2001 Exhibit to Form 8-K filed July 12,
between American Locker Group Incorporated and 2001
Manufacturers and Traders Trust Company
10.33 Deed of Trust Note dated as of July 5, 2001 made Exhibit to Form 8-K filed July 12,
by ALTRECO, Incorporated in favor of M&T Real 2001
Estate, Inc.
22.1 List of Subsidiaries Filed herewith
23.1 Consent of Schneider Downs & Co., Inc. Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended. Filed herewith
31.2 Certification of Principal Accounting Officer
pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended. Filed herewith
32 Certification of Chief Executive Officer and Filed herewith
Principal Accounting Officer Pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.