SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended March 31, 2005
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM ______________ TO
Commission file number 0-439
American Locker Group Incorporated
----------------------------------
(Exact name of business issuer as specified in its charter)
Delaware 16-0338330
- ---------------------------------------------- ----------------------------
(State of other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
608 Allen Street, Jamestown, NY 14701
-------------------------------------
(Address of principal executive offices)
(716) 664-9600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No[X]
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 there were outstanding 1,534,146 shares of the registrant's
Common Stock, $1 par value.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,617,295 $ 5,780,215
Accounts and notes receivable, less allowance for
doubtful accounts of $202,000 in 2005 and $232,000
in 2004 4,755,564 4,402,840
Inventories 5,881,237 6,463,496
Prepaid expenses 315,200 136,316
Prepaid income taxes 7,273 -
Deferred income taxes 1,409,230 1,300,230
------------ ------------
Total current assets 16,985,799 18,083,097
Property, plant and equipment:
Land 500,500 500,500
Buildings 3,488,722 3,463,205
Machinery and equipment 12,083,395 11,775,088
------------ ------------
16,072,617 15,738,793
Less allowance for depreciation (11,281,417) (11,154,157)
------------ ------------
4,791,200 4,584,636
Goodwill - 6,155,204
Deferred income taxes 24,558 24,558
Other assets 14,435 14,435
------------ ------------
Total assets $ 21,815,992 $ 28,861,930
============ ============
2
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Long-term debt in default and due on demand $ 6,337,051 $ 6,668,596
Accounts payable 1,556,982 1,974,460
Commissions, salaries, wages and taxes thereon 272,963 602,803
Other accrued expenses 685,122 565,477
Accrued environmental settlement 1,102,500 1,102,500
Income taxes payable - 454,059
------------ ------------
Total current liabilities 9,954,618 11,367,895
Long-term liabilities:
Pension, benefits and other long-term liabilities 782,576 707,465
Stockholders' equity:
Common stock, $1.00 par value:
Authorized shares - 4,000,000
Issued shares - 1,726,146 in 2005 and 2004
Outstanding shares - 1,534,146 in 2005 and 2004 1,726,146 1,726,146
Other capital 97,812 97,812
Retained earnings 11,823,997 17,521,028
Treasury stock at cost (192,000 shares in 2005 and 2004) (2,112,000) (2,112,000)
Accumulated other comprehensive loss (457,157) (446,416)
------------ ------------
Total stockholders' equity 11,078,798 16,786,570
------------ ------------
Total liabilities and stockholders' equity $ 21,815,992 $ 28,861,930
============ ============
See accompanying notes.
3
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- -----------
Net sales $ 9,160,220 $ 9,554,307
Cost of products sold 6,461,293 6,412,469
Asset impairment charge - goodwill 6,155,204 -
Selling, administrative and general expenses 1,879,956 2,006,661
----------- -----------
(5,336,233) 1,135,177
Interest income 21,978 5,433
Other income - net 13,275 7,790
Interest expense (107,417) (115,749)
----------- -----------
(Loss) income before income taxes (5,408,397) 1,032,651
Income taxes 288,634 401,831
----------- -----------
Net (loss) income $(5,697,031) $ 630,820
=========== ===========
(Loss) earnings per share of common stock:
Basic:
Net (loss) income $ (3.71) $ .41
=========== ===========
Diluted:
Net (loss) income $ (3.71) $ .41
=========== ===========
Dividends per share of common stock $ 0.00 $ 0.00
=========== ===========
See accompanying notes.
4
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net (loss) income $(5,697,031) $ 630,820
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 137,984 217,789
Asset impairment charge - goodwill 6,155,204 -
Deferred income taxes (109,000) -
Change in assets and liabilities:
Accounts and notes receivable (354,688) (297,557)
Inventories 581,792 (1,625,441)
Prepaid expenses (179,556) (168,807)
Accounts payable and accrued expenses (626,586) 64,502
Pension and other benefits 75,111 54,455
Income taxes (461,841) (104,646)
----------- -----------
Net cash used in operating activities (478,611) (1,228,885)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (344,763) (67,366)
----------- -----------
Net cash used in investing activities (344,763) (67,366)
FINANCING ACTIVITIES
Debt repayment (331,545) (328,613)
----------- -----------
Net cash used in financing activities (331,545) (328,613)
Effect of exchange rate changes on cash (8,001) (9,009)
----------- -----------
Net decrease in cash (1,162,920) (1,633,873)
Cash and cash equivalents at beginning of period 5,780,215 3,597,990
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,617,295 $ 1,964,117
=========== ===========
See accompanying notes.
5
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q. Accordingly, the condensed financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of the Company's management, all adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation of such condensed financial statements, have been included.
Operating results for the three-month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2005.
The consolidated balance sheet at December 31, 2004 has been derived from
the audited financial statements at the date, but does not include all of
the financial information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the Company's consolidated financial statements and
the notes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2004.
On February 8, 2005, the Company announced that it was notified that its
contract with the United States Postal Service (USPS) for polycarbonate
and aluminum cluster box units (CBUs) would not be renewed, and the
contract expired on May 31, 2005. During 2004, 2003 and 2002, sales to the
USPS accounted for 53.9%, 52.7% and 56.4%, respectively, of the Company's
net sales. In addition, sales of the current model polycarbonate and
aluminum CBUs to the private market accounted for an additional 18.6%,
14.6% and 10.2% of the Company's sales in 2004, 2003 and 2002,
respectively. Since May 31, 2005, the Company has experienced continuing
sales of its current CBU models to the private market, and it is unclear
when such sales will begin to decline as the new 1118F CBU specification
described below is introduced to the private market and purchasers begin
to purchase such units rather than the Company's current model CBUs. The
Company does not expect any significant change in sales of its other
postal and locker products.
The loss of over 50% of the Company's revenues resulting from the
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.
As discussed in Note 4 of the Company's consolidated financial statements
included in the 2004 Annual Report on Form 10-K, the Company has received
a notice of default and reservation of rights letter from its lender
regarding its term loans 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.
2. Provision for income taxes is based upon the estimated annual effective
tax rate. The impairment charge of $6,155,204 related to goodwill (see
Note 7) is a charge to earnings for financial reporting purposes and is
non-deductible for income tax reporting purposes. The goodwill was
originally recorded as part of a stock acquisition and a tax free exchange
for income tax reporting purposes.
3. The Company reports earnings per share in accordance with the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The
following table sets forth the computation of basic and diluted earnings
per common share:
6
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2005 2004
--------------- ---------------
Numerator:
Net (loss) income $ (5,697,031) $ 630,820
============= ==========
Denominator:
Denominator for basic earnings per share - weighted
average shares 1,534,146 1,534,146
Effect of Dilutive Securities:
Stock options - 21,144
------------- ----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversion 1,534,146 1,555,290
============= ==========
Basic (loss) earnings per common share:
Net (loss) income $ (3.71) $ .41
============= ==========
Diluted (loss) earnings per common share:
Net (loss) income $ (3.71) $ .41
============= ==========
The Company had 80,600 stock options outstanding for the three-month
period ended March 31, 2005, which were not included in the common share
computation for earnings (loss) per share, as the common stock
equivalents were anti-dilutive.
4. Inventories are valued at the lower of cost or market. Cost is determined
by using the last-in, first-out method for over 75% of the inventories.
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
Finished goods $ 1,322,729 $ 913,415
Work-in-process 1,643,845 2,388,049
Raw materials 3,381,282 3,628,651
----------- ------------
6,347,856 6,930,115
Less allowance to reduce to LIFO basis (466,619) (466,619)
----------- ------------
$ 5,881,237 $ 6,463,496
=========== ============
7
5. Total comprehensive (loss) income consisting of net (loss) income and
foreign currency translation adjustment was $(5,686,290) and $617,736 for
the three months ended March 31, 2005 and March 31, 2004, respectively.
6. The following sets forth the components of net periodic benefit cost of
the Company's defined benefit pension plan for the three months ended
March 31, 2005 and 2004:
MARCH 31, MARCH 31,
2005 2004
--------- ---------
Service cost $ 83,455 $ 73,149
Interest cost 65,281 57,990
Expected return on plan assets (62,697) (54,370)
Net actuarial loss 15,698 13,488
Amortization of prior service cost 377 377
--------- ---------
Net periodic benefit cost $ 102,114 $ 90,634
========= =========
For additional information on the Company's defined benefit pension plan,
please refer to Note 7 of the Company's consolidated financial statements
included in the 2004 Annual Report on Form 10-K.
7. 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, the
Company recorded an impairment charge of $6,155,204 in the quarter ending
March 31, 2005.
The Company also evaluated its inventory for impairment in accordance with
ARB No. 43, "Accounting for Inventory", and expected losses related to
committed purchase orders. As a result, the Company recorded an inventory
impairment charge of $147,000 and accrued $125,000 for an anticipated
loss on committed purchase orders. The expense was recorded as cost of
sales.
8. As discussed in Note 4 of the consolidated financial statements in the
Annual Report on Form 10-K for the year ended December 31, 2004, on March
18, 2005, the Company received a default and reservation of rights letter
from its lender regarding its term loans. The Company has also been
verbally advised by this lender that its revolving line of credit is not
available. As a result, the Company's debt may be due in full if called by
the lender and is therefore classified as a current liability.
The Company is in discussions with the lender 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.
8
9. As disclosed in Note 16 of the consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004,
the Company accrued for an environmental settlement of $1,102,000, net of
anticipated insurance proceeds. At March 31, 2005, this liability remained
unpaid. As of July 2005, all but a $200,000 installment, which is to be
made in August 2005, has been paid.
10. In May 2005, the Company announced that it would undertake restructuring
initiatives to realign its organization in response to the loss of its CBU
contract with the USPS. The Company's plan calls for significant
reductions in selling, general and administrative costs. A majority of the
cost reductions will be realized by relocating the Company's headquarters
from leased facilities in Jamestown, NY to a Company-owned facility 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. As a result
of the restructuring initiative, a pre-tax charge of $272,000 related to
impaired values of inventories and expected losses related to committed
purchase orders for raw materials is included in the cost of sales for the
first quarter of 2005. Additional anticipated impairment charges and costs
will include a charge to pre-tax operating results in 2005 totaling
$673,000 for the following:
Impairment of machinery and equipment $ 150,000
Severance pay for displaced employees 473,000
Other costs 50,000
----------
$ 673,000
==========
The balance of the costs to be incurred as the Company implements the
restructuring plan include professional services, outside consulting fees
and compensation.
11. In May 2005, the Company received a dividend from its Canadian operations
of CDN$800,000, an amount equivalent to US$604,000. This amount is net of
Canadian withholding taxes of CDN$40,000. The Company is evaluating the
impact of the American Jobs Creation Act of 2004, which allows, if
elected, a reduction in the amount of the dividend taxable for U.S.
federal income tax purposes. The potential tax consequence of the dividend
from the Canadian operations is expected to be less than US$60,000.
9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BACKGROUND
As more fully set forth in the Annual Report on Form 10-K filed by the Company
for its fiscal year ended December 31, 2004, on February 8, 2005, the Company
announced that it was notified that its contract with the United States Postal
Service (USPS) for polycarbonate and aluminum Cluster Box Units (CBUs) would not
be renewed, and the contract expired on May 31, 2005. During 2004, 2003 and
2002, sales to the USPS accounted for 53.9%, 52.7% and 56.4%, respectively, of
the Company's net sales. In addition, sales of the current model polycarbonate
and aluminum CBUs to the private market accounted for an additional 18.9%, 14.6%
and 10.2% of the Company's sales in 2004, 2003 and 2002, respectively. As a
result, the Board of Directors of the Company has adopted a restructuring plan
to reduce annual selling, general and administrative expenses by at least
$3,000,000, and the Company has recorded an impairment charge of $6,155,000 in
the first quarter of 2005 to recognize impairment of goodwill and approximately
$272,000 for inventory losses. See Note 7 in Item 1 of this Quarterly Report.
Since May 31, 2005, the Company has experienced continuing sales of its current
CBU models to the private market, and it is unclear when such sales will begin
to decline as the new 1118F CBU specification described below is introduced to
the private market and purchasers begin to purchase such units rather than the
Company's current model units. The USPS has advised the Company 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 has advised the Company that it may receive by the end of August 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.
RESTRUCTURING PLAN AND RELATED RISKS
As described more fully in the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 2004, the Company's Board of Directors has
adopted a restructuring plan to reduce annual selling, general and
administrative expenses by at least $3,000,000. Most of 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. To date,
the personnel downsizing has included a reduction in the executive,
administrative and sales staff in
10
Jamestown to be completed by the end of 2005, and the elimination of three
satellite sales offices. The Company believes that its non-postal locker sales
can be adequately handled by the remaining four satellite sales offices located
strategically across the country.
Substantial uncertainty exists as to whether the Company can implement the
restructuring plan in a manner that will allow the Company to continue as a
going concern. Management believes that it will be able to continue as a going
concern if it successfully implements its restructuring plan, which contemplates
that it will develop and commence sales of 1118F CBUs to the private market in
the first quarter of 2006. If the restructuring plan, as it may be modified by
the Company's Board of Directors from time to time to reflect changing
conditions and circumstances, does not adequately reduce the Company's expenses,
the Company's ability to remain in business would be adversely affected. A
failure by the Company to adhere to the time line or the incurrence of greater
than anticipated restructuring expenses as set forth in the restructuring plan
also would adversely affect the Company. Restructuring costs 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.
RESULTS OF OPERATIONS
FIRST THREE MONTHS 2005 VERSUS FIRST THREE MONTHS 2004
OVERALL RESULTS AND OUTLOOK
The first quarter of 2005 showed a 4.1% drop in net sales from the same period
in 2004, a decline from $9,554,307 to $9,160,220. A net loss of $5.7 million was
reported, which included pre-tax asset impairment charges of $6.1 million
representing the write-down of goodwill and a $0.3 million charge for inventory
losses.
NET SALES
Net sales were down across all of the Company's basic product groupings. Plastic
postal locker sales to the USPS, which include polycarbonate (or plastic) CBUs
and Outdoor Parcel Lockers, were $4.2 million in the first quarter 2005 versus
$4.5 million in the same period of 2004, a decline of 6.6%. Locker and metal
postal product sales were $4.9 million in the first quarter of 2005 versus $5.0
million in the first quarter of 2004, a decline of 2.8%.
Notwithstanding the loss of the USPS postal contract, the Company experienced
relatively little decline in CBU sales in the first quarter 2005, as the
contract originally set to expire on February 28, 2005 was extended to May 31,
2005, and the USPS announced that the current CBU model (1118E) would remain an
approved USPS product through September 2005.
COST OF PRODUCTS SOLD
Cost of Products Sold in the first quarter of 2005 were $6.5 million compared to
$6.4 million for the same period in 2004. Costs of Products Sold as a percentage
of net sales was 70.5% in 2005, compared to 67.1% in 2004. Increased costs of
metals in the first quarter of 2005 as compared to the first quarter of 2004
adversely impacted cost of products sold. The increase in the first quarter of
2005 is also due in part to a charge of $272,000 related to the Company's
recognition of impaired values of certain inventories on hand and expected
losses related to committed purchase orders for raw materials. The increases
were offset by a decrease in the number of units sold.
ASSET IMPAIRMENT CHARGE - GOODWILL
11
Due to the loss of the Company's CBU contract with the USPS (see Note 7 in Item
1 of this Quarterly Report), management has determined that the fair value of
the Company has declined significantly. Therefore, the Company, in accordance
with the provisions of FAS No. 142, "Goodwill and Other Intangible Assets", has
recorded a goodwill impairment charge against 2005 first quarter operating
results in the amount of $6,155,204.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and general administrative expenses for first quarter 2005 were $1.9
million or 20.5% of net sales, slightly better than the 21.0% of the prior year,
due primarily to a $75,000 decrease in bonuses paid, a $78,000 decrease in
research and development of a discontinued product and an increase of $27,000
related to freight charges.
INTEREST EXPENSE
Interest expense of $107,417 for the first three months of 2005 is relatively
comparable to interest expense of $115,749 for the same period in 2004. The
decrease resulted from lower average outstanding balances in 2005 compared to
2004 as the Company continues to make scheduled debt payments, offset by the
impact of higher effective interest rates. No new long-term debt was incurred
during 2004 or during the first three months of 2005. The Company made debt
repayments of $1,669,823 during the twelve month period ended March 31, 2005.
INCOME TAXES
The effective tax rate was 39% and 40% in 2005 and 2004, respectively, on
earnings, excluding in 2005 the asset impairment charge associated with
goodwill. The ratio of income taxes to loss before income taxes does not bear a
normal relationship, as the impairment charge related to the write-off of
goodwill in the amount of $6,155,204 is not deductible for income tax reporting
purposes because the goodwill was originally recorded as part of a tax-free
exchange.
NET (LOSS) INCOME
Due primarily to the charge against operations for goodwill impairment discussed
above, the Company recorded a net loss in the first quarter of 2005 of
$5,697,031 compared to the net income of $630,820 for the same period in the
prior year.
12
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity is reflected in the ratio of current assets to current
liabilities, or current ratio, and its working capital. The current ratio was
1.7 to 1 at March 31, 2005 and 1.6 at December 31, 2004. Working capital, the
excess of current assets over current liabilities, was $7,031,181 at March 31,
2005, an increase of $315,979 over $6,715,202 at December 31, 2004.
On March 18, 2005, the Company received a notice of default and reservation of
rights letter from its lender regarding the Company's term loan as a result of
the non-renewal of its CBU contract with the USPS. To date, the Company has made
all scheduled payments on its term loan and its outstanding mortgage loan. In
addition, the lender has verbally advised the Company that its revolving line of
credit is not available. The Company has no long-term capital commitments or
obligations, although this situation may require re-evaluation upon receipt of
the USPS drawing and design package for the new 1118F CBU. The Company is in
discussions with the lender 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.
EFFECT OF NEW ACCOUNTING GUIDANCE
The Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) - "Share
Based Payment" during December 2004. SFAS 123(R) is effective for fiscal years
beginning after June 15, 2005 and will require the Company to recognize
compensation expense in an amount equal to the fair value of share based
payments. The impact of SFAS 123(R) does not have a material impact on stock
options currently issued, but may in the future if additional stock options are
issued.
The FASB has also issued SFAS No. 151 - "Inventory Costs - An Amendment to ARB
No. 43, Chapter 4" effective for fiscal years beginning after June 15, 2005.
SFAS 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) should be recognized as current
period charges. The Company is in the process of evaluating the impact of
implementing SFAS 151.
FORWARD-LOOKING INFORMATION
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This Quarterly Report on Form 10-Q contains various "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve certain known and unknown risks and uncertainties,
including, among others, those contained in Item 1, "Business," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". When used in this Quarterly Report on Form 10-Q, the words
"anticipates," "plans," "believes," "estimates," "intends," "expects,"
"projects," "will" and similar expressions may identify forward-looking
statements, although not all forward-looking statements contain such words. Such
statements, including, but not limited to, the Company's statements regarding
business strategy, implementation of its restructuring plan, competition, new
product development and liquidity and capital resources are based on
management's beliefs, as well as on assumptions made by, and information
currently available to, management, and involve various risks and uncertainties,
some of which are beyond the Company's control. The Company's actual results
could differ materially from those expressed in any forward-looking statement
made by or on the Company's behalf. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information will in fact
prove to be accurate. The Company has undertaken no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of its management, including its principal executive officer and
principal accounting officer, of the effectiveness of its disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act,
as of March 31, 2005. These disclosure controls and procedures are designed to
provide reasonable assurance to the Company's management and board of directors
that information required to be disclosed by the Company in the reports that it
files under the Exchange Act is accumulated and communicated to its management
as appropriate to allow timely decisions regarding required disclosure. Based on
that evaluation, including 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 March 31,
2005 were not effective, at the reasonable assurance level, to ensure that (a)
material information relating to the Company is accumulated and made known to
the Company's management, including its principal executive officer and
principal accounting officer, to allow timely decisions regarding required
disclosure and (b) is recorded, processed, summarized and reported within the
time periods specified in SEC's rules and forms. There were no changes in the
Company's internal control over financial reporting during the first quarter of
2005.
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:
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- 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.
- 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.
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- 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.
- 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Financial Statement Schedules
(b) Exhibits.
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.
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.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN LOCKER GROUP INCORPORATED
/s/Edward F. Ruttenberg
-----------------------
Edward F. Ruttenberg
Chairman, Chief Executive Officer,
Chief Operating Officer and Treasurer
August 1, 2005
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