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 June 30, 2005
OR
[] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM _____________TO
Commission file number 0-439
American Locker Group Incorporated
-----------------------------------------------------------
(Exact name of business issuer as specified in its charter)
Delaware 16-0338330
- --------------------------------------------- ----------------------------
(State of other jurisdiction of 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 1, 2005 there were outstanding 1,546,146 shares of the registrant's
Common Stock, $1 par value.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,446,585 $ 5,780,215
Accounts and notes receivable, less allowance for doubtful
accounts of $223,000 in 2005 and $232,000 in 2004 4,381,297 4,402,840
Inventories 5,238,674 6,463,496
Prepaid expenses 286,664 136,316
Prepaid income taxes 483,560 --
Deferred income taxes 1,222,230 1,300,230
------------ ------------
Total current assets 15,059,010 18,083,097
Property, plant and equipment:
Land 500,500 500,500
Buildings 3,489,087 3,463,205
Machinery and equipment 12,103,656 11,775,088
------------ ------------
16,093,243 15,738,793
Less allowance for depreciation (11,485,331) (11,154,157)
------------ ------------
4,607,912 4,584,636
Goodwill --- 6,155,204
Deferred income taxes 24,558 24,558
Other assets --- 14,435
------------ ------------
Total assets $ 19,691,480 $ 28,861,930
============ ============
2
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt in default and due on demand $ 5,005,930 $ 6,668,596
Accounts payable 1,726,177 1,974,460
Commissions, salaries, wages and taxes thereon 216,323 602,803
Other accrued expenses 1,070,542 565,477
Accrued environmental settlement 200,000 1,102,500
Income taxes payable --- 454,059
------------ ------------
Total current liabilities 8,218,972 11,367,895
Long-term liabilities:
Pension, benefits and other long-term liabilities 779,576 707,465
Stockholders' equity:
Common stock, $1.00 per value:
Authorized shares - 4,000,000
Issued shares - 1,738,146 in 2005 and 1,726,146
in 2004, Outstanding shares - 1,546,146 in 2005
and 1,534,146 in 2004 1,738,146 1,726,146
Other capital 132,562 97,812
Retained earnings 11,448,470 17,521,028
Treasury stock at cost (192,000 shares in 2005 and 2004) (2,112,000) (2,112,000)
Accumulated other comprehensive loss (514,246) (446,416)
------------ ------------
Total stockholders' equity 10,692,932 16,786,570
------------ ------------
Total liabilities and stockholders' equity $ 19,691,480 $ 28,861,930
============ ============
See accompanying notes.
3
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2005 2004
------------ ------------
Net Sales $ 18,146,642 $ 19,808,471
Cost of products sold 13,082,508 13,618,806
Asset impairment - goodwill 6,155,204 ---
Selling, administrative and general expenses 4,807,315 4,221,550
------------ ------------
(5,898,385) 1,968,115
Interest income 43,715 9,590
Other income - net 28,904 19,353
Interest expense (194,135) (229,409)
------------ ------------
(Loss) income before income taxes (6,019,901) 1,767,649
Income tax expense 52,657 686,664
------------ ------------
Net (loss) income $ (6,072,558) $ 1,080,985
============ ============
(Loss) earnings per share of common stock:
Basic $ (3.96) $ .70
============ ============
Diluted $ (3.96) $ .69
============ ============
Dividends per share of common stock $ 0.00 $ 0.00
============ ============
See accompanying notes.
4
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
2005 2004
------------ ------------
Net Sales $ 8,986,422 $ 10,254,164
Cost of products sold 6,621,215 7,206,337
Asset impairment - goodwill --- ---
Selling, administrative and general expenses 2,927,359 2,214,889
------------ ------------
(562,152) 832,938
Interest income 21,736 4,157
Other income - net 15,630 11,563
Interest expense (86,718) (113,660)
------------ ------------
(Loss) income before income taxes (611,504) 734,998
Income tax (benefit) expense (235,977) 284,833
------------ ------------
Net (loss) income $ (375,527) $ 450,165
============ ============
(Loss) earnings per share of common stock:
Basic $ (.25) $ .29
============ ============
Diluted $ (.25) $ .29
============ ============
Dividends per share of common stock $ 0.00 $ 0.00
============ ============
See accompanying notes.
5
AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net (loss) income $ (6,072,558) $ 1,080,985
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities:
Depreciation and amortization 372,549 408,022
Asset impairment charge - goodwill 6,155,204 ---
Deferred income taxes 78,000 ---
Loss on disposal of assets 2,598 ---
Change in assets and liabilities:
Accounts and notes receivable 14,983 518,314
Inventories 1,224,300 (1,134,796)
Prepaid expenses (151,441) (150,915)
Accounts payable and accrued expenses (1,030,931) (154,604)
Pension and other benefits 72,111 95,489
Income taxes (948,886) (128,586)
------------ ------------
Net cash (used in) provided by operating activities (284,071) 533,909
INVESTING ACTIVITIES
Purchase of property, plant and equipment (381,286) (133,967)
------------ ------------
Net cash used in investing activities (381,286) (133,967)
FINANCING ACTIVITIES
Debt repayment (1,662,666) (657,255)
Issuance of common stock 33,750 ---
------------ ------------
Net cash used in financing activities (1,628,916) (657,255)
Effect of exchange rate changes on cash (39,357) (32,394)
------------ ------------
Net decrease in cash (2,333,630) (289,707)
Cash and cash equivalents at beginning of period 5,780,215 3,597,990
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,446,585 $ 3,308,283
============ ============
See accompanying notes.
6
Notes to Consolidated Financial Statements
American Locker Group Incorporated and Subsidiaries
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 six-month and three-month periods ended June 30,
2005 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2005.
The consolidated balance sheet at December 31, 2004 has been derived from
the audited financial statements at 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 units rather than the Company's current model CBUs. The
Company does not expect any significant change in sales of its other
postal and locker products.
The loss of over 50% of the Company's revenues resulting from the
non-renewal of the Company's CBU contract with the USPS, the potential
loss of sales of CBUs in the private market during the transition to the
1118F CBU 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, New York, to Company-owned facilities in Grapevine, Texas, 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 and eliminate many of the 37 salaried
and hourly positions in Jamestown. In addition, as part of the
restructuring plan, the Company has frozen the accrual of any additional
benefits under its defined benefit pension plan, effective July 15, 2005.
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, Texas, at Company-owned
manufacturing facilities.
As discussed in Note 4 of the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, 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
7
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 annual sales revenues in 2004, 2003 and 2002. Further, the
Company's prospects for continuing operations depend in part on its
ability to restructure its long-term debt and obtain short-term financing.
If the restructuring plan, as it may be modified by the Company's Board of
Directors from time to time to reflect changing conditions and
circumstances, does not adequately reduce 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 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:
8
SIX MONTHS ENDED JUNE 30,
2005 2004
------------ ----------
Numerator:
Net (loss) income $ (6,072,558) $1,080,985
============ ==========
Denominator:
Denominator for basic earnings per share - weighted
average shares 1,534,212 1,534,146
Effect of Dilutive Securities:
Stock options --- 32,337
------------ ----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversion 1,534,212 1,566,483
============ ==========
Basic (loss) earnings per common share:
Net (loss) income $ (3.96) $ .70
============ ==========
Diluted (loss) earnings per common share:
Net (loss) income $ (3.96) $ .69
============ ==========
THREE MONTHS ENDED JUNE 30,
2005 2004
------------ ----------
Numerator:
Net (loss) income $ (375,527) $ 450,165
============ ==========
Denominator
Denominator for basic earnings per share - weighted
average shares 1,534,278 1,534,146
Effect of Dilutive Securities:
Stock options --- 43,530
------------ ----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversion 1,534,278 1,577,676
============ ==========
Basic (loss) earnings per common share:
Net (loss) income $ (.25) $ .29
============ ==========
Diluted (loss) earnings per common share:
Net (loss) income $ (.25) $ .29
============ ==========
The Company had 68,600 stock options outstanding at June 30, 2005, which were
not included in the common share computation for earnings (loss) per share, as
the common stock equivalents were anti-dilutive.
4. Inventories are valued at the lower of cost or market. Cost is determined
by using the last-in, first-out method for over 75% of the inventories.
9
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
Finished goods $ 790,723 $ 913,415
Work-in-process 1,859,137 2,388,049
Raw materials 3,138,433 3,628,651
----------- ------------
5,788,293 6,930,115
Less allowance to reduce to LIFO basis (549,619) (466,619)
----------- ------------
$ 5,238,674 $ 6,463,496
=========== ============
5. Changes in stockholders' equity were due to the exercise of stock options
and changes in comprehensive income. On June 29, 2005, 12,000 options were
exercised at a price of $2.81 per share. In addition to the $33,750 of
proceeds received by the Company upon exercise of those options, the
Company also increased other capital by $13,000, representing the tax
benefit the Company estimates it will receive.
Total comprehensive (loss) income consisting of net income and foreign
currency translation adjustment was $(6,140,388) and $1,042,783 for the
six months ended June 30, 2005 and 2004, respectively and $(432,616) and
$425,027 for the three months ended June 30, 2005 and June 30, 2004,
respectively.
6. The following sets forth the components of net periodic benefit cost of
the Company's defined benefit pension plan for the six month and three
month periods ended June 30, 2005 and 2004:
SIX MONTHS ENDED JUNE 30,
2005 2004
----------- ------------
Service cost $ 166,910 $ 146,298
Interest cost 130,562 115,980
Expected return on plan assets (125,394) (108,740)
Net actuarial loss 31,396 26,976
Amortization of prior service cost 14,435 754
----------- ------------
Net periodic benefit cost $ 217,909 $ 181,268
=========== ============
THREE MONTHS ENDED JUNE 30,
2005 2004
----------- ------------
Service cost $ 83,455 $ 73,149
Interest cost 65,281 57,990
Expected return on plan assets (62,697) (54,370)
Net actuarial loss 15,698 13,488
Amortization of prior service cost 14,058 377
----------- ------------
Net periodic benefit cost $ 115,795 $ 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 Company's Annual Report on Form 10-K for the year ended December 31, 2004.
The Company has frozen the accrual of any additional benefits under the defined
benefit pension plan, effective July 15, 2005. Accordingly, the intangible asset
of $14,435 was written-off and included in the amortization of prior service
costs during the second quarter of 2005.
10
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 Tangible Assets", the
carrying value of goodwill is tested for impairment when such events occur
and a charge to earnings is required for any identified impairments. This
charge to earnings is to be recorded in the period in which the events
causing impairment occurred. Based on management's 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 indicated that no goodwill exists. Accordingly, the Company
recorded an impairment charge of $6,155,204 in the quarter ended
March 31, 2005.
The Company also evaluated its inventory for impairment in accordance with
ARB No. 43, "Accounting for Inventory", and expected losses related to
committed purchase orders. As a result, the Company recorded an inventory
impairment charge of $147,000 and accrued $125,000 for an anticipated loss
on committed purchase orders. The expense was included in cost of sales
for the quarter ended March 31, 2005.
8. As discussed in Note 4 of the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, on March 18, 2005, the Company received a default and
reservation of rights letter from its lender regarding its term loan. The
Company has also been verbally advised by this lender that its revolving
line of credit is 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.
9. As disclosed in Note 16 of the Company's consolidated financial statements
included 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 June 30, 2005,
$200,000 of this liability remained unpaid. The remainder of the
settlement balance will be paid by August 26, 2005.
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 restructuring 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, New York, to
Company-owned facilities in Grapevine, Texas. 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 (excusive 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 following table summarizes restructuring and related costs incurred by
the Company in the three- and six-month periods ended June 30:
11
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---------- ------ ---------- -------
COST OF SALES:
Equipment depreciation $ 75,000 -- $ 75,000 --
Inventory impairment -- -- 147,000 --
Purchase order commitments -- -- 125,000 --
---------- ------ ---------- -------
Subtotal 75,000 347,000
SALES, GENERAL AND
ADMINISTRATIVE:
Severance 473,000 -- 473,000 --
Leases 30,000 -- 30,000 --
Professional fees 580,000 -- 580,000 --
---------- ------ ---------- -------
Subtotal 1,083,000 1,083,000
---------- ------ ---------- -------
$1,158,000 $ -- $1,430,000 $ --
========== ====== ========== =======
The following table analyzes the changes in the Company's reserve with
respect to the restructuring plan from December 31, 2004 to June 30, 2005:
December Payments/ June 30,
31, 2004 Expense Charges 2005
-------- ---------- --------- ------------
Purchase order
commitments $ -- $ 125,000 $ -- $ 125,000
Severance -- 473,000 (46,000) 427,000
Other -- 610,000 (580,000) 30,000
-------- ---------- --------- ------------
TOTAL $ -- $1,208,000 $(626,000) $ 582,000
======== ========== ========= ============
The balance of the costs to be incurred as the Company implements the
restructuring plan substantially include professional services, outside
consulting fees and compensation, the total of which is expected to be
approximately $862,000.
11. In May 2005, the Company received a dividend from its Canadian operations
of CDN$800,000, net of Canadian withholding taxes of CDN$40,000. The
net receipt of CDN$760,000 is equivalent to US$604,000. 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.
12
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 18.6%, 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. In addition, during the first three months of 2005, the Company
recorded an impairment charge of $6,155,000 to recognize impairment of goodwill
and a charge of approximately $272,000 for inventory losses. During the second
quarter of 2005, the Company recorded a charge of $1,158,000 related to the
restructuring, which included professional fees associated with the planned
restructuring of $580,000. See Note 10 in Item 1 of this Quarterly Report.
Since May 31, 2005, the Company has experienced continuing sales of its current
CBU models to the private market, and it is unclear when such sales will begin
to decline as the new 1118F CBU specification described below is introduced to
the private market and purchasers begin to purchase such units rather than the
Company's current model units. The USPS has advised the Company 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 the planned savings
would be achieved by personnel reductions in Jamestown, New York, and by
relocating the Company headquarters from leased facilities in Jamestown, New
York, to
13
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 Jamestown and the elimination of three satellite sales
offices. The planned personnel reductions are scheduled to be completed by the
end of 2005. The Company believes that its non-postal locker sales can be
adequately handled by the remaining four satellite sales offices located
strategically across the United States.
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, now estimated to
total $2,290,000, are substantially greater than originally estimated at the
time the restructuring plan was adopted by the Board of Directors. Through June
30, 2005, the Company incurred restructuring costs of $1,430,000.
RESULTS OF OPERATIONS
FIRST SIX MONTHS 2005 VERSUS FIRST SIX MONTHS 2004
OVERALL RESULTS AND OUTLOOK
The first six months of 2005 reflect an 8.4% drop in net sales when compared to
the same period in 2004, a decline from $19,808,471 in 2004 to $18,146,642 in
2005. A net loss of $6.1 million was reported for the period, which included an
impairment charge of $6.1 million representing the write-down of goodwill,
restructuring charges of $1,430,000 of which $850,000 represents fixed asset
impairment, inventory losses and severance costs associated with the Company's
restructuring plan and $580,000 represents professional fees.
NET SALES
Net sales for the first six months of 2005 were $18,147,000, a decrease of 8.4%
compared to the same period in 2004. The reported decrease is due primarily to
reduced volume of plastic postal products sold to the USPS during the final
months of the Company's USPS contract for CBUs. Total plastic sales for the six
months ended June 30, 2005, including both CBUs and Outdoor Postal Lockers, were
$7,982,000 compared to $9,843,000 during the same period in 2004, a decrease of
18.9%. Sales of metal lockers and metal postal products including the aluminum
CBUs sold to the private market totaled $10,165,000 for the first six months of
2005 compared to $9,966,000 during the same period a year ago, an increase of
2.0%.
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Six Months Ended June 30, Increase
2005 2004 (decrease)
----------- ---------- ----------
Plastic Locker Sales $ 7,981,799 $9,842,557 (18.9)%
Metal Locker Products $10,164,843 $9,965,914 2.0%
COST OF PRODUCTS SOLD
Cost of products sold as a percentage of net sales was 72.1% during the first
six months of 2005 compared to 68.8% during the same period of 2004. The
increased percentage reflects charges of $347,000 related to the restructuring
plan, including a charge of $147,000 related to the Company's recognition of
impaired values of certain inventories on hand, a charge of $125,000 related to
expected losses on committed purchase orders for raw materials and a $75,000
increased deprecation charge associated with the impairment of certain fixed
assets. In addition, inventory reserves were increased by $100,000 to reflect
additional expected obsolescence and by $83,000 to adjust LIFO reserves related
to Plastic CBU inventory on hand as of June 30, 2005. Excluding these charges,
cost of products sold as a percentage of net sales would have been 69.2%,
compared to 68.8% during the same period in 2004. This increased percentage
relates primarily to an increase in the cost of raw materials, particularly
metal, throughout 2004 and during 2005.
ASSET IMPAIRMENT CHARGE - GOODWILL
Due to the loss of the Company's CBU contract with the USPS (see Note 7 in Item
1 of this Quarterly Report), management has determined that the fair value of
the Company has declined significantly. Therefore, the Company, in accordance
with the provisions of Financial Accounting Standards Board Statement No. 142,
"Goodwill and Other Intangible Assets", recorded a goodwill impairment charge
against 2005 first quarter operating results in the amount of $6,155,204.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling administrative and general expenses during the first six months of 2005
totaled $4,807,315, or 26.5% of net sales, compared to $4,221,550, or 21.3% of
net sales, during the same period in 2004, an increase of $585,765. The increase
in 2005 relates to restructuring charges, totaling $503,000, related principally
to severance costs associated with administrative and executive employees who
will be displaced as part of the Company's restructuring plan. In addition the
Company incurred restructuring costs for professional fees totaling $580,000
during the first six months of 2005. Excluding the $1,083,000 of
restructuring-related costs, selling administrative and general expenses would
have been 20.5% of net sales in the first six months of 2005 compared to 21.3%
during the same period in 2004. This decrease relates to a reduction of
approximately $200,000 in outside research and development engineering costs,
the elimination of $130,000 of bonuses for salaried employees, the reduction of
executive salaries of approximately $31,000, the reduction of $58,000 in
amortization expense related to a non-compete agreement, and the savings of
approximately $96,000 resulting from the decision not to replace four
individuals who are no longer employed by the company due to retirement and
other reasons.
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INTEREST EXPENSE
Interest expense for the first half of 2005 was $194,000 compared to $229,000
during the same period in the prior year. The decrease results from lower
average outstanding debt during the first six months of 2005 compared to the
same period in 2004 as the Company continues to make payments on its outstanding
debt. No new long-term debt was incurred during 2005 or 2004. The Company
reduced its outstanding debt by $1,663,000 during the first six months of 2005
by making its scheduled debt payments and paying down an additional $1 million
on its term loan in May 2005.
INCOME TAXES
The Company's effective tax rate on earnings was 39% and 40% in 2005 and 2004,
respectively, on earnings, excluding an asset impairment charge associated with
goodwill. The ratio of income taxes to loss before income taxes in 2005 does not
bear a normal relationship, as the impairment charge related to the write-off of
goodwill in the amount of $6,155,204 is not deductible for income tax reporting
purposes because the goodwill was originally recorded as part of a tax-free
exchange.
SECOND QUARTER 2005 VERSUS SECOND QUARTER 2004
NET SALES
Net sales were $8,986,000 during the second quarter of 2005 compared to
$10,254,000 for the same period in 2004, a decrease of 12.4%. The decreased
volume was due primarily to lower sales of CBUs to the USPS as the Company's
contract with USPS expired May 31, 2005. Plastic locker sales for the second
quarter of 2005 were $3,736,000 compared to $5,345,000 for the second quarter of
2004, a decrease of 30.1%. Metal locker and metal postal sales, however, were
$5,250,000 during the second quarter of 2005 compared to $4,909,000 for the same
period in 2004, an increase of 7.0%.
Three Months Ended June 30, Increase
2005 2004 (decrease)
----------- ---------- ----------
Plastic Locker Sales $ 3,736,476 $5,345,278 (30.1)%
Metal Locker Products $ 5,249,946 $4,908,886 7.0%
COST OF PRODUCTS SOLD
Cost of products sold as a percentage of net sales was 73.7% during the second
quarter of 2005 compared to 70.3% during the same period a year ago. The
increased percentage is due to increased depreciation of $75,000 associated with
an asset impairment related to the Company's planned restructuring, an
$83,000 increase in LIFO reserves for plastic inventory on hand as of June 30,
2005 and a $100,000 increase in inventory obsolescence reserves. Excluding these
adjustments, cost of products sold during the second quarter of 2005 would have
been $6,363,215, or 70.8% of net sales. This increased percentage relates
primarily to an increase in the cost of raw materials, particularly metal,
during 2005.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $712,000 from the
$2,215,000 incurred during the second quarter of 2004 to $2,927,000 during the
second quarter of 2005. Selling, general and administrative expenses represented
32.5% of net sales during the second quarter of 2005 compared to 21.6% during
the same period in 2004. The increase relates to a restructuring charge of
$1,083,000 recorded in the second quarter of 2005. This charge includes
severance costs of $473,000 for the employees that will be displaced, as well as
professional fees of $580,000. These restructuring related costs were partially
offset by savings resulting from cost cutting measures put in place during the
quarter ended June 30, 2005.
INTEREST EXPENSE
Interest expenses during the second quarter of 2005 of $87,000 decreased from
$114,000 during the same period in 2004. This decrease is a result of lower
average outstanding debt balances during the second quarter of 2005 compared to
2004.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity is reflected in the ratio of current assets to current
liabilities or current ratio and its working capital. The current ratio was 1.83
to 1 at June 30, 2005 compared 1.59 to 1 at December 31, 2004. Working capital,
the excess of current assets over current liabilities, was $6,840,038 at June
30, 2005, an increase of $124,836 over reported working capital of $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.
17
Cash used in operating activities was $284,071 during the first six months of
2005, despite a decrease in reported inventories of $1,224,300. The reduced
inventory results primarily from a decrease in the level of raw materials and
stock product being kept on hand in anticipation of the expected volume decline
in CBU sales as a result of the expired USPS contract. Offsetting the reduction
in inventory during the first six months of 2005 were payments against an
environmental settlement totaling $902,500 and payments of income taxes which
were accrued for at December 31, 2004. Capital expenditures of $381,000 during
the first six months of 2005 represented, for the most part, the purchase of
needed equipment for Security Manufacturing Corporation, a subsidiary of the
Company. Cash used in financing activities during the first six month of 2005
included scheduled debt repayments of $662,666 and an accelerated pay down of
outstanding debt to the bank of $1,000,000. Also, in June of 2005, 12,000 shares
of the Company's common stock were issued as a result of exercised options under
the Company's stock option plan at a price of $2.81 per share, generating
proceeds of $33,750.
The Company has frozen the accrual of any additional benefits under its defined
benefit pension plan, effective July 15, 2005. Accordingly, the intangible asset
of $14,435 was written-off and included in the amortization of prior service
costs during the second quarter of 2005. It is expected that this freeze will
decrease the Company's future cash payments to its defined benefit pension plan.
EFFECT OF NEW ACCOUNTING GUIDANCE
The Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) - "Share
Based Payment" during December 2004. SFAS 123(R) is effective for fiscal years
beginning after June 15, 2005 and will require the Company to recognize
compensation expense in an amount equal to the fair value of share based
payments. The impact of SFAS 123(R) does not have a material impact on stock
options currently issued, but may in the future if additional stock options are
issued.
The FASB has also issued SFAS No. 151 - "Inventory Costs - An Amendment to ARB
No. 43, Chapter 4" effective for fiscal years beginning after June 15, 2005.
SFAS 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (spoilage) should be recognized as current
period charges. The Company is in the process of evaluating the impact of
implementing SFAS 151.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains various "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve certain known and unknown risks and uncertainties,
including, among others, those contained in Item 1, "Business," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". When used in this Quarterly Report on Form 10-Q, the words
"anticipates," "plans," "believes," "estimates," "intends," "expects,"
"projects," "will" and similar expressions may identify forward-looking
statements, although not all forward-looking statements contain such words. Such
statements, including, but not limited to, the Company's statements regarding
business strategy, implementation of its restructuring plan, competition,
18
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 June 30, 2005. These disclosure controls and procedures are designed to
provide reasonable assurance to the Company's management and board of directors
that information required to be disclosed by the Company in the reports that it
files under the Exchange Act is accumulated and communicated to its management
as appropriate to allow timely decisions regarding required disclosure. Based on
that evaluation, including 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 June 30,
2005 were not effective, at the reasonable assurance level, to ensure that (a)
material information relating to the Company is accumulated and made known to
the Company's management, including its principal executive officer and
principal accounting officer, to allow timely decisions regarding required
disclosure and (b) is recorded, processed, summarized and reported within the
time periods specified in SEC's rules and forms. There were no changes in the
Company's internal control over financial reporting during the second 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:
- 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.
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- 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.
- 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.
20
- 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.
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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 and Principal Accounting
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 15, 2005
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