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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2012

 

¨	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 registrant as specified in its charter)

 

 

 

Delaware		16-0338330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2701 Regent Blvd., Suite 200 DFW Airport, TX		75261
(Address of principal executive offices)		(Zip code)

(817) 329-1600

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  ¨

Indicated by a check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller Reporting Company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 1,683,985 shares of common stock, par value $1.00, issued and outstanding as of March 31, 2012.

 

 

 

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TABLE OF CONTENTS

 

				Page No.
FORWARD-LOOKING INFORMATION					3
PART I — FINANCIAL INFORMATION					3
		Item 1. Financial Statements			3
		Consolidated Balance Sheets (Unaudited) as of March 31, 2012 and December 31, 2011			4
		Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2012 and 2011			6
		Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March  31, 2012 and 2011			7
		Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2012 and 2011			8
		Notes to Consolidated Financial Statements			9
		Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
		Item 3. Quantitative and Qualitative Disclosures About Market Risk			16
		Item 4. Controls and Procedures			16
PART II — OTHER INFORMATION					17
		Item 6. Exhibits			17
SIGNATURES					18
EX-31.1
EX-31.2
EX-32.1
EX-101		INSTANCE DOCUMENT
EX-101		SCHEMA DOCUMENT
EX-101		CALCULATION LINKBASE DOCUMENT
EX-101		LABELS LINKBASE DOCUMENT
EX-101		PRESENTATION LINKBASE DOCUMENT

 

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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 2. 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, 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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

The interim financial statements included herein are unaudited but reflect, in management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of financial position and the results of our operations for the interim periods presented.

The interim financial statements should be read in conjunction with the financial statements of American Locker Group Incorporated (the “Company”) and the notes thereto contained in the Company’s audited financial statements for the year ended December 31, 2011 presented in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2012.

Interim results are not necessarily indicative of results for the full fiscal year.

 

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American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets

 

		March 31, 2012 (Unaudited)				December 31, 2011
Assets
Current assets:
Cash and cash equivalents		$	427,885			$	525,632
Accounts receivable, less allowance for doubtful accounts of approximately $158,000 in 2012 and $149,000 in 2011			1,791,640				1,754,959
Inventories, net			2,657,831				2,845,563
Prepaid expenses			319,406				330,403
Deferred income taxes			273,874				278,437
Total current assets			5,470,636				5,734,994
Property, plant and equipment:
Land			500				500
Buildings and leasehold improvements			802,114				754,922
Machinery and equipment			10,944,866				10,891,820
			11,747,480				11,647,242
Less allowance for depreciation and amortization			(8,298,592	)			(8,087,988	)
			3,448,888				3,559,254
Other noncurrent assets			47,268				47,259
Deferred income taxes			733,093				727,118
Total assets		$	9,699,885			$	10,068,625

 

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American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets (continued)

 

		March 31, 2012 (Unaudited)				December 31, 2011
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,521,525			$	2,025,656
Commissions, salaries, wages, and taxes thereon			155,819				162,507
Income taxes payable			3,397				69,718
Revolving line of credit			800,000				700,000
Current portion of long-term debt			200,000				200,000
Other accrued expenses			717,471				491,188
Total current liabilities			3,398,212				3,649,069
Long-term liabilities:
Long-term debt, net of current portion			550,000				600,000
Pension and other benefits			2,051,754				2,051,054
			2,601,754				2,651,054
Total liabilities			5,999,966				6,300,123
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, $1.00 par value:
Authorized shares – 4,000,000 Issued shares – 1,875,985 in 2012 and 1,871,999 in 2011; Outstanding shares – 1,683,985 in 2012 and 1,679,999 in 2011			1,875,985				1,871,999
Other capital			285,994				284,478
Retained earnings			4,915,881				5,001,097
Treasury stock at cost, 192,000 shares			(2,112,000	)			(2,112,000	)
Accumulated other comprehensive loss			(1,265,941	)			(1,277,072	)
Total stockholders’ equity			3,699,919				3,768,502
Total liabilities and stockholders’ equity		$	9,699,885			$	10,068,625

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended March 31,
		2012				2011
Net sales		$	3,267,081			$	2,849,711
Cost of products sold			2,342,707				2,050,440
Gross profit			924,374				799,271
Selling, general and administrative expenses			1,034,682				978,084
Total operating loss			(110,308	)			(178,813	)
Other income (expense):
Interest income			7				8
Other income (expense) – net			(9,320	)			(11,823	)
Interest expense			(28,760	)			(13,477	)
Total other income (expense)			(38,073	)			(25,292	)
Loss before income taxes			(148,381	)			(204,105	)
Income tax (expense) benefit			63,163				(6,736	)
Net loss		$	(85,218	)		$	(210,841	)
Weighted average common shares:
Basic			1,679,999				1,642,106
Diluted			1,679,999				1,642,106
Loss per share of common stock:
Basic		$	(0.05	)		$	(0.13	)
Diluted		$	(0.05	)		$	(0.13	)

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Three Months Ended March 31,
		2012				2011
Net loss		$	(85,218	)		$	(210,841	)
Other comprehensive income:
Foreign currency translation adjustment			20,018				15,629
Adjustment to minimum pension liability, net of tax effect of $3,499 in 2012 and $3,445 in 2011			(8,887	)			(5,168	)
Other comprehensive income			11,131				10,461
Total comprehensive loss			(74,087	)			(200,380	)

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March 31,
		2012				2011
Operating activities
Net loss		$	(85,218	)		$	(210,841	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			181,757				157,445
Provision for uncollectible accounts			10,500				10,500
Equity based compensation			5,500				21,100
Deferred income taxes			(3,498	)			(2,886	)
Changes in assets and liabilities:
Accounts receivable			(74,195	)			815,218
Inventories			187,863				(78,473	)
Prepaid expenses			11,438				50,866
Accounts payable and accrued expenses			(254,685	)			(322,461	)
Pension and other benefits			(919	)			15,803
Income taxes			(66,321	)			4,079
Net cash (used in) provided by operating activities			(87,778	)			460,350
Investing activities
Purchase of property, plant and equipment			(66,885	)			(289,377	)
Net cash used in investing activities			(66,885	)			(289,377	)
Financing activities
Long-term debt payments			(50,000	)			(50,000	)
Borrowing on line of credit			100,000				—
Net cash provided by (used in) financing activities			50,000				(50,000	)
Effect of exchange rate changes on cash			6,916				11,222
Net increase (decrease) in cash and cash equivalents			(97,747	)			132,195
Cash and cash equivalents at beginning of period			525,632				649,952
Cash and cash equivalents at end of period		$	427,885			$	782,147
Supplemental cash flow information:
Cash paid for:
Interest		$	24,577			$	13,181
Income taxes		$	3,158			$	2,330

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Locker Group Incorporated and Subsidiaries

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of American Locker Group Incorporated (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of such consolidated financial statements, have been included. Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.

The consolidated balance sheet at December 31, 2011 has been derived from the Company’s audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company’s consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Additional risks and uncertainties not presently known or that the Company currently deems immaterial may also impair its business operations. Should one or more of these risks or uncertainties materialize, the Company’s business, financial condition or results of operations could be materially adversely affected.

2. Sale of Property

On September 18, 2009, the Company sold its headquarters and primary manufacturing facility to the City of Grapevine, Texas (the “City”) for a purchase price of $2,747,000.

The Company was entitled to continue to occupy the facility, through December 31, 2010 at no cost. The City further agreed to pay the Company’s relocation costs within the Dallas-Fort Worth area and to pay the Company’s real property taxes for the facility through June 2011. During May 2011, the Company relocated its corporate headquarters and primary manufacturing facility from Grapevine, Texas to a new 100,500 sq. ft. building in DFW Airport, Texas. The Company received a $341,000 payment towards the moving costs at closing which was recorded as “Deferred revenue” in the Company’s consolidated balance sheet as of December 31, 2010. The Company offset $211,768 of moving expense against deferred revenue in 2011. The difference of $129,232 between the deferred revenue balance at December 31, 2010 and the amount offset against moving expenses was recorded as “Other income.” Proceeds of the sale were used to pay off the $2 million mortgage secured by the property and for general working capital purposes.

The Company invested approximately $875,000 during 2011 for leasehold improvements and machinery and equipment related to relocating.

3. Disneyland Concession Agreement

On September 24, 2010, the Company entered into an agreement (the “Disney Agreement”) with Disneyland Resort, a division of Walt Disney Parks and Resorts U.S., Inc., and Hong Kong International Theme Parks Limited, (collectively referred to as “Disney”) to provide locker services under a concession arrangement. Under the Disney Agreement, the Company installed, operates and maintains electronic lockers at Disneyland Park and Disney’s California Adventure Park in Anaheim, California and at Hong Kong Disneyland Park in Hong Kong.

The Company installed approximately 4,300 electronic lockers under the Disney Agreement. The Company retains ownership of the lockers and receives a portion of the revenue generated by the locker operations. The term of the Disney Agreement is five years, with an option to renew for one year at Disney’s option, and operations began in late November 2010. The Agreement contains a buyout option at the end of each contract year and a provision to compensate the Company in the event Disney terminates the Agreement without cause.

Under appropriate accounting guidance, the Company capitalized its costs related to the Disney Agreement and the Company is depreciating such costs over the five year term of the agreement. The Company recognizes revenue for its portion of the revenue as it is collected.

 

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4. Inventories

Inventories are valued at the lower of cost or market value. Cost is determined using the first-in first-out method (FIFO).

Inventories consist of the following:

 

		March 31, 2012				December 31, 2011
Finished products		$	140,985			$	321,378
Work-in-process			817,058				862,000
Raw materials			1,699,788				1,662,185
Net inventories		$	2,657,831			$	2,845,563

5. Income Taxes

Provision for income taxes is based upon the estimated annual effective tax rate. The effective tax rate for the three months ended March 31, 2012 and 2011 was -43.7% and 3.3%, respectively. The difference in the effective rate from the statutory rate is primarily due to permanent timing differences between expenses recorded for financial and tax reporting and the reversal of a previously accrued tax provision. During the first quarter of 2012, certain statutes of limitations expired. As a result, in the first quarter of 2012, the Company reduced its income tax payable and tax provision by a net favorable amount of $69,791.

6. Stockholders’ Equity

On March 31, 2012, the Company issued 3,986 shares of common stock to non-employee directors and increased other capital by $1,516, representing compensation expense of $5,502. Changes in stockholders’ equity were also due to comprehensive loss of $74,087.

7. Pension Benefits

The following sets forth the components of net periodic employee benefit cost of the Company’s defined benefit pension plans for the three months ended March 31, 2012 and 2011:

 

		Three Months Ended March 31,
		Pension Benefits
		U.S. Plan								Canadian Plan
		2012				2011				2012				2011
Service cost		$	5,250			$	5,275			$	—			$	—
Interest cost			42,500				43,050				14,666				19,258
Expected return on plan assets			(40,250	)			(35,525	)			(18,383	)			(21,134	)
Net actuarial loss			—				—				8,480				3,497
Amortization			23,500				12,825				—				—
Net periodic benefit cost		$	31,000			$	25,625			$	4,763			$	1,621

The Company has frozen the accrual of any additional benefits under the U.S. defined benefit pension plan effective July 15, 2005.

Effective January 1, 2009, the Company converted its pension plan for its Canadian employees (the “Canadian Plan”) from a noncontributory defined benefit plan to a defined contribution plan. Until the conversion, benefits for the salaried employees were based on specified percentages of the employees’ monthly compensation. The conversion of the Canadian plan has the effect of freezing the accrual of future defined benefits under the plan. Under the defined contribution plan, the Company will contribute 3% of employee compensation plus 50% of employee elective contributions up to a maximum contribution of 5% of employee compensation.

The Fair Value Measurements and Disclosure Topic of the ASC requires the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. The various values of the Fair Value Measurements and Disclosure Topic of the ASC fair value hierarchy are described as follows:

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

 

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Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

The fair value hierarchy of the plan assets are as follows:

 

						March 31, 2012
						US Plan				Canadian Plan
Cash and cash equivalents			Level 1				—			$	76,057
Mutual funds			Level 1				—				1,219,093
Pooled separate accounts			Level 2			$	2,203,978				—
Total						$	2,203,978			$	1,295,150

US pension plan assets are invested solely in pooled separate account funds, which are managed by MetLife. The net asset values (“NAV”) are based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units outstanding. The NAV’s unit price of the pooled separate accounts is not quoted on any market; however, the unit price is based on the underlying investments which are traded in an active market and are priced by independent providers. There have been no significant transfers in or out of Level 1 or Level 2 fair value measurements.

For additional information on the defined benefit pension plans, please refer to Note 10 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

8. Earnings Per Share

The Company reports earnings per share in accordance with appropriate accounting guidance. The following table sets forth the computation of basic and diluted earnings per common share:

 

		Three Months Ended March 31,
		2012				2011
Numerator:
Net income (loss)		$	(85,218	)		$	(210,841	)
Denominator:
Denominator for earnings per share (basic and diluted) — weighted average shares			1,679,999				1,642,106
Income (loss) per common share (basic and diluted):		$	(0.05	)		$	(0.13	)

The Company had 12,000 stock options outstanding at March 31, 2012 and 2011, respectively, which were not included in the common share computation for loss per share, as the common stock equivalents were anti-dilutive.

9. Debt

On December 8, 2010, the Company entered into a credit agreement (the “Loan Agreement”) with BAML, pursuant to which the Company obtained a $1 million term loan (the “Term Loan”) and a $2.5 million revolving line of credit (the “Line of Credit”). On November 4, 2011, the Company entered into an amendment to the Loan Agreement (the “Amendment”) that extended the maturity date of the Line of Credit through December 8, 2012. The Amendment also included the addition of a $500,000 draw note (the “Draw Note”).

The Draw Note is to be used to fund the Company’s investment in future concession contracts. The Company can draw up to $500,000 on the Draw Note before October 27, 2012. The Company will pay interest only on the Draw Note through November 26, 2012, after which the Company will pay interest and principal so that the balance will be paid in full as of October 27, 2015. As of March 31, 2012, there were no borrowings on the Draw Note.

The proceeds of the Term Loan were used to fund the Company’s investment in lockers used in the Disney Agreement. The proceeds of the Line of Credit will be used primarily for working capital needs in the ordinary course of business and for general corporate purposes.

The Company can borrow, repay and re-borrow principal under the Line of Credit from time to time during its term, but the outstanding principal balance of the Line of Credit may not exceed the lesser of the borrowing base or $2,500,000. For purposes of the Line of Credit, “borrowing base” is calculated by multiplying eligible accounts receivable of the Company by 80% and eligible raw material and finished goods by 50%. As of March 31, 2012, there was $800,000 outstanding on the Line of Credit.

 

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The outstanding principal balances of the Line of Credit, the Draw Note and the Term Loan bear interest at the one-month LIBOR rate plus 375 basis points (3.75%). Accrued interest payments on the outstanding principal balance of the Line of Credit are due monthly, and all outstanding principal payments under the Line of Credit, together with all accrued but unpaid interest, is due at maturity, or December 8, 2012. Payments on the Term Loan, consisting of $16,667 in principal plus accrued interest, began in 2011. The entire outstanding balance of the Term Loan is due on December 8, 2015.

The Loan Agreement is secured by a first priority lien on all of the Company’s accounts receivable, inventory and equipment pursuant to a Security Agreement between the Company and BAML (the “Credit Security Agreement”).

The Credit Security Agreement and Loan Agreement contain covenants, including financial covenants, with which the Company must comply, including a debt service coverage ratio and a funded debt to EBITDA ratio. Subject to the Lender’s consent, the Company is prohibited under the Credit Security Agreement and the Loan Agreement, except under certain circumstances, from incurring or assuming additional debt and from permitting liens to be placed upon any of its property, assets or revenues. Additionally, the Company is prohibited from entering into certain transactions, including a merger or consolidation, without the Lender’s consent.

10. Restructuring

As a result of the economic crisis, the Company implemented a restructuring in January 2009 to rationalize its cost structure in an uncertain economic environment. The restructuring included the elimination of approximately 50 permanent and temporary positions (a reduction of approximately 40% of the Company’s workforce) as well as an across the board 10% reduction in wages and a 15% reduction in the base fee paid to members of the Company’s Board of Directors. These reductions resulted in severance and payroll charges during the year ended December 31, 2009 of approximately $264,000. As of March 31, 2012, the remaining balance of these payments is expected to be made over the next three months. Additionally, the Company expects to incur $100,000 in relocation expenses, which has not been accrued for, when it relocates its Ellicottville, New York operations to Texas during 2012. The restructuring and relocation is expected to result in approximately $240,000 in annual savings when completed. To implement the January 2009 restructuring plan, management anticipates incurring aggregate impairment charges and costs of $396,000, of which $296,000 have been previously incurred. Accrued restructuring expenses of $111,700 are included in “Other accrued expenses” in the Company’s consolidated balance sheet.

The following table analyzes the changes in the Company’s reserve with respect to the restructuring plan for the three months ended March 31, 2012:

 

		December 31, 2011				Expense				Payment/Charges				March 31, 2012
Severance		$	111,000				—			$	(11,300	)		$	99,700
Other			12,000				—				—				12,000
Total		$	123,000				—			$	(11,300	)		$	111,700

11. Commitments and Contingencies

In July 2001, the Company received a letter from the New York State Department of Environmental Conservation (the “NYSDEC”) advising the Company that it is a potentially responsible party (PRP) with respect to environmental contamination at and alleged migration from property located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corporation prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it set forth a remedy including continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet, which is intended to intercept any contaminates and implementation of an on-going monitoring system. The NYSDEC has estimated that its selected remediation plan will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a 30-year period after completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate plan. This matter has not been litigated, and at the present time the Company has only been identified as a PRP. The Company also believes that other parties may have been identified by the NYSDEC as PRPs, and the allocation of financial responsibility of such parties has not been litigated. To the Company’s knowledge, the NYSDEC has not commenced implementation of the remediation plan and has not indicated when construction will start, if ever. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The Company’s primary insurance carrier has assumed the cost of the Company’s defense in this matter, subject to a reservation of rights.

Beginning in September 1998 and continuing through the date of filing of this Annual Report on Form 10-K, the Company has been named as an additional defendant in approximately 191 cases pending in state court in Massachusetts and 1 in the state of

 

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Washington. The plaintiffs in each case assert that a division of the Company manufactured and furnished components containing asbestos to a shipyard during the period from 1948 to 1972 and that injury resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced which indicate that the Company appears to have been included in the chain of title for certain wall panels which contained asbestos and which were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company’s insurance carrier, subject to a reservation of rights. Settlement agreements have been entered in approximately 33 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 120 cases have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of March 8, 2012, the most recent date information is available, is approximately 38 cases.

While the Company cannot estimate potential damages or predict what the ultimate resolution of these asbestos cases may be because the discovery proceedings on the cases are not complete, based upon the Company’s experience to date with similar cases, as well as the assumption that insurance coverage will continue to be provided with respect to these cases, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company’s operations or financial condition.

The Company is involved in other claims and litigation from time to time in the normal course of business. The Company does not believe these matters will have a significant adverse impact on the Company’s operations or financial condition.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations — Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

Overall Results

The financial market and economic turmoil and the related disruption of the credit markets, which caused a significant slowdown in new construction of multifamily and commercial buildings, starting in the second half of 2008 and continuing to the present, has continued to constrain revenue growth in 2012. The economic crisis has also negatively impacted our customers in the travel and recreation industries. New construction in these markets is a key driver of revenue for the Company.

Consolidated net sales for the first quarter of 2012 reflect an increase in net sales of $417,370 to $3,267,081 when compared to net sales of $2,849,711 for the same period of 2011, representing a 14.6% increase. Pre-tax operating results improved to a pre-tax loss of $148,381 for the first quarter of 2012 from a pre-tax loss of $204,105 for the first quarter of 2011. After-tax operating results improved to net loss of $85,218 for the first quarter of 2012 from a net loss of $210,841 for the first quarter of 2011. Net loss per share (basic and diluted) was $0.05 in the first quarter of 2012, an improvement from a net loss per share (basic and diluted) of $0.13 for the first quarter of 2011.

Net Sales

Consolidated net sales for the three months ended March 31, 2012 were $3,267,081, an increase of $417,370, or 14.6%, compared to net sales of $2,849,711 for the same period of 2011. Sales of lockers for the three months ended March 31, 2012 were $2,320,745, an increase of $460,111, or 24.7%, compared to sales of $1,860,634 for the same period of 2011. The increase is primarily attributable to improved sales efforts resulting from the Company’s reorganization of its outside sales efforts to focus on larger projects and inside sales to focus on facilitating smaller orders and servicing distributors.

Concession revenue for the three months ended March 31, 2012 was $313,011, an increase of $53,378 or 20.6% from concession revenue of $259,633 for the same period of 2011. The concession revenue increase was driven by concession revenue generated from the addition of a second theme park in Hong Kong coupled with year-over-year revenue growth at existing customers. Additionally, sales of mailboxes were $437,502 for the three months ended March 31, 2012, a decrease of $217,868, or 33.2%, compared to sales of $655,370 for the same period of 2011. Decreased mailbox sales were the result of continued sluggish new construction.

Sales of contract manufacturing services were $195,823 for the three months ended March 31, 2012, compared to $74,074 for the same period of 2011. Contract manufacturing includes precision sheet metal fabrication of metal furniture, electrical enclosures and other metal products for third party customers. In order to increase the stability and growth of contract manufacturing revenue, the Company has refocused its contract manufacturing efforts on selling electrical enclosures and components to Fortune 1000 customers. This will allow the Company to benefit from the trend of bringing the manufacturing of items back to the United States that were previously manufactured overseas. This process improves quality, reduces lead time and reduces total costs for the end user.

 

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		Three Months Ended March 31,								Percentage Increase/(Decrease)
		2012				2011
Lockers		$	2,320,745			$	1,860,634				24.7	%
Mailboxes			437,502				655,370				(33.2	)%
Contract manufacturing			195,823				74,074				164.4	%
Concession revenues			313,011				259,633				20.6	%
Total		$	3,267,081			$	2,849,711				14.6	%

Gross Margin

Consolidated gross margin for the three months ended March 31, 2012 was $925,041, or 28.3% of net sales, compared to $799,271, or 28.0% of net sales, for the same period of 2011, an increase of $125,770, or 15.7%. The increase in cost of products sold was primarily due to material costs increasing 330 basis points as a percent of revenue and the commencement of rent at the new facility and increased depreciation expense related to leasehold improvements and additional equipment at the new facility.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the three months ended March 31, 2012 decreased to 31.7% of net revenue from 34.3% compared to the same period in 2011. SG&A expense increased $56,598 or 5.8% to $1,034,682 compared to $978,084 in the same period of 2011. The increase resulted from an increase in legal fees, pension expense, and freight out expense of approximately $44,000, $21,000 and $24,000, respectively. Offsetting the increased expense were reductions in outside contractor, audit, travel and stockholder relation costs totaling approximately $35,000 respectively.

Interest Expense

Interest expense for the three month period ended March 31, 2012 was $28,760, an increase of $15,283, or 113.4%, compared to interest expense of $13,477 for the same period of 2011. This increase was the result of higher average borrowings during 2012 as compared to 2011 under the loan agreement with Bank of America Merrill Lynch.

Income Taxes

For the first quarter of 2012, the Company recorded income tax benefit of $63,163 compared to income tax expense of $6,736 for the same period of 2011. The Company’s effective tax rate on earnings was approximately-43.7% and 3.3% in the first quarter of 2012 and 2011, respectively. The difference in the effective rate from the statutory rate is primarily due to permanent timing differences between expenses recorded for financial and tax reporting. During the first quarter of 2012, certain statutes of limitations expired resulting in a decrease in income tax payable and a favorable tax provision of $68,791.

Non-GAAP Financial Measure – Adjusted EBITDA

The Company presents the non-GAAP financial performance measure of Adjusted EBITDA because management uses this measure to monitor and evaluate the performance of the business and believe the presentation of this measure will enhance investors’ ability to analyze trends in the Company’s business, evaluate the Company’s performance relative to other companies and evaluate the Company’s ability to service debt.

Adjusted EBITDA is not a presentation made in accordance with GAAP and our computation of Adjusted EBITDA may vary from other companies. Adjusted EBITDA should not be considered as an alternative to operating earnings or net income as a measure of operating performance. In addition, Adjusted EBITDA is not presented as and should not be considered as an alternative to cash flows as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:

 

•

Does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

•

Does not reflect changes in, or cash requirements for, our working capital needs;

 

•

Does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

•

Does not reflect any cash requirements for assets being depreciated and amortized that may have to be replaced in the future; and

 

•

Excludes onetime expenses and equity compensation.

 

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The following table reconciles earnings as reflected in our condensed consolidated statements of operations prepared in accordance with GAAP to Adjusted EBITDA:

 

		Three Months Ended March 31,
		2012				2011
Net income (loss)		$	(85,218	)		$	(210,841	)
Income tax expense (benefit)			(63,163	)			6,736
Interest expense			28,760				13,477
Depreciation and amortization expense			181,757				157,445
Equity based compensation			5,500				21,100
Adjusted EBITDA		$	67,636			$	(12,083	)
Adjusted EBITDA as a percentage of revenues			2.1	%			(0.4	)%

Liquidity and Sources of Capital

The Company’s liquidity is reflected by its current ratio, which is the ratio of current assets to current liabilities, and its working capital, which is the excess of current assets over current liabilities. These measures of liquidity were as follows:

 

		As of March 31, 2012				As of December 31, 2011
Current Ratio			1.61 to 1				1.57 to 1
Working Capital		$	2,072,423			$	2,085,925

The Company’s capital expenditures approximated $67,000 and $1,228,000 for the three months ended March 31, 2012 and twelve months ended December 31, 2011, respectively. The majority of the capital expenditures in 2011 were related to the relocation of our headquarters and equipment purchases to support our concession contracts. Relocation related capital expenditures are complete. Except for capital expenditures to support future concession contracts, the Company expects future capital expenditures to be lower than the amounts expended in 2011.

The Company’s primary sources of liquidity include available cash and cash equivalents and borrowing under the Line of Credit and available Draw Note.

Expected uses of cash in fiscal 2012 include funds required to support the Company’s operating activities, growth of concession business, capital expenditures, relocation of the Company’s facilities in New York and contributions to the Company’s defined benefit pension plans.

The Company has taken steps to enhance its liquidity position by entering into the new Loan Agreement, which expands the Company’s ability to leverage accounts receivable and inventory. The Company’s plans to manage its liquidity position in 2012 by maintaining an intense focus on controlling expenses, reducing capital expenditures, continuing the Company’s implementation of LEAN manufacturing processes and reducing inventory levels by increasing sales and using excess capacity to manufacture products for third parties.

The Company has considered the impact of its financial outlook on the Company’s liquidity and has performed an analysis of the key assumptions in its forecast. Based upon these analyses and evaluations, the Company expects that its anticipated sources of liquidity will be sufficient to meet its obligations without disposition of assets outside of the ordinary course of business or significant revisions of the Company’s planned operations through 2012.

Since 2008, the credit markets have experienced significant dislocations and liquidity disruptions. These factors materially impacted debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Although credit availability has improved, continued uncertainty in the credit markets may still negatively impact the Company’s ability to access additional debt financing on favorable terms, or at all. The credit market disruptions could impair the Company’s ability to fund operations, limit the Company’s ability to expand the business or increase interest expense, which could have a material adverse effect on the Company’s financial results.

 

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Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company.

Effect of New Accounting Guidance

In June 2011, the FASB issued amendments to guidance regarding the presentation of comprehensive income. The amendments eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that comprehensive income be presented in either a single continuous statement or in two separate but consecutive statements. In a single continuous statement, the entity would present the components of net income and total net income, the components of other comprehensive income and a total of other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, the entity would present components of net income and total net income in the statement of net income and a statement of other comprehensive income would immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. The amendments also require the entity to present on the face of the financial statements any reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be re-classed to net income or the option to present components of other comprehensive income either net of related tax effects or before related tax effects. The amendments, excluding the specific requirement to present on the face of the financial statements any reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented which was deferred by the FASB in December 2011, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively. The Company adopted ASU 2011-05 in the first quarter of 2012. Upon adoption, the Company elected the two-statement approach and presents a separate consolidated statement of comprehensive loss.

In September 2011, the FASB issued amendments to simplify how entities test goodwill for impairment. Under the updated guidance, an entity now has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If the assessment of qualitative factors leads to a determination that is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then the entity is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing it against its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. Under the new guidance, an entity can elect to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginnings after December 15, 2011. The Company adopted ASU 2011-08 in the first quarter of 2012. The adoption had no impact on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Raw Materials

The Company does not have any long-term commitments for the purchase of raw materials. With respect to its products that use steel and aluminum, the Company expects that any raw material price changes would be reflected in adjusted sales prices. The Company believes that the risk of supply interruptions due to such matters as strikes at the source of supply or to logistics systems is limited. Present sources of supplies and raw materials incorporated into the Company’s products are generally considered to be adequate and are currently available in the marketplace.

Foreign Currency

The Company’s Canadian and Hong Kong operations subject the Company to foreign currency risk, though it is not considered a significant risk since the foreign operations’ net assets represented only 7.8% of the Company’s aggregate net assets at March 31, 2012. Presently, management does not hedge its foreign currency risk.

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, 2012. These disclosure controls and procedures are designed to provide

 

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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, 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, 2012 were 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 the SEC’s rules and forms. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II — OTHER INFORMATION

Item 2. Unregistered Sale of Equity Securities

In March 2012, the Company granted a total of 3,986 shares of common stock to non-employee directors. The shares were granted in consideration of services, and were valued at the market value on the date of grant. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act, as the issuance did not involve a public offering of securities.

Item 6. Exhibits.

Except as otherwise indicated, the following documents are filed as part of this Quarterly Report on Form 10-Q:

 

Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *		XBRL Instance Document
101.SCH *		XBRL Taxonomy Extension Schema Document
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB *		XBRL Taxonomy Extension Label Linkbase Document
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document

* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

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SIGNATURES

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
May 14, 2012		By:		/s/ Paul M. Zaidins
				Paul M. Zaidins
				Chief Executive Officer
May 14, 2012		By:		/s/ David C. Shiring
				David C. Shiring
				Chief Financial Officer

 

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