þ		Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

o		Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the transition period from      to      .

(Exact Name of registrant as specified in its charter)

Delaware		16-0338330
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
815 South Main Street		76051
Grapevine, Texas		(Zip Code)
(Address of principal executive offices)

(817) 329-1600
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:

Title of each class		Name of each exchange on which registered

None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $1.00 Per Share
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 o No þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by 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 such shorter period that the registrant was required to submit and post such files).  Yes o No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

As of January 29, 2010, 1,589,015 shares of Common Stock, $1.00 par value per share, were outstanding. The aggregate market value of the Common Stock held by non-affiliates was $2,175,944 based on the $1.60 price at which the Common Stock was last sold on January 19, 2010. Shares of Common Stock known by the Registrant to be beneficially owned by directors and officers of the Registrant and other persons known by the Registrant to have beneficial ownership of 5% or more of the outstanding Common Stock are not included in the computation. The Registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.

DOCUMENTS INCORPORATED BY REFERENCE
None

 

 

FORWARD-LOOKING INFORMATION

     This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this Annual Report on Form 10-K, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company’s statements regarding business strategy, implementation of its restructuring plan, competition, new product development and liquidity and capital resources are based on management’s beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond the Company’s control. The Company’s actual results could differ materially from those expressed in any forward-looking statement made by or on the Company’s behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. The Company has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business.

Overview

     American Locker Group Incorporated (the “Company”) is a leading manufacturer and distributor of lockers, locks and keys with a wide-range of applications for use in numerous industries. The Company is best known for manufacturing and servicing the widely-utilized key and lock system with the iconic plastic orange cap. The Company serves customers in a variety of industries in all 50 states, Canada, Mexico, Europe, Asia and South America.

     The Company’s lockers can be categorized as either postal lockers or non-postal lockers. Postal lockers are used for the delivery of mail, packages and other parcels to multi-tenant facilities. Non-postal lockers are used for applications other than mail delivery, though most of our non-postal lockers are key controlled checking lockers.

     The following table sets forth selected products of the Company, the primary industries we serve, and some of our representative customers:

Selected products/service:

Recreation lockers - stainless steel, painted steel or aluminum and plastic lockers typically secured by a coin operated lock for storage by patrons of amusement parks, water parks, ski resorts and swimming pools.

Coin operated keys and locks - manufactured in the Company’s Ellicottville, New York facility for use in new lockers or for replacement in existing lockers.

USPS approved multi-tenant mail distribution lockers - lockers are typically installed in apartment and commercial buildings and consist of the USPS-approved Horizontal 4c and Horizontal 4b+ models. The Horizontal 4c provides for lay flat mail delivery and was mandated by the USPS to replace the 4b+ for use in new construction after October 5, 2006.

Private mail delivery lockers - used for the internal distribution of mail in colleges and universities as well as large corporate offices.

Electronic distribution lockers - used to distribute items such as industrial supplies and library books using an electronic locking mechanism.

Evidence lockers - used by law enforcement agencies to securely store evidence.

Laptop lockers - used by large corporations, libraries and schools to recharge laptop computers in a secure storage environment.

Mini-check lockers - used by health clubs, law enforcement, the military and intelligence agencies to securely store small items such as cell phones, wallets and keys.

Selected end user types:		Amusement parks Water parks Apartment buildings Law enforcement Health clubs Ski resorts Colleges and universities Military Post offices

Selected customers:		Walt Disney World Sea World Aspen Skiing Company United States Department of Homeland Security Charleston County, South Carolina AT&T United States Postal Service The UPS Store

     The Company was incorporated as the Automated Voting Machine Corporation on December 15, 1958, as a subsidiary of Rockwell Manufacturing Company (“Rockwell”). In April 1964, the Company’s shares were distributed to the stockholders of Rockwell, and it thereby became a publicly held corporation. From 1965 to 1989, the Company acquired and disposed of a number of businesses, including the disposition of its original voting machine business. In 1985, the Company’s name was changed to American Locker Group Incorporated.

     In July 2001, the Company acquired Security Manufacturing Corporation (“SMC”). SMC manufactures aluminum multi-tenant mail lockers, which historically have been sold to the United States Postal Service (“USPS”) and private markets. The Company made this acquisition to increase its product offerings to existing customers, provide additional products to attract new customers, and to increase its market share in the postal market.

     A Cluster Box Unit (“CBU”) is a free standing, multi-tenant mailbox designed to be mounted on a pedestal for use outdoors. On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. Beginning in September 2007, the Company’s revenues and profitability were and continue to be adversely affected by this decertification. During 2008, 2007 and 2006, sales to the USPS accounted for 5.6%, 3.7%, and 3.2%, respectively, of the Company’s net sales. In addition, sales of the aluminum CBUs to the private market in 2008, 2007 and 2006 accounted for an additional 0.3%, 28.4%, and 35.6% of the Company’s sales, respectively.

     On November 30, 2007, the Company announced that the USPS had rejected the Company’s application to manufacture the USPS-B-1118 CBU. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company had remedied many of these weaknesses during the 2007 fiscal year, the USPS noted that such remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. Please see Management’s Annual Report on Internal Control over Financial Reporting included in this Annual Report on Form 10-K under Item 9a(T). However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time.

     As a result of the decertification of the Model E CBU, the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU and the current economic environment, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes include the adoption of lean manufacturing processes; reducing the number of employees, re-design of the Horizontal 4c mailbox to reduce manufacturing costs, negotiating lower costs with vendors, and in-sourcing the manufacturing of non-postal lockers. These changes will be augmented by an increased focus on selling value-added niche products (which have higher margins than the USPS licensed CBUs) and improving the Company’s sales and distribution efforts.

     Edward Ruttenberg resigned from his positions as Chairman, Chief Executive Officer, Chief Operating Officer and Treasurer, effective January 31, 2008. Mr. Ruttenberg continued to serve as a member of Board of Directors until his resignation on March 31, 2009. In connection with Mr. Ruttenberg’s resignation, John E. Harris, a current member of the Company’s Board of

Directors, was appointed as non-executive Chairman of the Board of Directors on January 11, 2008. Also on January 11, 2008, Allen D. Tilley, who is also a current member of the Company’s Board of Directors, was appointed as Chief Executive Officer of the Company, and Paul M. Zaidins, the Company’s Chief Financial Officer, was appointed as President and Chief Operating Officer of the Company. Mr. Zaidins continues to perform his duties as Chief Financial Officer, and, as President and Chief Operating Officer, oversees the Company’s day-to-day business operations.

Business Segment Financial Information

     The Company, including its foreign subsidiary, is engaged primarily in one business: the sale of lockers, including coin, key-only and electronically controlled checking lockers and related locks and aluminum centralized mail and parcel distribution lockers. Please see the Company’s consolidated financial statements included in this Annual Report on Form 10-K under Item 8.

Competition

     While the Company is not aware of any reliable trade statistics, it believes that its wholly-owned subsidiaries, American Locker Security Systems, Inc. and Canadian Locker Co., Ltd. are the leading suppliers of key/coin controlled checking lockers in the United States and Canada. The Company faces active competition from several manufacturers of postal locker products sold in the private market. USPS specifications limit the Company’s ability to develop postal lockers which have significant product performance differentiation from competitors. As a result, the Company differentiates itself in the postal locker market by offering a higher level of quality and service coupled with competitive prices. To the Company’s knowledge, it is the only company that manufactures both the lock and locker components featured in the products the Company sells in the non-postal locker markets in which the Company competes. Additionally, the Company believes that its recreation lockers possess a reputation in the marketplace of high quality and reliability. The Company believes this integrated secured storage solution, when combined with the Company’s high level of service, quality, and the reliability of its products, is a competitive advantage that differentiates the Company from its competitors in the non-postal locker markets.

Raw Materials

     Present sources of supplies and raw materials incorporated into the Company’s metal, aluminum and plastic lockers and locks are generally considered to be adequate and are currently available in the marketplace.

     Inflation in raw material and other prices has become an increasing factor in the general economy, and the Company continues to seek ways to mitigate its impact. For example, the Company experienced significant increases in steel and aluminum prices in 2006 and 2007, the two primary raw materials utilized in the Company’s operations. These price increases continued through the third quarter of 2008 before starting to fall. The cost per pound of aluminum based on the three month buyer contract peaked on July 11, 2008 at $1.52. The average cost per pound of aluminum, based on the three month buyer contract on the London Metals Exchange, was $1.19, $1.21, and $1.18 in 2008, 2007 and 2006, respectively, representing a decrease of 1.6% from 2007 to 2008 and an increase of 2.8% from 2006 to 2007. To the extent permitted by competition, the Company passes increased costs on to its customers by increasing sales prices over time.

     The Company’s metal coin operated and electronic lockers were manufactured through mid-year 2006 by Signore, Inc. pursuant to a manufacturing agreement that terminated effective May 24, 2006. From May 2006 through the second quarter of 2008, the Company’s metal lockers were manufactured by contract manufacturers. Beginning in the second quarter of 2008, the Company’s wholly-owned subsidiary, SMC, began manufacturing painted steel and stainless steel coin operated lockers. The Company’s aluminum mailboxes are manufactured and sold by SMC.

Patents

     The Company owns a number of patents, none of which it considers to be material to the conduct of its business.

Employees

     The Company and its subsidiaries actively employed 117 individuals on a full-time basis as of December 31, 2008, eight of whom were based in Canada. The Company considers its relations with its employees to be satisfactory. None of the Company’s employees are represented by a union.

Dependence on Material Customer

     During 2008, 2007 and 2006, sales to one customer, the USPS, accounted for 5.6%, 3.7% and 3.2%, respectively, of net sales. In addition, sales of the Model E CBU to the private market accounted for an additional 0.3%, 28.4% and 35.6% of the Company’s sales in 2008, 2007 and 2006, respectively. See Item 1. Business for additional information on the decrease in sales in 2008 related to the Model E CBU.

     The Company did not have any customer that was responsible for greater than 10% of consolidated revenue in 2008 and 2007.

Geographic Areas

     The Company sells lockers to foreign countries including Canada, Chile, Mexico, Greece, India, and the United Kingdom. During 2008, 2007 and 2006, sales to foreign countries accounted for 19.8%, 13.2% and 14.3%, respectively of consolidated net sales.

Research and Development

     The Company engages in research and development activities relating to new and improved products. It expended $199,553, $309,038 and $324,835, in 2008, 2007 and 2006, respectively, for such activity in its continuing businesses.

Compliance with Environmental Laws and Regulations

     The Company’s facilities and operations are subject to various federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose strict, joint and several liabilities on certain persons for the cost of investigation or remediation of contaminated properties. These persons may include former, current or future owners or operators of properties and persons who arranged for the disposal of hazardous substances. The Company’s owned and leased real property may give rise to such investigation, remediation and monitoring liabilities under applicable environmental laws. In addition, anyone disposing of hazardous substances on such sites must comply with applicable environmental laws. Based on the information available to it, the Company believes that, with respect to its currently owned and leased properties, it is in material compliance with applicable federal, state and local environmental laws and regulations. See “Item 3. Legal Proceedings” and Note 16 to the Company’s consolidated financial statements included under “Item 8. Financial Statements and Supplementary Data” for further discussion with respect to the settlement of certain environmental litigation.

Backlog and Seasonality

     Backlog of orders is not significant in the Company’s business, as shipments usually are made shortly after orders are received. Sales of lockers are greatest during the spring and summer months and lowest during the fall and winter months. The Company generally experiences lower sales and net income in the first and fourth quarters ending in March and December, respectively.

Available Information

     The Company files with the U.S. Securities and Exchange Commission (the “SEC”) quarterly and annual reports on Forms 10-Q and 10-K, respectively, current reports on Form 8-K, and proxy statements pursuant to the Securities Exchange Act of 1934, in addition to other information as required. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Company files this information with the SEC electronically, and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company also maintains a website at http://www.americanlocker.com. The contents of the Company’s website are not part of this Annual Report on Form 10-K.

     Also, copies of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC, through a link on the Company’s website. The Company will also provide electronic copies or paper copies free of charge upon written request to the Company.

Item 1A. Risk Factors.

     The Company’s results from continuing operations and its financial position could be adversely affected in the future by known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control. Some of these factors are described in more detail in this Annual Report on Form 10-K and in the Company’s other filings with the SEC. 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 Company has implemented a series of operational changes intended to reduce operating expenses. If the changes do not have the intended effects, the Company’s ability to remain in business may be adversely affected.

     As a result of the decertification of the Model E CBU and the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes include a reduction of administrative costs, the adoption of lean manufacturing processes, reducing the number of employees, re-design of the Horizontal 4c mailbox to reduce manufacturing costs, negotiating lower costs with vendors, and in-sourcing the manufacturing of non-postal lockers. These changes will be augmented by a shift in the Company’s business focus to selling value-added niche products (which have higher margins than the USPS licensed CBUs) and improving the Company’s sales and distribution efforts.

     The operational changes implemented by management assume that certain material changes in the operations of the Company will be sufficient to allow the Company to continue in operation despite the decertification of the Model E CBU by the USPS, the sales of which provided over 25% of the Company’s sales revenues in each of 2007 and 2006. Sales of the Model E CBU provided less than 1% of the Company’s sales revenues in 2008. If the operational changes do not adequately reduce the Company’s expenses, the Company’s ability to remain in business would be adversely affected.

The Company’s results of operations are dependent on the price of raw materials, particularly steel and aluminum. High raw material costs or cost increases could have a material adverse effect on the Company’s operating results.

     Volatility in raw material and other prices has become an increasing factor in the general economy, and the Company continues to seek ways to mitigate its impact. For example, the Company experienced significant volatility in steel and aluminum prices in 2008 and 2007. To the extent permitted by competition, the Company seeks to mitigate the adverse impact of rising costs of raw materials through product price increases. The Company’s ability to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond the Company’s control. Further, the benefits of any implemented price increases may be delayed due to manufacturing lead times and the terms of existing contracts. If the Company is not able to successfully mitigate the effects of rising raw materials costs, the Company’s results of operations, business and financial condition may be materially adversely affected.

The Company must relocate to a new facility by December 31, 2010. Failure to locate an adequate facility and relocate in a timely manner could have a materially adverse effect on the Company’s operating results.

     As a result of the sale of the Company’s headquarters and primary manufacturing facility to the City of Grapevine, the Company must relocate to a new headquarters and primary manufacturing facility by December 31, 2010. The Company manufacturers all of its postal and non-postal lockers at this facility and any delays or disruptions during the relocation would negatively impact the Company’s ability to manufacture product for sale. If this were to happen it would have a materially adverse effect on the Company’s operating results and liquidity.

The global economic recession has resulted in weaker demand for the Company’s products and may create challenges for us that could have a material adverse effect on our business and results of operations.

     The global economic recession has affected our domestic and international markets, and we are experiencing weaker demand for our products. Management believes the worsening global economic conditions in 2009 and beyond will reduce customer demand across all customer segments, particularly in construction, travel and recreational industries. As a result, customers will reduce their purchases of the Company’s products or delay the timing of their purchases from the Company, either of which may have a material adverse effect on the Company’s results of operations, business and financial condition.

Continuing disruptions in the financial markets or other factors could affect the Company’s liquidity

     U.S. credit markets have recently experienced significant dislocations and liquidity disruptions. These factors have 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. Continued uncertainty in the credit markets may negatively impact the Company’s ability to access additional debt financing or to refinance existing indebtedness 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.

Terrorist attacks or international hostilities may adversely affect the Company’s business, financial condition and operating results.

     The terrorist attacks of September 11, 2001 caused a significant slowdown in our industry. Additional terrorist attacks or fear of such attacks would negatively affect the Company and our industry. The Company’s financial resources might not be sufficient to absorb the adverse effects of any further terrorist attacks or other international hostilities.

The global financial crisis may have an impact on the Company’s business and financial condition in ways that management cannot predict.

     The continued credit crisis and related turmoil in the global financial system has had and may continue to have an impact on the Company’s business and financial condition. For example, the Company’s ability to access the capital and credit markets may be severely restricted which could have an impact on our flexibility to react to changing economic and business conditions.

     The financial crisis and economic downturn have also resulted in broadly lower investment asset returns and values, including in the defined benefit pension plans that we sponsor for eligible employees and retirees. Our funding obligations for the US Plan, which have been frozen for future benefit accruals, are governed by the Employee Retirement Income Security Act (“ERISA”). Our funding obligations for the Canadian Plan, which have been frozen for future benefit accruals, are governed by the Pension Benefits Act. Estimates of pension plan funding requirements can vary materially from actual funding requirements because the estimates are based on various assumptions concerning factors outside our control, including, among other things, the market performance of assets, statutory requirements, and demographic data for participants. Due primarily to the recent decline in the investment markets, we currently expect our contributions to these plans to significantly increase for 2010 and thereafter, which could have a material adverse effect on our financial condition.

If the Company experiences losses of senior management personnel and other key employees, operating results could be adversely affected.

     We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. If we experience a substantial turnover in our leadership and other key employees, our performance could be materially adversely impacted. Furthermore, we may be unable to attract and retain additional qualified executives as needed in the future.

The postal locker industry is subject to extensive regulation by the USPS, and new regulation might negatively impact the Company’s ability to continue to sell postal lockers or increase our operating costs

     A material portion of the Company’s postal locker sales come from products, including the Horizontal 4c and Horizontal 4b+ mailboxes, which require continued USPS approval. If the USPS were to withdraw approval for these products or change the requirements for approval, it may materially adversely affect the Company’s results of operations, business and financial condition. A change in the USPS’s requirements might also materially increase the Company’s operating costs.

     On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. Sales to the private market of the Model E CBU accounted for 0.3%, 28.4%, and 35.6% of the Company’s sales in 2008, 2007 and 2006, respectively. On November 30, 2007, the Company announced that the USPS had rejected the Company’s application to manufacture the USPS-B-1118 CBU. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company remedied most of these weaknesses during the 2007 fiscal year, the USPS noted remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. Please see Management’s Annual Report on Internal Control over Financial Reporting included in this Annual Report on Form 10-K under Item 9A(T). However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time. While the Company intends to shift its business plan to increase its focus on its higher-margin niche products to offset the loss of revenues from the USPS, failure to obtain USPS approval to manufacture the USPS-B-1118 CBU, may materially adversely affect the Company’s results of operations, business and financial condition.

The Company’s future success will depend, in large part, upon its ability to successfully introduce new products.

     The Company believes that its future success will depend, in large part, upon its ability to develop, manufacture and successfully introduce new products. The Company’s ability to successfully develop, introduce and sell new products depends upon a variety of factors, including new product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes and effective sales and marketing initiatives related to the new products. Given the Company’s current financial position, the Company may not have enough capital on hand to develop, manufacture and successfully introduce new products, and a failure to do so or to obtain the necessary capital in order to do so would have a material adverse effect on the Company.

     None.

     The location and approximate floor space of the Company’s principal plants, warehouses and office facilities are as follows (* indicates leased facility):

				Approximate
				Floor Space
Location		Subsidiary		In Sq. Ft.				Use
Ellicottville, NY		American Locker Security Systems, Inc. Lock Shop and Service Center			12,800			Lock manufacturing, service and repair
Toronto, Ontario		Canadian Locker Company, Ltd.			4,000	*		Sales, service and repair of lockers and locks
Toronto, Ontario		Canadian Locker Company, Ltd.			3,000	*		Warehouse
Grapevine, TX		Altreco, Inc. (Operated by Security Manufacturing Corporation)			70,000			Manufacturing and corporate headquarters (1)
TOTAL					89,800

     The Company believes that its facilities, which are of varying ages and types of construction, and the machinery and equipment utilized in such facilities, are in good condition and are adequate for the Company’s presently contemplated needs.

 

     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. Based upon currently available information, the Company is unable to estimate timing with respect to the resolution of this matter. The NYSDEC has not commenced implementation of the remedial plan and has not indicated when construction will start, if ever. The Company’s primary insurance carrier has assumed the cost of the Company’s defense in this matter, subject to a reservation of rights.

     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 200 cases pending in state court in Massachusetts and 1 in the state of 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 27 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 125 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 September 8, 2009, the most recent date information is available, is approximately 56 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 case, at the present time, the Company does not believe that the outcome of these cases will have a significant adverse impact on the Company’s operations or financial condition.

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

Item 4. Submission of Matters to a Vote of Security Holders.

     The 2008 Annual Meeting of the stockholders of the Company (the “Annual Meeting”) was held on September 24, 2008. At the Annual Meeting, the following persons were elected to serve as directors until the annual meeting of the Company’s stockholders following the fiscal year ending December 31, 2008 and until his or her respective successor is elected and qualified, or until his or her earlier death, resignation or removal from office, by the votes indicated:

										Abstain/Broker
		For				Against				Non-Votes
Edward F. Ruttenberg			1,102,379				245,518				N/A
Craig R. Frank			1,109,949				237,948				N/A
John E. Harris			1,060,079				287,818				N/A
Allen E. Tilley			1,108,169				239,728				N/A
James T. Vanasek			1,107,025				240,872				N/A
Anthony B. Johnston			1,226,307				121,590				N/A
Mary A. Stanford			1,058,555				289,342				N/A

     During the Annual Meeting, the stockholders also ratified the appointment of Travis, Wolff & Company, L.L.P. as the Company’s auditors for 2009, by the votes indicated below:

Abstain/Broker

For

Against

Non-Votes

Appointment of Travis, Wolff & Company, L.L.P.

1,144,843

192,376

10,678

     No other matters were voted on during the Annual Meeting. For further information with respect to the matters presented to the stockholders for approval at the Annual Meeting, please refer to our Definitive Proxy Statement on Schedule 14A, filed with the SEC on August 18, 2008.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Prices and Dividends

     The Company’s common stock, par value $1.00 per share, is not currently listed on any exchange. As of the opening of business on April 3, 2006, the Company voluntarily delisted its common stock from the Nasdaq Stock Market. The last trading day for the Company’s common stock on the Nasdaq National Market was Friday, March 31, 2006. The Company’s common stock currently is quoted on The Pink Sheets under the symbol “ALGI.PK”. The following table shows the range of the low and high sale prices and bid information, as applicable, for the Company’s common stock in each of the calendar quarters indicated. Such information reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

Market Price
Per Common Share

2008		High				Low
Quarter ended December 31, 2008		$	3.50			$	0.82
Quarter ended September 30, 2008			3.75				2.75
Quarter ended June 30, 2008			4.00				2.76
Quarter ended March 31, 2008			4.05				3.40

2007		High				Low
Quarter ended December 31, 2007		$	5.40			$	3.60
Quarter ended September 30, 2007			5.65				3.90
Quarter ended June 30, 2007			4.50				4.00
Quarter ended March 31, 2007			4.82				3.20

     The last reported sales price of the Company’s common stock as of December 31, 2008 was $0.90. The Company had 875 security holders of record as of that date.

     The Company has not paid dividends on its common stock in the two most recent fiscal years, or since then, and does not presently plan to pay dividends in the foreseeable future. The Company currently expects that earnings will be retained and reinvested to support either business growth or debt reduction.

Equity Compensation Plan Information

     The following table summarizes as of December 31, 2008, the shares of common stock authorized for issuance under our equity compensation plans:

Number of securities

Number of securities to be

Weighted-average

remaining available

issued upon exercise of

exercise price of

for future issuance

outstanding options,

outstanding options,

under equity

warrants and rights

warrants and rights

compensation plans

Equity compensation plans approved by security holders(1)

40,000

6.82

37,000

Equity compensation plans not approved by security holders

—

—

—

Total

40,000

6.82

37,000

Item 6. Selected Financial Data.

     The following table sets forth selected historical financial data of the Company and its consolidated subsidiaries as of, and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004. The historical selected financial information derived from the Company’s audited financial information may not be indicative of the Company’s future performance and should be read in conjunction with the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Item 8. Financial Statements and Supplementary Data,” “Item 1. Description of Business,” and Note 17 to the Company’s consolidated financial statements in this Annual Report on Form 10-K.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
Sales		$	14,129,807			$	20,242,803			$	25,065,090			$	32,303,689			$	49,653,129
Income (loss) before income taxes			(3,353,730	)			(2,749,743	)			845,224				(9,512,121	)			4,682,147
Income taxes			(653,519	)			(845,626	)			300,904				(1,272,006	)			1,874,567
Net income (loss)			(2,700,211	)			(1,904,117	)			544,320				(8,240,115	)			2,807,580
Earnings (loss) per share—basic			(1.73	)			(1.23	)			0.35				(5.35	)			1.83
Earnings (loss) per share—diluted			(1.73	)			(1.23	)			0.35				(5.35	)			1.80
Weighted average common shares outstanding—basic			1,564,039				1,549,516				1,547,392				1,540,179				1,534,146
Weighted average common shares outstanding—diluted			1,564,039				1,549,516				1,547,392				1,540,179				1,557,931
Dividends declared			0.00				0.00				0.00				0.00				0.00
Interest expense			159,380				195,280				184,257				333,389				456,865
Depreciation and amortization expense			416,664				386,430				396,304				562,078				706,929
Number of employees			117				126				147				132				149
Consolidated Balance Sheet
Total assets			10,810,038				12,416,042				14,517,522				15,241,854				29,152,613
Long-term debt, including current portion			2,004,315				2,143,765				2,178,042				2,316,210				6,668,596
Stockholders’ equity			4,627,185				7,758,161				9,302,162				8,614,629				16,840,232
Stockholders’ equity per share(1)			2.94				5.01				6.00				5.57				10.98
Common shares outstanding at year-end			1,571,849				1,549,516				1,549,516				1,546,146				1,534,146
Expenditures for property, plant and equipment			334,902				818,646				98,591				475,775				280,562

     The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and the accompanying notes. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, pensions and other post-retirement benefits, and contingencies and litigation. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

     The Company believes that the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

     The Company recognizes revenue at the point of passage of title, which occurs at the time of shipment to the customer. The Company derived approximately 29.3% of its revenue in 2008 from sales to distributors. These distributors do not have a right to return unsold products; however, returns may be permitted in specific situations. Historically, returns have not had a significant impact on the Company’s results of operations.

Allowance for Doubtful Accounts

     The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management uses judgmental factors such as customer’s payment history and the general economic climate, as well as considering the age of and past due status of invoices, in assessing collectability and establishing the allowance for doubtful accounts. If the financial condition of the Company’s customers were to deteriorate, resulting in an inability to make payments, an increase in the allowance resulting in a charge to expense would be required.

Inventories

     Inventories are stated at the lower of cost or market value using the FIFO method and are categorized as raw materials, work-in-progress or finished goods.

     The Company records reserves for estimated obsolescence or unmarketable inventory equal to the difference between the actual cost of inventory and the estimated market value based upon assumptions about future demand and market conditions and management’s review of existing inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory reserves resulting in a charge to expense would be required.

Property, Plant and Equipment

     Property, plant and equipment is stated at historical cost. Depreciation is computed by the straight-line and declining balance methods for financial reporting purposes and by accelerated methods for income tax purposes. Estimated useful lives for financial reporting purposes are 20 to 40 years for buildings and 3 to 12 years for machinery and equipment. Leasehold improvements are amortized over the shorter of the life of the building or the lease term. Expenditures for repairs and maintenance are expensed as incurred. Gains and losses resulting from the sale or disposal of property and equipment are included in other income.

     In accordance with Financial Accounting Standards Board Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss using discounted cash flows.

Pension Assumptions

     The Company maintains a defined benefit plan covering its U.S. employees and a separate defined benefit plan covering its Canadian employees. The accounting for the plans is based in part on certain assumptions that are uncertain and that could have a material impact on the financial statements if different reasonable assumptions were used. The assumptions for return on assets reflect the rates of earnings expected on funds invested or to be invested to provide for benefits included in the projected benefit obligation. The assumed rates of return of 7.5% and 7.0% used in 2008 for the U.S. and Canadian plans, respectively, were determined based on a forecasted rate of return for a portfolio invested 50% in equities and 50% in bonds. In addition to the assumptions related to the expected return on assets, assumptions for the rates of compensation increase and discount rate were also made. The rate of compensation increase used in determining the 2008 pension costs was 2.0% for the Canadian plan and was determined using projections of inflation and real wage increase assumptions. The discount rates used in determining the 2008 pension costs were 6.5% and 5.0% for the U.S. and Canadian plans, respectively. Consistent with prior years, for both plans the Company uses a discount rate that approximates the average AA corporate bond rate.

     Effective July 15, 2005, the Company froze the accrual of any additional benefits under the U.S. plan. Effective January 1, 2009, the Company converted the Canadian plan from a defined benefit plan to a defined contribution plan. 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.

Deferred Income Tax Assets

     The Company had net deferred tax assets of approximately $732,473 at December 31, 2008. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.

     The ultimate realization of the deferred income tax assets are primarily dependent on generating sufficient future taxable income or being able to carryback any taxable losses and claim refunds against previously paid income taxes. The Company has historically had taxable income and believes its net deferred income tax assets at December 31, 2008, are realizable. If future operating results continue to generate taxable losses, it may be necessary to provide valuation allowances to reduce the amount of the deferred income tax assets to realizable value.

     Consolidated net sales decreased by $6,112,996, or 30.2% in 2008 to $14,129,807 as compared to the prior year net sales of $20,242,803. This decrease was attributable primarily to the USPS decertification of the Model E CBU, which is discussed in more detail below. Net sales excluding the CBUs in 2008 decreased $392,637 or 2.7% in 2008 to $14,090,921 as compared to $14,483,558 in 2007. Pre-tax operating results decreased to a pre-tax loss of $3,353,730 in 2008 from a reported pre-tax loss of $2,749,743 in 2007. After tax operating results decreased to a reported net loss of $2,700,211 in 2008 from a net loss of $1,904,117 in 2007. Net loss per share was $1.73 per share (basic and diluted) in 2008, down from net loss per share of $1.23 (basic and diluted) in the previous year.

     On May 8, 2007, the USPS notified the Company that the Technical Data Package for the USPS’s new generation USPS-B-1118 CBU was available, and by prior agreement, the Company would be permitted to manufacture and sell the current Model E CBU version for only four more months terminating on September 8, 2007. Sales of the current Model E CBUs to the private market accounted for 0.3%, 28.4% and 35.6% of the Company’s sales in 2008, 2007 and 2006, respectively. The Company continued to sell existing inventories of the Model E CBU through September 2007. After September 2007, the Company’s revenues have been adversely affected by this decertification.

     The Company submitted financial and other data as part of its application for the new CBU license program in September 2007 as step one in a multi-stage application process required by the USPS. The Company was notified by the USPS in November 2007 that its application to manufacture the USPS-B-1118 CBU had been rejected. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company remedied many of these weaknesses during the 2007 fiscal year, the USPS noted the remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time. The Company is implementing a series of operational changes to compensate for the loss of revenues from the aluminum CBU. These changes include the adoption of lean manufacturing processes, reducing the number of employees, re-design of the Horizontal 4c mailbox to reduce manufacturing costs, negotiating lower costs with vendors, and in-sourcing the manufacturing of non-postal lockers. These changes will be augmented by an increased focus on selling value-added niche products (which have higher margins than the USPS licensed CBUs) and improving the Company’s sales and distribution efforts.

     Consolidated net sales in 2008 were $14,129,807, a decrease of $6,112,996, or 30.2% from net sales of $20,242,803 in 2007. Sales of the Model E CBU decreased $5,720,359 to $38,886 in 2008 as compared to $5,759,245 in 2007 due to its decertification by the USPS in September 2007. Net sales excluding CBUs decreased $392,637 or 2.7% to $14,090,921 in 2008 from $14,483,558 in 2007. Sales of postal lockers, excluding the CBU, decreased $70,985 to $5,260,616 in 2008 from $5,331,601 in 2007 due primarily to lower sales of the Horizontal 4b+ mailbox which were partially offset by higher sales of the Horizontal 4c mailbox. The Horizontal 4b+ mailbox was replaced by the new Horizontal 4c standard for use in new construction of apartment and commercial buildings after October 5, 2006. The Company did not obtain approval for a Horizontal 4c mailbox until the second half of 2007. Sales of non-postal lockers decreased $321,652 to $8,830,305 in 2008 from $9,151,957 in 2007. The decrease in non-postal locker sales was a result of general economic weakness in the fourth quarter of 2008.

     Sales by general product group for the last two years were as follows:

										Percentage
		2008				2007				Increase (Decrease)
Postal Lockers, excluding CBUs		$	5,260,616			$	5,331,601				(1.3	%)
Non-Postal Lockers			8,830,305				9,151,957				(3.5	%)
Total Non-CBU sales			14,090,921				14,483,558				(2.7	%)
CBUs			38,886				5,759,245				(99.3	%)
Total Net Sales		$	14,129,807			$	20,242,803				(30.2	%)

Cost of Sales

     Consolidated cost of sales as a percentage of sales was 77.5% in 2008 as compared to 75.7% in 2007. The increase in the cost of sales as a percentage of sales was due to higher material costs in the new Horizontal 4c as compared to the Horizontal 4b+ that it replaced. Additionally, cost of sales as a percentage of sales were higher due to underutilization of the Company’s Grapevine, Texas manufacturing plant as a result of the Model E CBU’s decertification. This resulted in fixed overhead being under-absorbed and increasing period costs. The Company recorded a provision for excess and obsolete inventory of approximately $124,000 in 2008.

Selling, Administrative and General Expenses

     Selling, administrative and general expenses in 2008 totaled $6,028,730, a decrease of $1,435,357 compared to $7,464,087 in 2007. The decrease in 2008 was due to a decrease in advertising expenses of $379,524, decrease in outbound freight of $353,279, reduced professional fees of approximately $300,000 and a reduction in severance expenses of $200,000.

Asset Impairment

Due to inadequate profitability of the current Horizontal 4c design, management decided during the second quarter of 2008 to redesign the Horizontal 4c to reduce manufacturing costs. Management determined that the decision to redesign the Horizontal 4c impaired the Company’s investment in tooling and inventory related to the then current Horizontal 4c design. Therefore, the Company, in accordance with the provisions of Financial Accounting Standards Board Statement 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” recorded impairment charges totaling $275,685 in 2008.

Other Income and Expense—Net

     Other expense in excess of other income in 2008 totaled $65,722, an increase of $3,779 compared to other expense in excess of other income of $61,943 in 2007.

Interest Expense

     Interest expense in 2008 totaled $159,380, a decrease of $35,900 compared to $195,280 in 2007. The decrease is due to lower interest rates, as a result of a lower prime rate, associated with the Company’s floating rate credit facility with F&M Bank and Trust Company.

Income Taxes

     In 2008, the Company recorded an income tax benefit of $653,519 compared to income tax benefit of $845,626 in 2007. The effective tax rate determined as the percentage of the tax benefit or expense to the pre-tax loss was a 19.5% benefit in 2008 compared to a 30.8% benefit in 2007. The decrease in 2008 was primarily due to the increase in the deferred tax valuation allowance which accounted for a 12.5 percentage point decrease in the effective tax rate.

     Overall results in 2007 were negatively impacted by the USPS decertification of the Model E CBU. The Company had consolidated net sales of $20,242,803 in 2007, a decrease of $4,822,287, or 19.2%, compared to the prior year net sales of $25,065,090. This decrease was attributable primarily to the USPS decision to decertify the Company’s Model E CBU in September 2007. From May 31, 2005, when the USPS polycarbonate CBU contract expired, until the USPS decertification of the Model E CBU, the Company had been selling the Model E CBU to the private market for use as USPS-approved mail delivery. Once the Model E CBU was decertified, the Company was no longer allowed by

the USPS to sell this model to the private market for USPS-approved mail delivery. Pre-tax operating results decreased to a pre-tax loss of $2,749,743 in 2007 from a reported pre-tax profit of $845,224 in 2006. After tax operating results decreased to a reported net loss of $1,904,117 in 2007 from a net profit of $544,320 in 2006. Net loss per share was $(1.23) per share (basic and diluted) in 2007, down from net income per share of $.35 (basic and diluted) in the previous year.

Decertification of the Model E CBU

     On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. This decertification prevented the Company from selling this model to the private market for USPS-approved mail delivery. Beginning in September 2007, the Company’s revenues and profitability have been adversely affected by this decertification. Sales of the Model E aluminum CBU to the private market accounted for an additional 28.4% and 35.6% of the Company’s sales in 2007 and 2006, respectively.

     As a result of the decertification of the Model E CBU and the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes include the adoption of lean manufacturing processes and a reduction of administrative costs. These changes will be augmented by a shift in the Company’s business focus to selling value-added niche products (which have higher margins than the USPS licensed CBUs) and improving the Company’s sales and distribution efforts.

Net Sales

     Consolidated net sales in 2007 amounted to $20,242,803, a decrease of $4,822,287 from net sales of $25,065,090 in 2006. Sales of the Model E CBU decreased $3,399,556 to $5,759,245 in 2007 as compared to $9,158,801 in 2006 due to its decertification by the USPS in September 2007. Sales of postal lockers, excluding the CBU, decreased $1,004,912 to $5,331,601 in 2007 from $6,336,513 in 2006 due primarily to lower sales of the Horizontal 4b+ mailbox. The Horizontal 4b+ mailbox was replaced by the new Horizontal 4c standard for use in new construction of apartment and commercial buildings after October 5, 2006. The Company did not obtain approval for a Horizontal 4c mailbox until the second half of 2007.

     Sales by general product group for the last two years were as follows:

										Percentage
		2007				2006				Increase (Decrease)
Postal Lockers, excluding CBUs		$	5,331,601			$	6,336,513				(15.9	%)
Non-Postal Lockers			9,151,957				9,569,776				(4.4	%)
Total Non-CBU sales			14,483,558				15,906,289				(8.9	%)
CBUs			5,759,245				9,158,801				(37.1	%)
Total Net Sales		$	20,242,803			$	25,065,090				(19.2	%)

Cost of Sales

     Consolidated cost of sales as a percentage of sales was 75.7% in 2007 as compared to 66.3% in 2006. In 2007, cost as a percentage of sales was higher due to one-time expenses of $165,000 to increase the reserve for inventory valuation following the decertification of the Model E CBU, increased raw material prices, and excess fixed overhead costs following the decertification of the Model E CBU.

Selling, Administrative and General Expenses

     Selling, administrative and general expenses in 2007 totaled $7,464,087, an increase of $178,875 compared to $7,285,212 in 2006. The increase in 2007 was primarily due to an increase in advertising expenses of $360,036 and severance expenses of $200,000, which were partially offset by lower selling and freight expenses resulting from decreased sales.

Other Income and Expense—Net

     Other expense in excess of other income in 2007 totaled $61,943, a decrease of $97,790 compared to other expense in excess of other income of $159,733 in 2006.

     Interest expense in 2007 totaled $195,280, an increase of $11,023 compared to $184,257 in 2006. The increase is due to higher interest rates associated with the Company’s new credit facility with F&M Bank and Trust Company.

     In 2007, the Company recorded an income tax benefit of $845,626 compared to income tax expense of $300,904 in 2006. The effective tax rate determined as the percentage of the tax benefit or expense to the pre-tax loss or pre-tax income was 30.8% in 2007 compared to 35.6% in 2006. The decrease in 2007 was primarily due to the increase in the deferred tax valuation allowance which accounted for a 10.8 percentage point decrease in the effective tax rate.

		Year ended December 31,
		2008				2007				2006
Net cash (used in) provided by:
Operating activities		$	(1,488,884	)		$	(294,669	)		$	1,443,757
Investing activities			(310,200	)			(818,646	)			(98,591	)
Financing activities			613,173				(34,277	)			(122,454	)
Effect of exchange rate changes on cash			(96,056	)			201,319				7,497
Increase (Decrease) in cash and cash equivalents		$	(1,281,967	)		$	(946,273	)		$	1,230,209

     In 2008, the Company used net cash in operating activities of $1,488,884 compared with net cash used in operating activities of $294,669 in 2007. The change was due primarily to the net loss of $2,700,212 in 2008 partially offset by an increase in income taxes receivable of $1,561,991, a reduction in inventory of $655,325, an increase in pension benefits of $494,788, depreciation of $416,664, and a reduction in deferred income taxes of $528,932 compared with a net loss of $1,904,117 in 2007.

     In 2007, the Company used net cash in operating activities of $294,669 compared with net cash provided by operating activities of $1,443,757 in 2006. The change was due primarily to the net loss of $1,904,117 in 2007 partially offset by a reduction in accounts receivable of $1,343,848 compared with net income of $544,320 in 2006.

     Net cash used in investing activities was $310,200 in 2008 compared with net cash used in investing activities of $818,646 in 2007. The change was due to reduced capital expenditures in 2008 as compared to 2007.

     Net cash used in investing activities was $818,646 in 2007 compared with net cash used in financing activities of $98,591 in 2006. The change was due to increased capital expenditures in 2007 as the Company invested in new machinery and equipment at their Grapevine, Texas manufacturing facility as part of the launch of the Horizontal 4c product and to support the lean manufacturing initiative.

     Net cash provided by financing activities was $613,173 in 2008 compared with net cash used in financing activities of $34,277 in 2007. The change is due to the Company borrowing $752,623 under its Line of Credit (defined below) and issuing $67,594 of common stock partially offset by principal payments of $139,450 on its mortgage.

     Net cash used in financing activities was $34,277 in 2007 compared with net cash used in financing activities of $122,454 in 2006. The change is due to the longer amortization period in the Company’s current mortgage payable as compared to the previous mortgage payable and the increase in mortgage debt as a result of the F&M Bank and Trust Co. (“F&M Bank”) mortgage.

     On December 31, 2008, outstanding debt totaled $2,756,938 compared with $2,143,765 at December 31, 2007 and $2,178,042 at December 31, 2006. The increase in debt during 2008 reflects borrowings under the Company’s Line of Credit.

     On March 6, 2007, the Company obtained a $750,000 revolving line of credit (the “Line of Credit”) and a $2,200,000 mortgage loan (the “Mortgage Loan”) from The F&M Bank. The Line of Credit was established under a Loan Agreement between the Company, the F&M Bank and Altreco, Incorporated, a wholly-owned subsidiary of the Company, as Guarantor (“Altreco”). The Mortgage Loan was established under a separate Loan Agreement between the Company, F&M Bank and Altreco, as Guarantor.

     The proceeds of the Mortgage Loan were used to satisfy the outstanding principal balance and related costs of the Company’s existing mortgage loan with Manufacturers and Traders Trust Company, under which the Company had been in default since March 2005. The proceeds of the Line of Credit have been used primarily for working capital needs in the ordinary course of business and for general corporate purposes

     On March 28, 2008, April 28, 2008 and June 13, 2008, the Company received waivers from The F&M Bank under its Loan Agreement with respect to, among other things, waiver of any default or event of default arising under the Credit Facility as a result of our failure to comply with certain reporting covenants requiring the delivery of the Company’s 2007 Annual Report on Form 10-K as well as the delivery of financial statements for the first quarter of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

     On December 31, 2008, the Company had $750,000 of borrowings, leaving no additional availability for borrowings under the Line of Credit.

     On March 5, 2009, the Company renewed its $750,000 revolving line of credit with F&M Bank. The loan accrued interest at prime plus 75 basis points (0.75%). The revolving line of credit matured on June 5, 2009 and was secured by all accounts receivable, inventory and equipment as well as a Deed of Trust covering the primary manufacturing and headquarters facility in Grapevine, Texas. The credit agreement underlying the revolving line of credit required compliance with certain covenants.

     On March 19, 2009, the Company obtained a new $2 million mortgage loan from F.F.F.C., Inc. which was used to repay the existing Mortgage Loan with the F&M Bank. Interest on the loan is 12% per annum and is payable monthly. The loan matures on March 20, 2011.

     On July 29, 2009, the Company entered into a receivables purchase agreement ( the “Receivables Agreement”) with Gulf Coast Bank and Trust Company (“GCBT”), pursuant to which the Company will sell certain of its accounts receivable to GCBT. GCBT will not purchase receivables from the Company if the total of all outstanding receivables held by it, at any time, exceeds $2,500,000. In addition, if a receivable is determined to be uncollectible or otherwise ineligible, GCBT may require the Company to repurchase the receivable.

     The Receivables Agreement calls for the Company to pay a daily variable discount rate, which is the greater of prime plus 1.50% or 6.5% per annum, computed on the amount of outstanding receivables held by GCBT, for the period during which such receivables are outstanding. The Company will also pay a fixed discount percentage of 0.2% for each ten-day period during which receivables held by GCBT are outstanding.

     Proceeds from the sales of receivables under the Receivables Agreement were used to repay the Line of Credit with the F&M Bank. The Company has granted to GCBT a security interest in certain assets to secure its obligations under the Agreement. The Agreement is terminable at any time by either the Company or GCBT upon the giving of notice.

     On September 18, 2009, the Company closed on the sale of its headquarters and primary manufacturing facility to the City of Grapevine. The Company is entitled to continue to occupy the facility, through December 31, 2010, at no cost. The City has 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 December 31, 2010. Proceeds of the sale were used to pay off the $2 million mortgage from F.F.F.C., Inc. and for general working capital purposes. The City paid a purchase price of $2,747,000. The Company estimates the total value of this transaction at $3,500,000.

Effect of Exchange Rate Changes on Cash

     Net cash used by the effect of exchange rate changes on cash was $96,056 in 2008 as compared to net cash provided of $201,318 in 2007. The change was primarily due to the decrease in value of the Canadian Dollar (“CAD”) as compared to the United States Dollar (“USD”) which caused a decrease in the value of the Company’s Canadian operation’s net assets. The CAD to USD exchange rate decreased 19.7% from $1.0194 to $0.8183 between December 31, 2007 and 2008.

     Net cash provided by the effect of exchange rate changes on cash was $201,318 in 2007 as compared to $7,497 in 2006. The change was primarily due to the increase in value of the CAD as compared to the USD which caused an increase in the value of the Company’s Canadian operation’s net assets. The CAD to USD exchange rate increased 18.8% from $0.8581 to $1.0194 between December 31, 2006 and 2007.

Cash and Cash Equivalents

     On December 31, 2008, the Company had cash and cash equivalents of $279,984 compared with $1,561,951 on December 31, 2007. The change was due primarily to the net loss of $2,700,212 in 2008 partially offset by an increase in income taxes receivable of $1,561,991, a reduction in inventory of $655,325, an increase in pension benefits of $113,726, depreciation of $416,664, and a reduction in deferred income taxes of $909,994.

Liquidity

     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 December 31,
		2008				2007
Current Ratio			1.9 to 1				3.5 to 1
Working Capital		$	2,802,308			$	5,318,126

     The Company’s primary sources of liquidity include available cash and cash equivalents and borrowing under the receivables purchase agreement.

     Expected uses of cash in fiscal 2009 include funds required to support the Company’s operating activities, capital expenditures, and contributions to the Company’s defined benefit pension plans. The Company expects capital expenditures in 2009 to be less than in 2008.

     The Company has taken steps to enhance the Company’s liquidity position with the new receivables purchase agreement which expands their ability to leverage accounts receivable. The Company’s plans to manage the Company’s liquidity position in 2009 include 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 by manufacturing products for outside parties.

     The Company has considered the impact of the financial outlook on the Company’s liquidity and has performed an analysis of the key assumptions in their forecast. Based upon these analyses and evaluations, the Company expects that their anticipated sources of liquidity will be sufficient to meet their obligations without disposition of assets outside of the ordinary course of business or significant revisions of the Company’s planned operations through 2009.

     On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009 (HR 3548) into law. The law includes a provision that will allow the Company to carryback its net operating loss for federal income tax purposes from 2008 for up to five years and obtain a refund to the extent that taxes were paid in the previous five years. As a result of this law, the Company anticipates receiving a refund in the amount of approximately $1,400,000 during the first quarter of 2010.

     Credit markets have recently experienced significant dislocations and liquidity disruptions. These factors have 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. Continued uncertainty in the credit markets may 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.

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’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

     The Company has contractual obligations as of December 31, 2008 relating to long-term and current debt and operating lease arrangements. The Company does not guarantee the debt of any third parties. All of the Company’s subsidiaries are 100% owned by the Company and are included in its consolidated financial statements. Total payments to be made under long-term debt and operating leases are as follows:

		Payments due by period
		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-term debt obligations		$	2,004,315			$	173,354			$	1,830,961			$	—			$	—
Line of credit obligations			752,623				752,623				—				—				—
Operating lease obligations			91,930				57,296				34,634				—				—
Total		$	2,848,868			$	983,273			$	1,865,595			$	—			$	—

     The above amounts for long-term debt do not include interest.

     The Company has had continuing obligations under its U.S. and Canadian defined benefit pension plans. These are funded plans under which the Company is required to make contributions to meet ERISA and Canadian funding requirements. The Company’s contributions to the plans have ranged from approximately $100,000 to $400,000 over the last four years. The required funding is based on actuarial calculations that take into account various actuarial results and certain assumptions. Contributions to the plans for the year ended December 31, 2008 totaled $229,196.

Impact of Inflation and Changing Prices

     Inflation in raw material and other prices has become an increasing factor in the general economy, and the Company continues to seek ways to mitigate its impact. For example, the Company experienced significant increases in steel and aluminum prices in 2006 and 2007, the two primary raw materials utilized in the Company’s operations. These price increases continued through the third quarter of 2008 before starting to fall. The cost per pound of aluminum based on the three month buyer contract peaked on July 11, 2008 at $1.5150. The average cost per pound of aluminum based on the three month buyer contract on the London Metals Exchange was $1.1880, $1.2077, and $1.1752 in 2008, 2007 and 2006, respectively, representing a decrease of 1.6% from 2007 to 2008 and an increase of 2.8% from 2006 to 2007. To the extent permitted by competition, the Company passes increased costs on to its customers by increasing sales prices over time.

     The Company intends to seek additional ways to control the administrative costs necessary to successfully run the business. By controlling these costs, such as administrative costs, the Company can continue to competitively price its products with other top quality locker manufacturers and distributors.

Market Risks

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, aluminum and plastic, the Company expects that any raw material price changes would be reflected in adjusted sales prices and passed on to customers. 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 operation subjects the Company to foreign currency risk, though it is not considered a significant risk, since the Canadian operation’s net assets represent only 12.7% of the Company’s aggregate net assets at December 31, 2008. Presently, management does not hedge its foreign currency risk.

Interest Rate Risks

     On March 5, 2007, the Company entered into a new credit agreement which provided a $2,200,000 term loan, the proceeds of which were used to repay the then outstanding mortgage balance, and a $750,000 line of credit. These loans bear interest at the Bank’s prime rate plus .75% (5.0% on December 31, 2008).

Effect of New Accounting Guidance

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for measuring the fair value of assets and liabilities. It requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Subsequent to the issuance of SFAS 157, the FASB issued FASB Staff Position (FSP) FAS 157-1 amending SFAS 157 to exclude FASB Statement No. 13, Accounting for Leases, and other accounting pronouncements that address fair value measurements for purposes of lease classifications or measurement under Statement 13, and FSP FAS 157-2 deferring the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 on January 1, 2008 and the impact on the Company’s consolidated financial statements was immaterial.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Most of the provisions in SFAS 159 are elective. This statement is effective for fiscal years beginning after November 15, 2008, and it may be applied prospectively. Early adoption is permitted, provided the Company also elects to apply the provisions of SFAS 157. The Company does not intend to adopt the elective provisions of SFAS 159.

     In December 2007 FASB issued Statement No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in revenue, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for combinations after December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted.

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the impact adoption of SFAS No. 160 to have a significant impact on the financial statements.

     In May 2008 the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses these issues by establishing that GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective November 15, 2008 and is only effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in SAS No. 69 for state and local governmental entities and federal governmental entities. SFAS 162 did not have a material impact on the Company’s consolidated financial statements upon adoption.

     In June 2008 the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions of FSP EITF 03-6-1. The Company is currently evaluating the impact adoption of FSP EITF 03-6-1 may have on the consolidated financial statements.

     In April 2009 the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”. This FSP amends the guidance in SFAS 141 (R). This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

     SFAS 141(R) and FSP FAS 141(R)-1 are effective for the financial statements included in the Company’s quarterly report for the three months ended March 31, 2009. The Company does not expect the adoption of SFAS 141(R) and FSP FAS 141(R)-1 to have a significant impact on the consolidated financial statements.

     In May 2009 the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 incorporates guidance into accounting literature that was previously addressed only in auditing standards. SFAS 165 refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as “recognized subsequent events”. Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as “non-recognized subsequent events”. SFAS 165 also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company does not expect the adoption of SFAS 165 to have a significant impact on the consolidated financial statements.

     In June 2009 the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162” (“SFAS 168”). The FASB Accounting Standards Codification is intended to be the source of authoritative U.S. generally accepted accounting principles (GAAP) and reporting standards as issued by the Financial Accounting Standards Board. Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change or alter existing GAAP and there is no expected impact on our consolidated financial position or results of operations.

     In June 2009 the SEC released Staff Accounting Bulletin No. 112 (“SAB 112”). SAB 112 amends or rescinds existing portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletin Series to be consistent with the authoritative accounting guidance of FASB Statement No. 141 (revised 2007), Business Combinations (“FAS 141R”) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”). SAB 112 is effective for the Company beginning with the first fiscal quarter of 2010 and will be utilized in conjunction with future business combinations accounted for in accordance with FAS 141R and non-controlling interests accounted for in accordance with FAS 160.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     The information required is reported under the “Impact of Inflation and Changing Prices” and “Market Risks” headings under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
American Locker Group Incorporated

We have audited the accompanying consolidated balance sheets of American Locker Group Incorporated and Subsidiaries (the Company) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period then ended. Our audits also included the financial statement schedule listed in the index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule an audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 7 and 8 to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” and effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132R.”

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the consolidated financial position of American Locker Group Incorporated and Subsidiaries as of December 31, 2008 and 2007 and the consolidated results of their operations and cash flows for each of the three years in the period then ended in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ Travis, Wolff & Company, L.L.P.

Dallas, Texas

February 1, 2010

American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets

		December 31,
		2008				2007
Assets
Current assets:
Cash and cash equivalents		$	279,984			$	1,561,951
Accounts receivable, less allowance for doubtful accounts of $180,000 in 2008 and $233,000 in 2007			1,315,536				1,568,464
Inventories, net			2,396,185				3,060,341
Prepaid expenses			212,867				223,068
Income tax receivable			1,599,892				44,467
Deferred income taxes			180,430				987,538
Total current assets			5,984,894				7,445,829
Property, plant and equipment:
Land			500,500				500,500
Buildings and leasehold improvements			3,503,515				3,509,891
Machinery and equipment			7,756,607				8,045,859
			11,760,622				12,056,250
Less allowance for depreciation and amortization			(7,526,963	)			(7,543,465	)
			4,233,659				4,512,785
Prepaid pension			39,442				—
Deferred income taxes			552,043				457,428
Total assets		$	10,810,038			$	12,416,042

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

American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets (continued)

		December 31,
		2008				2007
Liabilities and stockholders’ equity
Current liabilities:
Revolving line of credit		$	752,623			$	—
Current portion of long-term debt			173,354				96,530
Accounts payable			1,853,225				1,236,316
Commissions, salaries, wages and taxes thereon			182,752				285,759
Income taxes payable			68,791				72,146
Other accrued expenses and current liabilities			151,841				436,952
Total current liabilities			3,182,586				2,127,703
Long-term liabilities:
Long-term debt, net of current portion			1,830,961				2,047,235
Pension and other benefits			1,169,306				482,943
			3,000,267				2,530,178
Total liabilities			6,182,853				4,657,881
Commitments and contingencies (Note 16)
Stockholders’ equity:
Common stock, $1 par value:
Authorized shares—4,000,000
Issued shares—1,763,849 and 1,741,516 in 2008 and 2007, respectively
Outstanding shares—1,571,849 and 1,549,516 in 2008 and 2007, respectively			1,763,849				1,741,516
Other capital			233,841				184,988
Retained earnings			5,318,243				8,018,454
Treasury stock at cost (192,000 shares)			(2,112,000	)			(2,112,000	)
Accumulated other comprehensive loss			(576,748	)			(74,797	)
Total stockholders’ equity			4,627,185				7,758,161
Total liabilities and stockholders’ equity		$	10,810,038			$	12,416,042

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations

		Year ended December 31,
		2008				2007				2006
Net sales		$	14,129,807			$	20,242,803			$	25,065,090
Cost of products sold			10,954,020				15,321,106				16,619,734
Gross profit			3,175,787				4,921,697				8,445,356
Selling, administrative and general expenses			6,028,730				7,464,087				7,285,212
Asset impairment			275,685				—				—
			(3,128,628	)			(2,542,390	)			1,160,144
Interest income			10,891				49,870				29,070
Other income (expense)—net			(76,613	)			(61,943	)			(159,733	)
Interest (expense)			(159,380	)			(195,280	)			(184,257	)
Income (loss) before income taxes			(3,353,730	)			(2,749,743	)			845,224
Income tax expense (benefit)			(653,519	)			(845,626	)			300,904
Net income (loss)		$	(2,700,211	)		$	(1,904,117	)		$	544,320
Weighted average common shares:
Basic			1,564,039				1,549,516				1,547,392
Diluted			1,564,039				1,549,516				1,547,392
Earnings (loss) per share of common stock:
Basic		$	(1.73	)		$	(1.23	)		$	0.35
Diluted		$	(1.73	)		$	(1.23	)		$	0.35
Dividends per share of common stock		$	0.00			$	0.00			$	0.00

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Stockholders’ Equity

																		Accumulated
		Common				Other				Retained								Other Comprehensive				Total Stockholders’
		Stock				Capital				Earnings				Treasury Stock				Income (Loss)				Equity
Balance at January 1, 2006		$	1,738,146			$	132,071			$	9,378,251			$	(2,112,000	)		$	(521,838	)		$	8,614,630
Net income (loss)			—				—				544,320				—				—				544,320
Other comprehensive income (loss):
Foreign currency translation			—				—				—				—				7,361				7,361
Minimum pension liability adjustment, net of tax benefit of $80,091			—				—				—				—				120,137				120,137
Total comprehensive income																							671,818
Common stock issued (3,370 shares)			3,370				12,344				—				—				—				15,714
Balance at December 31, 2006		$	1,741,516			$	144,415			$	9,922,571			$	(2,112,000	)		$	(394,340	)		$	9,302,162
Net income (loss)			—				—				(1,904,117	)			—				—				(1,904,117	)
Other comprehensive income (loss):
Foreign currency translation			—				—				—				—				249,491				249,491
Minimum pension liability adjustment, net of tax benefit of $46,707			—				—				—				—				70,052				70,052
Total comprehensive loss																							(1,584,574	)
Stock-based compensation			—				40,573				—				—				—				40,573
Balance at December 31, 2007		$	1,741,516			$	184,988			$	8,018,454			$	(2,112,000	)		$	(74,797	)		$	7,758,161
Net income (loss)			—				—				(2,700,211	)			—				—				(2,700,211	)
Other comprehensive income (loss):
Foreign currency translation			—				—				—				—				(205,775	)			(205,775	)
Minimum pension liability adjustment, net of tax benefit of $197,451			—				—				—				—				(296,176	)			(296,176	)
Total comprehensive loss																							(3,202,162	)
Common stock issued (22,333 shares)			22,333				45,261				—				—				—				67,594
Stock-based compensation			—				3,592				—				—				—				3,592
Balance at December 31, 2008		$	1,763,849			$	233,841			$	5,318,243			$	(2,112,000	)		$	(576,748	)		$	4,627,185

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

		Year ended December 31,
		2008				2007				2006
Operating activities
Net income (loss)		$	(2,700,211	)		$	(1,904,117	)		$	544,320
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			416,664				386,430				396,304
Provision for uncollectible accounts			60,182				61,000				77,939
Equity based compensation			71,186				40,573				—
Loss on disposal of assets			138				—				—
Deferred income taxes			909,994				(488,728	)			400,251
Impairment of assets			275,685				—				—
Changes in assets and liabilities:
Accounts and other receivables			81,496				1,343,848				986,803
Inventories			545,510				341,078				(92,738	)
Prepaid expenses			7,384				(78,110	)			(92,610	)
Accounts payable and accrued expenses			291,353				(363,602	)			(928,210	)
Income taxes			(1,561,991	)			602,857				476,772
Pension and other benefits			113,726				(235,898	)			(325,074	)
Net cash provided by (used in) operating activities			(1,488,884	)			(294,669	)			1,443,757
Investing activities
Purchase of property, plant and equipment			(334,902	)			(818,646	)			(98,591	)
Proceeds from sale of property, plant and equipment			24,702				—				—
Net cash used in investing activities			(310,200	)			(818,646	)			(98,591	)
Financing activities
Long-term debt payments			(139,450	)			(2,234,277	)			(138,168	)
Long-term debt borrowings			—				2,200,000				—
Borrowings under revolving line of credit			752,623				—				—
Common stock issued			—				—				15,714
Net cash provided by (used in) financing activities			613,173				(34,277	)			(122,454	)
Effect of exchange rate changes on cash			(96,056	)			201,319				7,497
Net increase (decrease) in cash and cash equivalents			(1,281,967	)			(946,273	)			1,230,209
Cash and cash equivalents at beginning of year			1,561,951				2,508,224				1,278,015
Cash and cash equivalents at end of year		$	279,984			$	1,561,951			$	2,508,224
Supplemental cash flow information:
Cash paid during the year for:
Interest		$	152,343			$	195,502			$	183,708
Income taxes		$	11,806			$	15,898			$	—

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

Notes to Consolidated Financial Statements
American Locker Group Incorporated and Subsidiaries
December 31, 2008

1. Basis of Presentation

Consolidation, Business Description and Current Operating Condition

     The consolidated financial statements include the accounts of American Locker Group Incorporated and its subsidiaries (the “Company”), all of which are wholly owned. Intercompany accounts and transactions have been eliminated in consolidation. The Company is a leading manufacturer and distributor of lockers, locks and keys. The Company’s lockers can be categorized as either postal lockers or non-postal lockers. Postal lockers are used for the delivery of mail. Most non-postal lockers are key controlled checking lockers. The Company is best known for manufacturing and servicing the key and lock system with the plastic orange cap. The Company serves customers in a variety of industries in all 50 states, Canada, Mexico, Europe, Asia and South America.

     On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. Beginning in September 2007, the Company’s revenues and profitability were and continue to be adversely affected by this decertification. During 2008, 2007 and 2006, sales to the USPS accounted for 5.6%, 3.7%, and 3.2%, respectively, of the Company’s net sales. In addition, sales of aluminum CBUs to the private market accounted for an additional 0.3%, 28.4%, and 35.6% of the Company’s sales in 2008, 2007 and 2006, respectively.

     On November 30, 2007, the Company announced that the USPS had rejected the Company’s application to manufacture the USPS-B-1118 CBU. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company remedied many of these weaknesses during the 2007 fiscal year, the USPS noted that such remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time.

     As a result of the decertification of the Model E CBU, the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU and the current economic environment, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes include the adoption of lean manufacturing processes, reducing the number of employees, re-design of the Horizontal 4c mailbox to reduce manufacturing costs, negotiating lower costs with vendors, and in-sourcing the manufacturing of non-postal lockers. These changes will be augmented by an increased focus on selling value-added niche products (which have higher margins than the USPS licensed CBUs) and improving the Company’s sales and distribution efforts.

     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. Summary of Significant Accounting Policies

Cash and Cash Equivalents

     Cash and cash equivalents includes currency on hand and demand deposits with financial institutions. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash and cash equivalents on deposit in amounts in excess of federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk.

Accounts Receivable

     The Company grants credit to its customers and generally does not require collateral. Accounts receivable are reported at net realizable value and do not accrue interest. Management uses judgmental factors such as customer’s payment history and the general economic climate, as well as considering the age of and past due status of invoices in assessing collectability and establishing allowances for doubtful accounts. Accounts receivable are written off after all collection efforts have been exhausted.

     Estimated losses for bad debts are provided for in the consolidated financial statements through a charge to expense of approximately $60,000, $61,000 and $87,000 for 2008, 2007 and 2006, respectively. The net charge-off of bad debts was approximately $113,000, $41,000 and $9,000 for 2008, 2007 and 2006, respectively.

Inventories

     Inventories are valued principally at the lower of cost or market value. Cost is determined using the FIFO method.

Property, Plant and Equipment

     Property, plant and equipment are stated at historical cost. Depreciation is computed by the straight-line and declining-balance methods for financial reporting purposes and by accelerated methods for income tax purposes. Estimated useful lives for financial reporting purposes are 20 to 40 years for buildings and 3 to 12 years for machinery and equipment. Leasehold improvements are amortized over the shorter of the life of the building or the lease term. Expenditures for repairs and maintenance are expensed as incurred. Gains and losses resulting from the sale or disposal of property and equipment are included in other income.

     Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable in accordance with SFAS No. 144 (SFAS 144) “Accounting for the Disposal of Long Lived Assets”. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss using discounted cash flows. The Company recorded an equipment impairment charge of $164,000 in 2008 related to the decision to redesign the Horizontal 4c product line, please refer to Note 17 “Asset Impairment” for further information. The Company recorded no asset impairment charges in 2007 or 2006.

     Depreciation expense was $416,664 in 2008, of which $254,754 was included in cost of products sold, and $161,910 was included in selling, administrative and general expenses. Depreciation expense was $386,430 in 2007, of which $239,887 was included in cost of products sold, and $146,534 was included in selling, administrative and general expenses. Depreciation expense was $396,304 in 2006, of which $252,648 was included in cost of products sold, and $143,656 was included in selling, administrative and general expenses.

Pensions and Postretirement Benefits

     The Company has two defined benefit plans which recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income (loss) to report the funded status of the plans. The plan assets and obligations are measured at their year-end balance sheet date. Refer to Note 8 ‘Pensions and Other Postretirement Benefits,” for further detail on the plans.

Revenue Recognition

     The Company recognizes revenue at the point of passage of title, which occurs at the time of shipment to the customer. The Company derived approximately 29.3% of its revenue in 2008 from sales to distributors. These distributors do not have a right to return unsold products; however, returns may be permitted in specific situations. Historically, returns have not had a significant impact on the Company’s results of operations. Revenues are reported net of discounts and returns and net of sales tax.

Shipping and Handling Costs

     Shipping and handling costs are expensed as incurred and are included in selling, administrative and general expenses in the accompanying consolidated statements of operations. These costs were approximately $866,000, $1,209,000 and $1,340,000 during 2008, 2007 and 2006, respectively.

Advertising Expense

     The cost of advertising is generally expensed as incurred. The cost of catalogs and brochures are recorded as a prepaid cost and expensed over their useful lives, generally one year. The Company incurred approximately $219,000, $598,000 and $238,000 in advertising costs during 2008, 2007 and 2006, respectively.

Income Taxes

     The Company and its domestic subsidiaries file a consolidated U.S. income tax return. Canadian operations file income tax returns in Canada. The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized.

     Pursuant to SFAS No. 109, “Accounting for Income Taxes,” when establishing a valuation allowance, the Company considers future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” SFAS No. 109 defines a tax planning strategy as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.” In the event the Company determines that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets is charged to earnings in the period in which the Company makes such a determination. If it is later determined that it is more likely than not that the deferred tax assets will be realized, the Company will release the valuation allowance to current earnings or adjust the purchase price allocation, consistent with the manner of origination.

     The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities. The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and tax position taken or expected to be taken on the tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense.

Research and Development

     The Company engages in research and development activities relating to new and improved products. It expended approximately $200,000, $309,000 and $325,000 in 2008, 2007 and 2006, respectively, for such activity in its continuing businesses. Research and development costs are included in selling, administrative and general expenses.

Earnings Per Share

     The Company reports earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share (“SFAS 128”). Under SFAS No. 128 basic earnings per share excludes any dilutive effects of stock options, whereas diluted earnings per share assumes exercise of stock options, when dilutive, resulting in an increase in outstanding shares. Please refer to Note 12 for further information.

Foreign Currency

     In accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation (SFAS No. 52), the Company translates the financial statements of the Canadian subsidiary from its functional currency into the U.S. dollar. Assets and liabilities are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Income statement amounts are translated using the average exchange rate for the year. All translation gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. Foreign currency gains and losses resulting from current year exchange rate transactions are insignificant for all years presented.

Fair Value of Financial Instruments

     The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt approximate fair value.

Stock-Based Compensation

     On January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payments” on a modified-prospective-transition method. Under this method, the Company’s prior periods do not reflect any restated amounts. The Company recognized no compensation expense related to stock options during the year ended December 31, 2006, as a result of the adoption of Statement 123R. Prior to January 1, 2006, the Company had applied the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 and had adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148. Accordingly, the compensation expense of any employee stock options granted was the excess, if any, of the quoted market price of the Company’s common stock at the grant date over the amount the employee must pay to acquire the stock. Net income for 2008, 2007 and 2006 include pretax stock option expense of $3,592, $40,573 and $0, respectively. These expenses were included in selling, administrative and general expense.

Comprehensive Income

     Comprehensive income consists of net income, foreign currency translation and minimum pension liability adjustments and is reported in the consolidated statements of stockholders’ equity.

Use of Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include allowance for doubtful accounts, inventory obsolescence, product returns, intangible assets, pension, post-retirement benefits, contingencies, litigation and deferred tax asset valuation allowance. Actual results could differ from those estimates.

New Accounting Pronouncements

     Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157 (SFAS 157) “Fair Value Measurements,” which did not have a material impact on the Company’s consolidated financial statements. SFAS 157 establishes a common definition for fair value, a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-1 amending SFAS 157 to exclude FASB Statement No. 13, Accounting for Leases, and other accounting pronouncements that address fair value measurements for purposes of lease classifications or measurement under Statement 13, and FSP FAS 157-2 deferring the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 on January 1, 2008 and the impact on the Company’s consolidated financial statements was immaterial.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Most of the provisions in SFAS 159 are elective. This statement is effective for fiscal years beginning after November 15, 2008, and it may be applied prospectively. Early adoption is permitted, provided the Company also elects to apply the provisions of SFAS 157. The Company does not intend to adopt the elective provisions of SFAS 159.

     In December 2007 FASB issued Statement No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in revenue, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for combinations after December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted.

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 to have a significant impact on the financial statements.

     In May 2008 the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses these issues by establishing that GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective November 15, 2008 and is only effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in SAS No. 69 for state and local governmental entities and federal governmental entities. SFAS 162 did not have a material impact on the Company’s consolidated financial statements upon adoption.

     In June 2008 the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions of FSP EITF 03-6-1. The Company is currently evaluating the impact adoption of FSP EITF 03-6-1 may have on the consolidated financial statements.

     In April 2009 the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”. This FSP amends the guidance in SFAS 141 (R). This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

     SFAS 141(R) and FSP FAS 141(R)-1 are effective for the financial statements included in the Company’s quarterly report for the three months ended March 31, 2009. The Company does not expect the adoption of SFAS 141(R) and FSP FAS 141(R)-1 to have a significant impact on the consolidated financial statements.

     In May 2009 the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 incorporates guidance into accounting literature that was previously addressed only in auditing standards. SFAS 165 refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as “recognized subsequent events”. Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as “non-recognized subsequent events”. SFAS 165 also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company does not expect the adoption of SFAS 165 to have a significant impact on the consolidated financial statements.

     In June 2009 the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162” (“SFAS 168”). The FASB Accounting Standards Codification is intended to be the source of authoritative U.S. generally accepted accounting principles (GAAP) and reporting standards as issued by the Financial Accounting Standards Board. Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change or alter existing GAAP and there is no expected impact on our consolidated financial position or results of operations.

     In June 2009 the SEC released Staff Accounting Bulletin No. 112 (“SAB 112”). SAB 112 amends or rescinds existing portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletin Series to be consistent with the authoritative accounting guidance of FASB Statement No. 141 (revised 2007), Business Combinations (“FAS 141R”) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”). SAB 112 is effective for the Company beginning with the first fiscal quarter of 2010 and will be utilized in conjunction with future business combinations accounted for in accordance with FAS 141R and non-controlling interests accounted for in accordance with FAS 160.

3. Inventories

     Inventories consist of the following:

		December 31,
		2008				2007
Finished products		$	77,665			$	333,653
Work-in-process			1,071,218				898,620
Raw materials			1,247,302				1,828,068
Net inventories		$	2,396,185			$	3,060,341

4. Other Accrued Expenses and Current Liabilities

     Accrued expenses consist of the following at December 31:

		December 31,
		2008				2007
Short-term pension liability		$	—			$	177,987
Restructuring liability			—				11,941
Accrued severance			94,687				200,000
Accrued expenses, other			57,154				47,024
Total accrued expenses		$	151,841			$	436,952

5. Debt

     Long-term debt consists of the following:

		December 31,
		2008				2007
Mortgage payable to bank through January 2012 at $22,493 monthly including interest at prime plus 75 basis points with a 5% floor (5% at December 31, 2008) with payment for remaining balance due February 1, 2012, collateralized by real estate		$	2,004,315			$	2,143,765
Less current portion			(173,354	)			(96,530	)
Long-term portion		$	1,830,961			$	2,047,235

     At December 31, 2008 the Company had borrowings under the revolving line of credit of $750,000 leaving no availability for additional borrowing based upon the borrowing base as amended March 5, 2009. The Company had no borrowings under the revolving line of credit as of December 31, 2007.

     On March 28, 2008, April 28, 2008 and June 13, 2008, the Company received waivers from The F&M Bank and Trust Company under its credit facility with respect to, among other things, waiver of any default or event of default arising under the Credit Facility as a result of our failure to comply with certain reporting covenants requiring the delivery of the Company’s 2007 Annual Report on Form 10-K as well as the delivery of financial statements for the first quarter of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

     On March 5, 2009, the Company renewed its $750,000 revolving line of credit with F&M Bank and Trust Company (F&M Bank”). The loan accrued interest at prime plus 75 basis points (0.75%). The revolving line of credit matured on June 5, 2009. The line of credit was secured by all accounts receivable, inventory and equipment as well as a Deed of Trust covering the primary manufacturing and headquarters facility in Grapevine, Texas. The credit agreement underlying the revolving line of credit required compliance with certain covenants.

     On March 19, 2009, the Company obtained a new $2 million mortgage loan from F.F.F.C., Inc. which was used to repay the existing mortgage loan with the F&M Bank. Interest on the loan is 12% per annum and is payable monthly. The loan matures on March 20, 2011.

     On July 29, 2009, the Company entered into a receivables purchase agreement with Gulf Coast Bank and Trust Company (“GCBT”), pursuant to which the Company will sell certain of its accounts receivable to GCBT. GCBT will not purchase receivables from the Company if the total of all outstanding receivables held by it, at any time, exceeds $2,500,000. In addition, if a receivable is determined to be uncollectible or otherwise ineligible, GCBT may require the Company to repurchase the receivable.

     The receivables purchase agreement calls for the Company to pay a daily variable discount rate, which is the greater of prime plus 1.50% or 6.5% per annum, computed on the amount of outstanding receivables held by GCBT, for the period during which such receivables are outstanding. The Company will also pay a fixed discount percentage of 0.2% for each ten-day period during which receivables held by GCBT are outstanding.

Proceeds from the sales of receivables under the receivables purchase agreement were used to repay the Company’s existing $750,000 revolving line of credit with F&M Bank. The Company has granted to GCBT a security interest in certain assets to secure its obligations under the receivables purchase agreement. The receivables purchase agreement is terminable at any time by either the Company or GCBT upon the giving of notice. The receivables purchase agreement matures on July 29, 2010.

6. Operating Leases

     The Company leases several operating facilities, vehicles and equipment under non-cancelable operating leases. The Company accounts for operating leases on a straight line basis over the lease term. Future minimum lease payments consist of the following at December 31, 2008:

2009		$	57,296
2010			23,773
2011			10,861
2012			—
2013			—
Total		$	91,930

     Rent expense amounted to approximately $80,000, $136,000 and $150,000 in 2008, 2007 and 2006, respectively.

7. Income Taxes

     For financial reporting purposes, income before income taxes includes the following during the years ended December 31:

		2008				2007				2006
United States income (loss)		$	(3,064,985	)		$	(2,881,400	)		$	677,396
Foreign income (loss)			(288,745	)			131,657				167,828
		$	(3,353,730	)		$	(2,749,743	)		$	845,224

     Significant components of the provision for income taxes are as follows:

		2008				2007				2006
Current:
Federal		$	(1,589,218	)		$	(217,023	)		$	977
State			25,266				(105,590	)			139
Foreign			439				49,192				65,453
Total current			(1,563,513	)			(273,421	)			66,569
Deferred:
Federal			855,002				(529,628	)			182,726
State			10,279				(36,346	)			27,876
Foreign			44,713				(6,231	)			23,733
			909,994				(572,205	)			234,335
		$	(653,519	)		$	(845,626	)		$	300,904

     The differences between the federal statutory rate and the effective tax rate as a percentage of income before taxes are as follows:

		2008				2007				2006
Statutory income tax rate			(34	%)			(34	%)			34	%
State and foreign income taxes, net of federal benefit			(1	)			(1	)			3
Change in valuation allowance			13				11				—
Foreign earnings taxed at different rate			—				(4	)			—
Change in estimated state income tax rate			—				(4	)			—
Other permanent differences			2				1				(1	)
			(20	%)			(31	%)			36	%

     Differences between the application of accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities. Significant components of the Company’s deferred tax assets and liabilities at December 31 are as follows:

		2008				2007
Deferred tax liabilities:
Property, plant and equipment		$	4,933			$	—
Prepaid expenses and other			4,609				4,609
Total deferred tax liabilities			9,542				4,609
Deferred tax assets:
Property, plant and equipment			—				9,332
Operating loss carryforwards			839,244				703,651
Postretirement benefits			23,471				23,471
Pension costs			422,273				257,401
Allowance for doubtful accounts			52,573				73,194
Other assets			14,332				16,626
Accrued expenses			22,532				65,828
Other employee benefits			26,262				31,381
Inventory costs			56,005				564,342
Total deferred tax assets			1,456,692				1,745,226
Net			1,447,150				1,740,617
Valuation allowance			(714,677	)			(295,651	)
Net		$	732,473			$	1,444,966
Current deferred tax asset		$	180,430			$	987,538
Long-term deferred tax asset			552,043				457,428
		$	732,473			$	1,444,966

     As of December 31, 2008 and 2007, the Company’s gross deferred tax assets are reduced by a valuation allowance of $714,677 and $295,651, respectively, due to negative evidence, primarily continued operating losses, indicating that a valuation allowance is required under SFAS No. 109. The valuation allowance was created during 2007, principally due to the Company’s net operating loss incurred during 2007. Increases in 2008 are primarily due to net operating losses incurred during 2008 partially offset by the five year net operating loss carryback provisions included in Worker, Homeownership, and Business Assistance Act of 2009.

     As of December 31, 2008, the Company had U.S. net operating loss carryforwards for federal and state income tax purposes of approximately $2,047,000 and $5,419,000, respectively. These net operating losses are available to offset future federal and state income, if any, through 2028.

     The Company has not provided deferred taxes for taxes that could result from the remittance of undistributed earnings of the Company’s foreign subsidiary since it has generally been the Company’s intention to reinvest these earnings indefinitely. Undistributed earnings that could be subject to additional income taxes if remitted were approximately $658,000 at December 31, 2008.

     The Company files an income tax return in the U.S. federal jurisdiction and Texas. Tax returns for the years 2005 through 2008 remain open for examination in various tax jurisdictions in which it operates. The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, and at December 31, 2008, there were no unrecognized tax benefits. Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of December 31, 2008, no interest related to uncertain tax positions had been accrued.

8. Pension and Other Postretirement Benefits

U.S. Pension Plan

     The Company maintains a noncontributory defined benefit pension plan (the “U.S. Plan”) for its domestic employees, which was frozen effective July 15, 2005. Accordingly, no new benefits are being accrued under the U.S. Plan. Participant accounts are credited with interest at the federally mandated rates. Company contributions are based on computations by independent actuaries.

     The plan’s assets are invested in a balanced index fund (the “Fund”) where the assets were invested during 2006, 2007 and 2008. The principal investment objective of the Fund is to provide an incremental risk adjusted return compared to a portfolio invested 50% in stocks and 50% in bonds over a full market cycle. Under normal market conditions, the average asset allocation for the Fund is expected to be approximately 50% in stocks and 50% in bonds. This benchmark allocation may be adjusted by up to 20% based on economic or market conditions and liquidity needs. Therefore, the stock allocation may fluctuate from 30% to 70% of the total portfolio, with a corresponding bond allocation of from 70% to 30%. Fund reallocation may take place at any time.

Canadian Pension Plan

     Effective January 1, 2009, the Company converted its pension plan (the “Canadian Plan”) for its Canadian employees 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 Canadian Plan’s assets are invested in various pooled funds (the “Canadian Funds”) managed by a third party fund manager. The principal investment objective of the Canadian Funds is to provide an incremental risk adjusted return compared to a portfolio invested 50% in stocks and 50% in bonds over a full market cycle. Under normal market conditions, the average asset allocation for the Canadian Funds is expected to be approximately 50% in stocks and 50% in bonds. This benchmark allocation may be adjusted based on economic or market conditions and liquidity needs.

     In August 2006, the Pension Protection Act of 2006 was signed into law. The major provisions of the statute have taken effect January 1, 2008. Among other things, the statue is designed to ensure timely and adequate funding of pension plans by shortening the time period within which employers must fully fund pension benefits. Contributions to be made to the plan in 2009 are expected to approximate $49,000 for the U.S. plan and $61,000 for the Canadian plan. However, contributions for 2010 and beyond have not been quantified at this time.

     On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires the company to recognize the funded status of its pension plans in its balance sheets and recognize the changes in a plan’s funded status in accumulated other comprehensive income in the year in which the changes occur. The Company uses December 31, the last day of its fiscal year, as a measurement date for determining pension plan assets and obligations.

     The change in projected benefit obligation, change in plan assets and reconciliation of funded status for the plans were as follows:

		Pension Benefits
		U.S. Plan								Canadian Plan
		2008				2007				2008				2007
Change in projected benefit obligation
Projected benefit obligation at beginning of year		$	3,023,001			$	3,369,674			$	1,362,530			$	1,122,137
Service cost			21,300				29,610				33,704				31,627
Interest cost			193,552				191,828				62,688				60,727
Benefit payments			(485,490	)			(166,287	)			(84,403	)			(82,903	)
Administrative expenses			(13,808	)			(18,174	)			—				—
Actuarial (gain) loss			149,726				(383,650	)			(166,162	)			17,591
Currency translation adjustment			—				—				(240,057	)			213,351
Settlements			—				—				(61,460	)			—
Projected benefit obligation at end of year			2,888,281				3,023,001				906,840				1,362,530
Change in plan assets
Fair value of plan assets at beginning of year			2,608,288				2,639,553				1,184,543				927,607
Actual return on plan assets			(395,204	)			52,447				(76,661	)			(5,428	)
Benefit payments			(485,490	)			(166,287	)			(84,403	)			(82,903	)
Employer contribution			73,419				100,749				155,777				164,122
Administrative expenses			(13,808	)			(18,174	)			—				—
Currency translation adjustment			—				—				(232,974	)			181,145
Fair value of plan assets at end of year			1,787,205				2,608,288				946,282				1,184,543
Plan assets (less) greater than benefit obligation		$	(1,101,076	)		$	(414,713	)		$	39,442			$	(177,987	)

The net amounts recognized on the consolidated balance sheets were as follows:

		U.S. Plan								Canadian Plan
		2008				2007				2008				2007
Non-current assets		$	—			$	—			$	39,442			$	—
Current liabilities			—				—				—				(177,987	)
Non-current liabilities			(1,101,076	)			(414,713	)			—				—
Net amount recognized		$	(1,101,076	)		$	(414,713	)		$	39,442				(177,987	)

     Amounts in accumulated other comprehensive loss at year end, consist of:

		U.S. Plan								Canadian Plan
		2008				2007				2008				2007
Unrecognized net loss		$	823,177			$	202,150			$	163,333			$	290,733
		$	823,177			$	202,150			$	163,333			$	290,733

     The estimated net loss that will be amortized from accumulated other comprehensive income net periodic pension cost over the next fiscal year is $45,000 and $5,000 for the U.S. Plan and Canadian Plan, respectively.

     Net pension expense is included in selling, administrative and general expenses on the consolidated statements of operations. The components of net pension expense for the plans were as follows:

		U.S. Plan												Canadian Plan
		2008				2007				2006				2008				2007				2006
Components of net periodic benefit cost:
Service cost		$	21,300			$	29,610			$	30,487			$	33,704			$	31,627			$	29,198
Interest cost			193,552				191,828				184,377				62,688				60,727				57,954
Expected return on plan assets			(197,021	)			(197,588	)			(178,868	)			(79,682	)			(73,078	)			(68,980	)
Net actuarial loss			—				—				29,916				9,535				—				—
Amortization of prior service cost			—				9,384				—				—				3,275				3,087
Net periodic benefit cost		$	17,831			$	33,234			$	65,912			$	26,245			$	22,551			$	21,259

     Expected benefits to be paid by the plan during the next five years and in the aggregate for the five fiscal years thereafter, are as follows:

		U.S. Plan				Canadian Plan
2009		$	105,000			$	72,000
2010			104,000				310,000
2011			110,000				67,000
2012			136,000				65,000
2013			168,000				62,000
2014 through 2018			867,000				261,000