e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: March 31, 2008


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _________ to _________

Commission File Number: 0-439

American Locker Group Incorporated

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		16-0338330 (I.R.S. Employer Identification No.)

815 South Main Street, Grapevine, Texas (Address of principal executive offices)		76051 (Zip code)

(817) 329-1600

(Registrant’s telephone number, including area code)

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

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
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

1,568,516 shares of common stock, par value $1.00, issued and outstanding as of August 14, 2008

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this Quarterly Report on Form 10-Q, the words “anticipates,” “plans,” “believes,” “estimates,” “intends,” “expects,” “projects,” “will” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company’s statements regarding business strategy, implementation of its restructuring plan, competition, new product development 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 — FINANCIAL INFORMATION

Item 1. Financial Statements.

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

The interim financial statements should be read in conjunction with the financial statements of American Locker Group Incorporated (the “Company”) and the notes thereto contained in the Company’s audited financial statements for the year ended December 31, 2007 presented in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”) on June 19, 2008.

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

American Locker Group Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)


	March 31,			December 31,
	2008 (Unaudited)			2007
Liabilities and stockholders’ equity
Current liabilities:
Line of credit	$	250,804		$	—
Current portion of long-term debt		150,003			96,530
Accounts payable		1,132,226			1,236,316
Commissions, salaries, wages and taxes		248,149			285,759
Other accrued expenses		555,434			509,098

Total current liabilities		2,336,616			2,127,703

Long-term liabilities:
Long-term debt		1,966,631			2,047,235
Pension, benefits and other long-term liabilities		414,796			482,943

		2,381,427			2,530,178

Total liabilities		4,718,043			4,657,881

Commitments and contingencies

Stockholders’ equity:
Common stock, $1.00 par value:
Authorized shares — 4,000,000
Issued shares — 1,760,516 in 2008 and 1,741,516 in 2007; Outstanding shares — 1,568,516 in 2008 and 1,549,516 in 2007		1,760,516			1,741,516
Other capital		218,324			184,988
Retained earnings		7,284,931			8,018,454
Treasury stock at cost, 192,000 shares		(2,112,000	)		(2,112,000	)
Accumulated other comprehensive loss		(136,063	)		(74,797	)

Total stockholders’ equity		7,015,708			7,758,161


Total liabilities and stockholders’ equity	$	11,733,751		$	12,416,042

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

American Locker Group Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)


	Three Months Ended March 31,
	2008			2007

Operating activities
Net loss	$	(733,523	)	$	(144,356	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		109,158			90,171
Loss on disposal of property, plant and equipment		(1,623	)		—
Provision for uncollectible accounts		(495	)		24,000
Equity based compensation		52,336			—
Deferred income taxes		18,585			(11,209	)
Changes in assets and liabilities:
Accounts receivable		15,184			4,695
Inventories		23,293			(654,695	)
Prepaid expenses		(15,558	)		(38,615	)
Accounts payable and accrued expenses		(33,190	)		85,714
Pension and other benefits		(72,834	)		(44,996	)
Income taxes		13,025			7,890

Net cash used in operating activities		(625,642	)		(681,401	)

Investing activities
Proceeds from sale of property, plant and equipment		8,000			—
Purchase of property, plant and equipment		(106,697	)		(72,742	)

Net cash used in investing activities		(98,697	)		(72,742	)

Financing activities
Long-term debt payments		(27,131	)		(2,184,035	)
Borrowings under line of credit		250,804			—
Long-term debt borrowings		—			2,200,000

Net cash provided by financing activities		223,673			15,965
Effect of exchange rate changes on cash		(48,513	)		11,158

Net increase (decrease) in cash		(549,179	)		(727,020	)
Cash and cash equivalents at beginning of period		1,561,951			2,508,224

Cash and cash equivalents at end of period	$	1,012,772		$	1,781,204


Supplemental cash flow information
Cash paid for:
Interest	$	40,348		$	47,376

Income taxes	$	—		$	2,350

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

American Locker Group Incorporated and Subsidiaries
Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of American Locker Group Incorporated (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of such condensed financial statements, have been included. Operating results for the three-month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008.

The consolidated balance sheet at December 31, 2007 has been derived from the Company’s audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company’s consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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. Sales of the current model polycarbonate and aluminum CBUs to the private market in 2007 and 2006 accounted for 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. 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 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 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. Inventories

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

Inventories consist of the following:


	March 31, 2008		December 31, 2007
Finished products	$	279,089	$	333,653
Work-in-process		1,245,002		898,620
Raw materials		1,508,436		1,828,068

Net inventories	$	3,032,527	$	3,060,341

On January 1, 2007, the Company changed the method of accounting for inventories from a combination of the use of FIFO and LIFO methods to the FIFO method. The change is preferable because the FIFO method better reflects the current value of inventories on the Consolidated Balance Sheet, provides uniformity across operations with the respect to the method of inventory accounting, and reduces complexity in accounting for inventories. The change in accounting method to the FIFO method was completed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154 “Accounting Changes and Error

Corrections.” The Company applied this change in accounting principal by retrospectively restating prior years’ financial statements.

3. Income Taxes

Provision for income taxes is based upon the estimated annual effective tax rate. The difference in the statutory rate and the effective rate is primarily due to a change in the valuation allowance of approximately $233,000. Effective January 1, 2007, the Company adopted FIN 48, including the provisions of FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No 48.”. At the adoption date of January 1, 2007, and at March 31, 2008, there were no material unrecognized tax liabilities or benefits. Interest and penalties related to uncertain tax positions will be recognized in income tax expense. As of March 31, 2008, no interest related to uncertain tax positions had been accrued.

4. Stockholders’ Equity

Changes in stockholders’ equity were due to changes in comprehensive income as well as the issuance of stock as compensation to non-employee directors in 2008. Effective March 27, 2008, the Company issued 19,000 shares of common stock to non-employee directors and increased other capital by $45,600 representing compensation expense of $64,600. In addition, the Company also recorded an adjustment to estimated stock options compensation expense resulting in a benefit of $12,264 related to the forfeiture of 24,000 stock options by former employees. This benefit was recorded as a decrease to other capital of $12,264.

5. Comprehensive Income (Loss)

The following table summarizes net income (loss) plus changes in accumulated other comprehensive loss, a component of stockholders’ equity in the consolidated statement of financial position.


	Three Months Ended March 31,
	2008			2007


Net loss	$	(733,523	)	$	(144,356	)
Foreign currency translation adjustments		(68,299	)		28,804
Minimum pension liability adjustments, net of tax effect of $4,689 in 2008 and $4,496 in 2007		7,033			6,737

Total comprehensive income	$	(794,789	)	$	(108,815	)

6. Pension Benefits

The following sets forth the components of net periodic employee benefit cost of the Company’s defined benefit pension plans for the three month periods ended March 31, 2008 and 2007, respectively:


	Three Months Ended March 31,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2008			2007			2008			2007

Service cost	$	5,250		$	7,500		$	8,890		$	7,214
Interest cost		48,500			48,000			16,535			13,851
Expected return on plan assets		(49,250	)		(49,500	)		(20,943	)		(16,668	)
Net actuarial loss		—			2,250			2,515			747
Amortization or prior service cost		—			—			—			—

Net periodic benefit cost	$	4,500		$	8,250		$	6,997		$	5,144

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

For additional information on the defined benefit pension plans, please refer to Note 8 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

7. Earnings Per Share

The Company reports earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The following table sets forth the computation of basic and diluted earnings per common share:


	Three Months Ended March 31,
	2008			2007

Numerator:
Net loss	$	(733,523	)	$	(144,356	)


Denominator:
Denominator for basic earnings per share — weighted average shares		1,550,351			1,549,516
Effect of Dilutive Securities:
Stock options		—			—


Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversion		1,550,351			1,549,516


Basic loss per common share:
Net loss	$	(0.47	)	$	(0.09	)


Diluted loss per common share:
Net loss	$	(0.47	)	$	(0.09	)

The Company had 40,000 stock options outstanding at March 31, 2008, which were not included in the common share computation for loss per share, as the common stock equivalents were anti-dilutive.

8. Debt

As discussed in Note 5 of the Company’s consolidated financial statements included in the 2007 Annual Report on Form 10-K, filed on June 19, 2008, the Company received a notice of default and reservation of rights letter from its previous lender regarding its bank notes as a result of the non-renewal of the Company’s CBU contract with the USPS.

On March 5, 2007, the Company entered into a new credit facility with The F&M Bank and Trust Company (“F&M”), which was used to repay the previous mortgage loan. The new credit facility consists of a $2,200,000 term loan and a $750,000 revolving line of credit. The loan bears interest at prime plus 75 basis points (0.75%). The revolving line of credit was renewed on March 5, 2008. The revolving line of credit matures on March 5, 2009 and the term loan matures on March 5, 2012. The term loan is payable in monthly installments of $22,493 in principal and accrued interest (subject to upward adjustment based upon the current interest rate in effect). The revolving line of credit is secured by all accounts receivable, inventory, and equipment. The term loan and the revolving line of credit are secured by a deed of trust covering the Company’s primary manufacturing and headquarters facility in Grapevine, Texas. The Company’s credit facility with F&M requires compliance with certain covenants.

On July 24, 2008, the Company received a waiver from F&M 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 financial statements for the first and second quarters of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

9. Commitments and Contingencies

In July 2001, the Company received a letter from the New York State Department of Environmental Conservation (the “NYSDEC”) advising the Company that it is a potentially responsible party (“PRP”) with respect to environmental contamination at and alleged migration from property located in Gowanda, New York which was sold by the Company to Gowanda Electronics Corporation prior to 1980. In March 2001, the NYSDEC issued a Record of Decision with respect to the Gowanda site in which it set forth a remedy, including continued operation of an existing extraction well and air stripper, installation of groundwater pumping wells and a collection trench, construction of a treatment system in a separate building on the site, installation of a reactive iron wall covering 250 linear feet, which is intended to intercept any contaminates, and implementation of an on-going monitoring system. The NYSDEC has estimated that its selected remediation plan will cost approximately $688,000 for initial construction and a total of $1,997,000 with respect to expected operation and maintenance expenses over a 30-year period after

completion of initial construction. The Company has not conceded to the NYSDEC that the Company is liable with respect to this matter and has not agreed with the NYSDEC that the remediation plan selected by NYSDEC is the most appropriate plan. This matter has not been litigated, and at the present time the Company has only been identified as a PRP. The Company also believes that other parties may have been identified by the NYSDEC as PRPs, and the allocation of financial responsibility of such parties has not been litigated. 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 Quarterly Report on Form 10-Q, the Company has been named as an additional defendant in approximately 165 cases pending in state court in Massachusetts. 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 20 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 100 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 May 9, 2008 is approximately 45 cases.

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

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

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

Effect of New Accounting Guidance

Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS 157”), 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 generally accepted accounting principles in the United States, and enhances disclosures about fair value measurements. In February 2008 the Financial Accounting Standards Board (“FASB”) issued Staff Position No. 157-2, which delays the effective date of SFAS 157 for all nonrecurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. The Company is evaluating the expected impact of SFAS 157 for non-financial assets and non-financial liabilities on its consolidated financial position and results of operations.

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, 2007, and it may be applied prospectively. Early adoption is permitted, provided the Company also elects to apply the provisions of SFAS 157. The Company adopted SFAS No. 159 as of January 1, 2008. Adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) changes the requirements for an acquiring entity’s recognition and measurement of the assets acquired and liabilities assumed in a business combination. This statement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that adoption of SFAS No. 141(R) may have on its financial statements.

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 is currently evaluating the impact that adoption of SFAS No. 160 may have on its financial statements.

In May 2008 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 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 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. It is only effective for nongovernmental entities; therefore, GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. The Company is currently evaluating the impact adoption of SFAS 162 may have on the consolidated financial statements.

Results of Operations — the Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007

Overall Results and Outlook

Consolidated net sales for the first three months of 2008 reflect a decline of $1,573,902 to $3,521,548 when compared to net sales of $5,095,450 for the same period of 2007, representing a 30.9% decline. This decrease was attributable primarily to the USPS decertification of the Model E CBU, which is discussed below. Net sales excluding CBUs for the first three months of 2008 reflect an increase of $391,459 to $3,513,471 when compared to net sales of $3,122,012 for the same period of 2007, representing a 12.5% increase. Pre-tax operating results decreased to a pre-tax loss of $746,742 for the first three months of 2008 from a pre-tax loss of $208,905 for the first three months of 2007. After-tax operating results decreased to a net loss of $733,523 for the first three months of 2008 compared to a net loss of $144,356 for the first three months of 2007. Net loss was $.47 per share (basic and diluted) for the first three months of 2008, down from a net loss of $.09 per share (basic and diluted) for the same period in 2007.

Non-Renewal of USPS Contract and Other Events

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 CBU version for only four more months terminating on September 8, 2007. Sales of the current model aluminum CBUs to the private market accounted for an additional 28.4% and 35.6% of the Company’s sales in 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, which plan includes reducing administrative expenses, adopting lean manufacturing processes and expanding the Company’s sales efforts and product offerings in its private postal and non-postal markets.

Net Sales

Consolidated net sales for the three months ended March 31, 2008 were $3,521,548, a decrease of $1,573,902, or 30.9%, compared to net sales of $5,095,450 for the same period of 2007. The reported decrease is due primarily to reduced volume of the model E CBU as a result of its decertification by the USPS. Net sales excluding CBUs for the first three months of 2008 reflect an increase of $391,459 to $3,513,471 when compared to net sales of $3,122,012 for the same period of 2007, representing a 12.5% increase. Sales of postal lockers were $1,227,070 for the three months ended March 31, 2008, a decrease of $122,620, or 9.1%, compared to sales of $1,349,690 for the same period of 2007 due primarily to the lower sales of the Company’s Horizontal 4b+ mailboxes. 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 and the Company is working to replace lost Horizontal 4b+ sales with the replacement Horizontal 4c. Sales of non-postal lockers for the three months ended March 31, 2008 were $2,286,401, an increase of $514,079, or 29%, compared to sales of $1,772,322 for the same period of 2007. The increase is due primarily to increased sales at the Company’s Canadian Locker subsidiary in the local currency coupled with favorable Canadian exchange rates. Additionally, non-postal locker sales increases were also due to increased sales of the Mini-Check and laptop locker sales.


	Three Months Ended March 31,				Percentage Increase/
	2008		2007		(Decrease)
Postal Lockers, excluding CBUs	$	1,227,070	$	1,349,690		(9.1	%)
Non-Postal Lockers		2,286,401		1,772,322		29	%

Total Non-CBU	$	3,513,471	$	3,122,012		12.5	%

CBUs		8,077		1,973,438		(99.6	%)

Total Net Sales	$	3,521,548	$	5,095,450		(30.9	%)

Cost of Products Sold

Cost of products sold for the three months ended March 31, 2008 was $2,701,882, or 76.7% of net sales, compared to $3,272,559, or 64.2% of net sales, for the same period of 2007, a decrease of $570,677, or 17.4%. The increase in the cost of sales as a percentage of sales was primarily due to the 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. Additionally, the Company recorded a provision for excess obsolete inventory of $42,351 for the three month period ended March 31, 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2008 were $1,529,765, or 43.4%, of net sales, compared to 1,970,330, or 38.7%, of net sales for the same period of 2007, a decrease of $440,565, or 22.4%. This decrease was due to consulting expenses decreasing approximately $117,000 for the three month period ended March 31, 2008, as compared to the same period in 2007. The consulting fees were expended in 2007 as part of the Company’s efforts to file the delinquent Form 10-Ks for the years 2005 and 2006. Freight expenses decreased approximately $96,000 for the three month period ended March 31, 2008, as compared to the same period in 2007, as a result of the decreased net sales. Marketing expenses decreased approximately $67,000 from 2007 to 2008.

Interest Expense

Interest expense for the three month period ended March 31, 2008 was $38,544, a decrease of $8,842, or 18.7%, compared to interest expense of $47,386 for the same period of 2007.

Income Taxes

For the three month period ended March 31, 2008, the Company recorded an income tax benefit of $13,219 compared to $64,549 for the same period of 2007. The Company’s effective tax rate on earnings was approximately 2% for the first three months of 2008 and 31% for the first three months of 2007. The effective tax rate for the first quarter of 2008 was lower than the U.S Federal statutory tax rate primarily due to a change is the valuation allowance of approximately $233,000 due to the Company’s inability to record a tax benefit for losses from its U.S. subsidiaries

Liquidity and Sources of Capital

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


	As of March 31,		As of December 31,
	2008		2007
Current Ratio		2.9 to 1		3.5 to 1
Working Capital	$	4,433,852	$	5,318,126

The decrease in working capital of $884,274 results primarily from the Company’s net loss of $733,523.

Prior to March 5, 2007, the Company was in technical default of its long-term debt agreement with its then primary lender, rendering the entire outstanding principal balance due upon demand. On March 5, 2007, the Company entered into a new long-term debt agreement with The F&M Bank and Trust Company. The new credit facility consists of a $2,200,000 term loan and a $750,000 revolving line of credit. The loan bears interest at prime plus 75 basis points (0.75%). The revolving line of credit was renewed on March 5, 2008 and matures on March 5, 2009 and the term loan matures on March 5, 2012. The term loan is payable in monthly installments of $22,493 in principal and accrued interest (subject to upward adjustment based upon the current interest rate in effect). The revolving line of credit is secured by all accounts receivable, inventory and equipment. The term loan is secured by a deed of trust covering the Company’s primary manufacturing and headquarters facility in Grapevine, Texas. The Company’s credit facility with F&M requires compliance with certain covenants.

As a result of securing the new credit facility in March 2007, the Company used the proceeds of the term loan to repay the then existing mortgage. On July 24, 2008, the Company received a waiver from F&M 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 financial statements for the first and second quarters of 2008. Additionally, the covenant requiring the maintenance of a certain debt service coverage ratio was waived through January 1, 2009.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Raw Materials

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

Foreign Currency

The Company’s Canadian operation subjects the Company to foreign currency risk, though it is not considered a significant risk since the Canadian operation’s net assets represented only 13.8% of the Company’s aggregate net assets as of March 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 providing for a $2,200,000 term loan, the proceeds of which were used to repay the then-outstanding mortgage balance, and a $750,000 revolving line of credit. These loans bear interest at the lender’s prime rate plus 0.75%.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal accounting officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of March 31, 2008. These disclosure controls and procedures are designed to provide reasonable assurance to the Company’s management and board of directors that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to its management, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, including

consideration of the existence of the material weaknesses discussed below, the principal executive officer and principal accounting officer of the Company have concluded that the Company’s disclosure controls and procedures as of March 31, 2008 were not effective, at the reasonable assurance level, to ensure that (a) material information relating to the Company is accumulated and made known to the Company’s management, including its principal executive officer and principal accounting officer, to allow timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In connection with the preparation of the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2007, which was filed late with the SEC on June 19, 2008. A number of material weaknesses were identified in Item 9A(T) of that Form 10-K.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Taking into account the communication dated June 19, 2008 by the Company’s independent registered public accounting firm to the Audit Committee of the Board of Directors, management has identified the following material weaknesses in the Company’s internal control over financial reporting:

Material weaknesses previously identified as of December 31, 2006 that continue to exist as of December 31, 2007:

•

Perpetual Inventory System — The Company’s 2006 Annual Report on Form 10-K reported a material weakness due to the Company’s failure to routinely maintain the Company’s perpetual inventory system. As a result of this failure, the Company’s independent registered public accounting firm proposed numerous material adjustments in the Company’s financial statements as of and for the year ended December 31, 2006. Although the Company’s independent registered public accounting firm did not propose any material adjustments in 2007 related to this weakness, the Company was required to record adjustments as part of their annual closing process to adjust the perpetual inventory to the amounts determined by the Company’s physical count. Effective controls were not maintained to ensure that the Company’s inventory systems completely and accurately processed and accounted for inventory movements on an interim basis within the Company’s manufacturing facilities and adjustments were necessary to adjust interim financial statements. If not remediated, it is reasonably possible that our consolidated financial statements will contain a material misstatement or that we will miss a filing deadline in the future.

•

Entity Level Controls — The Company’s 2006 Annual Report on Form 10-K identified a material weakness due to the Company’s insufficient entity level controls, as defined by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), to ensure that the Company meets it disclosure and reporting obligations. Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties without the oversight of the board of directors or audit committee that allowed for the creation, review, approval and processing of financial data and authorization for the preparation of consolidation schedules and resulting financial statements without independent review. Certain documents lacked physical documentation of management review and approval where such review and approval was required. Additionally, due to the dynamic and evolving nature of our business, the Company lacked sufficiently documented policies and procedures reflecting management’s expectations. While this control deficiency did not result in audit adjustments in 2007, if not remediated, it is reasonably possible that our consolidated financial statements will contain a material misstatement or that we will miss a filing deadline in the future.

Material weakness initially identified as of December 31, 2007:

•

Information Technology — The Company did not maintain effective controls over the segregation of duties and access to financial reporting systems. Specifically, key financial reporting systems were not appropriately configured to ensure that certain transactions were properly processed with segregated duties amongst personnel and to ensure that unauthorized individuals did not have access to add or change key financial data. Additionally, the Company lacked adequate personnel with relevant expertise to maintain effective controls over information technology. Although the Company did not find any instances of unauthorized transactions in fiscal 2007, it is reasonably possible that our consolidated financial statements will contain a material misstatement if this deficiency is not remediated.

•

Timeliness of Financial Reporting — The Company did not maintain adequate staffing levels throughout 2007 to rebuild its accounting function and file in a timely manner the large number of delinquent interim and annual reports that existed during that time. Additionally, the Company did not maintain effective written policies, procedures and documentation to ensure the timely filing of required interim and annual financial reports with the SEC. The Company relocated its headquarters from Jamestown, New York to Grapevine, Texas in mid-2005. As a result of this relocation, the Company experienced the turnover of its’ entire accounting department. The rebuilding of the accounting function has taken longer than anticipated due to the lack of sufficient written policies and procedures and inadequate staffing levels that existed during 2007 as noted above. As a consequence of the foregoing, the Company has been unable to file its required interim and annual reports with the SEC in a timely manner.

Based on management’s assessment, and because of the material weaknesses described above, we have concluded that our internal control over financial reporting was not effective as of December 31, 2007.

Changes in Internal Control over Financial Reporting

We have developed and are implementing remediation plans to address our material weaknesses. We have taken the following actions to improve our internal control over financial reporting:

Actions implemented or initiated in 2008 to address the material weaknesses described above that existed as of December 31, 2007:

•

Actions to strengthen controls over the Company’s perpetual inventory include: (i) appointing a Manager of Supply Chain with responsibility for day-to-day oversight of inventory control; (ii) reorganizing and restructuring the inventory control function; (iii) implementing new policies and procedures related to cycle counting, including performing root cause analysis of discrepancies; (iv) implementing new policies and procedures to ensure inventory movements are completely and accurately processed in a timely manner; and (v) detailed reviewing of bills of materials by personnel possessing relevant expertise to ensure the accuracy of information contained therein.

•

Actions to strengthen the Company’s entity level controls include: (i) reducing the scope of duties of key accounting and financial personnel so that the person creating and processing financial data is separate from the person performing the review and approval of the same financial data; (ii) requiring the physical sign-off of accounting and financial personnel on review and approval of documents where such review and approval is required; (iii) developing written documentation of policies and procedures to document management’s expectations; and (iv) requiring key employees to periodically certify their compliance with the Company’s code of conduct.

•

Actions to strengthen controls over the Company’s information technologies include: (i) the Company has replaced its information technology personnel with persons possessing relevant expertise to maintain control over information technology; (ii) information technology systems will be configured to ensure appropriate access controls; and (iii) key financial reporting systems will be configured to ensure unauthorized individuals do not have access to add or change key financial data.

•

Actions to strengthen controls over financial reporting to ensure the timely filing of required interim and annual financial reporting with the SEC include; (i) effective written policies and procedures to ensure the timely close of the financial reporting process are being developed; (ii) the change in accounting principles from LIFO to FIFO will eliminate the time required to calculate the LIFO reserve; (iii) the reduction of outsourced manufacturing activities will reduce the time and complexity of the procedures performed to ensure that purchase and sales transactions are recorded in the appropriate accounting period; and (iv) the filing of late interim and annual financial reports with the SEC will reduce time spent by accounting and finance personnel on these matters.


	March 31,		December 31,
	2008 (Unaudited)		2007

Assets
Current assets:
Cash and cash equivalents	$	1,012,772	$	1,561,951
Accounts receivable, less allowance for doubtful accounts of approximately $232,000 in 2008 and $233,000 in 2007		1,489,049		1,568,464
Inventories, net		3,032,527		3,060,341
Prepaid expenses		238,184		223,068
Prepaid income taxes		30,361		44,467
Deferred income taxes		967,575		987,538

Total current assets		6,770,468		7,445,829

Property, plant and equipment:
Land		500,500		500,500
Buildings		3,507,790		3,509,891
Machinery and equipment		8,084,060		8,045,859

		12,092,350		12,056,250
Less allowance for depreciation and amortization		7,589,572		7,543,465

		4,502,778		4,512,785

Deferred income taxes		460,505		457,428

		460,505		457,428

Total assets	$	11,733,751	$	12,416,042


Exhibit
Number		Description

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	AMERICAN LOCKER GROUP INCORPORATED
August 15, 2008	By:	/s/ Allen D. Tilley
		Allen D. Tilley
		Chief Executive Officer


August 15, 2008	By:	/s/ Paul M. Zaidins
		Paul M. Zaidins
		President, Chief Operating Officer and Chief Financial Officer

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and



Date: August15, 2008	By:	/s/ Allen D. Tilley
		Allen D. Tilley
		Chief Executive Officer

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	Page No.

FORWARD-LOOKING INFORMATION		3

PART I — FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Balance Sheets (Unaudited) as of March 31, 2008 and December 31, 2007		4
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2008 and March 31, 2007		6
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2008 and March 31, 2007		7
Notes to Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures About Market Risk		14
Item 4. Controls and Procedures		14

PART II — OTHER INFORMATION		17
Item 6. Exhibits		17

SIGNATURES		18

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably like to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: August 15, 2008	By:	/s/ Paul M. Zaidins
		Paul M. Zaidins
		President, Chief Operating Officer and Chief Financial Officer

	1)		the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	2)		the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.