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: September 30, 2007


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

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

(817) 329-1600
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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	Smaller Reporting Company þ
	(Do not check if 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

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 September 22, 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, potential condemnation proceedings, 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, 2006 presented in the Company’s Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”) on September 4, 2007.

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

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


				(Restated)
	September 30,			December 31,
	2007 (Unaudited)			2006

Liabilities and stockholders’ equity
Current liabilities:
Line of credit	$	351,141			—
Current portion of long-term debt		84,665			152,192
Accounts payable		2,129,442			1,574,098
Commissions, salaries, wages and taxes		274,783			260,862
Other accrued expenses		255,077			420,354

Total current liabilities		3,095,108			2,407,506

Long-term liabilities:
Long-term debt		2,078,695			2,025,850
Pension, benefits and other long-term liabilities		700,073			782,004

		2,778,768			2,807,854

Total liabilities		5,873,876			5,215,360

Commitments and contingencies
Stockholders’ equity:
Common stock, $1.00 par value:
Authorized shares — 4,000,000
Issued shares — 1,741,516 in 2007 and 2006,
Outstanding shares — 1,549,516 in 2007 and 2006		1,741,516			1,741,516
Other capital		166,371			144,415
Retained earnings		9,189,302			9,922,571
Treasury stock at cost (192,000) shares		(2,112,000	)		(2,112,000	)
Accumulated other comprehensive loss		(180,763	)		(394,340	)

Total stockholders’ equity		8,804,426			9,302,162


Total liabilities and stockholders’ equity	$	14,678,302		$	14,517,522

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
				(Restated)
	2007			2006

Operating activities
Net (loss) income	$	(733,269	)	$	687,173
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		278,596			313,545
Provision for uncollectible accounts		74,000			78,000
Equity based compensation		21,956			—
Deferred income taxes		(263,562	)		301,485
Change in assets and liabilities:
Accounts receivable		(65,358	)		653,061
Inventories		(303,242	)		(408,023	)
Prepaid expenses		(23,232	)		(30,818	)
Accounts payable and accrued expenses		315,448			(734,018	)
Pension and other benefits		(70,994	)		(276,015	)
Income taxes		17,879			613,842

Net cash provided by (used in) operating activities		(751,778	)		1,198,232

Investing activities
Purchase of property, plant and equipment		(763,995	)		(73,745	)

Net cash used in investing activities		(763,995	)		(73,745	)

Financing activities
Long-term debt payments		(2,214,682	)		(102,449	)
Long-term debt borrowings		2,200,000			—
Borrowings under line of credit		351,141			—
Issuance of common stock		—			11,973

Net cash provided by (used in) financing activities		336,459			(90,476	)
Effect of exchange rate changes on cash		154,605			64,631

Net increase (decrease) in cash		(1,024,709	)		1,098,642
Cash and cash equivalents at beginning of period		2,508,224			1,278,015

Cash and cash equivalents at end of period	$	1,483,515		$	2,376,657


Supplemental cash flow information
Cash paid for:
Interest	$	143,495		$	137,754

Income taxes	$	11,410		$	—

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 nine-month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

The consolidated balance sheet at December 31, 2006 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, 2006.

On February 8, 2005, the Company announced that it was notified that its contract with the USPS for polycarbonate and aluminum cluster box units (“CBUs”) would not be renewed, and the contract expired on May 31, 2005. From May 31, 2005 through September 2007, the Company continued selling its aluminum CBU model (Model E) to the private market. 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 2006 and 2005, sales to the USPS accounted for 3.2% and 21.4%, respectively, of the Company’s net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market in 2006 and 2005 accounted for an additional 35.6% and 32.5% of the Company’s sales, respectively.

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. 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.

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. Summary of Significant Accounting Policies

Change in Accounting Method

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 Company believes this change is preferable as the FIFO method: better reflects the current value of inventories on the Consolidated Balance Sheet; provides uniformity across our 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. The adoption of the FIFO method did not have a material impact on the Company’s previously stated results of operations for the three and nine months ended September 30, 2006.

The effect of the change in accounting method on our previously reported consolidated balance sheet for the year ended December 31, 2006 was as follows:


	December 31, 2006
			As Adjusted
	As		for
	Originally		Accounting
	Reported		Change
Consolidated balance sheets
Inventories	$	3,340,409	$	3,387,729
Retained earnings		9,875,251		9,922,571

3. 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:


	September 30, 2007		December 31, 2006
Finished products	$	245,470	$	442,777
Work-in-process		1,141,863		1,243,362
Raw materials		2,315,677		1,701,590

Net inventories	$	3,703,010	$	3,387,729

4. Income Taxes

Provision for income taxes is based upon the estimated annual effective tax rate. 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 September 30, 2007, 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 September 30, 2007, no interest related to uncertain tax positions had been accrued.

5. 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 2006. Effective March 31, 2006, the Company issued 770 shares of common stock to non-employee directors and increased other capital by $2,965, representing compensation expense of $3,735. On June 30, 2006, the Company issued 900 common shares to non-employee directors increasing other capital by $3,600 representing compensation expense of $4,500. On September 30, 2006, the Company issued 840 common shares to non-employee directors increasing other capital by $2,898 representing compensation expense of $3,738. On September 6, 2007, the Company granted options for 36,000 shares to members of the management team and increased other capital by $21,956, representing compensation expense of $21,956.

6. 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.


	Nine Months Ended September 30,
	2007			2006

Net income (loss)	$	(733,269	)	$	687,173
Foreign currency translation adjustments		206,272			65,678
Minimum pension liability adjustments, net of tax effect of $4,874 in 2007 and $59,583 in 2006		7,307			85,059

Total comprehensive income	$	(519,690	)	$	837,910


	Three Months Ended September 30,
	2007			2006

Net income (loss)	$	(521,410	)	$	120,970
Foreign currency translation adjustments		78,402			7,216
Minimum pension liability adjustments, net of tax effect of $865 in 2007 and $20,139 in 2006		1,299			30,209

Total comprehensive income	$	(441,709	)	$	158,395

7. Pension Benefits

The following sets forth the components of net periodic employee benefit cost of the Company’s defined benefit pension plans for the nine and three months ended September 30, 2007 and 2006:


	Nine Months Ended September 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2007			2006			2007			2006

Service cost	$	22,500		$	22,865		$	22,981		$	21,899
Interest cost		144,000			138,283			44,124			43,466
Expected return on plan assets		(148,500	)		(134,151	)		(53,098	)		(51,735	)
Net actuarial loss		6,750			22,437			2,379			2,315

Net periodic benefit cost	$	24,750		$	49,434		$	16,386		$	15,945


	Three Months Ended September 30,
	Pension Benefits
	U.S. Plan						Canadian Plan
	2007			2006			2007			2006

Service cost	$	7,500		$	7,622		$	8,077		$	7,300
Interest cost		48,000			46,094			15,508			14,489
Expected return on plan assets		(49,500	)		(44,717	)		(18,662	)		(17,245	)
Net actuarial loss		2,250			7,479			836			771

Net periodic benefit cost	$	8,250		$	16,478		$	5,759		$	5,315

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, 2006.

8. 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:


	Nine Months Ended September 30,
	2007			2006

Numerator:
Net income (loss)	$	(733,269	)	$	687,173


Denominator:
Denominator for earnings per share (basic and diluted) – weighted average shares		1,549,516			1,546,965


Earnings (loss) per common share (basic and diluted):	$	(0.47	)	$	0.44


	Three Months Ended September 30,
	2007			2006

Numerator:
Net income (loss)	$	(521,410	)	$	120,970


Denominator:
Denominator for earnings per share (basic and diluted) – weighted average shares		1,549,516			1,547,816


Earnings (loss) per common share (basic and diluted):	$	(0.34	)	$	0.08

The Company had 64,000 stock options outstanding at September 30, 2007, which were not included in the common share computation for earnings (loss) per share, as the common stock equivalents were anti-dilutive.

9. Debt

As discussed in Notes 5 and 19 of the Company’s consolidated financial statements included in the 2006 Annual Report on Form 10-K, on September 4, 2007, the Company received a notice of default and reservation of rights letter from its lender regarding its bank notes as a result of the non-renewal of the Company’s CBU contract with the USPS. After discussions with its lender following the notice of the non-renewal of the USPS contract, the Company agreed to accelerate repayment of its bank notes and has repaid them in full.

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 existing 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.

10. Commitments and Contingencies

On April 25, 2008, the City of Grapevine, Texas (the “City”) notified the Company in writing of the City’s desire to acquire the real property that contains our manufacturing facility and corporate headquarters (the “Real Property”). Although the Company is not seeking to sell the Real Property, it would consider an offer that reflected the fair market value of the Real Property. On June 26, 2008, the City submitted a revised offer. The Company declined the City’s revised offer, but offered to negotiate a fair market value in mediation. The Company proposed that mediation would be the least costly and most expedient option for reaching a negotiated settlement.

On September 8, 2008, the City made a formal offer to purchase the Real Property and simultaneously notified the Company that, if the City and the Company were unable to reach an agreement regarding the City’s purchase of the Real Property, the City intended to initiate condemnation proceedings using the City’s power of eminent domain. The Company intends to vigorously assert all available defenses to the pending condemnation action. Under Texas law, the City must pay fair market value, for the Real Property, as determined by the courts, based on appraisals, as well as reimburse the Company for reasonable relocation expenses.

The Company and the City do not agree on the value of the Real Property. While it is too early to predict the outcome of this matter, the Company believes that if the courts were to determine the fair market value of the Real Property, it would exceed its recorded net book value as of June 30, 2008. It is possible; however, that a court determination could set a value for the Real Property that is materially lower than what the Company believes is its fair market value. If the City is successful in its condemnation of the Real Property, the financial position of the Company could be materially impacted. No adjustments have been recorded in the accompanying consolidated financial statements for these uncertainties.

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

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. If a tax position is more likely than not to be sustained upon examination, then an enterprise would be required to recognize in its financial statements the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company adopted FIN 48 on January 1, 2007 and the impact on the Company’s consolidated financial statements was immaterial.

In June 2006, the FASB ratified its consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is imposed concurrent with or subsequent to a revenue-producing transaction between a seller and a customer. For taxes within the scope of this issue that are significant in amount, the consensus requires the following disclosures: (i) the accounting policy elected for these taxes and (ii) the amount of the taxes reflected gross in the income statement on an interim and annual basis for all periods presented. The disclosure of those taxes can be done on an aggregate basis. The consensus is effective for interim and annual periods beginning after December 15, 2006, with earlier application permitted. There was no impact on the Company’s consolidated financial statements with respect to the adoption of EITF No. 06-3.

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 adoption of SFAS No. 157 on January 1, 2008 did not have a material effect on the financial statements.

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. The adoption of SFAS No. 159 on January 1, 2008 did not have a material effect on the 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 Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006

Overall Results and Outlook

Overall results in 2007 were negatively impacted by the USPS decertification of the Model E CBU. Consolidated net sales of the first nine months of 2007 reflect a decline of $2,922,807 to $16,370,409 when compared to net sales of $19,293,216 for the same period of 2006, representing a 15.1% decline. This decrease was attributable primarily to the USPS decision to decertify the Company’s Model E CBU in September 2007 as well as reduced volume of postal and non-postal lockers due to product development and supply chain disruption issues, which are discussed below in greater detail. Pre-tax operating results decreased to a pre-tax loss of $1,063,025 for the first nine months of 2007 compared to a pre-tax profit of $1,079,954 for the first nine months of 2006. After-tax operating results decreased to a net loss of $733,269 for the first nine months of 2007 compared to a net income of $687,173 for the first nine months of 2006. Net loss per share (basic and diluted) was $.47 per share for the first nine months of 2007, down from a net income per share (basic and diluted) of $.44 for the same period in 2006.

Non-Renewal of USPS Contract and Other Events

On February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (“USPS”) for polycarbonate and aluminum cluster box units (“CBUs”) would not be renewed, and the contract expired on May 31, 2005. During 2006 and 2005, sales to the USPS accounted for 3.2% and 21.4%, respectively, of the Company’s net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 35.6% and 32.5% of the Company’s sales in 2006 and 2005, respectively. From May 31, 2005 through September 8, 2007, the Company continued sales of its aluminum CBU model (Model E) to the private market.

Net Sales

Consolidated net sales for the nine months ended September 30, 2007 were $16,370,409, a decrease of $2,922,807, or 15.1%, compared to net sales of $19,293,216 for the same period of 2006. Sales of the Model E CBU decreased $1,156,574 to $5,705,207 for the first nine months of 2007 as compared to $6,861,781 for the same period of 2006 due to its decertification by

the USPS in September 2007. Sales of postal lockers, excluding the CBU, decreased $867,715 to $4,026,103 for the first nine months of 2007 from $4,893,818 for the same period of 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 USPS approval for a Horizontal 4c mailbox until the second half of 2007. Sales of non-postal lockers, for the nine months ended September 30, 2007 were $6,639,099, a decrease of $898,518 or 11.9%, compared to sales of $7,537,617, for the same period of 2006. The decrease is due to disruptions in the supply of certain lockers during the first nine months of 2007 as the Company transitioned from Signore to other contract manufacturers.


	Nine Months Ended September 30,				Percentage
	2007		2006		Increase/(Decrease)
Postal Lockers, excluding CBUs	$	4,026,103	$	4,893,818		(17.7	%)
Non-Postal Lockers		6,639,099		7,537,617		(11.9	%)

Total Non-CBU	$	10,665,202	$	12,431,435		(14.2	%)

CBUs		5,705,207		6,861,781		(16.9	%)

Total Net Sales	$	16,370,409	$	19,293,216		(15.1	%)

Cost of Products Sold

Cost of products sold for the nine months ended September 30, 2007 was $11,729,236, or 71.6% of net sales, compared to $12,652,235, or 65.6% of net sales for the same period of 2006, a decrease of $922,999, or 7.3%. The decrease in gross margin is primarily due to higher raw material prices as well as excess fixed overhead costs associated with lower sales volumes. The decreased cost of product is primarily attributable to the 15.1% decrease in sales between the nine month periods ended September 30, 2007 and 2006.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2007 were $5,550,790, or 33.9% of net sales, compared to $5,341,049, or 27.7% of net sales, for the same period of 2006 an increase of $209,741 or 3.9%. The increase in 2007 was primarily due to marketing expenses increasing approximately $244,000 for the nine month period ended September 30, 2007 as compared to the same period of 2006.

Interest Expense

Interest expense for the nine months ended September 30, 2007 was $146,585, a decrease of $6,692 or 4.8%, compared to interest expense of $139,893 for the same period of 2006.

Income Taxes

For the nine months ended September 30, 2007, the Company recorded an income tax benefit of $329,756 compared to an income tax expense of $392,781 for the same period of 2006. The Company’s effective tax rate on earnings was approximately 31% for the first nine months of 2007 and 36% in the first nine months of 2006. The lower effective tax rate in 2007 was primarily due to a change in the Company’s effective state and foreign income tax rates.

Results of Operations — the Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006

Overall Results and Outlook

Overall results in 2007 were negatively impacted by the USPS decertification of the Model E CBU. Consolidated net sales for the third quarter of 2007 reflect a decline in net sales of $990,121 to $5,498,562 when compared to net sales of $6,488,683 for the same period of 2006, representing a 15.3% decline. This decrease was attributable primarily to the USPS decision to decertify the Company’s Model E CBU in September 2007 as well as reduced volume of postal lockers due to product development issues, which are discussed below in greater detail. Pre-tax operating results decreased to a pre-tax loss of $754,602 for the third quarter of 2007 from a reported pre-tax profit of $181,071 for the third quarter of 2006. After-tax operating results decreased to a net loss of $521,410 for the third quarter of 2007 compared to a net profit of $120,970 for the third quarter of 2006. Net loss per share (basic and diluted) was $0.34 per share in the third quarter of 2007, down from a net income per share (basic and diluted) of $0.08 for the third quarter of 2006.

Net Sales

Consolidated net sales for the third quarter of 2007 were $5,498,562, a decrease of $990,121, or 15.3%, compared to net sales of $6,488,683 for the same period of 2006. Sales of the Model E CBU decreased $829,650 to $1,622,727 for the third quarter of 2007 as compared to $2,452,377 for the same period of 2007 due to its decertification by the USPS in September 2007. Sales of postal lockers, excluding the CBU, decreased $438,937 to $1,317,083 for the third quarter of 2007 from $1,756,020 for the same period of 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 USPS approval for a Horizontal 4c mailbox until the second half of 2007. Sales of non-postal lockers, for the third quarter of 2007 were $2,558,752, an increase of $278,466 or 12.2%, compared to sales of $2,280,286, for the same period of 2006. The reported increase in sales of non-postal lockers was primarily due to increased sales of the Company’s Mini-Check and laptop lockers.

Sales by general product group were as follows:


	Three Months Ended September 30,				Percentage
	2007		2006		Increase/(Decrease)
Postal Lockers, excluding CBUs	$	1,317,083	$	1,756,020		(25.0	%)
Non-Postal Lockers		2,558,752		2,280,286		12.2	%

Total Non-CBU	$	3,875,835	$	4,036,306		(4.0	%)

CBUs		1,622,727		2,452,377		(33.8	%)

Total Net Sales	$	5,498,562	$	6,488,683		(15.3	%)

Cost of Products Sold

Cost of products sold for the third quarter of 2007 was $4,301,230, or 78.2% of net sales, compared to $4,302,091, or 66.3% of net sales, for the same period of 2006, a decrease of $861, or 0.1%. The decrease in gross margin is primarily due to higher raw material prices as well as excess fixed overhead costs associated with lower sales volumes. The decreased cost of product is primarily attributable to the 15.3% decrease in sales between the nine month periods ended September 30, 2007 and 2006 offset by lower gross margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during the third quarter of 2007 totaled $1,903,094, or 34.6% of net sales, compared to $1,916,145, or 29.5% of net sales, during the same period of 2006, a decrease of $13,051, or 0.7%.

Interest Expense

Interest expense for the third quarter of 2007 was $49,969 compared to $45,722 for the same period of 2006.

Income Taxes

For the third quarter of 2007, the Company recorded an income tax benefit of $233,192 compared to an income tax expense of $60,101 for the same period of 2007. The Company’s effective tax rate on earnings was approximately 31% and 33% in the third quarter of 2007 and 2006, respectively. The lower effective tax rate in 2007 was primarily due to a change in the Company’s effective state and foreign income tax rates.

Liquidity and Sources of Capital

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


	As of September 30,		As of December 31,
	2007		2006
Current Ratio		3.2 to 1		4.3 to 1
Working Capital	$	6,800,672	$	7,954,349

The decrease in working capital of $1,153,677 relates primarily to the net loss for the first nine months of 2007 of $733,269.

During 2005 and 2006, the Company was in technical default of its long-term debt agreement with its then primary lender, which default rendered the entire $6,668,596 outstanding principal balance due upon demand. During 2005, the Company repaid $4,352,386 of the outstanding debt and in March 2007, 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. 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 revolving line of credit are both 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. Accordingly, the mortgage note balance outstanding at June 30, 2007 and 2006 is classified as to current and long-term under the respective agreement’s contractual scheduled payment terms.

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 10.6% of the Company’s aggregate net assets at September 30, 2007. 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 September 30, 2007. 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 September 30, 2007 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, 2006, which was filed late with the SEC on September 4, 2007 as a result of the previously disclosed restructuring plan approved after the loss of the Company’s contract with the USPS, a number of material weaknesses in the Company’s internal control over financial reporting were identified. These material weaknesses were identified in Item 9A of that Form 10-K. During the third quarter of 2005, the Company commenced the implementation of procedures to provide a more thorough and detailed review of financial information by centralizing and relocating many financial reporting functions and all administrative functions to the Company’s new headquarters in Grapevine, Texas. The Company also hired a corporate controller during the fourth quarter of 2006, who became the Company’s Chief Financial Officer in August 2007. There were no other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2007.

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 August 30, 2007 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:

	1)		The Company lacked adequate accounting personnel to oversee the financial accounting and reporting responsibilities of an SEC registrant and maintain internal control over financial reporting to produce financial statements in accordance with U.S. generally accepted accounting principles.

	2)		The Company’s independent registered public accounting firm proposed numerous material adjustments as a result of its audit procedures related to the following:

	•		Bank account reconciliations were not prepared in a timely manner and the Company’s management did not monitor the timeliness of the reconciliation process.

	•		Failure to routinely maintain the Company’s perpetual inventory system. In addition, Company inventory maintained offsite was not reconciled with the general ledger, except annually.

	•		Inadequate procedures in place to ensure that purchases or sale transactions are recorded in the appropriate accounting period.

	•		Reconciliations of subsidiary ledger systems for various other accounts were not reconciled to the general ledger in a timely manner.

	•		Failure to appropriately account for and disclose pension liabilities, which resulted in a restatement to the previously issued financial statements.

The Company has insufficient entity level controls, as defined by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), to ensure that the Company meets its disclosure and reporting obligations.

Management has endeavored to address the material weaknesses discussed above and is committed to effectively remediating known weaknesses. Although the Company’s remediation efforts with respect to the material weaknesses discussed above are currently on-going, the Company will not consider control weaknesses to be remediated until new internal controls over financial reporting are implemented and operational for a period of time and are tested, and management concludes that the new controls are operating effectively. However, management has addressed the following items:

	•		Hired a Chief Financial Officer.

	•		Implemented more thorough and detailed reviews of financial information.

	•		Developed a reporting package that includes interim financial statements, gross margin analysis, sales reports and material non-financial data by subsidiary.

	•		Implemented a prescribed time table for the prompt, regular reconciliations of bank accounts, with the bank reconciliations reviewed by management.

	•		The Company no longer maintains offsite inventory as of June 2006.

	•		Implementation of additional procedures to ensure that purchase or sale transactions are recorded in the appropriate accounting periods.

	•		Regularly update and reconcile the Company’s perpetual inventory records.

In addition, management is considering implementing entity level controls, such as: (i) a detailed policy and procedures manual; (ii) a strategic plan and business model; (iii) a budgeting/forecasting control activity; (iv) formalized and enhanced management reporting procedures, including reports to the audit committee; and (v) formal self-monitoring procedures.


				(Restated)
	September 30,			December 31,
	2007 (Unaudited)			2006

Assets
Current assets:
Cash and cash equivalents	$	1,483,515		$	2,508,224
Accounts receivable, less allowance for doubtful accounts of $285,000 in 2007 and $198,000 in 2006		2,932,937			2,902,079
Inventories, net		3,703,010			3,387,729
Prepaid expenses		169,257			143,481
Prepaid income taxes		625,855			578,653
Deferred income taxes		981,206			841,689

Total current assets		9,895,780			10,361,855

Property, plant and equipment:
Land		500,500			500,500
Buildings		3,494,421			3,430,162
Machinery and equipment		7,992,656			7,099,249

		11,987,577			11,029,911
Less allowance for depreciation		(7,422,918	)		(6,952,025	)

Property, plant and equipment, net		4,564,659			4,077,886

Deferred income taxes		217,863			77,781


Total assets	$	14,678,302		$	14,517,522


	Nine Months Ended September 30,
				(Restated)
	2007			2006

Net Sales	$	16,370,409		$	19,293,216

Cost of products sold		11,729,236			12,652,235

Gross profit		4,641,173			6,640,981

Selling, general and administrative expenses		5,550,790			5,341,049

Total operating income (loss)		(909,617	)		1,299,932

Other income (expense):
Interest income		42,094			18,986
Other income (expense) — net		(48,917	)		(99,071	)
Interest expense		(146,585	)		(139,893	)

Total other income (expense)		(153,408	)		(219,978	)

Income (loss) before income taxes		(1,063,025	)		1,079,954
Income tax benefit (expense)		329,756			(392,781	)


Net income (loss)	$	(733,269	)	$	687,173


Weighted average common shares:
Basic and diluted		1,549,516			1,548,656


Earnings (loss) per share of common stock:
Basic and diluted	$	(0.47	)	$	0.44


Dividends per share of common stock	$	0.00		$	0.00


	Three Months Ended September 30,
				(Restated)
	2007			2006

Net Sales	$	5,498,562		$	6,488,683

Cost of products sold		4,301,230			4,302,091

Gross profit		1,197,332			2,186,592

Selling, general and administrative expenses		1,903,094			1,916,145

Total operating income (loss)		(705,762	)		270,447

Other income (expense):
Interest income		11,493			8,602
Other income (expense) — net		(10,364	)		(52,256	)
Interest expense		(49,969	)		(45,722	)

Total other income (expense)		(48,840	)		(89,376	)

Income (loss) before income taxes		(754,602	)		181,071
Income tax benefit (expense)		233,192			(60,101	)


Net income (loss)	$	(521,410	)	$	120,970


Weighted average common shares:
Basic and diluted		1,549,516			1,548,656


Earnings (loss) per share of common stock:
Basic and diluted	$	(0.34	)	$	0.08


Dividends per share of common stock	$	0.00		$	0.00


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
September 23, 2008	By:	/s/ Allen D. Tilley
	Allen D. Tilley
	Chief Executive Officer


September 23, 2008	By:	/s/ Paul M. Zaidins
	Paul M. Zaidins
	President, Chief Operating Officer and Chief Financial 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 September 30, 2007 and December 31, 2006		4
Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 2007 and September 30, 2006		6
Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2007 and September 30, 2006		7
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2007 and September 30, 2006		8
Notes to Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		18
Item 4. Controls and Procedures		19

PART II — OTHER INFORMATION		21
Item 6. Exhibits		21

SIGNATURES		22
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certifications Pursuant to Section 906