UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2009

o		Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 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)

Securities registered under Section 12(b) of the Exchange Act:

Title of each class		Name of each exchange on which registered

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

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

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

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

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

     Indicate by check mark whether the registrant 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.

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

     The aggregate market value of the Common Stock held by non-affiliates was approximately $253,000 based on the $0.25 price at which the Common Stock was last sold on June 30, 2009, the last business day of the registrant’s most recently completed second quarter. Shares of Common Stock known by the Registrant to be beneficially owned by directors and officers of the Registrant and other persons known to the Registrant to have beneficial ownership of 5% or more of the outstanding Common Stock are not included in the computation. The Registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.

     As of March 30, 2010, 1,589,015 shares of Common Stock, $1.00 par value per share, were outstanding.

     The information required to be furnished pursuant to Part III of this Annual Report on Form 10-K will be set forth in, and is incorporated by reference to, the registrant’s Definitive Proxy Statement for the Annual Meeting of Stockholders (2009 Proxy Statement), which will be filed no later than 120 days after the end of the registrant’s 2009 fiscal year.

 

 

FORWARD-LOOKING INFORMATION

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

PART I

Item 1.		Business.

Overview

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

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

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

Selected products/service:

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

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

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

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

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

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

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

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

Selected end user types:		Amusement parks
		Water parks
		Apartment buildings
		Law enforcement
		Health clubs
		Ski resorts
		Colleges and universities
		Military
		Post offices
Selected customers:		Walt Disney World
		Sea World
		Vail Resorts, Inc.
		United States Department of Homeland Security
		Charleston County, South Carolina
		AT&T
		United States Postal Service
		The UPS Store

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

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

     A Cluster Box Unit (“CBU”) is a free standing, multi-tenant mailbox designed to be mounted on a pedestal for use outdoors. On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. Beginning in September 2007, the Company’s revenues and profitability were and continue to be adversely affected by this decertification. During 2009, 2008 and 2007, sales to the USPS accounted for 3.9%, 5.6%, and 3.7%, respectively, of the Company’s net sales. In addition, sales of the aluminum CBUs to the private market in 2009, 2008 and 2007 accounted for an additional 0.0%, 0.3%, and 28.4% of the Company’s sales, respectively.

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

     As a result of the decertification of the Model E CBU, the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU and the current economic environment, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes have included the adoption of lean manufacturing processes; reducing the number of employees, re-design of the Horizontal 4c mailbox to reduce manufacturing costs, negotiating lower costs with vendors, and in-sourcing the manufacturing of non-postal lockers. These changes will be augmented by an increased focus on selling value-added niche products (which have higher margins than the USPS licensed CBUs), improving the Company’s sales and distribution efforts and contract manufacturing projects. Contract manufacturing includes the manufacture of metal furniture, electrical junction boxes and other metal products for third party customers. Contract manufacturing generated approximately 12% of the Company’s sales in 2009. Revenue from contract manufacturing is volatile and should be expected to vary substantially from quarter to quarter.

     Edward Ruttenberg resigned from his positions as Chairman, Chief Executive Officer, Chief Operating Officer and Treasurer, effective January 31, 2008. Mr. Ruttenberg continued to serve as a member of Board of Directors until his resignation on March 31, 2009. In connection with Mr. Ruttenberg’s resignation, John E. Harris, a current member of the Company’s Board of Directors, was appointed as non-executive Chairman of the Board of Directors on January 11, 2008. Also on January 11, 2008, Allen D. Tilley, who is also a current member of the Company’s Board of Directors, was appointed as Chief Executive Officer of the Company, and Paul M. Zaidins, the Company’s Chief Financial Officer, was appointed as President and Chief Operating Officer of the Company. Mr. Zaidins continues to perform his duties as Chief Financial Officer and as President and Chief Operating Officer, oversees the Company’s day-to-day business operations.

Business Segment Financial Information

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

Competition

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

Raw Materials

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

     Price fluctuations of raw material and other components have become an increasing factor in the general economy, and the Company continues to seek ways to mitigate its impact. For example, the Company experienced a significant decreases in steel and aluminum prices in 2009 compared to 2008, the two primary raw materials utilized in the Company’s operations. However, prices for steel and aluminum significantly increased in 2007 and 2008. The cost per pound of aluminum based on the three month buyer contract peaked on July 11, 2008 at $1.52. By December 31, 2009, the cost per pound of aluminum was $1.02. The average cost per pound of aluminum, based on the three month buyer contract on the London Metals Exchange, was $0.77, $1.19, and $1.21 in 2009, 2008 and 2007, respectively, representing a decrease of 35% from 2008 to 2009 and a decrease of 1.6% from 2007 to 2008. To the extent permitted by competition, the Company passes increased costs on to its customers by increasing sales prices over time.

     The Company’s metal coin operated and electronic lockers were manufactured by contract manufacturers through the second quarter of 2008. Beginning in the second quarter of 2008, the Company’s wholly-owned subsidiary, Security Manufacturing Corporation (“SMC”), began manufacturing painted steel and stainless steel coin operated lockers. The Company’s aluminum mailboxes are also manufactured and sold by SMC.

Patents

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

Employees

     The Company and its subsidiaries actively employed 137 individuals on a full-time basis as of December 31, 2009, two of whom were based in Canada. The Company considers its relations with its employees to be satisfactory. None of the Company’s employees are represented by a union.

Dependence on Material Customer

     During 2009, 2008 and 2007, sales to one customer, the USPS, accounted for 3.9%, 5.6% and 3.7%, respectively, of net sales. In addition, sales of the Model E CBU to the private market accounted for an additional 0.0%, 0.3% and 28.4% of the Company’s sales in 2009, 2008 and 2007, respectively. See Overview in “Item 1. Business” for additional information on the decrease in sales in 2008 and 2009 related to the Model E CBU.

     The Company had one contract manufacturing customer that accounted for 12.5% of consolidated revenue in 2009. The Company did not have any customer that was responsible for greater than 10% of consolidated revenue in 2008 or 2007.

Geographic Areas

     The Company sells lockers in foreign countries including Canada, Chile, Mexico, Greece, India, and the United Kingdom. During 2009, 2008 and 2007, sales in foreign countries accounted for 17.6%, 19.8% and 13.2%, respectively of consolidated net sales.

Research and Development

     The Company engages in research and development activities relating to new and improved products. It expended $139,307, $199,553 and $309,038, in 2009, 2008 and 2007, respectively, for such activity in its continuing businesses.

Compliance with Environmental Laws and Regulations

     The Company’s facilities and operations are subject to various federal, state and local laws and regulations relating to environmental protection and human health and safety. Some of these laws and regulations may impose strict, joint and several liabilities on certain persons for the cost of investigation or remediation of contaminated properties. These persons may include former, current or future owners or operators of properties and persons who arranged for the disposal of hazardous substances. The Company’s owned and leased real property may give rise to such investigation, remediation and monitoring liabilities under applicable environmental laws. In addition, anyone disposing of hazardous substances on such sites must comply with applicable environmental laws. Based on the information available to it, the Company believes that, with respect to its currently owned and leased properties, it is in material compliance with applicable federal, state and local environmental laws and regulations. See “Item 3. Legal Proceedings” and Note 15 to the Company’s consolidated financial statements included under “Item 8. Financial Statements and Supplementary Data” for further discussion with respect to the settlement of certain environmental litigation.

Backlog and Seasonality

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

Available Information

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

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

Item 1A.		Risk Factors.

     The Company’s results from continuing operations and its financial position could be adversely affected in the future by known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control. Some of these factors are described in more detail in this Annual Report on Form 10-K and in the Company’s other filings with the SEC. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial may also impair its business operations. Should one or more of any of these risks or uncertainties materialize, the Company’s business, financial condition or results of operations could be materially adversely affected.

The Company has implemented a series of operational changes intended to reduce operating expenses. If the changes do not have the intended effects, the Company’s ability to remain in business may be adversely affected.

     As a result of the decertification of the Model E CBU and the USPS rejection of the Company’s application to manufacture the USPS-B-1118 CBU, the Company has implemented a series of operational changes for the purpose of streamlining operations and lowering costs. These changes include a reduction of administrative costs, the adoption of lean manufacturing processes, reducing the number of employees, re-design of the Horizontal 4c mailbox to reduce manufacturing costs, negotiating lower costs with vendors, and in-sourcing the manufacturing of non-postal lockers. These changes will be augmented by a shift in the Company’s business focus to selling value-added niche products (which have higher margins than the USPS-licensed CBUs) and improving the Company’s sales and distribution efforts. However, if these changes do not successfully reduce costs and/or increase revenues, the Company’s ability to remain in business would be adversely affected.

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

     Volatility in raw material and other prices has become an increasing factor in the general economy, and the Company continues to seek ways to mitigate its impact. For example, the Company experienced significant volatility in steel and aluminum prices from 2007 to 2009. To the extent permitted by competition, the Company seeks to mitigate the adverse impact of rising costs of raw materials through product price increases. However, the Company’s ability to implement price increases is dependent on market conditions, economic factors, raw material costs and availability, competitive factors, operating costs and other factors, some of which are beyond the Company’s control. Further, the benefits of any implemented price increases may be delayed due to manufacturing lead times and the terms of existing contracts. If the Company is not able to successfully mitigate the effects of rising raw materials costs, the Company’s results of operations, business and financial condition may be materially adversely affected.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     On May 8, 2007, the USPS notified the Company that, effective September 8, 2007, the USPS would decertify the Company’s Model E CBU. Sales to the private market of the Model E CBU accounted for 0.0%, 0.3%, and 28.4% of the Company’s sales in 2009, 2008, and 2007, respectively. On November 30, 2007, the Company announced that the USPS had rejected the Company’s application to manufacture the USPS-B-1118 CBU. In rejecting the Company’s application, the USPS cited weaknesses in the Company’s financial and inventory controls that existed in 2005 and 2006. Although the Company remedied most of these weaknesses during the 2007 fiscal year, the USPS noted remedies had not been in place long enough to be subjected to review as part of the Company’s annual audit. Please see Management’s Annual Report on Internal Control over Financial Reporting included in this Annual Report on Form 10-K under Item 9A(T). However, the USPS did advise the Company that it could resubmit its application within a reasonable period of time. Accordingly, the Company intends to evaluate the feasibility of reapplying to manufacture the USPS-B-1118 CBU at a later time. While the Company has shifted its business plan to increase its focus on its higher-margin niche products to offset the loss of revenues from the USPS, failure to obtain USPS approval to manufacture the USPS-B-1118 CBU may materially adversely affect the Company’s results of operations, business and financial condition in the future.

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

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

manufacture and successfully introduce new products, and a failure to do so or to obtain the necessary capital in order to do so would have a material adverse effect on the Company.

Item 1B. Unresolved Staff Comments.

     None.

Item 2. Properties.

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

				Approximate
				Floor Space
Location		Subsidiary		In Sq. Ft.				Use
Ellicottville, NY		American Locker Security Systems, Inc. Lock Shop and Service Center			12,800			Lock manufacturing, service and repair
Toronto, Ontario		Canadian Locker Company, Ltd.			1,000*			Sales, service and repair of lockers and locks
Grapevine, TX		Operated by Security Manufacturing Corporation			70,000*			Manufacturing and corporate headquarters (1)
TOTAL					83,800

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

Item 3. Legal Proceedings.

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

     Beginning in September 1998 and continuing through the date of filing of this Annual Report on Form 10-K, the Company has been named as an additional defendant in approximately 200 cases pending in state court in Massachusetts and one in the state of Washington. The plaintiffs in each case assert that a division of the Company manufactured and furnished components containing asbestos to a shipyard during the period from 1948 to 1972 and that injury resulted from exposure to such products. The assets of this division were sold by the Company in 1973. During the process of discovery in certain of these actions, documents from sources outside the Company have been produced which indicate that the Company appears to have been included in the chain of title for certain wall panels which contained asbestos and which were delivered to the Massachusetts shipyards. Defense of these cases has been assumed by the Company’s insurance carrier, subject to a reservation of rights. Settlement agreements have been entered in approximately 30 cases with funds authorized and provided by the Company’s insurance carrier. Further, over 125 cases have been terminated as to the Company without liability to the Company under Massachusetts procedural rules. Therefore, the balance of unresolved cases against the Company as of March 17, 2010, the most recent date information is available, is approximately 43 cases.

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

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

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

     None.

PART II

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

Market Prices and Dividends

     The Company’s common stock, par value $1.00 per share, is not currently listed on any exchange. The Company’s common stock currently is quoted on The Pink Sheets under the symbol “ALGI.PK”. The following table shows the range of the low and high sale prices and bid information, as applicable, for the Company’s common stock in each of the calendar quarters indicated. Such information reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

Market Price
Per Common Share

2009		High				Low
Quarter ended December 31, 2009		$	2.00			$	0.40
Quarter ended September 30, 2009			0.75				0.25
Quarter ended June 30, 2009			0.35				0.15
Quarter ended March 31, 2009			1.05				0.15

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

     The last reported sales price of the Company’s common stock as of December 31, 2009 was $1.60. The Company had 808 security holders of record as of that date.

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

Equity Compensation Plan Information

     The following table summarizes as of December 31, 2009, the shares of common stock authorized for issuance under our equity compensation plans:

										Number of securities
		Number of securities to be				Weighted-average				remaining available
		issued upon exercise of				exercise price of				for future issuance
		outstanding options,				outstanding options,				under equity
		warrants and rights				warrants and rights				compensation plans
Equity compensation plans approved by security holders(1)			12,000			$	4.95				37,000
Equity compensation plans not approved by security holders			—				—				—
Total			12,000			$	4.95				37,000

Item 6. Selected Financial Data.

     The following table sets forth selected historical financial data of the Company and its consolidated subsidiaries as of, and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. The historical selected financial information derived from the Company’s audited financial information may not be indicative of the Company’s future performance and should be read in conjunction with the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Item 8. Financial Statements and Supplementary Data,” and “Item 1. Description of Business.”

		For the Years Ended December 31,
		2009				2008				2007				2006				2005
Sales		$	12,515,433			$	14,129,807			$	20,242,803			$	25,065,090			$	32,303,689
Income (loss) before income taxes			(618,945	)			(3,353,730	)			(2,749,743	)			845,224				(9,512,121	)
Income tax (benefit)			(196,339	)			(653,519	)			(845,626	)			300,904				(1,272,006	)
Net income (loss)			(422,606	)			(2,700,211	)			(1,904,117	)			544,320				(8,240,115	)
Earnings (loss) per share—basic			(0.27	)			(1.73	)			(1.23	)			0.35				(5.35	)
Earnings (loss) per share—diluted			(0.27	)			(1.73	)			(1.23	)			0.35				(5.35	)
Weighted average common shares outstanding—basic			1,572,511				1,564,039				1,549,516				1,547,392				1,540,179
Weighted average common shares outstanding—diluted			1,572,511				1,564,039				1,549,516				1,547,392				1,540,179
Dividends declared			0.00				0.00				0.00				0.00				0.00
Interest expense			255,973				159,380				195,280				184,257				333,389
Depreciation and amortization expense			337,507				416,664				386,430				396,304				562,078
Number of employees (1)			137				117				126				147				132
Consolidated Balance Sheet Total assets			8,894,726				10,810,038				12,416,042				14,517,522				15,241,854
Long-term debt, including current portion			0				2,004,315				2,143,765				2,178,042				2,316,210
Stockholders’ equity			4,265,782				4,627,185				7,758,161				9,302,162				8,614,629
Stockholders’ equity per share (2).			2.68				2.94				5.01				6.00				5.57
Common shares outstanding at year-end			1,589,015				1,571,849				1,549,516				1,549,516				1,546,146
Expenditures for property, plant and equipment			97,118				334,902				818,646				98,591				475,775

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

     The Company recognizes revenue at the point of passage of title, which occurs at the time of shipment to the customer. The Company derived approximately 25.0% of its revenue in 2009 from sales to distributors. These distributors do not have a right to return unsold products; however, returns may be permitted in specific situations. Historically, returns have not had a significant impact on the Company’s results of operations.

Allowance for Doubtful Accounts

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

Inventories

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

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

Property, Plant and Equipment

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

     In accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment, long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss using discounted cash flows.

Pension Assumptions

     The Company maintains a defined benefit plan covering its U.S. employees and a separate defined contribution plan covering its Canadian employees. The accounting for the plans is based in part on certain assumptions that are uncertain and that could have a

material impact on the financial statements if different reasonable assumptions were used. The assumptions for return on assets reflect the rates of earnings expected on funds invested or to be invested to provide for benefits included in the projected benefit obligation. The assumed rates of return of 7.5% and 7.0% used in 2009 for the U.S. and Canadian plans, respectively, were determined based on a forecasted rate of return for a portfolio invested 50% in equities and 50% in bonds. In addition to the assumptions related to the expected return on assets, and discount rate were also made. The discount rates used in determining the 2009 pension costs were 6.0% and 6.75% for the U.S. and Canadian plans, respectively. Consistent with prior years, for both plans the Company uses a discount rate that approximates the average AA corporate bond rate.

     Effective July 15, 2005, the Company froze the accrual of any additional benefits under the U.S. plan. Effective January 1, 2009, the Company converted the Canadian plan from a defined benefit plan to a defined contribution plan. The conversion of the Canadian plan has the effect of freezing the accrual of future defined benefits under the plan. Under the defined contribution plan, the Company will contribute 3% of employee compensation plus 50% of employee elective contributions up to a maximum contribution of 5% of employee compensation.

Deferred Income Tax Assets

     The Company had net deferred tax assets of approximately $929,000 at December 31, 2009. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The ultimate realization of the deferred income tax assets are primarily dependent on generating sufficient future taxable income or being able to carryback any taxable losses and claim refunds against previously paid income taxes. The Company has historically had taxable income and believes its net deferred income tax assets at December 31, 2009, are realizable. If future operating results continue to generate taxable losses, it may be necessary to increase the valuation allowances to reduce the amount of the deferred income tax assets to realizable value.

Results of Operations—Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Overall Results and Outlook

     The financial market and economic turmoil and related disruption of the credit markets has caused a significant slowdown in new construction of multifamily and commercial buildings during the second half of 2008 and continuing through 2009. The economic crisis has also negatively impacted our customers in the travel and recreation industries. New construction in these markets is a key driver of revenue for the Company. Consolidated net sales for the twelve months ended December 31, 2009 decreased $1,614,374 to $12,515,433 when compared to net sales of $14,129,807 for the same period of 2008, representing an 11.4% decline. This decrease was attributable primarily to the negative effects of the credit crisis as described above. Pre-tax operating results improved to a pre-tax loss of $618,945 for the twelve months ended December 31, 2009 from a reported pre-tax loss of $3,353,730 for the same period of 2008. After tax operating results improved to a net loss of $422,606 for the twelve months ended December 31, 2009 compared to a net loss of $2,700,211 for the first twelve months ended December 31, 2008. Net loss per share (basic and diluted) was $0.27 for the year ended December 31, 2009, an improvement from a net loss per share (basic and diluted) of $1.73 for the same period in 2008.

Net Sales

     Consolidated net sales in 2009 were $12,515,433, a decrease of $1,614,374, or 11.4% from net sales of $14,129,807 in 2008. Sales of non-postal lockers for the year ended December 31, 2009 were $7,044,760, a decrease of $1,785,545, or 20.2%, compared to sales of $8,830,305 for the same period of 2008. The non-postal locker decrease is primarily attributable to lower revenue from the Company’s Canada Locker Company, Ltd. (“Canadian Locker”) subsidiary. Canadian Locker revenue for the twelve months ended December 31, 2009 was approximately $1.1 million less than revenue during the same period in 2008. The remaining decrease in non-postal locker sales is attributable to lower revenue from replacement keys, locks and parts which were approximately $600,000 less in 2009 than in 2008. Sales of postal lockers were $3,923,610 for the twelve months ended December 31, 2009, a decrease of $1,375,892, or 26.0%, compared to sales of $5,299,502 for the same period of 2008. Lower postal locker sales were due primarily to reduced new construction activity as a result of the economic crisis described above. Decreases in postal and non-postal locker sales were partially offset by the Company’s entry into contract manufacturing in 2009. The Company generated $1,547,063 in revenue from contract manufacturing in 2009 as compared to $0 in 2008. Contract manufacturing includes the manufacture of metal furniture, electrical junction boxes and other metal products for third party customers. Revenue from contract manufacturing is volatile and should be expected to vary substantially from quarter to quarter.

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

										Percentage
		2009				2008				Increase (Decrease)
Postal Lockers		$	3,923,610			$	5,299,502				(26.0	)%
Contract Manufacturing			1,547,063				—				—
Non-Postal Lockers			7,044,760				8,830,305				(20.2	)%
Total		$	12,515,433			$	14,129,807				(11.4	)%

Gross Margin

     Consolidated gross margin as a percentage of sales was 31.3% in 2009 as compared to 22.5% in 2008. The increase in gross margin as a percentage of sales was primarily due to reduced overhead expenses as a result of the Company’s restructuring plan as well as reduced raw material costs. The transition to the lower cost second generation Horizontal 4c mailbox also contributed to the decrease in cost of sales as a percentage of sales.

Selling, Administrative and General Expenses

     Selling, administrative and general expenses in 2009 totaled $3,873,415, a decrease of $2,155,315 compared to $6,028,730 in 2008. This decrease was primarily due to reduced personnel costs related to the Company’s restructuring plan. Freight expenses decreased approximately $370,000 for the twelve month period ended December 31, 2009, as compared to the same period in 2008, as a result of the decreased net sales coupled with lower negotiated freight rates.

Restructuring Costs

     As a result of the economic crisis, the Company implemented a restructuring in January 2009 to rationalize its cost structure in an uncertain economic environment. The restructuring included the elimination of approximately 50 permanent and temporary positions as well as an across-the-board 10% reduction in wages and a 15% reduction in the base fee paid to members of the Company’s Board of Directors. These reductions representing approximately 40% of the Company’s workforce, resulted in severance and payroll tax charges during the twelve months ended December 31, 2009 of approximately $296,000. These payments are expected to be made over the next twelve months. Additionally, the Company will relocate its Ellicottville, New York operations to be co-located with its Grapevine, Texas operations in the first half of 2011. The restructuring will result in approximately $1,400,000 in annual savings. To implement the restructuring plan, management anticipates incurring aggregate impairment charges and costs of $396,000. Refer to Note 17 to the Company’s consolidated financial statements for more detail related to restructure costs incurred during 2009.

Pension Settlement Charge

     As a consequence of the Company’s staff reductions at its Canadian subsidiary, the Company recorded a non-cash pension settlement charge of approximately $133,000 during the twelve months ended December 31, 2009. In addition, as lump sums paid exceeded the sum of service cost and interest cost in the US plan the Company was required to record a non cash pension settlement charge of approximately $63,000 for the twelve months ended Dec 31, 2009. Refer to Note 9 to the Company’s consolidated financial statements for detail related to pension benefit costs incurred during 2009.

Loss on Sales of Property, Plant and Equipment

     Loss on sales of property, plant and equipment for the year ended December 31, 2009 was $14,299. The loss is primarily attributable to the loss the Company recorded on the sale of its property in Grapevine, Texas. Refer to Note 3, “Sale of Property” to the Company’s consolidated financial statements for detail related to the sale of property.

Other Income and Expense—Net

     Other income, net in 2009 totaled $89,982, an increase of $155,754 compared to other expense in excess of other income of $65,772 in 2008.

Interest Expense

     Interest expense in 2009 totaled $255,973, an increase of $96,593 compared to $159,380 in 2008. The increase is due to higher interest rates on the F.F.F.C., Inc. mortgage and the higher interest rate on the Gulf Coast Bank & Trust Company receivables purchase agreement as well as loan origination costs in 2009 as compared to the interest rate on the F&M Bank & Trust Co. loans in 2008. See “Financing Activities” below.

Income Taxes

     In 2009, the Company recorded an income tax benefit of $196,339 compared to income tax benefit of $653,519 in 2008. The effective tax rate determined as the percentage of the tax benefit or expense to the pre-tax loss was a 31.7% benefit in 2009 compared to a 19.5% benefit in 2008.

Non-GAAP Financial Measure — Adjusted EBITDA

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

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

	•		Does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
	•		Does not reflect changes in, or cash requirements for, our working capital needs;
	•		Does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
	•		Excludes tax payments that represent a reduction in available cash;
	•		Excludes non-cash equity based compensation;
	•		Excludes one-time restructuring costs and pension settlement costs;
	•		Excludes one-time expenses and equity compensation; and
	•		Does not reflect any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.

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

		Twelve Months Ended December 31,
		2009				2008
Net income (loss)			(422,606	)			(2,700,211	)
Income tax benefit			(196,339	)			(653,519	)
Interest expense			255,973				159,380
Depreciation and amortization expense			337,507				416,664
Loss on sale of equipment			14,299				138
Equity based compensation			26,171				71,186
Asset impairment			0				275,685
Restructuring charge			296,118				0
Pension settlement charge			186,069				0
Adjusted EBITDA			497,192				(2,430,677	)
Adjusted EBITDA as a percentage of revenues			4.0	%			-17.2	%

Results of Operations—Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Overall Results and Outlook

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

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 Model E CBU version for only four more months terminating on September 8, 2007. Sales of the current Model E CBUs to the private market accounted for 0.3%, 28.4% and 35.6% of the Company’s sales in 2008, 2007 and 2006, respectively. The Company continued to sell existing inventories of the Model E CBU through September 2007. After September 2007, the Company’s revenues have been adversely affected by this decertification.

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

Net Sales

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

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

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

Gross Margin

     Consolidated gross margin as a percentage of sales was 22.5% in 2008 as compared to 24.3% in 2007. The decrease in the gross margin as a percentage of sales was due to higher material costs in the new Horizontal 4c as compared to the Horizontal 4b+ that it replaced. Additionally, gross margin as a percentage of sales were lower due to underutilization of the Company’s Grapevine, Texas manufacturing plant as a result of the Model E CBU’s decertification. This resulted in fixed overhead being under-absorbed and increasing period costs. The Company recorded a provision for excess and obsolete inventory of approximately $124,000 in 2008.

Selling, Administrative and General Expenses

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

Asset Impairment

     Due to inadequate profitability of the current Horizontal 4c design, management decided during the second quarter of 2008 to redesign the Horizontal 4c to reduce manufacturing costs. Management determined that the decision to redesign the Horizontal 4c impaired the Company’s investment in tooling and inventory related to the then current Horizontal 4c design. Therefore, the Company, in accordance with the provisions of ASC 360, Property, Plant and Equipment recorded impairment charges totaling $275,685 in 2008.

Other Income and Expense—Net

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

Interest Expense

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

Income Taxes

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

Liquidity and Sources of Capital

Cash Flows Summary

		Year ended December 31,
		2009				2008				2007
Net cash (used in) provided by:
Operating activities		$	(70,463	)		$	(1,488,884	)		$	(294,669	)
Investing activities			2,649,882				(310,200	)			(818,646	)
Financing activities			(2,328,350	)			613,173				(34,277	)
Effect of exchange rate changes on cash			(4,301	)			(96,056	)			201,319
Increase (Decrease) in cash and cash equivalents		$	246,768			$	(1,281,967	)		$	(946,273	)

Operating Activities

     In 2009, net cash used in operating activities was $70,463 compared with net cash used in operating activities of $1,488,884 in 2008. The change was due primarily to the decreased net loss of $564,016 in 2009 partially offset by an increase in income taxes receivable of $197,581, an increase in pension benefits of $135,126, and depreciation of $337,507 compared with a net loss of $2,700,212 in 2008.

     In 2008, the Company used net cash in operating activities of $1,488,884 compared with net cash used in operating activities of $294,669 in 2007. The change was due primarily to the net loss of $2,700,212 in 2008 partially offset by an increase in income taxes receivable of $1,561,991compared with a net loss of $1,904,117 in 2007.

Investing Activities

     Net cash provided by investing activities was $2,649,882 in 2009 compared with net cash used in investing activities of $310,200 in 2008. The increase was due to the sale of the Company’s facility in Grapevine, Texas which resulted in proceeds of $2,747,000 in 2009.

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

Financing Activities

     Net cash used in financing activities was $2,328,350 in 2009 compared with net cash provided by financing activities of $613,173 in 2008. The change is due to repayment of the Company’s borrowings of $757,081 under its Line of Credit (defined below) and the repayment of the Company’s long term debt.

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

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

     On March 19, 2009, the Company obtained a new $2 million mortgage loan from F.F.F.C., Inc. which was used to repay the existing Mortgage Loan with the F&M Bank. Interest on the loan was 12% per annum and was payable monthly. The loan matured on March 20, 2011. This loan has been prepaid with the proceeds of the sale of the Grapevine, Texas facility discussed below.

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

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

     Proceeds from the sales of receivables under the Receivables Agreement were used to repay the Line of Credit with the F&M Bank. The Company has granted to GCBT a security interest in certain assets to secure its obligations under the Receivables Agreement. The Agreement is terminable at any time by either the Company or GCBT upon the giving of notice. The Receivables Agreement expires July 29, 2010.

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

Effect of Exchange Rate Changes on Cash

     Net cash used by the effect of exchange rate changes on cash was $4,301 in 2009 as compared to net cash used of $96,055 in 2008. The change was primarily due to the increase in value of the Canadian Dollar (“CAD”) as compared to the United States Dollar (“USD”), which caused an increase in the value of the Company’s Canadian operation’s net assets. The CAD to USD exchange rate increased 16.5% from $0.8183 to $0.9532 between December 31, 2008 and 2009.

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

Cash and Cash Equivalents

     On December 31, 2009, the Company had cash and cash equivalents of $526,752 compared with $279,984 on December 31, 2008. The change was due primarily to the net proceeds from the sale of the Company’s headquarters and primary manufacturing facility after repayment of the Company’s mortgage loan from F.F.F.C., Inc.

Liquidity

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

		As of December 31,
		2009				2008
Current Ratio		2.1 to 1				1.9 to 1
Working Capital		$	3,757,669			$	2,802,308

     The Company’s primary sources of liquidity include available cash and cash equivalents and borrowing under the Receivables Agreement.

     Expected uses of cash in fiscal 2010 include funds required to support the Company’s operating activities, capital expenditures, relocation of the Company’s primary manufacturing facility and contributions to the Company’s defined benefit pension plans. The Company expects capital expenditures in 2010 to be higher than in 2009.

     The Company has taken steps to enhance the Company’s liquidity position with the new Receivables Agreement which expands its ability to leverage accounts receivable. The Company’s plans to manage the Company’s liquidity position in 2010 include maintaining an intense focus on controlling expenses, reducing capital expenditures, continuing the Company’s implementation of lean manufacturing processes and reducing inventory levels by increasing sales and using excess capacity by manufacturing products for outside parties.

     The Company has considered the impact of the financial outlook on the Company’s liquidity and has performed an analysis of the key assumptions in its forecast. Based upon these analyses and evaluations, the Company expects that its anticipated sources of liquidity will be sufficient to meet its obligations without disposition of assets outside of the ordinary course of business or significant revisions of the Company’s planned operations through 2010.

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

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

Off-Balance Sheet Arrangements

     The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Market Risks

Raw Materials

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

Foreign Currency

     The Company’s Canadian operation subjects the Company to foreign currency risk, though it is not considered a significant risk, since the Canadian operation’s net assets represent only 13.9% of the Company’s aggregate net assets at December 31, 2009. Presently, management does not hedge its foreign currency risk.

Effect of New Accounting Guidance

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“US GAAP”) -a replacement of FASB Statement No. 162” (“SFAS 168”) which was primarily codified into Topic 105 in the ASC. The FASB Accounting Standards Codification is intended to be the source of authoritative U.S. GAAP and reporting standards as issued by the Financial Accounting Standards Board. Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics. This statement is effective beginning with the quarter ended September 30, 2009. All references to GAAP in the consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP; therefore, it does not have an impact on the Company’s consolidation financial statements.

     In June 2009, the FASB issued SFAS No. 166, (ASC Topic 860) “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). The provisions of SFAS 166, in part, amend the derecognition guidance in FASB Statement No. 140, eliminate the exemption from consolidation for qualifying special-purpose entities and require additional disclosures. SFAS 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company does not expect the provisions of SFAS 166 to have a material effect on the financial position, results of operations or cash flows of the Company.

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

     The information required is reported under “Market Risks” heading under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
American Locker Group Incorporated

We have audited the accompanying consolidated balance sheets of American Locker Group Incorporated and Subsidiaries (the Company) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period then ended. Our audits also included the financial statement schedule listed in the index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the consolidated financial position of American Locker Group Incorporated and Subsidiaries as of December 31, 2009 and 2008 and the consolidated results of their operations and cash flows for each of the three years in the period then ended in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Travis Wolff, LLP (also known as Travis, Wolff & Company, L.L.P.)

Dallas, Texas
March 31, 2010

American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets

		December 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	526,752			$	279,984
Accounts receivable, less allowance for doubtful accounts of $216,000 in 2009 and $180,000 in 2008			2,319,440				1,315,536
Inventories, net			2,378,017				2,396,185
Prepaid expenses			95,489				212,867
Income tax receivable			1,409,696				1,599,892
Deferred income taxes			416,713				180,430
Total current assets			7,146,107				5,984,894
Property, plant and equipment:
Land			500				500,500
Buildings and leasehold improvements			394,739				3,503,515
Machinery and equipment			7,907,732				7,756,607
			8,302,971				11,760,622
Less allowance for depreciation and amortization			(7,066,629	)			(7,526,963	)
			1,236,342				4,233,659
Prepaid pension			—				39,442
Deferred income taxes			512,277				552,043
Total assets		$	8,894,726			$	10,810,038

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

American Locker Group Incorporated and Subsidiaries

Consolidated Balance Sheets (continued)

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Operations

		Year ended December 31,
		2009				2008				2007
Net sales		$	12,515,433			$	14,129,807			$	20,242,803
Cost of products sold			8,598,486				10,954,020				15,321,106
Gross profit			3,916,947				3,175,787				4,921,697
Selling, administrative and general expenses			3,873,415				6,028,730				7,464,087
Restructuring charge			296,118				—				—
Pension settlement charge			186,069				—				—
Asset impairment			—				275,685				—
Total selling, administrative and general			4,355,602				6,304,415				7,464,087
Total operating loss			(438,655	)			(3,128,628	)			(2,542,390	)
Interest income			36				10,891				49,870
Loss on sale of property, plant and equipment			(14,299	)			(138	)			—
Other income (expense)—net			89,946				(76,475	)			(61,943	)
Interest expense			(255,973	)			(159,380	)			(195,280	)
Loss before income taxes			(618,945	)			(3,353,730	)			(2,749,743	)
Income tax benefit			(196,339	)			(653,519	)			(845,626	)
Net loss		$	(422,606	)		$	(2,700,211	)		$	(1,904,117	)
Weighted average common shares:
Basic			1,572,511				1,564,039				1,549,516
Diluted			1,572,511				1,564,039				1,549,516
Loss per share of common stock:
Basic		$	(0.27	)		$	(1.73	)		$	(1.23	)
Diluted		$	(0.27	)		$	(1.73	)		$	(1.23	)
Dividends per share of common stock		$	0.00			$	0.00			$	0.00

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Stockholders’ Equity

																		Accumulated
																		Other Comprehensive				Total Stockholders’
		Common Stock				Other Capital				Retained Earnings				Treasury Stock				Income (Loss)				Equity
Balance at December 31, 2006		$	1,741,516			$	144,415			$	9,922,571			$	(2,112,000	)		$	(394,340	)		$	9,302,162
Net income (loss)			—				—				(1,904,117	)			—				—				(1,904,117	)
Other comprehensive income (loss):
Foreign currency translation			—				—				—				—				249,491				249,491
Minimum pension liability adjustment, net of tax benefit of $46,707			—				—				—				—				70,052				70,052
Total comprehensive loss																							(1,584,574	)
Stock-based compensation			—				40,573				—				—				—				40,573
Balance at December 31, 2007		$	1,741,516			$	184,988			$	8,018,454			$	(2,112,000	)		$	(74,797	)		$	7,758,161
Net income (loss)			—				—				(2,700,211	)			—				—				(2,700,211	)
Other comprehensive income (loss):
Foreign currency translation			—				—				—				—				(205,775	)			(205,775	)
Minimum pension liability adjustment, net of tax benefit of $197,451			—				—				—				—				(296,176	)			(296,176	)
Total comprehensive loss																							(3,202,162	)
Common stock issued (22,333 shares)			22,333				45,261				—				—				—				67,594
Stock-based compensation			—				3,592				—				—				—				3,592
Balance at December 31, 2008		$	1,763,849			$	233,841			$	5,318,243			$	(2,112,000	)		$	(576,748	)		$	4,627,185
Net income (loss)			—				—				(422,606	)			—				—				(422,606	)
Other comprehensive income (loss):
Foreign currency translation			—				—				—				—				37,293				37,293
Minimum pension liability adjustment, net of tax benefit of $1,506			—				—				—				—				(2,261	)			(2,261	)
Total comprehensive loss																							(387,574	)
Common stock issued (17,166 shares)			17,166				4,210				—				—				—				21,376
Stock-based compensation			—				4,795				—				—				—				4,795
Balance at December 31, 2009		$	1,781,015			$	242,846			$	4,895,637			$	(2,112,000	)		$	(541,716	)		$	4,265,782

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

American Locker Group Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

		Year ended December 31,
		2009				2008				2007
Operating activities
Net income (loss)		$	(422,606	)		$	(2,700,211	)		$	(1,904,117	)
Adjustments to reconcile net loss to net cash used in) operating activities:
Depreciation and amortization			337,507				416,664				386,430
Provision for uncollectible accounts			36,000				60,182				61,000
Equity based compensation			26,171				71,186				40,573
Loss on disposal of assets			14,299				138				—
Deferred income taxes			(204,628	)			909,994				(488,728	)
Impairment of assets			—				275,685				—
Changes in assets and liabilities:
Accounts and other receivables			(1,162,825	)			81,496				1,343,848
Inventories			18,440				545,510				341,078
Prepaid expenses			118,835				7,384				(78,110	)
Deferred revenue			341,000				—				—
Accounts payable and accrued expenses			491,171				291,353				(363,602	)
Income taxes			197,581				(1,561,991	)			602,857
Pension and other benefits			138,592				113,726				(235,898	)
Net cash provided by (used in) operating activities			(70,463	)			(1,488,884	)			(294,669	)
Investing activities
Purchase of property, plant and equipment			(97,118	)			(334,902	)			(818,646	)
Proceeds from sale of property, plant and equipment			2,747,000				24,702				—
Net cash provided by (used in) investing activities			2,649,882				(310,200	)			(818,646	)
Financing activities
Long-term debt payments			(4,004,315	)			(139,450	)			(2,234,277	)
Long-term debt borrowings			2,000,000				—				2,200,000
Borrowings under revolving line of credit			4,458				752,623				—
Repayment of revolving line of credit			(757,081	)			—				—
Borrowings under factoring agreement			428,588				—				—
Net cash provided by (used in) financing activities			(2,328,350	)			613,173				(34,277	)
Effect of exchange rate changes on cash			(4,301	)			(96,056	)			201,319
Net increase (decrease) in cash and cash equivalents			246,768				(1,281,967	)			(946,273	)
Cash and cash equivalents at beginning of year			279,984				1,561,951				2,508,224
Cash and cash equivalents at end of year		$	526,752			$	279,984			$	1,561,951
Supplemental cash flow information:
Cash paid during the year for:
Interest		$	267,227			$	152,343			$	195,502
Income taxes		$	—			$	11,806			$	15,898

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

Notes to Consolidated Financial Statements
American Locker Group Incorporated and Subsidiaries
December 31, 2009

1. Basis of Presentation

Consolidation and Business Description

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

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

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

Accounts Receivable

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

     Estimated losses for bad debts are provided for in the consolidated financial statements through a charge to expense of approximately $36,000, $60,000 and $61,000 for 2009, 2008 and 2007, respectively. The net charge-off of bad debts was approximately $0, $113,000 and $41,000 for 2009, 2008 and 2007, respectively.

Inventories

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

Property, Plant and Equipment

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

     Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. The Company uses undiscounted cash flows to determine whether impairment exists and measures any impairment loss using discounted cash flows. The Company recorded an equipment impairment charge of approximately $164,000 in 2008 related to the decision to redesign the Horizontal 4c product line, please refer to Note 16 “Asset Impairment” for further information. The Company recorded asset impairment charges of $0, $164,000 and $0 in 2009, 2008 and 2007, respectively.

     Depreciation expense was $337,507 in 2009, of which $207,308 was included in cost of products sold, and $130,199 was included in selling, administrative and general expenses. Depreciation expense was $416,664 in 2008, of which $254,754 was included in cost of products sold, and $161,910 was included in selling, administrative and general expenses. Depreciation expense was $386,430 in 2007, of which $239,887 was included in cost of products sold, and $146,534 was included in selling, administrative and general expenses.

Pensions and Postretirement Benefits

     The Company has two defined benefit plans which recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income (loss) to report the funded status of the plans. The plan assets and obligations are measured at their year-end balance sheet date. Refer to Note 9 ‘Pensions and Other Postretirement Benefits,” for further detail on the plans.

Revenue Recognition

     The Company recognizes revenue at the point of passage of title, which occurs at the time of shipment to the customer. The Company derived approximately 25.0% of its revenue in 2009 from sales to distributors. These distributors do not have a right to return unsold products; however, returns may be permitted in specific situations. Historically, returns have not had a significant impact on the Company’s results of operations. Revenues are reported net of discounts and returns and net of sales tax.

Shipping and Handling Costs

     Shipping and handling costs are expensed as incurred and are included in selling, administrative and general expenses in the accompanying consolidated statements of operations. These costs were approximately $412,000, $866,000 and $1,209,000 during 2009, 2008 and 2007, respectively.

Advertising Expense

     The cost of advertising is generally expensed as incurred. The cost of catalogs and brochures are recorded as a prepaid cost and expensed over their useful lives, generally one year. The Company incurred approximately $150,000, $219,000 and $598,000 in advertising costs during 2009, 2008 and 2007, respectively.

Income Taxes

     The Company and its domestic subsidiaries file a consolidated U.S. income tax return. Canadian operations file income tax returns in Canada. The Company accounts for income taxes using the liability method in accordance with ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized.

     Pursuant to ASC 740, Income Taxes when establishing a valuation allowance, the Company considers future sources of taxable income such as “future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards” and “tax planning strategies.” ASC 740 defines a tax planning strategy as “an action that: is prudent and feasible; an enterprise ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; and would result in realization of deferred tax assets.” In the event the Company determines that the deferred tax assets will not be realized in the future, the valuation adjustment to the deferred tax assets is charged to earnings in the period in which the Company makes such a determination. If it is later determined that it is more likely than not that the deferred tax assets will be realized, the Company will release the valuation allowance to current earnings.

     The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities. The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to ASC 740. ASC 740 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured pursuant to ASC 740 and tax position taken or expected to be taken on the tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax-related interest and penalties as a component of income tax expense.

Research and Development

     The Company engages in research and development activities relating to new and improved products. It expended approximately $140,000, $200,000 and $309,000 in 2009, 2008 and 2007, respectively, for such activity in its continuing businesses. Research and development costs are included in selling, administrative and general expenses.

Earnings Per Share

     The Company reports earnings per share in accordance with ASC 260 Earnings Per Share. Under ASC 260 basic earnings per share excludes any dilutive effects of stock options, whereas diluted earnings per share assumes exercise of stock options, when dilutive, resulting in an increase in outstanding shares. Please refer to Note 12 for further information.

Foreign Currency

     In accordance with ASC 830 Foreign Currency Matters the Company translates the financial statements of the Canadian subsidiary from its functional currency into the U.S. dollar. Assets and liabilities are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Income statement amounts are translated using the average exchange rate for the year. All translation gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. Foreign currency gains and losses resulting from current year exchange rate transactions are insignificant for all years presented.

Fair Value of Financial Instruments

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

Stock-Based Compensation

     On January 1, 2006, the Company adopted ASC 718 Compensation-Stock Compensation on a modified-prospective-transition method. Under this method, the Company’s prior periods do not reflect any restated amounts. The Company recognized no compensation expense related to stock options during the year ended December 31, 2006, as a result of the adoption of ASC 718. Prior to January 1, 2006, the Company had applied the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 and had adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148. Accordingly, the compensation expense of any employee stock options granted was the excess, if any, of the quoted market price of the Company’s common stock at the grant date over the amount the employee must pay to acquire the stock. Net income for 2009, 2008 and 2007 include pretax stock option expense of $4,795, $3,592 and $40,573, respectively. These expenses were included in selling, administrative and general expense.

Comprehensive Income

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

Use of Estimates

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

New Accounting Pronouncements

     In June 2009 the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“US GAAP”) -a replacement of FASB Statement No. 162” (“SFAS 168”) which was primarily codified into Topic 105 in the ASC. The FASB Accounting Standards Codification is intended to be the source of authoritative U.S. GAAP and reporting standards as issued by the Financial Accounting Standards Board. Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics. This statement is effective beginning with the quarter ended September 30, 2009. All references to GAAP in the consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP; therefore, it does not have an impact on the Company’s consolidated financial statements.

     In June 2009, the FASB issued SFAS No. 166, (ASC Topic 860) “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). The provisions of SFAS 166, in part, amend the derecognition guidance in FASB Statement No. 140, eliminate the exemption from consolidation for qualifying special-purpose entities and require additional

disclosures. SFAS 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company does not expect the provisions of SFAS 166 to have a material effect on the financial position, results of operations or cash flows of the Company.

3. Sale of Property

     On September 18, 2009, the Company closed on the sale of its headquarters and primary manufacturing facility to the City of Grapevine. The Company estimates the total value of the Agreement at $3,500,000. Under the Agreement, the City paid a purchase price of $2,747,000. At the time of the sale, the Company had a net book value in the land and building of $2,759,396 and recorded a loss on the sale of $12,396.

     The Company is entitled to continue to occupy the facility, through December 31, 2010, at no cost. The City has further agreed to pay the Company’s relocation costs within the Dallas-Fort Worth area and to pay the Company’s real property taxes for the Facility through December 31, 2010. The Company received a $341,000 payment towards the moving costs at close which is recorded as “deferred revenue” in the Company’s consolidated balance sheet as of December 31, 2009. Proceeds of the sale were used to pay off the $2 million mortgage and for general working capital purposes.

4. Inventories

     Inventories consist of the following:

		December 31,
		2009				2008
Finished products		$	76,303			$	77,665
Work-in-process			1,020,838				1,071,218
Raw materials			1,280,876				1,247,302
Net inventories		$	2,378,017			$	2,396,185

5. Other Accrued Expenses and Current Liabilities

     Accrued expenses consist of the following at December 31:

		December 31,
		2009				2008
Restructuring liability		$	169,000			$	—
Accrued severance			—				94,687
Accrued expenses, other			177,941				57,154
Total accrued expenses		$	346,941			$	151,841

6. Debt

     Long-term debt consists of the following:

		December 31,
		2009				2008
Mortgage payable to bank through January 2012 at $22,493 monthly including interest at prime plus 75 basis points with a 5% floor (5% at December 31, 2008) with payment for remaining balance due February 1, 2012, collateralized by real estate		$	—			$	2,004,315
Secured borrowings from factoring agreement			428,588				—
Less current portion			(428,588	)			(173,354	)
Long-term portion		$	—			$	1,830,961

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

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

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

     The receivables purchase agreement calls for the Company to pay a daily variable discount rate, which is the greater of prime plus 1.50% or 6.5% per annum, computed on the amount of outstanding receivables held by GCBT, for the period during which such receivables are outstanding. The Company will also pay a fixed discount percentage of 0.2% for each ten-day period during which receivables held by GCBT are outstanding. Fees related to the receivables purchase agreement of $36,648 are recorded in interest expense in the 2009 Consolidated Statement of Operations.

     Secured borrowings at December 31, 2009 of $428,588 represent the Company’s liability on the sale of accounts receivables with recourse. When the Company sells accounts receivable with recourse, the receivables remain recorded in accounts receivable, and an equivalent liability is recorded in short-term secured borrowings on the Company’s balance sheet until the customers pay the receivables outstanding.

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

7. Operating Leases

     The Company leases several operating facilities, vehicles and equipment under non-cancelable operating leases. The Company accounts for operating leases on a straight line basis over the lease term. Future minimum lease payments consist of the following at December 31, 2009:

2010			29,088
2011			13,118
2012			—
2013			—
2014			—
Total		$	42,206

     Rent expense amounted to approximately $46,000, $80,000 and $136,000 in 2009, 2008 and 2007, respectively.

8. Income Taxes

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

		2009				2008				2007
United States income (loss)		$	(525,995	)		$	(3,064,985	)		$	(2,881,400	)
Foreign income (loss)		$	(92,950	)			(288,745	)			131,657
		$	(618,945	)		$	(3,353,730	)		$	(2,749,743	)

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

		2009				2008				2007
Current:
Federal		$	—			$	(1,589,218	)		$	(217,023	)
State			—				25,266				(105,590	)
Foreign			8,229				439				49,192
Total current			8,229				(1,563,513	)			(273,421	)
Deferred:
Federal			(182,605	)			855,002				(529,628	)
State			(530	)			10,279				(36,346	)
Foreign			(21,433	)			44,713				(6,231	)
			(204,568	)			909,994				(572,205	)
		$	(196,339	)		$	(653,519	)		$	(845,626	)

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

		2009				2008				2007
Statutory income tax rate			(34	%)			(34	%)			(34	%)
State and foreign income taxes, net of federal benefit			(1	)			(1	)			(1	)
Change in valuation allowance			—				13				11
Foreign earnings taxed at different rate			—				—				(4	)
Change in estimated state income tax rate			—				—				(4	)
Other permanent differences			3				2				1
			(32	)%			(20	)%			(31	)%

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

		2009				2008
Deferred tax liabilities:
Property, plant and equipment		$	(49,555	)		$	4,933
Prepaid expenses and other			(4,609	)			4,609
Total deferred tax liabilities			(54,164	)			9,542
Deferred tax assets:
Operating loss carryforwards			843,484				839,244
Postretirement benefits			22,783				23,471
Pension costs			473,473				422,273
Allowance for doubtful accounts			63,409				52,573
Deferred revenues			118,852				—
Other assets			12,039				14,332
Accrued expenses			61,902				22,532
Other employee benefits			24,169				26,262
Inventory costs			75,627				56,005
Total deferred tax assets			1,695,738				1,456,692
Net			1,641,574				1,447,150
Valuation allowance			(712,584	)			(714,677	)
Net		$	928,990			$	732,473
Current deferred tax asset		$	416,713			$	180,430
Long-term deferred tax asset			512,277				552,043
		$	928,990			$	732,473

     As of December 31, 2009 and 2008, the Company’s gross deferred tax assets are reduced by a valuation allowance of $712,584 and $714,677, respectively, due to negative evidence, primarily continued operating losses, indicating that a valuation allowance is required under ASC 740 Income Taxes. Increases in the valuation allowance in 2009 are primarily due to net operating losses incurred during 2009. Increases in the valuation allowance in 2008 are primarily due to net operating losses incurred during 2008 partially offset by the five year net operating loss carry back provisions included in Worker, Homeownership, and Business Assistance Act of 2009.

     As of December 31, 2009, the Company had U.S. net operating loss carry forwards for federal and state income tax purposes of approximately $2,008,000 and $5,840,000, respectively. These net operating losses are available to offset future federal and state income, if any, through 2028.

     The Company has not provided deferred taxes for taxes that could result from the remittance of undistributed earnings of the Company’s foreign subsidiary since it has generally been the Company’s intention to reinvest these earnings indefinitely. Undistributed earnings that could be subject to additional income taxes if remitted were approximately $85,200 at December 31, 2009.

     The Company files an income tax return in the U.S. federal jurisdiction, Texas, and a number of other U.S. state and local jurisdictions. Tax returns for the years 2005 through 2009 remain open for examination in various tax jurisdictions in which it operates. The Company adopted the provisions of a new accounting pronouncement that addresses the accounting for uncertainty in income taxes recognized in the financial statements, on January 1, 2007. As a result of the implementation of this pronouncement, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, and at December 31, 2009, there were no unrecognized tax benefits. As of December 31, 2009, no interest related to uncertain tax positions had been accrued.

9. Pension and Other Postretirement Benefits

U.S. Pension Plan

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

     The plan’s assets are invested in a balanced index fund (the “Fund”) where the assets were invested during 2007, 2008 and 2009. The principal investment objective of the Fund is to provide an incremental risk adjusted return compared to a portfolio invested 50% in stocks and 50% in bonds over a full market cycle. Under normal market conditions, the average asset allocation for the Fund is expected to be approximately 50% in stocks and 50% in bonds. This benchmark allocation may be adjusted by up to 20% based on economic or market conditions and liquidity needs. Therefore, the stock allocation may fluctuate from 30% to 70% of the total portfolio, with a corresponding bond allocation of from 70% to 30%. Fund reallocation may take place at any time.

Canadian Pension Plan

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

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

     In August 2006, the Pension Protection Act of 2006 was signed into law. The major provisions of the statute have taken effect January 1, 2008. Among other things, the statue is designed to ensure timely and adequate funding of pension plans by shortening the time period within which employers must fully fund pension benefits. Contributions to be made to the plan in 2010 are expected to approximate $47,000 for the U.S. plan and $67,000 for the Canadian plan. However, contributions for 2011 and beyond have not been quantified at this time.

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

		Pension Benefits
		U.S. Plan								Canadian Plan
		2009				2008				2009				2008
Change in projected benefit obligation
Projected benefit obligation at beginning of year		$	2,888,281			$	3,023,001			$	906,840			$	1,362,530
Service cost			21,220				21,300				—				33,704
Interest cost			173,030				193,552				63,206				62,688
Benefit payments			(302,150	)			(485,490	)			(78,699	)			(84,403	)
Administrative expenses			(30,118	)			(13,808	)			—				—
Actuarial (gain) loss			201,454				149,726				36,620				(166,162	)
Plan Amendments			—				—				105,196				—
Currency translation adjustment			—				—				159,957				(240,057	)
Settlements			—				—				—				(61,460	)
Projected benefit obligation at end of year			2,951,717				2,888,281				1,193,120				906,840
Change in plan assets
Fair value of plan assets at beginning of year			1,787,205				2,608,288				946,282				1,184,543
Actual return on plan assets			273,542				(395,204	)			63,382				(76,661	)
Benefit payments			(302,150	)			(485,490	)			(78,699	)			(84,403	)
Employer contribution			48,962				73,419				61,445				155,777
Administrative expenses			(30,118	)			(13,808	)			—				—
Currency translation adjustment			—				—				159,818				(232,974	)
Fair value of plan assets at end of year			1,777,441				1,787,205				1,152,228				946,282
Plan assets (less) greater than benefit obligation		$	(1,174,276	)		$	(1,101,076	)		$	(40,892	)		$	39,442

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

		U.S. Plan								Canadian Plan
		2009				2008				2009				2008
Non-current assets		$	—			$	—			$	—			$	39,442
Current liabilities			—				—				(40,892	)			—
Non-current liabilities			(1,174,276	)			(1,101,076	)			—				—
Net amount recognized		$	(1,174,276	)		$	(1,101,076	)		$	(40,892	)		$	39,442

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

		U.S. Plan								Canadian Plan
		2009				2008				2009				2008
Unrecognized net loss		$	777,237			$	823,177			$	213,040			$	163,333
		$	777,237			$	823,177			$	213,040			$	163,333

     The estimated net loss that will be amortized from accumulated other comprehensive income net periodic pension cost over the next year is $42,000 and $6,162 for the U.S. Plan and Canadian Plan, respectively.

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

		U.S. Plan												Canadian Plan
		2009				2008				2007				2009				2008				2007
Components of net periodic benefit cost:
Service cost		$	21,220			$	21,300			$	29,610			$	5,810			$	33,704			$	31,627
Interest cost			173,030				193,552				191,828				63,206				62,688				60,727
Expected return on plan assets			(134,666	)			(197,021	)			(197,588	)			(70,688	)			(79,682	)			(73,078	)
Net actuarial loss			45,251				—				—				—				—				—
Amortization of prior service cost			—				—				9,384				5,282				9,535				3,275
Net periodic benefit cost		$	104,835			$	17,831			$	33,234			$	3,609			$	26,245			$	22,551

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

Level 1 –		Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 –		Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
Level 3 –		Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

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

						December 31, 2009
						US Plan				Canadian Plan
Cash and cash equivalents		Level 1				$	—			$	9,221
Mutual funds		Level 1					—				1,181,452
Pooled separate accounts		Level 2					1,777,441				—
Total						$	1,777,441			$	1,190,673