Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended June 30, 2009**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                 to                 **

 

**Commission File Number 1 - 5332**

 

**P&FINDUSTRIES, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                             | ** ** | **22-1657413**                          |
|----------------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of                          |       | (I.R.S. Employer Identification Number) |
| incorporation or organization)                           |       |                                    |
|                                                     |       |                                    |
| **445 Broadhollow Road, Suite 100, Melville, New  York** |       | **11747**                               |
| (Address of principal executive offices)                 |       | (Zip Code)                              |

 

Registrant’s telephonenumber, including area code: **(631) 694-9800**

 

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Indicate by checkmark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted  electronically and posted to its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period the registrant wasrequired to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by checkmark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of August 17, 2009 there were 3,614,562 shares of the registrant’s ClassA Common Stock outstanding.

 

 

 

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Table of Contents

 

**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009**

 

**TABLE OF CONTENTS**

 
| ** **                              | ** **                                                                                                          | ** ** | **PAGE** |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                    |                                                                                                                |       |     |
| **PART I — FINANCIAL INFORMATION** |                                                                                                                | 1          |
|                                    |                                                                                                                |       |     |
| Item 1.                                 | Financial Statements                                                                                                |       | 1        |
|                                    |                                                                                                                |       |     |
|                                    | Consolidated Condensed Balance Sheets as of June 30,  2009 and December 31, 2008                                    |       | 1        |
|                                    |                                                                                                                |       |     |
|                                    | Consolidated  Condensed Statements of Operations for the three and six months ended June  30, 2009 and 2008         |       | 3        |
|                                    |                                                                                                                |       |     |
|                                    | Consolidated Condensed Statement of Shareholders’  Equity for the period from January 1, 2009 to June 30, 2009 |       | 4        |
|                                    |                                                                                                                |       |     |
|                                    | Consolidated Condensed Statements of Cash Flows for  the six months ended June 30, 2009 and 2008                    |       | 5        |
|                                    |                                                                                                                |       |     |
|                                    | Notes to Consolidated Condensed Financial Statements                                                                |       | 7        |
|                                    |                                                                                                                |       |     |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 19       |
|                                    |                                                                                                                |       |     |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 28       |
|                                    |                                                                                                                |       |     |
| Item 4T                                 | Controls and  Procedures                                                                                            |       | 28       |
|                                    |                                                                                                                |       |     |
| **PART  II — OTHER INFORMATION**   |                                                                                                                | 30         |
|                                    |                                                                                                                |       |     |
| Item 1.                                 | Legal Proceedings                                                                                                   |       | 30       |
|                                    |                                                                                                                |       |     |
| Item 1A.                                | Risk Factors                                                                                                        |       | 30       |
|                                    |                                                                                                                |       |     |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        |       | 30       |
|                                    |                                                                                                                |       |     |
| Item 3.                                 | Defaults Upon  Senior Securities                                                                                    |       | 30       |
|                                    |                                                                                                                |       |     |
| Item 4.                                 | Submission of  Matters to a Vote of Security Holders                                                                |       | 30       |
|                                    |                                                                                                                |       |     |
| Item 5.                                 | Other Information                                                                                                   |       | 30       |
|                                    |                                                                                                                |       |     |
| Item 6.                                 | Exhibits                                                                                                            |       | 30       |
|                                    |                                                                                                                |       |     |
| **Signature**                           |                                                                                                                |       | 31       |
|                                    |                                                                                                                |       |     |
| **Exhibit Index**                       |                                                                                                                |       | 32       |

 

i

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.                    Financial Statements**

 

**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **(unaudited)**   | ** ** | **(See Note 1)**      | ** ** |
| **ASSETS**                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash  and cash equivalents                      |       | $                 | 527,000    |                  | $          | 1,043,000 |   |
| Accounts  receivable – net                 |       | 11,648,000        |       | 8,507,000             |       |
| Inventories                                     |       | 33,479,000        |       | 31,286,000            |       |
| Notes  and other receivables                    |       | 590,000           |       | —                |       |
| Deferred  income taxes – net               |       | 1,584,000         |       | 1,584,000             |       |
| Income  tax refund receivable                   |       | 738,000           |       | 327,000               |       |
| Prepaid  expenses and other current assets      |       | 1,735,000         |       | 990,000               |       |
| TOTAL  CURRENT ASSETS                           |       | 50,301,000        |       | 43,737,000            |       |
|                                            |       |              |       |                  |       |
| PROPERTY  AND EQUIPMENT                         |       |              |       |                  |       |
| Land                                            |       | 1,550,000         |       | 1,550,000             |       |
| Buildings  and improvements                     |       | 7,702,000         |       | 7,637,000             |       |
| Machinery  and equipment                        |       | 18,995,000        |       | 15,567,000            |       |
|                                            |       | 28,247,000        |       | 24,754,000            |       |
| Less  accumulated depreciation and amortization |       | 12,111,000        |       | 11,232,000            |       |
| NET  PROPERTY AND EQUIPMENT                     |       | 16,136,000        |       | 13,522,000            |       |
|                                            |       |              |       |                  |       |
| GOODWILL                                        |       | 8,972,000         |       | 4,183,000             |       |
|                                            |       |              |       |                  |       |
| OTHER  INTANGIBLE ASSETS – net             |       | 5,813,000         |       | 3,121,000             |       |
|                                            |       |              |       |                  |       |
| DEFERRED  INCOME TAXES -net                     |       | 4,773,000         |       | 5,424,000             |       |
|                                            |       |              |       |                  |       |
| OTHER  ASSETS – net                        |       | 1,058,000         |       | 485,000               |       |
|                                            |       |              |       |                  |       |
| TOTAL  ASSETS                                   |       | $                 | 87,053,000 |                  | $          | 70,472,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                 | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **(unaudited)**   | ** ** | **(See Note 1)**      | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT  LIABILITIES                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Short-term  borrowings                                                                                                     |       | $                 | 22,374,000 |                  | $          | 15,000,000 |   |
| Accounts  payable                                                                                                          |       | 6,354,000         |       | 1,962,000             |       |
| Other  accrued liabilities                                                                                                 |       | 4,789,000         |       | 3,768,000             |       |
| Current  maturities of long-term debt                                                                                      |       | 10,440,000        |       | 6,516,000             |       |
| TOTAL  CURRENT LIABILITIES                                                                                                 |       | 43,957,000        |       | 27,246,000            |       |
|                                                                                                                       |       |              |       |                  |       |
| Other  long-term liabilities                                                                                               |       | 4,911,000         |       | 331,000               |       |
| Note  payable                                                                                                              |       | 3,972,000         |       | —                |       |
| Long  –term debt, less current maturities                                                                             |       | 1,379,000         |       | 9,028,000             |       |
|                                                                                                                       |       |              |       |                  |       |
| TOTAL  LIABILITIES                                                                                                         |       | 54,219,000        |       | 36,605,000            |       |
|                                                                                                                       |       |              |       |                  |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                             |       |              |       |                  |       |
|                                                                                                                       |       |              |       |                  |       |
| SHAREHOLDERS’  EQUITY                                                                                                 |       |              |       |                  |       |
| Preferred  stock - $10 par; authorized - 2,000,000 shares; no shares issued                                                |       | —            |       | —                |       |
| Common  stock                                                                                                              |       |              |       |                  |       |
| Class  A - $1 par; authorized - 7,000,000 shares; issued - 3,956,431 at June 30,  2009 and December 31, 2008, respectively |       | 3,956,000         |       | 3,956,000             |       |
| Class  B - $1 par; authorized - 2,000,000 shares; no shares issued                                                         |       | —            |       | —                |       |
| Additional  paid-in capital                                                                                                |       | 10,545,000        |       | 10,407,000            |       |
| Retained  earnings                                                                                                         |       | 21,288,000        |       | 22,459,000            |       |
| Treasury  stock, at cost – 341,869 shares at June 30, 2009 andDecember 31, 2008                                       |       | (2,955,000        | )          | (2,955,000            | )          |
|                                                                                                                       |       |              |       |                  |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                           |       | 32,834,000        |       | 33,867,000            |       |
|                                                                                                                       |       |              |       |                  |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                           |       | $                 | 87,053,000 |                  | $          | 70,472,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)**

 
| ** **                                    | ** ** | **Three  months**   | ** **     | **Six  months**     | ** ** |
|-----------------------------------------------|------------|---------------------|----------------|---------------------|------------|
| ** **                                    | ** ** | **ended  June 30,** | ** **     | **ended  June 30,** | ** ** |
| ** **                                    | ** ** | **2009**            | ** **     | **2008**            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  revenue                                  |       | $                   | 18,528,000     |                | $          | 25,554,000 |   | $ | 34,090,000 |   | $ | 49,879,000 |   |
| Cost  of sales                                |       | 13,817,000          |           | 17,499,000          |       | 24,748,000 |   | 34,151,000 |   |
| Gross  profit                                 |       | 4,711,000           |           | 8,055,000           |       | 9,342,000 |   | 15,728,000 |   |
| Selling,  general and administrative expenses |       | 5,288,000           |           | 6,702,000           |       | 10,343,000 |   | 13,191,000 |   |
| Operating  (loss) income                      |       | (577,000            | )              | 1,353,000           |       | (1,001,000 | ) | 2,537,000 |   |
| Interest  expense                             |       | 362,000             |           | 452,000             |       | 671,000 |   | 1,010,000 |   |
| (Loss)  earnings before income taxes          |       | (939,000            | )              | 901,000             |       | (1,672,000 | ) | 1,527,000 |   |
| Income  tax (benefit) expense                 |       | (374,000            | )              | 406,000             |       | (501,000 | ) | 670,000 |   |
| Net  (loss) earnings                          |       | $                   |  (565,000 | )                   | $          |  495,000 |   | $ |  (1,171,000 | ) | $ |  857,000 |   |
|                                          |       |                |           |                |       |   |   |   |   |
| Basic  (loss) earnings per common share:      |       |                |           |                |       |   |   |   |   |
| Net  (loss) earnings                          |       | $                   |  (0.16    | )                   | $          |  0.14 |   | $ | (0.32 | ) | $ |  0.24 |   |
|                                          |       |                |           |                |       |   |   |   |   |
| Diluted  (loss) earnings per common share:    |       |                |           |                |       |   |   |   |   |
| Net  (loss) earnings                          |       | $                   | (0.16          | )                   | $          |  0.13 |   | $ | (0.32 | ) | $ |  0.23 |   |
|                                          |       |                |           |                |       |   |   |   |   |
| Weighted  average common shares outstanding:  |       |                |           |                |       |   |   |   |   |
| Basic                                         |       | 3,614,562           |           | 3,637,277           |       | 3,614,562 |   | 3,637,370 |   |
| Diluted                                       |       | 3,614,562           |           | 3,713,440           |       | 3,614,562 |   | 3,694,338 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY(unaudited)**

 
| ** **               | ** ** | ** ** | ** ** | **Class A Common  Stock, $1 Par** | ** ** | **Additional  paid-in** | ** ** | **Retained** | ** ** | **Treasury stock** | ** ** |
|--------------------------|------------|------------|------------|-----------------------------------|------------|-------------------------|------------|--------------|------------|--------------------|------------|
| ** **               | ** ** | **Total**  | ** ** | **Shares**                        | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **earnings**       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **               | ** ** | ** ** | ** ** | ** **                        | ** ** | ** **              | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, January 1, 2009 |       | $          | 33,867,000 |                              | 3,956,000  |                    | $          | 3,956,000    |       | $                  | 10,407,000 |   | $ | 22,459,000 |   | 342,000 |   | $ | (2,955,000 | ) |
|                     |       |       |       |                              |       |                    |       |         |       |               |       |   |   |   |   |
| Net loss                 |       | (1,171,000 | )          |                              |       |                    |       |         |       | (1,171,000         | )          |   |   |   |   |
| Stock-based compensation |       | 138,000    |       |                              |       |                    |       | 138,000      |       |               |       |   |   |   |   |
|                     |       |       |       |                              |       |                    |       |         |       |               |       |   |   |   |   |
| Balance, June 30, 2009   |       | $          | 32,834,000 |                              | 3,956,000  |                    | $          | 3,956,000    |       | 10,545,000         |       | $ | 21,288,000 |   | 342,000 |   | $ | (2,955,000 | ) |
|                          |            |            |            |                                   |            |                         |            |              |            |                    |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&FINDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)**

 
| ** **                                                                                  | ** ** | **Six months  ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| Cash Flows from Operating Activities:                                                       |       |                           |       |   |   |
| Net (loss) earnings                                                                         |       | $                              | (1,171,000 | ) | $ | 857,000 |   |
|                                                                                        |       |                           |       |   |   |
| Adjustments to reconcile net (loss) earnings to  net cash provided by operating activities: |       |                           |       |   |   |
| Non-cash charges:                                                                           |       |                           |       |   |   |
| Depreciation and amortization                                                               |       | 895,000                        |       | 856,000 |   |
| Amortization of other intangible assets                                                     |       | 180,000                        |       | 458,000 |   |
| Amortization of other assets                                                                |       | 19,000                         |       | 5,000 |   |
| Provision for losses on accounts receivable - net                                           |       | (166,000                       | )          | (99,000 | ) |
| Stock-based compensation                                                                    |       | 138,000                        |       | 97,000 |   |
| Deferred income taxes - net                                                                 |       | —                         |       | 334,000 |   |
| (Gain) loss on sale of fixed asset                                                          |       | (2,000                         | )          | 127,000 |   |
| Changes in operating assets and liabilities:                                                |       |                           |       |   |   |
| Accounts receivable                                                                         |       | (1,724,000                     | )          | (1,405,000 | ) |
| Notes and other receivables                                                                 |       | (33,000                        | )          | 274,000 |   |
| Inventories                                                                                 |       | 4,483,000                      |       | 326,000 |   |
| Income tax refund receivable                                                                |       | (411,000                       | )          | 6,000 |   |
| Prepaid expenses and other current assets                                                   |       | (424,000                       | )          | 73,000 |   |
| Other assets                                                                                |       | (591,000                       | )          | 20,000 |   |
| Accounts payable                                                                            |       | 2,431,000                      |       | 2,319,000 |   |
| Accruals and other liabilities                                                              |       | 342,000                        |       | (1,332,000 | ) |
| Income taxes payable                                                                        |       | —                         |       | (340,000 | ) |
| Total adjustments                                                                           |       | 5,137,000                      |       | 1,719,000 |   |
| Net cash provided by operating activities                                                   |       | $                              | 3,966,000  |   | $ | 2,576,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)(continued)**

 
| ** **                                                   | ** ** | **Six months   ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Cash Flows from Investing Activities:                        |       |                            |       |   |   |
| Capital expenditures                                         |       | $                               | (1,099,000 | ) | $ | (562,000 | ) |
| Proceeds from sale of fixed assets                           |       | 3,000                           |       | — |   |
| Payment for acquisition                                      |       | (4,528,000                      | )          | — |   |
| Additional purchase price – working capital  adjustment |       | (2,362,000                      | )          | — |   |
| Net cash used in investing activities                        |       | (7,986,000                      | )          | (562,000 | ) |
|                                                         |       |                            |       |   |   |
| Cash Flows from Financing Activities:                        |       |                            |       |   |   |
| Proceeds from short-term borrowings                          |       | 16,935,000                      |       | 9,000,000 |   |
| Repayments of short-term borrowings                          |       | (9,561,000                      | )          | (4,000,000 | ) |
| Term loan -advances                                          |       | 1,134,000                       |       | — |   |
| Repayments of term loan                                      |       | (6,889,000                      | )          | (7,620,000 | ) |
| Net proceeds from equipment lease financing                  |       | 302,000                         |       | — |   |
| Principal payments on long-term debt                         |       | (137,000                        | )          | (132,000 | ) |
| Proceeds from notes payable                                  |       | 1,720,000                       |       | — |   |
| Purchase of treasury stock                                   |       | —                          |       | (3,000 | ) |
| Net cash used in financing activities                        |       | 3,504,000                       |       | (2,755,000 | ) |
|                                                         |       |                            |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                    |       | (516,000                        | )          | (741,000 | ) |
| Cash and cash equivalents at beginning of period             |       | 1,043,000                       |       | 1,334,000 |   |
| Cash and cash equivalents at end of period                   |       | $                               | 527,000    |   | $ | 593,000 |   |
|                                                         |       |                            |       |   |   |
| **Supplemental disclosures of  cash flow information:**      |       |                            |       |   |   |
| ** **                                                   |       |                            |       |   |   |
| Cash paid for:                                               |       |                            |       |   |   |
| Interest                                                     |       | $                               | 665,000    |   | $ |  1,085,000 |   |
| Income taxes                                                 |       | $                               | 30,000     |   | $ |  741,000 |   |

 

Non-cash investing and financing activities were as follows:

 

Inconnection with the WMC transactions, as described in Note 2 of the Notes toConsolidated Financial Statements, the Company issued a note payable to theseller in the amount of $3,972,000.  Inaddition, the Company recorded a liability for contingent consideration in theamount of $4,586,000.

 

See accompanying notes to consolidated condensed financial statements(unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(unaudited)**

 

**NOTE 1 - SUMMARY OF ACCOUNTING POLICIES**

 

**Principles of Consolidation**

 

The unaudited consolidated condensed financialstatements contained herein include the accounts of P&F Industries, Inc.and its subsidiaries (“P&F”). All significant intercompany balances andtransactions have been eliminated.

 

P&F conducts its business operations through twoof its wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and its subsidiariesare herein referred to collectively as the “Company.” In addition, the words“we”, “our” and “us” refer to the Company.

 

Further, P&F operates in two primary lines of business, orsegments: (i) tools and other products (“Tools”) and (ii) hardware andaccessories (“Hardware”).

 

**Tools**

 

We conduct our Tools business through Continental, which in turncurrently operates through its wholly-owned subsidiaries, Florida PneumaticManufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc.(“Hy-Tech”).

 

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division(“Berkley”), a line of pipe cutting and threading tools, wrenches andreplacement electrical components for a widely-used brand of pipe cutting andthreading machines. In addition, through its Franklin Manufacturing(“Franklin”) division, Florida Pneumatic imports a line of door and windowhardware.  Hy-Tech is primarily engagedin the manufacture and distribution of pneumatic tools and parts for industrialapplications.

 

**Hardware**

 

We conduct our Hardware business through Countrywide, which in turnoperates through its wholly-owned subsidiaries, Nationwide Industries, Inc.(“Nationwide”), Woodmark International, L.P. (“Woodmark”), Pacific StairProducts, Inc. (“PSP”) and WM Coffman, LLC (“WMC”). Woodmark was, until thetransactions described in Note 2 (the “WMC transactions”), which was effective June8, 2009, an importer of both stair parts components and kitchen and bathhardware and accessories. Woodmark and PSP contributed certain net assets toWMC in return for members’ equity. Accordingly, effective with the WMC transaction,the stair parts business, which formerly reported through Woodmark, is part ofWMC.  PSP, until mid-2008, manufacturedand distributed premium stair rail products. Since the closing of its mill inmid-2008, it had operated primarily as a distributer of Woodmark’s staircasecomponents to the building industry, in southern California and thesouthwestern region of the United States. As a result of the transaction, PSP will no longer be an operating unit.The Company exited the remaining facility on July 31, 2009. Its customers willbe serviced by WMC.  Nationwide is animporter and distributor of fencing, door, and window hardware.  Effective with this filing, the Company willreport the results of operations of its kitchen and bath hardware and accessoriesproduct line with Nationwide and will be referred to as other hardware and theresults of operations for WMC as “Stair Parts” or “WMC”.

 

**Basis of Financial Statement Presentation**

 

The accompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information, and with the rules and regulations of the Securities andExchange Commission regarding interim financial reporting. Accordingly, theseinterim financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion of theCompany, these unaudited consolidated condensed financial statements includeall adjustments necessary to present fairly the information set forth therein.All such adjustments are of a normal recurring nature. Results for interimperiods are not necessarily indicative of results to be expected for a fullyear.

 

Theaccompanying unaudited interim condensed consolidated financial statements havebeen prepared assuming that the Company will continue as a going concern. Goingconcern contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business over a reasonable length of time.However, the Company has reclassified all of its long-term bank debt as acurrent liability due to its default on certain financial covenants. Managementintends to finalize and resolve its discussions with its lender and believe thedefaults will be cured through waivers and/or amendments.

 

The unaudited consolidated condensed balance sheetinformation as of December 31, 2008 was derived from the audited financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2008. The interim financial statements contained hereinshould be read in conjunction with that Report.

 

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In preparing its unaudited consolidated condensedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, the Company is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an ongoing basis, the Company evaluatesestimates, including those related to bad debts, inventory reserves, goodwilland intangible assets and income taxes. The Company bases its estimates onhistorical data and experience, when available, and on various otherassumptions that are believed to be reasonable under the circumstances, thecombined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results could differ from those estimates.

 

**Subsequent Events**

 

In preparing these condensed consolidated financialstatements, we have evaluated events and transactions for potential recognitionor disclosure through the issuance of the condensed consolidated financialstatements.

 

**Reclassifications**

 

Certain amounts in the consolidated condensed financialstatements at December 31, 2008 have been reclassified to conform to thecurrent period’s presentation.

 

**NOTE 2 – ACQUISITION**

 

On June 10, 2009,pursuant to an Asset Purchase Agreement dated as of June 8, 2009 (the “AssetPurchase Agreement”), WMC, a Delaware limited liability company, (“WMC”) a newlyformed subsidiary of the Company, acquired substantially all of the assets ofCoffman Stairs LLC, a Delaware limited liability company (“Coffman”).  Coffman was in the business of manufacturingand distributing interior wood and iron stair components throughout the UnitedStates. Woodmark and PSP contributed to WMC certain respective assets, subjectto WMC’s assumption of certain respective liabilities and obligations of eachof Woodmark and PSP (the “Asset Contribution”).  In addition, Woodmark and PSP entered intocertain agreements with WMC, effectively transferring the Company’s stair partsbusiness to WMC.

 

On June 10, 2009, WMCentered into a Revolving Credit, Term Loan and Security Agreement (“WMC loanagreement”), dated as of June 8, 2009 with PNC Bank, National Association,(“PNC”) pursuant to which WMC may receive loans from PNC in the aggregateprincipal amount of $12,000,000 (See Note 11).

 

The purchase priceconsisted of a cash payment of $4,528,000, a promissory note in the amount of$3,972,000 payable to Coffman, and the assumption of certain payables, liabilitiesand obligations.  Additionally, subjectto certain conditions, WMC also agreed to pay to Coffman contingentconsideration based upon the financial performance of WMC and certain otherfactors described in the Asset Purchase Agreement.  The Company estimated a range of outcomeswherein contingent consideration would have to be paid to Coffman.  The amount of potential contingentconsideration ranged from $3,697,000 to $6,770,000.  The Company, in accordance with FinancialAccounting Standards Board (“FASB”), Statement of Financial AccountingStandards (“SFAS”) 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”),recorded $3,972,000, which is thepresent value of $5,885,000, which is whatit believes to be the most likely scenario of the potential estimatedcontingent consideration obligation. WMC also entered into an advisory agreement withVisador Holding Corporation (“Visador”), the parent company of Coffman,pursuant to which WMC agreed to pay Visador, subject to certain conditions,advisory fees, aggregating during the first three years to a maximum of$750,000 in exchange for Visador providing consulting and advisory services toWMC. Cash payments to Visador may be made only with permission of PNC.  The fair value of this obligation of $614,000has been included in contingent consideration. As such the Company recorded a total of $4,586,000 as contingentconsideration. Additionally, the Company incurred approximately $952,000 oftotal fees and expenses in connection with the formation of WMC, of which, in accordancewith SFAS 141(R), it recorded in its selling, general and administrativeexpenses approximately $432,000. The balance will be amortized over the three yearterm of the WMC loan agreement or approximately 18 years, which is theremaining life of the facility lease, discussed below.

 

Intereston the unpaid principal balance of the promissory note of $3,972,000 accrues (i)from June 8, 2009 until the Maturity Date, as defined, at the rate of six andone-half percent (6.5%) per annum.  Theprincipal amount and accrued interest due pursuant to Coffman is payable on thedate (the “Maturity Date”) that is the latter of (1) the last day of theContingency Period, as defined in the Asset Purchase Agreement or (2) theearlier of (a) the date that is three (3) years and ninety (90) days after thedate of the promissory note or (b) the date that all obligations under the LoanAgreement, as defined , are satisfied in full.  Pursuant to the terms of the promissory note,all obligations thereunder are subject to the terms of a SubordinationAgreement, dated as of June 8, 2009, among WMC, Coffman and PNC.

 

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Contemporaneously withthe execution and delivery of the Asset Purchase Agreement, WMC and Coffmanentered into an Assignment and Assumption of Lease Agreement dated as of June 8,2009 (the “Assignment and Assumption Agreement”).  Pursuant to the Assignment and AssumptionAgreement, Coffman transferred, conveyed and assigned to WMC all of its right,title and interest, as tenant, in, to and under, and WMC assumed all rights,obligations and liabilities of Coffman under, that certain Lease Agreement, datedas of March 30, 2007, for the lease of certain real property located in Marion,Virginia (the “Leased Premises”). The Lease Agreement has an expiration date ofMarch 30, 2027.  The base annual rent is$580,000, payable quarterly in advance on July 1, October 1, January 1 and April1, in equal installments of $145,000.  Further, WMC was required to present to thelandlord a $100,000 letter of credit as security deposit.

 

The purchase price ofCoffman Stairs, LLC is as follows:

 
| Cash  paid at closing            |   | $         | 4,528,000  |   |
|----------------------------------|--------|-----------|------------|--------|
| Notes  payable                   |   | 3,972,000 |       |
| Liabilities  assumed             |   | 2,788,000 |       |
| Future  contingent consideration |   | 4,586,000 |       |
|                             |   |      |       |
| Total                            |   | $         | 15,874,000 |   |

 

Thefollowing table presents, as of the date of the transaction, the estimated fairvalues of the assets acquired and liabilities assumed and the amounts allocatedto intangible assets and goodwill.

 
| Accounts  receivable                        |   |      |      | $          | 1,251,000  |   |
|---------------------------------------------|--------|-----------|-----------|------------|------------|--------|
| Inventories                                 |   |      |      | 6,677,000  |       |
| Other  current assets                       |   |      |      | 403,000    |       |
| Property  and equipment                     |   |      |      | 2,411,000  |       |
| Other  non-current assets                   |   |      |      | 485,000    |       |
| Identifiable  intangible assets:            |   |      |      |       |       |
| Customer  relationships                     |   | $         | 1,250,000 |       |       |   |
| Trademark                                   |   | 1,622,000 |      | 2,872,000  |       |
|                                        |   |      |      | 14,099,000 |       |
| Less: Deferred tax liability                |   |      |      | 652,000    |       |
| **Total fair value of net assets acquired** |   |      |      | 13,447,000 |       |
| Goodwill                                    |   |      |      | 2,427,000  |       |
| **Total purchase price**                    |   |      |      | $          | 15,874,000 |   |
|                                             |        |           |           |            |            |        |  |

 

The Company obtained apreliminary valuation of the identifiable intangible assets from an independentthird party and may be subject to change. The excess of the total purchaseprice over the fair value of the net assets acquired, including the value ofthe identifiable intangible assets, has been allocated to goodwill. Goodwillwill be amortized for fifteen years for tax purposes, but not for financialreporting purposes.  The fair value andestimated lives of the identifiable intangible assets are based on currentinformation and may be subject to change. Those intangible assets which aresubject to amortization will be amortized over fifteen years for taxpurposes.  For financial reportingpurposes, useful lives have been assigned as follows:

 
| ** **              | ** ** | **Estimated**   | ** ** |
|-------------------------|------------|-----------------|------------|
| ** **              | ** ** | **Useful Life** | ** ** |
| Trademark               |       | Indefinite      |       |
| Customer  Relationships |       | 16 years        |       |

 

The following tablesummarizes, on an unaudited pro forma basis, the combined results of operationsof the Company and Coffman, as though the transaction had occurred as of January1, 2008. The pro forma amounts give effect to

 

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appropriate adjustmentsfor amortization, depreciation, interest expense and income taxes. The proforma amounts presented are not necessarily indicative of either the actualconsolidated operating results had the transaction occurred as of January 1,2008 or of future consolidated operating results.

 
| ** **                       | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  revenue                     |       | $                               | 21,739,000 |                          | $          | 33,152,000 |   | $ | 41,689,000 |   | $ | 65,432,000 |   |
|                             |       |                            |       |                          |       |   |   |   |   |
| Net  loss                        |       | $                               | (1,800,000 | )                             | $          | (2,336,000 | ) | $ | (3,477,000 | ) | $ | (2,932,000 | ) |
|                             |       |                            |       |                          |       |   |   |   |   |
| Loss  per share of common stock: |       |                            |       |                          |       |   |   |   |   |
| Basic                            |       | $                               | (0.50      | )                             | $          | (0.64 | ) | $ | (0.96 | ) | $ | (0.81 | ) |
| Diluted                          |       | $                               | (0.50      | )                             | $          | (0.63 | ) | $ | (0.96 | ) | $ | (0.79 | ) |

 

**NOTE 3 - FAIR VALUE MEASUREMENTS**

 

Effective January 1,2008, the Company adopted FASB Statement No. 157, “Fair Value Measurements”(“FAS 157”), as it relates to financial assets and financial liabilities. FAS157 establishes a framework for measuring fair value in accounting principlesgenerally accepted in the United States of America and expands disclosuresabout fair value measurements. FAS 157 applies under other previously issuedaccounting pronouncements that require or permit fair value measurements butdoes not require any new fair value measurements. The adoption of FAS 157 didnot have a material impact on the Company’s consolidated financial statements.

 

FAS 157 defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date. FAS 157 establishes a fair value hierarchy that distinguishesbetween (1) market participant assumptions developed based on market dataobtained from independent sources (observable inputs) and (2) an entity’s ownassumptions about market participant assumptions developed based on the bestinformation available in the circumstances (unobservable inputs).

 

The fair value hierarchyconsists of three broad levels, which gives the highest priority to unadjustedquoted prices in active markets for identical assets or liabilities (Level 1)and the lowest priority to unobservable inputs (Level 3). The three levels ofthe fair value hierarchy under FAS 157 are described as follows:

 

·                              Level 1-Unadjusted quoted prices in active markets for identical assets or liabilitiesthat are accessible at the measurement date.

 

·                              Level 2- Inputsother than quoted prices included within Level 1 that are observable for theasset or liability, either directly or indirectly. Level 2 inputs includequoted prices for similar assets or liabilities in active markets; quotedprices for identical or similar assets or liabilities in markets that are notactive; inputs other than quoted prices that are observable for the asset orliability; and inputs that are derived principally from or corroborated byobservable market data by correlation or other means.

 

·                              Level3- Inputs that are unobservable for the asset or liability.

 

The following sectiondescribes the valuation methodologies that we used to measure financialinstruments at fair value.

 

The fair value of thecontingent consideration obligation incurred in connection with the WMCtransaction is estimated based on the estimated weighted average cost ofcapital and estimated future income, among other criteria.

 

The following tablepresents the liabilities that are measured and recognized at fair value on arecurring basis classified under the appropriate level of the fair valuehierarchy as of June 30, 2009:

 
| ** **               | ** ** | **Level 1** | ** **   | **Level 2** | ** ** | **Level 3**  | ** ** | **Total** | ** ** |
|--------------------------|------------|-------------|--------------|-------------|------------|--------------|------------|-----------|------------|
| Liabilities:             |       |        |         |        |       |         |       |      |       |
| Contingent consideration |       | $           |  — |        | $          |  — |       | $         | 4,586,000  |   | $ | 4,586,000 |   |
|                          |            |             |              |             |            |              |            |           |            |  |  |  |  |

 

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The carrying amounts of cash equivalents,investments, receivables, accounts payable, and accrued expenses approximatefair value due to the immediate or short-term maturity of these financialinstruments. The fair value of notes payable is determined using currentapplicable rates for similar instruments as of the balance sheet date andapproximates the carrying value of such debt.

 

**NOTE 4 – (LOSS) EARNINGS PER SHARE**

 

Basic (loss) earnings per common share is based onlyon the average number of shares of common stock outstanding for the periods.Diluted earnings per common share reflects the effect of shares of common stockissuable upon the exercise of options, unless the effect on earnings isantidilutive.

 

Diluted (loss) earnings per common share is computedusing the treasury stock method. Under this method, the aggregate number ofshares of common stock outstanding reflects the assumed use of proceeds fromthe hypothetical exercise of any outstanding options to purchase shares of theCompany’s Class A Common Stock. The average market value for the period is usedas the assumed purchase price.

 

The following table sets forth the computation ofbasic and diluted (loss) earnings per common share:

 
| ** **                                                                                                                 | ** ** | **Three  months ended** | ** ** | **Six  months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **June  30,**           | ** ** | **June  30,**         | ** ** |
| ** **                                                                                                                 | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator:                                                                                                                 |       |                    |       |                  |       |   |   |   |   |
| Numerator for basic and  diluted(loss)  earnings per common share:                                                         |       |                    |       |                  |       |   |   |   |   |
| Net (loss) earnings                                                                                                        |       | $                       | (565,000   | )                     | $          |  495,000 |   | $ | (1,171,000 | ) | $ |  857,000 |   |
| Denominator:                                                                                                               |       |                    |       |                  |       |   |   |   |   |
| Denominator for basic  (loss) earnings per share –weighted average common shares outstanding                          |       | 3,615,000               |       | 3,637,000             |       | 3,615,000 |   | 3,637,000 |   |
| Effect of dilutive  securities:                                                                                            |       |                    |       |                  |       |   |   |   |   |
| Stock options                                                                                                              |       | —                  |       | 76,000                |       | — |   | 57,000 |   |
| Denominator for diluted  (loss) earnings per share – adjusted weighted average common shares and  assumed conversions |       | 3,615,000               |       | 3,713,000             |       | 3,615,000 |   | 3,694,000 |   |
|                                                                                                                            |            |                         |            |                       |            |  |  |  |  |  |  |  |  |

 

At June 30, 2009 and 2008 and during the three andsix-month periods ended June 30, 2009 and 2008, there were outstanding stockoptions whose exercise prices were higher than the average market values of theunderlying Class A Common Stock for the period. These options are antidilutiveand are excluded from the computation of (loss) earnings per share. Theweighted average antidilutive stock options outstanding were as follows:

 
| ** **                                               | ** ** | **Three  months ended** | ** ** | **Six  months ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **June  30,**           | ** ** | **June  30,**         | ** ** |
| ** **                                               | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted average  antidilutive stock options outstanding |       | 554,000                 |       | 381,000               |       | 554,000 |   | 326,000 |   |

 

Diluted loss per share for the three and six-month period ended June 30,2009 was the same as basic loss per share, since the effect of the inclusion ofcommon share equivalents would be anti-dilutive, because of the reported loss.

 

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**NOTE 5 - STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

The Company did not grant any stock options orwarrants during the three- or six-month periods ended June 30, 2009. In accordancewith SFAS No. 123(R), “Share-Based Payment” (“Statement 123(R)”), the Companyrecorded stock-based compensation expense for the three-month periods ended June30, 2009 and 2008 of approximately $68,000 and $51,000, respectively, and $138,000 and $97,000, respectively for thesix-month periods ended June 30, 2009 and 2008. The compensation expense is recognized in selling, general andadministrative expenses on the Company’s statements of operations on astraight-line basis over the vesting periods.  TheCompany recognizes compensation cost over the requisite service period.However, the exercisability of the respective non-vested options, which are atpre-determined dates on a calendar year, do not necessarily correspond to theperiod(s) in which straight-line amortization of compensation cost is recorded.As of June 30, 2009, the Company had approximately $247,000 of total unrecognizedcompensation cost related to non-vested awards granted under our stock-basedplans, which we expect to recognize over a weighted-average period of 1.7years.

 

Stock Option Plan

 

The Company’s 2002 Incentive Stock Option Plan (the“Current Plan”) authorizes the issuance, to employees and directors, of optionsto purchase a maximum of 1,100,000 shares of Class A Common Stock. Theseoptions must be issued within ten years of the effective date of the CurrentPlan and are exercisable for a ten year period from the date of grant, atprices not less than 100% of the market value of the Class A Common Stock onthe date the option is granted. Incentive stock options granted to any 10%stockholder are exercisable for a five year period from the date of grant, atprices not less than 110% of the market value of the Class A Common Stock onthe date the option is granted. Pursuant to the Current Plan, the Stock OptionCommittee has the discretion to award non-qualified stock option grants withvarious vesting parameters. Options have vesting periods of immediate to threeyears. In the event options granted contain a vesting schedule over a period ofyears, the Company recognizes compensation cost for these awards on astraight-line basis over the service period. The Current Plan, which terminatesin 2012, is the successor to the Company’s 1992 Incentive Stock Option Plan(the “Prior Plan”).

 

The following is a summary of the changes inoutstanding options for the six months ended June 30, 2009:

 
| ** **                   | ** ** | **Option Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, January 1, 2009 |       | 553,936           |       | $                                      | 7.38       |                                                       | 6.5        |                            | —     |   |
| Granted                      |       | —            |       |                                   |       |                                                       |       |                            |       |
| Exercised                    |       | —            |       |                                   |       |                                                       |       |                            |       |
| Forfeited                    |       | —            |       |                                   |       |                                                       |       |                            |       |
| Expired                      |       | (12,000           | )          |                                   |       |                                                       |       |                            |       |
| Outstanding, June 30, 2009   |       | 541,936           |       | $                                      | 7.34       |                                                       | 6.2        |                            | —     |   |
|                         |       |              |       |                                   |       |                                                       |       |                            |       |
| Vested, June 30, 2009        |       | 394,269           |       | $                                      | 8.27       |                                                       | 5.2        |                            | —     |   |

 

The following is a summaryof changes in non-vested shares for the six months ended June 30, 2009:

 
| ** **                         | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-Date  Fair Value** | ** ** |
|------------------------------------|------------|-------------------|------------|---------------------------------------------|------------|
| Non-vested shares, January 1, 2009 |       | 212,406           |       | $                                           | 3.02       |   |
| Granted                            |       | —            |       |                                        |       |
| Vested                             |       | (64,739           | )          |                                        |       |
| Forfeited                          |       | —            |       |                                        |       |
| Non-vested shares, June 30, 2009   |       | 147,667           |       | $                                           | 2.85       |   |

 

The number of shares of Class A common stockreserved for stock options available for issuance under the Current Plan as of June30, 2009 was 417,900. Of the options outstanding at June 30, 2009, 539,936 wereissued under the Current Plan and 2,000 were issued under the Prior Plan.

 

**NOTE 6 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

InMay 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS165 establishes general standards of accounting and disclosure of events thatoccur after the balance sheet date, but before financial statements are issuedor available to be issued. SFAS 165 requires the disclosure of the date throughwhich subsequent events have been

 

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evaluatedand whether such date represents the date the financial statements were issuedor were available to be issued. SFAS 165 is effective for the Company on June 30,2009. The Company has evaluated subsequent events through August 18, 2009,which could be required to be disclosed. The adoption of SFAS 165 did not havea material impact on the Company’s consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS 141(R) to change how an entity accounts forthe acquisition of a business. SFAS 141(R) replaced existing SFAS 141 in itsentirety. SFAS 141(R) carries forward the existing requirements to account forall business combinations using the acquisition method (formerly called thepurchase method). In general, SFAS 141(R) requires acquisition-date fair valuemeasurement of identifiable assets acquired, liabilities assumed, andnon-controlling interests in the acquiree. SFAS 141(R) eliminates the currentcost-based purchase method under SFAS 141. The measurement requirements willresult in the recognition of the full amount of acquisition-date goodwill,which includes amounts attributable to non-controlling interests. The acquirerwill be required to recognize in income any gain or loss on the remeasurementto acquisition-date fair value of consideration transferred or of previouslyacquired equity interests in the acquiree. Neither the direct costs incurred toeffect a business combination nor the costs the acquirer expects to incur undera plan to restructure an acquired business will be included as part of the businesscombination accounting. As a result, those costs will be charged to expensewhen incurred, except for debt or equity issuance costs, which will beaccounted for in accordance with other accounting principles generally acceptedin the United States of America. SFAS 141(R) also changes the accounting forcontingent consideration, in process research and development, contingencies,and restructuring costs. In addition, changes in deferred tax asset valuationallowances and acquired income tax uncertainties in a business combination thatoccur after the measurement period will impact income taxes under SFAS 141(R).SFAS 141(R) became effective for the Company on January 1, 2009. As the resultof adopting SFAS 141(R) the Company, in connection with the acquisition ofCoffman Stairs LLC, incurred approximately $952,000, of which approximately $432,000 was recorded as expenses.Prior to its adoption SFAS 141(R) approximately $952,000 would have been included in goodwill.  Additionally, as the result of the adoptionof SFAS 141(R), the Company recorded contingent consideration of $4,586,000, which is reflected on theCompany’s balance sheet as part of Long-Term Debt. In accordance with SFAS141(R), the Company will, in future periods, determine the fair value of thecontingent consideration obligation and record any adjustment through thecurrent statement of operations.

 

In December 2007, the FASB issued SFAS 160, “Non-controlling Interestsin Consolidated Financial Statements” an amendment of ARB No. 51, (“SFAS 160”).SFAS 160 changes the accounting for, and the financial statement presentationof, non-controlling equity interests in a consolidated subsidiary. SFAS 160replaces the existing minority-interest provisions of Accounting ResearchBulletin (ARB) 51, “ConsolidatedFinancial Statements”, by defining a new term—*non-controlling interests*—to replace what were previouslycalled *minority interests*. SFAS160 establishes non-controlling interests as a component of the equity of aconsolidated entity. The underlying principle of SFAS 160 is that both thecontrolling interest and the non-controlling interests are part of the equityof a single economic entity, the consolidated reporting entity. Classifyingnon-controlling interests as a component of consolidated equity is a changefrom the current practice of treating minority interests as a mezzanine itembetween liabilities and equity or as a liability. The change affects both theaccounting and financial reporting for non-controlling interests in aconsolidated subsidiary. SFAS 160 includes reporting requirements intended toclearly identify and differentiate the interests of the parent and theinterests of the non-controlling owners. The adoption of SFAS 160 on January 1,2009, did not have a material impact on our condensed consolidated financialstatements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sourcesof accounting principles and the framework for selecting the principles to beused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with accounting principles generally acceptedin the United States of America. It is effective 60 days following the Securityand Exchange Commission’s approval of the Public Company Accounting OversightBoard amendments to AU Section 411, “The Meaning of Present Fairly inConformity With Generally Accepted Accounting Principles. The adoption of SFAS162 did not have any effect on our condensed consolidated financial position,results of operations or cash flows.

 

InApril 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3,“Determination of the Useful Life of Intangible Assets,” (“FSP 142-3”). FSP142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” andalso requires expanded disclosure related to the determination of intangibleasset useful lives. FSP 142-3 is effective for fiscal years beginning after December15, 2008. The adoption of FSP 142-3 did not have a material impact on ourcondensed consolidated financial statements.

 

Management does not believe that any other recently issued, but not yeteffective accounting standards, if currently adopted would have a materialeffect on our condensed consolidated financial statements.

 

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**NOTE 7 - ****ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS******

 

Accounts receivable - net consists of:

 
| ** **                      | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| Accounts receivable             |       | $                 | 12,089,000 |                  | $          | 9,114,000 |   |
| Allowance for doubtful accounts |       | (441,000          | )          | (607,000              | )          |
|                            |       | $                 | 11,648,000 |                  | $          | 8,507,000 |   |

 

**NOTE 8 – INVENTORIES**

 

Inventories- net consist of:

 
| ** **                                       | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| Raw material                                     |       | $                 | 2,944,000  |                  | $          | 2,019,000 |   |
| Work in process                                  |       | 1,462,000         |       | 1,606,000             |       |
| Finished goods                                   |       | 33,178,000        |       | 31,575,000            |       |
|                                             |       | 37,584,000        |       | 35,200,000            |       |
| Reserve for obsolete and slow-moving inventories |       | (4,105,000        | )          | (3,914,000            | )          |
|                                             |       | $                 | 33,479,000 |                  | $          | 31,286,000 |   |

 

**NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS**

 

As the result of the WMC transaction, effective June 8, 2009, theCompany increased its customer relationships and trademarks by $1,250,000 and $1,622,000, respectively.  Customer relationships will be amortized oversixteen years for financial reporting purposes and fifteen years for taxpurposes. Trademarks, having indefinite lives will not be amortized forfinancial reporting purposes. The carrying value will be tested for impairmentannually, or as required. Trademarks will be amortized over a fifteen periodfor tax purposes. Further, as part of the WMC transaction, the Company recordedadditional goodwill of $2,427,000.  Asdiscussed in previous filings, the Company recorded additional goodwill of$2,362,000, thecontingent consideration due the sellers of Hy-Tech.

 

The changes in the carrying amounts of goodwill are as follows:

 
| ** **                                              | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| Balance, December 31, 2008                              |       | $                | 4,183,000  |      | $          | 916,000      |       | $ | 3,267,000 |   |
| Additions – January 1, 2009 through March 31, 2009 |       | 4,789,000        |       | 2,362,000 |       | 2,427,000    |       |
| Balance June 30, 2009                                   |       | $                | 8,972,000  |      | $          | 3,278,000    |       | $ | 5,694,000 |   |

 

Other intangible assets were as follows:

 
| ** **                            | ** ** | **June 30, 2009** | ** ** | **December 31, 2008**         | ** ** |
|---------------------------------------|------------|-------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Cost**          | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| Other intangible assets:              |       |              |       |                          |       |   |   |   |   |   |   |   |   |
| Customer relationships                |       | $                 | 6,320,000  |                          | $          | 2,767,000 |   | $ | 3,553,000 |   | $ | 5,070,000 |   | $ | 2,604,000 |   | $ | 2,466,000 |   |
| Non-compete and Employment agreements |       | 810,000           |       | 795,000                       |       | 15,000 |   | 810,000 |   | 790,000 |   | 20,000 |   |
| Trademarks                            |       | 1,921,000         |       | —                        |       | 1,921,000 |   | 299,000 |   | — |   | 299,000 |   |
| Drawings                              |       | 290,000           |       | 34,000                        |       | 256,000 |   | 290,000 |   | 27,000 |   | 263,000 |   |
| Licensing                             |       | 105,000           |       | 37,000                        |       | 68,000 |   | 105,000 |   | 32,000 |   | 73,000 |   |
| Totals                                |       | $                 | 9,446,000  |                          | $          | 3,633,000 |   | $ | 5,813,000 |   | $ | 6,574,000 |   | $ | 3,453,000 |   | $ | 3,121,000 |   |

 

Amortization expense forintangible assets subject to amortization was as follows:

 
| ** ** | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|       |       | $                               | 90,000     |                          | $          | 230,000 |   | $ | 180,000 |   | $ | 459,000 |   |
|            |            |                                 |            |                               |            |  |  |  |  |  |  |  |  |

 

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Amortization expense for each of the twelve-monthperiods ending June 30, 2010 through June 30, 2014 is estimated to be asfollows: 2010 - $439,000; 2011 - $433,000; 2012 - $429,000; 2013 - $366,000 and 2014 - $264,000 .  The weighted average amortization period forintangible assets was 11.3 years at June 30, 2009 and 9.9 years at December 31,2008.

 

**NOTE 10- WARRANTY LIABILITY**

 

The Company offers to itscustomers, warranties against product defects for periods primarily rangingfrom one to three years.  Certainproducts carry limited lifetime warranties. The Company’s typical warrantiesrequire it to repair or replace the defective products during the warrantyperiod at no cost to the customer. At the time the product revenue isrecognized, the Company records a liability for estimated costs under itswarranties, which are estimated based on historical experience. The Companyperiodically assesses the adequacy of its recorded warranty liability andadjusts the amounts as necessary. While the Company believes that its estimatedliability for product warranties is adequate, the estimated liability for theproduct warranties could differ materially from future actual warranty costs.

 

Changes in the Company’swarranty liability, included in other accrued liabilities, were as follows:

 
| ** **                                                          | ** ** | **Six-months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                          | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| Balance, beginning of period                                        |       | $                             | 337,000    |   | $ | 552,000 |   |
| Acquisition                                                         |       | 120,000                       |       | — |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 241,000                       |       | 406,000 |   |
| Actual warranty costs incurred                                      |       | (262,000                      | )          | (487,000 | ) |
| Balance, end of period                                              |       | $                             | 436,000    |   | $ | 471,000 |   |

 

**NOTE 11 – BANK DEBT**

 

**SHORT-TERM LOANS**

 

TheCompany and its subsidiaries as co-borrowers entered into a Credit Agreement, (“CreditAgreement”) as amended, with two banks (“banks”) in 2004.  In March 2009, the banks amended the CreditAgreement to among other things increase the revolving credit loan facility, toa maximum of $22,000,000 for directborrowings, with various sublimits for letters of credit, bankers’ acceptancesand equipment loans. There are no commitment fees for any unused portion ofthis Credit Agreement. The revolving credit loan facility within the CreditAgreement, as amended, expires March 30, 2010 and is subject to annual reviewby the lending banks.  Direct borrowingsunder the revolving credit loan facility are secured by the Company’s accountsreceivable, inventory and equipment and are cross-guaranteed by each of theCompany’s subsidiaries, except WMC. These borrowings bear interest at LIBOR(London InterBank Offered Rate) plus the currently applicable loan margin, orthe prime interest rate.  The amendmentwas not a material modification as defined by the Emerging Issues TaskForce in Issue No. 96-19 and, as a result, no gain or loss had been recorded.

 

OnJune 10, 2009, the banks, in connection with the WMC transaction (see Note 2),entered into an new Amendment to the Credit Agreement which, among other things,released certain collateral contemporaneous with the Company remitting therespective advanced funds associated thereto, lowered the maximum eligibleinventory, and increased the applicable loan margins on the Company’s revolvingcredit loan facility to 2.00% with respect to prime rate loans and 3.75% withrespect to LIBOR loans as well as resetting the applicable term loan margins to2.00% and 4.00%, respectively, for prime rate and LIBOR loans. Additionally, ascertain collateral was released by the banks in connection with the WMCtransaction, this amendment reduced certain components of the collateral baseas well as the maximum amount available under the terms of the revolving creditloan facility to $20,700,000 as of theeffective date of the Amendment, and $19,400,000 as of August 31, 2009.  At June 30, 2009 and December 31, 2008, theapplicable loan margins added to LIBOR were 3.75% and 3.5%, respectively.  At June 30, 2009 and December 31, 2008, theapplicable loan margins added to prime rate were 2.00% and 0.5%, respectively.As such, interest rates applied to the loan balances at June 30, 2009 were 4.3%and 5.25% for borrowings at LIBOR and prime rate, respectively, and at December31, 2008 were 3.45% and 5.75% for borrowings at LIBOR and prime rate,respectively. At June 30, 2009 and December 31, 2008, the balances outstandingon the revolving credit loan facility with the banks within the CreditAgreement were $17,000,000 and $20,000,000, respectively.

 

Inconnection with the transaction, WMC entered into the WMC loan agreement with PNC.The WMC loan agreement expires June 8, 2012. Neither the Company nor any othersubsidiary is a co-borrower or a guarantor to this WMC loan agreement.  The WMC loan agreement provides a maximumloan amount of $12,000,000, of which$1,134,000 wasestablished as a term loan, the balance of $10,866,000 set as the maximum revolvingadvance amount.  The WMC loan agreementis collateralized by the accounts receivable, inventory, equipment, investmentproperty and general intangibles of WMC. The revolving advances made against the WMC loan agreement will bearinterest based upon either the Eurodollar Rate Loans plus 3.50%, or at DomesticRate Loans plus 2.50%.  Domestic RateLoans are advances at a rate of interest per 

 

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annumequal to the highest of (i) the Base Rate in effect on such day, (ii) theFederal Funds Open Rate in effect on such day plus 1/2 of 1%, (iii) the DailyLIBOR plus 1%, and (iv) three hundred fifty basis points (3.50%). At June 30,2009 the balance owing on the revolving advance was $5,374,000.

 

**LONG TERM LOANS**

 

Aspart of the amendment to the Credit Agreement entered into in March 2009, thebanks agreed to cancel and refinance two term loans, which, immediately priorto the amendment, aggregated approximately $13,200,000. One term loan had a balance of $6,000,000 and was being repaid $950,000 quarterly through June 2010and the balance of $300,000 payable in September2010.  The second term loan had a balanceimmediately prior to the amendment of $7,200,000 payable in quarterly installments of $360,000. Both term loans incurredinterest at LIBOR plus the applicable loan margin. The amendment created onenew term loan in the amount of $7,116,000 with the balance of $6,084,000 added to the revolvingcredit loan facility. The new term loan expires March 30, 2012. Further, thenew term loan requires the Company to make monthly principal installmentpayments, which aggregate to approximately $1,780,000 annually, compared to the previousinstallment payments which required the Company to make quarterly paymentsaggregating $5,240,000, annually.  Borrowings under the term loan are secured bythe Company’s accounts receivable, inventory and equipment and arecross-guaranteed by each of the Company’s subsidiaries, with the exception ofWMC. These borrowings bear interest at LIBOR plus the currently applicable loanmargin, or the prime interest rate. At June 30, 2009, the term loan balance was$6,671,000 withapplicable loan margin of 4.00% added to LIBOR. At December 31, 2008, the twoterm loans then in existence aggregated approximately $13,560,000, and had applicable loanmargin added LIBOR of 3.75%.

 

Includedwithin the WMC loan agreement entered into with PNC, was a term loan with aprincipal amount of $1,134,000, which is to be repaid in twenty-four equal monthlyinstallments of $47,000.  The term loan may consist ofDomestic Rate Loans or Eurodollar Rate Loans, or a combination thereof. At June30, 2009 the balance was $1,134,000 and the applicable loan rate plus marginapplied to this term loan was 7.0%.

 

TheCredit Agreement entered into with the banks also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases of foreigncurrencies needed for payments to foreign suppliers. The total amount offoreign currency forward contracts outstanding under the foreign exchange lineat June 30, 2009, based on that day’s closing spot rate, was approximately $49,000.

 

Underthe terms of the Credit Agreement entered into with the banks, the Company isrequired to adhere to certain financial covenants. At June 30, 2009, theCompany was not in compliance with certain financial covenants. The Companybelieves that it may not be in compliance at September 30, 2009 with certainfinancial covenants currently in place. As such, it has reclassified the longterm portion of its bank debt to short term debt on its consolidated condensedbalance sheet.  The banks proposed awaiver and amendment to the related credit facility. The proposed waiver andamendment, conditionally would waive the non-compliance of the financialcovenants at June 30, 2009, require certain changes to the credit facility, andincrease all applicable loan margins.  The Company is in discussion with the lender,however, there can be no assurance that a satisfactory waiver and amendmentwill be entered into. The total amount of the debt that is subject toacceleration as a result of these matters is approximately $27,400,000.

 

**NOTE 12—RELATED PARTY TRANSACTIONS**

 

Pursuant to certainrequirements in the WMC loan agreement with PNC, WMC requested and receivedfrom Richard Horowitz, President and Chief Executive Officer, and a principalstockholder of the Company, two letters of credit, each in the amount of$145,000 with PNC as the beneficiary.  Theletters of credit may be drawn against, should WMC’s availability related tothe revolving credit portion of the WMC loan agreement fall below a certainthreshold.  Should a letter of credit bedrawn upon by PNC, WMC will issue to Mr. Horowitz a note payable bearinginterest at the rate of six and one half percent (6.5%) from the date of theletter of credit note to its maturity. The letters of credit were issuedthrough a bank at which a member of the Company’s board of directors is anExecutive Vice President. Further, the letters of credit terminate on theearliest of (a) June 30, 2010 for one letter of credit and September 30, 2010for the other letter of credit, (b) the date on which there has been a drawing,or (c) the day upon which a substitute letter of credit becomes effective.

 

The president of one of our subsidiaries is part owner of one of thesubsidiary’s vendors. During the six- month periods ended June 30, 2009 and2008, we purchased approximately $506,000 and $549,000, respectively of product from thisvendor.

 

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**NOTE 13 - BUSINESS SEGMENTS**

 

P&F operates in two primary lines of business, or segments: (i) toolsand other products (“Tools”) and (ii) hardware and accessories (“Hardware”).For reporting purposes, Florida Pneumatic and Hy-Tech are combined in the Toolssegment, while WM Coffman, Woodmark, Pacific Stair Products and Nationwide arecombined in the Hardware segment. The Company evaluates segment performancebased primarily on segment operating income. The accounting policies of each ofthe segments are the same as those described in Note 1.

 
| **Three  months ended June 30, 2009** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|---------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                            |       |             |       |      |       |         |       |
| Revenues from  unaffiliated customers |       | $                | 18,528,000 |      | $          | 9,336,000    |       | $ | 9,192,000 |   |
|                                  |       |             |       |      |       |         |       |
| Segment operating  income (loss)      |       | $                | 332,000    |      | $          | 589,000      |       | $ | (257,000 | ) |
| General corporate  expense            |       | (909,000         | )          |      |       |         |       |
| Interest expense – net           |       | (362,000         | )          |      |       |         |       |
| Loss before income  taxes             |       | $                | (939,000   | )         |       |         |       |   |
|                                  |       |             |       |      |       |         |       |
| Segment assets                        |       | $                | 78,694,000 |      | $          | 43,557,000   |       | $ | 35,137,000 |   |
| Corporate assets                      |       | 8,359,000        |       |      |       |         |       |
| Total assets                          |       | $                | 87,053,000 |      |       |         |       |   |
|                                  |       |             |       |      |       |         |       |
| **Three  months ended June 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
| ** **                            |       |             |       |      |       |         |       |
| Revenues from  unaffiliated customers |       | $                | 25,554,000 |      | $          | 14,487,000   |       | $ | 11,067,000 |   |
|                                  |       |             |       |      |       |         |       |
| Segment operating  income             |       | $                | 2,511,000  |      | $          | 1,725,000    |       | $ | 786,000 |   |
| General corporate  expense            |       | (1,158,000       | )          |      |       |         |       |
| Interest expense – net           |       | (452,000         | )          |      |       |         |       |
| Earnings before income  taxes         |       | $                | 901,000    |      |       |         |       |   |
|                                  |       |             |       |      |       |         |       |
| Segment assets                        |       | $                | 76,601,000 |      | $          | 45,834,000   |       | $ | 30,767,000 |   |
| Corporate assets                      |       | 5,489,000        |       |      |       |         |       |
| Total assets                          |       | $                | 82,090,000 |      |       |         |       |   |
|                                  |       |             |       |      |       |         |       |
| **Six  months ended June 30, 2009**   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
| ** **                            |       |             |       |      |       |         |       |
| Revenues from  unaffiliated customers |       | $                | 34,090,000 |      | $          | 18,481,000   |       | $ | 15,609,000 |   |
|                                  |       |             |       |      |       |         |       |
| Segment operating  income (loss)      |       | $                | 1,124,000  |      | $          | 1,596,000    |       | $ | (472,000 | ) |
| General corporate  expense            |       | (2,125,000       | )          |      |       |         |       |
| Interest expense – net           |       | (671,000         | )          |      |       |         |       |
| Loss before income  taxes             |       | $                | (1,672,000 | )         |       |         |       |   |

 

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| **Six  months ended June 30, 2008**   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|---------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                            |       |             |       |      |       |         |       |
| Revenues from  unaffiliated customers |       | $                | 49,879,000 |      | $          | 27,773,000   |       | $ | 22,106,000 |   |
|                                  |       |             |       |      |       |         |       |
| Segment operating  income             |       | $                | 4,972,000  |      | $          | 3,365,000    |       | $ | 1,607,000 |   |
| General corporate  expense            |       | (2,435,000       | )          |      |       |         |       |
| Interest expense – net           |       | (1,010,000       | )          |      |       |         |       |
| Earnings before income  taxes         |       | $                | 1,527,000  |      |       |         |       |   |

 

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**P&FINDUSTRIES, INC. AND SUBSIDIARIES**

 

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

 

**General**

 

The Private Securities Litigation Reform Act of 1995(the “Reform Act”) provides a safe harbor for forward-looking statements madeby or on behalf of P&F Industries, Inc. and subsidiaries (“P&F”, or “theCompany”). P&F and its representatives may, from time to time, make writtenor verbal forward-looking statements, including statements contained in theCompany’s filings with the Securities and Exchange Commission and in itsreports to stockholders. Generally, the inclusion of the words “believe,” “expect,”“intend,” “estimate,” “anticipate,” “will,” and their opposites and similarexpressions identify statements that constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and that are intended to come within thesafe harbor protection provided by those sections. Any forward-lookingstatements contained herein, including those related to the Company’s futureperformance, are based upon the Company’s historical performance and on currentplans, estimates and expectations. All forward-looking statements involve risksand uncertainties. These risks and uncertainties could cause the Company’sactual results for the 2009 fiscal year and beyond to differ materially fromthose expressed in any forward-looking statement made by or on behalf of theCompany for a number of reasons, as previouslydisclosed in the Company’s Annual Report on Form 10-K for the year ended December31, 2008 in response to Item 1A to Part I of Form 10-K. Forward-lookingstatements speak only as of the date on which they are made. The Companyundertakes no obligation to update publicly or revise any forward-lookingstatement, whether as a result of new information, future developments orotherwise.

 

**Business**

 

The unaudited consolidated condensed financialstatements contained herein include the accounts of P&F Industries, Inc.and its subsidiaries (“P&F”). All significant intercompany balances andtransactions have been eliminated.

 

P&F conducts its business operations through twoof its wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and its subsidiariesare herein referred to collectively as the “Company.” In addition, the words “we”,“our” and “us” refer to the Company.

 

Further, P&F operates in two primary lines of business, orsegments: (i) tools and other products (“Tools”) and (ii) hardware and accessories(“Hardware”).

 

On June 10, 2009,pursuant to an Asset Purchase Agreement dated as of June 8, 2009 (the “AssetPurchase Agreement”), WMC, a Delaware limited liability company, (“WMC”) a newlyformed subsidiary of the Company, acquired substantially all of the assets ofCoffman Stairs LLC, a Delaware limited liability company (“Coffman”).  Coffman was in the business of manufacturingand distributing interior wood and iron stair components throughout the UnitedStates. Woodmark and PSP contributed to WMC certain respective assets, subjectto WMC’s assumption of certain respective liabilities and obligations of eachof Woodmark and PSP (the “Asset Contribution”).  In addition, Woodmark and PSP entered intocertain agreements with WMC, effectively transferring the Company’s stair partsbusiness to WMC.

 

On June 10, 2009, WMCentered into a Revolving Credit, Term Loan and Security Agreement (“WMC loanagreement”), dated as of June 8, 2009 with PNC Bank, National Association, (“PNC”)pursuant to which WMC may receive loans from PNC in the aggregate principalamount of $12,000,000. (See Note 11).

 

The purchase priceconsisted of a cash payment of $4,528,000, a promissory note in the amount of$3,972,000 payable to Coffman, and the assumption of certain payables,liabilities and obligations.  Additionally, subject to certain conditions,WMC also agreed to pay to Coffman contingent consideration based upon thefinancial performance of WMC and certain other factors described in the AssetPurchase Agreement.  The Companyestimated a range of outcomes wherein contingent consideration would have to bepaid to Coffman.  The amount of potentialcontingent consideration ranged from $3,697,000 to $6,770,000.  The Company, in accordance with FinancialAccounting Standards Board (“FASB”), Statement of Financial AccountingStandards (“SFAS”) 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”),recorded $3,972,000, which is thepresent value of $5,885,000, which is whatit believes to be the most likely scenario of the potential estimatedcontingent consideration obligation. WMC also entered into an advisory agreement withVisador Holding Corporation (“Visador”), the parent company of Coffman,pursuant to which WMC agreed to pay Visador, subject to certain conditions,advisory fees, aggregating during the first three years to a maximum of$750,000 in exchange for Visador providing consulting and advisory services toWMC. Cash payments to Visador may be made only with permission of PNC.  The fair value of this obligation of $614,000has been included in contingent consideration. As such the Company recorded a total of $4,586,000 as contingentconsideration. Additionally, the Company incurred approximately $952,000 oftotal fees and expenses in connection with the formation of WMC, of which, in accordancewith SFAS 141(R), it recorded in its 

 

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selling,general and administrative expenses approximately $432,000. The balance will beamortized over the three year term of the WMC loan agreement or approximately18 years, which is the remaining life of the facility lease, discussed below.

 

The newly-acquiredbusiness, headquartered in Marion, VA, includes a 500,000 sq. footmanufacturing facility. We intend to continue warehouse operations in Marion,VA, Plano, TX and Austell, GA. Coffman Stairs had revenue of $27.5 million in2008 and had approximately 115 employees at the time of the acquisition. Webelieve that as a result of this transaction, WMC is the largest manufacturerand supplier of wood and iron stair parts in the United States. Further, webelieve that the complementary combination of product lines, distributionnetworks, employees, sales representatives, and domestic and internationalsuppliers is unique in the industry and should enable WMC to respond to theservice requirements of one- and two-step distributors as well as stairspecialists.

 

**Tools**

 

We conduct our Tools business through Continental, which in turnoperates through its wholly-owned subsidiaries, Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware.  Hy-Tech is primarily engaged in themanufacture and distribution of pneumatic tools and parts for industrialapplications.

 

**Hardware**

 

We conduct our Hardware business through Countrywide, which in turnoperates through its wholly-owned subsidiaries, Nationwide Industries, Inc. (“Nationwide”),Woodmark International, L.P. (“Woodmark”), Pacific Stair Products, Inc. (“PSP”)and WM Coffman, LLC (“WMC”). Woodmark was, until the transactions described inNote 2 (the “WMC transactions”), which was effective June 8, 2009, an importerof both stair parts components and kitchen and bath hardware and accessories.Woodmark and PSP contributed certain net assets to WMC in return for members’equity. Accordingly, effective with the WMC transaction, the stair partsbusiness, which formerly reported through Woodmark, is part of WMC.  PSP, until mid-2008, manufactured anddistributed premium stair rail products. Since the closing of its mill inmid-2008, it had operated primarily as a distributer of Woodmark’s staircasecomponents to the building industry, in southern California and thesouthwestern region of the United States. As a result of the transaction, PSP will no longer be an operating unit.The Company exited the remaining facility on July 31, 2009. Its customers willbe serviced by WMC.  Nationwide is animporter and distributor of fencing, door, window hardware.  Effective with this filing, the Company willreport the results of operations of its kitchen & bath hardware andaccessories product line with Nationwide and will be referred to as “otherhardware and the results of operations of WMC as “Stair Parts” or “WMC”.

 

KEY INDICATORS

 

**Economic Measures**

 

The most critical economic indicator affecting ouroverall performance, specifically our Hardware segment, has been and willcontinue to be new home construction data. According to the U.S. Census Bureau and the Department of Housing andUrban Development, new privately-ownedhousing starts in June 2009 were at a seasonally adjusted annual rate of582,000, down 496,000 or 46% below the June 2008 rate of 1,078,000.  Economic indicators for the Tools segmentinclude general economic conditions and retail sales, which during thethree-month period ended June 30, 2009, had an adverse impact on revenue andgross margins.

 

Another key economic measure relevant to us is thecost of our raw materials, in particular metals, especially various types ofsteel and aluminum. Lastly, to a lesser extent, we are impacted by the value ofthe U.S. dollar in relation to the Japanese yen (“yen”) and the Taiwan dollar (“TWD”),as we purchase a significant portion of our products from these two countries.We also make purchases from Chinese sources in U.S. dollars. However, if theChinese currency, the Renminbi (“RMB”), were to be revalued against the dollar,there could be a significant negative impact on the cost of our products.

 

**Operating Measures**

 

Key operating measures we use to manage ouroperating segments are: future sales orders; shipments; development of newproducts; controlling customer retention; inventory levels and productivity.These measures are recorded and monitored at various intervals, includingdaily, weekly and monthly. To the extent these measures are relevant; they arediscussed in the detailed sections for each operating segment.

 

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**Financial Measures**

 

Key financial measures we use to evaluate theresults of our business include: revenue; gross margin; selling, general andadministrative expenses; earnings before interest; taxes and bonus; operatingcash flows and capital expenditures; return on sales; return on assets; dayssales outstanding and inventory turns. These measures are reviewed at monthly,quarterly and annual intervals and are compared to historical periods as wellas established objectives. To the extent that these measures are relevant, theyare discussed in the detailed sections for each operating segment below.

 

**CriticalAccounting Policies and Estimates**

 

Weprepare our consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America. Certain of theseaccounting policies require us to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities, revenues and expenses. On anongoing basis, we evaluate estimates, including those related to bad debts,inventory reserves, goodwill and intangible assets and warranty reserves. Webase our estimates on historical data and experience, when available, and onvarious other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates.

 

Therehave been no material changes in our critical accounting policies and estimatesfrom those discussed in Item 7 of our Annual Report on Form 10-K for the yearended December 31, 2008.

 

**RESULTS OF OPERATIONS**

 

Thetable below provides an analysis of our net revenue for the three month andsix-month periods ended June 30, 2009 and 2008.

 

**Revenue**

 
| ** **        | ** ** | **Three-months  Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|-------------------|------------|----------------------------------|------------|------------|------------|--------------|------------|
| ** **        | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                       | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             |       |                             |       |       |       |         |       |   |   |
| Florida Pneumatic |       | $                                | 6,121,000  |       | $          | 9,450,000    |       | $ | (3,329,000 | ) | (35.2 | )% |
| Hy-Tech           |       | 3,215,000                        |       | 5,037,000  |       | (1,822,000   | )          | (36.2 | ) |
| Tools Total       |       | 9,336,000                        |       | 14,487,000 |       | (5,151,000   | )          | (35.6 | ) |
|              |       |                             |       |       |       |         |       |   |   |
| Hardware          |       |                             |       |       |       |         |       |   |   |
| Stair Parts       |       | 4,461,000                        |       | 5,290,000  |       | (829,000     | )          | (15.7 | ) |
| Other hardware    |       | 4,731,000                        |       | 5,777,000  |       | (1,046,000   | )          | (18.1 | ) |
| Hardware Total    |       | 9,192,000                        |       | 11,067,000 |       | (1,875,000   | )          | (16.9 | ) |
|              |       |                             |       |       |       |         |       |   |   |
| Consolidated      |       | $                                | 18,528,000 |       | $          | 25,554,000   |       | $ | (7,026,000 | ) | (27.5 | )% |
|              |       |                             |       |       |       |         |       |   |   |
| ** **        | ** ** | **Six-months  Ended June 30,**   | ** ** | ** ** | ** ** | ** **   | ** ** |
| ** **        | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                       | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             |       |                             |       |       |       |         |       |   |   |
| Florida Pneumatic |       | $                                | 10,830,000 |       | $          | 18,357,000   |       | $ | (7,527,000 | ) | (41.0 | )% |
| Hy-Tech           |       | 7,651,000                        |       | 9,416,000  |       | (1,765,000   | )          | (18.7 | ) |
| Tools Total       |       | 18,481,000                       |       | 27,773,000 |       | (9,292,000   | )          | (33.5 | ) |
|              |       |                             |       |       |       |         |       |   |   |
| Hardware          |       |                             |       |       |       |         |       |   |   |
| Stair Parts       |       | 7,803,000                        |       | 10,754,000 |       | (2,951,000   | )          | (27.4 | ) |
| Other hardware    |       | 7,806,000                        |       | 11,352,000 |       | (3,546,000   | )          | (31.2 | ) |
| Hardware Total    |       | 15,609,000                       |       | 22,106,000 |       | (6,497,000   | )          | (29.4 | ) |
|              |       |                             |       |       |       |         |       |   |   |
| Consolidated      |       | $                                | 34,090,000 |       | $          | 49,879,000   |       | $ | (15,789,000 | ) | (31.7 | )% |

 

Allrevenues are generated in U.S. dollars and are not impacted by changes inforeign currency exchange rates.

 

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***Tools***

 

When comparing thethree-month periods ended June 30, 2009 and 2008, net revenue reported by ourTools segment decreased $5,151,000. Significant components to the reduction inrevenue at Florida Pneumatic include the loss of The Home Depot businessresulting in a decrease in net revenue of $1,557,000 and decreased shipments toits major retail customer of $813,000. Additionally, revenue from itsindustrial / catalog and OEM product lines decreased $524,000 and $257,000,respectively, when comparing the revenue for the three-month periods ended June30, 2009 to June 30, 2008.  Lastly, ourFranklin products line continues to weaken, as its market continues to erode.During the three-month period ended June 30, 2009, Franklin revenue decreased$108,000 when comparing second quarter of 2009 revenue to the revenue reportedduring the same period in 2008.  Otherthan the loss of revenue from The Home Depot, we believe the key factor to thefall-off in revenue at Florida Pneumatic is the result of the slowing overalleconomy. Florida Pneumatic’s relationships with its key customers, given thecurrent economic conditions remain good.

 

For the first time sinceits acquisition in February 2007, revenue at Hy-Tech decreased when comparingrevenue on a year over year basis. Revenue for the three-month period ended June 30, 2009 was $3,215,000,compared to $5,037,000 reported during the same three-month period in 2008.Hy-Tech, focuses on the industrial sector of the pneumatic tools market, asector for the Company which, until March 2009, had not been affected by thesluggish economy.  The decrease inrevenue was across its suite of products as well as customer base.  Hy-Tech’s relationships with its keycustomers, given the current economic conditions, remain good.

 

Overall conditions in thepneumatic tool market, exacerbated by a sluggish economy, the loss of a majorcustomer and inventory reductions occurring throughout our customer base,continue to adversely affect net revenue for the Tools segment. During thesix-month periods ended June 30, 2009, net revenue for our Tools segment decreasedto $18,481,000 from $27,773,000 in the same period a year ago. Until March ofthis year, many of these factors had not affected performance at Hy-Tech, whoserevenue for the six-month period ended June 30, 2009 decreased to $7,651,000from $9,416,000 during the six month period ended June 30, 2008.  All of the above factors continue toadversely affect revenue at Florida Pneumatic as well. During the latter halfof 2008 and early 2009, a number of its major customers reduced or cancelledorders.

 

***Hardware***

 

WMC is driven by thenumber of new homes being constructed which, has for some time been in decline.As noted earlier, based upon United States Census Bureau statistics, the annualnumber, seasonally adjusted, of new privately-owned housing starts for June 2009is 582,000, down 46% from the same figure for June 2008. This downward trend innew home construction continues to adversely affect performance at P&F, theHardware segment in particular. As such, revenue for the Hardware segmentdecreased to $9,192,000 from $11,067,000, when comparing the three-monthperiods ended June 30, 2009 and 2008.  Asthe result of the WMC transaction, revenue generated at WMC for the three-monthperiod ended June 30, 2009, which included less than one month of the acquiredentity, reported revenue of $4,461,000 compared to $5,290,000, reported for thesame period in 2008. Revenue at our other hardware businesses, which areprimarily from the sale of fencing and gate hardware, kitchen and bathaccessories, OEM products and line of patio hardware, is also feeling theimpact of the general overall economic sluggishness, a diminishing recreationalvehicle market and modular homes, the downturn in new home construction, andcompetitive pressures.  As such, otherhardware revenue during the three-month period ended June 30, 2009 was$4,731,000, compared to $5,777,000 during the second fiscal quarter of 2008.Within other hardware net revenue from fencing and gate hardware, kitchen andbath, OEM and patio hardware during the three-month period ended June 30,2009,were $2,794,000, $850,000, $948,000 and $139,000, respectively, comparedto $3,328,000, $1,235,000, $888,000 and $326,000, respectively during the sameperiod in the prior year.  We anticipatethat we will likely continue to see the affects of the sluggish economy andlagging new home starts along with competitive pressures on future revenue forthe remainder of 2009.

 

Net revenue for theHardware segment for the six-month period ended June 30, 2009 continues to feelthe impact of the low number of new homes being constructed compared to prioryears, as well as the general sluggishness of the overall economy, both are keydrivers to Hardware revenue.  As such,the Hardware segment reported a decrease of $6,497,000 or 29.4% when comparingthe six-month period ended June 30, 2009 revenue of $15,609,000 with thatreported in the same period last year of $22,106,000.  Stair parts revenue continued to decline to$7,803,000 during the six-month period ended June 30, 2009, from $10,754,000,in the same period in the prior year.  Webelieve it is difficult to predict when the economy, specifically housingstarts, will improve. However, as a result of the WMC transaction in June 2009,discussed previously, which effectively expanded market coverage andpenetration, we expect additional stair parts revenue.  During the six-month period ended June 30,2009, revenue from our other hardware product lines also continued to feel theadverse effects of the sluggish economy, low housing starts and depressedmodular and mobile home markets. Its revenue during this 

 

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period was $7,806,000,compared to $11,352,000 in the same period in the prior year.  We believe it is likely that revenue for theremainder of 2009 from our other hardware product lines will be at or slightlybelow those reported in 2008, however, there can be no assurance this willoccur.

 

**GrossMargins / Profits**

 

Grossprofits for the three and six-month periods ended June 30, 2009 and 2008:

 
| **Three months ended June  30,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|----------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2009                             |       | Gross Profit |       | $                | 4,711,000  |      | $          | 2,524,000    |       | $ | 2,187,000 |   |
|                             |       | Gross Margin |       | 25.4             | %          | 27.0      | %          | 23.8         | %          |
|                             |       |         |       |             |       |      |       |         |       |
| 2008                             |       | Gross Profit |       | $                | 8,055,000  |      | $          | 4,762,000    |       | $ | 3,293,000 |   |
|                             |       | Gross Margin |       | 31.5             | %          | 32.9      | %          | 29.8         | %          |
|                             |       |         |       |             |       |      |       |         |       |
| **Six months ended June  30,**   | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
| 2009                             |       | Gross Profit |       | $                | 9,343,000  |      | $          | 5,724,000    |       | $ | 3,619,000 |   |
|                             |       | Gross Margin |       | 27.4             | %          | 31.0      | %          | 23.2         | %          |
|                             |       |         |       |             |       |      |       |         |       |
| 2008                             |       | Gross Profit |       | $                | 15,728,000 |      | $          | 9,173,000    |       | $ | 6,555,000 |   |
|                             |       | Gross Margin |       | 31.5             | %          | 33.0      | %          | 29.7         | %          |

 

***Tools***

 

Gross margins in theTools segment for the three-month period ended June 30, 2009 decreased 5.9percentage points to 27.0% from 32.9% for the three-month period ended June 30,2008. Gross profit for this segment decreased $2,237,000, due primarily to thedecrease in revenue, close-out sales and price reductions.  Specifically, when comparing the three-month periodsended June 30, 2009 and 2008, Florida Pneumatic’s gross margin decreased 8.0percentage points.  This decrease in thegross margin combined with reduced revenue, close-out sales of certain Franklinproducts as well as product mix resulted in a decrease in Florida Pneumatic’sgross profit.  Both gross margin andgross profit decreased at Hy-Tech when comparing the three-month periods ended June30, 2009 and 2008. Gross margins decreased approximately 1.7 percentage points.The reduction in gross margin, combined with the decrease in revenue, causedHy-Tech’s gross profit to decrease approximately $742,000.  The decrease in gross margin reported thisquarter at Hy-Tech is primarily due to lower overhead absorption which in turnwas due to lower volume through the facility. During the second quarter of 2009Hy-Tech has reduced its cost of manufacturing, which should lessen the impactof less volume; however, we expect these relative results to continue as aslowdown in the industrial sector of our Tools segment which began toward theend of the first quarter of 2009 continues.

 

Gross margin and grossprofit for the Tools segment for the six-month period ended June 30, 2009decreased 2.0 percentage points and $3,449,000, respectively, when comparingthe six-month periods ended June 30, 2009 and 2008. Florida Pneumatic, duringthe six-month period ended June 30, 2009, continued to feel the ill effects oflower gross margins due to product mix, compounded by close-out sales atFranklin. In 2008 Florida Pneumatic had a greater percentage of industrialsales along with higher margin products sold to its major retail customer.  Hy-Tech’s gross margin and gross profit alsoreflect a decrease when comparing the six-month periods ended June 30, 2009 and2008. While its gross margins are essentially flat, it is the decrease in thesix-month revenue which is the key factor in the falloff in its grossmargin.  Should revenue remain at currentlevels, it is likely that gross margins, when compared to the prior year, may decrease,as it might be difficult for Hy-Tech to adequately absorb manufacturingoverhead.

 

***Hardware***

 

It should be noted thatCoffman, as a manufacturer and wholesaler primarily to major distributors inthe stair parts industry, had historically generated gross margins that werelower than Woodmark’s stair parts business. Further, primarily a result of the low number of new housing starts, themanufacturing facility in Marion Virginia is operating at reduced output,thereby reduced efficiency, creating under-absorption of its overhead.  The under absorption of its overheadadversely impacts the facilities cost of manufacturing, thus generating lowgross margin on the products it manufactures and sells.  Additionally, costs associated to inventoryconsolidation and liquidation at Pacific Stair Products, which created a grossdeficit of approximately a $200,000, contributed to the low gross margin .Assuch, gross margin for the stair parts for the three month period ended June 30,2009 which included approximately one month of the Marion, Virginia facility,was 13.0%, compared to gross margin of 24.1% in the second quarter of2008.  Our gross margin at the otherhardware product

 

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lines for the three-monthperiod ended June 30, 2009 decreased to 32.9% during the three-month periodended June 30, 2009 from 37.7% during the same period in the prior year. Thisdecrease is primarily due to product mix, competitive pricing pressures andunder absorption of warehousing costs. Gross profit for the Hardware segment decreased to $2,187,000 reportedfor the three-month period ended June 30, 2009 from $3,294,000 for the sameperiod in 2008.

 

Key factors contributingto the decrease in the Hardware segment’s year to date gross margins includeunder absorption of overhead costs throughout the segment, in particular PSPand the facility in Marion, Virginia; inventory write-downs and obsolescencecharges during the first six months of 2009 in excess of the same period in2008, and market driven price reductions. As such the gross margin for the Hardware segment for the six-monthperiod ended June 30, 2009 was 23.2%, a decrease from 29.7% reported in thesame period in 2008.  Stair parts grossmargin for the six-months ended June 30, 2009 was 15.9% compared to 24.6% forthe same period in the prior year.  Thegross margin for other hardware for the six-month period ended June 30, 2009was 26.5%, compared to 28.2% for the same period in 2008.  Until the number of new housing starts beginsto improve, it is likely that our gross margins in the Hardware segment willremain under pressure.

 

***Selling,General and Administrative Expenses***

 

Selling, general andadministrative expenses, (“SG&A”) include salaries and related costs,commissions, travel, administrative facilities, communications costs andpromotional expenses for our direct sales and marketing staff, administrativeand executive salaries and related benefits, legal, accounting and otherprofessional fees as well as general corporate overhead and certain engineeringexpenses.

 

For thethree-month period ended June 30, 2009, our SG&A was $5,288,000 reflectinga decrease of $1,414,000 or 21.1% when compared to $6,702,000 for thethree-month period ended June 30, 2008. Significant components of the decrease include reductions incompensation, payroll taxes and benefits aggregating $794,000, depreciation andamortization expenses decreased $118,000 as the result of the impairmentcharges taken in 2008.  The followingitems also decreased: freight by $146,000; commissions by $200,000; promotionalexpenses by $137,000; warranty by $128,000; and travel and entertainmentexpenses by $37,000.  Additionally,during the three-month period ended June 30, 2008 we reported expensesaggregating approximately $219,000 incurred in connection with the wind down ofcertain product lines at Florida Pneumatic. However, during the three-monthperiod ended June 30, 2009 we recognized $352,000 of expenses incurred inconnection with the WMC transaction.  Weintend to continue to examine our operating expenses, particularly during thesedifficult times. However, as a significant portion of these expenses are fixed,as a percentage of revenue, SG&A was 28.5% for the three-month period endedJune 30, 2009 compared to 26.2% for the same period in the prior year.

 

Our SG&A for thesix-month period ended June 30, 2009 aggregated $10,343,000, reflecting areduction of $2,848,000, or 21.6% from $13,191,000 reported during the sameperiod in the prior year.  Key areas thathave been reduced when comparing SG&A for the six-month periods ended June 30,2009 and 2008, include: wages, payroll taxes and benefits of $1,436,000;commissions of $444,000; freight of $444,000; advertising of $318,000;depreciation and amortization of $257,000; warranty costs of $190,000; andseverance and related costs incurred in connection with the wind down ofcertain product lines of $219,000 during the three-month period ended June 30,2008. In accordance with SFAS 141(R), we expensed approximately $432,000 inconnection with the WMC transaction. Lastly, we increased our use of temporary labor and consultants during thewind-down of Woodmark and transition of operations into WMC by $137,000.  During the remainder of 2009 we will likelysee increased SG&A as a result of the acquisition of Coffman.  We anticipate that our operating expenseswill begin to decrease during early 2010.

 

***Interest- Net***

 

Our net interest expense of $362,000 for the three-month period ended June 30,2009 reflects a decrease of $90,000, or 19.9%, when compared to net interestexpense of $452,000 incurred forthe same period in the prior year. Interest expense decreased $106,000 and $25,000, respectively, on the termloans associated with the Woodmark and Hy-Tech acquisitions. The Woodmark loanwas effectively eliminated at March 31, 2009, the result of the refinancing asof that date.  The obligation wasreclassified into the Company’s revolving credit facility. Interest expense onborrowings under our revolving credit loan facility for the three-month periodended June 30, 2009 was $230,000, compared to $175,000 for the same period in 2008, an increase of$55,000, due primarilyto the refinancing at March 31, 2009. Our total average debt balances under theterms of our credit facilities with our banks for the quarters ended June 30,2009 and 2008 were $26,501,000 and $32,070,000, respectively.

 

Our net interestfor the six-month period ended June 30, 2009 was $671,000, lower by $339,000compared to the same period in the prior year. Interest expense associated withthe Woodmark loan decreased $197,000, due to lower interest rates, principalreductions through March 31, 2009 and refinancing effective March 31, 2009.Likewise, interest incurred on the Hy-Tech note decreased $115,000 due in partto principal reduction and lower average interest rates.  Interest expense on 

 

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the revolving creditfacility increased $6,000. As the result of the refinancing that was completedon March 31, 2009, we expect that interest expense for the remainder of 2009will reflect comparative increases of interest expense on the revolving creditfacility and comparative decreases of interest expense associated with both theWoodmark and Hy-Tech notes payable, as they no longer exist.  Further, as the result of the WMC transactionour interest will increase as we have additional bank debt as well as intereston the $3,972,000 promissory note payable to Coffman.

 

***IncomeTaxes***

 

The effective tax ratesapplicable to (loss) earnings for the three-month periods ended June 30, 2009and 2008 were 39.8% and 45.1%, respectively. The effective tax rates applicable to (loss) earnings for the six-monthperiods ended June 30, 2009 and 2008 were 30.0% and 43.9%, respectively.  The primary factor affecting our effectivetax rate applied at June 30, 2009, was state income taxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash flows from operations can be somewhat cyclical, typically with the greatest demandin the second and third quarters followed by positive cash flows in thefourth quarter as receivables and inventories trend down.  We monitor average days sales outstanding,inventory turns and capital expenditures to project liquidity needs andevaluate return on assets employed.

 

We gauge our liquidity and financial stability by various measurementssome of which are shown in the following table:

 
| ** **                | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------|------------|-------------------|------------|-----------------------|------------|
| Working Capital           |       | $                 | 11,870,000 |                  | 16,491,000 |   |
| Current Ratio             |       | 1.31 to 1         |       | 1.61 to 1             |       |
| Shareholders’ Equity |       | $                 | 32,834,000 |                  | $          | 33,867,000 |   |
|                           |            |                   |            |                       |            |  |  |

 

TheCompany and its subsidiaries as co-borrowers entered into a Credit Agreement, (“CreditAgreement”) as amended, with two banks (“banks”) in 2004.  In March 2009, the banks amended the CreditAgreement to among other things increase the revolving credit loan facility, toa maximum of $22,000,000 for directborrowings, with various sublimits for letters of credit, bankers’ acceptancesand equipment loans. There are no commitment fees for any unused portion ofthis Credit Agreement. The revolving credit loan facility within the CreditAgreement, as amended, expires March 30, 2010 and is subject to annual reviewby the lending banks.  Direct borrowingsunder the revolving credit loan facility are secured by the Company’s accountsreceivable, inventory and equipment and are cross-guaranteed by each of theCompany’s subsidiaries, except WMC. These borrowings bear interest at LIBOR(London InterBank Offered Rate) plus the currently applicable loan margin, orthe prime interest rate.  The amendmentwas not a material modification as defined by the Emerging Issues TaskForce in Issue No. 96-19 and, as a result, no gain or loss had been recorded.

 

OnJune 10, 2009, the banks, in connection with the WMC transaction (see Note 2),entered into an new Amendment to the Credit Agreement which, among otherthings, released certain collateral contemporaneous with the Company remittingthe respective advanced funds associated thereto, lowered the maximum eligibleinventory, and increased the applicable loan margins on the Company’s revolvingcredit loan facility to 2.00% with respect to prime rate loans and 3.75% withrespect to LIBOR loans as well as resetting the applicable term loan margins to2.00% and 4.00%, respectively for prime rate and LIBOR loans. Additionally, ascertain collateral was released by the banks in connection with the WMCtransaction, this amendment reduced certain components of the collateral baseas well as the maximum amount available under the terms of the revolving creditloan facility to $20,700,000 as of theeffective date of the Amendment, and $19,400,000 as of August 31, 2009.  At June 30, 2009 and December 31, 2008, theapplicable loan margins added to LIBOR were 3.75% and 3.5%, respectively.  At June 30, 2009 and December 31, 2008, theapplicable loan margins added to prime rate were 2.00% and 0.5%, respectively.As such, interest rates applied to the loan balances at June 30, 2009 were 4.3%and 5.25% for borrowings at LIBOR and prime rate, respectively, and at December31, 2008 were 3.45% and 5.75% for borrowings at LIBOR and prime rate,respectively. At June 30, 2009 and December 31, 2008, the balances outstandingon the revolving credit loan facility with the banks within the CreditAgreement were $17,000,000 and $20,000,000, respectively.

 

Inconnection with the transaction WMC entered into the WMC loan agreement withPNC. The WMC loan agreement expires June 8, 2012. Neither the Company nor anyother subsidiary is a co-borrower or a guarantor to this WMC loanagreement.  The WMC loan agreementprovides a maximum loan amount of $12,000,000, of which $1,134,000 was established as a term loan, the balanceof $10,866,000 set as themaximum revolving advance amount.  TheWMC loan 

 

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agreementis collateralized by the accounts receivable, inventory, equipment, investmentproperty and general intangibles of WMC. The revolving advances made against the WMC loan agreement will bearinterest based upon either the Eurodollar Rate Loans plus 3.50%, or at DomesticRate Loans plus 2.50%.  Domestic RateLoans are advances at a rate of interest per annum equal to the highest of (i) theBase Rate in effect on such day, (ii) the Federal Funds Open Rate in effect onsuch day plus 1/2 of 1%, (iii) the Daily LIBOR plus 1%, and (iv) three hundredfifty basis points (3.50%). At June 30, 2009 the balance owing on the revolvingadvance was $5,374,000.

 

Aspart of the amendment to the Credit Agreement entered into in March 2009, thebanks agreed to cancel and refinance two term loans, which, immediately priorto the amendment, aggregated approximately $13,200,000. One term loan had a balance of $6,000,000 and was being repaid $950,000 quarterly through June 2010and the balance of $300,000 payable in September2010.  The second term loan had a balanceimmediately prior to the amendment of $7,200,000 payable in quarterly installments of $360,000. Both term loans incurredinterest at LIBOR plus the applicable loan margin. The amendment created onenew term loan in the amount of $7,116,000 with the balance of $6,084,000 added to the revolvingcredit loan facility. The new term loan expires March 30, 2012. Further, thenew term loan requires the Company to make monthly principal installmentpayments, which aggregate to approximately $1,780,000 annually, compared to the previousinstallment payments which required the Company to make quarterly paymentsaggregating $5,240,000, annually.  Borrowings under the term loan are secured bythe Company’s accounts receivable, inventory and equipment and arecross-guaranteed by each of the Company’s subsidiaries, with the exception ofWMC. These borrowings bear interest at LIBOR plus the currently applicable loanmargin, or the prime interest rate. At June 30, 2009, the term loan balance was$6,671,000 withapplicable loan margin of 4.00% added to LIBOR. At December 31, 2008, the twoterm loans then in existence aggregated approximately $13,560,000, and had applicable loanmargin added LIBOR of 3.75%.

 

Includedwithin the WMC loan agreement entered into with PNC, was a term loan with aprincipal amount of $1,134,000, which is to be repaid in twenty-four equalmonthly installments of $47,000.  The term loanmay consist of Domestic Rate Loans or Eurodollar Rate Loans, or a combinationthereof. At June 30, 2009 the balance was $1,134,000 and the applicable loanrate plus margin applied to this term loan was 7.0%.

 

TheCredit Agreement also includes a foreign exchange line, which provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. The total amount of foreign currencyforward contracts outstanding under the foreign exchange line at June 30, 2009,based on that day’s closing spot rate, was approximately $49,000.

 

Underthe terms of the Credit Agreement entered into with the banks, the Company isrequired to adhere to certain financial covenants. At June 30, 2009, theCompany was not in compliance with certain financial covenants.  The Company believes that it may not be incompliance at September 30, 2009 with certain financial covenants currently inplace. As such, it has reclassified the long term portion of its bank debt toshort term debt on its consolidated condensed balance sheet.  The banks proposed a waiver and amendment tothe related credit facility. The proposed waiver and amendment, conditionallywould waive the non-compliance of the financial covenants at June 30, 2009,require certain changes to the credit facility, and increase all applicableloan margins.  The Company is indiscussion with the lender, however, there can be no assurance that asatisfactory waiver and amendment will be entered into. The total amount of thedebt that is subject to acceleration as a result of these matters isapproximately $27,400,000.

 

Ourcash decreased to $527,000 at June 30,2009, from $1,043,000 as of December31, 2008.  Our total debt increased to$34,486,000 at June 30,2009 from $30,544,000 at December 31,2008, due primarily to the WMC transaction. This was partially offset by termloan repayments and lower inventory purchases during the quarter ended June 30,2009. The percent of total debt to total book capitalization (total debtdivided by total bank debt plus equity) was 51.2% at June 30, 2009 compared to47.4% at December 31, 2008.

 

Wehad net cash of $3,966,000 provided by operating activities for the six-monthperiod ended June 30, 2009 compared to net cash of $2,576,000 provided by operatingactivities for the six-month period ended June 30, 2008. We believe that cashon hand derived from operations and cash available through borrowings under ourcredit facilities should be sufficient to allow us to meet our foreseeableworking capital needs; however, there can be no assurance.

 

In connection with the acquisition of Hy-Tech, weagreed to make additional payments (“Contingent Consideration”) to the sellers.The amount of the Contingent Consideration is to be based on a percentage ofthe average increase in earnings before interest, taxes, depreciation andamortization (“EBITDA”) over a two-year period from the date of acquisition, February12, 2007, over a base year EBITDA of $4,473,000. In addition, we agreed to make anadditional payment (“Additional Contingent Consideration”), subject to certainconditions related to an exclusive supply agreement with a major customer andto a certain extent and subject to certain provisions, the achievement ofContingent Consideration. The 

 

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maximumamount of Additional Contingent Consideration may not exceed $1,900,000.  Hy-Tech successfully achieved the requiredthresholds necessary to be entitled to both the Contingent Consideration andthe Additional Contingent Consideration. The total amount of the ContingentConsideration and the Additional Contingent Consideration is approximately$2,300,000. According tothe agreement, the amounts due the sellers are payable in May 2009. However, weand the sellers have agreed upon payment arrangement wherein we paid approximately$573,000 in May 2009with the balance of approximately $1,719,000 to be paid in six equal payments incurringinterest at the rate of 6.0% per annum, payable quarterly commencing in August2009. Total amount of approximately $2,300,000 owed has been recorded as goodwill.

 

Capital spending was approximately $532,000 and $1,099,000 for the three and six-monthperiods ended June 30, 2009, compared to $373,000 and $562,000 of capital expenditures made during thethree and six-month periods ended June 30, 2008.  Capital expenditures for the balance of 2009are expected to be approximately $500,000, some of which may be financed through ourcredit facilities or financed through independent third party financialinstitutions. Included in the expected total for 2009 are capital expendituresrelating to new products, expansion of existing product lines and replacementof equipment.

 

Pursuant to certainrequirements incorporated in the WMC loan agreement with PNC, WMC requested andreceived from Richard Horowitz, President and Chief Executive Officer, and aprincipal stockholder, of the Company two letters of credit, each in the amountof $145,000 with PNC as the beneficiary. The letters of credit may be drawn against should WMC’s availabilityrelated to the revolving credit portion of the WMC loan agreement fall below acertain threshold.  Should a letter ofcredit be drawn upon by PNC, WMC will issue to Mr. Horowitz a note payablebearing interest at the rate of six and one half percent (6.5%) from the dateof the letter of credit note to its maturity. The letters of credit were issuedthrough a bank at which one of the Company’s board of directors is an ExecutiveVice President. Further, the letters of credit terminate on the earliest of (a)June 30, 2010 for one letter of credit and September 30, 2010 for the otherletter of credit, (b) the date on which there has been a drawing, (c) the dayupon which a substitute letter of credit becomes effective.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

Ourforeign exchange line provides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases of foreigncurrencies needed for payments to foreign suppliers. We have not purchasedforward contracts on New Taiwan dollars (“TWD”). The total amount of foreigncurrency forward contracts outstanding at June 30, 2009, based on that day’sclosing spot rate, was approximately $49,000.

 

Amajority of our products are manufactured outside the United States, of which asignificant amount is purchased in the local currency. As a result, we areexposed to movements in the exchange rates of various currencies against theUnited States dollar which could have an adverse effect on our results ofoperations or financial position. We believe our most significant foreigncurrency exposures are the Japanese yen, the Taiwan dollar (“TWD”) and theChinese Renminbi (“RMB”). Purchases of product from China and Taiwan are madein U.S. dollars. However, if either or both the TWD or RMB, were to strengthenmaterially in relation to the U.S. dollar, there could be an adverse effect onour business, results of operations or financial position. We are also subjectto currency risk with respect to the Yen, however we generally purchase Yenforward to mitigate the exposure in the short run.  However, should the Yen strengthen materiallyin relation to the U.S. dollar, there could be an adverse effect on ourbusiness, results of operations or financial position.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

InMay 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS165 establishes general standards of accounting and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor available to be issued. SFAS 165 requires the disclosure of the date throughwhich subsequent events have been evaluated and whether such date representsthe date the financial statements were issued or were available to be issued.SFAS 165 is effective for the Company on June 30, 2009. The Company hasevaluated subsequent events through August 18, 2009, which could be required tobe disclosed. The adoption of SFAS 165 did not have a material impact on theCompany’s consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS 141(R) to change how an entity accounts forthe acquisition of a business. SFAS 141(R) replaced existing SFAS 141 in itsentirety. SFAS 141(R) carries forward the existing requirements to account forall business combinations using the acquisition method (formerly called thepurchase method). In general, SFAS 141(R) requires acquisition-date fair valuemeasurement of identifiable assets acquired, liabilities assumed, andnon-controlling interests in the acquiree. SFAS 141(R) eliminates the currentcost-based purchase method under SFAS 141. The measurement requirements willresult in the recognition of the full amount of acquisition-date goodwill,which includes amounts attributable to non-controlling interests. The acquirerwill be required to recognize in income any gain or loss on the 

 

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remeasurementto acquisition-date fair value of consideration transferred or of previouslyacquired equity interests in the acquiree. Neither the direct costs incurred toeffect a business combination nor the costs the acquirer expects to incur undera plan to restructure an acquired business will be included as part of thebusiness combination accounting. As a result, those costs will be charged toexpense when incurred, except for debt or equity issuance costs, which will beaccounted for in accordance with other accounting principles generally acceptedin the United States of America. SFAS 141(R) also changes the accounting forcontingent consideration, in process research and development, contingencies,and restructuring costs. In addition, changes in deferred tax asset valuationallowances and acquired income tax uncertainties in a business combination thatoccur after the measurement period will impact income taxes under SFAS 141(R).SFAS 141(R) became effective for the Company on January 1, 2009. As the resultof adopting SFAS 141(R) the Company, in connection with the acquisition ofCoffman, Stairs LLC, incurred approximately $952,000, of which approximately $432,000 was recorded as expenses.  Prior to its adoption SFAS 141(R) approximately$952,000 would havebeen included in goodwill.  Additionally,as the result of the adoption of SFAS 141(R), the Company recorded contingentconsideration of $4,586,000, which isreflected on the Company’s balance sheet as part of Long-Term Debt. Inaccordance with SFAS 141(R), the Company will, in future periods, determine thefair value of the contingent consideration obligation and record any adjustmentthrough the current statement of operations.

 

In December 2007, the FASB issued SFAS 160, “Non-controlling Interestsin Consolidated Financial Statements”: an amendment of ARB No. 51, (“SFAS 160”).SFAS 160 changes the accounting for, and the financial statement presentationof, non-controlling equity interests in a consolidated subsidiary. SFAS 160replaces the existing minority-interest provisions of Accounting ResearchBulletin (ARB) 51, “ConsolidatedFinancial Statements”, by defining a new term—*non-controlling interests*—to replace what were previouslycalled *minority interests*. SFAS160 establishes non-controlling interests as a component of the equity of aconsolidated entity. The underlying principle of SFAS 160 is that both thecontrolling interest and the non-controlling interests are part of the equityof a single economic entity: the consolidated reporting entity. Classifyingnon-controlling interests as a component of consolidated equity is a changefrom the current practice of treating minority interests as a mezzanine itembetween liabilities and equity or as a liability. The change affects both theaccounting and financial reporting for non-controlling interests in aconsolidated subsidiary. SFAS 160 includes reporting requirements intended toclearly identify and differentiate the interests of the parent and theinterests of the non-controlling owners. The adoption of SFAS 160 on January 1,2009, did not have a material impact on our condensed consolidated financialstatements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sourcesof accounting principles and the framework for selecting the principles to beused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with accounting principles generally acceptedin the United States of America. It is effective 60 days following the Securityand Exchange Commission’s approval of the Public Company Accounting OversightBoard amendments to AU Section 411, “The Meaning of Present Fairly inConformity With Generally Accepted Accounting Principles. The adoption of SFAS162 did not have any effect on our condensed consolidated financial position,results of operations or cash flows.

 

InApril 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determinationof the Useful Life of Intangible Assets,” (“FSP 142-3”). FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill and Other Intangible Assets” and also requiresexpanded disclosure related to the determination of intangible asset usefullives. FSP 142-3 is effective for fiscal years beginning after December 15,2008. The adoption of FSP 142-3 did not have a material impact on our condensedconsolidated financial statements.

 

Management does not believe that any other recently issued, but not yeteffective accounting standards, if currently adopted would have a materialeffect on our condensed consolidated financial statements.

 

**Item 3.                Quantitative And Qualitative Disclosures About MarketRisk**

 

Notrequired.

**Item 4T.             ****Controls and Procedures**

 

**Evaluation of disclosure controls and procedures**

 

An evaluation was performed, under the supervisionof, and with the participation of, our management including the PrincipalExecutive Officer and Principal Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) to the Securities and Exchange Act of 1934). Based onthat evaluation, our management, including the Principal Executive Officer andPrincipal Financial Officer, concluded that our disclosure controls andprocedures as of June 30, 2009 were effective. Accordingly, management believesthat the 

 

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consolidatedcondensed financial statements included in this Quarterly Report on Form 10-Qfairly present, in all material respects, our financial condition, results ofoperations and cash flows for the periods presented.

 

P&F management is responsible for establishingand maintaining effective internal controls. Because of our inherentlimitations, internal controls may not prevent or detect misstatements. Acontrol system, no matter how well designed and operated, can only providereasonable, not absolute, assurance that the control system’s objectives willbe met. Also, projections of any evaluation of effectiveness as to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with policies andprocedures may deteriorate.

 

The Certifications of our Principal ExecutiveOfficer and Principal Financial Officer included as Exhibits 31.1 and 31.2 tothis Quarterly Report on Form 10-Q include, in paragraph 4 of suchcertifications, information concerning our disclosure controls and proceduresand internal control over financial reporting. Such certifications should beread in conjunction with the information contained in this Item 4T - Controlsand Procedures for a more complete understanding of the matters covered by suchcertifications.

 

**Changes in Internal Control Over Financial Reporting**

 

There have been no significant changes in ourinternal control over financial reporting during the three-month period ended June30, 2009, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 
| **Item 1.**  | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                           |
|         | We  are a defendant or co-defendant in various actions brought about in the ordinary  course of conducting our business. We do not believe that any of these  actions are material to our financial condition.                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                 |
| **Item 1A.** | **Risk Factors**                                                                                                                                                                                                                                                                                                                                                                     |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                           |
|         | There were no material changes from risk factors  previously disclosed in our Annual Report on Form 10-K for the year ended  December 31, 2008 in response to Item 1A. to Part I of such Form 10-K.                                                                                                                                                                                  |
|         |                                                                                                                                                                                                                                                                                                                                                                                 |
| **Item 2.**  | **Unregistered Sales of Equity Securities and Use  of Proceeds**                                                                                                                                                                                                                                                                                                                     |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                           |
|         | None.                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                 |
| **Item 3.**  | **Defaults Upon Senior Securities**                                                                                                                                                                                                                                                                                                                                                  |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                           |
|         | None.                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                 |
| **Item 4.**  | **Submission of Matters to a Vote of Security Holders**                                                                                                                                                                                                                                                                                                                              |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                           |
| ** **   | On May 27, 2009, we  held our Annual Meeting of Stockholders, at which the election of certain  members of our Board of Directors were voted upon. The following persons were  duly elected to serve, subject to our Bylaws, as directors of P&F  Industries, Inc until the 2012 Annual Meeting of Stockholders, or until the  election and qualification of their successor(s): |

 
| **Name of Director** | ** ** | **votes in favor** | ** ** | **votes withheld** | ** ** | **votes abstained** | ** ** |
|----------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|
| Jeffrey  D. Franklin |       | 3,218,283          |       | 119,514            |       | 0                   |       |
| Dennis Kalick        |       | 3,307,783          |       | 30,014             |       | 0                   |       |

 
|        | The terms of office of  Robert L. Dubofsky, Alan I. Goldberg, Richard A. Horowitz, Kenneth M.  Scheriff, Mitchell A. Solomon and Marc A. Utay as directors of the Registrant  continued after the Annual Meeting of Stockholders.

 

There were no broker  non-votes pertaining to this proposal. |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                    |
| **Item 5.** | **Other Information**                                                                                                                                                                                                                                                                                   |
| ** **  | ** **                                                                                                                                                                                                                                                                                              |
|        | None                                                                                                                                                                                                                                                                                                    |
|        |                                                                                                                                                                                                                                                                                                    |
| **Item 6.** | **Exhibits**                                                                                                                                                                                                                                                                                            |
| ** **  | ** **                                                                                                                                                                                                                                                                                              |
|        | See  “Exhibit Index” immediately following the signature page.                                                                                                                                                                                                                                |

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** **             | **P&F INDUSTRIES, INC.** |
|------------------------|------------------------------|
|                   | (Registrant)                 |
|                   |                         |   |
|                   |                         |   |
|                   | By                           | /s/  Joseph A. Molino, Jr. |
|                   |                         | Joseph  A. Molino, Jr. |
|                   |                         | Chief  Financial Officer |
| Dated: August 19, 2009 |                         | (Principal Financial and  Chief Accounting Officer) |

 

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**EXHIBITINDEX**

 

Thefollowing exhibits are either included in this report or incorporated herein byreference as indicatedbelow:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** 2.1**       |       | Asset Purchase  Agreement, dated as of June 8, 2009, by and between Coffman Stairs, LLC and  WM Coffman LLC (Incorporated by reference to Exhibit 2.1 to  Registrant’s Current Report on Form 8-K dated June 10, 2009).                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** 2.2**       |       | Seller Note, dated June  8, 2009, made payable by WM Coffman LLC to Coffman Stairs, LLC (Incorporated  by reference to Exhibit 2.2 to Registrant’s Current Report on Form 8-K dated  June 10, 2009).                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** 2.3**       |       | Assignment and Assumption  of Lease Agreement, made and entered into as of June 8, 2009, by and among  Coffman Stairs, LLC and WM Coffman LLC (Incorporated by reference  to Exhibit 2.3 to Registrant’s Current Report on Form 8-K dated June 10,  2009).                                                                                                                                                                                                                                                                                                                                              |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** 2.4**       |       | Management Agreement,  dated June 8, 2009, between WM Coffman LLC and Visador Holding Corporation (Incorporated  by reference to Exhibit 2.4 to Registrant’s Current Report on Form 8-K dated  June 10, 2009).                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.1**            |       | Lease Agreement, dated  as of March 30, 2007, by and among AGNL Coffman, L.L.C., Coffman Stairs, LLC  and Visador Holding Corporation (Incorporated by reference  to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 10,  2009).                                                                                                                                                                                                                                                                                                                                                     |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.2**            |       | First Amendment to  Lease Agreement, dated as of June 8, 2009, made by AGNL Coffman, L.L.C. and  WM Coffman LLC (Incorporated by reference to Exhibit 10.2 to  Registrant’s Current Report on Form 8-K dated June 10, 2009) .                                                                                                                                                                                                                                                                                                                                                                           |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.3**            |       | Revolving Credit, Term  Loan and Security Agreement, dated as of June 8, 2009, among WM Coffman LLC,  the Lenders (as defined therein) and PNC Bank, National Association, as Agent  (Incorporated by reference to Exhibit 10.3 to Registrant’s Current  Report on Form 8-K dated June 10, 2009).                                                                                                                                                                                                                                                                                                       |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.4**            |       | Reimbursement  Agreement, dated as of June 8, 2009, by and between WM Coffman, LLC and  Richard A. Horowitz (Incorporated by reference to Exhibit 10.4 to  Registrant’s Current Report on Form 8-K dated June 10, 2009).                                                                                                                                                                                                                                                                                                                                                                                |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.5**            |       | Term Note, dated June  8, 2009, made payable by WM Coffman LLC to the order of PNC Bank, National  Association (Incorporated by reference to Exhibit 10.5 to  Registrant’s Current Report on Form 8-K dated June 10, 2009).                                                                                                                                                                                                                                                                                                                                                                             |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.6**            |       | Revolving Credit Note,  dated June 8, 2009, made payable by WM Coffman LLC to the order of PNC Bank,  National Association (Incorporated by reference to Exhibit 10.6 to  Registrant’s Current Report on Form 8-K dated June 10, 2009).                                                                                                                                                                                                                                                                                                                                                                 |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.7**            |       | Amendment No. 19 and  Waiver to Credit Agreement, dated as of June 10, 2009, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, Embassy Industries,  Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair Products, Inc.,  WILP Holdings, Inc., Continental Tool Group, Inc., Hy-Tech Machine, Inc. and  Citibank, N.A., as Administrative Agent, and the lenders party thereto (Incorporated  by reference to Exhibit 10.7 to Registrant’s Current Report on Form 8-K dated  June 10, 2009). |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.8**            |       | Fourth Amended and  Restated Revolving Credit Note, dated June 10, 2009, issued by the  Registrant, Florida Pneumatic Manufacturing Corporation, Embassy Industries,  Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair Products, Inc.,  WILP Holdings, Inc., Continental Tool Group, Inc. and Hy-Tech Machine, Inc.  to Citibank, N.A. (Incorporated by reference to Exhibit 10.8 to  Registrant’s Current Report on Form 8-K dated June 10, 2009)                                                                |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **10.9**            |       | Fourth Amended and  Restated Revolving Credit Note, dated June 10, 2009, issued by the  Registrant, Florida                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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| ** ** |       | Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., Continental Tool Group,  Inc. and Hy-Tech Machine, Inc. to HSBC Bank USA, National Association (Incorporated  by reference to Exhibit 10.9 to Registrant’s Current Report on Form 8-K dated  June 10, 2009) |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.10**  |       | Amendment No. 1 to  Purchase Agreement, dated as of June 26, 2009, by and among Hy-Tech Machine  Inc., Hy-Tech Holdings, Inc., Quality Gear Holdings, Inc., HTM Associates,  Robert Ober, Elizabeth Smail, James J. Browne, Daniel Berg and James Hohman (Incorporated  by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated  June 26, 2009).                                                                             |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.11**  |       | Subordinated Promissory  Note, dated May 16, 2009, issued by Hy-Tech Machine, Inc. payable to Hy-Tech  Holdings, Inc. (Incorporated by reference to Exhibit 10.2 to  Registrant’s Current Report on Form 8-K dated June 26, 2009).                                                                                                                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **31.1**   |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **31.2**   |       | Certification of Joseph A.  Molino, Jr., Principal Financial Officer of the Registrant, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **32.1**   |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **32.2**   |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     |

 

Acopy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q maybe obtained, upon payment of the Registrant’s reasonable expenses in furnishingsuch exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite100, Melville New York 11747, Attention: Corporate Secretary.

 

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