Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****     QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

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

 

**o****      TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition 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’stelephone number, including area code: **(631)694-9800**

 

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Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days. Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted to its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months(or for such shorter period the registrant was required to submit and post suchfiles).  Yeso  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

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

 

Indicate by checkmarkwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  No x

 

As of November 13, 2009there were 3,614,562 shares of the registrant’s Class A Common Stockoutstanding.

 

 

 

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Table of Contents

 

**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

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

 

**TABLE OF CONTENTS**

 
| ** **                                   | ** **                                                                                                                               | **PAGE** |
|----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                         |                                                                                                                                     |     |
| **PART I — FINANCIAL INFORMATION** | 1                                                                                                                                        |
|                                         |                                                                                                                                     |     |
| Item 1.                                      | Financial  Statements                                                                                                                    | 1        |
|                                         |                                                                                                                                     |     |
|                                         | Consolidated Condensed Balance Sheets as of  September 30, 2009 and December 31, 2008                                          | 1        |
|                                         |                                                                                                                                     |     |
|                                         | Consolidated Condensed Statements of Operations for  the three and nine months ended September   30, 2009 and 2008             | 3        |
|                                         |                                                                                                                                     |     |
|                                         | Consolidated Condensed Statement of Shareholders’  Equity for the period from January 1, 2009 to September 30,  2009 | 4        |
|                                         |                                                                                                                                     |     |
|                                         | Consolidated Condensed Statements of Cash Flows for  the nine months ended September 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                                              | 20       |
|                                         |                                                                                                                                     |     |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                                              | 29       |
|                                         |                                                                                                                                     |     |
| Item 4T                                      | Controls and  Procedures                                                                                                                 | 29       |
|                                         |                                                                                                                                     |     |
| **PART II  — OTHER INFORMATION**   | 31                                                                                                                                       |
|                                         |                                                                                                                                     |     |
| Item 1.                                      | Legal  Proceedings                                                                                                                       | 31       |
|                                         |                                                                                                                                     |     |
| Item 1A.                                     | Risk Factors                                                                                                                             | 31       |
|                                         |                                                                                                                                     |     |
| Item  2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                             | 31       |
|                                         |                                                                                                                                     |     |
| Item  3.                                     | Defaults  Upon Senior Securities                                                                                                         | 31       |
|                                         |                                                                                                                                     |     |
| Item  4.                                     | Submission  of Matters to a Vote of Security Holders                                                                                     | 31       |
|                                         |                                                                                                                                     |     |
| Item 5.                                      | Other  Information                                                                                                                       | 31       |
|                                         |                                                                                                                                     |     |
| Item 6.                                      | Exhibits                                                                                                                                 | 31       |
|                                         |                                                                                                                                     |     |
| **Signature**                                |                                                                                                                                     | 32       |
|                                         |                                                                                                                                     |     |
| **Exhibit Index**                       |                                                                                                                                     | 33       |

 

i

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**PART I - FINANCIALINFORMATION**

 

**Item 1.****                   ****FinancialStatements**

 

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

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                     | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**             | ** ** | **(See Note 1)**           | ** ** |
| **ASSETS**                                     | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| CURRENT ASSETS                                 | ** ** | ** **                  | ** ** | ** **                 | ** ** |
|                                           | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Cash and cash equivalents                      |       | $                           | 660,000    |                       | $          | 1,043,000 |   |
| Accounts receivable – net                 |       | 10,965,000                  |       | 8,507,000                  |       |
| Inventories                                    |       | 30,947,000                  |       | 31,286,000                 |       |
| Notes and other receivables                    |       | 305,000                     |       | —                     |       |
| Deferred income taxes – net               |       | 1,584,000                   |       | 1,584,000                  |       |
| Income tax refund receivable                   |       | 1,074,000                   |       | 327,000                    |       |
| Prepaid expenses and other current assets      |       | 1,803,000                   |       | 990,000                    |       |
| TOTAL CURRENT ASSETS                           |       | 47,338,000                  |       | 43,737,000                 |       |
|                                           |       |                        |       |                       |       |
| PROPERTY AND EQUIPMENT                         |       |                        |       |                       |       |
| Land                                           |       | 1,550,000                   |       | 1,550,000                  |       |
| Buildings and improvements                     |       | 7,642,000                   |       | 7,637,000                  |       |
| Machinery and equipment                        |       | 19,553,000                  |       | 15,567,000                 |       |
|                                           |       | 28,745,000                  |       | 24,754,000                 |       |
| Less accumulated depreciation and amortization |       | 12,656,000                  |       | 11,232,000                 |       |
| NET PROPERTY AND EQUIPMENT                     |       | 16,089,000                  |       | 13,522,000                 |       |
|                                           |       |                        |       |                       |       |
| GOODWILL                                       |       | 8,972,000                   |       | 4,183,000                  |       |
|                                           |       |                        |       |                       |       |
| OTHER INTANGIBLE ASSETS – net             |       | 5,704,000                   |       | 3,121,000                  |       |
|                                           |       |                        |       |                       |       |
| DEFERRED INCOME TAXES -net                     |       | 4,773,000                   |       | 5,424,000                  |       |
|                                           |       |                        |       |                       |       |
| OTHER ASSETS – net                        |       | 689,000                     |       | 485,000                    |       |
|                                           |       |                        |       |                       |       |
| TOTAL ASSETS                                   |       | $                           | 83,565,000 |                       | $          | 70,472,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                               | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                               | ** ** | **(unaudited)**             | ** ** | **(See Note 1)**           | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                           | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| CURRENT LIABILITIES                                                                                                                      | ** ** | ** **                  | ** ** | ** **                 | ** ** |
|                                                                                                                                     | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Short-term borrowings                                                                                                                    |       | $                           | 21,285,000 |                       | $          | 15,000,000 |   |
| Accounts payable                                                                                                                         |       | 5,671,000                   |       | 1,962,000                  |       |
| Other accrued liabilities                                                                                                                |       | 4,339,000                   |       | 3,768,000                  |       |
| Current maturities of long-term debt and debt in  default                                                                                |       | 10,586,000                  |       | 6,516,000                  |       |
| TOTAL CURRENT LIABILITIES                                                                                                                |       | 41,881,000                  |       | 27,246,000                 |       |
|                                                                                                                                     |       |                        |       |                       |       |
| Other long-term liabilities                                                                                                              |       | 5,043,000                   |       | 331,000                    |       |
| Note payable                                                                                                                             |       | 4,053,000                   |       | —                     |       |
| Long –term debt, less current maturities                                                                                            |       | 495,000                     |       | 9,028,000                  |       |
|                                                                                                                                     |       |                        |       |                       |       |
| TOTAL LIABILITIES                                                                                                                        |       | 51,472,000                  |       | 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 September30, 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                                                                                                               |       | 10,580,000                  |       | 10,407,000                 |       |
| Retained earnings                                                                                                                        |       | 20,512,000                  |       | 22,459,000                 |       |
| Treasury stock, at cost – 341,869 shares at  September 30, 2009 andDecember 31, 2008                                      |       | (2,955,000                  | )          | (2,955,000                 | )          |
|                                                                                                                                     |       |                        |       |                       |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                          |       | 32,093,000                  |       | 33,867,000                 |       |
|                                                                                                                                     |       |                        |       |                       |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                          |       | $                           | 83,565,000 |                       | $          | 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**             | ** ** | **Nine months**              | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **ended September 30,** | ** ** | **ended September 30,** | ** ** |
| ** **                                   | ** ** | **2009**                     | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue                                  |       | $                            | 20,470,000 |                         | $          | 22,104,000 |   | $ | 54,560,000 |   | $ | 71,983,000 |   |
| Cost of sales                                |       | 15,157,000                   |       | 15,225,000                   |       | 39,905,000 |   | 49,377,000 |   |
| Gross profit                                 |       | 5,313,000                    |       | 6,879,000                    |       | 14,655,000 |   | 22,606,000 |   |
| Selling, general and administrative expenses |       | 5,734,000                    |       | 6,083,000                    |       | 16,076,000 |   | 19,274,000 |   |
| Operating (loss) income                      |       | (421,000                     | )          | 796,000                      |       | (1,421,000 | ) | 3,332,000 |   |
| Interest expense                             |       | 686,000                      |       | 407,000                      |       | 1,358,000 |   | 1,416,000 |   |
| (Loss) earnings before income taxes          |       | (1,107,000                   | )          | 389,000                      |       | (2,779,000 | ) | 1,916,000 |   |
| Income tax (benefit) expense                 |       | (331,000                     | )          | 115,000                      |       | (832,000 | ) | 785,000 |   |
| Net (loss) earnings                          |       | $                            | (776,000   | )                            | $          | 274,000 |   | $ | (1,947,000 | ) | $ | 1,131,000 |   |
|                                         |       |                         |       |                         |       |   |   |   |   |
| Basic (loss) earnings per common share:      |       |                         |       |                         |       |   |   |   |   |
| Net (loss) earnings                          |       | $                            | (0.21      | )                            | $          | 0.08 |   | $ | (0.54 | ) | $ | 0.31 |   |
|                                         |       |                         |       |                         |       |   |   |   |   |
| Diluted (loss) earnings per common share:    |       |                         |       |                         |       |   |   |   |   |
| Net (loss) earnings                          |       | $                            | (0.21      | )                            | $          | 0.07 |   | $ | (0.54 | ) | $ | 0.30 |   |
|                                         |       |                         |       |                         |       |   |   |   |   |
| Weighted average common shares outstanding:  |       |                         |       |                         |       |   |   |   |   |
| Basic                                        |       | 3,614,562                    |       | 3,625,864                    |       | 3,614,562 |   | 3,633,507 |   |
| Diluted                                      |       | 3,614,562                    |       | 3,800,990                    |       | 3,614,562 |   | 3,729,861 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

 

**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                    |       | (1,947,000 | )          |                                   |       |                    |       |         |       | (1,947,000         | )          |   |   |   |   |
| Stock-based compensation    |       | 173,000    |       |                                   |       |                    |       | 173,000      |       |               |       |   |   |   |   |
|                        |       |       |       |                                   |       |                    |       |         |       |               |       |   |   |   |   |
| Balance, September 30, 2009 |       | $          | 32,093,000 |                                   | 3,956,000  |                    | $          | 3,956,000    |       | $                  | 10,580,000 |   | $ | 20,512,000 |   | 342,000 |   | $ | (2,955,000 | ) |

 

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)**

 
| ** **                                                                                  | ** ** | **Nine months  ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Cash Flows from Operating  Activities:                                                      |       |                                      |       |   |   |
| Net (loss) earnings                                                                         |       | $                                         | (1,947,000 | ) | $ | 1,131,000 |   |
|                                                                                        |       |                                      |       |   |   |
| Adjustments to reconcile  net (loss) earnings to net cash provided by operating activities: |       |                                      |       |   |   |
| Noncash charges:                                                                            |       |                                      |       |   |   |
| Depreciation and  amortization                                                              |       | 1,456,000                                 |       | 1,277,000 |   |
| Amortization of other  intangible assets                                                    |       | 289,000                                   |       | 687,000 |   |
| Amortization of other  assets                                                               |       | 19,000                                    |       | 5,000 |   |
| Provision for losses on  accounts receivable - net                                          |       | (138,000                                  | )          | (122,000 | ) |
| Stock-based compensation                                                                    |       | 173,000                                   |       | 169,000 |   |
| Deferred income taxes -  net                                                                |       | —                                    |       | 547,000 |   |
| Loss on sale of fixed  asset                                                                |       | 24,000                                    |       | 242,000 |   |
| Change in fair value of  contingent consideration                                           |       | 135,000                                   |       | — |   |
| Changes in operating  assets and liabilities, net of business acquired:                     |       |                                      |       |   |   |
| Accounts receivable                                                                         |       | (1,069,000                                | )          | 712,000 |   |
| Notes and other  receivables                                                                |       | 253,000                                   |       | 290,000 |   |
| Inventories                                                                                 |       | 7,015,000                                 |       | (612,000 | ) |
| Income tax refund  receivable                                                               |       | (747,000                                  | )          | 6,000 |   |
| Prepaid expenses and other  current assets                                                  |       | (492,000                                  | )          | (156,000 | ) |
| Other assets                                                                                |       | (223,000                                  | )          | (257,000 | ) |
| Accounts payable                                                                            |       | 1,748,000                                 |       | (10,000 | ) |
| Accruals and other  liabilities                                                             |       | (111,000                                  | )          | (972,000 | ) |
| Income taxes payable                                                                        |       | —                                    |       | (453,000 | ) |
| Total adjustments                                                                           |       | 8,332,000                                 |       | 1,353,000 |   |
| Net cash provided by  operating activities                                                  |       | $                                         | 6,385,000  |   | $ | 2,484,000 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

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

 

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

 
| ** **                                              | ** ** | **Nine months   ended September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Cash Flows from Investing  Activities:                  |       |                                       |       |   |   |
| Capital expenditures                                    |       | $                                          | (1,638,000 | ) | $ | (694,000 | ) |
| Proceeds from sale of  fixed assets                     |       | 2,000                                      |       | 16,000 |   |
| Payment for acquisition                                 |       | (4,528,000                                 | )          | — |   |
| Additional purchase price –  Hy-Tech               |       | (2,362,000                                 | )          | — |   |
| Net cash used in investing  activities                  |       | (8,526,000                                 | )          | (678,000 | ) |
|                                                    |       |                                       |       |   |   |
| Cash Flows from Financing  Activities:                  |       |                                       |       |   |   |
| Proceeds from short-term  borrowings                    |       | 27,158,000                                 |       | 11,500,000 |   |
| Repayments of short-term  borrowings                    |       | (20,873,000                                | )          | (4,500,000 | ) |
| Term loan -advances                                     |       | 1,134,000                                  |       | — |   |
| Repayments of term loan                                 |       | (7,394,000                                 | )          | (8,930,000 | ) |
| Net proceeds from  equipment lease financing            |       | 494,000                                    |       | — |   |
| Principal payments on  long-term debt                   |       | (194,000                                   | )          | (198,000 | ) |
| Net proceeds from notes  payable                        |       | 1,433,000                                  |       | — |   |
| Purchase of treasury stock                              |       | —                                     |       | (62,000 | ) |
| Net cash provided (used)  in financing activities       |       | 1,758,000                                  |       | (2,190,000 | ) |
|                                                    |       |                                       |       |   |   |
| NET DECREASE IN CASH AND  CASH EQUIVALENTS              |       | (383,000                                   | )          | (384,000 | ) |
| Cash and cash equivalents  at beginning of period       |       | 1,043,000                                  |       | 1,334,000 |   |
| Cash and cash equivalents  at end of period             |       | $                                          | 660,000    |   | $ | 950,000 |   |
|                                                    |       |                                       |       |   |   |
| **Supplemental disclosures of  cash flow information:** |       |                                       |       |   |   |
| ** **                                              |       |                                       |       |   |   |
| Cash paid for:                                          |       |                                       |       |   |   |
| Interest                                                |       | $                                          | 1,092,000  |   | $ | 1,485,000 |   |
| Income taxes                                            |       | $                                          | 30,000     |   | $ | 758,000 |   |

 

Noncash investing and financing activitieswere as follows:

 

In connection with the WMC transactions, asdescribed in Note 2 of the Notes to Consolidated Condensed FinancialStatements, the Company issued a note payable to the seller in the amount of$3,972,000.  In addition, on June 8,2009, the Company recorded a liability for contingent consideration in theamount of $4,586,000.

 

See accompanying notes to consolidatedcondensed financial statements (unaudited).

 

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

 

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

 

**NOTE 1 - SUMMARY OF ACCOUNTINGPOLICIES**

 

**Basis of Financial StatementPresentation**

 

The accompanying unauditedconsolidated condensed financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information, and with the rules and regulations ofthe Securities and Exchange Commission regarding interim financial reporting.Accordingly, these interim financial statements do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. In theopinion of the Company, these unaudited consolidated condensed financialstatements include all adjustments necessary to present fairly the informationset forth therein. All such adjustments are of a normal recurring nature.Results for interim periods are not necessarily indicative of results to beexpected for a full year.

 

The accompanying unaudited interim condensedconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. Going concern contemplates the realization ofassets and the satisfaction of liabilities in the normal course of businessover a reasonable length of time. However, the Company has reclassified all ofits long-term bank debt as a current liability due to its default on certainfinancial covenants. Management intends to finalize and resolve its discussionswith its lender and believe the defaults will be cured through waivers and/oramendments.

 

The unaudited consolidatedcondensed balance sheet information as of December 31, 2008 was derivedfrom the audited financial statements included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2008. The interimfinancial statements contained herein should be read in conjunction with thatReport.

 

**Subsequent Events**

 

In preparing these condensedconsolidated financial statements, we have evaluated events and transactionsthrough November 13, 2009 for potential recognition or disclosure throughthe issuance of the condensed consolidated financial statements.

 

**Reclassifications**

 

Certain amounts in theconsolidated condensed financial statements for the three and nine-monthperiods ended September 30, 2008 have been reclassified to conform to the currentperiod’s presentation.

 

**Management Estimates**

 

The preparation of financialstatements and related disclosures in conformity with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses reported in those financial statements.  Certain significant accounting policies thatcontain subjective management estimates and assumptions include those relatedto revenue recognition, inventory, goodwill, intangible assets and otherlong-lived assets, income taxes and deferred taxes.  Descriptions of these policies are discussedin the Company’s Annual Report on Form 10-K for the year ended December 31,2008.  Management evaluates its estimatesand assumptions on an ongoing basis using historical experience and otherfactors, including the current economic environment, and makes adjustments whenfacts and circumstances dictate. Illiquid credit markets and declines in consumer spending have, amongother things, combined to increase the uncertainty inherent in such estimatesand assumptions.  As future events andtheir effects cannot be determined with precision, actual results could differsignificantly from those estimates and assumptions.  Significant changes, if any, in thoseestimates resulting from continuing changes in the economic environment will bereflected in the consolidated financial statements in future periods.

 

**Recently Adopted Accounting Standards**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) established the FASB AccountingStandards CodificationTM (the “Codification”) as the single source ofauthoritative U.S. GAAP recognized by the FASB to be applied by nongovernmentalentities.  Rules and interpretivereleases of the United States Securities and Exchange Commission (“SEC”) underauthority of Federal securities laws are also sources of authoritative U.S.GAAP for SEC registrants.  TheCodification did not have a material impact on the Company’s consolidatedfinancial statements upon adoption. Accordingly, the Company’s notes to consolidated financial statementswill explain accounting concepts rather than cite the topics of specific U.S.GAAP.

 

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**The Company**

 

P&F Industries, Inc.,(“P&F”) conducts its business operations through two of its wholly-ownedsubsidiaries: Continental Tool Group, Inc. (“Continental”) and CountrywideHardware, Inc. (“Countrywide”). P&F and its subsidiaries are hereinreferred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

 

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

 

**Tools**

 

We conduct our Toolsbusiness through Continental, which in turn currently operates through itswholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“FloridaPneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engagedin the importation, manufacture and sale of pneumatic hand tools, primarily forthe industrial, retail and automotive markets, and the importation and sale ofcompressor air filters. Florida Pneumatic also markets, through its BerkleyTool division (“Berkley”), a line of pipe cutting and threading tools, wrenchesand replacement electrical components for a widely-used brand of pipe cuttingand threading machines. In addition, through its Franklin Manufacturing (“Franklin”)division, Florida Pneumatic 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 Hardwarebusiness through Countrywide, which in turn operates through its wholly-ownedsubsidiaries, Nationwide Industries, Inc. (“Nationwide”), WoodmarkInternational, L.P. (“Woodmark”), Pacific Stair Products, Inc. (“PSP”) andWM Coffman, LLC (“WMC”). Woodmark was, until the transactions described in Note2 (the “WMC transactions”), which were effective June 8, 2009, an importerof both stair parts components and kitchen & 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. PSPmanufactured and distributed premium stair rail products, until mid-2008. Sincethe closing of its mill in mid-2008, it had operated primarily as a distributerof Woodmark’s staircase components to the building industry, in southernCalifornia and the southwestern region of the United States.  PSP exited the remaining facility on July 31,2009.  As a result of the WMCtransaction, PSP no longer functions as an operating unit.  Its customers are being serviced through WMC.

 

Nationwide, headquartered inTampa, Florida, is an importer and distributor of fencing, door, and windowhardware.

 

Effective as of the date ofthe WMC transaction, the Company reports the results of operations of itskitchen & bath hardware and accessories product line, which, prior tothe WMC transaction, was part of Woodmark, with Nationwide and is referred toas “Other Hardware”.  The Company reportsthe results of operations of WMC as “Stair Parts” or “WMC”.

 

**NOTE 2 — ACQUISITION**

 

On June 10,2009, pursuant to an Asset Purchase Agreement dated as of June 8, 2009(the “Asset Purchase Agreement”), WMC, a Delaware limited liabilitycompany,  and a newly formed subsidiaryof the Company, acquired substantially all of the assets of Coffman 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 into certain agreements with WMC,effectively transferring the Company’s stair parts business to WMC.

 

On June 10,2009, WMC entered into a Revolving Credit, Term Loan and Security Agreement (“WMCloan agreement”), dated as of June 8, 2009 with PNC Bank, NationalAssociation, (“PNC”) pursuant to which WMC may receive loans from PNC in theaggregate principal amount of $12,000,000 (See Note 11).

 

Thepurchase price consisted of a cash payment of $4,528,000, a promissory note inthe amount of $3,972,000 payable to Coffman, and the assumption of certainpayables, liabilities and obligations. Additionally, subject to certain conditions, WMC also agreed to pay toCoffman contingent consideration based upon the financial performance of WMCand certain other factors 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, recorded $3,972,000, which is the present valueof $5,885,000, which is whatit believed to be the most likely outcome of the potential 

 

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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, it recorded inits selling, general and administrative expenses approximately $432,000. A portion of this amountwill be amortized over the three year term of the WMC loan agreement, with theremaining portion being amortized over approximately 18 years, which is theremaining life of the facility lease, discussed below.

 

Interest on the unpaid principal balance of thepromissory note of $3,972,000 accrues (i) from June 8, 2009 until theMaturity Date, as defined, at the rate of six and one-half percent (6.5%)simple interest per annum.  The principalamount and accrued interest due Coffman is payable on the date (the “MaturityDate”) that is the latter of (1) the last day of the Contingency Period,as defined in the Asset Purchase Agreement or (2) the earlier of (a) thedate that is three (3) years and ninety (90) days after the date of thepromissory 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 thereunderare subject to the terms of a Subordination Agreement, dated as of June 8,2009, among WMC, Coffman and PNC.

 

Contemporaneouslywith the execution and delivery of the Asset Purchase Agreement, WMC andCoffman entered into an Assignment and Assumption of Lease Agreement dated asof 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,dated as of March 30, 2007, for the lease of certain real property locatedin Marion, Virginia (the “Leased Premises”). The Lease Agreement has anexpiration date of March 30, 2027. The base annual rent is $580,000, payable quarterly in advance on July 1,October 1, January 1 and April 1, in equal installments of$145,000.  Further, WMC was required topresent to the landlord a $100,000 letter of credit as security deposit.

 

Thepurchase price of Coffman 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 |   |

 

The following table presents, as of the date of thetransaction, the air values of the assets acquired and liabilities assumed andthe amounts allocated to 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 |   |
|                                              |        |           |           |            |            |        |  |

 

Theexcess of the total purchase price over the fair value of the net assetsacquired, less the value of the identifiable intangible assets, has beenallocated to goodwill. Goodwill will be amortized for fifteen years for taxpurposes, but not for financial reporting purposes.  The fair value and estimated lives of theidentifiable intangible assets are based on current information and may besubject to change. Those intangible assets which are subject to amortizationwill be amortized over fifteen years for tax purposes.  For financial reporting purposes, usefullives have been assigned as follows:

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

 

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Thefollowing table summarizes, on an unaudited pro forma basis, the combinedresults of operations of the Company and Coffman, as though the transaction hadoccurred as of January 1, 2008. The pro forma amounts give effect toappropriate adjustments for amortization, depreciation, interest expense andincome taxes. The pro forma amounts presented are not necessarily indicative ofeither the actual consolidated operating results had the transaction occurredas of January 1, 2008 or of future consolidated operating results.

 
| ** **                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue                     |       | $                                          | 20,470,000 |                                      | $          | 28,871,000 |   | $ | 62,159,000 |   | $ | 94,303,000 |   |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Net loss                        |       | $                                          | (777,000   | )                                         | $          | (498,000 | ) | $ | (4,254,000 | ) | $ | (3,431,000 | ) |
|                            |       |                                       |       |                                      |       |   |   |   |   |
| Loss per share of common stock: |       |                                       |       |                                      |       |   |   |   |   |
| Basic                           |       | $                                          | (0.21      | )                                         | $          | (0.14 | ) | $ | (1.18 | ) | $ | (0.94 | ) |
| Diluted                         |       | $                                          | (0.21      | )                                         | $          | (0.14 | ) | $ | (1.18 | ) | $ | (0.94 | ) |

 

**NOTE 3 -FAIR VALUE MEASUREMENTS**

 

Effective January 1,2008, the Company began recording its financial assets and liabilities at fairvalue, which is defined as the price that would be received to sell an asset orpaid to transfer a liability, in the principal or most advantageous market forthe asset or liability, in an orderly transaction between market participants atthe measurement date.     Prior tothe WMC transaction, the Company did not have significant measurements ofnonfinancial assets or nonfinancial liabilities at fair value on a nonrecurringbasis subsequent to their initial recognition.  In accordance with authoritativeguidance, the Company is required to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.

 

Thefair value hierarchy consists of three broad levels, which gives the highestpriority to unadjusted quoted prices in active markets for identical assets orliabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).The three levels of the fair value hierarchy are described as follows:

 

·                              Level 1- Unadjusted quoted prices in activemarkets for identical assets or liabilities that are accessible at themeasurement date.

 

·                              Level 2- Inputs other than quoted pricesincluded within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly. Level 2 inputs include quoted prices for similar assetsor liabilities in active markets; quoted prices for identical or similar assetsor liabilities in markets that are not active; inputs other than quoted pricesthat are observable for the asset or liability; and inputs that are derivedprincipally from or corroborated by observable market data by correlation orother means.

 

·                              Level 3- Inputs that are unobservable forthe asset or liability.

 

Thefollowing describes the valuation methodologies that we used to measurefinancial instruments at fair value.

 

Thefair value of the contingent consideration obligation incurred in connectionwith the WMC transaction is estimated based on the estimated weighted averagecost of capital and estimated future income, among other criteria.

 

Thefollowing table presents the liabilities that are measured and recognized atfair value on a recurring basis classified under the appropriate level of thefair value hierarchy as of September 30, 2009:

 
| ** **               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|--------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Liabilities:             |       |        |       |        |       |        |       |      |       |
| Contingent consideration |       | $           | —     |        | $          | —      |       | $         | 4,721,000  |   | $ | 4,721,000 |   |
|                          |            |             |            |             |            |             |            |           |            |  |  |  |  |

 
| ** **                              | ** ** | **Three-months ended  September  30, 2009** | ** ** | **June 8, 2009 (date of WMC  Transaction)  through September 30, 2009** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| Roll-forward of Level 3  Liabilities:   |       |                                             |       |                                                                              |       |
| Balance at beginning of  period         |       | $                                                | 4,586,000  |                                                                              | $          | 4,586,000 |   |
| Net realized loss included  in earnings |       | 135,000                                          |       | 135,000                                                                           |       |
| Balance end of period                   |       | $                                                | 4,721,000  |                                                                              | $          | 4,721,000 |   |

 

The carrying amounts of cashequivalents, investments, receivables, accounts payable, and accrued expensesapproximate fair 

 

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value due to the immediate or short-term maturity ofthese financial instruments. The fair value of notes payable is determinedusing current applicable rates for similar instruments as of the balance sheetdate and approximates the carrying value of such debt.

 

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

 

Basic (loss) earnings percommon share is based only on the average number of shares of common stockoutstanding for the periods. Diluted earnings per common share reflects theeffect of shares of common stock issuable upon the exercise of options, unlessthe effect on earnings is antidilutive.

 

Diluted (loss) earnings percommon share is computed using the treasury stock method. Under this method,the aggregate number of shares of common stock outstanding reflects the assumeduse of proceeds from the hypothetical exercise of any outstanding options topurchase shares of the Company’s Class A Common Stock. The average marketvalue for the period is used as the assumed purchase price.

 

Thefollowing table sets forth the computation of basic and diluted (loss) earningsper common share:

 
| ** **                                                                                                                 | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                 | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator:                                                                                                                 |       |                   |       |                   |       |   |   |   |   |
| Numerator for  basic and diluted(loss) earnings per common share:                                                          |       |                   |       |                   |       |   |   |   |   |
| Net (loss)  earnings                                                                                                       |       | $                      | (776,000   | )                      | $          | 274,000 |   | $ | (1,947,000 | ) | $ | 1,131,000 |   |
| Denominator:                                                                                                               |       |                   |       |                   |       |   |   |   |   |
| Denominator for  basic (loss) earnings per share –weighted average common shares outstanding                          |       | 3,614,562              |       | 3,625,864              |       | 3,614,562 |   | 3,633,507 |   |
| Effect of  dilutive securities:                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Stock options                                                                                                              |       | —                 |       | 175,126                |       | — |   | 96,354 |   |
| Denominator for  diluted (loss) earnings per share – adjusted weighted average common shares  and assumed conversions |       | 3,614,562              |       | 3,800,990              |       | 3,614,562 |   | 3,729,861 |   |
|                                                                                                                            |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

At September 30, 2009and 2008 and during the three and nine-month periods ended September 30,2009 and 2008, there were outstanding stock options whose exercise prices werehigher than the average market values of the underlying Class A CommonStock for the period. These options are antidilutive and are excluded from thecomputation of (loss) earnings per share. The weighted average antidilutivestock options outstanding were as follows:

 
| ** **                                               | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted average  antidilutive stock options outstanding |       | 554,000                |       | 554,000                |       | 554,000 |   | 402,000 |   |

 

Diluted loss per share forthe three and nine-month periods ended September 30, 2009 was the same asbasic loss per share, since the effect of the inclusion of common shareequivalents would be anti-dilutive, because of the reported loss.

 

**NOTE 5 - STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

Total stock-based compensation expense is attributableto the granting of, and the remaining requisite service periods of, stockoptions and warrants.  Compensation expense attributable to stock-basedcompensation during the three-month periods ended September 30, 2009and 2008 was approximately $35,000 and $72,000, respectively, and $173,000 and $169,000, respectively for thenine-month periods ended September 30, 2009 and 2008.  The compensation expense is recognized inselling, general and administrative expenses on the Company’s statements of operationson a straight-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 isrecorded. As of September 30, 2009, the Company had approximately$212,000 of totalunrecognized compensation cost related to non-vested awards granted under ourstock-based plans, which we expect to recognize over a weighted-

 

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average period of 2.0 years.  The Company did not grant any stock optionsor warrants during the three- or nine-month periods ended September 30,2009.

 

Stock Option Plan

 

The Company’s 2002 IncentiveStock Option Plan (the “Current Plan”) authorizes the issuance, to employeesand directors, of options to purchase a maximum of 1,100,000 shares of Class ACommon Stock. These options must be issued within ten years of the effectivedate of the Current Plan and are exercisable for a ten year period from thedate of grant, at prices not less than 100% of the market value of the Class ACommon Stock on the date the option is granted. Incentive stock options grantedto any 10% stockholder are exercisable for a five year period from the date ofgrant, at prices not less than 110% of the market value of the Class ACommon Stock on the date the option is granted. Pursuant to the Current Plan,the Stock Option Committee has the discretion to award non-qualified stockoption grants with various vesting parameters. Options have vesting periods ofimmediate to three years. In the event options granted contain a vestingschedule over a period of years, the Company recognizes compensation cost forthese awards on a straight-line basis over the service period. The CurrentPlan, which terminates in 2012, is the successor to the Company’s 1992Incentive Stock Option Plan (the “Prior Plan”).

 

The following is a summaryof the changes in outstanding options for the nine months ended September 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                               |       | (39,312           | )          |                                   |       |                                                       |       |                            |       |
| Outstanding,  September 30, 2009 |       | 514,624           |       | $                                      | 7.26       |                                                       | 6.3        |                            | —     |   |
|                                  |       |              |       |                                   |       |                                                       |       |                            |       |
| Vested, September 30,  2009      |       | 366,957           |       | $                                      | 8.22       |                                                       | 8.6        |                            | —     |   |

 

Thefollowing is a summary of changes in non-vested shares for the nine monthsended September 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,  September 30, 2009 |       | 147,667           |       | $                                           | 2.85       |   |

 

The number of shares of Class Acommon stock reserved for stock options available for issuance under theCurrent Plan as of September 30, 2009 was 443,212. Of the optionsoutstanding at September 30, 2009, all were issued under the Current Plan.

 

**NOTE 6 — RECENT ACCOUNTINGPRONOUNCEMENTS**

 

***Recently adopted Accounting Standards***

 

In June 2009, theFASB established the FASB Accounting Standards Codification TM (the “Codification”)as the single source of authoritative U.S. GAAP recognized by the FASB to beapplied by nongovernmental entities.  Rules and interpretive releasesof the United States Securities and Exchange Commission (“SEC”) under authorityof federal securities laws are also sources of authoritative U.S. GAAP for SECregistrants.  The Codification did not have a material impact on theCompany’s consolidated financial statements upon adoption.  Accordingly,the Company’s notes to consolidated financial statements will explainaccounting concepts rather than cite the topics of specific U.S. GAAP.

 

In May 2009, the FASB issued authoritativeguidance which establishes general standards of accounting and disclosure ofevents that occur after the balance sheet date, but before financial statementsare issued or available to be issued. The guidance requires the disclosure ofthe date through which subsequent events have been evaluated and whether suchdate represents the date the financial statements were issued or were availableto be issued. The guidance is effective for the Company on September 30,2009.

 

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TheCompany has evaluated subsequent events through November 13, 2009, whichcould be required to be disclosed. The adoption of this guidance did not have amaterial impact on the Company’s consolidated condensed financial statements.

 

In April 2009, theFASB issued authoritative guidance that principally requires publicly tradedcompanies to provide disclosures about fair value of financial instruments ininterim financial information.  The adoption of this disclosure-onlyguidance for the Company’s September 30, 2009 interim consolidatedfinancial statements is included in Note 3 — Fair Value Measurements and didnot have an impact on the Company’s consolidated financial results.

 

In April 2009, theFASB issued authoritative guidance to require that assets acquired andliabilities assumed in a business combination that arise from contingencies berecognized at fair value if fair value can be reasonably determined.  Ifthe fair value of such assets or liabilities cannot be reasonably determined,then they would generally be recognized in accordance with certain otherpre-existing accounting standards.  Thisguidance also amends the subsequent accounting for assets and liabilitiesarising from contingencies in a business combination and certain otherdisclosure requirements.  This guidancedid not have an impact on the Company’s September 30, 2009 interimconsolidated condensed financial statements.

 

In November 2008,the FASB issued authoritative guidance regarding the accounting for defensiveintangible assets.  Defensive intangible assets are assets acquired in abusiness combination that the acquirer (a) does not intend to use or (b) intendsto use in a way other than the assets’ highest and best use as determined by anevaluation of market participant assumptions.  While defensive intangibleassets are not being actively used, they are likely contributing to an increasein the value of other assets owned by the acquiring entity.  This guidancewill require defensive intangible assets to be accounted for as separate unitsof accounting at the time of acquisition and the useful life of such assetswould be based on the period over which the assets will directly or indirectlyaffect the entity’s cash flows.  This guidance is to be appliedprospectively for defensive intangible assets acquired on or after thebeginning of the Company’s fiscal 2010 and did not have an impact on theCompany’s September 30, 2009 interim consolidated financial statements.

 

In November 2008,the FASB issued authoritative guidance to address questions about equity-methodaccounting.  The primary issues include how the initial carrying value ofan equity method investment should be determined, how to account for anysubsequent purchases and sales of additional ownership interests, and whetherthe investor must separately assess its underlying share of the investee’s indefinite-livedintangible assets for impairment.  This guidance became effective January 1,2009 and did not have an impact on the Company’s September 30, 2009interim consolidated financial statements.

 

In April 2008, theFASB issued authoritative guidance to amend the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset and to require additionaldisclosures.  The guidance for determining useful lives must be appliedprospectively to intangible assets acquired after the effective date.  Thedisclosure requirements must be applied prospectively to all intangible assetsrecognized as of the effective date.  This guidance became effective forthe Company January 1, 2009 and did not have a material impact on theCompany’s consolidated condensed financial statements.

 

In December 2007,the FASB issued authoritative guidance to affirm that the acquisition method ofaccounting (previously referred to as the purchase method) be used for allbusiness combinations and for an acquirer to be identified for each businesscombination.  This guidance defines the acquirer as the entity thatobtains control of one or more businesses in the business combination andestablishes the acquisition date as the date that the acquirer achievescontrol.  Among other requirements, this guidance requires the acquiringentity in a business combination to recognize the identifiable assets acquired,liabilities assumed and any noncontrolling interest in the acquiree at theiracquisition-date fair values, with limited exceptions; acquisition-relatedcosts generally will be expensed as incurred.  This guidance requirescertain financial statement disclosures to enable users to evaluate and understandthe nature and financial effects of the business combination.  Thisguidance became effective on January 1, 2009, and did not have a materialimpact on the Company’s consolidated condensed financial statements.

 

In December 2007,the FASB issued authoritative guidance to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Among other requirements, this guidanceclarifies that a noncontrolling interest in a subsidiary, which is sometimesreferred to as minority interest, is to be reported as a separate component ofequity in the consolidated financial statements.  This guidance alsorequires consolidated net income to include the amounts attributable to boththe parent and the noncontrolling interest and to disclose those amounts on theface of the consolidated statement of earnings.  This guidance must beapplied prospectively for fiscal years, and interim periods within those fiscalyears, beginning in the Company’s fiscal 2009, except for the presentation anddisclosure requirements, which will be applied retrospectively for all periodspresented.  The adoption of this guidance did not have a material impacton the Company’s consolidated condensed financial statements.

 

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*** ***

***Recently Issued Accounting Standards***

 

In August 2009, theFASB issued authoritative guidance to provide clarification on measuringliabilities at fair value when a quoted price in an active market is notavailable.  In these circumstances, a valuation technique should beapplied that uses either the quote of the liability when traded as an asset,the quoted prices for similar liabilities or similar liabilities when traded asassets, or another valuation technique consistent with existing fair valuemeasurement guidance, such as an income approach or a market approach. The new guidance also clarifies that when estimating the fair value of aliability, a reporting entity is not required to include a separate input oradjustment to other inputs relating to the existence of a restriction thatprevents the transfer of the liability.  This guidance is effective forthe first reporting period beginning after issuance.  The Company does notanticipate this guidance will have a material impact on the Company’sconsolidated financial statements.

 

In December 2008,the FASB issued authoritative guidance to require employers to provideadditional disclosures about plan assets of a defined benefit pension or otherpost-retirement plan.  These disclosures should principally includeinformation detailing investment policies and strategies, the major categoriesof plan assets, the inputs and valuation techniques used to measure the fairvalue of plan assets and an understanding of significant concentrations of riskwithin plan assets.  While earlier application of this guidance ispermitted, the required disclosures shall be provided for fiscal years endingafter December 15, 2009.  Upon initial application, this guidance isnot required to be applied to earlier periods that are presented forcomparative purposes.  The Company does not expect this guidance to have amaterial impact on its consolidated financial statements.

 

Management does not believethat any other recently issued, but not yet effective accounting standards, ifcurrently adopted would have a material effect on our condensed consolidatedfinancial statements.

 

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

 

Accountsreceivable - net consists of:

 
| ** **                       | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Accounts receivable              |       | $                           | 11,434,000 |                       | $          | 9,114,000 |   |
| Allowance for doubtful  accounts |       | (469,000                    | )          | (607,000                   | )          |
|                             |       | $                           | 10,965,000 |                       | $          | 8,507,000 |   |

 

**NOTE 8 — INVENTORIES**

 

Inventories - net consist of:

 
| ** **                                        | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Raw material                                      |       | $                           | 2,616,000  |                       | $          | 2,019,000 |   |
| Work in process                                   |       | 1,189,000                   |       | 1,606,000                  |       |
| Finished goods                                    |       | 31,117,000                  |       | 31,575,000                 |       |
|                                              |       | 34,922,000                  |       | 35,200,000                 |       |
| Reserve for obsolete and  slow-moving inventories |       | (3,975,000                  | )          | (3,914,000                 | )          |
|                                              |       | $                           | 30,947,000 |                       | $          | 31,286,000 |   |

 

**NOTE 9 - GOODWILL AND OTHERINTANGIBLE ASSETS**

 

As the result of the WMCtransaction, effective June 8, 2009, the Company increased its customerrelationships 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 necessary. 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 carryingamounts 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 September 30, 2009 |       | 4,789,000        |       | 2,362,000 |       | 2,427,000    |       |
| Balance September 30,  2009                                       |       | $                | 8,972,000  |      | $          | 3,278,000    |       | $ | 5,694,000 |   |

 

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Other intangible assets wereas follows:

 
| ** **                             | ** ** | **September 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  |                          | $          | 2,868,000 |   | $ | 3,452,000 |   | $ | 5,070,000 |   | $ | 2,604,000 |   | $ | 2,466,000 |   |
| Non-compete and Employment  agreements |       | 810,000                      |       | 797,000                       |       | 13,000 |   | 810,000 |   | 790,000 |   | 20,000 |   |
| Trademarks                             |       | 1,921,000                    |       | —                        |       | 1,921,000 |   | 299,000 |   | — |   | 299,000 |   |
| Drawings                               |       | 290,000                      |       | 38,000                        |       | 252,000 |   | 290,000 |   | 27,000 |   | 263,000 |   |
| Licensing                              |       | 105,000                      |       | 39,000                        |       | 66,000 |   | 105,000 |   | 32,000 |   | 73,000 |   |
| Totals                                 |       | $                            | 9,446,000  |                          | $          | 3,742,000 |   | $ | 5,704,000 |   | $ | 6,574,000 |   | $ | 3,453,000 |   | $ | 3,121,000 |   |

 

Amortizationexpense for intangible assets subject to amortization was as follows:

 
| ** ** | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|       |       | $                                          | 109,000    |                                      | $          | 229,000 |   | $ | 289,000 |   | $ | 687,000 |   |
|            |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

Amortization expense foreach of the twelve-month periods ending September 30, 2010 through September 30,2014 is estimated to be as follows: 2010 - $439,000 ; 2011 - $431,000 ; 2012 - $429,000; 2013 - $325,000 and 2014 - $264,000 .  The weighted average amortization period forintangible assets was 11.5 years at September 30, 2009 and 9.9 years at December 31,2008.

 

**NOTE 10- WARRANTY LIABILITY**

 

TheCompany offers to its customers, warranties against product defects for periodsprimarily ranging from one to three years. Certain products carry limited lifetime warranties. The Company’stypical warranties require it to repair or replace the defective productsduring the warranty period at no cost to the customer. At the time the productrevenue is recognized, the Company records a liability for estimated costsunder its warranties, which are estimated based on historical experience. TheCompany periodically assesses the adequacy of its recorded warranty liabilityand adjusts the amounts as necessary. While the Company believes that itsestimated liability for product warranties is adequate, the estimated liabilityfor the product warranties could differ materially from future actual warrantycosts.

 

Changesin the Company’s warranty liability, included in other accrued liabilities,were as follows:

 
| ** **                                                          | ** ** | **Nine-months ended  September 30,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Balance, beginning of  period                                       |       | $                                         | 337,000    |   | $ | 552,000 |   |
| Additions related to the  Acquisition of Coffman Stairs, LLC        |       | 120,000                                   |       | — |   |
| Warranties issued and  changes in estimated pre-existing warranties |       | 392,000                                   |       | 563,000 |   |
| Actual warranty costs  incurred                                     |       | (500,000                                  | )          | (789,000 | ) |
| Balance, end of period                                              |       | $                                         | 349,000    |   | $ | 326,000 |   |

 

**NOTE 11 —BANK DEBT**

 

**SHORT-TERM LOANS**

 

The Company and its subsidiaries as co-borrowersentered into a Credit Agreement, (“Credit Agreement”) as amended, with twobanks (“banks”) in 2004.  In March 2009,the banks amended the Credit Agreement to among other things increase therevolving credit loan facility, to a maximum of $22,000,000 for direct borrowings, withvarious sublimits for letters of credit, bankers’ acceptances and equipmentloans. There are no commitment fees for any unused portion of this CreditAgreement. The revolving credit loan facility within the Credit Agreement, asamended, expires March 30, 2010 and is subject to annual review by thelending banks.  Direct borrowings underthe 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 a result, no gain or losshad been recorded.

 

On June 10, 2009, the banks, in connection withthe WMC transaction (see Note 2), entered into a new Amendment to the CreditAgreement which, among other things, released certain collateralcontemporaneous with the Company remitting the respective advanced fundsassociated thereto, lowered the maximum eligible inventory, and increased theapplicable loan margins on the Company’s revolving credit loan facility to2.00% with respect to prime rate loans and 3.75% with respect to LIBOR loans aswell as 

 

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resettingthe applicable term loan margins to 2.00% and 4.00%, respectively, for primerate and LIBOR loans. Additionally, as certain collateral was released by thebanks in connection with the WMC transaction, this amendment reduced certaincomponents of the collateral base as well as established the maximum amountavailable under the terms of this revolving credit loan facility to $20,700,000 as of the effective date ofthe Amendment, and $19,400,000 as of August 31, 2009. At September 30,2009 and December 31, 2008, the balances outstanding on the revolvingcredit loan facility with the banks within the Credit Agreement were $15,500,000 and $20,000,000, respectively.

 

In connection with the transaction, WMC entered intothe WMC loan agreement with PNC. The WMC loan agreement expires June 8,2012. Neither the Company nor any other subsidiary is a co-borrower or aguarantor to this WMC loan agreement. The WMC loan agreement provides a maximum loan amount of $12,000,000, of which $1,134,000 was established as a termloan, the balance of $10,866,000 was the maximum revolving advance amount.  The WMC loan agreement is collateralized bythe accounts receivable, inventory, equipment, and general intangibles ofWMC.  The revolving advances made againstthe WMC loan agreement will bear interest based upon either the Eurodollar RateLoans plus 3.50%, or at Domestic Rate Loans plus 2.50%.  Domestic Rate Loans are advances at a rate ofinterest per annum equal to the highest of (i) the Base Rate in effect onsuch day, (ii) the Federal Funds Open Rate in effect on such day plus 1/2of 1%, (iii) the Daily LIBOR plus 1%, and (iv) three hundred fiftybasis points (3.50%). At September 30, 2009 the balance owing on therevolving advance was $5,785,000 and the interest rate applied was 7.0%

 

**LONG TERM LOANS**

 

As part of the amendment to the Credit Agreement enteredinto in March 2009, the banks agreed to cancel and refinance two termloans, which, immediately prior to the amendment, aggregated approximately$13,200,000. One term loanhad a balance of $6,000,000 and was beingrepaid $950,000 quarterlythrough June 2010 and the balance of $300,000 payable in September 2010.  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.  Similar to the borrowings under the creditfacility portion of the Credit Agreement, borrowings under the new term loancreated by the March 2009 amendment are secured by the Company’s accountsreceivable, inventory and equipment and are cross-guaranteed by each of theCompany’s subsidiaries, with the exception of WMC. These borrowings bearinterest at LIBOR plus the currently applicable loan margin, or the primeinterest rate. As a result of the Company’s non-compliance with certainfinancial covenants discussed below, the entire term loan balance of $6,227,000at September 30, 2009 was classified as a current liability on itsconsolidated condensed balance sheet. At December 31, 2008, the two termloans then in existence aggregated approximately $13,560,000, and had applicable loanmargin added LIBOR of 3.75%.

 

Included within the WMC loan agreement entered intowith PNC, was a term loan with a principal amount of $1,134,000, which is to berepaid in twenty-four equal monthly installments of $47,000.  The term loan may consist ofDomestic Rate Loans or Eurodollar Rate Loans, or a combination thereof. As aresult of our non-compliance with certain financial covenants discussed furtherbelow, the entire balance of $992,000 was presented on the consolidatedcondensed balance sheet as a current liability.

 

Under the terms of the Credit Agreement entered intowith the banks, the Company is required to adhere to certain financialcovenants. In August 2009, the banks issued a waiver and amendment to therelated credit facility for non-compliance with certain financial covenants asof June 30, 2009. As part of the waiver and amendment, the banks, amongother things, increased the applicable loan margins on both the revolvingcredit and term loan portions of the Credit Agreement by 50 basis points, Thus,the applicable revolving credit loan margin rates are, effective with thisamendment, 2.50% for borrowings at the Prime Rate and 4.25% for any borrowingstaken at LIBOR. The applicable term loan margin is now 2.5% for any portion ofthe term loan at Prime Rate and 4.5% for any portion taken at LIBOR.  Further, as part of the waiver and amendment,the Company was required to adhere to certain financial covenants  for the months of July, August andSeptember, 2009.  At September 30,2009 the Company was not in compliance with financial covenants set forth inthe August 2009 amendment and the amendment dated June 10, 2009.  Further, we believe it is more likely thannot that we will not be in compliance with certain financial covenants at December 31,2009. As such, the Company is working with the banks to convert the creditagreement to an asset-based loan facility; however, there can be no assurancethat the Company will be successful in such negotiation and documentation, thatsuch facility will be on terms favorable to the Company or that the banks willnot accelerate the existing facility.  Inaddition, we continue to search for additional sources of cash from ourequipment and real estate. The Company and the banks executed and delivered aletter agreement dated November 2, 2009 relating to the credit agreementwhich reduced the maximum amount the Company may borrow under the revolvingcredit portion to $17,500,000.  TheCompany does not expect this reduction to have an adverse affect. The letter agreementalso confirmed that the Company is not in compliance with financial covenantsand such non-compliance has not been waived by the Lenders.  In such letter agreement, the banks reservedall of their rights and remedies from any defaults by the Company.    The total amount of the debt at September 30,2009 that is subject to acceleration, as set forth above is approximately$21,727,000, and is reflected in current liabilities.

 

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At September 30, 2009, WMC was not incompliance with certain financial covenants associated to the WMC loanagreement with PNC.  As a result of thisnon-compliance, WMC is required to pay an additional interest rate defaultpremium of 2.00% on the entire WMC loan agreement.  Further, we believe it is more likely thannot, that WMC will not be in compliance with certain financial covenants at December 31,2009. WMC is in discussion with the lender and is attempting to obtain a waiverof non-compliance with such covenants or enter into an amendment to the WMCloan agreement that would adjust such covenants; however, there can be noassurance that WMC will be successful in entering into such an amendment, thatany such amendment will be on terms favorable to WMC, or that the lender willnot accelerate the facility. WMC received a letter from PNC in which PNCprovided notice to WMC that it was not in compliance with a financial covenantat July 31, 2009, and that while PNC chose at such time not to exerciseany of its rights and remedies provided under the PNC Credit Agreement, itreserved its rights to do so in the future at any time.  Further, WMC is out of compliance with acovenant for August 2009 and September 2009 which have also not beenwaived.  The total amount of the debt at September 30,2009 that is subject to acceleration as set forth above is approximately$6,777,000, and is reflected in current liabilities.

 

Countrywideis a party to a loan agreement with Wachovia Bank, which is secured by amortgage with respect to the real property owned by Countrywide and utilized byNationwide.  Countrywide did not make thefinal “balloon” payment that was due on September 21, 2009, and currentlyowes Wachovia approximately $1,094,000 under the Countrywide loan agreementwhich is reflected in current liabilities.  As a resultof the non-payment, cross-default provisions set forth in the loan agreementbetween Florida Pneumatic and Wachovia, secured by a mortgage with respect tothe real property owned and utilized by Florida Pneumatic, were triggered.  Absent any acceleration as a result of thecross default, regular payments under this the Florida Pneumatic loan agreementwould be scheduled to continue until February 26, 2014, and FloridaPneumatic intends to continue to make such payments.  As of the date hereof, the total amount ofdebt that is subject to acceleration relating to the Florida Pneumatic loanagreement is approximately $744,000 and is reflected in current liabilities.

 

We believe we will be able to fund our currentworking capital needs, interest and debt servicing payments over the nexttwelve months with cash on hand and cash generated from operations, supplementedby borrowings available under the loan agreements from both the banks and PNCand potentially available elsewhere, such as vendor financing.

 

The Credit Agreement entered into with the banksalso includes a foreign exchange line, which provides for the availability ofup to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. Thetotal amount of foreign currency forward contracts outstanding under theforeign exchange line at September 30, 2009, based on that day’s closingspot rate, was approximately $33,000.

 

**NOTE 12—RELATED PARTYTRANSACTIONS**

 

Pursuantto certain requirements 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 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 30,2010 for the other letter of credit, (b) the date on which there has beena drawing, or (c) the day upon which a substitute letter of credit becomeseffective.  The Company expects that,based upon current projections, it is likely that one of the two letters ofcredit will be drawn upon in the very near future.

 

The president of one of oursubsidiaries is part owner of one of the subsidiary’s vendors. During the nine-month periods ended September 30, 2009 and 2008, we purchasedapproximately $671,000 and $1,014,000, respectively of productfrom thisvendor.

 

**NOTE 13—SUBSEQUENT EVENT**

 

Management has evaluatedsubsequent events through November 13, 2009, the date on which the financialstatements were available to be issued.

 

In January 2006, the Company entered into a Contract of Sale ofwith J. D’Addario & Company, Inc., (“D’Addario”) to sell itsFarmingdale, New York premises (the “Farmingdale Premises”) to D’Addario.  On July 24, 2006, the Company received aletter (the “Purchaser Letter”) from counsel to D’Addario, purporting toterminate the Contract of Sale of the Farmingdale Premises.  The Purchaser Letter purported to terminatethe Contract of Sale based upon D’Addario’s assertion that the Company had notsatisfied certain requirements and demands that the escrow agent return thedown-payment of $650,000 with accrued interest, and that Purchaser bereimbursed for the costs of survey and title examination.

 

The Company informed D’Addario that its purported termination of theContract of Sale was in default of its obligation to consummate the purchase ofthe Farmingdale Premises under the terms of the Contract of Sale. On August 2,2006, D’Addario 

 

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institutedan action against the Company in the Supreme Court of the State of New York,County of Suffolk, for breach of contract and return of down-payment, seeking$650,000, together with costs of title and survey and interest thereon, and thecost of the action.

 

TheSupreme Court of the State of New York, County of Suffolk, rendered a decisiondated October 28, 2009 in our favor. Among other things, the decision contained a judgment that the Companyis entitled to the escrowed funds, accrued interest thereon and reimbursementof certain costs.  The court has not yetestablished the aggregate amount of this judgment.  After the court enters this judgment andcertain procedural steps are taken, D’Addario has the right to appeal.  No recognition of this event has beenrecorded in our consolidated condensed financial statements.

 

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**NOTE 14 -BUSINESS SEGMENTS**

 

P&F operates in twoprimary lines of business, or segments: (i) tools and other products (“Tools”)and (ii) hardware and accessories (“Hardware”). For reporting purposes,Florida Pneumatic and Hy-Tech are combined in the Tools segment, while WMCoffman, Woodmark, Pacific Stair Products and Nationwide are combined in theHardware segment. The Company evaluates segment performance based primarily on segmentoperating income. The accounting policies of each of the segments are the sameas those described in Note 1.

 
| **Three months ended September 30, 2009** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                     |       |             |       |      |       |         |       |
| Revenue from  unaffiliated customers           |       | $                | 20,470,000 |      | $          | 9,753,000    |       | $ | 10,717,000 |   |
|                                           |       |             |       |      |       |         |       |
| Segment  operating income (loss)               |       | $                | 714,000    |      | $          | 1,149,000    |       | $ | (435,000 | ) |
| General  corporate expense                     |       | (1,135,000       | )          |      |       |         |       |
| Interest expense  – net                   |       | (686,000         | )          |      |       |         |       |
| Loss before  income taxes                      |       | $                | (1,107,000 | )         |       |         |       |   |
|                                           |       |             |       |      |       |         |       |
| Segment assets                                 |       | $                | 75,415,000 |      | $          | 42,198,000   |       | $ | 33,217,000 |   |
| Corporate assets                               |       | 8,150,000        |       |      |       |         |       |
| Total assets                                   |       | $                | 83,565,000 |      |       |         |       |   |

 
| **Three  months ended September 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                      |       |             |       |      |       |         |       |
| Revenue from  unaffiliated customers            |       | $                | 22,104,000 |      | $          | 12,253,000   |       | $ | 9,851,000 |   |
|                                            |       |             |       |      |       |         |       |
| Segment  operating income                       |       | $                | 1,949,000  |      | $          | 1,746,000    |       | $ | 203,000 |   |
| General  corporate expense                      |       | (1,153,000       | )          |      |       |         |       |
| Interest expense  – net                    |       | (407,000         | )          |      |       |         |       |
| Earnings before  income taxes                   |       | $                | 389,000    |      |       |         |       |   |
|                                            |       |             |       |      |       |         |       |
| Segment assets                                  |       | $                | 75,435,000 |      | $          | 45,334,000   |       | $ | 30,101,000 |   |
| Corporate assets                                |       | 5,485,000        |       |      |       |         |       |
| Total assets                                    |       | $                | 80,920,000 |      |       |         |       |   |

 
| **Nine  months ended September 30, 2009** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                     |       |             |       |      |       |         |       |
| Revenue from  unaffiliated customers           |       | $                | 54,560,000 |      | $          | 28,234,000   |       | $ | 26,326,000 |   |
|                                           |       |             |       |      |       |         |       |
| Segment  operating income (loss)               |       | $                | 1,838,000  |      | $          | 2,745,000    |       | $ | (907,000 | ) |
| General  corporate expense                     |       | (3,259,000       | )          |      |       |         |       |
| Interest expense  – net                   |       | (1,358,000       | )          |      |       |         |       |
| Loss before  income taxes                      |       | $                | (2,779,000 | )         |       |         |       |   |

 
| **Nine months ended September 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                    |       |             |       |      |       |         |       |
| Revenue from  unaffiliated customers          |       | $                | 71,983,000 |      | $          | 40,026,000   |       | $ | 31,957,000 |   |
|                                          |       |             |       |      |       |         |       |
| Segment  operating income                     |       | $                | 6,922,000  |      | $          | 5,111,000    |       | $ | 1,811,000 |   |
| General  corporate expense                    |       | (3,590,000       | )          |      |       |         |       |
| Interest expense  – net                  |       | (1,416,000       | )          |      |       |         |       |
| Earnings before  income taxes                 |       | $                | 1,916,000  |      |       |         |       |   |

 

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

 

**Item 2.****       ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**General**

 

The Private SecuritiesLitigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor forforward-looking statements made by or on behalf of P&F Industries, Inc.and subsidiaries (“P&F”, or “the Company”). P&F and its representativesmay, from time to time, make written or verbal forward-looking statements,including statements contained in the Company’s filings with the Securities andExchange Commission and in its reports to stockholders. Generally, theinclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,”“will,” and their opposites and similar expressions identify statements thatconstitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 and that are intended to come within the safe harbor protectionprovided by those sections. Any forward-looking statements contained herein,including those related to the Company’s future performance, are based upon theCompany’s historical performance and on current plans, estimates andexpectations. All forward-looking statements involve risks and uncertainties.These risks and uncertainties could cause the Company’s actual results for the2009 fiscal year and beyond to differ materially from those expressed in anyforward-looking statement made by or on behalf of the Company for a number ofreasons, as previously disclosed in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008 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 consolidatedcondensed financial statements contained herein include the accounts of P&FIndustries, Inc. and its subsidiaries (“P&F”). All significantintercompany balances and transactions have been eliminated.

 

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

 

Further, P&F operates intwo primary lines of business, or segments: (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 “Asset Purchase Agreement”), WMC, a Delaware limited liability company, (“WMC”)a newly formed subsidiary of the Company, acquired substantially all of theassets of Coffman 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 into certain agreements with WMC,effectively transferring the Company’s stair parts business to WMC.

 

On June 10,2009, WMC entered into a Revolving Credit, Term Loan and Security Agreement (“WMCloan agreement”), 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).

 

Thenewly-acquired business, headquartered in Marion, VA, includes a 500,000 sq.foot manufacturing facility. We intend to continue warehouse operations inMarion, VA, Plano, TX and Austell, GA. Coffman Stairs had revenue of $27.5million in 2008 and had approximately 115 employees at the time of theacquisition. We believe that as a result of this transaction, WMC is the largestmanufacturer and supplier of wood and iron stair parts in the United States.Further, we believe that the complementary combination of product lines,distribution networks, employees, sales representatives, and domestic andinternational suppliers is unique in the industry and should enable WMC torespond to the service requirements of one- and two-step distributors as wellas stair specialists.

 

**Tools**

 

We conduct our Toolsbusiness through Continental, which in turn operates through its wholly-ownedsubsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”)and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engagedin the importation, manufacture and sale of pneumatic hand tools, primarily forthe industrial, retail and automotive markets, and the importation and sale ofcompressor air filters. Florida Pneumatic also markets, through its BerkleyTool division (“Berkley”), a line of pipe cutting and threading tools, wrenchesand replacement electrical components for a widely-used brand of pipe cuttingand threading machines. In addition, through its Franklin Manufacturing (“Franklin”)division, Florida Pneumatic imports a line of door and window hardware.  Hy-Tech is primarily engaged in themanufacture and distribution of pneumatic tools and parts for industrialapplications.

 

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**Hardware**

 

We conduct our Hardwarebusiness through Countrywide, which in turn operates through its wholly-ownedsubsidiaries, Nationwide Industries, Inc. (“Nationwide”), WoodmarkInternational, L.P. (“Woodmark”), Pacific Stair Products, Inc. (“PSP”) andWM Coffman, LLC (“WMC”). Woodmark was, until the transactions described in Note2 (the “WMC transactions”), which were 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. PSPmanufactured and distributed premium stair rail products, until mid-2008. Sincethe closing of its mill in mid-2008, it had operated primarily as a distributerof Woodmark’s staircase components to the building industry, in southernCalifornia and the southwestern region of the United States.  PSP exited the remaining facility on July 31,2009.  As a result of the WMC transaction,PSP no longer functions as an operating unit. Its customers are being serviced through WMC.

 

Nationwide, headquartered inTampa, Florida, is an importer and distributor of fencing, door, and windowhardware.

 

Effective as of the date ofthe WMC transaction, the Company reports the results of operations of itskitchen & bath hardware and accessories product line, which, prior tothe WMC transaction, was part of Woodmark, with Nationwide and is referred toas “Other Hardware”.  The Company reportsthe results of operations of WMC as “Stair Parts” or “WMC”.

 

KEY INDICATORS

 

**Economic Measures**

 

The most critical economicindicator affecting our overall performance, specifically our Hardware segment,has been and will continue to be new home construction data.  According to the U.S. Census Bureau and theDepartment of Housing and Urban Development, new privately-owned housing starts in September 2009were at a seasonally adjusted annual rate of 590,000, down 232,000 or 28% belowthe September 2008 rate of 822,000. As our Tools segment focuses on a wider array of customer types, it doesnot rely as much on specific economic measures or indicators.  The Tools segment tends to track the  general economic conditions of the UnitedStates, industrial production and general retail sales, all of which have, forthe most part, trended downward during the nine-month period ended September 30,2009, thus  adversely impacting thefinancial performance of our Tools segment.

 

Another key economic measurerelevant to us is the cost of our raw materials, in particular metals,especially various types of steel and aluminum, and wood.  Lastly, to a lesser extent, we are impactedby the value of the U.S. dollar in relation to the Japanese yen (“yen”) and theTaiwan dollar (“TWD”), as we purchase a significant portion of our productsfrom these two countries in the local currencies. We also make purchases fromChinese sources in U.S. dollars. However, if the Chinese currency, the Renminbi(“RMB”), were to be revalued against the dollar, there could be a significantnegative impact on the cost of our products.

 

**Operating Measures**

 

Key operating measures weuse to manage our operating segments are: future sales orders; shipments;development of new products; controlling customer retention; inventory levelsand productivity. These measures are recorded and monitored at variousintervals, including daily, weekly and monthly. To the extent these measuresare relevant; they are discussed in the detailed sections for each operating segment.

 

**Financial Measures**

 

Key financial measures weuse to evaluate the results of our business include: revenue; gross margin;selling, general and administrative expenses; earnings before interest taxesand bonus; operating cash flows, capital expenditures; return on sales; returnon assets; days sales outstanding and inventory turns. These measures arereviewed at monthly, quarterly and annual intervals and are compared tohistorical periods as well as established objectives. To the extent that thesemeasures are relevant, they are discussed in the detailed sections for eachoperating segment below.

 

**Critical Accounting Policies and Estimates**

 

We prepare our consolidated financial statements inaccordance with accounting principles generally accepted in the United Statesof America. Certain of these accounting policies require us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and the related disclosure of contingent assets and liabilities, revenuesand expenses. On an ongoing basis, we evaluate estimates, including thoserelated to bad debts, inventory reserves, goodwill and intangible assets andwarranty reserves. We base our estimates on historical data and experience,when available, and on various other assumptions that are believed to bereasonable under the circumstances, the combined results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates.

 

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There have been no material changes in our criticalaccounting policies and estimates from those discussed in Item 7 of our AnnualReport on Form 10-K for the year ended December 31, 2008.

 

**RESULTSOF OPERATIONS**

 

The table below provides an analysis of our netrevenue for the three month and six-month periods ended September 30, 2009and 2008.

 

**Revenue**

 
| ** **         | ** ** | **Three-months Ended September 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|--------------------|------------|-------------------------------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2009**                                  | ** ** | **2008**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **         | ** ** | ** **                                | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools              |       |                                      |       |       |       |         |       |   |   |
| Florida  Pneumatic |       | $                                         | 6,483,000  |       | $          | 7,211,000    |       | $ | (728,000 | ) | (10.1 | )% |
| Hy-Tech            |       | 3,270,000                                 |       | 5,042,000  |       | (1,772,000   | )          | (35.1 | ) |
| Tools Total        |       | 9,753,000                                 |       | 12,253,000 |       | (2,500,000   | )          | (20.4 | ) |
|               |       |                                      |       |       |       |         |       |   |   |
| Hardware           |       |                                      |       |       |       |         |       |   |   |
| Stair Parts        |       | 7,353,000                                 |       | 4,961,000  |       | 2,392,000    |       | 48.2 |   |
| Other Hardware     |       | 3,364,000                                 |       | 4,890,000  |       | (1,526,000   | )          | (31.2 | ) |
| Hardware Total     |       | 10,717,000                                |       | 9,851,000  |       | 866,000      |       | 8.8 |   |
|               |       |                                      |       |       |       |         |       |   |   |
| Consolidated       |       | $                                         | 20,470,000 |       | $          | 22,104,000   |       | $ | (1,634,000 | ) | (7.4 | )% |

 
| ** **         | ** ** | **Nine-months Ended September 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|--------------------|------------|------------------------------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2009**                                 | ** ** | **2008**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **         | ** ** | ** **                               | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools              |       |                                     |       |       |       |         |       |   |   |
| Florida  Pneumatic |       | $                                        | 17,313,000 |       | $          | 25,569,000   |       | $ | (8,256,000 | ) | (32.3 | )% |
| Hy-Tech            |       | 10,921,000                               |       | 14,457,000 |       | (3,536,000   | )          | (24.5 | ) |
| Tools Total        |       | 28,234,000                               |       | 40,026,000 |       | (11,792,000  | )          | (29.5 | ) |
|               |       |                                     |       |       |       |         |       |   |   |
| Hardware           |       |                                     |       |       |       |         |       |   |   |
| Stair Parts        |       | 15,122,000                               |       | 15,714,000 |       | (592,000     | )          | (3.8 | ) |
| Other Hardware     |       | 11,204,000                               |       | 16,243,000 |       | (5,039,000   | )          | (31.0 | ) |
| Hardware Total     |       | 26,326,000                               |       | 31,957,000 |       | (5,631,000   | )          | (17.6 | ) |
|               |       |                                     |       |       |       |         |       |   |   |
| Consolidated       |       | $                                        | 54,560,000 |       | $          | 71,983,000   |       | $ | (17,423,000 | ) | (24.2 | )% |

 

All revenues are generated in U.S. dollars and arenot impacted by changes in foreign currency exchange rates.

 

***Tools***

 

Whencomparing the three-month periods ended September 30, 2009 and 2008, netrevenue reported by our Tools segment decreased $2,500,000. Significantcomponents to the reduction in revenue at Florida Pneumatic include the loss ofThe Home Depot business resulting in a decrease in net revenue of$573,000.  Additionally, revenue from itsindustrial / catalog and OEM product lines decreased $318,000 and $190,000,respectively, when comparing the revenue for the three-month periods ended September 30,2009 to September 30, 2008. Offsetting the reductions were increases in revenue of $195,000 and$127,000, respectively, generated through its retail products and Franklinproducts lines.  Other than the loss ofrevenue from The Home Depot, we believe the key factor to the fall-off inrevenue at Florida Pneumatic is the result of the slowing overall economy.Florida Pneumatic’s relationships with its key customers, given the currenteconomic conditions remain good.

 

Hy-Tech,which focuses on the industrial sector of the pneumatic tools market, had not,until March of 2009, been as adversely affected by the down-turn in thegeneral economy, incurred a fall-off in revenue to $3,270,000 during thethree-month period ended September 30, 2009 from $5,042,000 for the sameperiod in 2008. A significant portion of the decrease this quarter is due to areduction in sales to one of its major customers. The balance of the decreasewas across its suite of products as well as customer base.  Given the current economic conditions,Hy-Tech’s relationships with its customers, remain good.

 

Revenuefor our Tools segment for the nine-month period ended September 30, 2009continues to feel the ill effects of an overall sluggish economy. Revenue atFlorida Pneumatic during the nine-month was $17,313,000, down from $25,569,000in the same period a year ago. The loss of The Home Depot is a significantfactor in the reduced revenue.   As notedearlier, until March of this year, many of the factors which werenegatively impacting our Company, had not affected performance at Hy-Tech.However, since March 2009 through September 30, 2009 Hy-Tech has beenadversely affected by, among other factors, the downturn in the 

 

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overall economy, and asignificant decrease in orders from one of its major customers,  resulting in revenue decreasing to$10,921,000 for the nine-month period ended September 30, 2009, from$14,457,000 during the same period in 2008. Both Hy-Tech and Florida Pneumatichave encountered lower sales as many of their customers during 2009 continue toreduce inventory levels. As a result of the foregoing issues, the nine-monthperiod ended September 30, 2009 revenue for our Tools segment decreased to$28,234,000 from $40,026,000 in the same period a year ago.

 

***Hardware***

 

Thekey economic driver for WMC is the number of new homes being constructed which,has for some time been in decline. As noted earlier, based upon United StatesCensus Bureau statistics, the annual number, seasonally adjusted, of newprivately-owned housing starts for September 2009 is 590,000, down 28%from the same figure for September 2008. This downward trend in new homeconstruction continues to adversely affect performance for P&F, theHardware segment in particular. As such, revenue for the Hardware segmentdecreased to $20,470,000 from $22,104,000, when comparing the three-monthperiods ended September 30, 2009 and 2008. However, as the result of the WMC transaction, in which we acquiredsubstantially of all of the assets of Coffman Stairs, LLC, revenue generated atWMC for the three-month period ended September 30, 2009, was $7,353,000,reflecting an increase of $2,392,000 compared to $4,961,000, reported for thesame period in 2008.

 

OtherHardware revenue, which is comprised of revenue from the sale of fencing andgate hardware, kitchen and bath accessories, OEM products and patio hardware,continues to be adversely affected by, among other things, the general overalleconomic sluggishness, a diminishing recreational vehicle and modular homemarkets, the downturn in new home construction, and competitive pressures.  As such, Other Hardware revenue for thethree-month period ended September 30, 2009 was $3,364,000, compared to$4,890,000 in the third fiscal quarter of 2008. Within Other Hardware revenuefrom fencing and gate hardware, kitchen and bath, OEM and patio hardware duringthe three-month period ended September 30, 2009, was $1,840,000, $734,000,$590,000 and $200,000, respectively, compared to $2,684,000, $1,196,000,$765,000 and $245,000, respectively during the same period in the prioryear.  We anticipate that we will likelycontinue to see the adverse affects of a sluggish economy, lagging new home startsand competitive pressures impacting revenue for the remainder of 2009.

 

Netrevenue for the Hardware segment for the nine-month period ended September 30,2009 continues to feel the impact of the low number of new homes beingconstructed, as well as the general sluggishness of the overall economy, both,as previously noted  are the key driversto Hardware revenue.  As such, theHardware segment reported revenue for the nine month period ended September 30,2009 of $26,326,000, a decrease of $5,631,000 or 17.6% when compared to$31,957,000 in the same period in 2008. Stair parts revenue for the nine-month period ended September 30,2009 was $15,122,000, a slight decline from $15,714,000 during the same perioda year ago. The WMC transaction was a key factor in the year to dateimprovement from June 30, 2009. We believe it is difficult to predict whenthe economy, specifically housing starts, will improve. However, as a result ofthe WMC transaction in June 2009, discussed previously, which effectivelyexpanded market coverage and penetration, we expect stair parts revenue tocontinue to show improvement on a comparative basis.  During the nine-month period ended September 30,2009, revenue from our Other Hardware product lines continued to feel theadverse effects of the sluggish economy, low housing starts and depressedmodular and mobile home markets. Other Hardware revenue during this period was$11,204,000, compared to $16,243,000 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 below thosereported in 2008, however, there can be no assurance this will occur.

 

**Gross Margins / Profits**

 

Grossprofits for the three and nine-month periods ended September 30, 2009 and2008:

 
| ** **                                 | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools**  | ** ** | **Hardware** | ** ** |
|--------------------------------------------|------------|--------------|------------|------------------|------------|------------|------------|--------------|------------|
| **Three months ended  September 30,** |       |         |       |             |       |       |       |         |       |
| 2009                                       |       | Gross Profit |       | $                | 5,313,000  |       | $          | 3,112,000    |       | $ | 2,201,000 |   |
|                                       |       | Gross Margin |       | 26.0             | %          | 31.9       | %          | 20.6         | %          |
|                                       |       |         |       |             |       |       |       |         |       |
| 2008                                       |       | Gross Profit |       | $                | 6,879,000  |       | $          | 4,231,000    |       | $ | 2,648,000 |   |
|                                       |       | Gross Margin |       | 31.1             | %          | 34.5       | %          | 26.9         | %          |
|                                       |       |         |       |             |       |       |       |         |       |
| **Nine months ended  September 30,**  | ** ** | ** **   | ** ** | ** **       | ** ** | ** ** | ** ** | ** **   | ** ** |
| 2009                                       |       | Gross Profit |       | $                | 14,656,000 |       | $          | 8,836,000    |       | $ | 5,820,000 |   |
|                                       |       | Gross Margin |       | 26.9             | %          | 31.3       | %          | 22.1         | %          |
|                                       |       |         |       |             |       |       |       |         |       |
| 2008                                       |       | Gross Profit |       | $                | 22,606,000 |       | $          | 13,403,000   |       | $ | 9,203,000 |   |
|                                       |       | Gross Margin |       | 31.4             | %          | 33.5       | %          | 28.8         | %          |

 

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***Tools***

 

Grossmargins in the Tools segment for the three-month period ended September 30,2009 decreased 2.6 percentage points to 31.9% from 34.5% for the three-monthperiod ended September 30, 2008. Gross profit for this segment decreased$1,119,000, due primarily to lower revenue, close-out sales, product mix andprice reductions.  Specifically, whencomparing the three-month periods ended September 30, 2009 and 2008,Florida Pneumatic’s gross margin decreased 1.9 percentage points.  The decrease in gross margin combined, withreduced revenue, close-out sales of certain Franklin products, as well as overallproduct mix, were key components to the decrease in Florida Pneumatic’s grossprofit.

 

Bothgross margin and gross profit decreased at Hy-Tech when comparing thethree-month periods ended September 30, 2009 and 2008. Gross marginsdecreased approximately 3.1 percentage points. The reduction in gross margin,combined with the decrease in revenue, caused Hy-Tech’s gross profit todecrease approximately $799,000.  Thedecrease in gross margin reported this quarter at Hy-Tech is primarily due tolower overhead absorption which in turn was due to lower volume through thefacility.  We anticipate similar resultsat least for the remainder of 2009 as the economic slowdown affecting theindustrial sector of our Tools segment which began toward the end of the firstquarter of 2009 continues. In an effort to improve its manufacturing overheadabsorption, Hy-Tech began to reduce its cost of manufacturing, which we believeshould result in lessening the impact of lower volume in future periods;however there can be no assurance this will be effective.

 

Grossmargin and gross profit for the Tools segment for the nine-month period ended September 30,2009 decreased 2.2 percentage points and $4,567,000, respectively, whencomparing the nine-month periods ended September 30, 2009 and 2008.Florida Pneumatics’ gross margin during the nine-month period ended September 30,2009 decreased 3.6 percentage points, primarily the result of product mix,compounded by close-out sales at Franklin. In 2008 Florida Pneumatic had a greaterpercentage of industrial sales, which provide higher margins along with highermargin products sold to its major retail customer.  Hy-Tech’s gross margin and gross profit alsoreflect a decrease when comparing the nine-month periods ended September 30,2009 and 2008. While its gross margins are essentially flat, decreasing amodest 0.7 percentage points, it is the decrease in the nine-month revenuewhich is the key factor in the fall off in its gross margin.  Should revenue remain at current levels, itis likely that gross margins, when compared to the prior year, will likelydecrease, as it might be difficult for Hy-Tech to adequately absorbmanufacturing overhead.

 

***Hardware***

 

Itshould be noted that Coffman, as a manufacturer and wholesaler primarily tomajor distributors in the stair parts industry, had historically generatedgross margins that were lower than Woodmark’s stair parts business.  Further, primarily as a result of the lownumber of new housing starts, the manufacturing facility in Marion Virginia isoperating at reduced output, thereby reduced efficiency, creatingunder-absorption of its overhead costs per part.  The under absorption of overhead adverselyimpacted the per unit cost of manufacturing, thus generating lower gross marginon the products it manufactures. Additionally, also contributing to the low gross margin was therecognition of costs associated with inventory consolidation and liquidation ofPacific Stair Products, which generated a gross deficit of approximately$161,000. As such, gross margin for the stair portion of our Hardware segmentfor the three month period ended September 30, 2009, was 13.3%, comparedto gross margin of 22.7% in the third fiscal quarter of 2008.

 

Ourgross margin at the Other Hardware productlines for the three-month period ended September 30,2009 increased to 36.6% from 31.1% during the same period in the prior year.This increase is primarily due to product mix and reduction in product costs.

 

Forthe nine-month period ended September 30, 2009, gross profit for theHardware segment was $5,820,000, or 22.1% compared to $9,203,000, or 28.8%during the same period in 2008.  Keyfactors contributing to the decrease in the stair parts gross margin  include, among other things, under absorptionof overhead costs, which effectively increases the cost per unit, in particularat PSP and the facility in Marion, Virginia and inventory write-downs andobsolescence charges that were in excess of the same period in 2008.  The above factors contributed to our stairparts reporting gross profit for the nine-month period ended September 30,2009 of 14.8% compared to 23.4% in the same period in 2008.

 

Thegross margin for Other Hardware for the nine-month period ended September 30,2009 was 31.9%, compared to 34.0% for the same period in 2008  A portion of this decrease is due to theunder absorption of overhead costs, which increases the cost of the individualproducts. Additional factors include product mix, as well as the resetting ofthe selling prices on certain products due to market factors.  Until the number of new housing starts beginsto increase and the general overall economy begins to improve, it is likelythat our gross margins in the Hardware segment will remain under pressure.

 

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

 

Selling,general and administrative expenses, (“SG&A”) include salaries and relatedcosts, commissions, travel, 

 

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administrative facilitiesexpense, communications costs and promotional expenses for our direct sales andmarketing staff, administrative and executive salaries and related benefits,legal, accounting and other professional fees as well as general corporateoverhead and certain engineering expenses.

 

For the three-month period ended September 30,2009, our SG&A was $5,734,000 reflecting a decrease of $349,000 or 5.7%when compared to $6,083,000 for the three-month period ended June 30,2008. As a percentage of revenue, SG&A was 28.0% for the three-month periodended September 30, 2009 compared to 27.5% for the same period in theprior year.  The WMC transaction, whichis described elsewhere, has effectively increased our consolidated SG&A. Asa result, the comparative year over year decreases which been occurringpreviously during 2009, will now be affected accordingly. Other factorscontributing to this net change include, among other things, an overallreduction in compensation, payroll taxes and benefits aggregating $366,000, adecrease in depreciation and amortization expenses of $61,000 as the result ofthe impairment charges taken in 2008. The following items also decreased: commissions by $31,000; advertisingand promotional expenses by $42,000 and travel and entertainment expenses by$84,000.  However, we did encounterincreases to certain expenses such as, bank fees, insurance and consulting feesof $74,000, $78,000 and $69,000, respectively. We intend to continue to examine our operating expenses, particularlyduring these difficult times.

 

OurSG&A for the nine-month period ended September 30, 2009 of$16,076,000, reflecting a reduction of $3,198,000, or 16.6% from $19,274,000reported during the same period in the prior year. As noted above the WMCtransaction impacted our SG&A, with our operating expenses increasingaccordingly. Key areas that have been reduced when comparing SG&A for thenine-month periods ended September 30, 2009 and 2008, include: wages,payroll taxes and benefits of $1,803,000; commissions of $475,000; freight of$442,000; advertising and promotional expenses of $360,000; depreciation andamortization of $308,000 and warranty costs of $199,000. Additionally, during2008 we incurred severance and related costs in connection with the wind downof certain product lines at Florida Pneumatic along with costs associated withthe closure of the mill at PSP. The total was $355,000. In accordance with theauthoritative guidance pertaining to the accounting for costs incurred inconnection with a business combination, we expensed approximately $432,000 inconnection with the WMC transaction. Lastly, we increased our use of temporary labor and consultants duringthe wind-down of Woodmark and transition of operations into WMC by$137,000.  During the remainder of 2009we will likely see increased SG&A as a result of the acquisition ofCoffman.

 

***Interest- Net***

 

Interest expense of $686,000 for the three-month periodended September 30, 2009 reflects an increase of $279,000, or 68.6%, when compared to$407,000 incurred forthe same period in the prior year. During the three-month period ended September 30,2009 we incurred approximately $319,000 in interest expense as the result ofthe WMC transaction, which occurred in June 2009; of approximately$118,000 from our short and long-term debt with PNC, $66,000 of interestexpense associated to the note payable to Visador and $135,000 as an adjustmentto the fair value of the contingent consideration payment.  Interest expense associated with our termloans decreased $102,000.  Interest expense on borrowings under ourrevolving credit loan facility for the three-month period ended September 30,2009 increased $49,000, due primarilyto the refinancing at March 31, 2009. As the result of the arrangemententered into earlier in 2009 to pay to the sellers of Hy-Tech their contingentconsideration we incurred interest expense of $41,000 during the third fiscalquarter of 2009. Lastly, interest expense associated with the financing ofoverseas trade payables decreased $31,000 when comparing the three-monthperiods ended September 30, 2009 and 2008, with other interest componentsincreasing $3,000.

 

Our interest expense for the nine-month period ended September 30,2009 was $1,358,000, lower by $58,000 compared to the same period in the prioryear. Interest expense associated with the two term loans decreased $414,000,due primarily to principal reductions through March 31, 2009 andrefinancing effective March 31, 2009. However, interest expense on therevolving credit facility increased $31,000. As the result of thearrangement entered into earlier in 2009 to pay to the sellers of Hy-Tech theircontingent consideration we incurred interest expense of $41,000 thus farthrough fiscal third quarter  2009.  As the result of the refinancing that was completed onMarch 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 the twoterm notes payable, as they no longer exist. Further, as the result of the WMC transaction, our interest expense forthe nine-month period ended September 30, 2009 increased approximately$223,000 and, adjusting the fair value of the contingent considerationobligation associated to the WMC transaction, we recorded additional interestexpense of approximately $135,000.   Itis likely that as the result of the WMC transaction, we will continue to seeinterest expense increase as we have additional bank debt as well as intereston the $3,972,000 promissory note payable to Visador. Additionally, we willrecord as either interest expense or interest income as may be required, torecord any adjustment to the fair value of the contingent consideration.

 

***Income Taxes***

 

Theeffective tax rates applicable to (loss) earnings for the three-month periodsended September 30, 2009 and 2008 were (29.9%) and 29.1%,respectively.  The effective tax ratesapplicable to (loss) earnings for the nine-month periods ended September 30,2009 and 2008 were (29.9%) and 41.0%, respectively.  The primary factor affecting our effectivetax rate applied at September 30, 

 

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2009, was state incometaxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash flows from operations can be somewhat cyclical,typically with the greatest demand in the second and third quarters followed bypositive cash flows in the fourth quarter as receivables and inventoriestrend down.  We monitor average dayssales outstanding, inventory turns and capital expenditures to projectliquidity needs and evaluate return on assets employed.

 

We gauge our liquidity andfinancial stability by various measurements, some of which are shown in thefollowing table:

 
| ** **                | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Working Capital           |       | $                           | 5,457,000  |                       | $          | 16,491,000 |   |
| Current Ratio             |       | 1.13 to 1                   |       | 1.61 to 1                  |       |
| Shareholders’ Equity |       | $                           | 32,093,000 |                       | $          | 33,867,000 |   |

 

The Company and its subsidiaries as co-borrowersentered into a Credit Agreement, (“Credit Agreement”) as amended, with twobanks (“banks”) in 2004.  In March 2009,the banks amended the Credit Agreement to among other things increase therevolving credit loan facility, to a maximum of $22,000,000 for direct borrowings, withvarious sublimits for letters of credit, bankers’ acceptances and equipmentloans. There are no commitment fees for any unused portion of this CreditAgreement. The revolving credit loan facility within the Credit Agreement, asamended, expires March 30, 2010 and is subject to annual review by thelending banks.  Direct borrowings underthe 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 a result, no gain or losshad been recorded.

 

On June 10, 2009, the banks, in connection withthe WMC transaction (see Note 2), entered into a new Amendment to the CreditAgreement which, among other things, released certain collateralcontemporaneous with the Company remitting the respective advanced fundsassociated thereto, lowered the maximum eligible inventory, and increased theapplicable loan margins on the Company’s revolving credit loan facility to2.00% with respect to prime rate loans and 3.75% with respect to LIBOR loans aswell as resetting the applicable term loan margins to 2.00% and 4.00%,respectively, for prime rate and LIBOR loans. Additionally, as certaincollateral was released by the banks in connection with the WMC transaction,this amendment reduced certain components of the collateral base as well asestablishing the maximum amount available under the terms of this revolvingcredit loan facility to $20,700,000 as of the effective date of the Amendment,and $19,400,000 as of August 31,2009. At September 30, 2009 and December 31, 2008, the balancesoutstanding on the revolving credit loan facility with the banks within theCredit Agreement were $15,500,000 and $20,000,000, respectively.

 

In connection with the transaction, WMC entered intothe WMC loan agreement with PNC. The WMC loan agreement expires June 8,2012. Neither the Company nor any other subsidiary is a co-borrower or aguarantor to this WMC loan agreement. The WMC loan agreement provides a maximum loan amount of $12,000,000, of which $1,134,000 was established as a termloan, the balance of $10,866,000 was the maximum revolving advance amount.  The WMC loan agreement is collateralized bythe accounts receivable, inventory, equipment, and general intangibles ofWMC.  The revolving advances made againstthe WMC loan agreement will bear interest based upon either the Eurodollar RateLoans plus 3.50%, or at Domestic Rate Loans plus 2.50%.  Domestic Rate Loans are advances at a rate ofinterest per annum equal to the highest of (i) the Base Rate in effect onsuch day, (ii) the Federal Funds Open Rate in effect on such day plus 1/2of 1%, (iii) the Daily LIBOR plus 1%, and (iv) three hundred fiftybasis points (3.50%). At September 30, 2009 the balance owing on therevolving advance was $5,785,000 and the interest rate applied was 7.0%

 

Under the terms of the Credit Agreement entered intowith the banks, the Company is required to adhere to certain financialcovenants. In August 2009, the banks issued a waiver and amendment to therelated credit facility for non-compliance with certain financial covenants asof June 30, 2009. As part of the waiver and amendment, the banks, amongother things, increased the applicable loan margins on both the revolvingcredit and term loan portions of the Credit Agreement by 50 basis points, Thus,the applicable revolving credit loan margin rates are, effective with thisamendment, 2.50% for borrowings at the Prime Rate and 4.25% for any borrowingstaken at LIBOR. The applicable term loan margin is now 2.5% for any portion ofthe term loan at Prime Rate and 4.5% for any portion taken at LIBOR.  Further, as part of the waiver and amendment,the Company was required to adhere to certain financial covenants  for the months of July, August andSeptember, 2009.  At September 30,2009 the Company was not in compliance with financial covenants set forth inthe August 2009 amendment and the amendment dated June 10, 2009.  Further, we believe it is more likely thannot that we will not be in compliance with certain financial covenants at December 31,2009. As such, the Company is working with the banks to convert the creditagreement to an asset-based loan facility; however, there can be no assurance thatthe Company will be successful in such negotiation and documentation, that suchfacility will be on terms favorable to the Company or that the banks will notaccelerate the existing facility.  Inaddition, we continue to search for additional sources of cash from ourequipment and real estate. The Company and the banks executed and delivered aletter agreement dated November 2, 2009 relating to

 

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thecredit agreement which reduced the maximum amount the Company may borrow underthe revolving credit portion to $17,500,000. The Company does not expect this reduction to have an adverse affect.The letter agreement also confirmed that the Company is not in compliance withfinancial covenants and such non-compliance has not been waived by theLenders.  In such letter agreement, thebanks reserved all of their rights and remedies from any defaults by theCompany.    The total amount of the debtat September 30, 2009 that is subject to acceleration, as set forth aboveis approximately $21,727,000, and is reflected in current liabilities.

 

At September 30, 2009, WMC was not incompliance with certain financial covenants associated to the WMC loanagreement with PNC.  As a result of thisnon-compliance, WMC is required to pay an additional interest rate defaultpremium of 2.00% on the entire WMC loan agreement.  Further, we believe it is more likely thannot, that WMC will not be in compliance with certain financial covenants at December 31,2009. WMC is in discussion with the lender and is attempting to obtain a waiverof non-compliance with such covenants or enter into an amendment to the WMCloan agreement that would adjust such covenants; however, there can be noassurance that WMC will be successful in entering into such an amendment, thatany such amendment will be on terms favorable to WMC, or that the lender willnot accelerate the facility. WMC received a letter from PNC in which PNCprovided notice to WMC that it was not in compliance with a financial covenantat July 31, 2009, and that while PNC chose at such time not to exerciseany of its rights and remedies provided under the PNC Credit Agreement, itreserved its rights to do so in the future at any time.  Further, WMC is out of compliance with acovenant for August 2009 and September 2009 which have also not beenwaived.  The total amount of the debt at September 30,2009 that is subject to acceleration as set forth above is approximately$6,777,000, and is reflected in current liabilities.

 

Pursuantto certain requirements 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 terminateon the earliest of (a) June 30, 2010 for one letter of credit and September 30,2010 for the other letter of credit, (b) the date on which there has beena drawing, or (c) the day upon which a substitute letter of credit becomeseffective.  The Company expects that,based upon current projections, it is likely that one of the two letters ofcredit will be drawn upon in the very near future.

 

Countrywideis a party to a loan agreement with Wachovia Bank, which is secured by amortgage with respect to the real property owned by Countrywide and utilized byNationwide.  Countrywide did not make thefinal “balloon” payment that was due on September 21, 2009, and currentlyowes Wachovia approximately $1,094,000 under the Countrywide loan agreementwhich is reflected in current liabilities.  As a resultof the non-payment, cross-default provisions set forth in the loan agreementbetween Florida Pneumatic and Wachovia, secured by a mortgage with respect tothe real property owned and utilized by Florida Pneumatic, were triggered.  Absent any acceleration as a result of thecross default, regular payments under this the Florida Pneumatic loan agreementwould be scheduled to continue until February 26, 2014, and FloridaPneumatic intends to continue to make such payments.  As of the date hereof, the total amount ofdebt that is subject to acceleration relating to the Florida Pneumatic loanagreement is approximately $744,000 and is reflected in current liabilities.

 

We believe we will be able to fund our currentworking capital needs, interest and debt servicing payments over the nexttwelve months with cash on hand and cash generated from operations,supplemented by borrowings available under the loan agreements from the banksand PNC and potentially available elsewhere, such as vendor financing.

 

The Credit Agreement also includes a foreignexchange line, 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 September 30, 2009, based on that day’s closing spot rate, wasapproximately $33,000.

 

During the nine-month period ended September 30,2009, our cash decreased to $660,000 from $1,043,000 as of December 31, 2008.  Our total debt at September 30, 2009,which included approximately $6,777,000 resulting from the WMC transaction, was$32,366,000, compared to $30,544,000 at December 31, 2008. This waspartially offset by term loan repayments and lower inventory purchases during2009. The percent of total debt to total book capitalization (total debtdivided by total bank debt plus equity) was 50.2% at September 30, 2009,compared to 47.4% at December 31, 2008.

 

We had net cash of $6,385,000 provided by operatingactivities for the nine-month period ended September 30, 2009 compared to$2,484,000 provided byoperating activities during the nine-month period ended September 30,2008. We believe that cash on hand plus likely to be derived from operationsand cash available through borrowings under our credit facilities should besufficient to allow us to meet our foreseeable working capital needs; however,there can be no assurance that we can continue to generate sufficient 

 

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amountsof cash from operations and that our banks will amend the credit agreementscurrently in place.

 

In connection with theacquisition of Hy-Tech, we agreed to make additional payments (“ContingentConsideration”) to the sellers. The amount of the Contingent Consideration isto be based on a percentage of the average increase in earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) over a two-yearperiod from the date of acquisition, February 12, 2007, over a base yearEBITDA of $4,473,000. In addition,we agreed to make an additional payment (“Additional Contingent Consideration”),subject to certain conditions related to an exclusive supply agreement with amajor customer and to a certain extent and subject to certain provisions, theachievement of Contingent Consideration. The maximum amount of AdditionalContingent Consideration may not exceed $1,900,000. Hy-Tech successfully achieved the required thresholds necessary to beentitled to both the Contingent Consideration and the Additional ContingentConsideration. The total amount of the Contingent Consideration and theAdditional Contingent Consideration is $2,362,000. According to the agreement, the amounts duethe sellers are payable in May 2009. However, we and the sellers haveagreed upon payment arrangement wherein we paid approximately $573,000 in May 2009 with thebalance 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 August 2009.  The August 2009 installment payment withinterest was paid timely.  The totalamount of approximately $2,362,000 owed was recorded as goodwill.

 

Capital spending wasapproximately $539,000 and $1,638,000 for the three and nine-monthperiods ended September 30, 2009, compared to $694,000 and $1,028,000 of capital expendituresmade during the three and nine-month periods ended September 30,2008.  Capital expenditures for thebalance of 2009 are expected to be approximately $100,000, some of which may befinanced through our credit facilities or financed through independent thirdparty financial institutions. Included in the expected total for 2009 arecapital expenditures relating to new products, expansion of existing product linesand replacement of equipment.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

Our foreign exchange line 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. We have not purchased forwardcontracts on New Taiwan dollars (“TWD”). The total amount of foreign currencyforward contracts outstanding at September 30, 2009, based on that day’sclosing spot rate, was approximately $33,000.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

***Recently adopted Accounting Standards***

 

In June 2009, theFASB established the Codification as the single source of authoritative U.S.GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules andinterpretive releases of the SEC under authority of federal securities laws arealso sources of authoritative U.S. GAAP for SEC registrants.  TheCodification did not have a material impact on the Company’s consolidatedfinancial statements upon adoption.  Accordingly, the Company’s notes toconsolidated financial statements will explain accounting concepts rather thancite the topics of specific U.S. GAAP.

 

In May 2009, the FASB issued authoritativeguidance which establishes general standards of accounting and disclosure ofevents that occur after the balance sheet date, but before financial statementsare issued or available to be issued. The guidance requires the disclosure ofthe date through which subsequent events have been evaluated and whether suchdate represents the date the financial statements were issued or were availableto be issued. The guidance is effective for the Company on September 30,2009. The Company has evaluated subsequent events through November 13,2009, which could be required to be disclosed. The adoption of this guidancedid not have a material impact on the Company’s consolidated condensedfinancial statements.

 

In April 2009, theFASB issued authoritative guidance that principally requires publicly tradedcompanies to provide disclosures about fair value of financial instruments ininterim financial information.  The adoption of this disclosure-onlyguidance for the Company’s September 30, 2009 interim consolidatedfinancial statements is included in Note 3 — Fair Value Measurements and didnot have an impact on the Company’s consolidated financial results.

 

In April 2009, theFASB issued authoritative guidance to require that assets acquired andliabilities assumed in a business combination that arise from contingencies berecognized at fair value if fair value can be reasonably determined.  Ifthe fair value of such assets or liabilities cannot be reasonably determined,then they would generally be recognized in accordance with certain otherpre-existing accounting standards.  This guidance also amends thesubsequent accounting for assets and liabilities arising from 

 

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contingencies in abusiness combination and certain other disclosure requirements.  Thisguidance did not have an impact on the Company’s September 30, 2009interim consolidated condensed financial statements.

 

In November 2008,the FASB issued authoritative guidance regarding the accounting for defensiveintangible assets.  Defensive intangible assets are assets acquired in abusiness combination that the acquirer (a) does not intend to use or (b) intendsto use in a way other than the assets’ highest and best use as determined by anevaluation of market participant assumptions.  While defensive intangibleassets are not being actively used, they are likely contributing to an increasein the value of other assets owned by the acquiring entity.  This guidancewill require defensive intangible assets to be accounted for as separate unitsof accounting at the time of acquisition and the useful life of such assetswould be based on the period over which the assets will directly or indirectlyaffect the entity’s cash flows.  This guidance is to be appliedprospectively for defensive intangible assets acquired on or after thebeginning of the Company’s fiscal 2010 and did not have an impact on theCompany’s September 30, 2009 interim consolidated financial statements.

 

In November 2008,the FASB issued authoritative guidance to address questions about equity-methodaccounting.  The primary issues include how the initial carrying value ofan equity method investment should be determined, how to account for any subsequentpurchases and sales of additional ownership interests, and whether the investormust separately assess its underlying share of the investee’s indefinite-livedintangible assets for impairment.  This guidance became effectivebeginning in the Company’s fiscal 2010 and did not have an impact on theCompany’s September 30, 2009 interim consolidated financial statements.

 

In April 2008, theFASB issued authoritative guidance to amend the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset and to require additionaldisclosures.  The guidance for determining useful lives must be appliedprospectively to intangible assets acquired after the effective date.  Thedisclosure requirements must be applied prospectively to all intangible assetsrecognized as of the effective date.  This guidance became effective forthe Company January 1, 2009 and did not have a material impact on theCompany’s consolidated condensed financial statements.

 

In December 2007,the FASB issued authoritative guidance to affirm that the acquisition method ofaccounting (previously referred to as the purchase method) be used for allbusiness combinations and for an acquirer to be identified for each businesscombination.  This guidance defines the acquirer as the entity thatobtains control of one or more businesses in the business combination andestablishes the acquisition date as the date that the acquirer achievescontrol.  Among other requirements, this guidance requires the acquiringentity in a business combination to recognize the identifiable assets acquired,liabilities assumed and any noncontrolling interest in the acquiree at theiracquisition-date fair values, with limited exceptions; acquisition-relatedcosts generally will be expensed as incurred.  This guidance requirescertain financial statement disclosures to enable users to evaluate andunderstand the nature and financial effects of the business combination. This guidance became effective on January 1, 2009, and did not have amaterial impact on the Company’s consolidated condensed financial statements.

 

In December 2007,the FASB issued authoritative guidance to establish accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Among other requirements, this guidanceclarifies that a noncontrolling interest in a subsidiary, which is sometimesreferred to as minority interest, is to be reported as a separate component ofequity in the consolidated financial statements.  This guidance alsorequires consolidated net income to include the amounts attributable to boththe parent and the noncontrolling interest and to disclose those amounts on theface of the consolidated statement of earnings.  This guidance must beapplied prospectively for fiscal years, and interim periods within those fiscalyears, beginning in the Company’s fiscal 2009, except for the presentation anddisclosure requirements, which will be applied retrospectively for all periodspresented.  The adoption of this guidance did not have a material impacton the Company’s consolidated condensed financial statements.

 

Management does not believethat any other recently issued, but not yet effective accounting standards, ifcurrently adopted would have a material effect on our condensed consolidatedfinancial statements.

 

**Item 3.****               ****Quantitative And Qualitative Disclosures About Market Risk**

 

Not required.

 

**Item 4T.****             ****Controlsand Procedures**

 

**Evaluationof disclosure controls and procedures**

 

An evaluation was performed, under thesupervision of, and with the participation of, our management including thePrincipal Executive Officer and Principal Financial Officer, of theeffectiveness of the design and operation of our disclosure controls and 

 

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procedures (as defined in Rules 13a-15(e) and15d-15(e) to the Securities and Exchange Act of 1934). Based on thatevaluation, our management, including the Principal Executive Officer andPrincipal Financial Officer, concluded that our disclosure controls andprocedures as of September 30, 2009 were effective. Accordingly, managementbelieves that the consolidated condensed financial statements included in thisQuarterly Report on Form 10-Q fairly present, in all material respects,our financial condition, results of operations and cash flows for the periodspresented.

 

P&F management is responsible forestablishing and maintaining effective internal controls. Because of ourinherent limitations, internal controls may not prevent or detectmisstatements. A control system, no matter how well designed and operated, canonly provide reasonable, not absolute, assurance that the control system’sobjectives will be met. Also, projections of any evaluation of effectiveness asto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance withpolicies and procedures 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 inInternal Control Over Financial Reporting**

 

There have been no significant changes in ourinternal control over financial reporting during the three-month period ended September 30,2009, 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.****         ****LegalProceedings**

** **

We are a defendant orco-defendant in various actions brought about in the ordinary course ofconducting our business. We do not believe that any of these actions arematerial to our financial condition.

 

**Item 1A.****      ****RiskFactors**

** **

Exceptas set forth below, there were no material changes from risk factors previouslydisclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2008 in response to Item 1A. to Part I of suchForm 10-K:

 

**Non-compliancewith loan agreements.**

** **

Underthe terms of our credit agreements, we are required to adhere to certainfinancial covenants. At September 30, 2009, we were not in compliance withcertain of our financial covenants set forth in our secured credit agreements,and we have not received waivers for such non-compliance as of the filing dateof this Quarterly Report. Further, we have not yet made a final “balloon”payment due in September 2009 on an additional loan secured by one of ourreal properties, which non-payment caused a cross-default on another loansecured by another of our real properties. As a result of the foregoing, ouraccess to funds may be adversely affected, debt may become due immediatelyand/or certain of our assets securing our debt could be foreclosed.

 

**Item 2.****         ****Unregistered Sales of EquitySecurities and Use of Proceeds**

** **

None.

 

**Item 3.****         ****DefaultsUpon Senior Securities**

** **

The information required bythis Item 3 is incorporated by reference to our Current Report onForm 8-K filed with the Securities and Exchange Commission onNovember 9, 2009.

 

**Item 4.****         ****Submissionof Matters to a Vote of Security Holders**

** **

None.

 

**Item 5.****         ****OtherInformation**

** **

None

 

**Item 6.****         ****Exhibits**

** **

See “Exhibit Index”immediately following the signature page.

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
| ** **                     | **P&F INDUSTRIES, INC.** |
|--------------------------------|------------------------------|
|                           | (Registrant)                 |
|                           |                         |   |
|                           |                         |   |
|                           | By                           | /s/ Joseph A. Molino, Jr. |
|                           |                         | Joseph A. Molino, Jr. |
|                           |                         | Chief Financial Officer |
| Dated:  November 13, 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**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.1**            |       | Amendment No. 20 and Waiver to Credit Agreement, dated as of  August 27, 2009, by and among P & F Industries, Inc.,  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. as Co-Borrowers, Citibank,  N.A. and HSBC Bank USA, National Association as Lenders, and Citibank, N.A.,  as Administrative Agent for the Lenders (Incorporated by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated  August 31, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

A copy of any of the foregoing exhibits to thisQuarterly Report on Form 10-Q may be obtained, upon payment of theRegistrant’s reasonable expenses in furnishing such exhibit, by writing toP&F Industries, Inc., 445 Broadhollow Road, Suite 100, MelvilleNew York 11747, Attention: Corporate Secretary.

 

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