P&F INDUSTRIES INC - Quarter Report: 2008 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2008

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number 1 - 5332

 

P&F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (631) 694-9800

 

 

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

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

As of August 12, 2008 there were 3,627,562 shares of the registrant’s Class A Common Stock outstanding.

 

 

Table of Contents

 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

 

TABLE OF CONTENTS

 

					PAGE
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Condensed Balance Sheets as of June 30, 2008 and December 31, 2007				1
	Consolidated Condensed Statements of Earnings for the three and six months months ended June 30, 2008, and 2007				3
	Consolidated Condensed Statement of Shareholders’ Equity for the period from January 1, 2008 to June 30, 2008				4
	Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007				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 4(T).	Controls and Procedures				29
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings				30
Item 1A.	Risk Factors				30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds				30
Item 3.	Defaults Upon Senior Securities				30
Item 4.	Submission of Matters to a Vote of Security Holders				30
Item 5.	Other Information				31
Item 6.	Exhibits				31
Signature					32
Exhibit Index					33

 

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PART I - FINANCIAL INFORMATION

 

Item 1.             Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

		June 30, 2008			December 31, 2007
		(unaudited)			(derived from audited financial statements)
ASSETS
CURRENT
Cash and cash equivalents		$	592,699		$	1,334,167
Accounts receivable – net		14,387,353			12,883,095
Notes and other receivables		119,281			393,525
Inventories – net		31,409,934			31,736,103
Deferred income taxes – net		1,397,000			1,397,000
Assets of discontinued operations		41,807			56,142
Income tax refund receivables		219,059			225,524
Prepaid expenses and other current assets		1,097,885			1,171,279
TOTAL CURRENT ASSETS		49,265,018			49,196,835
PROPERTY AND EQUIPMENT
Land		1,549,773			1,549,773
Buildings and improvements		7,613,514			7,613,514
Machinery and equipment		15,740,733			15,563,078
		24,904,020			24,726,365
Less accumulated depreciation and amortization		10,608,714			10,010,179
NET PROPERTY AND EQUIPMENT		14,295,306			14,716,186
GOODWILL		4,594,028			4,594,028
OTHER INTANGIBLE ASSETS – net		10,645,303			11,103,534
DEFERRED INCOME TAXES -net		3,111,000			3,445,000
ASSETS OF DISCONTINUED OPERATIONS		—			9,400
OTHER ASSETS – net		179,728			204,684
TOTAL ASSETS		$	82,090,383		$	83,269,667

 

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

 

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		June 30, 2008			December 31, 2007
		(unaudited)			(derived from audited financial statements)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term borrowings		$	13,000,000		$	8,000,000
Accounts payable		7,360,676			5,042,046
Income taxes payable		185,080			524,780
Accrued compensation		1,176,309			1,805,120
Other accrued liabilities		2,767,251			3,489,703
Current maturities of long-term debt		5,509,543			6,305,423
Liabilities of discontinued operations		30,494			30,236
TOTAL CURRENT LIABILITIES		30,029,353			25,197,308
LONG-TERM DEBT, less current maturities		12,788,139			19,744,173
LIABILITIES OF DISCONTINUED OPERATIONS		336,809			342,367
TOTAL LIABILITIES		43,154,301			45,283,848
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued		—			—
Common stock
Class A - $1 par; authorized - 7,000,000 shares; issued - 3,956,431 at June 30, 2008 and December 31, 2007, respectively		3,956,431			3,956,431
Class B - $1 par; authorized - 2,000,000 shares; no shares issued					—
Additional paid-in capital		10,263,897			10,166,662
Retained earnings		27,613,852			26,756,514
Treasury stock, at cost – 319,969 and 318,969 shares at June 30, 2008 and December 31, 2007, respectively		(2,898,098		)	(2,893,788		)
TOTAL SHAREHOLDERS’ EQUITY		38,936,082			37,985,819
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	82,090,383		$	83,269,667

 

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

 

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (unaudited)

 

		Three months ended June 30,						Six months ended June 30,
		2008			2007			2008			2007
Net revenues		$	25,554,114		$	30,607,864		$	49,878,869		$	55,566,751
Cost of sales		17,499,081			21,530,979			34,151,353			38,742,263
Gross profit		8,055,033			9,076,885			15,727,516			16,824,488
Selling, general and administrative expenses		6,763,417			7,814,457			13,273,763			14,667,646
Operating income		1,291,616			1,262,428			2,453,753			2,156,842
Interest expense – net		451,796			831,081			1,010,160			1,482,739
Earnings from continuing operations before income taxes		839,820			431,347			1,443,593			674,103
Income taxes		387,000			201,000			641,000			297,000
Earnings from continuing operations		452,820			230,347			802,593			377,103
Earnings (loss) from discontinued operations (net of tax expense (benefit) of $19,000 and $28,000 for 2008 and $2,000 and $(12,000) for 2007, respectively)		42,037			2,666			54,745			(18,301		)
Gain on sale of assets of discontinued operations (net of tax expense of $2,093,000)		—			3,026,560			—			3,026,560
Earnings from discontinued operations		42,037			3,029,226			54,745			3,008,259
Net earnings		$	494,857		$	3,259,573		$	857,338		$	3,385,362
Basic earnings per common share:
Continuing operations		$	0.13		$	0.07		$	0.22		$	0.10
Discontinued operations		0.01			0.84			0.02			0.84
Net earnings		$	0.14		$	0.91		$	0.24		$	0.94
Diluted earnings per common share:
Continuing operations		$	0.12		$	0.06		$	0.22		$	0.10
Discontinued operations		0.01			0.80			0.01			0.79
Net earnings		$	0.13		$	0.86		$	0.23		$	0.89
Weighted average common shares outstanding:
Basic		3,637,277			3,596,703			3,637,370			3,589,155
Diluted		3,713,440			3,796,962			3,694,338			3,799,613

 

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

 

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P&F INDUSTRIES, 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, 2008		$	37,985,819		3,956,431		$	3,956,431		$	10,166,662		$	26,756,514		(318,969	)	$	(2,893,788	)
Net earnings		362,481											362,481
Stock-based compensation		46,534			—		—			46,534			—			—		—
Balance, March 31, 2008		38,394,834			3,956,431		3,956,431			10,213,196			27,118,995			(318,969	)	(2,893,788		)
Net earnings		$	494,857										$	494,857
Stock-based compensation		50,701								50,701
Purchase of Treasury stock		(4,310		)	—		—			—			—			(1,000	)	(4,310		)
Balance, June 30, 2008		$	38,936,082		3,956,431		$	3,956,431		$	10,263,897		$	27,613,852		(319,969	)	$	(2,898,098	)

 

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

 

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

 

		Six months ended June 30
		2008			2007
Cash Flows from Operating Activities of Continuing Operations:
Net earnings		$	857,338		$	3,385,362
Earnings from discontinued operations – net of taxes		(54,745		)	(3,008,259		)
Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations:
Noncash charges:
Depreciation and amortization		856,145			729,442
Amortization of other intangible assets		458,231			708,069
Amortization of other assets		4,893			2,631
Provision for losses on accounts receivable - net		(99,379		)	72,747
Stock-based compensation		97,235			250,976
Deferred income taxes - net		334,000			—
Loss on write-down of fixed asset		126,646			—
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable		(1,404,879		)	(915,284		)
Notes and other receivables		274,244			838,056
Inventories		326,169			(217,967		)
Income tax refund receivable		6,465			1,011,795
Prepaid expenses and other current assets		73,394			340,910
Other assets		20,063			209,878
Accounts payable		2,318,630			841,448
Accruals and other		(1,351,263		)	(282,523		)
Income taxes payable		(339,700		)	—
Total adjustments		1,646,149			581,919
Net cash provided by operating activities of continuing operations		$	2,503,487		$	3,967,281

 

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

 

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		Six months ended June 30
		2008			2007
Cash Flows from Investing Activities of Continuing Operations:
Capital expenditures		$	(561,911	)	$	(958,687	)
Purchase of certain assets, net of certain liabilities, of Hy-Tech Machine, Inc.		—			(20,749,066		)
Net cash used in investing activities of continuing operations		(561,911		)	(21,707,753		)
Cash Flows from Financing Activities of Continuing Operations:
Proceeds from short-term borrowings		9,000,000			8,000,000
Repayments of short-term borrowings		(4,000,000		)	(5,500,000		)
Proceeds from term loan		—			19,000,000
Repayments of term loan		(7,620,000		)	(6,900,000		)
Principal payments on long-term debt		(131,914		)	(117,768		)
Proceeds from exercise of stock options		—			122,356
Tax benefits from the exercise of stock options		—			100,000
Purchase of treasury stock		(4,310		)	—
Net cash (used in) provided by financing activities of continuing operations		(2,756,224		)	14,704,588
Cash Flows from Discontinued Operations:
Net cash provided by operating activities		73,180			520,939
Net cash provided by investing activities		—			3,603,095
Net cash used in financing activities		—			(1,254,117		)
Net cash provided by discontinued operations		73,180			2,869,917
NET DECREASE IN CASH AND CASH EQUIVALENTS		(741,468		)	(165,967		)
Cash and cash equivalents at beginning of period		1,334,167			1,339,882
Cash and cash equivalents at end of period		$	592,699		$	1,173,915

 

Supplemental disclosures of cash flow information:

 

		Six months ended June 30,
		2008			2007
Cash paid for:
Interest		$	1,085,000		$	1,297,000
Income taxes		$	741,000		$	185,000

 

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

 

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

 

Principles of Consolidation

 

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

 

P&F conducts its business operations through two of its wholly-owned subsidiaries: Continental Tool 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 in two primary lines of business, or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”).

 

Tools

 

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

 

Florida Pneumatic is engaged in the importation, manufacture and sale of pneumatic hand tools, primarily for the industrial, retail and automotive markets, and the importation and sale of compressor air filters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a line of pipe cutting and threading tools, wrenches and replacement electrical components for a widely-used brand of pipe cutting and threading machines. In addition, through its Franklin Manufacturing (“Franklin”) division, Florida Pneumatic imports a line of door and window hardware. In February 2007, the Company acquired substantially all of the operating assets of Hy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear & Machine, Inc. and certain real property from HTM Associates, which collectively comprise Hy-Tech. Hy-Tech, is primarily engaged in the manufacture and distribution of pneumatic tools and parts for industrial applications.

 

Hardware

 

We conduct our Hardware business through a wholly owned subsidiary, Countrywide, which in turn operates through its wholly-owned subsidiaries, Nationwide Industries, Inc. (“Nationwide”), Woodmark International, L.P. (“Woodmark”) and Pacific Stair Products, Inc. (“Pacific Stair”).

 

Nationwide is an importer and manufacturer of door, window and fencing hardware. Woodmark is an importer of builders’ hardware, including staircase components and kitchen and bath hardware and accessories. Pacific Stair manufactures premium stair rail products and distributes Woodmark’s staircase components to the building industry, primarily in southern California and the southwestern region of the United States.

 

The Company’s wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), was engaged in the manufacture and sale of baseboard heating products and the importation and sale of radiant heating systems until it exited that business in October 2005 through the sale of substantially all of its non-real estate assets. Embassy sold its real estate assets in June 2007. The Company’s wholly-owned subsidiary, Green Manufacturing, Inc. (“Green”), was primarily engaged in the manufacture, development and sale of heavy-duty welded custom designed hydraulic cylinders, a line of access equipment for the petro-chemical

 

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industry and a line of post hole digging equipment for the agricultural industry until it exited those businesses between December 2004 and July 2005. The assets and liabilities and results of operations of Embassy and Green have been segregated and reported separately as discontinued operations in the Consolidated Condensed Financial Statements. Note 13 to the Notes to Consolidated Condensed Financial Statements presents financial information for the segments of the Company’s business.

 

Basis of Financial Statement Presentation

 

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

 

The results of operations for Embassy and Green have been segregated from continuing operations and are reflected on the consolidated condensed statements of earnings as discontinued operations.

 

The unaudited consolidated condensed balance sheet information as of December 31, 2007 was derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The interim financial statements contained herein should be read in conjunction with that Report.

 

In preparing its unaudited consolidated condensed financial statements in conformity with accounting principles generally accepted in the United States of America, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates estimates, including those related to bad debts, inventory reserves, goodwill and intangible assets. The Company bases its estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

NOTE 2 - EARNINGS PER SHARE

 

Basic earnings per common share is based only on the average number of shares of common stock outstanding for the periods. Diluted earnings per common share reflects the effect of shares of common stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.

 

Diluted earnings per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of common stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options or warrants to purchase shares of the Company’s Class A Common Stock. The average market value for the period is used as the assumed purchase price.

 

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The following table sets forth the computation of basic and diluted earnings per common share:

 

		Three months ended June 30,						Six months ended June 30,
		2008			2007			2008			2007
Numerator:
Numerator for basic and diluted earnings per common share:
Earnings from continuing operations		$	453,000		$	231,000		$	802,000		$	377,000
Discontinued operations, net of taxes		42,000			3,029,000			55,000			3,008,000
Net earnings		$	495,000		$	3,260,000		$	857,000		$	3,385,000
Denominator:
Denominator for basic earnings per share – weighted average common shares outstanding		3,637,000			3,597,000			3,637,000			3,589,000
Effect of dilutive securities:
Stock options		76,000			200,000			57,000			211,000
Denominator for diluted earnings per share – adjusted weighted average common shares and assumed conversions		3,713,000			3,797,000			3,694,000			3,800,000

 

At June 30, 2008 and 2007 and during the three and six-month periods ended June 30, 2008 and 2007, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Class A Common Stock for the period. These options are antidilutive and are excluded from the computation of earnings per share. The weighted average antidilutive stock options outstanding were as follows:

 

		Three months ended June 30,				Six months ended June 30,
		2008		2007		2008		2007
Weighted average antidilutive stock options outstanding		380,936		29,500		326,218		29,500

 

NOTE 3 - STOCK-BASED COMPENSATION

 

Stock-based Compensation

 

During the six-month period ended June 30, 2008, the Company granted 174,000 options to purchase its Class A common stock, of which 145,000 were granted to its Chief Executive Officer / President and 25,000 to its Chief Operating Officer / Chief Financial Officer, with the balance to a non-executive employee of the Company. Twenty percent of the common stock options granted to the Chief Executive Officer / President vest on the first five anniversaries of the date of the grant. One third of the common stock options granted to the Chief Operating Officer / Chief Financial Officer vest one the first three anniversaries of the grant date. The remaining 4,000 options were immediately vested on the grant date.  All common stock options granted herein have an exercise price of $4.16 and will expire ten years from the date of the grant.

 

Risk-free interest rate		4.2	%
Expected term (in years)		Ranging from 6.8 to 10.
Volatility		Ranging from 40.39% to 41.49	%
Dividend yield		0	%
Weighted-average fair value of options granted		$2.43

 

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The fair values of the Company’s common stock options were estimated on the date of the grant using the Black-Scholes pricing model with the following assumptions:  (i) the expected term is based on historical exercises and terminations; (ii) the expected volatility of our shares of common stock is determined using historical volatilities based on historical stock prices over a period of time equal to the expected life of the options; (iii) the dividend yield is 0% as the Company has historically not declared dividends and does not expect to declare any in the future and (iv) with respect to risk-free interest rate, the Company applies the ten year U.S. Treasury bill interest rate as of the date of the grant.

 

The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding.  Because we consider our options to be “plain vanilla”, we estimated the expected term using a modified version of the simplified method of calculation, as prescribed by Staff Accounting Bulletin (“SAB”) No. 107. This modified calculation uses the actual life for options that have been settled, and a uniform distribution assumption for the options still outstanding. Under SAB 107, options are considered to be “plain vanilla” if they have the following characteristics:  granted “at-the-money” exercisability is conditioned upon service through a vesting date; termination of service prior to vesting results in forfeiture; limited exercise period following termination of service; and options are non-transferable and non-hedgeable.

 

The Company recorded stock-based compensation expense for the three month periods ended June 30, 2008 and 2007 of approximately $51,000 and $245,000, respectively, and $97,000 and $251,000 for the six-month periods ended June 30, 2008 and 2007, respectively. The compensation expense is recognized in the selling, general and administrative expenses line item of the Company’s statements of earnings on a straight-line basis over the vesting periods. There are no capitalized stock-based compensation costs at either June 30, 2008 or 2007.

 

As of June 30, 2008, the Company had approximately $528,000 of total unrecognized compensation cost related to non-vested awards granted under our share-based plans, which we expect to recognize over a weighted-average period of 2.3 years.

 

The Company did not receive any cash during the six-month period ended June 30, 2008 from any exercise of stock options, but did receive cash of approximately $122,000 from options exercised during the six-month period ended June 30, 2007. Statement 123(R) requires that cash flows from tax benefits attributable to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows. Accordingly, the impact of the cash received in 2007 is included in financing activities in the accompanying consolidated condensed statements of cash flows.

 

Stock Option Plan

 

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

 

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The following is a summary of the changes in outstanding options for the six months ended June 30, 2008:

 

		Option Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, January 1, 2008		533,436		$	8.58		4.5
Granted		174,000		4.16			10.0
Exercised		—		—
Forfeited		—		—
Expired		(152,500	)	7.88
Outstanding, June 30, 2008		554,936		$	7.38		7.1		—
Vested, June 30, 2008		342,530		$	8.60		5.6		—

 

The following is a summary of changes in non-vested shares for the six months ended June 30, 2008:

 

		Option Shares		Weighted Average Grant-Date Fair Value
Nonvested shares, January 1, 2008		71,827		$		5.20
Granted		170,000		2.44
Vested		29,421		5.00
Forfeited		—
Nonvested shares, June 30, 2008		212,406		$	3.02

 

The number of shares of Class A common stock reserved for stock options available for issuance under the Current Plan as of June 30, 2008 was 416,900. Of the options outstanding at June 30, 2008, 540,936 were issued under the Current Plan and 14,000 were issued under the Prior Plan.

 

NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS

 

New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Standard of Financial Accounting Statements (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a new single authoritative definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 became effective as of November 15, 2007 and became effective for the Company January 1, 2008. The adoption of this statement did not have a material effect on our consolidated financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115’’, (‘‘SFAS 159’’). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective as of the beginning of fiscal 2008. The adoption of this statement did not have a material effect on our consolidated financial position or results of operations, as the Company did not elect the fair value option for any assets or liabilities.

 

In December 2007, the SEC staff issued SAB 110, “Share Based Payment”, which amends SAB 107, Share Based Payment, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does not provide a reasonable basis for estimating the expected term of the options. We currently use the simplified method to estimate the expected term for employee option grants as adequate

 

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historical experience is not available to provide a reasonable estimate. SAB 110 is effective for employee options granted after December 31, 2007. We adopted SAB 110 effective January 1, 2008 and continue applying the simplified method until enough historical experience is readily available to provide a reasonable estimate of the expected term for employee option grants.

 

In December 2007, the FASB issued Statement 141 (revised 2007), “Business Combinations” (“Statement 141R”) to change how an entity accounts for the acquisition of a business. When effective, Statement 141R will replace existing Statement 141 in its entirety. Statement 141R carries forward the existing requirements to account for all business combinations using the acquisition method (formerly called the purchase method). In general, Statement 141R will require acquisition-date fair value measurement of identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree. Statement 141R will eliminate the current cost based purchase method under Statement 141. The new measurement requirements will result in the recognition of the full amount of acquisition-date goodwill, which includes amounts attributable to non-controlling interests. The acquirer will recognize in income any gain or loss on the remeasurement to acquisition-date fair value of consideration transferred or of previously acquired equity interests in the acquiree. Neither the direct costs incurred to effect a business combination nor the costs the acquirer expects to incur under a plan to restructure an acquired business will be included as part of the business combination accounting. As a result, those costs will be charged to expense when incurred, except for debt or equity issuance costs, which will be accounted for in accordance with other generally accepted accounting principles. Statement 141R will also change the accounting for contingent consideration, in process research and development, contingencies, and restructuring costs. In addition, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination that occur after the measurement period will impact income taxes under Statement 141R. Statement 141R is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. We intend to adopt Statement 141R effective January 1, 2009 and apply its provisions prospectively. We are evaluating the impact that the adoption of Statement 141R will have on our consolidated financial statements.

 

In December 2007, the FASB issued Statement 160, “Non-controlling Interests in Consolidated Financial Statements: an amendment of ARB No. 51”, (“Statement 160”). The new statement changes the accounting for, and the financial statement presentation of, non-controlling equity interests in a consolidated subsidiary. Statement 160 replaces the existing minority interest provisions of Accounting Research Bulletin (ARB) 51, Consolidated Financial Statements, by defining a new term—non-controlling interests—to replace what were previously called minority interests. The new standard establishes non-controlling interests as a component of the equity of a consolidated entity. The underlying principle of the new standard is that both the controlling interest and the non-controlling interests are part of the equity of a single economic entity: the consolidated reporting entity. Classifying non-controlling interests as a component of consolidated equity is a change from the current practice of treating minority interests as a mezzanine item between liabilities and equity or as a liability. The change affects both the accounting and financial reporting for non-controlling interests in a consolidated subsidiary. Statement 160 includes reporting requirements intended to clearly identify and differentiate the interests of the parent and the interests of the non-controlling owners. The reporting requirements are required to be applied retrospectively. Statement 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. We intend to adopt Statement 160 effective January 1, 2009 and apply its provisions prospectively. We will also present comparative financial statements that reflect the retrospective application of the disclosure and presentation provisions when it applies the requirements of Statement 160. We are evaluating the impact that the adoption of Statement 160 will have on our consolidated financial statements.

 

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NOTE 5 – ACQUISITION

 

Hy-Tech Machine, Inc.

 

On February 14, 2007, pursuant to an Asset Purchase Agreement (the “Hy-Tech APA”) effective as of February 12, 2007, Hy-Tech, acquired substantially all of the assets (the “Hy-Tech Purchased Property”) of Hy-Tech Machine, Inc. and Quality Gear & Machine, Inc., (collectively, the “Hy-Tech Sellers”). The purchase price consisted of $16,900,000 in cash, subject to adjustments, plus the assumption of certain payables and liabilities and the obligation to make certain contingent payments based on factors described in the Hy-Tech APA. The purchase price was negotiated on the basis of the Hy-Tech Sellers’ historical financial performance. The Hy-Tech Purchased Property was used by the Hy-Tech Sellers in the business of, among other things, manufacturing and selling pneumatic tools and other tool products.

 

In connection with this acquisition, Hy-Tech entered into an Agreement of Sale with HTM Associates, a Pennsylvania general partnership comprised of certain shareholders of the Hy-Tech Sellers (“HTM”), pursuant to which Hy-Tech purchased certain real property located in Cranberry Township, Pennsylvania from HTM for $2,200,000 in cash.

 

The Company also agreed to make additional payments (“Contingent Consideration”) to the Hy-Tech Sellers. The amount of Contingent Consideration is to be based on a percentage of the average increase in earnings before interest, taxes, depreciation and amortization (“EBITDA”) over a two-year period from the date of acquisition, over a base year EBITDA of $4,473,000. In addition, the Company has agreed to make a further additional payment (“Additional Contingent Consideration”), subject to certain conditions related to an exclusive supply agreement with a major customer and, to a certain extent and subject to certain provisions, the achievement of Contingent Consideration. This Additional Contingent Consideration can not exceed $1,900,000. Any such additional payments for Contingent Consideration or Additional Contingent Consideration, if any, would be payable in accordance with the terms and conditions set forth in the Hy-Tech APA.  Any such payments will be treated by the Company as additions to goodwill.

 

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company and Hy-Tech as though the acquisition transaction had occurred as of January 1, 2007. The pro forma amounts give effect to appropriate adjustments for amortization of intangible assets, interest expense and income taxes. The pro forma amounts presented are not necessarily indicative of either the actual consolidated operating results had the acquisition transaction occurred as of January 1, 2007 or of future consolidated operating results.

 

		Three months ended			Six Months ended
		June 30, 2007			June 30, 2007
Net revenues		$	30,608,000		$	57,746,000
Net earnings		$	3,260,000		$	3,568,000
Earnings per share of common stock
Basic		$	0.91		$	0.99
Diluted		$	0.86		$	0.94

 

NOTE 6 – DISCONTINUED OPERATIONS

 

Embassy Industries, Inc.

 

Pursuant to an Asset Purchase Agreement (the “Embassy APA”), dated as of October 11, 2005,

 

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among P&F, Embassy, Mestek, Inc. (“Mestek”) and Embassy Manufacturing, Inc., a wholly owned subsidiary of Mestek (“EMI”), Embassy sold substantially all of its operating assets to EMI. Certain assets were retained by Embassy, including, but not limited to, cash and title to any real property owned by Embassy at the consummation of the sale to EMI. Embassy has effectively ceased all operating activities.

 

On July 24, 2006, Embassy received a letter (the “Purchaser Letter”) from counsel to J. D’Addario & Company, Inc., a New York corporation (“Purchaser”), purporting to terminate that certain contract entered into by Embassy and Purchaser on January 13, 2006 (the “Agreement”, and as amended, the “Contract of Sale”). Pursuant to the Contract of Sale, Embassy agreed to sell its Farmingdale, New York premises (the “Farmingdale Premises”) to Purchaser for a purchase price of $6,403,000.  The Purchaser Letter purports to terminate the Contract of Sale based upon Purchaser’s assertion that Embassy had not satisfied certain requirements and demands that the escrow agent return the Embassy Industries, Inc. down-payment with accrued interest, and that Purchaser be reimbursed for the costs of survey and title examination.

 

The Purchases Letter purports to terminate the Contract of Sale based upon Purchaser’s assertion the Embassy had not satisfied certain requirements and demands that the escrow agent return the down payment with accrued interest, and that Purchaser be reimbursed for the costs of the survey and title examinations.

 

Embassy informed Purchaser that its purported termination of the Contract of Sale was in default of its obligation to consummate the purchase of the Farmingdale Premises under the terms of the Contract of Sale. On August 2, 2006, Purchaser instituted an action against Embassy 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 the cost of the action. The down-payment remains in escrow pending resolution of this matter. Embassy believes the action is without merit and intends to vigorously defend it.

 

In June 2007, Embassy sold this property to an unrelated third party, receiving approximately $6,300,000 from the sale, used the after-tax proceeds from the sale to satisfy the mortgage on the building of approximately $1,200,000 and to reduce its long-term debt. The Company recorded a pre-tax gain from this sale of approximately $5,100,000.

 

Green

 

Green was primarily engaged in the manufacture, development and sale of heavy-duty welded custom designed hydraulic cylinders sold for use as integrated components on a variety of equipment and machinery manufactured by others. Green also manufactured a line of access equipment for the petro chemical and bulk storage industries. This product line consisted of bridges, platforms, walkways and stairways, constructed of steel or aluminum and generally installed outdoors. In addition, Green marketed a small line of diggers used primarily as attachments to small tractors for light farm work. This product line was marketed through farm equipment dealers and wholesalers. We sold the principal assets of Green between December 2004 and July 2005 in three transactions pursuant to three separate asset purchase agreements with non-affiliated third parties. During 2008 and 2007, Green received commission income from one of the non-affiliated third parties. These amounts are included in the earnings from discontinued operations.

 

The following amounts pertain to the Company’s discontinued operations and have been segregated from the Company’s continuing operations and are reported as assets held for sale and assets and liabilities of discontinued operations in the consolidated condensed balance sheets:

 

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		June 30, 2008			December 31, 2007
Assets held for sale and assets of discontinued operations:
Current:
Prepaid expenses		$	42,000		$	56,000
Subtotal		42,000			56,000
Long-term:
Other receivable		—			9,000
Total assets held for sale and assets of discontinued operations		$	42,000		$	65,000
Liabilities of discontinued operations:
Current:
Accounts payable and accrued expenses		$	30,000		$	30,000
Subtotal		30,000			30,000
Long-term:
Pension obligation		337,000			342,000
Total liabilities of discontinued operations		$	367,000		$	372,000

 

Results of operations for Embassy and Green and have been segregated from continuing operations and reflected as discontinued operations approximately as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2007			2008			2007
Earnings (loss) from operation of discontinued operations, before taxes		$	61,000		$	5,000		$	83,000		$	(30,000	)
Gain on sale of assets of discontinued operations		—			5,119,000			—			5,119,000
		61,000			5,124,000			83,000			5,089,000
Income tax expense		(19,000		)	(2,095,000		)	(28,000		)	(2,081,000		)
Earnings from discontinued operations		$	42,000		$	3,029,000		$	55,000		$	3,008,000

 

NOTE 7 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable -net consists of:

 

		June 30, 2008			December 31, 2007
Trade accounts receivable		$	14,906,000		$	13,502,000
Less: Allowance for doubtful accounts		519,000			619,000
		$	14,387,000		$	12,883,000

 

NOTE 8 – INVENTORIES

 

Inventories - net consist of:

 

		June 30, 2008			December 31, 2007
Raw material		$	2,593,000		$	2,525,000
Work in process		1,672,000			2,156,000
Finished goods		29,366,000			29,015,000
		33,631,000			33,696,000
Reserve for obsolete and slow-moving inventories		(2,221,000		)	(1,960,000		)
		$	31,410,000		$	31,736,000

 

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At December 31, 2007, the Company originally reported a reserve for obsolete and slow-moving inventories in connection with the acquisition of Hy-Tech, which has been reclassified to finished goods to conform to the current period’s presentation.

 

NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

During the six-month period ended June 30, 2008 there was no change to the carrying value of goodwill.

 

Other intangible assets were as follows:

 

		June 30, 2008						December 31, 2007
		Cost			Accumulated amortization			Cost			Accumulated amortization
Other intangible assets:
Customer relationships and backlog		$	14,130,000		$	4,557,000		$	14,130,000		$	4,117,000
Vendor relationship		—			—			—			—
Non-compete and Employment agreements		810,000			785,000			810,000			780,000
Trademark/trade name		699,000			—			699,000			—
Engineering drawings		290,000			20,000			290,000			12,000
Licensing		105,000			27,000			105,000			21,000
Total		$	16,034,000		$	5,389,000		$	16,034,000		$	4,930,000

 

Amortization expense for intangible assets subject to amortization was as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2008			2007			2008			2007
		$	230,000		$	343,000		$	459,000		$	708,000

 

Amortization expense for each of the twelve-month periods ending June 30, 2009 through the twelve-month period ending June 30, 2013, is estimated to be as follows: 2009 - $916,000; 2010 - $917,000; 2011 - $911,000; 2012 - $907,000 and 2013 - $844,000. The weighted average amortization period for intangible assets was 12.7 years at June 30, 2008 and 13.1 years at December 31, 2007.

 

NOTE 10 - WARRANTY LIABILITY

 

The Company offers warranties on certain products against product defects for periods primarily ranging from one to three years, with certain faucet hardware having a limited lifetime warranty, depending on the specific product and terms of the customer purchase agreement. The Company’s typical warranty requires it to repair or replace the defective products during the warranty period at no cost to the customer. At the time the product revenue is recognized, the Company records a liability for estimated costs under its warranty program, which costs are estimated based on historical experience. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. While the Company believes that its estimated liability for product warranties is adequate, the estimated liability for the product warranties could differ materially from future actual warranty costs.

 

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