Overview

We are a leading manufacturer of security products, precision ball bearing slides, and ergonomic computer support systems used in the office furniture, transportation, tool storage and a variety of other industries. We are also a leading manufacturer of stainless steel exhaust systems, gauges, and throttle controls for the performance marine industry.

We reported an operating loss of $949,000 in the second quarter of 2009 compared to operating income of $4.5 million in the same period of 2008. We reported an operating loss of $1.9 million for the six-month period ended June 30, 2009 compared to operating income of $8.0 million for the comparable period of 2008. The decreases in operating income are primarily due to the negative effects of lower order rates from our customers relating to unfavorable economic conditions in North America, reduced coverage of overhead and fixed manufacturing costs from the resulting under-utilization of production capacity, higher legal expense relating to certain patent related litigation, and a write-down on assets held for sale, partially offset by the positive effects of cost reductions implemented in response to lower sales and the impact of relative changes in foreign currency exchange rates.

Results of Operations

                                               Three months ended
                                                     June 30,
                                    2008          %          2009          %
                                             (Dollars in thousands)

Net sales                         $ 43,708       100.0 %   $ 29,239       100.0 %
Cost of goods sold                  32,726        74.9       22,991        78.6

 Gross margin                       10,982        25.1        6,248        21.4

Operating costs and expenses         6,515        14.9        6,480        22.2
Assets held for sale write-down          -           -          717         2.5

 Operating income (loss)          $  4,467        10.2 %   $   (949 )      (3.2 )%



                                                Six months ended
                                                     June 30,
                                    2008          %          2009          %
                                             (Dollars in thousands)

Net sales                         $ 84,228       100.0 %   $ 57,715       100.0 %
Cost of goods sold                  63,305        75.2       46,695        80.9

 Gross margin                       20,923        24.8       11,020        19.1

Operating costs and expenses        12,927        15.3       12,190        21.1
Assets held for sale write-down          -           -          717         1.2

 Operating income (loss)          $  7,996         9.5 %   $ (1,887 )      (3.3 )%

Net sales. Net sales decreased 33% in the second quarter and 31% in the first six months of 2009 compared to the same periods in 2008. Net sales decreased principally due to lower order rates from our customers resulting from unfavorable economic conditions in North America.

Cost of goods sold and gross margin. Cost of goods sold as a percentage of sales increased by 4% in the second quarter and 6% in the first six months of 2009 compared to the same periods in 2008. As a result, gross margin percentage decreased over the same periods. The resulting declines in gross margin are primarily due to reduced coverage of overhead and fixed manufacturing costs from lower sales volume and the related under-utilization of capacity, partially offset by cost reductions implemented in response to lower sales.

Operating costs and expenses. Operating costs and expenses consist primarily of salaries, commissions and advertising expenses directly related to product sales, as well as, gains and losses on plant, property and equipment and currency transaction gains and losses. As a percentage of net sales, operating costs and expenses increased approximately 7% and 6% for the quarter and six month comparative periods. The increases are primarily due to reduced coverage of selling and general administrative costs as a result of lower sales volumes and approximately $920,000 in Furniture Components patent litigation expenses incurred in the second quarter of 2009. See Note 8 to the Condensed Consolidated Financial Statements.

Assets held for sale. During the second quarter of 2009, we recorded a write-down on assets held for sale of $717,000, which is included in corporate operating expense. See Note 5 to the Condensed Consolidated Financial Statements.

Operating income (loss). Operating income (loss) as a percentage of sales decreased 13% in each of the second quarter and the first six months of 2009 as compared to the same periods in 2008. The decrease is primarily due to the impact of lower gross margin and higher operating costs and expenses as discussed above, partially offset by the impact of relative changes in foreign currency exchange rates.

Currency. Our Furniture Components segment has substantial operations and assets located outside the United States (in Canada and Taiwan). The majority of sales generated from our non-U.S. operations are denominated in the U.S. dollar with the remainder denominated in foreign currencies, principally the Canadian dollar and the New Taiwan dollar. Most raw materials, labor and other production costs for our non-U.S. operations are primarily denominated in local currencies. Consequently, the translated U.S. dollar values of our non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect comparability of period-to-period operating results. Our Furniture Component segment's net sales were negatively impacted while its operating income was positively impacted by currency exchange rates in the following amounts as compared to the currency exchange rates in effect during the corresponding period in the prior year:

                                          Increase (decrease)
                              Three months ended         Six months ended
                                June 30, 2009             June 30, 2009
                                   vs. 2008                  vs. 2008
                                            (In thousands)

Impact on net sales          $               (354 )     $             (947 )

Impact on operating income                    618                    1,306

The negative impact on sales relates to sales denominated in non-U.S. dollar currencies translated into lower U.S. dollar sales due to a weakening of the local currency in relation to the U.S. dollar. The positive impact on operating income results from the U.S. dollar denominated sales of non-U.S. operations converted into higher local currency amounts due to the strengthening of the U.S. dollar. This positively impacted our gross margin as it results in more local currency generated from sales to cover the costs of non-U.S. operations which are denominated in local currency.

Interest expense. Interest expense decreased by approximately $211,000 and $650,000 for the three month and six month periods ended June 30, 2009 compared to the same periods ended June 30, 2008, respectively. The decreases in interest expense are the result of a decrease in interest rates on the outstanding principal amount of our note payable to affiliate (3.7% at June 30, 2008 as compared to 2.2% at June 30, 2009) and the approximate $8.0 million less of principal outstanding in the first six months of 2009 as compared to 2008.

Provision for income taxes. A tabular reconciliation between our effective income tax rates and the U.S. federal statutory income tax rate of 35% is included in Note 7 to the Condensed Consolidated Financial Statements. Our income tax rates vary by jurisdiction (country and/or state), and relative changes in the geographic mix of our pre-tax earnings can result in fluctuations in the effective income tax rate. Generally, the effective tax rate on income derived from our U.S. operations, including the effect of U.S. state income taxes, is lower than the effective tax rate on income derived from our non-U.S. operations, in part due to an election not to claim a credit with respect to foreign income taxes paid but instead to claim a tax deduction, consistent with the election made by Contran, the parent of our consolidated U.S. federal income tax group. Our geographic mix of pre-tax earnings and the U.S. deferred tax or benefit related to our foreign earnings that are not permanently reinvested without offset by foreign tax credits where available are the primary reasons our effective income tax rates in 2008 and 2009 vary from the 35% U.S. federal statutory income tax rate.

Segment Results

The key performance indicator for our segments is the level of their operating
income margins.

                           Three months ended                            Six months ended
                                June 30,                                      June 30,
                           2008          2009          % Change         2008          2009          % Change
                                                       (Dollars in thousands)

Net sales:
 Security Products      $   20,189     $  15,430           (23.6 )%   $  39,265     $  30,712           (21.8 )%
 Furniture Components       19,731        11,694           (40.7 )       37,484        23,589           (37.1 )
 Marine Components           3,788         2,115           (44.2 )        7,479         3,414           (54.4 )

  Total net sales       $   43,708     $  29,239           (33.1 )%   $  84,228     $  57,715           (31.5 )%

Gross margin:
 Security Products      $    5,660     $   4,526           (20.0 )%   $  11,200     $   8,275           (26.1 )%
 Furniture Components        4,383         1,526           (65.2 )        7,817         3,057           (60.9 )
 Marine Components             939           196           (79.1 )        1,906          (312 )        (116.4 )

  Total gross margin    $   10,982     $   6,248           (43.1 )%   $  20,923     $  11,020           (47.3 )%

Operating income
(loss):
 Security Products      $    3,357     $   2,528           (24.7 )%   $   6,596     $   4,104           (37.8 )%
 Furniture Components        2,370          (981 )        (141.4 )        3,795        (1,001 )        (126.4 )
 Marine Components             165          (439 )          n.m.            268        (1,590 )          n.m.
 Corporate operating
expense                     (1,425 )      (2,057 )         (44.4 )       (2,663 )      (3,400 )         (27.7 )

  Total operating
income (loss)           $    4,467     $    (949 )        (121.2 )%   $   7,996     $  (1,887 )        (123.6 )%

Gross margin as a
percentage of net
sales:
  Security Products           28.0 %        29.3 %                         28.5 %        26.9 %
  Furniture
Components                    22.2 %        13.0 %                         20.9 %        13.0 %
  Marine Components           24.8 %         9.3 %                         25.5 %        (9.1 )%

Operating income
(loss) as
a percentage of net
  sales:
  Security Products           16.6 %        16.4 %                         16.8 %        13.4 %
  Furniture
Components                    12.0 %        (8.4 )%                        10.1 %        (4.2 )%
  Marine Components            4.4 %       (20.8 )%                         3.6 %       (46.6 )%

n.m. = not meaningful

Security Products. Security Products net sales decreased 24% in the second quarter of 2009 compared to the same period of last year, and decreased 22% in the first six months of 2009 compared to the same period in the prior year. The decrease in sales is primarily due to lower customer order rates resulting from unfavorable economic conditions in North America. Gross margin percentage increased approximately 1% for the quarter and decreased approximately 2% for the six month comparative period. The increase for the quarter is primarily related to the positive impact of price and cost changes during the second quarter of 2009 and the reduction of managed fixed costs partially offset by reduced fixed costs coverage from lower sales and the related under-utilization of capacity. The decrease for the six month comparative period is primarily due to the gross margin improvements experienced in the second quarter being insufficient to offset the results experienced prior to the noted second quarter cost changes already discussed. Operating income as a percentage of net sales was flat for the quarter and decreased 3% for the six month period. The decrease in operating income as a percentage of sales for the year to date period is primarily due to reduced fixed cost coverage from lower sales and the related under-utilization of capacity, partially offset by cost reductions implemented in response to lower sales.

Furniture Components. Furniture Components net sales declined 41% and 37% in the second quarter and the first six months of 2009, respectively, compared to the same periods in 2008. The declines in net sales are primarily due to lower order rates from our customers resulting from unfavorable economic conditions in North America. Furniture Components gross margin percentage decreased approximately 9% and 8% in the second quarter and six month period of 2009, respectively, compared to the same periods in 2008. Operating income percentage decreased approximately 20% and 14% in the second quarter and six month period of 2009 compared to the same periods in 2008. The decreases in the gross margin and operating income percentages for the quarter are primarily the result of reduced fixed cost coverage from lower sales and the related under-utilization of capacity and approximately $920,000 of litigation expense recorded in selling, general and administrative expense during the second quarter of 2009, partially offset by the impact of relative changes in foreign currency exchange rates. See Note 8 to the Condensed Consolidated Financial Statements.

Marine Components. Marine Components net sales decreased 44% during the second quarter of 2009 as compared to the same period in 2008, and declined 54% in the first six months of 2009 compared to the same period in the prior year primarily due to a dramatic overall downturn in the marine industry. Gross margin percentage decreased 16% and 35% in the second quarter and first six months of 2009, compared to the same periods in the prior year, respectively. Operating income percentage decreased 25% and 50% in the second quarter and six month periods of 2009 compared to the same periods in 2008, respectively. The decreases in gross margin and operating income percentages are the result of reduced coverage of fixed costs from lower sales volume.

Outlook. Demand for our products continues to be slow and unstable as customers react to the condition of the overall economy. While changes in market demand are not within our control, we are focused on the areas we can impact. Staffing levels are continuously being evaluated in relation to sales order rates resulting in headcount adjustments, to the extent possible, to match staffing levels with demand. We expect our lean manufacturing and cost improvement initiatives to continue to positively impact our productivity and result in a more efficient infrastructure that we can leverage when demand growth returns. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, expand into new markets and develop new product features in order to mitigate the impact of reduced demand as well as broaden our sales base.

In addition to challenges with overall demand, volatility in the cost of raw materials is ongoing. We currently expect these costs to be volatile for the remainder of 2009. If raw material prices increase, we may not be able to fully recover the cost by passing them on to our customers through price increases due to the competitive nature of the markets we serve and the depressed economic conditions.

As discussed in Note 8 to the Condensed Consolidated Financial Statements, certain competitors have filed claims against us for patent infringement. We have denied the allegations of patent infringement and are seeking to have the claims dismissed. While we currently believe the disposition of these claims should not have a material, long-term adverse effect on our consolidated financial condition, results of operations or liquidity, we expect to incur costs defending against such claims during the short-term that are likely to be material.

Due to continued unfavorable economic conditions and lower than expected results of our Furniture Components reporting unit we re-evaluated goodwill associated with this reporting unit in the second quarter of 2009 and concluded no impairments were present at June 30, 2009. However, if our future cash flows from operations less capital expenditures for this reporting unit were to be significantly below our current expectations (approximately 10% below our current projections), it is reasonably likely that we would conclude an impairment of the goodwill associated with our Furniture Components reporting unit would be present under Statement of Financial Accounting Standard (SFAS) No. 142. At June 30, 2009, our Furniture Components reporting unit had approximately $7.1 million of goodwill. Holding all other assumptions constant at the re-evaluation date, a 100 basis point increase in the rate used to discount our expected cash flows under SFAS No. 142 would reduce the enterprise value for our Furniture Components unit sufficiently to indicate a potential impairment.

Due to the continued decline in the marine industry and lower than expected results of our Custom Marine and Livorsi Marine operations comprising our Marine Components reporting unit, we evaluated the long-lived assets for our Marine Components reporting unit under SFAS No. 144 and concluded no impairments were present at June 30, 2009. However, if our future cash flows from operations less capital expenditures were to drop significantly below our current expectations (approximately 50% to 75% below our current projections), it is reasonably likely that we would conclude an impairment was present.

Our $37.5 million revolving credit facility requires us to maintain minimum levels of equity, and certain financial ratios, limits dividends and additional indebtedness and contains other provisions customary in lending transactions of this type. We believe it is probable that we will not be able to comply with the interest coverage ratio covenant as of September 30, 2009. The interest coverage ratio requires our ratio of earnings before interest and taxes, as defined, for the cumulative period of four consecutive fiscal quarters to interest expense for that period to be greater than 2.5 to 1.0. At June 30, 2009, our interest coverage ratio was 4.2 to 1.0. Additionally, it is probable that we would not be able to pay a dividend in the third quarter without violating the consolidated net worth covenant, even though we expect to have sufficient cash on hand to pay a dividend, if declared. The consolidated net worth covenant, as defined, requires our consolidated net worth to be greater than $77.0 million. At June 30, 2009, our consolidated net worth was $77.6 million. We have begun discussions with the lenders to amend the terms of the existing credit facility to, among other things, modify the interest coverage ratio covenant and change the amount of the consolidated net worth covenant. While we believe it is possible we can obtain such an amendment, there is no assurance that such an amendment will be obtained, (or waived, in the event the lenders would only agree to a waiver and not an amendment). Any amendment or waiver which we might obtain could increase our future borrowing costs, either from a requirement that we pay a higher interest rate on future outstanding borrowings and/or pay a fee to the lenders as part of agreeing to an amendment or waiver. There are no current expectations to borrow on the revolving credit facility in the near term. At June 30, 2009, there are no amounts outstanding under our revolving credit facility. Lower than expected future operating results would likely reduce our amount available to borrow and restrict future dividends.

Liquidity and Capital Resources

Consolidated cash flows -

Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities, have generally been similar to the trends in our operating earnings. Changes in assets and liabilities result primarily from the timing of production, sales, and purchases. Such changes in assets and liabilities generally tend to even out over time. However, period-to-period relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities. Cash provided by operating activities for the first six months of 2009 was flat compared to the first six months of 2008 due primarily to the net effects of the following items:

· Lower operating income in 2009 of $9.2 million (exclusive of the non-cash $717,000 write-down on assets held-for-sale);

· Higher net cash provided by relative changes in our inventories, receivables, payables, and non-tax related accruals of $5.1 million in 2009;

· Lower cash paid for income taxes in 2009 of $2.5 million due to lower earnings; and

· Lower cash paid for interest in 2009 of approximately $435,000 due to lower interest rates and a lower outstanding principle balance

Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, our average days sales' outstanding increased from December 31, 2008 to June 30, 2009. The increase is primarily due to the timing of collections on a lower accounts receivable balance as of June 30, 2009. As shown below, our average number of days in inventory increased from December 31, 2008 to June 30, 2009. The increase in days in inventory is primarily due to lower sales in the first six months of 2009 which impacted the days in inventory. In absolute terms, however, we reduced inventory by $3.6 million in the first six months of 2009 as compared to December 31, 2008. For comparative purposes, we have provided prior year numbers below.

                        December 31,     June 30,    December 31,   June 30,
                             2007          2008           2008         2009

Days' Sales Outstanding    44 days       42 days        41 days      44 days
Days in Inventory          63 days       72 days        70 days      74 days

Investing activities. Net cash used in investing activities totaled $1.0 million in the first six months of 2009 compared to $1.9 million used in the first six months of 2008 due to lower planned capital expenditures in 2009, offset in part by lower principal collected on a note receivable.

Financing activities. Net cash used in financing activities was comparable at $3.9 million for the first six months of 2009 and $4.2 million for the first six months of 2008.

Debt obligations. While there are no amounts outstanding under our revolving credit facility, provisions contained in our $37.5 million revolving credit facility could result in the acceleration of any outstanding indebtedness prior to its stated maturity for reasons other than defaults from failing to comply with typical financial covenants. For example, our revolving credit facility allows the lender to accelerate the maturity of the indebtedness upon a change of control (as defined) of the borrower. The terms of our revolving credit facility could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside of the ordinary course of business. Although there are no current expectations to borrow on the revolving credit facility, lower future operating results would likely reduce our amount available to borrow and restrict future dividends. See "Outlook" for further discussion of expectations relating to compliance with credit facility debt covenants.

Future cash requirements -

Liquidity. Our primary source of liquidity on an ongoing basis is our cash flow from operating activities, which is generally used to (i) fund capital expenditures, (ii) repay short-term indebtedness incurred primarily for working capital or capital expenditure purposes and (iii) provide for the payment of dividends (if declared). From time-to-time, we will incur indebtedness, primarily for short-term working capital needs or to fund capital expenditures. From time-to-time, we may also sell assets outside the ordinary course of business, the proceeds of which are generally used to repay indebtedness (including indebtedness which may have been collateralized by the assets sold) or to fund capital expenditures or business acquisitions.

Periodically, we evaluate liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements, dividend policy and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, modify our dividend policy or take a combination of such steps to manage liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations in the component products industry. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing our indebtedness or that of our subsidiaries.

We believe cash generated from operations together with cash on hand will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service and dividends (if declared) for at least the next twelve months. To the extent that actual operating results or other developments differ from our expectations, our liquidity could be adversely affected.

At June 30, 2009, there were no amounts outstanding under our $37.5 million revolving credit facility that matures in January 2012, and the entire balance is currently available for future borrowings, although lower future operating results would likely reduce our amount available to borrow and restrict future dividends. See "Outlook" for further discussion of expectations relating to compliance with credit facility debt covenants.

Capital expenditures. Firm purchase commitments for capital projects in process at June 30, 2009 approximated $683,000. We have lowered our planned capital expenditures in 2009 in response to the current economic conditions. We are limiting 2009 investments to those expenditures required to meet our lower expected customer demand and those required to properly maintain our facilities.

Repurchase of common stock. We have in the past, and may in the future, make repurchases of our common stock in market or privately-negotiated transactions. At June 30, 2009, we had approximately 678,000 shares available for repurchase of our common stock under previous authorizations.

Commitments and contingencies. See Note 8 to the Condensed Consolidated . . .