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**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 theQuarterly Period Ended June 30, 2010**

 

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

 

**For thetransition periodfrom                 to             **

 

**Commission File Number 1 - 5332**

 

**P&FINDUSTRIES, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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Indicate by checkmark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has beensubject to such filing requirements for the past 90 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).  Yes o  No o

 

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

 

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

 

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

 

As of August 13, 2010 there were 3,614,562 shares of theregistrant’s Class A Common Stock outstanding.

 

 

 

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Table of Contents

 

**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010**

 

**TABLE OF CONTENTS**

 
| ** **                                    | ** **                                                                                                                        | **PAGE** |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                                              |     |
| **PART I —  FINANCIAL INFORMATION** | 1                                                                                                                                 |
|                                          |                                                                                                                              |     |
| Item 1.                                       | Financial  Statements                                                                                                             | 1        |
|                                          |                                                                                                                              |     |
|                                          | Consolidated  Condensed Balance Sheets as of June 30, 2010 (unaudited) and  December 31, 2009                           | 1        |
|                                          |                                                                                                                              |     |
|                                          | Consolidated  Condensed Statements of Operations for the three and six months ended  June 30, 2010 and 2009 (unaudited) | 3        |
|                                          |                                                                                                                              |     |
|                                          | Consolidated  Condensed Statement of Shareholders’ Equity for the six months  ended June 30, 2010                  | 4        |
|                                          |                                                                                                                              |     |
|                                          | Consolidated  Condensed Statements of Cash Flows for the six months ended June 30,  2010 (unaudited) and 2009                | 5        |
|                                          |                                                                                                                              |     |
|                                          | Notes to  Consolidated Condensed Financial Statements                                                                             | 7        |
|                                          |                                                                                                                              |     |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       | 18       |
|                                          |                                                                                                                              |     |
| Item 3.                                       | Quantitative  and Qualitative Disclosures About Market Risk                                                                       | 27       |
|                                          |                                                                                                                              |     |
| Item 4T                                       | Controls and  Procedures                                                                                                          | 27       |
|                                          |                                                                                                                              |     |
| **PART II — OTHER  INFORMATION**    | 28                                                                                                                                |
|                                          |                                                                                                                              |     |
| Item 1.                                       | Legal Proceedings                                                                                                                 | 28       |
|                                          |                                                                                                                              |     |
| Item 1A.                                      | Risk Factors                                                                                                                      | 28       |
|                                          |                                                                                                                              |     |
| Item 2.                                       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                      | 28       |
|                                          |                                                                                                                              |     |
| Item 3.                                       | Defaults Upon Senior Securities                                                                                                   | 28       |
|                                          |                                                                                                                              |     |
| Item 4.                                       | RESERVED                                                                                                                          | 28       |
|                                          |                                                                                                                              |     |
| Item 5.                                       | Other Information                                                                                                                 | 28       |
|                                          |                                                                                                                              |     |
| Item 6.                                       | Exhibits                                                                                                                          | 28       |
|                                          |                                                                                                                              |     |
| **Signature**                                 | 29                                                                                                                                |
|                                          |                                                                                                                              |
| **Exhibit Index**                        | 30                                                                                                                                |

 

i

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.                    Financial Statements**

 

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

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                     | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**        | ** ** | **(See Note 1)**           | ** ** |
| **ASSETS**                                     | ** ** | ** **             | ** ** | ** **                 | ** ** |
| CURRENT ASSETS                                 | ** ** | ** **             | ** ** | ** **                 | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Cash                                           |       | $                      | 820,000    |                       | $          | 546,000 |   |
| Accounts receivable — net                 |       | 7,596,000              |       | 7,545,000                  |       |
| Inventories - net                              |       | 17,931,000             |       | 19,746,000                 |       |
| Notes and other receivables                    |       | 92,000                 |       | 110,000                    |       |
| Deferred income taxes — net               |       | 670,000                |       | 670,000                    |       |
| Income tax refund receivable                   |       | 49,000                 |       | 3,270,000                  |       |
| Prepaid expenses and other current assets      |       | 209,000                |       | 169,000                    |       |
| Assets of discontinued operations              |       | 188,000                |       | 10,797,000                 |       |
| TOTAL CURRENT ASSETS                           |       | 27,555,000             |       | 42,853,000                 |       |
|                                           |       |                   |       |                       |       |
| PROPERTY AND EQUIPMENT                         |       |                   |       |                       |       |
| Land                                           |       | 1,550,000              |       | 1,550,000                  |       |
| Buildings and improvements                     |       | 7,480,000              |       | 7,476,000                  |       |
| Machinery and equipment                        |       | 16,199,000             |       | 16,130,000                 |       |
|                                           |       | 25,229,000             |       | 25,156,000                 |       |
| Less accumulated depreciation and amortization |       | 12,792,000             |       | 11,990,000                 |       |
| NET PROPERTY AND EQUIPMENT                     |       | 12,437,000             |       | 13,166,000                 |       |
|                                           |       |                   |       |                       |       |
| GOODWILL                                       |       | 5,150,000              |       | 5,150,000                  |       |
|                                           |       |                   |       |                       |       |
| OTHER INTANGIBLE ASSETS — net             |       | 2,476,000              |       | 2,651,000                  |       |
|                                           |       |                   |       |                       |       |
| DEFERRED INCOME TAXES -net                     |       | 1,437,000              |       | 1,437,000                  |       |
|                                           |       |                   |       |                       |       |
| ASSETS OF DISCONTINUED OPERATIONS              |       | 16,000                 |       | 3,924,000                  |       |
|                                           |       |                   |       |                       |       |
| OTHER ASSETS — net                        |       | 233,000                |       | 237,000                    |       |
|                                           |       |                   |       |                       |       |
| TOTAL ASSETS                                   |       | $                      | 49,304,000 |                       | $          | 69,418,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

 

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                 | ** ** | **(unaudited)**        | ** ** | **(See Note 1)**           | ** ** |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                             | ** ** | ** **             | ** ** | ** **                 | ** ** |
| CURRENT LIABILITIES                                                                                                        | ** ** | ** **             | ** ** | ** **                 | ** ** |
| ** **                                                                                                                 | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Short-term borrowings                                                                                                      |       | $                      | 11,300,000 |                       | $          | 16,300,000 |   |
| Accounts payable                                                                                                           |       | 2,530,000              |       | 1,396,000                  |       |
| Other accrued liabilities                                                                                                  |       | 3,103,000              |       | 2,003,000                  |       |
| Liabilities of discontinued operations                                                                                     |       | 12,870,000             |       | 9,719,000                  |       |
| Current maturities of long-term debt                                                                                       |       | 4,883,000              |       | 5,015,000                  |       |
| TOTAL CURRENT LIABILITIES                                                                                                  |       | 34,686,000             |       | 34,433,000                 |       |
|                                                                                                                       |       |                   |       |                       |       |
| Long–term debt, less current maturities                                                                               |       | 1,688,000              |       | 4,148,000                  |       |
| Liabilities of discontinued operations                                                                                     |       | 313,000                |       | 5,222,000                  |       |
|                                                                                                                       |       |                   |       |                       |       |
| TOTAL LIABILITIES                                                                                                          |       | 36,687,000             |       | 43,803,000                 |       |
|                                                                                                                       |       |                   |       |                       |       |
| COMMITMENTS AND CONTINGENCIES                                                                                              |       |                   |       |                       |       |
|                                                                                                                       |       |                   |       |                       |       |
| SHAREHOLDERS’ EQUITY                                                                                                  |       |                   |       |                       |       |
| Preferred stock - $10 par; authorized - 2,000,000  shares; no shares issued                                                |       | —                 |       | —                     |       |
| Common stock                                                                                                               |       |                   |       |                       |       |
| Class A - $1 par; authorized - 7,000,000  shares; issued - 3,956,431 at June 30, 2010 and December 31, 2009 |       | 3,956,000              |       | 3,956,000                  |       |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued                                                    |       | —                 |       | —                     |       |
| Additional paid-in capital                                                                                                 |       | 10,684,000             |       | 10,615,000                 |       |
| Retained earnings                                                                                                          |       | 932,000                |       | 13,999,000                 |       |
| Treasury stock, at cost – 341,869 shares at  June 30, 2010 and December 31, 2009                            |       | (2,955,000             | )          | (2,955,000                 | )          |
|                                                                                                                       |       |                   |       |                       |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                            |       | 12,617,000             |       | 25,615,000                 |       |
|                                                                                                                       |       |                   |       |                       |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                            |       | $                      | 49,304,000 |                       | $          | 69,418,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

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

 
| ** **                                                                                                                                                                                                            | ** ** | **Three  months**        | ** **  | **Six  months**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|--------------------------|------------|
| ** **                                                                                                                                                                                                            | ** ** | **ended  June 30,** | ** **  | **ended  June 30,** | ** ** |
| ** **                                                                                                                                                                                                            | ** ** | **2010**                 | ** **  | **2009**                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  revenue                                                                                                                                                                                                          |       | $                        | 13,320,000  |                     | $          | 14,073,000 |   | $ | 24,467,000 |   | $ | 26,294,000 |   |
| Cost  of sales                                                                                                                                                                                                        |       | 8,630,000                |        | 10,105,000               |       | 15,778,000 |   | 18,226,000 |   |
| Gross  profit                                                                                                                                                                                                         |       | 4,690,000                |        | 3,968,000                |       | 8,689,000 |   | 8,068,000 |   |
| Selling,  general and administrative expenses                                                                                                                                                                         |       | 4,084,000                |        | 3,823,000                |       | 8,401,000 |   | 8,026,000 |   |
| Operating  income                                                                                                                                                                                                     |       | 606,000                  |        | 145,000                  |       | 288,000 |   | 42,000 |   |
| Interest  expense                                                                                                                                                                                                     |       | 337,000                  |        | 322,000                  |       | 726,000 |   | 627,000 |   |
| (Loss)  income from continuing operations before income taxes                                                                                                                                                         |       | 269,000                  |        | (177,000                 | )          | (438,000 | ) | (585,000 | ) |
| Income  tax benefit                                                                                                                                                                                                   |       | —                   |        | (106,000                 | )          | — |   | (175,000 | ) |
| Net  (loss) income from continuing operations                                                                                                                                                                         |       | 269,000                  |        | (71,000                  | )          | (438,000 | ) | (410,000 | ) |
|                                                                                                                                                                                                                  |       |                     |        |                     |       |   |   |   |   |
| Loss  from discontinued operations (net of tax benefit of none for the three and  six-month periods ended June 30, 2010 and $268,000 and $326,000 for the  three and six-month periods ended June 30, 2009) |       | (10,885,000              | )           | (494,000                 | )          | (12,629,000 | ) | (761,000 | ) |
|                                                                                                                                                                                                                  |       |                     |        |                     |       |   |   |   |   |
| Net loss                                                                                                                                                                                                              |       | $                        | (10,616,000 | )                        | $          | (565,000 | ) | $ | (13,067,000 | ) | $ | (1,171,000 | ) |
|                                                                                                                                                                                                                  |       |                     |        |                     |       |   |   |   |   |
| Basic  and diluted earnings (loss) per share                                                                                                                                                                          |       |                     |        |                     |       |   |   |   |   |
| Continuing  operations                                                                                                                                                                                                |       | $                        | 0.07        |                     | $          | (0.02 | ) | $ | (0.12 | ) | $ | (0.11 | ) |
| Discontinued  operations                                                                                                                                                                                              |       | (3.01                    | )           | (0.14                    | )          | (3.49 | ) | (0.21 | ) |
| Net  loss                                                                                                                                                                                                             |       | $                        | (2.94       | )                        | $          | (0.16 | ) | $ | (3.61 | ) | $ | (0.32 | ) |
|                                                                                                                                                                                                                  |       |                     |        |                     |       |   |   |   |   |
| Weighted  average common shares outstanding:                                                                                                                                                                          |       |                     |        |                     |       |   |   |   |   |
|                                                                                                                                                                                                                  |       |                     |        |                     |       |   |   |   |   |
| Basic  and diluted                                                                                                                                                                                                    |       | 3,615,000                |        | 3,615,000                |       | 3,615,000 |   | 3,615,000 |   |

 

See accompanying notes to consolidatedcondensed 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, 2010 |       | $           | 25,615,000 |                                   | 3,956,000  |                    | $          | 3,956,000    |       | $                  | 10,615,000 |   | $ | 13,999,000 |   | 342,000 |   | $ | (2,955,000 | ) |
|                          |       |        |       |                                   |       |                    |       |         |       |               |       |   |   |   |   |
| Net loss                      |       | (13,067,000 | )          |                                   |       |                    |       |         |       | (13,067,000        | )          |   |   |   |   |
| Stock-based compensation      |       | 69,000      |       |                                   |       |                    |       | 69,000       |       |               |       |   |   |   |   |
|                          |       |        |       |                                   |       |                    |       |         |       |               |       |   |   |   |   |
| Balance, June 30, 2010   |       | $           | 12,617,000 |                                   | 3,956,000  |                    | $          | 3,956,000    |       | $                  | 10,684,000 |   | $ | 932,000 |   | 342,000 |   | $ | (2,955,000 | ) |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

 

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

 
| ** **                                                                                                | ** ** | **Six months  ended June 30,** | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                                                | ** ** | **2010**                            | ** **  | **2009** | ** ** |
| Cash Flows from Operating Activities                                                                      |       |                                |        |   |   |
| Net loss                                                                                                  |       | $                                   | (13,067,000 | ) | $ | (1,171,000 | ) |
|                                                                                                      |       |                                |        |   |   |
| Adjustments to reconcile net loss to net cash  provided by operating activities of continuing operations: |       |                                |        |   |   |
| Loss from discontinued operations                                                                         |       | 12,629,000                          |        | 761,000 |   |
| Non-cash charges:                                                                                         |       |                                |        |   |   |
| Depreciation and amortization                                                                             |       | 826,000                             |        | 779,000 |   |
| Amortization of other intangible assets                                                                   |       | 175,000                             |        | 175,000 |   |
| Amortization of other assets                                                                              |       | 38,000                              |        | 6,000 |   |
| Provision for losses on accounts receivable - net                                                         |       | 27,000                              |        | (22,000 | ) |
| Stock-based compensation                                                                                  |       | 69,000                              |        | 138,000 |   |
| Deferred income taxes - net                                                                               |       | —                              |        | 651,000 |   |
| (Gain) loss on sale of fixed assets                                                                       |       | 2,000                               |        | (2,000 | ) |
| Changes in operating assets and liabilities:                                                              |       |                                |        |   |   |
| Accounts receivable                                                                                       |       | (78,000                             | )           | (1,614,000 | ) |
| Notes and other receivables                                                                               |       | 18,000                              |        | (34,000 | ) |
| Inventories                                                                                               |       | 1,815,000                           |        | 3,131,000 |   |
| Income tax refund receivable                                                                              |       | 3,221,000                           |        | (411,000 | ) |
| Prepaid expenses and other current assets                                                                 |       | (40,000                             | )           | (419,000 | ) |
| Other assets                                                                                              |       | (34,000                             | )           | (184,000 | ) |
| Accounts payable                                                                                          |       | 1,134,000                           |        | 2,153,000 | ) |
| Accrued liabilities                                                                                       |       | 904,000                             |        | (149,000 | ) |
| Income taxes payable                                                                                      |       | 196,000                             |        | — |   |
| Total adjustments                                                                                         |       | 20,902,000                          |        | 4,959,000 |   |
| Net cash provided by operating activities of  continuing operations                                       |       | $                                   | 7,835,000   |   | $ | 3,788,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

 

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS (unaudited) (continued)**

 
| ** **                                             | ** ** | **Six months  ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| Cash Flows from Investing Activities:                  |       |                                |       |   |   |
| Capital expenditures                                   |       | $                                   | (99,000    | ) | $ | (1,066,000 | ) |
| Proceeds from sale of fixed assets                     |       | —                              |       | 3,000 |   |
| Additional purchase price – Hy-Tech               |       | —                              |       | (2,362,000 | ) |
| Net cash used in investing activities                  |       | (99,000                             | )          | (3,425,000 | ) |
|                                                   |       |                                |       |   |   |
| Cash Flows from Financing Activities:                  |       |                                |       |   |   |
| Proceeds from short-term borrowings                    |       | —                              |       | 10,484,000 |   |
| Repayments of short-term borrowings                    |       | (5,000,000                          | )          | (8,484,000 | ) |
| Term loan advances                                     |       | 957,000                             |       | — |   |
| Repayments of term loan                                |       | (3,835,000                          | )          | (6,889,000 | ) |
| Net proceeds from equipment lease financing            |       | —                              |       | 348,000 |   |
| Principal payments on long-term debt                   |       | (464,000                            | )          | (35,000 | ) |
| Proceeds from notes payable                            |       | 750,000                             |       | 1,583,000 |   |
| Net cash used in financing activities                  |       | (7,592,000                          | )          | (2,993,000 | ) |
|                                                   |       |                                |       |   |   |
| Cash Flows from Discontinued Operations:               |       |                                |       |   |   |
| Operating activities                                   |       | 258,000                             |       | 825,000 |   |
| Investing activities                                   |       | 460,000                             |       | (13,799,000 | ) |
| Financing activities                                   |       | (588,000                            | )          | 15,194,000 |   |
| Net cash provided by Discontinued Operations           |       | 130,000                             |       | 2,220,000 |   |
|                                                   |       |                                |       |   |   |
| NET INCREASE (DECREASE) IN CASH                        |       | 274,000                             |       | (410,000 | ) |
| Cash at beginning of period                            |       | 546,000                             |       | 845,000 |   |
| Cash at end of period                                  |       | $                                   | 820,000    |   | $ | 435,000 |   |
|                                                   |       |                                |       |   |   |
| Supplemental disclosures of cash flow information**:** |       |                                |       |   |   |
|                                                   |       |                                |       |   |   |
| Cash paid for:                                         |       |                                |       |   |   |
| Interest                                               |       | $                                   | 694,000    |   | $ | 627,000 |   |
| Income taxes                                           |       | $                                   | 16,000     |   | $ | 30,000 |   |

 

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**

 

**Basis of Financial Statement Presentation**

 

The accompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information, and with the rules and regulations of theSecurities and Exchange Commission regarding interim financial reporting.Accordingly, these interim financial statements do not include all of theinformation and footnotes required by GAAP for complete financial statements.In the opinion 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 unaudited consolidated condensed balance sheetinformation as of December 31, 2009 was derived from the auditedconsolidated financial statements included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2009. The interim financialstatements contained herein should be read in conjunction with that Report.

 

**Principles of Consolidation**

 

The unaudited consolidated condensed financialstatements 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 its business operations through twoof its wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.  P&F operates in two primary lines ofbusiness, or segments: (i) tools and other products (“Tools”) and(ii) hardware and accessories (“Hardware”).

 

**The Company**

 

**Tools**

 

The Company conducts its Tools business through Continental, which inturn currently operates through its wholly-owned subsidiaries, FloridaPneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-TechMachine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines.   Through its Franklin Manufacturing (“Franklin”)division, Florida Pneumatic imported and marketed a line of door and windowhardware including locksets, deadbolts, door and window security hardware,rope-related hardware products and fire escape ladders. However, primarily dueto an ongoing diminishing market for its products, Florida Pneumaticdiscontinued marketing the Franklin products line effective December 31,2009.

 

Hy-Tech manufactures and distributes pneumatic tools and parts forindustrial applications. Hy-Tech manufactures approximately sixty types ofindustrial pneumatic tools, most of which are sold at prices ranging from $300to $7,000, under the names “ATP”, “Thaxton”, “THOR” and “Eureka”, as well asunder the trade names or trademarks of other private label customers. This lineof products includes grinders, drills, saws, impact wrenches and pavementbreakers.

 

Hy-Tech’s products are sold to distributors and private label customersthrough in-house sales personnel and manufacturers’ representatives. Users ofHy-Tech’s tools include refineries, chemical plants, power generationfacilities, the heavy construction industry, oil and mining companies and heavymachine industry. Hy-Tech’s products are sold off the shelf, and are alsoproduced to customer’s orders. The business is not seasonal, but it may besubject to significant periodic changes resulting from scheduled shutdowns inrefineries, power generation facilities and chemical plants.

 

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**Hardware**

 

The Company conducts its Hardware business through Countrywide, whichin turn operates through its wholly-owned subsidiaries, NationwideIndustries, Inc (“Nationwide”). Prior to June 8, 2009, Countrywide alsooperated through its wholly owned subsidiaries, Woodmark International, L.P. (“Woodmark”)and Pacific Stair Products, Inc. (“PSP”). Woodmark was, until thetransactions, (“WMC transactions”) which formed WM Coffman, LLC (“WMC”) inJune 2009, an importer of both stair parts components and kitchen and bathhardware and accessories. Woodmark marketed its stair parts nationally.Additionally, effective with the WMC transactions, the operations of Woodmark’skitchen and bath hardware and accessories product line was transferred toNationwide.  PSP marketed Woodmark’sstaircase components to the building industry, in southern California and thesouthwestern region of the United States. As a result of the WMC transactions, Woodmark and PSP no longerfunctioned as operating units.  Woodmarkand PSP contributed certain net assets to WMC in return for members’ equity.Accordingly, effective with the WMC transactions, the stair parts business,which formerly reported through Woodmark and PSP, became part of WMC. OnJune 10, 2009, pursuant to an Asset Purchase Agreement dated as ofJune 8, 2009, WMC acquired substantially all of the assets of CoffmanStairs, LLC, a Delaware limited liability company (“Coffman”).

 

As the result of a decision reached by the Company’s board of directorsin March 2010, the Company began reporting WMC as a discontinued operationeffective January 1, 2010. Additionally, as of June 7, 2010, WMC ceasedoperations and its bank began liquidating its assets. The Company has restatedprior year financial information to present WMC as a discontinued operation.

 

Nationwide designs and manufactures quality hardware for the fence, rail,gate, and window and door industry.  Italso markets a full line of components for other companies which produce pooland patio enclosures, storm and screen doors. Nationwide distributes a wide array of sweep and sash locks manufacturedfor vinyl, aluminum or wood windows. As part of Nationwide’s product offering,it began distributing kitchen and bath hardware and accessories during thesecond quarter of 2009.

 

**Reclassifications**

 

Certain amounts in the consolidated condensedfinancial statements for the three and six- month periods ended June 30,2010 and the year ended December 31, 2009 have been reclassified toconform to the current period’s presentation.

 

**Management Estimates**

 

The preparation of financial statements and relateddisclosures in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses in those financialstatements.  Certain significantaccounting policies that contain subjective management estimates andassumptions include those related to revenue recognition, inventory, goodwill,intangible assets and other long-lived assets, income taxes and deferredtaxes.  Descriptions of these policiesare discussed in the Company’s Annual Report on Form 10-K for the yearended December 31, 2009.  Managementevaluates its estimates and assumptions on an ongoing basis using historical experienceand other factors, including the current economic environment, and makesadjustments when facts and circumstances dictate.  Illiquid credit markets and declines inconsumer spending have, among other things, combined to increase theuncertainty inherent in such estimates and assumptions.  As future events and their effects cannot bedetermined with precision, actual results could differ significantly from thoseestimates and assumptions.  Significantchanges, if any, in those estimates resulting from continuing changes in theeconomic environment will be reflected in the consolidated financial statementsin future periods.

 

**Recently Adopted Accounting Standards**

 

During the three-month period ended June 30,2010, the Company did not adopt any new accounting standards.

 

**NOTE 2—FAIR VALUE MEASUREMENTS**

 

The Company is required to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.

 

The fair value hierarchy consists of three broad levels, which givesthe highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (Level 1) and the lowest priority tounobservable inputs (Level 3). The three levels of the fair valuehierarchy are described as follows:

 

·                  Level 1—Unadjustedquoted prices in active markets for identical assets or liabilities that areaccessible at the measurement date.

 

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

 

·                  Level 3—Inputs that areunobservable for the asset or liability.

 

The following describes the valuation methodologies that we used tomeasure financial instruments at fair value.

 

WMCentered into an advisory agreement with Visador 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 firstthree years to a maximum of $750,000 in exchange for Visador providingconsulting and advisory services to WMC. Cash payments to Visador may be madeonly with permission of PNC Bank (“PNC”).

 

The following table presents the liabilities that are measured andrecognized at fair value on a recurring basis classified under the appropriatelevel of the fair value hierarchy as of June 30, 2010.

 
| Roll-forward of Level 3 Liabilities:                                |   |    |    |
|---------------------------------------------------------------------|--------|---------|---------|
| Balance — December 31, 2009                               |   | $       | 603,000 |   |
| Adjustment to liability due to termination of  advisory arrangement |   | 482,000 |    |
|                                                                |   |    |    |
| Balance June 30, 2010                                          |   | $       | 121,000 |   |

 

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

 

AtJune 30, 2010 and 2009, the Company had no material foreign exchangeforward contracts outstanding. Additionally, there was no material realized or unrealized gains relatedto these contracts during the three or six month periods ended June 30,2010 and 2009, respectively.

 

**NOTE 3 — DISCONTINUED OPERATIONS —**

 

WMC was primarily engaged in themanufacturing and importing of stair parts and related accessories.  In an effort to improve theoverall results of the Company’s existing stair parts operation, the Companyacquired, as of June 8, 2009, through a newly formed subsidiary, WMC,substantially all of the assets of one of its competitors in the stair partsbusiness, Coffman. These transactions were executed in an attempt to takeadvantage of the synergies available by combining two large players in anindustry at the bottom of its economic cycle with complementary distributionchannels and operations.

 

WMC was not able to achieve the revenue levels anticipated prior to theWMC transactions and, as a result, never produced positive cash flows. Thiscaused, among other things, defaults on the loan agreement specific to WMC. Asthe result of a decision reached by the Company’s board of directors in March 2010,the Company reported WMC as a discontinued operation effective January 1,2010.

 

OnMay 4, 2010, WMC received a termination letter from AGNL Coffman, L.L.C. (“AGNL”)purporting to terminate the lease agreement, dated as of March 30, 2007,by and between AGNL, as Landlord, and Coffman and Visador, jointly andseverally, as Tenant (the “Original Lease”), as amended on June 8, 2009 toprovide for, among other things, WMC’s replacement of the original tenantsunder the Lease (the Original Lease and the First Amendment are collectivelyreferred to herein as the “Lease”).

 

TheLease, among other things, (1) provided for Basic Rent (as such term isdefined in the Lease) of $580,000 per annum, payable quarterly and suchAdditional Rent (as such term is defined in the Lease) as is set forth in theLease, including, but not limited to, all costs of landlord and tenant incurredin connection with the ownership, use and maintenance of the Leased Premises(as such term is defined in the Lease); (2) provided that AGNL may declarean Event of Default (as such term is defined in the Lease) under the Lease ifWMC fails to pay any Monetary Obligation (as such term is defined in theLease), regardless of the reason for such failure, and such default continuesbeyond the date that is ten (10) days following the date on which suchMonetary Obligation is due; (3) provided that upon the occurrence of anEvent of Default, AGNL shall have the right, at its sole option, to exerciseany of the remedies set forth in the Lease, including, but not limited to,giving notice to WMC of its intent to terminate the Lease on a specific date;and 

 

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(4) providedthat, in the event AGNL gives notice to WMC of its intent to terminate theLease, then, upon written demand from AGNL, WMC shall (a) immediatelysurrender and deliver possession of the Leased Premises to AGNL; (b) payto AGNL, as liquidated and agreed final damages for Tenant’s default and inlieu of all current damages beyond the date of such demand, an amount equal tothe present value of the excess, if any, of (i) all Basic Rent from thedate of such demand to the date on which the term of the Lease is scheduled toexpire in the absence of any earlier termination, re-entry or repossession over(ii) the then fair market rental value of the Leased Premises for the sameperiod and (c) pay to AGNL all Monetary Obligations that are then due andunpaid and those that arise or become due by reason of Tenant’s default underthe Lease.

 

Accordingto the Termination Letter, (1) Basic Rent in the amount of $152,187 wasdue on April 1, 2010; (2) WMC failed to make such payment and, on orabout April 28, 2010, made a partial payment of $50,528.65; and (3) asof May 4, 2010, the date of the Termination Letter, WMC had not paideither the balance due with respect to the Basic Rent or Additional Rentamounting to $94,198.81.  AGNL and WMC are currently in discussionwherein the parties have tentatively agreed to $4.3 million as the amount dueas the result of WMC’s defaulting on its real property lease with AGNL.  As the result of the foregoing, WMC duringthe three-month period ended June 30, 2010 recorded approximately $4.3million as a current liability for this obligation.

 

Inconnection with the WMC transactions, WMC entered into the WMC loan agreementwith PNC Bank (“PNC”). The WMC loan agreement expires June 8, 2012.Neither the Company nor any other subsidiary is a co-borrower or a guarantor tothis WMC loan agreement.  The WMC loanagreement provides a maximum loan amount of $12,000,000, of which $1,134,000was established as a term loan, the balance of $10,866,000 was the maximumrevolving advance amount.  The WMC loanagreement is collateralized by the accounts receivable, inventory, equipment,and general intangibles of WMC.  WMC wasnot in compliance with certain financial covenants of the Loan Agreement.  Thiscaused a default on the WMC loan agreement. Pursuant to a Forbearance Agreementdated February 22, 2010, PNC agreed to forbear from taking certainactions, such as accelerating repayment of the loan, through August 31,2010. The Forbearance Agreement set new financial covenants and adjustedthe borrowing base calculation as well as reduced the maximum amount theCompany could borrow under the revolver from $10,866,000 to $7,000,000.  Per the Forbearance Agreement, PNC requiredWMC to obtain additional funding of $250,000. During the three month period ended March 31, 2010, this fundingwas made by the CEO and a trust controlled by the president of CountrywideHardware, pursuant to a secured junior participation agreement (see Note 12).

 

Subsequent to February 22, 2010, WMC, among other things,defaulted on its lease in Marion, Virginia. This default and other eventscaused PNC on May 24, 2010 to issue a Notice of Sale of Collateral (“Notice”).The Notice stated that PNC will dispose of substantially all assets of WMCsubject to PNC’s liens and/or security interests (the “Collateral”) as follows:(a) by the private sale of substantially all of the Collateral other thanWMC’s machinery and equipment (the “Marion Fixed Assets”), located at Marion,Virginia on or after June 3, 2010 and (b)arrange to conduct anInternet-only auction and sale of the Marion Fixed Assets, on or about June 23,2010.

 

Effective June 7, 2010,WMC executed and delivered to PNC an Acknowledgment of Events of Default andPeaceful Possession Letter (the “Peaceful Possession Letter”), dated as of June 4,2010, pursuant to which (1) WMC acknowledged that a material adversechange in its business and assets occurred and that such event constituted aforbearance default under the Loan Agreement, and (2):

 

(a) consentedto PNC’s exercise of all rights of possession in and to the Collateralconsistent with the Loan Agreement, the Other Documents (as defined in the LoanAgreement) and applicable law, to be disposed of consistent with the LoanAgreements, the Other Documents and applicable law;

 

(b) acknowledgedthat it received from PNC due, proper, timely and sufficient notice as to thesale, license or other disposition by PNC of the Collateral and that, due toits financial condition, it had no means or ability to exercise its right toredeem the Collateral;

 

(c) consentedto a sale of substantially all of the Collateral, other than the Marion FixedAssets by PNC to WM Coffman Resources, LLC, or the “Buyer”, pursuant to theterms and conditions of a Foreclosure Agreement,

 

(d) consentedto the Fixed Asset Auction; and

 

(e) agreedto change its name from WM Coffman, LLC to Old Stairs Co. LLC.

 

The effectiveness of thePeaceful Possession Letter was conditioned upon, among other things, (i) theexecution and delivery of the Mutual Release Agreement, dated as of June 4,2010 (the “Bank Release”) pursuant to which all claims between PNC and P&FIndustries, Inc and its wholly owned subsidiaries, other than WMC (the “P &F Entities”), were released, (ii) the execution and delivery of a mutualrelease agreement which contains certain claims between WMC and the P &F Entities were released and (iii) the provision for the payment ofcertain accrued and unpaid expenses of WMC totaling approximately $412,000,including employee wages, benefits, payroll taxes, other taxes and amountsnecessary to fund outstanding checks of the Subsidiary. All such conditionswere satisfied on June 7, 2010.

 

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Included within the WMC loanagreement, was a term loan with an original principal amount of $1,134,000,which was to be repaid in twenty-four equal monthly installments of$47,250.  This term note between PNC andWMC was collateralized by WMC’s fixed assets. As the result of the Notice andPeaceful Foreclosure Letter described above, PNC took title to all of WMC’sfixed assets, selling all of WMC’s fixed assets.  The Company has included in current portionof liabilities of discontinued operations the balances due of $115,000 at June 30,2010 and $992,000 at December 31, 2009.

 

At the time of the sale byPNC to the Buyer, the total outstanding amount of principal and accruedinterest owing to PNC was approximately $5.2 million. Upon the effectiveness ofthe aforementioned sale by PNC, and the sale of the Marion Fixed Assets, theoutstanding amount of principal and accrued interest was reduced byapproximately $4.8 million. As of June 30, 2010, PNC is required to provide toWMC an accounting of the proceeds of the disposition of all the collateral andto turn over, after all fees and expenses, have been paid, any surplusproceeds from the disposition. PNC has not yet provided WMC with a finalaccounting of the results of the auction and sale of the Marion Fixed Assets.

 

The table below presents the items that have been reclassified intoassets and liabilities of discontinued operations:

 
| ** **                                                                                         | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                                                                               |       |                        |       |                            |       |
| Cash                                                                                               |       | $                           | 159,000    |                            | $          | 53,000 |   |
| Accounts  receivable, net                                                                          |       | —                      |       | 2,124,000                       |       |
| Inventory,  net                                                                                    |       | —                      |       | 7,919,000                       |       |
| Other current assets                                                                               |       | 29,000                      |       | 701,000                         |       |
| Total  assets reclassified to current assets of discontinued operations                            |       | $                           | 188,000    |                            | $          | 10,797,000 |   |
|                                                                                               |       |                        |       |                            |       |
| Machinery  and equipment, net                                                                      |       | $                           | —     |                            | $          | 2,439,000 |   |
| Other                                                                                              |       | 16,000                      |       | 1,485,000                       |       |
| Total  assets reclassified to non-current assets of discontinued operations                        |       | $                           | 16,000     |                            | $          | 3,924,000 |   |
|                                                                                               |       |                        |       |                            |       |
| Short-term  borrowings                                                                             |       | $                           | 250,000    |                            | $          | 4,382,000 |   |
| Accounts  payable and accrued expenses                                                             |       | 3,304,000                   |       | 4,251,000                       |       |
| Current  maturities of long-term debt                                                              |       | 9,316,000                   |       | 1,086,000                       |       |
| Total  liabilities reclassified to current liabilities of discontinued operations                  |       | $                           | 12,870,000 |                            | $          | 9,719,000 |   |
|                                                                                               |       |                        |       |                            |       |
| Long-term  debt, less current portion                                                              |       | $                           | 313,000    |                            | $          | 5,222,000 |   |
| Total  non-current liabilities reclassified to non-current liabilities of  discontinued operations |       | $                           | 313,000    |                            | $          | 5,222,000 |   |

 

Theresults of operations of WMC for the periods presented are:

 
| ** **                                                         | ** ** | **Three months ended June 30,** | ** **  | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|-------------|------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                             | ** **  | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                         | ** ** | ** **                           | ** **  | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                            |       | $                                    | 3,867,000   |                               | $          | 4,481,000 |   | $ | 10,136,000 |   | $ | 7,822,000 |   |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Gross profit                                                       |       | $                                    | 416,000     |                               | $          | 742,000 |   | $ | 907,000 |   | $ | 1,274,000 |   |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Loss on foreclosure and other expenses                             |       | 5,829,000                            |        | —                             |       | 5,829,000 |   | — |   |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Rent expense                                                       |       | 4,280,000                            |        |                               |       | 4,280,000 |   |   |   |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Selling, general and administrative expenses and  interest expense |       |                                 | 1,192,000   |                               |       | 1,504,000 |   |   | 3,427,000 |   |   | 2,361,000 |   |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Loss before income taxes                                           |       |                                 | (10,885,000 | )                                  |       | (762,000 | ) |   | (12,629,000 | ) |   | (1,087,000 | ) |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Income tax benefit                                                 |       | —                               |        | (268,000                           | )          | — |   | (326,000 | ) |
|                                                               |       |                                 |        |                               |       |   |   |   |   |
| Loss from discontinued operations                                  |       | $                                    | (10,885,000 | )                                  | $          | (494,000 | ) | $ | (12,629,000 | ) | $ | (761,000 | ) |

 

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

 

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

 

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

 

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

 
| ** **                                                                                          | ** ** | **Three  months ended** | ** **  | **Six  months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **June 30,**       | ** **  | **June 30,**     | ** ** |
| ** **                                                                                          | ** ** | **2010**                | ** **  | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Numerator:                                                                                          |       |                    |        |                  |       |   |   |   |   |
| Numerator  for basic and diluted earnings (loss) per common share:                                  |       |                    |        |                  |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                                         |       | $                       | 269,000     |                  | $          | (71,000 | ) | $ | (438,000 | ) | $ | (410,000 | ) |
| Loss  from discontinued operations                                                                  |       | (10,885,000             | )           | (494,000              | )          | (12,629,000 | ) | (761,000 | ) |
| Net  loss                                                                                           |       | $                       | (10,616,000 | )                     | $          | (565,000 | ) | $ | (13,067,000 | ) | $ | (1,171,000 | ) |
|                                                                                                |       |                    |        |                  |       |   |   |   |   |
| Denominator:                                                                                        |       |                    |        |                  |       |   |   |   |   |
| Denominator  for basic (loss) earnings per share — weighted average common shares  outstanding |       | 3,615,000               |        | 3,615,000             |       | 3,615,000 |   | 3,615,000 |   |

 

At June 30, 2010 and 2009 and during the threeand six-month periods ended June 30, 2010 and 2009, there were outstandingstock options whose exercise prices were higher than the average market valuesof the underlying Class A Common Stock for the period. These options areantidilutive and are excluded from the computation of (loss) earnings pershare. The weighted average antidilutive stock options outstanding were asfollows:

 
| ** **                                               | ** ** | **Three  months ended** | ** ** | **Six  months ended** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                               | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted  average antidilutive stock options outstanding |       | 515,000                 |       | 554,000               |       | 515,000 |   | 554,000 |   |

 

Diluted loss per share for the six-month period ended June 30,2010 and diluted loss per share for the three and six-month periods ended June 30,2009 were the same as basic loss per share, since the effect of the inclusionof common share equivalents would be anti-dilutive, because of the reportedloss.

 

**NOTE 5- STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

Total stock-based compensation expense is attributable to the grantingof, and the remaining requisite service periods of, stock options andwarrants.  Compensation expense attributable to stock-based compensationduring the three and six-month periods ended June 30, 2010 wasapproximately $34,000 and $69,000, respectively, and for the three andsix-month periods ended June 30, 2009 was approximately $68,000 and$138,000, respectively.  The compensationexpense is recognized in selling, general and administrative expenses on theCompany’s statements of operations on a straight-line basis over the vestingperiods.  The Company recognizes compensation cost over the requisite serviceperiod. However, the exercisability of the respective non-vested options, whichare at pre-determined dates on a calendar year, do not necessarily correspondto the period(s) in which straight-line amortization of compensation costis recorded. As of June 30, 2010, the Company had approximately$108,000 of total unrecognized compensation 

 

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costrelated to non-vested awards granted under our stock-based plans, which weexpect to recognize over a weighted-average period of 1.3 years.  The Company did not grant any stock options orwarrants during the three and six month periods ended June 30, 2010.

 

Stock Option Plan

 

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

 

The following is a summary of the changes inoutstanding options for the six months ended June 30, 2010:

 
| ** **                        | ** ** | **Option Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, January 1, 2010 |       | 514,624           |       | $                                      | 7.26       |                                                       | 6.0        |                            | —     |   |
| Granted                           |       | —            |       | —                                 |       |                                                       |       |                            |       |
| Exercised                         |       | —            |       | —                                 |       |                                                       |       |                            |       |
| Forfeited                         |       | —            |       | —                                 |       |                                                       |       |                            |       |
| Expired                           |       | —            |       | —                                 |       |                                                       |       |                            |       |
| Outstanding, June 30, 2010   |       | 514,624           |       | $                                      | 7.26       |                                                       | 5.5        |                            | —     |   |
|                              |       |              |       |                                   |       |                                                       |       |                            |       |
| Vested, June 30, 2010        |       | 419,291           |       | $                                      | 7.96       |                                                       | 8.0        |                            | —     |   |

 

The following is a summaryof changes in non-vested shares for the six months ended June 30, 2010:

 
| ** **                              | ** ** | **Option Shares** | ** ** | **Weighted  Average Grant-  Date  Fair Value** | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|
| Non-vested shares, January 1, 2010 |       | 147,667                |       | $                                                        | 2.85       |   |
| Granted                                 |       | —                 |       |                                                     |       |
| Vested                                  |       | 52,334                 |       | 3.61                                                     |       |
| Forfeited                               |       | —                 |       |                                                     |       |
| Non-vested shares, June 30, 2010   |       | 95,333                 |       | $                                                        | 2.44       |   |

 

The number of shares of Class A common stockreserved for stock options available for issuance under the Current Plan as of June 30,2010 was 443,212. Of the options outstanding at June 30, 2010, all wereissued under the Current Plan.

 

**NOTE 6 — RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

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

 

Accounts receivable - net consists of:

 
| ** **                      | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------------|------------|
| Accounts receivable             |       | $                      | 7,772,000  |                       | $          | 7,694,000 |   |
| Allowance for doubtful accounts |       | (176,000               | )          | (149,000                   | )          |
|                            |       | $                      | 7,596,000  |                       | $          | 7,545,000 |   |

 

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**NOTE 8 — INVENTORIES**

 

Inventories- net consist of:

 
| ** **                                       | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Raw material                                     |       | $                      | 1,983,000  |                       | $          | 2,086,000 |   |
| Work in process                                  |       | 535,000                |       | 680,000                    |       |
| Finished goods                                   |       | 16,859,000             |       | 18,532,000                 |       |
|                                             |       | 19,377,000             |       | 21,298,000                 |       |
| Reserve for obsolete and slow-moving inventories |       | (1,446,000             | )          | (1,552,000                 | )          |
|                                             |       | $                      | 17,931,000 |                       | $          | 19,746,000 |   |

 

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

 

During the three and six month periods ended June 30,2010, there was no change to the carrying value of goodwill.

 

Other intangible assets were as follows:

 
| ** **                                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009**    | ** ** |
|--------------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Cost**               | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| Other intangible assets:                   |       |                   |       |                          |       |   |   |   |   |   |   |   |   |
| Customer relationships                     |       | $                      | 5,070,000  |                          | $          | 3,092,000 |   | $ | 1,978,000 |   | $ | 5,070,000 |   | $ | 2,930,000 |   | $ | 2,140,000 |   |
| Non-compete and Employment agreements |       | 760,000                |       | 760,000                       |       | — |   | 760,000 |   | 760,000 |   | — |   |
| Trademarks                                 |       | 199,000                |       | —                        |       | 199,000 |   | 199,000 |   | — |   | 199,000 |   |
| Drawings                                   |       | 290,000                |       | 49,000                        |       | 241,000 |   | 290,000 |   | 41,000 |   | 249,000 |   |
| Licensing                                  |       | 105,000                |       | 47,000                        |       | 58,000 |   | 105,000 |   | 42,000 |   | 63,000 |   |
| Totals                                     |       | $                      | 6,424,000  |                          | $          | 3,948,000 |   | $ | 2,476,000 |   | $ | 6,424,000 |   | $ | 3,773,000 |   | $ | 2,651,000 |   |

 

Amortizationexpense for intangible assets subject to amortization was as follows:

 
| **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| $                                    | 87,000     |                               | $          | 87,000 |   | $ | 175,000 |   | $ | 175,000 |   |
|                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

Amortization expense for each of the twelve-monthperiods ending June 30, 2011 through June 30, 2015 is estimated to beas follows: 2011 - $350,000 ; 2012 - $351,000 ; 2013 - $289,000; 2014 -$185,000 and 2015 - $185,000.  Theweighted average amortization period for intangible assets was 8.9 years at June 30,2010 and 9.3 years at December 31, 2009.

 

**NOTE 10- WARRANTY LIABILITY**

 

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

 

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

 
| ** **                                                          | ** ** | **Six-months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                          | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Balance, beginning of period                                        |       | $                                  | 183,000    |   | $ | 337,000 |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 211,000                            |       | 241,000 |   |
| Actual warranty costs incurred                                      |       | (166,000                           | )          | (262,000 | ) |
| Balance, end of period                                              |       | $                                  | 228,000    |   | $ | 316,000 |   |

 

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**NOTE 11 — DEBT**

 

*SHORT-TERM LOANS*

 

TheCompany and its subsidiaries, other than WMC, as co-borrowers, entered into aCredit Agreement, (“Credit Agreement”) as amended, with two banks (“banks”) in2004.  The Credit Agreement, among otherthings, includes a revolving credit loan facility, (“revolving loan”). Therevolving loan can be used for direct borrowings, with various sub-limits forletters of credit, bankers’ acceptances and equipment loans. There were noletters of credit, bankers’ acceptances or equipment loan borrowings at June 30,2010 or December 31, 2009. There are no commitment fees for any unusedportion of this Credit Agreement. Direct borrowings under the revolving loanare secured by the Company’s accounts receivable, inventory, equipment and realproperty, and are cross-guaranteed by each of the Company’s subsidiaries,except WMC. These borrowings bear interest at either LIBOR (London InterBankOffered Rate), at a minimum of 1.0%, plus the currently applicable loan marginof 4.25%, or the prime interest rate, which June 30, 2010 was 3.25% plusthe currently applicable loan margin of 2.50%. As such, the interest rates in effect at June 30, 2010 were 5.25%for borrowings at LIBOR and 5.75% for borrowings at prime rate. Should theCompany not comply with certain financial covenants, an additional defaultinterest rate of 2.0% would be added.  OnApril 23, 2010, the Company and the banks executed a waiver and amendmentwhich, among other things, extended the termination date of the revolvingcredit loan portion of the Credit Agreement facility to January 1, 2011and waived all then existing defaults, which also eliminated the 2.0%additional default interest rate which had been in effect. Further, the waiverand amendment set new financial covenants and adjusted the borrowing basecalculation as well as reduced the size of the facility from $17,500,000 to$16,500,000.  In addition, it requiredthat all future advances shall be subject to the requirement that the aggregateamount advanced after giving effect to any such future advances be at least$750,000 less than the aggregate lendable value in eligible borrowing baseassets.  Finally, the banks required a subordinatedloan of $750,000, which, in the aggregate, was provided by the Company’s ChiefExecutive Officer, President and Chairman of the Board of Directors, (“CEO”),and another unrelated party.

 

*LONG TERM LOANS*

 

Aspart of the amendment to the Credit Agreement entered into in March 2009,the banks agreed to cancel and refinance two term loans as a single new termloan which will expire March 30, 2012. Further, this new term loanrequires the Company to make monthly principal installment payments, whichaggregate to approximately $1,780,000 annually. Borrowings under the new term loan created by the March 2009amendment are secured by the Company’s accounts receivable, inventory,equipment and real property and are cross-guaranteed by each of the Company’ssubsidiaries, with the exception of WMC. In May 2010 the Company receivedapproximately $3,455,000 in federal tax refunds. In accordance with the termsand conditions of the waiver and amendment dated April 23, 2010, theCompany repaid $1,989,000 of this term note, with the balance of the refundapplied to the revolving loan portion of the Credit facility.  The balance of this term loan at June 30,2010 and December 31, 2009 was $2,903,000 and $5,782,000,respectively.  At June 30, 2010,this term loan bears interest at LIBOR, at a minimum of 1%, plus the currentlyapplicable loan margin of 4.50%, or the prime interest rate, which June 30,2010 was 3.25% plus the currently applicable loan margin of 2.5%.  As such, the interest rates in effect at June 30,2010 were 5.50% for borrowings at LIBOR and 5.75% for borrowings at primerate.  However, as the result of theCompany not complying with certain financial covenants, a default interest ratepremium of an additional 2.0% was added during the period January 22,  2010 through April 23, 2010, the date ofthe waiver and amendment, at which time this default rate adjustment wasremoved.

 

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.  As a result of the non-payment, cross-defaultprovisions set forth in the loan agreement between Florida Pneumatic andWachovia, secured by a mortgage with respect to the real property owned andutilized by Florida Pneumatic, were triggered. On February 23, 2010, Wachovia amended the underlying loan documentto among other things, extend the maturity date of the balloon payment toJune 1, 2010 and require the Company to make monthly principal payments ofapproximately $11,000 plus accrued interest commencing on March 24,2010.  On April 22, 2010, theCompany and Wachovia entered into a new Loan Modification Agreement, whichbecame effective April 23, 2010, wherein the Company prepaid $150,000toward the balance due on the loan agreement. In exchange, Wachovia waived allprior defaults and extended the maturity date to January 1, 2011. Thebalance on this loan agreement at June 30, 2010 and December 31, 2009was $896,000 and $1,091,000, respectively.

 

TheCredit Agreement entered into with the banks also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreigncurrency forward contracts.  Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. At June 30, 2010, there were no foreign currency forward contractsoutstanding.

 

Inconnection with the acquisition of Hy-Tech, the Company agreed to makeadditional payments (“Contingent Consideration”) to the sellers. The amount ofthe Contingent Consideration was based upon Hy-Tech achieving certain financialperformance thresholds during the two year period ending on the secondanniversary of the acquisition. Further, the Company agreed to make anadditional payment (“Additional Contingent Consideration”), subject to certainconditions related primarily to an exclusive 

 

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supplyagreement with a major customer and, to a certain extent, and subject tocertain provisions, the achievement of Contingent Consideration. Hy-Tech successfullyachieved the required thresholds necessary to be entitled to both theContingent Consideration and the Additional Contingent Consideration. The totalamount of the Contingent Consideration and the Additional ContingentConsideration was approximately $2,292,000. According to the Company’s purchaseagreement with the Hy-Tech sellers, the amounts due the sellers were payable inMay 2009. The Company and the sellers agreed upon a payment arrangementwherein the Company was required and did make a payment of approximately$573,000 in May 2009, with the balance of approximately $1,719,000 to bepaid in six equal payments with interest at 6.0% per annum, payable quarterlycommencing in August 2009. The August 2009 and November 2009 installmentpayments with interest were paid timely. However, due to the default on theCredit Agreement, the Company was not permitted to make any subsequent paymentwithout permission from the banks. Further, pursuant to the Waiver andAmendment dated April 23, 2010, the Company is still not permitted to makeany future payments without permission from the banks. The balance owing onthis obligation was $1,146,000 at June 30, 2010 and December 31,2009.  The Company is accruing interestat 12.0% per annum, the default rate of interest. At June 30, 2010,accrued interest was approximately $68,000.

 

**NOTE 12—RELATED PARTY TRANSACTIONS**

 

On February 22, 2010, in connection with a Forbearance andAmendment Agreement by and among WMC and PNC, the Company’s CEO and the president of one of our subsidiaries(collectively the “Junior Participants”), entered into a Junior ParticipationAgreement with PNC. Each Junior Participant remitted to PNC $125,000. Accordingto the terms of the Junior Participation Agreements, these remittances are withoutrecourse to PNC and shall constitute a secured junior and subordinateparticipation in the outstanding advances PNC may make to WMC. All amountspayable to the Junior Participants, whether regarding principal, interest orotherwise shall be repayable by PNC bank only on the termination of all of thetransactions between WMC and PNC, and only out of any surplus received by PNCremaining after the payment in full in cash to PNC of all obligations owing toPNC, including expenses, interest and all other charges. In no event shall theamount returned to the Junior Participants exceed the amount of the investedamount plus accrued interest. The rate of interest accruing on the $250,000shall be at the identical rate PNC is permitted under the terms of the originalcredit facility.  As part of thetransactions described in Notes 3 and 11 in July, 2010, PNC repaid the JuniorParticipants the $250,000 plus approximately $6,000 in total interest.

 

As discussed in Note 11, on April 23, 2010, the Company and the banksexecuted a waiver and amendment which extended the termination date of therevolving credit loan portion of the Credit Agreement facility toJanuary 1, 2011 and waived any existing events of default. Among otherthings, the banks required the Company to obtain an advance of $750,000. Thisadvance was, in the aggregate, received from its CEO and another unrelatedparty as a subordinated loan.

 

The president of one of our subsidiaries is part owner of one of thesubsidiary’s vendors. During the three and six-month periods ended June 30,2010, we purchased approximately $222,000 and $426,000, respectively, ofproduct from this vendor. During the three and six-month periods ended June 30,2009, we purchased approximately $161,000 and $506,000, respectively, ofproduct from this vendor.

 

**NOTE 13 - BUSINESS SEGMENTS**

 

P&F operates in two primary lines of business, or segments: (i) toolsand other products (“Tools”) and (ii) hardware and accessories (“Hardware”).For reporting purposes, Florida Pneumatic and Hy-Tech are combined in the Toolssegment, while Nationwide is currently the only subsidiary in the Hardwaresegment. 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  June 30, 2010**          | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                |       |             |       |      |       |         |       |
| Revenues  from unaffiliated customers               |       | $                | 13,320,000 |      | $          | 8,695,000    |       | $ | 4,625,000 |   |
|                                                |       |             |       |      |       |         |       |
| Segment  operating income                           |       | $                | 1,941,000  |      | $          | 1,095,000    |       | $ | 846,000 |   |
| General  corporate expense                          |       | (1,335,000       | )          |      |       |         |       |
| Interest  expense – net                        |       | (337,000         | )          |      |       |         |       |
| Earnings  before income taxes                       |       | $                | 269,000    |      |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Segment  assets                                     |       | $                | 45,705,000 |      | $          | 35,684,000   |       | $ | 10,021,000 |   |
| Corporate  assets                                   |       | 3,599,000        |       |      |       |         |       |
| Total  assets                                       |       | $                | 49,304,000 |      |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Long-lived  assets, including $382,000 at corporate |       | $                | 20,063,000 |      | $          | 15,044,000   |       | $ | 4,637,000 |   |

 

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| **Three months ended  June 30, 2009**          | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                |       |             |       |      |       |         |       |
| Revenues  from unaffiliated customers               |       | $                | 14,073,000 |      | $          | 9,336,000    |       | $ | 4,737,000 |   |
|                                                |       |             |       |      |       |         |       |
| Segment  operating income                           |       | $                | 1,080,000  |      | $          | 589,000      |       | $ | 491,000 |   |
| General  corporate expense                          |       | (935,000         | )          |      |       |         |       |
| Interest  expense – net                        |       | (322,000         | )          |      |       |         |       |
| Loss  before income taxes                           |       | $                | (177,000   | )         |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Segment  assets                                     |       | $                | 55,170,000 |      | $          | 43,557,000   |       | $ | 11,613,000 |   |
| Corporate  assets                                   |       | 7,704,000        |       |      |       |         |       |
| Total  assets                                       |       | $                | 62,874,000 |      |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Long-lived  assets, including $161,000 at corporate |       | $                | 21,333,000 |      | $          | 16,441,000   |       | $ | 4,731,000 |   |

 
| **Six months ended June 30,  2010**            | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                |       |             |       |      |       |         |       |
| Revenues  from unaffiliated customers               |       | $                | 24,467,000 |      | $          | 16,515,000   |       | $ | 7,952,000 |   |
|                                                |       |             |       |      |       |         |       |
| Segment  operating income                           |       | $                | 3,209,000  |      | $          | 1,948,000    |       | $ | 1,261,000 |   |
| General  corporate expense                          |       | (2,921,000       | )          |      |       |         |       |
| Interest  expense – net                        |       | (726,000         | )          |      |       |         |       |
| Loss  before income taxes                           |       | $                | (438,000   | )         |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Segment  assets                                     |       | $                | 45,705,000 |      | $          | 35,684,000   |       | $ | 10,021,000 |   |
| Corporate  assets                                   |       | 3,599,000        |       |      |       |         |       |
| Total  assets                                       |       | $                | 49,304,000 |      |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Long-lived  assets, including $382,000 at corporate |       | $                | 20,063,000 |      | $          | 15,044,000   |       | $ | 4,637,000 |   |

 
| **Six months ended June 30,  2009**            | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                |       |             |       |      |       |         |       |
| Revenues  from unaffiliated customers               |       | $                | 26,294,000 |      | $          | 18,481,000   |       | $ | 7,813,000 |   |
|                                                |       |             |       |      |       |         |       |
| Segment  operating income                           |       | $                | 2,179,000  |      | $          | 1,596,000    |       | $ | 583,000 |   |
| General  corporate expense                          |       | (2,137,000       | )          |      |       |         |       |
| Interest  expense – net                        |       | (627,000         | )          |      |       |         |       |
| Loss  before income taxes                           |       | $                | (585,000   | )         |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Segment  assets                                     |       | $                | 55,170,000 |      | $          | 43,557,000   |       | $ | 11,613,000 |   |
| Corporate  assets                                   |       | 7,704,000        |       |      |       |         |       |
| Total  assets                                       |       | $                | 62,874,000 |      |       |         |       |   |
|                                                |       |             |       |      |       |         |       |
| Long-lived  assets, including $161,000 at corporate |       | $                | 21,333,000 |      | $          | 16,441,000   |       | $ | 4,731,000 |   |

 

**NOTE 14— SUBSEQUENT EVENTS**

 

TheCompany has evaluated subsequent events through the date that these financialstatements were available to be issued and noted no items requiring disclosure.

 

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

 

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

 

**General**

 

The Private Securities Litigation Reform Act of 1995(the “Reform Act”) provides a safe harbor for forward-looking statements madeby or on behalf of P&F Industries, Inc. and subsidiaries (“P&F”,or “the Company”). P&F and its representatives may, from time to time, makewritten or verbal forward-looking statements, including statements contained inthe Company’s filings with the Securities and Exchange Commission and in itsreports to stockholders. Generally, the inclusion of the words “believe,” “expect,”“intend,” “estimate,” “anticipate,” “will,” and their opposites and similarexpressions identify statements that constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934 and that are intendedto come within the safe harbor protection provided by those sections. Anyforward-looking statements contained herein, including those related to theCompany’s future performance, are based upon the Company’s historicalperformance and on current plans, estimates and expectations. Allforward-looking statements involve risks and uncertainties. These risks anduncertainties could cause the Company’s actual results for the 2010 fiscal yearand beyond to differ materially from those expressed in any forward-lookingstatement made by or on behalf of the Company for a number of reasons, as previously disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2009. Forward-lookingstatements speak only as of the date on which they are made. The Companyundertakes no obligation to update publicly or revise any forward-lookingstatement, whether as a result of new information, future developments orotherwise.

 

**Business**

 

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

 

P&F conducts its business operations through twoof its wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.  P&F operates in two primary lines ofbusiness, or segments: (i) tools and other products (“Tools”) and(ii) hardware and accessories (“Hardware”).

 

**Tools**

 

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

 

*Florida Pneumatic*

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines.   Through its Franklin Manufacturing (“Franklin”)division, Florida Pneumatic imported and marketed a line of door and windowhardware including locksets, deadbolts, door and window security hardware,rope-related hardware products and fire escape ladders. However, primarily dueto an ongoing diminishing market, Florida Pneumatic decided to discontinuemarketing the Franklin products line effective December 31, 2009.

 

*Hy-Tech*

 

Hy-Tech manufactures and distributes pneumatic tools and parts forindustrial applications. Hy-Tech manufactures approximately sixty types ofindustrial pneumatic tools, most of which are sold at prices ranging from $300to $7,000, under the names “ATP”, “Thaxton”, “THOR” and “Eureka”, as well asunder the trade names or trademarks of other private label customers. This lineof products includes grinders, drills, saws, impact wrenches and pavementbreakers.

 

Hy-Tech’s products are sold to distributors and private label customersthrough in-house sales personnel and manufacturers’ representatives. Users ofHy-Tech’s tools include refineries, chemical plants, power generationfacilities, the heavy construction industry, oil and mining companies and heavymachine industry. Hy-Tech’s products are sold off the shelf, and are alsoproduced to customer’s orders. The business is not seasonal, but it may besubject to significant periodic changes resulting from scheduled shutdowns inrefineries, power generation facilities and chemical plants.

 

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**Hardware**

 

The Company conducts its Hardware business through Countrywide, whichin turn operates through its wholly-owned subsidiaries, NationwideIndustries, Inc (“Nationwide”). Prior to June 8, 2009, Countrywide alsooperated through its wholly owned subsidiaries, Woodmark International, L.P. (“Woodmark”)and Pacific Stair Products, Inc. (“PSP”). Woodmark was, until thetransactions, (“WMC transactions”) which formed WM Coffman, LLC (“WMC”) inJune 2009, an importer of both stair parts components and kitchen and bathhardware and accessories. Woodmark marketed its stair parts nationally.Additionally, effective with the WMC transactions, the operations of Woodmark’skitchen and bath hardware and accessories product line was transferred toNationwide.  PSP marketed Woodmark’sstaircase components to the building industry, in southern California and thesouthwestern region of the United States. As a result of the WMC transactions, Woodmark and PSP no longerfunctioned as operating units.  Woodmarkand PSP contributed certain net assets to WMC in return for members’ equity.Accordingly, effective with the WMC transactions, the stair parts business,which formerly reported through Woodmark and PSP, became part of WMC. OnJune 10, 2009, pursuant to an Asset Purchase Agreement dated as ofJune 8, 2009, WMC acquired substantially all of the assets of CoffmanStairs, LLC, a Delaware limited liability company (“Coffman”).

 

As the result of a decision reached by the Company’s board of directorsin March 2010, the Company began reporting WMC as a discontinued operationeffective January 1, 2010. The Company has restated prior year financialinformation to present WMC as a discontinued operation.

 

Nationwide designs and manufactures quality hardware for the fence,rail, gate, and window and door industry. It also markets a full line of components for other companies whichproduce pool and patio enclosures, storm and screen doors.  Nationwide distributes a wide array of sweepand sash locks manufactured for vinyl, aluminum or wood windows. As part ofNationwide’s product offering, it began distributing kitchen and bath hardwareand accessories during the second quarter of 2009.

 

**Overview**

 

The WMC transactions were executed in an attempt to take advantage ofthe synergies available by combining two large players in the stair partsbusiness, an industry at the bottom of its economic cycle with complementarydistribution channels and operations. WMC was not able to achieve the revenuelevels anticipated prior to the WMC transactions and, as a result, neverproduced positive cash flow. This caused, among other things, a default on theloan agreement specific to WMC and the lender agreed to forbear from takingcertain actions, through August 31, 2010. Neither P & F nor anyof its subsidiaries other than WMC is a party to or a guarantor of any debtobligations of WMC.

 

As a result of a decision reached by our board of directors, we arereporting WMC as a discontinued operation, effective January 1, 2010. Additionally,as of June 7, 2010, WMC ceased operations and its bank began liquidating itsassets. WMC funded itsoperations through a separate asset based credit facility with PNC.

 

On May 24, 2010, PNC issued to WMC a Notice of Sale of Collateral(“Notice”), the impact of which will be discussed further in our “Liquidity andCapital Resources” within Management’s Discussion and Analysis

 

Effective June 7, 2010,WMC executed and delivered to PNC an Acknowledgment of Events of Default andPeaceful Possession Letter (the “Peaceful Possession Letter”), dated as of June 4,2010, pursuant to which (1) WMC acknowledged that a material adversechange in its business and assets occurred and that such event constituted aforbearance default under the Loan Agreement, and (2):

 

(a) consentedto PNC’s exercise of all rights of possession in and to the Collateralconsistent with the Loan Agreement, the Other Documents (as defined in the LoanAgreement) and applicable law, to be disposed of consistent with the LoanAgreements, the Other Documents and applicable law;

 

(b) acknowledgedthat it received from PNC due, proper, timely and sufficient notice as to the sale,license or other disposition by PNC of the Collateral and that, due to itsfinancial condition, it had no means or ability to exercise its right to redeemthe Collateral;

 

(c) consentedto a sale of substantially all of the Collateral, other than the Marion FixedAssets by PNC to WM Coffman Resources, LLC, or the “Buyer”, pursuant to theterms and conditions of a Foreclosure Agreement,

 

(d) consentedto the Fixed Asset Auction; and

 

(e) agreedto change its name from WM Coffman, LLC to Old Stairs Co. LLC.

 

**KEY INDICATORS**

 

**Economic Measure**

 

We focus on a wide array of customer types, and as such, do not rely asmuch on specific economic measures or indicators.  As such, we tend to track the generaleconomic conditions of the United States, industrial production and generalretail sales, all of which have, for the most part, trended downward during thepast year.

 

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We pay particular attention to the cost of our raw materials, inparticular metals, especially various types of steel and aluminum.  To a lesser extent, we are impacted by thevalue of the U.S. dollar in relation to the Japanese yen (“yen”) and the Taiwandollar (“TWD”), as we purchase a portion of our products from these twocountries in the local currencies. We also make purchases from Chinese sourcesin U.S. dollars. However, if the Chinese currency, the Renminbi (“RMB”), wereto be revalued against the dollar, there could be a significant negative impacton the cost of our products.

 

**Operating Measures**

 

Key operating measures we use to manage our operating segments are:future sales orders; shipments; development of new products; controllingcustomer retention; inventory levels and productivity. These measures arerecorded and monitored at various intervals, including daily, weekly andmonthly. To the extent these measures are relevant; they are discussed in thedetailed sections for each operating segment.

 

**Financial Measures**

 

Key financial measures we use to evaluate the results of our businessinclude: revenue; gross margin; selling, general and administrative expenses;earnings before interest, taxes and bonus; operating cash flows, capitalexpenditures; return on sales; return on assets; days sales outstanding andinventory turns. These measures are reviewed at monthly, quarterly and annualintervals and are compared to historical periods as well as establishedobjectives. To the extent that these measures are relevant, they are discussedin the detailed sections for each operating segment below.

 

**Critical Accounting Policies and Estimates**

 

We prepare our consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America, (“GAAP”).Certain of these accounting policies require us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and the related disclosure of contingent assets and liabilities, revenues andexpenses. On an ongoing basis, we evaluate estimates, including those relatedto bad debts, inventory reserves, goodwill and intangible assets, deferred taxassets and warranty 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.

 

Therehave been no material changes in our critical accounting policies and estimatesfrom those discussed in Item 7 of our Annual Report on Form 10-K for theyear ended December 31, 2009.

 

**RESULTSOF OPERATIONS**

 

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

 

**Revenue**

 
| ** **         | ** ** | **Three-months  Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|--------------------|------------|---------------------------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2010**                              | ** ** | **2009**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools              |       |                                  |       |       |       |         |       |   |   |
| Florida  Pneumatic |       | $                                     | 5,115,000  |       | $          | 6,121,000    |       | $ | (1,006,000 | ) | (16.4 | )% |
| Hy-Tech            |       | 3,580,000                             |       | 3,215,000  |       | 365,000      |       | 11.3 |   |
| Tools  Total       |       | 8,695,000                             |       | 9,336,000  |       | (641,000     | )          | (6.9 | ) |
|               |       |                                  |       |       |       |         |       |   |   |
| Hardware           |       |                                  |       |       |       |         |       |   |   |
|               |       |                                  |       |       |       |         |       |   |   |
| Other  hardware    |       | 4,625,000                             |       | 4,737,000  |       | (112,000     | )          | (2.4 | ) |
| Hardware  Total    |       | 4,625,000                             |       | 4,737,000  |       | (112,000     | )          | (2.4 | ) |
|               |       |                                  |       |       |       |         |       |   |   |
| Consolidated       |       | $                                     | 13,320,000 |       | $          | 14,073,000   |       | $ | (753,000 | ) | (5.3 | )% |

 
| ** **         | ** ** | **Six-months Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|--------------------|------------|----------------------------------------------|------------|------------|------------|--------------|------------|
| ** **         | ** ** | **2010**                                     | ** ** | **2009**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **         | ** ** | ** **                                   | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools              |       |                                         |       |       |       |         |       |   |   |
| Florida  Pneumatic |       | $                                            | 9,661,000  |       | $          | 10,830,000   |       | $ | (1,169,000 | ) | (10.8 | )% |
| Hy-Tech            |       | 6,854,000                                    |       | 7,651,000  |       | (797,000     | )          | (10.4 | ) |
| Tools  Total       |       | 16,515,000                                   |       | 18,481,000 |       | (1,966,000   | )          | (10.6 | ) |
|               |       |                                         |       |       |       |         |       |   |   |
| Hardware           |       |                                         |       |       |       |         |       |   |   |
| Other  hardware    |       | 7,952,000                                    |       | 7,813,000  |       | 139,000      |       | 1.8 |   |
| Hardware  Total    |       | 7,952,000                                    |       | 7,813,000  |       | 139,000      |       | 1.8 |   |
|               |       |                                         |       |       |       |         |       |   |   |
| Consolidated       |       | $                                            | 24,467,000 |       | $          | 26,294,000   |       | $ | (1,827,000 | ) | (6.9 | )% |

 

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

 

***Tools***

 

Whencomparing the three-month periods ended June 30, 2010 and 2009, netrevenue reported by our Tools segment decreased $641,000 or 6.9%. Specifically,revenue at Florida Pneumatic decreased $1,006,000, primarily due to reducedvolume from its major retail customer’s basic stock keeping units of $498,000and revenue generated during the three-month period ended June 30, 2009 ofspecialty products which did not occur during the three-month period ended June 30,2010 of $506,000.  Additionally, whencomparing the three-month period ended June 30, 2010 to the same period inthe prior year, Florida Pneumatic’s revenue decreased $433,000 resulting fromthe decision effective January 1, 2010, to no longer market the Franklinproducts line. Revenue from our Industrial/Catalog product line increased$308,000 in the three month period ended June 30, 2010. Additionally, ourBerkley and automotive product line had a combined increase in revenue of$176,000, when comparing the periods ended June 30, 2010 and 2009. Webelieve that Florida Pneumatic’s relationships with its key customers, giventhe current economic conditions remain good.

 

Revenueat Hy-Tech, which focuses on the industrial sector of the pneumatic toolsmarket, increased $365,000 this quarter compared to the same period in theprior year.  During the three-monthperiod ended June 30, 2010, Hy-Tech was able to increase its volume overthe prior year to a major customer by approximately $252,000, thus accountingfor much of its increase.  Revenue fromits ATP product line increased nominally over the prior year.  Given the current economic conditions, webelieve Hy-Tech’s relationships with its customer base remain good.

 

Duringthe six-month period ended June 30, 2010, net revenue for our Toolssegment decreased to $16,515,000 from $18,481,000 in the same period a yearago. It should be noted that Hy-Tech revenue during the three month periodended March 31, 2009 included unusually large orders from one of itscustomers that have not repeated thus far in 2010.  Although its revenue for the second quarterof 2010 reflects an increase over the prior year, revenue for the six-monthperiod ended June 30, 2010 is down 10.4% to $6,854,000 from $7,651,000 inthe same period in the prior year.   Revenue at Florida Pneumatic for the six-month period ended June 30,2010, has decreased primarily due to the decision, effective January 1,2010, to discontinue marketing the Franklin products line, as well as areduction in revenue from its major customer resulting from lower shipments oftheir basic stock keeping units. However, increased revenue from itsindustrial/catalog products as well as new products and promotional sales toits major retail customer has offset the decline.

 

***Hardware***

 

OurHardware revenue is comprised of the sales of fencing and gate hardware,kitchen and bath accessories, OEM products and patio hardware.

 
| ** **               | ** ** | **Three-months Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|--------------------------|------------|------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **               | ** ** | **2010**                                       | ** ** | **2009**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **               | ** ** | ** **                                     | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Other  Hardware          |       |                                           |       |       |       |         |       |   |   |
| Fence  and gate hardware |       | $                                              | 3,115,000  |       | $          | 2,794,000    |       | $ | 321,000 |   | 11.5 | % |
| Kitchen  and Bath        |       | 703,000                                        |       | 856,000    |       | (153,000     | )          | (17.9 | ) |
| OEM                      |       | 557,000                                        |       | 948,000    |       | (391,000     | )          | (41.2 | ) |
| Patio                    |       | 250,000                                        |       | 139,000    |       | 111,000      |       | 79.9 |   |
| Total  Other Hardware    |       | $                                              | 4,625,000  |       | $          | 4,737,000    |       | $ | (112,000 | ) | (2.4 | ) |

 
| ** **               | ** ** | **Six-months Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|--------------------------|------------|----------------------------------------------|------------|------------|------------|--------------|------------|
| ** **               | ** ** | **2010**                                     | ** ** | **2009**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **               | ** ** | ** **                                   | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Other  Hardware          |       |                                         |       |       |       |         |       |   |   |
| Fence  and gate hardware |       | $                                            | 4,964,000  |       | $          | 4,425,000    |       | $ | 539,000 |   | 12.2 | % |
| Kitchen  and Bath        |       | 1,523,000                                    |       | 1,701,000  |       | (178,000     | )          | (10.5 | ) |
| OEM                      |       | 1,006,000                                    |       | 1,377,000  |       | (371,000     | )          | (26.9 | ) |
| Patio                    |       | 459,000                                      |       | 310,000    |       | 149,000      |       | 48.1 |   |
| Total  Other Hardware    |       | $                                            | 7,952,000  |       | $          | 7,813,000    |       | $ | 139,000 |   | 1.8 | % |

 

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Theincrease in fence and gate hardware is due primarily to new product sales andincreased customer base. Kitchen and bath product sales declined due primarilyto declines in the recreational vehicle and modular home markets, andcompetitive pressures.  Much of thedecline in OEM revenue was due to the loss of Coffman, which prior to the WMCtransaction in June 2009, was a customer of Nationwide. Sales byNationwide after the date of the WMC transaction were eliminated onconsolidation.    Given the currenteconomic conditions, we believe relationships with the major customers withinour Other Hardware segment remain good.

 

Analysisof our net revenue for the Hardware segment during the six-month period ended June 30,2010 falls much in line with that of the second quarter; there has been yearover year growth in the fence and gate hardware product line revenue dueessentially to an expanded customer base as well as the launching of newproducts.  With respect to OEM productline, revenue decreased due primarily to the loss of recognition of revenuegenerated from shipments to Coffman.  After June 9, 2009 Nationwide shipmentsto Coffman were eliminated on consolidation. Revenue for the kitchen and bath product line during the six monthperiod ended June 30, 2010 reflects a 10.5% decline when compared to thesame period in 2009, due to further weakening within this market sector.  Patio hardware product line revenue improvedto of $459,000 from $310,000 during the six-month period ended June 30,2009.

 

**GrossMargins / Profits**

 

Grossprofits for the three and six-month periods ended June 30, 2010 and 2009:

 
| **Three  months ended June 30,**             | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|---------------------------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2010                                              |       | Gross Profit |       | $                | 4,690,000  |      | $          | 2,937,000    |       | $ | 1,753,000 |   |
|                                              |       | Gross Margin |       | 35.2             | %          | 33.8      | %          | 37.9         | %          |
|                                              |       |         |       |             |       |      |       |         |       |
| 2009                                              |       | Gross Profit |       | $                | 3,968,000  |      | $          | 2,524,000    |       | $ | 1,444,000 |   |
|                                              |       | Gross Margin |       | 28.2             | %          | 27.0      | %          | 30.5         | %          |
|                                              |       |         |       |             |       |      |       |         |       |
| **Six months ended June 30,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
| 2010                                              |       | Gross Profit |       | $                | 8,689,000  |      | $          | 5,644,000    |       | $ | 3,045,000 |   |
|                                              |       | Gross Margin |       | 35.5             | %          | 34.2      | %          | 38.3         | %          |
|                                              |       |         |       |             |       |      |       |         |       |
| 2009                                              |       | Gross Profit |       | $                | 8,068,000  |      | $          | 5,724,000    |       | $ | 2,344,000 |   |
|                                              |       | Gross Margin |       | 30.7             | %          | 31.0      | %          | 30.4         | %          |

 

***Tools***

 

Grossmargins in the Tools segment for the three-month period ended June 30,2010 increased 6.8 percentage points to 33.8% from 27.0% for the three-monthperiod ended June 30, 2009. Gross profit for this segment increased$413,000.

 

Specifically,when comparing the three-month periods ended June 30, 2010 and 2009,Florida Pneumatic’s gross margin increased 9.0 percentage points.  This increase in gross margin is dueprimarily to, among other factors; improved mix of products sold; improvedpricing from its overseas suppliers, lower indirect labor and improvedutilization of fixed overhead.  Althoughrevenue decreased, as the result of improved gross margins Florida Pneumatic’sgross profit improved by $278,000.

 

Grossmargin increased at Hy-Tech to 35.5% from 35.3% when comparing the three-monthperiods ended June 30, 2010 and 2009. This improvement is due in part to improved cost of manufacturing.  During the second quarter of 2009 Hy-Techreduced its cost of manufacturing, in an effort to offset the impact of lessvolume through the facility, which lowers overhead absorption. This improvementin gross margin, combined with the increase in revenue, resulted in Hy-Tech’sgross profit increase of $135,000, when comparing the three-month periods endedJune 30, 2010 and 2009.

 

Grossmargin for the Tools segment for the six-month period ended June 30, 2010increased to 34.2% from 31.0% in the same period a year ago. Gross profit forthe Tools segment however decreased slightly to $5,644,000 from$5,724,000.  Florida Pneumatic, duringthe six-month period ended June 30, 2010, was able to improve its six month gross margin 7.5 percentage points dueprimarily to improved mix of products sold, lower pricing from its overseassuppliers, lower indirect labor and improved utilization of fixedoverhead.  Despite revenue decreasingduring the six-month period ended June 30, 2010 compared to the same timea year ago, Florida Pneumatic was able to increase its gross profit by $420,000.

 

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Hy-Tech’sgross margin for the six-month period ended June 30, 2010 decreased to 35.3%from 38.2% for the same period in 2009, due in part to less product being manufactured,thereby adversely affecting absorption of fixed overhead, thus increasingcosts.  The lower gross margin in 2010applied to decreased year to date revenue caused Hy-Tech’s gross profit todecline $500,000, when comparing the six-month periods ended June 30, 2010 and2009.

 

***Hardware***

 

Ourgross margin attributable to Hardware product lines for the three-month periodended June 30, 2010 increased to 37.9% from 30.5% during the same period in theprior year. As the result of increased revenue during the second quarter of2010 compared to 2009 and improved gross margins, the Hardware’s gross profitgrew to $1,753,000 from $1,444,000 during the same three-month period in2009.  This improvement is primarily theresult of (i) product mix, (ii) reduction in the cost of productsbeing relieved from inventory, and (iii) greater absorption of warehouseoverhead.  We expect gross margin forthis segment to decrease slightly during the remainder of 2010, as higherpriced products currently being purchased will ultimately flow through cost ofgoods sold.

 

Ourgross margin at our Hardware segment for the six-month period ended June 30,2010 increased to 38.3% from 30.0% during the same period in the prior year.When comparing the six-month periods ended June 30, 2010 and 2009, gross profitincreased for all product lines, except for Patio, which decreasedslightly,  This improvement is primarilythe result of (i) product mix, (ii) reduction in the cost of productsbeing relieved from inventory, and (iii) greater absorption of warehouseoverhead.  We expect gross margin forthis segment to reduce slightly during the remainder of 2010, as higher pricedproducts currently being purchased will ultimately flow through cost of goodssold.

 

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

 

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

 

For the three-month period ended June 30, 2010, our SG&A was$4,084,000, reflecting an increase of $261,000 when compared to $3,823,000 forthe three-month period ended June 30, 2009. As a percentage of revenue,SG&A was 30.7% for the three-month period ended June 30, 2010 compared to27.2% for the same period in the prior year. The most significant factor contributing to the net change was theincrease of $118,000 in legal and consulting fees incurred during this quartercompared to the second quarter of 2009. This increase is primarily attributable to our efforts to resolvevarious matters with our banks, including a new waiver and amendment enteredinto in April 2010, and costs incurred as the result of PNC’s actionspertaining to their foreclosure on WMC.  During the three-month period ended March 31, 2009, we recordedapproximately $80,000 of expense attributable to a then proposed WMC transaction.During the second quarter of 2009, we reclassified and capitalized debtissuance costs of approximately $80,000, which resulted in a reduction of ourSG&A during the quarter ended June 30, 2009. As there was no similarreduction occurring during the three-month period ended June 30, 2010, ourSG&A effectively increased during the three-month period ended June 30,2010 when compared to the same period in the prior year by a like amount.   Additional areas of increased costs includebank fees and charges by $34,000, freight out by $42,000 and depreciation andamortization of $31,000.  These increaseswere offset slightly as our on-going compensation and benefits reduction planremains in place, resulting in a decrease of $38,000 over the second quarter of2009.  We intend to continue to examineour operating expenses, for further possible reductions particularly duringthese difficult times.

 

OurSG&A for the six-month period ended June 30, 2010 of $8,401,000, reflectsan increase $375,000 or 4.7% from $8,026,000 reported during the same period inthe prior year.  The most significantcomponent of the increase as noted above are legal, consulting and accounting costsof $555,000 incurred in connection with our efforts to resolve matters with ourbanks, including a new waiver and amendment entered into during the secondquarter of 2010, and costs incurred as the result of PNC’s actions pertainingto their foreclosure on WMC. Additional areas which encountered increases weredepreciation and amortization of $76,000, which is due primarily to a softwareapplication implementation and freight out which increased by $59,000.  These increases were partially offset by, amongother things, our continuing compensation and benefits reduction plan andreduced staff, which resulting in a savings of $315,000 and a reduction of$69,000 in the required expensing of prior period non-cash stock basedcompensation charges.

 

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***Interest - Net***

 

Our net interest expense of $337,000 for the three-month period endedJune 30, 2010, reflects an increase of $15,000 or 4.7%, when compared to net interestexpense of $322,000 incurred for the same period in the prior year. Interestexpense incurred in connection with our term loan during the second quarter of2010, reflects a decrease of $11,000 to $65,000 incurred during the three-monthperiod ended June 30, 2010 from $76,000 incurred during the same period in theprior year, The decrease is principally the result of lower average borrowingsduring the period due to repayments, partially offset by higher averageinterest rates. Interest expense on borrowings under our revolving credit loanfacility for the three-month period ended June 30, 2010 was $192,000, comparedto $205,000 for the same period in 2009, a decrease of $13,000.  Factors contributing to this decrease includelower average loan balances partially offset by higher interest rates, whichincluded the addition of the default rate adjustment applied to our borrowingsunder the revolving credit facility through April 23, 2010, the date of anamendment and waiver to our credit facility which eliminated the additionaldefault rate. Other material items included in our interest expense includeapproximately $35,000 of interest accrued on the Hy-Tech sellers note and$11,000 of accrued interest on the loan from our CEO and an unrelated thirdparty made as a condition by the banks to the waiver and amendment to ourcredit facility dated April 23, 2010. Our total average debt balances under the terms of our credit facilitieswith our banks for the quarters ended June 30, 2010 and 2009 were $17,118,000and $26,501,000, respectively.  The totalaverage interest rate for the quarters ended June 30, 2010 and 2009 were 6.00%and 4.17%, respectively.

 

Our net interest for the six-month period ended June 30, 2010 was$726,000, compared to $627,000 during the same period in 2009, an increase of$99,000 or 15.8%. Interest expense incurred in connection with our Term Loanwas $161,000 compared to $212,000 in 2009. This decrease is principally theresult of lower average borrowings during the period due to repayments, offsetby higher average interest rates. Interest expense on borrowings under ourrevolving credit loan facility for the six-month period ended June 30, 2010 was$432,000, compared to $344,000 for the same period in 2009, an increase of $88,000.  Factors contributing to this increase includehigher interest rates, which included the addition of the default rateadjustment applied to our borrowings through April 23, 2010, the date of anamendment and waiver to our credit facility. The increase was partially offset by lower average loan balances. Othermaterial items included in our interest expense are approximately $60,000 ofinterest accrued on the Hy-Tech sellers note and $11,000 of accrued interest onthe loan from our CEO and an unrelated third party made as a condition to thewaiver and amendment to our credit facility dated April 23, 2010.  Our total average debt balances under theterms of our credit facilities with our banks was $18,373,000 and $27,096,000for the six-month periods ended June 30, 2010 and 2009, respectively.  The total average interest rate for thesix-month periods ended June 30, 2010 and 2009 were 6.45% and 4.10%,respectively.

 

***Income Taxes***

 

Theeffective rate applicable to our loss from continuing operations for the threeand six-month periods ended June 30, 2010, differs from the statutory rateprimarily due to uncertainties relating to projected future taxable income,which would enable us to realize the federal carry-forward benefit. As such, weapplied a 100% valuation allowance of the calculated tax benefit.   The effective rate applicable to the lossfrom continuing operations for the three and six-month periods ended June 30,2009 of approximately 60% and 30%.   Theprimary factors affecting our effective tax rate for the three and six monthended periods ended June 30, 2009, were state income taxes and permanentdifferences.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

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

 

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

 
| ** **                               | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------------------------|------------|
| Working Capital of continuing operations |       | $                 | 5,551,000  |                       | $          | 7,342,000 |   |
| Current Ratio of continuing operations   |       | 1.25 to 1.0       |       | 1.30 to 1.0                |       |
| Shareholders’ Equity                |       | $                 | 12,617,000 |                       | $          | 25,615,000 |   |

 

Weand our subsidiaries, other than WMC, as co-borrowers, entered into a CreditAgreement, (“Credit Agreement”) as amended, with two banks (“banks”) in2004.  The Credit Agreement, among otherthings, includes a revolving credit loan facility, (“revolving loan”). Therevolving loan can be used for direct borrowings, with various sub-limits forletters of credit, bankers’ 

 

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acceptancesand equipment loans. There were no letters of credit, bankers’ acceptances orequipment loan borrowings at June 30, 2010, or December 31, 2009. Thereare no commitment fees for any unused portion of this Credit Agreement. Directborrowings under the revolving loan are secured by our accounts receivable,inventory, equipment and real property, and are cross-guaranteed by each of oursubsidiaries, except WMC. These borrowings bear interest at either LIBOR(London InterBank Offered Rate), at a minimum of 1.0%, plus the currentlyapplicable loan margin of 4.25%, or the prime interest rate, plus the currentlyapplicable loan margin of 2.50%.  Therevolving loan within the Credit Agreement expired March 30, 2010.  Primarily the result of the expiration of therevolving credit facility, and us being in default on various financialcovenants, the banks on March 31, 2010 withdrew approximately $957,000from our operating accounts and applied these funds to pay down the termnote.  During the period from April 1,2010 through April 23, 2010, the banks returned the $957,000 to ouroperating accounts.  On April 23,2010, we and the banks executed a waiver and amendment which, among otherthings, extended the termination date of the revolving credit loan portion ofthe Credit Agreement facility to January 1, 2011, waived all then existingdefaults and eliminated the additional default interest rate of 2.0%. Thewaiver and amendment set new financial covenants and adjusted the borrowingbase calculation as well as reduced the size of the facility from $17,500,000to $16,500,000.  In addition, it requiredthat all future advances shall be subject to the requirement that the aggregateamount advanced after giving effect to any such future advances be at least$750,000 less than the aggregate lendable value in eligible borrowing baseassets.  Finally, the banks required asubordinated loan of $750,000, which, in the aggregate was provided by theCompany’s Chief Executive Officer, President and Chairman of the Board ofDirectors, (“CEO”), and another unrelated party.

 

Aspart of the March 2009 amendment to the Credit Agreement we have a term loan, enteredinto in March 2009.  Similar to theborrowings under the revolving loan facility of the Credit Agreement,borrowings under this term loan are secured by our accounts receivable,inventory, equipment and real property and are cross-guaranteed by each of oursubsidiaries, with the exception of WMC. The balance of this term loan at June30, 2010 and December 31, 2009 was $2,903,000 and $5,782,000,respectively.  At June 30, 2010, thisterm loan bears interest at LIBOR, at a minimum of 1%, plus the currentlyapplicable loan margin of 4.50%.

 

In connection with the WMC transactions, WMC entered into the WMC loanagreement with PNC Bank (“PNC”). The WMC loan agreement was set to expireJune 8, 2012. Neither P&F nor any other subsidiary was a co-borroweror a guarantor to this WMC loan agreement. The WMC loan agreement provided a maximum loan amount of $12,000,000, ofwhich $1,134,000 was established as a term loan, the balance of $10,866,000 wasthe maximum revolving advance amount. The WMC loan agreement is collateralized by the accounts receivable,inventory, equipment, and general intangibles of WMC.  Since December 31, 2009 WMC was not in compliancewith certain financial covenants of the Loan Agreement.  Thiscaused a default on the WMC loan agreement, and pursuant to a ForbearanceAgreement dated February 22, 2010, PNC agreed to forbear from takingcertain actions, such as accelerating repayment of the loan, throughAugust 31, 2010.  Per theForbearance Agreement, PNC required WMC to obtain additional funding of$250,000, which was made by the CEO and a trust controlled by the president ofCountrywide Hardware, pursuant to a secured junior participation agreement (SeeNote 12).  In return, PNC agreed toreduce a block that applied to the revolving loan by $350,000.

 

 Subsequent to February 22, 2010,WMC, among other things, defaulted on its lease in Marion, Virginia. Thisdefault and other events caused PNC on May 24, 2010 to issue a Notice of Saleof Collateral (“Notice”). The Notice stated that PNC will dispose ofsubstantially all assets of WMC subject to PNC’s liens and/or securityinterests (the “Collateral”) as follows: (a) by the private sale ofsubstantially all of the Collateral other than WMC’s machinery and equipment(the “Marion Fixed Assets”)  located atMarion, Virginia on or after June 3, 2010 and (b) by the private sale of theMarion Fixed Assets on or after June 23, 2010 contemporaneously with anInternet-only auction and sale of the Marion Fixed Assets by the immediatepurchaser thereof.  Please see theoverview section of this Management’s Discussion and Analysis section, as wellas Notes to Consolidated Condensed Financial Statements for further detaileddiscussion.

 

Further, included in the WMCloan agreement entered into with PNC, was a term loan with an originalprincipal amount of $1,134,000, which was to be repaid in twenty-four equalmonthly installments of $47,250.  Thisterm note between PNC and WMC was collateralized by WMC’s fixed assets. As theresult of the Notice and Peaceful Foreclosure Letter described above, PNC tooktitle to all of WMC’s fixed assets.  Wehave included in current portion of liabilities of discontinued operations thebalance of $115,000 at June 30, 2010 and $992,000 at December 31, 2009. PNC hasnot yet provided WMC with a final accounting of the results of the auction andsale of the Marion Fixed Assets.

 

As the result of PNC’s actions and other events, WMC is no longer inoperation and has no assets to settle its liabilities, which at June 30, 2010,were approximately $12,838,000 and is the major portion of Liabilities of DiscontinuedOperations presented in current liabilities in the Consolidated CondensedBalance Sheet.  We believe neitherP&F or any of its subsidiaries other than WMC are legally responsible forany of WMC’s liabilities belonging to WMC. However, until such time as these obligations have been resolved, eitherdirectly with the creditors or discharged by a court of law, we are required tomaintain these obligations on our financial statements.

 

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 

 

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September 21,2009.  As a result of the non-payment,cross-default provisions set forth in the loan agreement between FloridaPneumatic and Wachovia, secured by a mortgage with respect to the real propertyowned and utilized by Florida Pneumatic, were triggered.  On February 23, 2010, Wachovia amendedthe underlying loan document to among other things, extend the maturity date ofthe balloon payment to June 1, 2010 and require the Company to makemonthly principal payments of approximately $11,000 plus accrued interestcommencing on March 24, 2010.  OnApril 22, 2010, the Company and Wachovia entered into a new LoanModification Agreement, which became effective April 23, 2010, wherein theCompany agreed to prepay $150,000 toward the balance due on the loan agreement.In exchange, Wachovia waived all prior defaults and extended the maturity dateto January 1, 2011. The balance on this loan agreement at June 30, 2010and December 31, 2009 was $896,000 and $1,091,000, respectively.

 

Inconnection with the acquisition of Hy-Tech, we agreed to make additionalpayments (“Contingent Consideration”) to the sellers. The amount of theContingent Consideration was based upon Hy-Tech achieving certain financialperformance thresholds during the two year period ending on the secondanniversary of the acquisition. Further, the Company agreed to make anadditional payment (“Additional Contingent Consideration”), subject to certainconditions related primarily to an exclusive supply agreement with a majorcustomer and, to a certain extent, and subject to certain provisions, theachievement of Contingent Consideration. Hy-Tech successfully achieved therequired thresholds necessary to be entitled to both the ContingentConsideration and the Additional Contingent Consideration. The total amount ofthe Contingent Consideration and the Additional Contingent Consideration wasapproximately a $2,292,000. According to the agreement, the amounts due thesellers were payable in May 2009. We and the sellers agreed upon payment arrangement wherein we wererequired and did make a payment of approximately $573,000 in May 2009,with the balance of approximately $1,719,000 to be paid in six equal paymentsincurring interest at 6.0% per annum, payable quarterly commencing inAugust 2009. The August 2009 and November 2009 installmentpayments with interest were paid timely. However, due to the default on theCredit Agreement, we were not permitted to make any subsequent payment withoutpermission from the banks. The balance due on this obligation was $1,146,000 atJune 30, 2010.  Pursuant to the Waiverand Amendment dated April 23, 2010, we are still not permitted to make anyfuture payments without permission from the banks.  As such, we have been accruing interest at12.0% per annum, the default rate of interest.

 

TheCredit Agreement entered into with the banks also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreigncurrency forward contracts.  Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. At June 30, 2010 and 2009, theCompany had no material foreign exchange forward contracts outstanding.  Additionally, there was no material realizedor unrealized gains related to these contracts during the three and six monthperiods ended June 30, 2010 and 2009, respectively.

 

Duringthe six-month period ended June 30, 2010, our cash increased $274,000 to$820,000 from $546,000 at December 31, 2009.  Our total debt at June 30, 2010, excludingdebt included in Liabilities of Discontinued operations, was $17,871,000,compared to $25,463,000 at December 31, 2009. The percent of total debt tototal book capitalization (total debt divided by total bank debt plus equity)was 58.6% at June 30, 2010, compared to 50.9% at December 31, 2009.

 

Wehad net cash of $7,836,000 provided by operating activities of continuingoperations for the six-month period ended June 30, 2010, compared to $3,788,000provided by operating activities of continuing operations during the six-monthperiod ended June 30, 2009.

 

Capital spending was approximately $99,000 for the six-month periodended June 30, 2010, compared to $1,066,000 during the six-month periodended June 30, 2009.  Capitalexpenditures for the balance of 2010 are expected to be approximately $300,000,some of which may be financed through our credit facilities or financed throughindependent third party financial institutions. Included in the expected totalfor 2010 are capital expenditures relating to new products, expansion ofexisting product lines and replacement of equipment.

 

We believe we will be able to fund our current working capital needs,interest and debt servicing payments with cash on hand and cash generated fromoperations, supplemented by borrowings available under the loan agreements fromthe banks, through at least January 1, 2011, which is the expiration ofour current revolving credit facility with our current banks. Further, theCompany continues to seek alternative sources of funding that may be moreflexible. For example, the Company is attempting to obtain new first mortgageson its three real properties to replace the current mortgages and the bank’sterm note. In addition, the Company is in discussions with several lendersregarding a new revolving line of credit as well as a term loan secured by theCompany’s machinery and equipment. The goal of these activities is to enhancethe Company’s access to capital as well as cash flow.  However, there can be no assurance that wewill be successful in our search for new banking arrangements on termssatisfactory to us or in generating the necessary cash flows to fund ourcurrent working capital needs.

 

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**OFF-BALANCESHEET ARRANGEMENTS**

 

Ourforeign exchange line within the Credit Agreement provides for the availabilityof up to $10,000,000 in foreign currency forward contracts. These contracts fixthe exchange rate on future purchases of foreign currencies needed for paymentsto foreign suppliers. We have not purchased forward contracts on New Taiwandollars (“TWD”). At June 30, 2010 and 2009, the Company had no materialforeign exchange forward contracts outstanding. Additionally, there was no material realized or unrealized gains relatedto these contracts during the three and six month periods ended June 30,2010 and 2009, respectively.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

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

 

Notrequired.

 

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

 

**Evaluation of disclosure controls and procedures**

 

An evaluation was performed, under the supervision of, and with theparticipation of, our management including the Principal Executive Officer andPrincipal Financial Officer, of the effectiveness of the design and operationof our disclosure controls and 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 June 30, 2010 were effective. Accordingly, management believesthat the consolidated condensed financial statements included in this QuarterlyReport on Form 10-Q fairly present, in all material respects, our financial condition,results of operations and cash flows for the periods presented.

 

P&F management is responsible for establishing and maintainingeffective internal controls. Because of our inherent limitations, internalcontrols may not prevent or detect misstatements. A control system, no matterhow well designed and operated, can only provide reasonable, not absolute,assurance that the control system’s objectives will be met. Also, projectionsof any evaluation of effectiveness as to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with policies and procedures may deteriorate.

 

The Certifications of our Principal Executive Officer and PrincipalFinancial Officer included as Exhibits 31.1 and 31.2 to this Quarterly Reporton Form 10-Q include, in paragraph 4 of such certifications, informationconcerning our disclosure controls and procedures and internal control overfinancial reporting. Such certifications should be read in conjunction with theinformation contained in this Item 4T - Controls and Procedures for a morecomplete understanding of the matters covered by such certifications.

 

**Changes in Internal Control Over Financial Reporting**

 

There have been no significant changes in our internal control overfinancial reporting during the three-month period ended June 30, 2010, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 
| **Item 1.**  | **Legal Proceedings**                                                                                                                                      |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                                                                                 |
|         | There  have been no material changes to the legal proceedings described in our  Annual Report on Form 10-K for the year ended December 31, 2009. |
|         |                                                                                                                                                       |
| **Item 1A.** | **Risk Factors**                                                                                                                                           |
| ** **   | ** **                                                                                                                                                 |
|         | There were no material changes from risk factors  previously disclosed in our Annual Report on Form 10-K for the year  ended December 31, 2009.  |
|         |                                                                                                                                                       |
| **Item 2.**  | **Unregistered Sales of Equity Securities and Use  of Proceeds**                                                                                           |
| ** **   | ** **                                                                                                                                                 |
|         | None.                                                                                                                                                      |
|         |                                                                                                                                                       |
| **Item 3.**  | **Defaults Upon Senior Securities**                                                                                                                        |
| ** **   | ** **                                                                                                                                                 |
|         | None.                                                                                                                                                      |
|         |                                                                                                                                                       |
| **Item 4.**  | **[RESERVED]**                                                                                                                                             |
| ** **   | ** **                                                                                                                                                 |
| **Item 5.**  | **Other Information**                                                                                                                                      |
| ** **   | ** **                                                                                                                                                 |
|         | None.                                                                                                                                                      |
|         |                                                                                                                                                       |
| **Item 6.**  | **Exhibits**                                                                                                                                               |
| ** **   | ** **                                                                                                                                                 |
|         | See  “Exhibit Index” immediately following the signature page.                                                                                   |

 

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**SIGNATURE**

 

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

 
| ** **              | **P&F INDUSTRIES, INC.** |
|-------------------------|------------------------------|
|                    | (Registrant)                 |
|                    |                         |
|                    |                         |
|                    | By                           | /s/  Joseph A. Molino, Jr. |
|                    |                         | Joseph  A. Molino, Jr. |
|                    |                         | Chief  Financial Officer |
| Dated:  August 13, 2010 |                         | (Principal  Financial and Chief Accounting Officer) |

 

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**EXHIBITINDEX**

 

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

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                |       | Amendment No. 21 and  Waiver to Credit Agreement, dated as of April 23, 2010, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, Embassy Industries,  Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair Products, Inc.,  WILP Holdings, Inc., Continental Tool Group, Inc., Hy-Tech Machine, Inc. and  Citibank, N.A., as Administrative Agent, and the lenders party thereto  (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on  Form 8-K dated April 23, 2010). |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **10.2**            |       | Secured  Subordinated Promissory Note, dated as of April 23, 2010, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, Embassy Industries,  Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair Products, Inc.,  WILP Holdings, Inc., Continental Tool Group, Inc., Hy-Tech Machine, Inc. in  favor of Marc Schorr in the principal amount of $500,000 (Incorporated by  reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-Kdated  April 23, 2010).                            |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.3**            |       | Secured  Subordinated Promissory Note, dated as of April 23, 2010, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, Embassy Industries,  Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair Products, Inc.,  WILP Holdings, Inc., Continental Tool Group, Inc., Hy-Tech Machine, Inc. in  favor of Richard A. Horowitz in the principal amount of $500,000  (Incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on  Form 8-K dated April 23, 2010).                   |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.4**            |       | Security Agreement, dated  as of April 23, 2010, between Marc Schorr and Richard A. Horowitz, as secured  parties, and the Registrant, as debtor (Incorporated by reference to Exhibit  10.4 to Registrant’s Current Report on Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                                            |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.5**            |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Florida Pneumatic Manufacturing  Corporation, as debtor (Incorporated by reference to Exhibit 10.5 to  Registrant’s Current Report on Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                              |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.6**            |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Embassy Industries, Inc., as debtor (Incorporated  by reference to Exhibit 10.6 to Registrant’s Current Report on Form 8-K dated  April 23, 2010).                                                                                                                                                                                                                                                                                                                                 |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.7**            |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Green Manufacturing, Inc., as debtor  (Incorporated by reference to Exhibit 10.7 to Registrant’s Current Report on  Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                                |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.8**            |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Countrywide Hardware, Inc., as debtor  (Incorporated by reference to Exhibit 10.8 to Registrant’s Current Report on  Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                               |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.9**            |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Nationwide Industries, Inc., as debtor  (Incorporated by reference to Exhibit 10.9 to Registrant’s Current Report on  Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                              |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.10**           |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Woodmark International, L.P, as debtor  (Incorporated by reference to Exhibit 10.10 to Registrant’s Current Report on  Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                             |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.11**           |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and WILP Holdings, Inc., as debtor  (Incorporated by reference to Exhibit 10.11 to Registrant’s Current Report on  Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                                     |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **10.12**           |       | Security  Agreement, dated as of April 23, 2010, between Marc Schorr and Richard A.  Horowitz, as secured parties, and Continental Tool Group, Inc., as debtor  (Incorporated by reference to Exhibit 10.12 to Registrant’s Current Report on                                                                                                                                                                                                                                                                                                                                                             |

 

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| ** ** |       | Form  8-K dated April 23, 2010)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.13**  |       | Security Agreement, dated  as of April 23, 2010, between Marc Schorr and Richard A. Horowitz, as secured  parties, and Hy-Tech Machine, Inc., as debtor (Incorporated by reference to  Exhibit 10.13 to Registrant’s Current Report on Form 8-K dated April 23,  2010).                                                                                                                                                                                                                                                                                                                                              |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.14**  |       | Second Loan Documents  Modification Agreement, dated April 22, 2010, between Countrywide Hardware,  Inc. and Wells Fargo, National Association (successor by merger to Wachovia  Bank, National Association) as modifying the related (i) Mortgage, Security  Agreement and Absolute Assignment of Leases, (ii) Promissory Note, and (iii)  Loan  Agreement, each dated May 24,  2002, between Countrywide Hardware, Inc. and Wachovia Bank, National  Association, as previously amended (Incorporated by reference to Exhibit  10.15 to Registrant’s Current Report on   Form 8-K dated April 23, 2010). |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.15**  |       | Indemnification  Agreement, dated as of April 23, 2010, by the Registrant in favor of Marc  Schorr and Richard A. Horowitz (Incorporated by reference to Exhibit 10.16 to  Registrant’s Current Report on Form 8-K dated April 23, 2010).                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.16**  |       | P&F Industries, Inc.  2010 CEO Deferred Compensation Plan (Incorporated by reference to Exhibit  10.1 to Registrant’s Current Report on Form 8-K dated April 26, 2010).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.17**  |       | Lease  Agreement, dated as of March 30, 2007, by and between AGNL Coffman, L.L.C.  and Coffman Stairs, LLC and Visador Holding Corporation (Incorporated by  reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated  June 16, 2009).                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.18**  |       | First Amendment to Lease  Agreement, dated as of June 8, 2009, made by AGNL Coffman, L.L.C. and WM  Coffman LLC  (Incorporated by reference  to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated June 10,  2009).                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.19**  |       | Acknowledgment of Events  of Default and Peaceful Possession Letter, dated June 4, 2010, by WM Coffman  LLC in favor of PNC Bank National Association (Incorporated by reference to  Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated June 7, 2010).                                                                                                                                                                                                                                                                                                                                                    |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.20**  |       | Mutual  Release Agreement, dated as of June 4, 2010, by and among P & F  Industries, Inc., Continental Tool Group, Inc., Florida Pneumatic Manufacturing  Corporation, Hy-Tech Machine, Inc., Countrywide Hardware, Inc., WILP  Holdings, Inc., Green Manufacturing, Inc., Embassy Industries, Inc.,  Nationwide Industries, Inc., Pacific Stair Products, Inc. and Woodmark  International, L.P. (Incorporated by reference to Exhibit 10.2 to  Registrant’s Current Report on Form 8-K dated June 7, 2010).                                                                                                    |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **31.1**   |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **31.2**   |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **32.1**   |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **32.2**   |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

Acopy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q maybe obtained, upon payment of the Registrant’s reasonable expenses in furnishingsuch exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road,Suite 100, Melville New York 11747, Attention: Corporate Secretary.

 

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