** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March 31,2008**

 

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

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                    to                    **

 

**Commission File Number 1 - 5332**

 

**P&F INDUSTRIES, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **22-1657413**                          |
|---------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification Number) |
| incorporation or organization)  |       |                                    |

 

| **445 Broadhollow Road, Suite 100, Melville, New York  11747**                                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Address of principal executive offices)                              (Zip  Code) |

 

Registrant’stelephone number, including area code: **(631)694-9800**

 

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

 

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

 

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

 

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

 

As of May 10, 2008 there were 3,637,462 shares of theregistrant’s Class A Common Stock outstanding.

 

 

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**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2008**

 

**TABLE OF CONTENTS**

 
| ** **                                   | ** ** | ** **                                                                                                           | **PAGE** |
|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|----------|
|                                         |       |                                                                                                                 |     |
| **PART I – FINANCIAL INFORMATION** |       |
|                                         |       |                                                                                                                 |     |
| Item 1.                                      |       | Financial  Statements (unaudited)                                                                                    |     |
|                                         |       |                                                                                                                 |     |
|                                         |       | Consolidated Condensed Balance Sheets as of March 31, 2008 and  December 31, 2007                          | 1        |
|                                         |       |                                                                                                                 |     |
|                                         |       | Consolidated Condensed Statements of Earnings for the three months  months ended March 31, 2008, and 2007            | 3        |
|                                         |       |                                                                                                                 |     |
|                                         |       | Consolidated Condensed Statement of Shareholders’ Equity for the  period from January 1, 2008 to March 31, 2008 | 4        |
|                                         |       |                                                                                                                 |     |
|                                         |       | Consolidated Condensed Statements of Cash Flows for the three months  ended March 31, 2008 and 2007                  | 5        |
|                                         |       |                                                                                                                 |     |
|                                         |       | Notes to Consolidated Condensed Financial Statements                                                                 | 8        |
|                                         |       |                                                                                                                 |     |
| Item 2.                                      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 20       |
|                                         |       |                                                                                                                 |     |
| Item 3.                                      |       | Quantitative and  Qualitative Disclosures About Market Risk                                                          | 31       |
|                                         |       |                                                                                                                 |     |
| Item 4.                                      |       | Controls and  Procedures                                                                                             | 31       |
|                                         |       |                                                                                                                 |     |
| **PART II –  OTHER INFORMATION**   |       |
|                                         |       |                                                                                                                 |     |
| Item 1.                                      |       | Legal Proceedings                                                                                                    | 32       |
|                                         |       |                                                                                                                 |     |
| Item 1A.                                     |       | Risk Factors                                                                                                         | 32       |
|                                         |       |                                                                                                                 |     |
| Item 2.                                      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         | 32       |
|                                         |       |                                                                                                                 |     |
| Item 3.                                      |       | Defaults Upon  Senior Securities                                                                                     | 32       |
|                                         |       |                                                                                                                 |     |
| Item 4.                                      |       | Submission of  Matters to a Vote of Security Holders                                                                 | 32       |
|                                         |       |                                                                                                                 |     |
| Item 5.                                      |       | Other Information                                                                                                    | 32       |
|                                         |       |                                                                                                                 |     |
| Item 6.                                      |       | Exhibits                                                                                                             | 32       |
|                                         |       |                                                                                                                 |     |
| **Signature**                                |       |                                                                                                                 | 33       |
|                                         |       |                                                                                                                 |     |
| **Exhibit Index**                       |       |                                                                                                                 | 34       |
|                                              |            |                                                                                                                      |          |  |  |

 

i

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**PART I - FINANCIAL INFORMATION**

 

**Item1.                    Financial Statements**

 

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

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **March 31, 2008** | ** ** | **December 31, 2007**                                 | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**              | ** ** | **(derived from audited  financial statements)** | ** ** |
| **ASSETS**                                      | ** ** | ** **                   | ** ** | ** **                                                      | ** ** |
| CURRENT                                         | ** ** | ** **                   | ** ** | ** **                                                      | ** ** |
|                                            | ** ** | ** **                   | ** ** | ** **                                                      | ** ** |
| Cash and cash equivalents                       |       | $                            | 1,089,231  |                                                            | $          | 1,334,167 |   |
| Accounts receivable – net                  |       | 14,891,375                   |       | 12,883,095                                                      |       |
| Notes and other receivables                     |       | 159,226                      |       | 393,525                                                         |       |
| Inventories – net                          |       | 30,157,343                   |       | 31,736,103                                                      |       |
| Deferred income taxes – net                |       | 1,397,000                    |       | 1,397,000                                                       |       |
| Assets of discontinued operations               |       | 64,737                       |       | 56,142                                                          |       |
| Income tax refund receivables                   |       | 189,923                      |       | 225,524                                                         |       |
| Prepaid expenses and other current assets       |       | 1,462,094                    |       | 1,171,279                                                       |       |
| TOTAL CURRENT ASSETS                            |       | 49,410,929                   |       | 49,196,835                                                      |       |
|                                            |       |                         |       |                                                            |       |
| PROPERTY AND EQUIPMENT                          |       |                         |       |                                                            |       |
| Land                                            |       | 1,549,773                    |       | 1,549,773                                                       |       |
| Buildings and improvements                      |       | 7,621,524                    |       | 7,613,514                                                       |       |
| Machinery and equipment                         |       | 15,744,287                   |       | 15,563,078                                                      |       |
|                                            |       | 24,915,584                   |       | 24,726,365                                                      |       |
| Less accumulated depreciation and  amortization |       | 10,437,581                   |       | 10,010,179                                                      |       |
| NET PROPERTY AND EQUIPMENT                      |       | 14,478,003                   |       | 14,716,186                                                      |       |
|                                            |       |                         |       |                                                            |       |
| GOODWILL                                        |       | 4,594,028                    |       | 4,594,028                                                       |       |
|                                            |       |                         |       |                                                            |       |
| OTHER INTANGIBLE ASSETS – net              |       | 10,874,418                   |       | 11,103,534                                                      |       |
|                                            |       |                         |       |                                                            |       |
| DEFERRED INCOME TAXES -net                      |       | 3,259,000                    |       | 3,445,000                                                       |       |
|                                            |       |                         |       |                                                            |       |
| ASSETS OF DISCONTINUED OPERATIONS               |       | 1,330                        |       | 9,400                                                           |       |
|                                            |       |                         |       |                                                            |       |
| OTHER ASSETS – net                         |       | 254,136                      |       | 204,684                                                         |       |
|                                            |       |                         |       |                                                            |       |
| TOTAL ASSETS                                    |       | $                            | 82,871,844 |                                                            | $          | 83,269,667 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

1

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| ** **                                                                                                                                 | ** ** | **March 31, 2008** | ** ** | **December 31, 2007**                                 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **(unaudited)**              | ** ** | **(derived from audited  financial statements)** | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                             | ** ** | ** **                   | ** ** | ** **                                                      | ** ** |
| CURRENT LIABILITIES                                                                                                                        | ** ** | ** **                   | ** ** | ** **                                                      | ** ** |
|                                                                                                                                       | ** ** | ** **                   | ** ** | ** **                                                      | ** ** |
| Short-term borrowings                                                                                                                      |       | $                            | 15,500,000 |                                                            | $          | 8,000,000 |   |
| Accounts payable                                                                                                                           |       | 4,905,479                    |       | 5,042,046                                                       |       |
| Income taxes payable                                                                                                                       |       | 61,780                       |       | 524,780                                                         |       |
| Accrued compensation                                                                                                                       |       | 804,459                      |       | 1,805,120                                                       |       |
| Other accrued liabilities                                                                                                                  |       | 3,169,707                    |       | 3,489,703                                                       |       |
| Current maturities of long-term debt                                                                                                       |       | 5,507,134                    |       | 6,305,423                                                       |       |
| Liabilities of discontinued operations                                                                                                     |       | 22,143                       |       | 30,236                                                          |       |
| TOTAL CURRENT LIABILITIES                                                                                                                  |       | 29,970,702                   |       | 25,197,308                                                      |       |
|                                                                                                                                       |       |                         |       |                                                            |       |
| LONG-TERM DEBT, less current maturities                                                                                                    |       | 14,166,698                   |       | 19,744,173                                                      |       |
|                                                                                                                                       |       |                         |       |                                                            |       |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                                                     |       | 339,610                      |       | 342,367                                                         |       |
|                                                                                                                                       |       |                         |       |                                                            |       |
| TOTAL LIABILITIES                                                                                                                          |       | 44,477,010                   |       | 45,283,848                                                      |       |
|                                                                                                                                       |       |                         |       |                                                            |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                              |       |                         |       |                                                            |       |
|                                                                                                                                       |       |                         |       |                                                            |       |
| SHAREHOLDERS’ EQUITY                                                                                                                  |       |                         |       |                                                            |       |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares outstanding                                                           |       | —                       |       | —                                                          |       |
| Common stock                                                                                                                               |       |                         |       |                                                            |       |
| Class A - $1 par; authorized -  7,000,000 shares; issued - 3,956,431 at March 31, 2008 and  December 31, 2007, respectively |       | 3,956,431                    |       | 3,956,431                                                       |       |
| Class B - $1 par; authorized -  2,000,000 shares; no shares issued                                                                    |       | —                       |       | —                                                          |       |
| Additional paid-in capital                                                                                                                 |       | 10,213,196                   |       | 10,166,662                                                      |       |
| Retained earnings                                                                                                                          |       | 27,118,995                   |       | 26,756,514                                                      |       |
| Treasury stock, at cost – 318,969 shares at  March 31, 2008 and December 31, 2007                                           |       | (2,893,788                   | )          | (2,893,788                                                      | )          |
|                                                                                                                                       |       |                         |       |                                                            |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                            |       | 38,394,834                   |       | 37,985,819                                                      |       |
|                                                                                                                                       |       |                         |       |                                                            |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                            |       | $                            | 82,871,844 |                                                            | $          | 83,269,667 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

2

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

**CONSOLIDATED CONDENSED STATEMENTS OFEARNINGS (unaudited)**

** **
| ** **                                                                                                                                       | ** ** | **Three months   ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Net revenues                                                                                                                                     |       | $                                                      | 24,324,755 |   | $ | 24,958,887 |   |
| Cost of sales                                                                                                                                    |       | 16,652,272                                             |       | 17,211,284 |   |
| Gross profit                                                                                                                                     |       | 7,672,483                                              |       | 7,747,603 |   |
| Selling, general and administrative  expenses                                                                                                    |       | 6,510,346                                              |       | 6,853,189 |   |
| Operating income                                                                                                                                 |       | 1,162,137                                              |       | 894,414 |   |
| Interest expense – net                                                                                                                      |       | 558,364                                                |       | 651,658 |   |
| Earnings from continuing operations before  income taxes                                                                                         |       | 603,773                                                |       | 242,756 |   |
| Income taxes                                                                                                                                     |       | 254,000                                                |       | 96,000 |   |
| Earnings from continuing operations                                                                                                              |       | 349,773                                                |       | 146,756 |   |
|                                                                                                                                             |       |                                                   |       |   |   |
| Earnings (loss) from operation of  discontinued operations (net of tax benefit (expense) of $9,000 for 2008 and  $14,000 for 2007, respectively) |       | 12,708                                                 |       | (20,967 | ) |
|                                                                                                                                             |       |                                                   |       |   |   |
| Net earnings                                                                                                                                     |       | $                                                      | 362,481    |   | $ | 125,789 |   |
| Basic earnings per common share:                                                                                                                 |       |                                                   |       |   |   |
| Continuing operations                                                                                                                            |       | $                                                      | 0.10       |   | $ | 0.04 |   |
| Discontinued operations                                                                                                                          |       | —                                                 |       | — |   |
|                                                                                                                                             |       | $                                                      | 0.10       |   | $ | 0.04 |   |
|                                                                                                                                             |       |                                                   |       |   |   |
| Diluted earnings per common share:                                                                                                               |       |                                                   |       |   |   |
| Continuing operations                                                                                                                            |       | $                                                      | 0.10       |   | $ | 0.04 |   |
| Discontinued operations                                                                                                                          |       | —                                                 |       | (0.01 | ) |
|                                                                                                                                             |       | $                                                      | 0.10       |   | $ | 0.03 |   |
|                                                                                                                                             |       |                                                   |       |   |   |
| Weighted average common shares outstanding:                                                                                                      |       |                                                   |       |   |   |
| Basic                                                                                                                                            |       | 3,637,462                                              |       | 3,581,522 |   |
| Diluted                                                                                                                                          |       | 3,675,235                                              |       | 3,802,179 |   |

 

See accompanying notesto consolidated condensed financial statements (unaudited).

 

3

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

 

**CONSOLIDATED CONDENSED STATEMENT OFSHAREHOLDERS’ EQUITY (unaudited)**

 
| ** **                                  | ** ** | ** ** | ** **     | **Class A Common  Stock, $1 Par** | ** **    | **Additional  paid-in** | ** ** | **Retained**  | ** ** | **Treasury stock** | ** **     |
|---------------------------------------------|------------|------------|----------------|-------------------------------------------------------|---------------|-------------------------|------------|---------------|------------|-------------------------|----------------|
| ** **                                  | ** ** | **Total**  | ** **     | **Shares**                                            | ** **    | **Amount**              | ** ** | **capital**   | ** ** | **earnings**            | ** **     | **Shares** | ** ** | **Amount** | ** ** |
| ** **                                  | ** ** | ** ** | ** **     | ** **                                            | ** **    | ** **              | ** ** | ** **    | ** ** | ** **              | ** **     | ** ** | ** ** | ** ** | ** ** |
| **Balance, January 1, 2008** | ** ** | **$**      | **37,985,819** | ** **                                            | **3,956,431** | ** **              | **$**      | **3,956,431** | ** ** | **$**                   | **10,166,662** | ** ** | **$** | **26,756,514** | ** ** | **(318,969** | **)** | **$** | **(2,893,788** | **)** |
| ** **                                  | ** ** | ** ** | ** **     | ** **                                            | ** **    | ** **              | ** ** | ** **    | ** ** | ** **              | ** **     | ** ** | ** ** | ** ** | ** ** |
| Net earnings                           |       | 362,481    |           |                                                  |          |                    |       |          |       | 362,481                 |           |   |   |   |   |
| Stock-based  compensation                   |       | 46,534     |           | —                                                |          | —                  |       | 46,534        |       | —                  |           | — |   | — |   |
|                                        |       |       |           |                                                  |          |                    |       |          |       |                    |           |   |   |   |   |
| **Balance,  March 31, 2008**           | ** ** | **$**      | **38,394,834** | ** **                                            | **3,956,431** | ** **              | **$**      | **3,956,431** | ** ** | **$**                   | **10,213,196** | ** ** | **$** | **27,118,995** | ** ** | **(318,969** | **)** | **$** | **(2,893,788** | **)** |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

4

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

 

**CONSOLIDATED CONDENSED STATEMENTS OFCASH FLOWS (unaudited)**

 
| ** **                                                                                                    | ** ** | **Three months  ended March 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| Cash Flows from Operating Activities of  Continuing Operations:                                               |       |                                            |       |   |   |
| Net earnings                                                                                                  |       | $                                               | 362,481    |   | $ | 125,789 |   |
| (Earnings) loss from discontinued  operations – net of taxes                                             |       | (12,708                                         | )          | 20,967 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities of continuing operations: |       |                                            |       |   |   |
| Non-cash charges:                                                                                             |       |                                            |       |   |   |
| Depreciation and amortization                                                                                 |       | 427,402                                         |       | 313,406 |   |
| Amortization of other intangible assets                                                                       |       | 229,116                                         |       | 365,370 |   |
| Amortization of other assets                                                                                  |       | 4,893                                           |       | 2,631 |   |
| Provision for losses on accounts receivable  - net                                                            |       | (113,194                                        | )          | 37,767 |   |
| Stock-based compensation                                                                                      |       | 46,534                                          |       | 5,780 |   |
| Deferred income taxes - net                                                                                   |       | 186,000                                         |       | — |   |
| Changes in operating assets and  liabilities, net of assets and liabilities acquired:                         |       |                                            |       |   |   |
| Accounts receivable                                                                                           |       | (1,895,086                                      | )          | 64,600 |   |
| Notes and other receivables                                                                                   |       | 234,299                                         |       | 276,206 |   |
| Inventories                                                                                                   |       | 1,578,760                                       |       | (553,910 | ) |
| Income tax refund receivable                                                                                  |       | 35,601                                          |       | — |   |
| Prepaid expenses and other current assets                                                                     |       | (290,815                                        | )          | (138,107 | ) |
| Other assets                                                                                                  |       | (54,345                                         | )          | (41,420 | ) |
| Accounts payable                                                                                              |       | (136,567                                        | )          | (1,698,578 | ) |
| Accruals and other                                                                                            |       | (1,320,657                                      | )          | (1,917,858 | ) |
| Income taxes payable                                                                                          |       | (463,000                                        | )          | — |   |
| Total adjustments                                                                                             |       | (1,543,767                                      | )          | (3,263,146 | ) |
| Net cash provided by operating activities  of continuing operations                                           |       | $                                               | (1,181,286 | ) | $ | (3,137,357 | ) |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

5

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| ** **                                                                             | ** ** | **Three months   ended March 31** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                              | ** ** | **2007** | ** ** |
| Cash Flows from Investing Activities of  Continuing Operations:                        |       |                                                  |       |   |   |
| Capital expenditures                                                                   |       | $                                                     | (189,219   | ) | $ | (207,097 | ) |
| Purchase of certain assets, net of certain  liabilities, of Hy-Tech Machine, Inc. |       | —                                                |       | (20,627,686 | ) |
| Net cash used in investing activities of  continuing Operations                        |       | (189,219                                              | )          | (20,834,783 | ) |
|                                                                                   |       |                                                  |       |   |   |
| Cash Flows from Financing Activities of  Continuing Operations:                        |       |                                                  |       |   |   |
| Proceeds from short-term borrowings                                                    |       | 7,500,000                                             |       | 6,500,000 |   |
| Repayments of short-term borrowings                                                    |       | —                                                |       | (1,000,000 | ) |
| Proceeds from term loan                                                                |       | —                                                |       | 19,000,000 |   |
| Repayments of term loan                                                                |       | (6,310,000                                            | )          | (950,000 | ) |
| Principal payments on long-term debt                                                   |       | (65,764                                               | )          | (63,426 | ) |
| Proceeds from exercise of stock options                                                |       | —                                                |       | 49,350 |   |
| Net cash provided by financing activities  of continuing operations                    |       | 1,124,236                                             |       | 23,535,924 |   |
|                                                                                   |       |                                                  |       |   |   |
| Cash Flows from Discontinued Operations:                                               |       |                                                  |       |   |   |
| Net cash provided by (used in) operating  activities                                   |       | 1,333                                                 |       | (69,589 | ) |
| Net cash used in financing activities                                                  |       | —                                                |       | (30,878 | ) |
| Net cash provided by (used in) discontinued  operations                                |       | 1,333                                                 |       | (100,467 | ) |
|                                                                                   |       |                                                  |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                              |       | (244,936                                              | )          | (536,683 | ) |
| Cash and cash equivalents at beginning of  period                                      |       | 1,334,167                                             |       | 1,339,882 |   |
| Cash and cash equivalents at end of period                                             |       | $                                                     | 1,089,231  |   | $ | 803,199 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

6

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**Supplemental disclosures of cashflow information:**

 
| ** **     | ** ** | **Three months ended March 31,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Cash paid for: |       |                                                 |       |   |   |
| Interest       |       | $                                                    | 596,000    |   | $ | 454,000 |   |
| Income taxes   |       | $                                                    | 565,000    |   | $ | 132,000 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

7

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** **

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

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

 

**NOTE 1 -SUMMARY OF ACCOUNTING POLICIES**

 

**Principles ofConsolidation**

 

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

 

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

 

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

 

**Tools**

 

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

 

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

 

**Hardware**

 

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

 

Nationwide is an importer andmanufacturer of door, window and fencing hardware. Woodmark is an importer ofbuilders’ hardware, including staircase components and kitchen and bathhardware and accessories. Pacific Stairmanufactures premium stair rail products and distributes Woodmark’sstaircase components to the building industry, primarily in southern Californiaand the southwestern region of the United States.

 

The Company’s wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), wasengaged in the manufacture and sale of baseboard heating products and theimportation and sale of radiant heating systems until it exited that businessin October 2005 through the sale of substantially all of its non-realestate assets. Embassy sold its real estate assets in June 2007. TheCompany’s wholly-owned subsidiary, Green 

 

8

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Manufacturing, Inc. (“Green”), was primarilyengaged in the manufacture, development and sale of heavy-duty welded customdesigned hydraulic cylinders, a line of access equipment for the petro-chemicalindustry and a line of post hole digging equipment for the agriculturalindustry until it exited those businesses between December 2004 and July 2005.The assets and liabilities and results of operations of Embassy and Green havebeen segregated and reported separately as discontinued operations in theConsolidated Condensed Financial Statements. Note 13 to the Notes toConsolidated Condensed Financial Statements presents financial information forthe segments of the Company’s business.

 

**Basis of Financial StatementPresentation**

 

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

 

The results ofoperations for Embassy and Green have been segregated from continuingoperations and are reflected on the consolidated condensed statements ofearnings as discontinued operations.

 

The unaudited consolidatedcondensed balance sheet information as of December 31, 2007 was derivedfrom the audited financial statements included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2007. The interimfinancial statements contained herein should be read in conjunction with thatReport.

 

In preparing its unauditedconsolidated condensed financial statements in conformity with accountingprinciples generally accepted in the United States of America, the Company isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. On an ongoing basis, theCompany evaluates estimates, including those related to bad debts, inventoryreserves, goodwill and intangible assets. The Company bases its estimates onhistorical data and experience, when available, and on various otherassumptions that are believed to be reasonable under the circumstances, thecombined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results could differfrom those estimates.

 

**NOTE 2 - EARNINGS PER SHARE**

 

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

 

Diluted earnings per commonshare is computed using the treasury stock method. Under this method, theaggregate number of shares of common stock outstanding reflects the assumed useof proceeds from the hypothetical exercise of any outstanding options orwarrants to purchase shares of the Company’s Class A Common Stock. Theaverage market value for the period is used as the assumed purchase price.

 

9

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

 
| ** **                                                                                                         | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Numerator:                                                                                                         |       |                                             |       |   |   |
| Numerator for basic and diluted earnings per common share:                                                         |       |                                             |       |   |   |
| Earnings from continuing operations                                                                                |       | $                                                | 350,000    |   | $ | 147,000 |   |
| Discontinued operations, net of taxes                                                                              |       | 12,000                                           |       | (21,000 | ) |
| Net earnings                                                                                                       |       | $                                                | 362,000    |   | $ | 126,000 |   |
| Denominator:                                                                                                       |       |                                             |       |   |   |
| Denominator for basic earnings per share – weighted average common  shares outstanding                        |       | 3,637,462                                        |       | 3,581,522 |   |
| Effect of dilutive securities:                                                                                     |       |                                             |       |   |   |
| Stock options                                                                                                      |       | 37,773                                           |       | 220,657 |   |
| Denominator for diluted earnings per share – adjusted weighted  average common shares and assumed conversions |       | 3,675,235                                        |       | 3,802,179 |   |

 

At March 31, 2008 and 2007and during the three-month period ended March 31, 2008 and 2007, therewere outstanding stock options whose exercise prices were higher than theaverage market values of the underlying Class A Common Stock for theperiod. These options are antidilutive and are excluded from the computation ofearnings per share. The weighted average antidilutive stock options outstandingwere as follows:

 
| ** **                                              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Weighted average antidilutive stock options outstanding |       | 271,500                                          |       | 29,500 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

On January 1, 2006, theCompany adopted the provisions of FASB Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Share-Based Payment” (“Statement 123(R)”),which revises FASB SFAS No. 123, “Accounting for Stock-Based Compensation”,and supersedes APB Opinion 25, “Accounting for Stock Issued to Employees”.Statement 123(R) requires the Company to recognize expense related to thefair value of our stock-based compensation awards, including employee stockoptions.

 

The Company did not grant any stock options orwarrants during the three-month periods ended March 31, 2008 and 2007.

 

Asa result of adopting Statement 123(R), the Company recorded stock-basedcompensation expense for the three-month periods ended March 31, 2008 and2007 of approximately $47,000 and $6,000, respectively. Compensation expense isrecognized in the selling, general and administrative expenses line item of theCompany’s statements of earnings on a straight-line basis over the vestingperiods. There are no capitalized stock-based compensation costs at either March 31,2008 or 2007. The 

 

10

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adoptionof Statement 123(R) had no material impact on our basic and dilutedearnings per common share for the three-month March 31, 2007.  However, the adoption of Statement 123(R) affectedthe Company’s basic and diluted earnings per common share for the three-monthperiod ended March 31, 2008, by reductions to diluted earnings per share of$47,000.  The Company recognizes compensation cost overthe requisite service period. However, the exercisability of the respectivenon-vested options, which are at pre-determined dates on a calendar year, donot necessarily correspond to the period(s) in which straight-lineamortization of compensation cost is recorded. As of March 31, 2008, the Company had approximately $157,000 oftotal unrecognized compensation cost related to non-vested awards granted underour share-based plans, which we expect to recognize over a weighted-averageperiod of 2.3 years.

 

The Company did not receive anycash during the three-month period ended March 31, 2008 from an exerciseof stock options, but did receive cash of approximately $49,000 from optionsexercised during the three-month period ended March 31, 2007. The impactof the cash receipts is included in financing activities in the accompanyingconsolidated condensed statements of cash flows. Statement 123(R) requiresthat cash flows from tax benefits attributable to tax deductions in excess ofthe compensation cost recognized for those options (excess tax benefits) beclassified as financing cash flows.

 

Stock Option Plan

 

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

 

The following is a summary ofthe changes in outstanding options for the three months ended March 31,2008:

 
| ** **                        | ** ** | **Option Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, January 1, 2008 |       | 533,436                |       | $                                      | 8.58       |                                                                 | 4.5        |                            |       |   |
| Granted                           |       |                   |       |                                   |       |                                                                 |       |                            |       |
| Exercised                         |       |                   |       |                                   |       |                                                                 |       |                            |       |
| Forfeited                         |       |                   |       |                                   |       |                                                                 |       |                            |       |
| Expired                           |       | (152,500               | )          | 7.88                                   |       |                                                                 |       |                            |       |
| Outstanding, March 31, 2008  |       | 380,936                |       | $                                      | 8.86       |                                                                 | 6.0        |                            | —     |   |
|                              |       |                   |       |                                   |       |                                                                 |       |                            |       |
| Vested, March 31, 2008       |       | 323,530                |       | $                                      | 8.53       |                                                                 | 5.7        |                            | —     |   |

 

11

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Thefollowing is a summary of changes in non-vested shares for the three monthsended March 31, 2008:

 
| ** **                              | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-Date  Fair Value** | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|
| Non-vested shares, January 1, 2008 |       | 71,827                 |       | $                                                          | 5.20       |   |
| Granted                                 |       | —                 |       |                                                       |       |
| Vested                                  |       | 14,421                 |       | 3.43                                                       |       |
| Forfeited                               |       | —                 |       |                                                       |       |
| Non-vested shares, March 31, 2008  |       | 57,406                 |       | $                                                          | 5.65       |   |

 

The number of shares of Class Acommon stock reserved for stock options available for issuance under theCurrent Plan as of March 31, 2008 was 590,900. Of the options outstandingat March 31, 2008, 366,936 were issued under the Current Plan and 14,000were issued under the Prior Plan.

 

**NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS**

 

**New Accounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).SFAS 157 provides a new single authoritative definition of fair value andprovides enhanced guidance for measuring the fair value of assets andliabilities and requires additional disclosures related to the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 is effective as of January 1, 2008. The adoption of thisstatement did not have a material effect on our financial position or resultsof operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Optionfor Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115’’,(‘‘SFAS 159’’). This Statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 is effective as ofthe beginning of fiscal 2008. The adoption of thisstatement did not have a material effect on our financial position or resultsof operations.

 

InDecember 2007, the SEC staff issued Staff Accounting Bulletin (SAB) 110,Share Based Payment, which amends SAB 107, Share Based Payment, to permitpublic companies, under certain circumstances, to use the simplified method inSAB 107 for employee option grants after December 31, 2007. Use of thesimplified method after December 2007 is permitted only for companieswhose historical data about their employees’ exercise behavior does not providea reasonable basis for estimating the expected term of the options. Wecurrently use the simplified method to estimate the expected term for employeeoption grants as adequate historical experience is not available to provide areasonable estimate. SAB 110 is effective for employee options granted after December 31,2007. We adopted SAB 110 effective January 1, 2008 and continue applyingthe simplified method until enough historical experience is readily availableto provide a reasonable estimate of the expected term for employee optiongrants.

 

InDecember 2007, the FASB issued Statement 141 (revised 2007), BusinessCombinations (Statement 141R) to change how an entity accounts for theacquisition of a business. When effective, Statement 141R will replace existingStatement 141 in its entirety. Statement 141R carries forward the existingrequirements to account for all business combinations using the acquisitionmethod (formerly called the purchase method). In general, Statement 141R willrequire acquisition-date fair value measurement of identifiable assetsacquired, liabilities assumed, and non-controlling interests in the acquiree.Statement 141R will eliminate the current cost based purchase method underStatement 141. The new measurement requirements will result in the recognitionof the full amount of acquisition-date 

 

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goodwill,which includes amounts attributable to non-controlling interests. The acquirerwill recognize in income any gain or loss on the remeasurement toacquisition-date fair value of consideration transferred or of previouslyacquired equity interests in the acquiree. Neither the direct costs incurred toeffect a business combination nor the costs the acquirer expects to incur undera plan to restructure an acquired business will be included as part of thebusiness combination accounting. As a result, those costs will be charged toexpense when incurred, except for debt or equity issuance costs, which will beaccounted for in accordance with other generally accepted accountingprinciples. Statement 141R will also change the accounting for contingentconsideration, in process research and development, contingencies, andrestructuring costs. In addition, changes in deferred tax asset valuationallowances and acquired income tax uncertainties in a business combination thatoccur after the measurement period will impact income taxes under Statement141R. Statement 141R is effective for fiscal years and interim periods withinthose fiscal years beginning on or after December 15, 2008. Early adoptionis prohibited. We intend to adopt Statement 141R effective January 1, 2009and apply its provisions prospectively. We are evaluating the impact that theadoption of Statement 141R will have on our financial statements.

 

In December 2007,the FASB issued Statement 160, Non-controlling Interests in ConsolidatedFinancial Statements: an amendment of ARB No. 51. The new Statementchanges the accounting for, and the financial statement presentation of,non-controlling equity interests in a consolidated subsidiary. Statement 160replaces the existing minority interest provisions of Accounting ResearchBulletin (ARB) 51, Consolidated Financial Statements, by defining a newterm—non-controlling interests—to replace what were previously called minorityinterests. The new standard establishes non-controlling interests as a componentof the equity of a consolidated entity. The underlying principle of the newstandard is that both the controlling interest and the non-controllinginterests are part of the equity of a single economic entity: the consolidatedreporting entity. Classifying non-controlling interests as a component ofconsolidated equity is a change from the current practice of treating minorityinterests as a mezzanine item between liabilities and equity or as a liability.The change affects both the accounting and financial reporting fornon-controlling interests in a consolidated subsidiary. Statement 160 includesreporting requirements intended to clearly identify and differentiate theinterests of the parent and the interests of the non-controlling owners. Thereporting requirements are required to be applied retrospectively. Statement160 is effective for fiscal years and interim periods within those fiscal yearsbeginning on or after December 15, 2008. Early adoption is prohibited. Weintend to adopt Statement 160 effective January 1, 2009 and apply itsprovisions prospectively. We will also present comparative financial statementsthat reflect the retrospective application of the disclosure and presentationprovisions when it applies the requirements of Statement 160. We are evaluatingthe impact that the adoption of Statement 160 will have on its financialstatements.

 

**NOTE 5****–****ACQUISITION**

 

Hy-TechMachine, Inc.

 

OnFebruary 14, 2007, pursuant to an Asset Purchase Agreement (the “Hy-TechAPA”) effective as of February 12, 2007, Hy-Tech, acquired substantiallyall of the assets (the “Hy-Tech Purchased Property”) of Hy-Tech Machine, Inc.,  and Quality Gear & Machine, Inc.,(collectively, the “Hy-Tech Sellers”). The purchase price consisted of$16,900,000 in cash, subject to adjustments, plus the assumption of certainpayables and liabilities and the obligation to make certain contingent paymentsbased on factors described in the Hy-Tech APA. The purchase price wasnegotiated on the basis of the Hy-Tech Sellers’ historical financialperformance. The Hy-Tech Purchased Property was used by the Hy-Tech Sellers inthe business of, among other things, manufacturing and selling pneumatic toolsand other tool products.

 

Inconnection with this acquisition, Hy-Tech entered into an Agreement of Salewith HTM Associates, a Pennsylvania general partnership comprised of certainshareholders of the Hy-Tech Sellers (“HTM”), pursuant to which Hy-Techpurchased certain real property located in Cranberry Township, Pennsylvaniafrom HTM for $2,200,000 in cash.

 

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TheCompany also agreed to make additional payments (“Contingent Consideration”) tothe Hy-Tech Sellers. The amount of Contingent Consideration is to be based on apercentage of the average increase in earnings before interest, taxes,depreciation and amortization (“EBITDA”) over a two-year period from the dateof acquisition, over a base year EBITDA of $4,473,000. In addition, the Companyhas agreed to make a further additional payment (“Additional ContingentConsideration”), subject to certain conditions related to an exclusive supplyagreement with a major customer and, to a certain extent and subject to certainprovisions, the achievement of Contingent Consideration. This Additional ContingentConsideration may not exceed $1,900,000. Any such additional payments forContingent Consideration or Additional Contingent Consideration, if any, wouldbe payable on or about ninety days subsequent to the second anniversary of theacquisition date and will be treated by the Company as additions to goodwill.

 

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

 
| ** **                         | ** ** | **Three months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31,  2007**         | ** ** |
| Net revenues                       |       | $                                | 27,137,000 |   |
|                               |       |                             |       |
| Net earnings                       |       | $                                | 409,000    |   |
|                               |       |                             |       |   |
| Earnings per share of common stock |       |                             |       |
| Basic                              |       | $                                | .11        |   |
| Diluted                            |       | $                                | .11        |   |
|                                    |            |                                  |            |  |  |

 

**NOTE 6 –DISCONTINUED OPERATIONS**

 

*EmbassyIndustries, Inc.*

 

Pursuantto an Asset Purchase Agreement (the “Embassy APA”), dated as of October 11,2005, among P&F, Embassy, Mestek, Inc. (“Mestek”) and EmbassyManufacturing, Inc., a wholly owned subsidiary of Mestek (“EMI”), Embassysold substantially all of its operating assets to EMI. Certain assets wereretained by Embassy, including, but not limited to, cash and title to any realproperty owned by Embassy at the consummation of the sale to EMI. Embassy haseffectively ceased all operating activities.

 

OnJuly 24, 2006, Embassy received a letter (the “Purchaser Letter”) fromcounsel to J. D’Addario & Company, Inc., a New York corporation (“Purchaser”),purporting to terminate that certain contract entered into by Embassy andPurchaser on January 13, 2006 (the “Agreement”, and as amended, the “Contractof Sale”). Pursuant to the Contract of Sale, Embassy agreed to sell itsFarmingdale, New York premises (the “Farmingdale Premises”) to Purchaser for apurchase price of $6,403,000.

 

ThePurchaser Letter purports to terminate the Contract of Sale based uponPurchaser’s assertion that Embassy had not satisfied certain requirements anddemands that the escrow agent return the Embassy Industries, Inc.down-payment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

 

Embassyinformed Purchaser that its purported termination of the Contract of Sale wasin default of its obligation to consummate the purchase of the FarmingdalePremises under the terms of the Contract of Sale. On August 2, 2006,Purchaser instituted an action against Embassy in the Supreme Court of the 

 

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Stateof New York, County of Suffolk, for breach of contract and return ofdown-payment, seeking $650,000, together with costs of title and survey andinterest thereon, and the cost of the action. The down-payment remains inescrow pending resolution of this matter. Embassy believes the action iswithout merit and intends to vigorously defend it.

 

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

 

*Green*

 

Greenwas primarily engaged in the manufacture, development and sale of heavy-dutywelded custom designed hydraulic cylinders sold for use as integratedcomponents on a variety of equipment and machinery manufactured by others.Green also manufactured a line of access equipment for the petro chemical andbulk storage industries. This product line consisted of bridges, platforms,walkways and stairways, constructed of steel or aluminum and generallyinstalled outdoors. In addition, Green marketed a small line of diggers usedprimarily as attachments to small tractors for light farm work. This productline was marketed through farm equipment dealers and wholesalers. We sold theprincipal assets of Green between December 2004 and July 2005 inthree transactions pursuant to three separate asset purchase agreements withnon-affiliated third parties. During 2008 and 2007, Green received commissionincome from one of the non-affiliated third parties. These amounts are includedin the earnings from discontinued operations.

 

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

 
| ** **                                                       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Assets held for sale and assets of discontinued operations:      |       |                         |       |                            |       |
| Current:                                                         |       |                         |       |                            |       |
| Prepaid expenses                                                 |       | $                            | 65,000     |                            | $          | 56,000 |   |
| Subtotal                                                         |       | 65,000                       |       | 56,000                          |       |
| Long-term:                                                       |       |                         |       |                            |       |
| Other receivable                                                 |       | 1,000                        |       | 9,000                           |       |
| Total assets held for sale and assets of discontinued operations |       | $                            | 66,000     |                            | $          | 65,000 |   |
|                                                             |       |                         |       |                            |       |
| Liabilities of discontinued operations:                          |       |                         |       |                            |       |
| Current:                                                         |       |                         |       |                            |       |
| Accounts payable and accrued expenses                            |       | $                            | 22,000     |                            | $          | 30,000 |   |
| Subtotal                                                         |       | 22,000                       |       | 30,000                          |       |
| Long-term:                                                       |       |                         |       |                            |       |
| Pension obligation                                               |       | 340,000                      |       | 342,000                         |       |
| Total liabilities of discontinued operations                     |       | $                            | 362,000    |                            | $          | 372,000 |   |

 

15

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Resultsof operations for Embassy and Green and have been segregated from continuingoperations and reflected as discontinued operations approximately as follows:

 
| ** **                                                               | ** ** | **Three Months Ended March  31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Earnings (loss) from operation of discontinued operations, before  taxes |       | $                                                | 21,000     |   | $ | (35,000 | ) |
| Income tax (expense) benefit                                             |       | (9,000                                           | )          | 14,000 |   |
|                                                                     |       |                                             |       |   |   |
| Earnings from discontinued operations                                    |       | $                                                | 12,000     |   | $ | (21,000 | ) |

 

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

 

Accounts receivable -netconsists of:

 
| ** **                            | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Trade accounts receivable             |       | $                            | 15,397,000 |                            | $          | 13,502,000 |   |
| Less: Allowance for doubtful accounts |       | 506,000                      |       | 619,000                         |       |
|                                  |       | $                            | 14,891,000 |                            | $          | 12,883,000 |   |

 

**NOTE 8 –INVENTORIES**

 

Inventories - net consist of:

 
| ** **                                       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw material                                     |       | $                            | 2,422,000  |                            | $          | 2,525,000 |   |
| Work in process                                  |       | 1,516,000                    |       | 2,156,000                       |       |
| Finished goods                                   |       | 28,357,000                   |       | 29,015,000                      |       |
|                                             |       | 32,295,000                   |       | 33,696,000                      |       |
| Reserve for obsolete and slow-moving inventories |       | (2,138,000                   | )          | (1,960,000                      | )          |
|                                             |       | $                            | 30,157,000 |                            | $          | 31,736,000 |   |

 

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

 

16

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

 

During the three-month period ended March 31,2008 there was no change to the carrying value of goodwill.

 

Other intangible assets wereas follows:

 
| ** **                            | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Cost**                     | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible assets:              |       |                         |       |                            |       |   |   |   |   |
| Customer relationships and backlog    |       | $                            | 14,130,000 |                            | $          | 4,337,000 |   | $ | 14,130,000 |   | $ | 4,117,000 |   |
| Vendor relationship                   |       |                         |       |                            |       | — |   | — |   |
| Non-compete and Employment agreements |       | 810,000                      |       | 783,000                         |       | 810,000 |   | 780,000 |   |
| Trademark/trade name                  |       | 699,000                      |       | —                          |       | 699,000 |   | — |   |
| Engineering drawings                  |       | 290,000                      |       | 16,000                          |       | 290,000 |   | 12,000 |   |
| Licensing                             |       | 105,000                      |       | 24,000                          |       | 105,000 |   | 21,000 |   |
| Total                                 |       | $                            | 16,034,000 |                            | $          | 5,160,000 |   | $ | 16,034,000 |   | $ | 4,930,000 |   |

 

Amortization expense for intangible assets subjectto amortization was as follows:

 
| ** ** | ** ** | **Three months ended March 31,** | ** **    |
|------------|------------|------------------------------------------------------|---------------|
| ** ** | ** ** | **2008**                                             | ** **    | **2007** | ** ** |
|       |       | $                                                    |  229,000 |   | $ |  365,000 |   |
|            |            |                                                      |               |  |  |  |  |

 

Amortization expense for each of the twelve-monthperiods ending March 31, 2009 through the twelve-month period ending March 31,2013, is estimated to be as follows: 2009 -$916,000; 2010 - $917,000; 2011 - $914,000; 2012 - $906,000 and 2013 - $886,000.The weighted average amortization period for intangible assets was 12.9 yearsat March 31, 2008 and 13.1 years at December 31, 2007.

 

**NOTE 10 - WARRANTY LIABILITY**

 

TheCompany offers to its customers warranties against product defects for periodsprimarily ranging from one to three years, with certain faucet hardware havinga limited lifetime warranty, depending on the specific product and terms of thecustomer purchase agreement. The Company’s typical warranties require it torepair or replace the defective products during the warranty period at no costto the customer. At the time the product revenue is recognized, the Companyrecords a liability for estimated costs under its warranties, which costs areestimated based on historical experience. The Company periodically assesses theadequacy of its recorded warranty liability and adjusts the amounts asnecessary. While the Company believes that its estimated liability for productwarranties is adequate, the estimated liability for the product warrantiescould differ materially from future actual warranty costs.

 

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

 
| ** **                                                         | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Balance, beginning of period                                       |       | $                                                    | 552,000    |   | $ | 368,000 |   |
| Warranties issued and changes in estimated pre-existing warranties |       | 268,000                                              |       | 273,000 |   |
| Actual warranty costs incurred                                     |       | (459,000                                             | )          | (264,000 | ) |
| Balance, end of period                                             |       | $                                                    | 361,000    |   | $ | 377,000 |   |

 

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**NOTE 11 – BANKDEBT**

 

The Company entered into a credit agreement, asamended, with two banks in 2004.  This agreement includes a revolving credit loanfacility, which provides a total of $18,000,000 for direct borrowings, withvarious sublimits for letters of credit, bankers’ acceptances and equipmentloans. There are no commitment fees for any unused portion of thiscredit facility. The credit agreement, asamended, expires in June 2008 and is subject to annual review by thelending banks.  Direct borrowings underthe revolving credit loan facility are secured by the Company’s accountsreceivable, inventory and equipment and are cross-guaranteed by each of theCompany’s subsidiaries. These borrowings bear interest at either LIBOR (LondonInterBank Offered Rate) plus the currentlyapplicable loan margin, or the prime interest rate. At both March 31, 2008and December 31, 2007, the applicable loan margin added to LIBOR was1.75%.  At March 31, 2008 andDecember 31, 2007, the balances outstanding on the revolving credit loanfacility were $15,500,000 and $8,000,000, respectively.

 

The Company’s credit agreement also includesa term loan facility, which provided a maximum commitment of $34,000,000 tofinance acquisitions subject to the approval of the lending banks. Inconnection with the acquisition of Hy-Tech in February 2007, the Companyexecuted and delivered an amendment to the credit agreement, which, among otherthings, added Continental and Hy-Tech as additional co-borrowers and providedfor new term loans in amounts not to exceed $19,000,000. There are nocommitment fees for any unused portion of this credit facility. Borrowingsunder the term loan facility are secured by the Company’s accounts receivable,inventory and equipment and are cross-guaranteed by each of the Company’ssubsidiaries. These borrowings bear interest at either LIBOR plus the currentlyapplicable loan margin, or the prime interest rate. At both March 31, 2008and December 31, 2007, the applicable loan margin added to LIBOR was2.00%.

 

 In2004, the Company borrowed $29,000,000 against the term loan facility tofinance the Woodmark acquisition transaction, and there was $8,850,000 and$9,800,000 outstanding against this term loan at March 31, 2008 and December 31,2007, respectively. In 2007, the Company borrowed $19,000,000against the term loan facility to finance the Hy-Tech acquisition transaction.During 2007, the Company paid down $5,000,000 against the Hy-Tech term loan. InJanuary 2008, the Company paid down an additional $5,000,000 against thisterm loan, through additional borrowings on the revolving credit loan facility. There was $8,640,000 and$14,000,000 outstanding against this term loan at March 31, 2008 and December 31,2007, respectively. The principal amounts on these term loans are payable inquarterly installments of $950,000 and $360,000, respectively, over the term ofthe respective loans

 

The credit agreementalso includes a foreign exchange line, which provides for the availability ofup 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. The total amount of foreign currency forward contractsoutstanding under the foreign exchange line at March 31, 2008, based onthat day’s closing spot rate, was approximately $5,000.

 

Under the terms of thecredit agreement, the Company is required to adhere to certain financialcovenants. At March 31, 2008, the Company was not in compliance with certainfinancial covenants.  Subsequent to March 31,2008, the Company and the banks executed Amendment No.11 and Waiver to CreditAgreement, pursuant to which, among other things, the banks waived compliancewith such financial covenants at March 31, 2008, and amended certainfinancial covenants for future periods.Accordingly the Company has not reclassified to current liabilities thelong-term portions of its bank debts. However, there can be no assurances that the Company will be ableto comply with such covenants in the future.

 

**NOTE 12—RELATED PARTYTRANSACTIONS**

 

Thepresident of one of our subsidiaries is part owner of one of the subsidiary’svendors. During the three month periods ended March 31, 2008 and 2007, wepurchased approximately $325,000 and $17,000 of product from thisvendor. All transactions are conducted at arms length.

 

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**NOTE 13 -BUSINESS SEGMENTS**

 

P&F operates in twoprimary lines of business, or segments: (i) tools and other products (“Tools”)and (ii) hardware and accessories (“Hardware”).. For reporting purposes,Florida Pneumatic and Hy-Tech are combined in the Tools segment, whileWoodmark, Pacific Stair and Nationwide are combined in the Hardware segment.Results for Hy-Tech have been included since its acquisition date. The Company evaluates segment performance basedprimarily on segment operating income. The accounting policies of each of thesegments are the same as those described in Note 1.

 

The following presents financialinformation by segment for the three-month periods ended March 31, 2008and 2007. Segment operating income excludes general corporate expenses,interest expense and income taxes. Identifiable assets are those assetsdirectly owned or utilized by the particular business segment.

 
| **Three months ended March 31, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                           |       |             |       |      |       |         |       |
| Revenues from unaffiliated customers                           |       | $                | 24,325,000 |      | $          | 13,286,000   |       | $ | 11,039,000 |   |
|                                                           |       |             |       |      |       |         |       |
| Segment operating income                                       |       | $                | 2,461,000  |      | $          | 1,640,000    |       | $ | 821,000 |   |
| General corporate expense                                      |       | (1,299,000       | )          |      |       |         |       |
| Interest expense – net                                    |       | (558,000         | )          |      |       |         |       |
| Earnings from continuing operations before income taxes        |       | $                | 604,000    |      |       |         |       |   |
|                                                           |       |             |       |      |       |         |       |
| Segment assets                                                 |       | $                | 77,006,000 |      | $          | 45,071,000   |       | $ | 31,935,000 |   |
| Corporate assets and assets of discontinued operations         |       | 5,866,000        |       |      |       |         |       |
| Total assets                                                   |       | $                | 82,872,000 |      |       |         |       |   |

 
| **Three months ended March 31, 2007** | ** ** | **Consolidated** | ** **  | **Tools** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------------|------------|------------------|-------------|-----------|------------|--------------|------------|
|                                                           |       |             |        |      |       |         |       |
| Revenues from unaffiliated customers                           |       | $                | 24,959,000  |      | $          | 11,613,000   |       | $ | 13,346,000 |   |
|                                                           |       |             |        |      |       |         |       |
| Segment operating income                                       |       | $                | 2,037,000   |      | $          | 857,000      |       | $ | 1,180,000 |   |
| General corporate expense                                      |       | (1,142,000       | )           |      |       |         |       |
| Interest expense – net                                    |       | (652,000         | )           |      |       |         |       |
| Earnings from continuing operations before income taxes        |       | $                | 243,000     |      |       |         |       |   |
|                                                           |       |             |        |      |       |         |       |
| Segment assets                                                 |       | $                | 106,814,000 |      | $          | 47,607,000   |       | $ | 59,207,000 |   |
| Corporate assets and assets of discontinued operations         |       | 4,574,000        |        |      |       |         |       |
| Total assets                                                   |       | $                | 111,388,000 |      |       |         |       |   |

 

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

 

**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 and Section 21Eof the Securities Exchange Act of 1934 and that are intended to come within thesafe harbor protection provided by those sections. Any forward-looking statements contained herein, including thoserelated to the Company’s future performance, are based upon the Company’shistorical performance and on current plans, estimates and expectations. Allforward-looking statements involve risks and uncertainties. These risks and uncertainties could cause theCompany’s actual results for the 2008 fiscal year and beyond to differmaterially from those expressed in any forward-looking statement made by or onbehalf of the Company for a number of reasons, as previously disclosed inthe Company’s Annual Report on Form 10-K for the year ended December 31,2007 in response to Item 1A. to Part I of Form 10-K. Forward-looking statements speak only as of thedate on which they are made. The Company undertakes no obligation to updatepublicly or revise any forward-looking statement, whether as a result of newinformation, future developments or otherwise.

 

**Business**

 

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

 

Further, P&F operates in two primary lines ofbusiness, or segments: (i) tools and other products (“Tools”) and (ii) hardwareand accessories (“Hardware”).

 

**Tools**

 

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

 

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

 

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**Hardware**

 

Weconduct our Hardware business through a wholly owned subsidiary, CountrywideHardware Inc. (“Countrywide”), which in turn operates through its whollyowned subsidiaries, Nationwide Industries, Inc. (“Nationwide”), WoodmarkInternational, L.P. (“Woodmark”) and Pacific Stair Products, Inc. (“PacificStair”).

 

Nationwide is an importer andmanufacturer of door, window and fencing hardware. Woodmark is an importer ofbuilders’ hardware, including staircase components and kitchen and bathhardware and accessories. Pacific Stairmanufactures premium stair rail products and distributes Woodmark’sstaircase components to the building industry, primarily in southern Californiaand the southwestern region of the United States.

 

Our wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), was engaged in themanufacture and sale of baseboard heating products and the importation and saleof radiant heating systems until it exited that business in October 2005through the sale of substantially all of its non-real estate assets. Embassysold its real estate assets in June 2007. The Company’s wholly-ownedsubsidiary, Green Manufacturing, Inc. (“Green”), was primarily engaged inthe manufacture, development and sale of heavy-duty welded custom designedhydraulic cylinders, a line of access equipment for the petro-chemical industryand a line of post hole digging equipment for the agricultural industry untilit exited those businesses between December 2004 and July 2005. Theassets and liabilities and results of operations of Embassy and Green have beensegregated and reported separately as discontinued operations in theConsolidated Condensed Financial Statements.

 

**Overview**

 

Thesignificant factors listed below, which affected our results for thethree-month period ending March 31, 2008 are discussed in further detainin Results of Operations section:

 

·                                                      *ReportingHy-Tech’s results of operations for a full three- month period in 2008 comparedto approximately one and a half months for the quarter ended March 31,2007, had a positive affect on our revenue and income from operations;*

 

·                                                      *Theon-going down-turn in the new home construction sector of the nation’s economycontinues to have an adverse affect on Countrywide’s operating performance;*

 

·                                                      *Consolidatedgross margins increased slightly by 0.5% when comparing the three-month periodsended March 31, 2008 and 2007;*

 

·                                                      *Sellingand general & administrative expenses decreased $343,000 or 5%; and*

 

·                                                      *Netinterest expense decreased $94,000.*

 

**Critical Accounting Policies and Estimates**

 

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

 

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carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates.

 

There have been no material changes in our criticalaccounting policies and estimates from those discussed in Item 7 of our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**ACQUISITION**

 

Results of operations are included in theConsolidated Condensed Financial Statements from the date of acquisition.

 

Hy-Tech Machine, Inc.

 

OnFebruary 14, 2007, pursuant to an Asset Purchase Agreement (the “Hy-TechAPA”) effective as of February 12, 2007, Hy-Tech, a Delaware corporationand a wholly-owned subsidiary of Continental, acquired substantially all of theassets (the “Hy-Tech Purchased Property”) of Hy-Tech Machine, Inc., aPennsylvania corporation, and Quality Gear & Machine, Inc., aPennsylvania corporation (collectively, the “Hy-Tech Sellers”). The purchaseprice consisted of $16,900,000 in cash, subject to adjustments, plus theassumption of certain payables and liabilities and the obligation to makecertain contingent payments based on factors described in the Hy-Tech APA. Thepurchase price was negotiated on the basis of the Hy-Tech Sellers’ historicalfinancial performance. The Hy-Tech Purchased Property was used by the Hy-TechSellers in the business of, among other things, manufacturing and sellingpneumatic tools and other tool products.

 

Inconnection with this acquisition, Hy-Tech contemporaneously entered into anAgreement of Sale with HTM Associates, a Pennsylvania general partnershipcomprised of certain shareholders of the Hy-Tech Sellers (“HTM”), pursuant towhich Hy-Tech purchased certain real property located in Cranberry Township,Pennsylvania from HTM for $2,200,000 in cash. The acquisition of the Hy-TechPurchased Property and the real property was financed through our Company’ssenior credit facility.

 

Wealso agreed to make additional payments (“Contingent Consideration”) to theSellers. The amount of Contingent Consideration is to be based on a percentageof the average increase in earnings before interest, taxes, depreciation andamortization (“EBITDA”) over a two-year period from the date of acquisition,over a base year EBITDA of $4,473,000. In addition, we agreed to make a furtheradditional payment (“Additional Contingent Consideration”), subject to certainconditions related to an exclusive supply agreement with a major customer and,to a certain extent and subject to certain provisions, the achievement ofContingent Consideration. This Additional Contingent Consideration may notexceed $1,900,000. Any such additional payments for Contingent Consideration orAdditional Contingent Consideration, if any, would be payable on or aboutninety days subsequent to the second anniversary of the acquisition date andwill be treated as additions to goodwill.

 

**DISCONTINUED OPERATIONS**

 

*Green*

 

                Green was primarily engaged inthe manufacture, development and sale of heavy-duty welded custom designedhydraulic cylinders sold for use as integrated components on a variety ofequipment and machinery manufactured by others. Green also manufactured a lineof access equipment for the petro chemical and bulk storage industries. Thisproduct line consisted of bridges, platforms, walkways and stairways,constructed of steel or aluminum and generally installed outdoors. In addition,Green marketed a small line of diggers used primarily as attachments to smalltractors for light farm work. This product line was marketed through farmequipment dealers and wholesalers. We sold the principal assets of Greenbetween December 2004 and July 2005 in three transactions pursuant tothree separate asset purchase agreements with non-affiliated third parties.

 

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*Embassy*

 

Embassy was engaged in the manufacture and sale ofbaseboard heating products, sold nationally for use in hot-water heatingsystems installed in single family homes, multi-unit dwellings and commercialand industrial buildings. Embassy’s products were sold principally towholesalers by manufacturers’ representatives and in-house sales personnel.Embassy’s products were also sold to other manufacturers for incorporation intotheir products and for distribution on a private label basis. Embassy alsoimported a line of radiant heating systems. These systems include the tubing,manifolds, controls and installation supplies. Embassy also provided computersoftware that aids in the design ofthe system. In October 2005,Embassy sold substantially all of its operating assets, including, amongothers, machinery and equipment, inventory, accounts receivable and certainintangibles, to a non-affiliated third party. In June 2007, Embassy soldthe real property to a different non-affiliated third party.

 

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

 
| ** **                                                       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Assets held for sale and assets of discontinued operations:      |       |                         |       |                            |       |
| Current:                                                         |       |                         |       |                            |       |
| Prepaid expenses                                                 |       | $                            | 65,000     |                            | $          | 56,000 |   |
| Subtotal                                                         |       | 65,000                       |       | 56,000                          |       |
| Long-term:                                                       |       |                         |       |                            |       |
| Other receivable                                                 |       | 1,000                        |       | 9,000                           |       |
| Total assets held for sale and assets of discontinued operations |       | $                            | 66,000     |                            | $          | 65,000 |   |
|                                                             |       |                         |       |                            |       |
| Liabilities of discontinued operations:                          |       |                         |       |                            |       |
| Current:                                                         |       |                         |       |                            |       |
| Accounts payable and accrued expenses                            |       | $                            | 22,000     |                            | $          | 30,000 |   |
| Subtotal                                                         |       | 22,000                       |       | 30,000                          |       |
| Long-term:                                                       |       |                         |       |                            |       |
| Pension obligation                                               |       | 340,000                      |       | 342,000                         |       |
| Total liabilities of discontinued operations                     |       | $                            | 362,000    |                            | $          | 372,000 |   |

 

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**RESULTSOF OPERATIONS**

 

**Quartersended March 31, 2008 and 2007**

 

**Revenue**

 

The table below provides an analysis of our revenue.

 
| ** **        | ** ** | **Three-months Ended March 31,** | ** ** | ** ** | ** ** |
|-------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **        | ** ** | **2008**                                        | ** ** | **2007**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                                      | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| Tools             |       |                                            |       |       |       |   |   |   |   |
| Florida Pneumatic |       | $                                               | 8,907,000  |       | $          | 9,434,000 |   | $ | (527,000 | ) | (5.6 | )% |
| Hy-Tech           |       | 4,379,000                                       |       | 2,179,000  |       | 2,200,000 |   | 101.0 |   |
| Tools Total       |       | $                                               | 13,286,000 |       | $          | 11,613,000 |   | $ | 1,673,000 |   | 14.4 |   |
|              |       |                                            |       |       |       |   |   |   |   |
| Hardware          |       |                                            |       |       |       |   |   |   |   |
| Woodmark          |       | $                                               | 6,438,000  |       | $          | 8,516,000 |   | $ | (2,078,000 | ) | (24.4 | )% |
| Pacific Stair     |       | 471,000                                         |       | 939,000    |       | (468,000 | ) | (49.8 | ) |
| Nationwide        |       | 4,130,000                                       |       | 3,891,000  |       | 239,000 |   | 6.1 |   |
| Hardware Total    |       | $                                               | 11,039,000 |       | $          | 13,346,000 |   | $ | (2,307,000 | ) | (17.3 | ) |
|              |       |                                            |       |       |       |   |   |   |   |
| Consolidated      |       | $                                               | 24,325,000 |       | $          | 24,959,000 |   | $ | (634,000 | ) | (2.5 | )% |

 

The acquisition of Hy-Tech, consummated as of February 12,2007, continues to provide a positive impact. As illustrated above, Hy-Techprovided an increase of $2.2 million of revenue to the Tools segment whencompared to the three-month period in 2007.

 

Offsetting the above mentioned increase weencountered a reduction in revenue at Florida Pneumatic of $527,000.  Primary factors contributing to the decreaseat Florida Pneumatic include: (i) a net reduction in retail revenue of$365,000, a portion of which was due to the wind-down of The Home Depotbusiness; and (ii) our Franklin hardware product line revenue decreased$281,000, primarily the result of the loss of The Home Depot business, whichfor Franklin commenced in mid-2007.  Itshould be noted however, that we believe the loss of The Home Depot businessshould not materially affect overall operating margins. The above declines inproduct line revenues were offset by increases reported at our Berkley line of$74,000, and our industrial products line of $85,000.

 

As a result of the continued weakness in the newhome construction market which is the principal driver for the Hardwaresegment, revenue for the quarter ended March 31, 2008 decreased anaggregate of $2,307,000 when compared to the three-month period ended March 31,2007. Woodmark’s revenue continues to be hard hit reporting an aggregate decreaseof $2,078,000.  Within Woodmark, revenuefrom the sale of its stair parts and accessories decreased $1,937,000.Additionally, Woodmark’s kitchen/bath product line witnessed a decrease inrevenue of $140,000 do to a lagging recreational vehicle market, the loss of alarge customer, as well as the current economic conditions. Nationwide’srevenue increased approximately $239,000, primarily the result of the launchingof a number of new products in our fencing product line where revenue increased$538,000 when comparing the three-month periods ending March 31, 2008 and2007.  Nationwide’s revenue for OEMproducts and patio products decreased $222,000 and $77,000, respectively.  We anticipate that competitive pressures andcost increases from our foreign suppliers may reduce the impact of our newproducts.  Pacific Stair’s decrease inrevenue of approximately $468,000 is primarily attributable to continuingdecline in the new home construction market in southern California and Arizona.

 

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All revenues are generated in U.S. dollars and are not impacted bychanges in foreign currency exchange rates.

 

**GrossMargins / Profits**

 

Gross profits for thethree-month periods ended March 31, 2008 and 2007:

 
| **Three months ended   March 31,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|--------------------------------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2008                                                   |       | Gross Profit |       | $                | 7,672,000  |      | $          | 4,411,000    |       | $ | 3,261,000 |   |
|                                                   |       | Gross Margin |       | 31.5             | %          | 33.2      | %          | 29.5         | %          |
|                                                   |       |         |       |             |       |      |       |         |       |
| 2007                                                   |       | Gross Profit |       | $                | 7,748,000  |      | $          | 3,713,000    |       | $ | 4,035,000 |   |
|                                                   |       | Gross Margin |       | 31.0             | %          | 32.0      | %          | 30.2         | %          |

 

Gross margins in the Tools segment increased 1.2% from 32.0% for thethree-month period ended March 31, 2007 to 33.2% reported for thethree-months ended March 31, 2008. Gross profit for this segment increased$698,000.  When comparing the three-monthperiods ended March 31, 2008 and 2007 gross margins at Florida Pneumaticincreased 0.6% points primarily as the result of a reduction in the fees paidto an overseas trading partner.  Howeverwhen taken in conjunction with the decrease in revenue, Florida Pneumatics’gross profit declined approximately $100,000. The acquisition in February 2007of Hy-Tech favorably impacted the Tools segment’s gross profit, as we includedHy-Tech for the full three-month period ended March 31, 2008 compared toapproximately one and a half months during the same period in the prior year.Hy-Tech’s gross profit for the three-month period ended March 31, 2008 was$1,708,000 compared to $909,000 reported in the previous year.  However, Hy-Tech’s gross margin declined 3.0%when comparing the three-month periods ended March 31, 2008 and 2007,primarily the result in increased raw material and labor costs.

 

Grossprofit for the Hardware segment continues to be adversely affected by thedown-turn in the home construction; decreasing $774,000 from $4,035,000reported for the three-month period ended March 31, 2007 to $3,261,000 forthe same period in 2008.  Gross marginpercentage for the Hardware segment decreased 0.7% during the sameperiods.  Specifically, gross margins forour stair parts business at Woodmark increased 0.8%, while kitchen &bath product line decreased 0.5%.  Thegross margin percentage decrease was mitigated primarily due to a favorableproduct mix as a greater percentage of stair parts shipments were generatedfrom its warehouse which generally provide higher margins compared to directshipments from overseas.  As discussearlier, while Nationwide was able to increase revenue this quarter compared tothe same three-month period in 2007, its gross margins slipped 1.5% to 35.4%for the three-months ended March 31, 2008, primarily the result of pricereductions caused by competitive pressures. Additionally we absorbed costincreases from Asian suppliers for which we were not able to pass through toour customers.  Our gross margin atPacific Stair was severely impacted, decreasing 24.0% from 12.0% reported forthe three-month period ended March 31, 2007 to a deficit of 12.0% reportedfor the same period in 2008, essentially due to the inability to reduce fixedoverhead costs as sales levels decreased.

 

**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.

 

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Duringthe three-month period ended March 31, 2008, SG&A decreased $343,000or 5.0% when compared to the three-month period ended March 31, 2007.  While SG&A expenses this quarter reflecta full three-months of Hy-Tech operating expenses, compared to approximatelyone and one half months during the same three-month period in 2007, we wereable to reduce SG&A as a percentage of revenue to 26.8% for the three-monthperiod ended March 31, 2008, compared to 27.5% for the three-month periodended March 31, 2007. Excluding the impact of Hy-Tech, where SG&Aincreased approximately $181,000 due to a full three-months in the firstquarter of 2008, our remaining SG&A decreased $525,000.  Savings aggregating approximately $240,000 infreight-out, warranty costs and advertising primarily the result of thewind-down of our business with The Home Depot, is a primary component of thereduction in our SG&A expenses. During the three-month period ended March 31, 2008 we received$165,000, in reimbursement of legal fees and other costs related to thesettlement of formerly outstanding litigation. Additionally, certain intangible assets related to our acquisition ofNationwide were fully amortized during 2007, resulting in a reduction ofamortization expense of $133,000 when comparing the three-month periods ended March 31,2008 and 2007.  As the result of theimpairment of certain intangible assets during the fourth quarter of 2007, ouramortization for the three-month period ended March 31, 2008 wasapproximately $22,000 lower than the amount recorded during the samethree-month period in the prior year.

 

**Interest -Net**

 

Netinterest expense incurred during the three-month period ended March 31,2008 of $558,000, reflects a decrease of $94,000, or 14.4% compared to $652,000which was incurred during the same three-month period in the prior year.  Interest expense on borrowings under the termloan associated with the Woodmark acquisition decreased by approximately$79,000 due primarily to overall lower interest rates in effect during thethree-month period ended March 31, 2008 compared to the applicableinterest rates in place during the three months ended March 31, 2007.  Interest expense associated with the aboveloan was further reduced due to a lower principal balance.  Interest expense incurred in association withthe Hy-Tech term loan of $175,000 decreased $11,000 when comparing the three-monthperiods ended March 31, 2008 to 2007. The causal affects of this interestexpense reduction were: (i) the term loan was in place for the fullthree-month period in 2008 compared to only approximately one and one halfmonths during the first quarter of 2007, the average interest rates in effectduring the three-month period ended March 31, 2008 were lower than theaverage interest rates in effect during the period commencing February 12,2007, the effective date of the acquisition of Hy-Tech in 2008 and March 31,2007 were lower; and (ii) during the fourth quarter of 2007 we paid down$5,000,000 of this term loan.  Interestexpense on borrowings under our revolving credit loan facility increased byapproximately $59,000, as higher average borrowings occurred during thethree-month period ended March 31, 2008 primarily due to our pay-down oflong term debt discussed above with short term debt of $5,000,000.  During 2007 we paid in full, notes payable tothe former owners of Woodmark, which resulted in a reduction in interestexpense of $43,000 when comparing the three-month periods ended March 31,2008 and 2007.  Interest expense incurredon our trade financing decreased 17,000 when comparing the three-month periodsended March 31, 2008 to 2007. Interest income improved by $7,000 when comparing the three-monthperiods ended March 31, 2008 to 2007.

 

**Income****Taxes**

 

Theeffective tax rates applicable to earnings from continuing operations for thequarters ended March 31, 2008 and 2007 were 42.1% and 39.5%,respectively.  The effective tax rateincrease of 2.6% is primarily due to higher state taxes as well as certainexpenses incurred during the three-month period ended March 31, 2008 whichwere not deductible for tax purposes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash flows from operations can be somewhat cyclical, typically withthe greatest demand in 

 

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the second and third quartersfollowed by positive cash flows in the fourth quarter as receivables andinventories trend down. Due to our strong asset base, predictable cash flowsand favorable banking relationships, we believe we have adequate access tocapital, if and when needed. Additionally, we monitor average days sales outstanding, inventory turnsand capital expenditures to project liquidity needs and evaluate return onassets employed.

 

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

 
|                      | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                            | 19,440,000 |                            | $          | 24,000,000 |   |
| Current Ratio             |       | 1.65 to 1                    |       | 1.95 to 1                       |       |
| Shareholders’ Equity |       | $                            | 38,395,000 |                            | $          | 37,986,000 |   |

 

TheCompany entered into a credit agreement, as amended, with two banks in2004.  Thisagreement includes a revolving credit loan facility, which provides a total of$18,000,000 for direct borrowings, with various sublimits for letters ofcredit, bankers’ acceptances and equipment loans. There are nocommitment fees for any unused portion of this credit facility. The credit agreement, as amended, expires in June 2008and is subject to annual review by the lending banks.  Direct borrowings under the revolving creditloan facility are secured by the Company’s accounts receivable, inventory andequipment and are cross-guaranteed by each of the Company’s subsidiaries. Theseborrowings bear interest at either LIBOR (London InterBank Offered Rate)plus the currently applicable loan margin,or the prime interest rate. At both March 31, 2008 and December 31,2007, the applicable loan margin added to LIBOR was 1.75%.  At March 31, 2008 and December 31,2007, the balances outstanding on the revolving credit loan facility were$15,500,000 and $8,000,000, respectively.

 

TheCompany’s credit agreement also includes a term loan facility, which provided amaximum commitment of $34,000,000 to finance acquisitions subject to theapproval of the lending banks. In connection with the acquisition of Hy-Tech inFebruary 2007, the Company executed and delivered an amendment to thecredit agreement, which, among other things, added Continental and Hy-Tech asadditional co-borrowers and provided for new term loans in amounts not to exceed$19,000,000. There are no commitment fees for any unused portion of this creditfacility. Borrowings under the term loan facility are secured by the Company’saccounts receivable, inventory and equipment and are cross-guaranteed by eachof the Company’s subsidiaries. These borrowings bear interest at either LIBORplus the currently applicable loan margin, or the prime interest rate. At both March 31,2008 and December 31, 2007, the applicable loan margin added to LIBOR was2.00%.

 

In2004, the Company borrowed $29,000,000 against the term loan facility tofinance the Woodmark acquisition transaction, and there was $8,850,000 and$9,800,000 outstanding against this term loan at March 31, 2008 and December 31,2007, respectively. In2007, the Company borrowed $19,000,000 against the term loan facility tofinance the Hy-Tech acquisition transaction. During 2007, the Company paid down$5,000,000 against the Hy-Tech term loan. In January 2008, the Companypaid down an additional $5,000,000 against this term loan, through additionalborrowings on the revolving credit loanfacility. There was $8,640,000 and $14,000,000 outstanding against thisterm loan at March 31, 2008 and December 31, 2007, respectively. Theprincipal amounts on these term loans are payable in quarterly installments of$950,000 and $360,000, respectively, over the term of the respective loans

 

The credit agreement also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. The 

 

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total amount of foreigncurrency forward contracts outstanding under the foreign exchange line at March 31,2008, based on that day’s closing spot rate, was approximately $5,000.

 

Under the terms of the credit agreement, the Company isrequired to adhere to certain financial covenants. At March 31, 2008, theCompany was not in compliance with certain financial covenants.  Subsequent to March 31, 2008, the Company and the banks executed AmendmentNo.11 and Waiver to Credit Agreement, pursuant to which, among other things,the banks waived compliance with such financial covenants at March 31,2008, and amended certain financial covenants for future periods. Accordingly the Company has not reclassified tocurrent liabilities the long-term portions of its bank debts.  However, there can be no assurancesthat the Company will be able to comply with such covenants in the future.

 

Embassyparticipated in a multi employer pension plan until it sold substantially allof its operating assets in October 2005. This plan provided definedbenefits to all of its union workers. Contributions to this plan weredetermined by the union contract. Embassy does not administer the plan fundsand does not have any control over the plan funds. As a result of Embassy’swithdrawal from the plan, it recorded the net present value of a withdrawalliability of approximately $369,000, which is payable in quarterly installmentsof approximately $8,200 from May 2006 through February 2026. Thebalance at March 31, 2008 and December 31, 2007 was 340,000 and  $342,000, respectively and is reported inLiabilities of Discontinued Operations. Further, in connection with our sale ofEmbassy, we recorded the net present value of a receivable of approximately$90,000, which is scheduled to be collected at approximately $8,200 per quarterfrom May 2006 through May 2009.

 

Cashdecreased $245,000, from $1,334,000 as of December 31, 2007 to $1,089,000as of March 31, 2008. Our debt levels increased from $34,050,000 at December 31,2007 to $35,174,000 at March 31, 2008, due primarily to increasedshort-term borrowings necessary to fund a build-up in our seasonal inventoryduring the three-month period ended March 31, 2008. The total percent ofdebt to total book capitalization (debt plus equity) increased from 47.3% at December 31,2007 to 47.8% at March 31, 2008.

 

Cashused in operating activities of continuing operations for the three-monthperiods ended March 31, 2008 and 2007 were approximately $1,181,000, and$3,137,000, respectively. We believe that cash on hand derived from operationsand cash available through borrowings under our credit facilities will besufficient to allow us to meet our foreseeable working capital needs.

 

Capitalspending was approximately $189,000 and $207,000 for the three-month periodsended March 31, 2008 and 2007, respectively.  Capital expenditures for the balance of 2008are expected to be approximately $900,000, some of which may be financedthrough our credit facilities. Included in the expected total for 2008 arecapital expenditures relating to new products, expansion of existing product linesand replacement of equipment.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

Ourforeign exchange line provides for the availability of up to $10,000,000 inforeign currency forward contracts. These contracts fix the exchange rate onfuture purchases of foreign currencies needed for payments to foreignsuppliers. We have not purchased forward contracts on New Taiwan dollars (“TWD”).The total amount of foreign currency forward contracts outstanding at March 31,2008, based on that day’s closing spot rate, was approximately $5,000.

 

Amajority of our products are manufactured outside the United States, of which asignificant amount is purchased in the local currency. As a result, we areexposed to movements in the exchange rates of various currencies against theUnited States dollar which could have an 

 

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adverseeffect on our results of operations or financial position. We believe our mostsignificant foreign currency exposures are the Japanese yen, the Taiwan dollar(“TWD”) and the Chinese Renminbi (“RMB”). Purchases of product from China andTaiwan are made in U.S. dollars. However, if either or both the TWD or RMB,were to strengthen materially in relation to the U.S. dollar, there could be anadverse effect on our business, results of operations or financial position. Weare also subject to currency risk with respect to the Yen; however we generallypurchase Yen forward to mitigate the exposure.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157provides a new single authoritative definition of fair value and providesenhanced guidance for measuring the fair value of assets and liabilities andrequires additional disclosures related to the extent to which companiesmeasure assets and liabilities at fair value, the information used to measurefair value, and the effect of fair value measurements on earnings. SFAS 157 iseffective as of January 1, 2008. The adoption of this statement did nothave a material effect on our financial position or results of operations.

 

In February 2007, the FASBissued SFAS No. 159, ‘‘The Fair Value Option for Financial Assets andLiabilities, Including an amendment of FASB Statement No. 115’’, (‘‘SFAS159’’). This Statement permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. SFAS 159 is effective as of thebeginning of fiscal 2008. The adoption of this statement did not have amaterial effect on our financial position or results of operations.

 

In December 2007, the SECstaff issued Staff Accounting Bulletin (SAB) 110, Share Based Payment, whichamends SAB 107, Share Based Payment, to permit public companies, under certaincircumstances, to use the simplified method in SAB 107 for employee optiongrants after December 31, 2007. Use of the simplified method after December 2007is permitted only for companies whose historical data about their employees’exercise behavior does not provide a reasonable basis for estimating theexpected term of the options. We currently use the simplified method toestimate the expected term for employee option grants as adequate historicalexperience is not available to provide a reasonable estimate. SAB 110 iseffective for employee options granted after December 31, 2007. We adoptedSAB 110 effective January 1, 2008 and continue applying the simplifiedmethod until enough historical experience is readily available to provide a reasonableestimate of the expected term for employee option grants.

 

In December 2007, the FASBissued Statement 141 (revised 2007), Business Combinations (Statement 141R) tochange how an entity accounts for the acquisition of a business. Wheneffective, Statement 141R will replace existing Statement 141 in our entirety.Statement 141R carries forward the existing requirements to account for allbusiness combinations using the acquisition method (formerly called thepurchase method). In general, Statement 141R will require acquisition-date fairvalue measurement of identifiable assets acquired, liabilities assumed, andnon-controlling interests in the acquiree. Statement 141R will eliminate thecurrent cost based purchase method under Statement 141. The new measurementrequirements will result in the recognition of the full amount ofacquisition-date goodwill, which includes amounts attributable tonon-controlling interests. The acquirer will recognize in income any gain orloss on the remeasurement to acquisition-date fair value of considerationtransferred or of previously acquired equity interests in the acquiree. Neitherthe direct costs incurred to effect a business combination nor the costs theacquirer expects to incur under a plan to restructure an acquired business willbe included as part of the business combination accounting. As a result, thosecosts will be charged to expense when incurred, except for debt or equityissuance costs, which will be accounted for in accordance with other generally acceptedaccounting principles. Statement 141R will also change the accounting forcontingent consideration, 

 

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in process research anddevelopment, contingencies, and restructuring costs. In addition, changes indeferred tax asset valuation allowances and acquired income tax uncertaintiesin a business combination that occur after the measurement period will impactincome taxes under Statement 141R. Statement 141R is effective for fiscal yearsand interim periods within those fiscal years beginning on or after December 15,2008. Early adoption is prohibited. We intend to adopt Statement 141R effectiveJanuary 1, 2009 and apply our provisions prospectively. We are evaluatingthe impact that the adoption of Statement 141R will have on our financialstatements.

 

In December 2007, the FASBissued Statement 160, Non-controlling Interests in Consolidated FinancialStatements: an amendment of ARB No. 51. The new Statement changes theaccounting for, and the financial statement presentation of, non-controllingequity interests in a consolidated subsidiary. Statement 160 replaces theexisting minority interest provisions of Accounting Research Bulletin (ARB) 51,Consolidated Financial Statements, by defining a new term—non-controllinginterests—to replace what were previously called minority interests. The newstandard establishes non-controlling interests as a component of the equity ofa consolidated entity. The underlying principle of the new standard is thatboth the controlling interest and the non-controlling interests are part of theequity of a single economic entity: the consolidated reporting entity.Classifying non-controlling interests as a component of consolidated equity isa change from the current practice of treating minority interests as amezzanine item between liabilities and equity or as a liability. The changeaffects both the accounting and financial reporting for non-controllinginterests in a consolidated subsidiary. Statement 160 includes reportingrequirements intended to clearly identify and differentiate the interests ofthe parent and the interests of the non-controlling owners. The reportingrequirements are required to be applied retrospectively. Statement 160 iseffective for fiscal years and interim periods within those fiscal yearsbeginning on or after December 15, 2008. Early adoption is prohibited. Weintend to adopt Statement 160 effective January 1, 2009 and apply itsprovisions prospectively. We will also present comparative financial statementsthat reflect the retrospective application of the disclosure and presentationprovisions when it applies the requirements of Statement 160. We are evaluatingthe impact that the adoption of Statement 160 will have on its financialstatements.

 

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**Item 3.                Quantitative And QualitativeDisclosures About Market Risk**

 

Not required

 

**Item 4.               ****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 March 31, 2008 were effective. Accordingly, managementbelieves that the consolidated condensed financial statements included in thisQuarterly Report on Form 10-Q fairly present, in all material respects,our financial condition, results of operations and cash flows for the periodspresented.

 

P&F management is responsible 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 Report onForm 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 4 - 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 most recently completed fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II- OTHER INFORMATION**

 
| **Item 1.**  | ** ** | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | We are a defendant or co-defendant in various actions  brought about in the ordinary course of conducting our business. We do not  believe that any of these actions are material to our financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Item 1A.** | ** ** | **Risk Factors**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | There were no material  changes from risk factors previously disclosed in our Annual Report on  Form 10-K for the year ended December 31, 2007 in response to Item  1A. to Part I of Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Item 2.**  | ** ** | **Unregistered Sales of Equity Securities and Use of Proceeds**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Item 3.**  | ** ** | **Defaults Upon Senior Securities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Item 4.**  | ** ** | **Submission of Matters to a Vote of  Security Holders**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Item 5.**  | ** ** | **Other Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | As of May 12, 2008, the Company and its  subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida  Pneumatic”), Embassy Industries, Inc.(“Embassy”), Green  Manufacturing, Inc. (“Green”), Countrywide  Hardware, Inc.(“Countrywide”), Nationwide Industries, Inc. (“Nationwide”),  Woodmark International, L.P. (“Woodmark”), Pacific Stair Products, Inc.  (“Pacific”), WILP Holdings, Inc. (“WILP”), Continental Tool  Group, Inc. (“Continental”) and Hy-Tech Machine, Inc. (“Hy-Tech”,  and collectively with the Company, Florida Pneumatic, Embassy, Green, Countrywide,  Nationwide, Woodmark, Pacific, WILP and Continental, the “Co-Borrowers”),  Citibank, N.A. and HSBC Bank USA, National Association (collectively, the  “Lenders”) and Citibank, N.A., as Administrative Agent for the Lenders,  entered into an amendment and waiver (the “Amendment”) to the Credit  Agreement, dated as of June 30, 2004, by and among the Co-Borrowers, the  Lenders and the Administrative Agent, as previously amended (the “Credit  Agreement”). The Amendment waived compliance with certain financial covenants  that the Company was not in compliance with on March 31, 2008 and  amended certain financial covenant for future periods. |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |       | The foregoing summary of the Amendment is qualified in  its entirety by the terms and provisions of the Amendment, a copy of which is  attached hereto as Exhibit 10.1 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Item 6.**  | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |       | See “Exhibit Index” immediately following the  signature page.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| ** **               | **P&F INDUSTRIES, INC.**                       |
|--------------------------|----------------------------------------------------|
|                     | (Registrant)                                       |
|                     |                                               |
|                     |                                               |
|                     | By  /s/ Joseph A. Molino, Jr.       |
|                     | Joseph A. Molino, Jr.                         |
|                     | Chief Financial Officer                            |
| Dated: May 12, 2008 | (Principal Financial and Chief Accounting Officer) |

 

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**EXHIBIT INDEX**

 

The following exhibits are either included in this report or incorporatedherein by reference as indicatedbelow:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **10.1**            |       | Amendment No. 11 and Waiver to Credit Agreement,  dated as of May 12, 2008, 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., and Hy-Tech Machine, Inc. as Co-Borrowers, Citibank,  N.A., as Administrative Agent and the lenders party thereto. |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **31.1**            |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **31.2**            |       | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **32.1**            |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                 |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **32.2**            |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                          |

 

A copy of any of the foregoing exhibits to this QuarterlyReport on Form 10-Q may be obtained, upon payment of the Registrant’sreasonable expenses in furnishing such exhibit, by writing to P&FIndustries, Inc., 445 Broadhollow Road, Suite 100, Melville New York11747, Attention: Corporate Secretary.

 

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