Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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** **

**FORM 10-Q**

** **

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** **

**x****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For theQuarterly Period Ended September 30, 2008**

** **

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from                    to                     **

** **

**CommissionFile Number 1 - 5332**

** **

**P&F INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days. Yes  x    No  o

 

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

 

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

 

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

 

Asof November 12, 2008 there were 3,614,562 shares of the registrant’s Class ACommon Stock outstanding.

 

 

 

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**P&FINDUSTRIES, INC.**

** **

**FORM 10-Q**

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2008**

** **

**TABLE OFCONTENTS**

 
| ** **                                   | **PAGE**                                                                                                                            |
|----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                   | ** **                                                                                                                          |
| **PART I — FINANCIAL INFORMATION** |                                                                                                                                |
| ** **                                   |                                                                                                                                |
| Item 1.                                      | Financial Statements (unaudited)                                                                                                    |   |
|                                         |                                                                                                                                |   |
|                                         | Consolidated Condensed Balance Sheets as of  September 30, 2008 and December 31, 2007                                     | 1 |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Statements of Earnings for the three and nine months ended  September 30, 2008 and 2007                | 3 |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Statement of Shareholders’ Equity for the period from  January 1, 2008 to September 30, 2008 | 4 |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Statements of Cash Flows for the nine months ended  September 30, 2008 and 2007                        | 5 |
|                                         |                                                                                                                                |   |
|                                         | Notes to  Consolidated Condensed Financial Statements                                                                               | 7 |
|                                         |                                                                                                                                |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                         | 20 |
|                                         |                                                                                                                                |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                                         | 29 |
|                                         |                                                                                                                                |   |
| Item 4(T).                                   | Controls and  Procedures                                                                                                            | 29 |
|                                         |                                                                                                                                |   |
| **PART II  — OTHER INFORMATION**   |                                                                                                                                |   |
| ** **                                   |                                                                                                                                |   |
| Item 1.                                      | Legal Proceedings                                                                                                                   |   | 31 |
|                                         |                                                                                                                                |   |   |
| Item 1A.                                     | Risk Factors                                                                                                                        |   | 31 |
|                                         |                                                                                                                                |   |   |
| Item 2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                        |   | 31 |
|                                         |                                                                                                                                |   |   |
| Item 3.                                      | Defaults  Upon Senior Securities                                                                                                    |   | 31 |
|                                         |                                                                                                                                |   |   |
| Item 4.                                      | Submission  of Matters to a Vote of Security Holders                                                                                |   | 31 |
|                                         |                                                                                                                                |   |   |
| Item 5.                                      | Other Information                                                                                                                   |   | 31 |
|                                         |                                                                                                                                |   |   |
| Item 6.                                      | Exhibits                                                                                                                            |   | 31 |
|                                         |                                                                                                                                |   |   |
| **Signature**                                |                                                                                                                                |   | 32 |
| ** **                                   |                                                                                                                                |   |   |
| **Exhibit Index**                       |                                                                                                                                |   | 33 |
|                                              |                                                                                                                                     |  |  |  |

 

i

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**PART I - FINANCIAL INFORMATION**

** **

**Item 1.****                                                          ****Financial Statements**

** **

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

** **

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                            |       | **(unaudited)**              |       | **(derived  from audited**  |       |
|                                            |       |                         |       | **financial  statements)**  |       |
| **ASSETS**                                      |       |                         |       |                        |       |
| CURRENT                                         |       |                         |       |                        |       |
| Cash and cash equivalents                       |       | $                            | 949,895    |                        | $          | 1,334,167 |   |
| Accounts receivable – net                  |       | 12,293,531                   |       | 12,883,095                  |       |
| Notes and other receivables                     |       | 103,709                      |       | 393,525                     |       |
| Inventories – net                          |       | 32,347,880                   |       | 31,736,103                  |       |
| Deferred income taxes – net                |       | 1,397,000                    |       | 1,397,000                   |       |
| Income tax refund receivables                   |       | 219,926                      |       | 225,524                     |       |
| Prepaid expenses and other current assets       |       | 1,326,961                    |       | 1,171,279                   |       |
| Assets of discontinued operations               |       | 42,083                       |       | 56,142                      |       |
| TOTAL CURRENT ASSETS                            |       | 48,680,985                   |       | 49,196,835                  |       |
|                                            |       |                         |       |                        |       |
| PROPERTY AND EQUIPMENT                          |       |                         |       |                        |       |
| Land                                            |       | 1,549,773                    |       | 1,549,773                   |       |
| Buildings and improvements                      |       | 7,619,422                    |       | 7,613,514                   |       |
| Machinery and equipment                         |       | 15,571,743                   |       | 15,563,078                  |       |
|                                            |       | 24,740,938                   |       | 24,726,365                  |       |
| Less accumulated depreciation and  amortization |       | 10,866,247                   |       | 10,010,179                  |       |
| NET PROPERTY AND EQUIPMENT                      |       | 13,874,691                   |       | 14,716,186                  |       |
|                                            |       |                         |       |                        |       |
| GOODWILL                                        |       | 4,594,028                    |       | 4,594,028                   |       |
|                                            |       |                         |       |                        |       |
| OTHER INTANGIBLE ASSETS - net                   |       | 10,416,188                   |       | 11,103,534                  |       |
|                                            |       |                         |       |                        |       |
| DEFERRED INCOME TAXES - net                     |       | 2,898,000                    |       | 3,445,000                   |       |
|                                            |       |                         |       |                        |       |
| ASSETS OF DISCONTINUED OPERATIONS               |       | —                       |       | 9,400                       |       |
|                                            |       |                         |       |                        |       |
| OTHER ASSETS - net                              |       | 456,335                      |       | 204,684                     |       |
|                                            |       |                         |       |                        |       |
| TOTAL ASSETS                                    |       | $                            | 80,920,227 |                        | $          | 83,269,667 |   |

 

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

 

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

 

**CONSOLIDATEDCONDENSED BALANCE SHEETS (continued)**

 
|                                                                                                                                           | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                                                                                                                                           | ** ** | **(unaudited)**                  |       | **(derived  from audited**      | ** ** |
|                                                                                                                                           | ** ** |                             |       | **financial  statements)**      | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                   | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| CURRENT LIABILITIES                                                                                                                            | ** ** | ** **                       | ** ** | ** **                      | ** ** |
|                                                                                                                                           |       |                             |       |                            |       |
| Short-term borrowings                                                                                                                          |       | $                                | 15,000,000 |                            | $          | 8,000,000 |   |
| Accounts payable                                                                                                                               |       | 5,031,795                        |       | 5,042,046                       |       |
| Income taxes payable                                                                                                                           |       | 71,380                           |       | 524,780                         |       |
| Accrued compensation                                                                                                                           |       | 1,471,886                        |       | 1,805,120                       |       |
| Other accrued liabilities                                                                                                                      |       | 2,834,981                        |       | 3,489,703                       |       |
| Current maturities of long-term debt                                                                                                           |       | 5,511,997                        |       | 6,305,423                       |       |
| Liabilities of discontinued operations                                                                                                         |       | 30,626                           |       | 30,236                          |       |
| TOTAL CURRENT LIABILITIES                                                                                                                      |       | 29,952,665                       |       | 25,197,308                      |       |
|                                                                                                                                           |       |                             |       |                            |       |
| LONG-TERM DEBT, less current maturities                                                                                                        |       | 11,409,133                       |       | 19,744,173                      |       |
|                                                                                                                                           |       |                             |       |                            |       |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                                                         |       | 333,962                          |       | 342,367                         |       |
|                                                                                                                                           |       |                             |       |                            |       |
| TOTAL LIABILITIES                                                                                                                              |       | 41,695,760                       |       | 45,283,848                      |       |
|                                                                                                                                           |       |                             |       |                            |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                  |       |                             |       |                            |       |
|                                                                                                                                           |       |                             |       |                            |       |
| SHAREHOLDERS’ EQUITY                                                                                                                      |       |                             |       |                            |       |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares issued                                                                    |       | —                           |       | —                          |       |
| Common stock                                                                                                                                   |       |                             |       |                            |       |
| Class A - $1 par; authorized -  7,000,000 shares; issued - 3,956,431 at September 30, 2008 and  December 31, 2007, respectively |       | 3,956,431                        |       | 3,956,431                       |       |
| Class B - $1 par; authorized -  2,000,000 shares; no shares issued                                                                        |       | —                           |       | —                          |       |
| Additional paid-in capital                                                                                                                     |       | 10,335,606                       |       | 10,166,662                      |       |
| Retained earnings                                                                                                                              |       | 27,887,995                       |       | 26,756,514                      |       |
| Treasury stock, at cost - 341,869 and  318,969 shares at September 30, 2008 and December 31, 2007,  respectively                     |       | (2,955,565                       | )          | (2,893,788                      | )          |
|                                                                                                                                           |       |                             |       |                            |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                |       | 39,224,467                       |       | 37,985,819                      |       |
|                                                                                                                                           |       |                             |       |                            |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                |       | $                                | 80,920,227 |                            | $          | 83,269,667 |   |

 

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

 

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

**CONSOLIDATEDCONDENSED STATEMENTS OF EARNINGS (unaudited)**

** **
| ** **                                                                                                                            | ** ** | **Three months  ended September 30,** | ** ** | **Nine months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                                                                                                                          |       | $                                                    | 22,103,757 |                                                | $          | 30,353,224 |   | $ | 71,982,626 |   | $ | 85,919,975 |   |
| Cost of sales                                                                                                                         |       | 15,225,162                                           |       | 21,985,036                                          |       | 49,376,515 |   | 60,727,299 |   |
| Gross profit                                                                                                                          |       | 6,878,595                                            |       | 8,368,188                                           |       | 22,606,111 |   | 25,192,676 |   |
| Selling, general and administrative  expenses                                                                                         |       | 6,122,315                                            |       | 6,945,008                                           |       | 19,396,078 |   | 21,612,654 |   |
| Operating income                                                                                                                      |       | 756,280                                              |       | 1,423,180                                           |       | 3,210,033 |   | 3,580,022 |   |
| Interest expense – net                                                                                                           |       | 406,326                                              |       | 739,475                                             |       | 1,416,486 |   | 2,222,214 |   |
| Earnings from continuing operations before  income taxes                                                                              |       | 349,954                                              |       | 683,705                                             |       | 1,793,547 |   | 1,357,808 |   |
| Income taxes                                                                                                                          |       | 102,000                                              |       | 341,000                                             |       | 743,000 |   | 638,000 |   |
| Earnings from continuing operations                                                                                                   |       | 247,954                                              |       | 342,705                                             |       | 1,050,547 |   | 719,808 |   |
|                                                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings from discontinued operations (net  of taxes of $13,000 and $41,000 for 2008 and $46,000 and $58,000 for 2007,  respectively) |       | 26,189                                               |       | 120,620                                             |       | 80,934 |   | 102,319 |   |
| Gain on sale of assets held for sale of  discontinued operations (net of taxes of $2,093,000)                                         |       | —                                               |       | —                                              |       | — |   | 3,026,560 |   |
| Earnings from discontinued operations                                                                                                 |       | 26,189                                               |       | 120,620                                             |       | 80,934 |   | 3,128,879 |   |
| Net earnings                                                                                                                          |       | $                                                    | 274,143    |                                                | $          | 463,325 |   | $ | 1,131,481 |   | $ | 3,848,687 |   |
| Basic earnings per common share:                                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                                                                                                 |       | $                                                    | 0.07       |                                                | $          | 0.10 |   | $ | 0.29 |   | $ | 0.20 |   |
| Discontinued operations                                                                                                               |       | 0.01                                                 |       | 0.03                                                |       | 0.02 |   | 0.87 |   |
| Net earnings                                                                                                                          |       | $                                                    | 0.08       |                                                | $          | 0.13 |   | $ | 0.31 |   | $ | 1.07 |   |
|                                                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings per common share:                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                                                                                                 |       | $                                                    | 0.06       |                                                | $          | 0.09 |   | $ | 0.28 |   | $ | 0.19 |   |
| Discontinued operations                                                                                                               |       | 0.01                                                 |       | 0.03                                                |       | 0.02 |   | 0.82 |   |
| Net earnings                                                                                                                          |       | $                                                    | 0.07       |                                                | $          | 0.12 |   | $ | 0.30 |   | $ | 1.01 |   |
|                                                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding:                                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                                                                                 |       | 3,625,864                                            |       | 3,635,075                                           |       | 3,633,507 |   | 3,604,630 |   |
| Diluted                                                                                                                               |       | 3,800,990                                            |       | 3,789,357                                           |       | 3,729,861 |   | 3,796,363 |   |

 

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

 

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

** **

**CONSOLIDATEDCONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)**

 
| ** **                       | ** ** | ** ** | ** ** | **Class A Common  Stock, $1 Par** | ** ** | **Additional  paid-in** | ** ** | **Retained** | ** ** | **Treasury stock** | ** ** |
|----------------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| ** **                       | ** ** | **Total**  | ** ** | **Shares**                                            | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                             |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Balance, January 1, 2008    |       | $          | 37,985,819 |                                                  | 3,956,431  |                    | $          | 3,956,431    |       | $                       | 10,166,662 |   | $ | 26,756,514 |   | (318,969 | ) | $ | (2,893,788 | ) |
|                             |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Net earnings                     |       | 1,131,481  |       | —                                                |       | —                  |       | —       |       | 1,131,481               |       | — |   | — |   |
| Stock-based compensation         |       | 168,944    |       | —                                                |       | —                  |       | 168,944      |       | —                  |       | — |   | — |   |
| Purchase of Treasury stock       |       | (61,777    | )          | —                                                |       | —                  |       | —       |       | —                  |       | (22,900 | ) | (61,777 | ) |
|                             |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Balance, September 30, 2008 |       | $          | 39,224,467 |                                                  | 3,956,431  |                    | $          | 3,956,431    |       | $                       | 10,335,606 |   | $ | 27,887,995 |   | (341,869 | ) | $ | (2,955,565 | ) |

 

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

 

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

 

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

 
| ** **                                                                                                    | ** ** | **Nine months  ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash flows from operating activities of  continuing operations:                                               |       |                                                |       |   |   |
| Net earnings                                                                                                  |       | $                                                   | 1,131,481  |   | $ | 3,848,687 |   |
| Earnings from discontinued operations                                                                         |       | (80,934                                             | )          | (3,128,879 | ) |
| Adjustments to reconcile net earnings to  net cash provided by operating activities of continuing operations: |       |                                                |       |   |   |
| Noncash charges:                                                                                              |       |                                                |       |   |   |
| Depreciation and amortization                                                                                 |       | 1,277,133                                           |       | 1,138,487 |   |
| Amortization of other intangible assets                                                                       |       | 687,346                                             |       | 982,934 |   |
| Amortization of other assets                                                                                  |       | 4,893                                               |       | 12,417 |   |
| Provision for losses on accounts receivable  - net                                                            |       | (121,869                                            | )          | 90,017 |   |
| Stock-based compensation                                                                                      |       | 168,944                                             |       | 301,569 |   |
| Deferred income taxes - net                                                                                   |       | 547,000                                             |       | — |   |
| Loss on write-down of fixed asset                                                                             |       | 242,207                                             |       | — |   |
| Changes in operating assets and  liabilities, net of assets and liabilities acquired:                         |       |                                                |       |   |   |
| Accounts receivable                                                                                           |       | 711,433                                             |       | (3,039,924 | ) |
| Notes and other receivables                                                                                   |       | 289,816                                             |       | 824,618 |   |
| Inventories                                                                                                   |       | (611,777                                            | )          | (1,164,439 | ) |
| Income tax refund receivable                                                                                  |       | 5,598                                               |       | 898,847 |   |
| Prepaid expenses and other current assets                                                                     |       | (155,682                                            | )          | 387,714 |   |
| Other assets                                                                                                  |       | (256,544                                            | )          | 201,539 |   |
| Accounts payable                                                                                              |       | (10,251                                             | )          | 3,173,330 |   |
| Accruals and other                                                                                            |       | (987,956                                            | )          | (466,423 | ) |
| Income taxes payable                                                                                          |       | (453,400                                            | )          | — |   |
| Total adjustments                                                                                             |       | 1,255,957                                           |       | 211,807 |   |
| Net cash provided by operating activities  of continuing operations                                           |       | 2,387,438                                           |       | 4,060,494 |   |
|                                                                                                               |            |                                                     |            |  |  |  |  |

 

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

 

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

 

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

 
| ** **                                                                             | ** ** | **Nine months  ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash flows from investing  activities of continuing operations:                        |       |                                                |       |   |   |
| Capital expenditures                                                                   |       | (694,195                                            | )          | (1,027,724 | ) |
| Proceeds from disposal of  fixed assets                                                |       | 16,350                                              |       | — |   |
| Purchase of certain assets,  net of certain liabilities, of Hy-Tech Machine, Inc. |       | —                                              |       | (20,752,896 | ) |
| Net cash used in investing  activities of continuing operations                        |       | (677,845                                            | )          | (21,780,620 | ) |
|                                                                                   |       |                                                |       |   |   |
| Cash flows from financing  activities of continuing operations:                        |       |                                                |       |   |   |
| Proceeds from short-term  borrowings                                                   |       | 11,500,000                                          |       | 16,500,000 |   |
| Repayments of short-term  borrowings                                                   |       | (4,500,000                                          | )          | (9,500,000 | ) |
| Proceeds from term loan                                                                |       | —                                              |       | 19,000,000 |   |
| Repayments of term loan                                                                |       | (8,930,000                                          | )     | (7,850,000 | ) |
| Principal payments on  long-term debt                                                  |       | (198,466                                            | )          | (3,694,254 | ) |
| Proceeds from exercise of  stock options                                               |       | —                                              |       | 122,356 |   |
| Tax benefits from the  exercise of stock options                                       |       | —                                              |       | 84,000 |   |
| Purchase of treasury stock                                                             |       | (61,777                                             | )          | — |   |
| Net cash (used in) provided  by financing activities of continuing operations          |       | (2,190,243                                          | )          | 14,662,102 |   |
|                                                                                   |       |                                                |       |   |   |
| Cash flows from discontinued  operations:                                              |       |                                                |       |   |   |
| Net cash provided by  operating activities                                             |       | 96,378                                              |       | 387,817 |   |
| Net cash provided by  investing activities                                             |       | —                                              |       | 3,603,095 |   |
| Net cash used in financing  activities                                                 |       | —                                              |       | (1,254,117 | ) |
| Net cash provided by  discontinued operations                                          |       | 96,378                                              |       | 2,736,795 |   |
|                                                                                   |       |                                                |       |   |   |
| NET DECREASE IN CASH AND CASH  EQUIVALENTS                                             |       | (384,272                                            | )          | (321,229 | ) |
| Cash and cash equivalents at  beginning of period                                      |       | 1,334,167                                           |       | 1,339,882 |   |
| Cash and cash equivalents at  end of period                                            |       | $                                                   | 949,895    |   | $ | 1,018,653 |   |
|                                                                                        |            |                                                     |            |  |  |  |  |

 

**Supplementaldisclosures of cash flow information:**

 
| ** **     | ** ** | **Nine months ended September 30,** | ** ** |
|----------------|------------|---------------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Cash paid for: |       |                                                    |       |   |   |
| Interest       |       | $                                                       | 1,485,000  |   | $ | 2,412,000 |   |
| Income taxes   |       | $                                                       | 758,000    |   | $ | 1,610,000 |   |

 

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

 

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

**NOTES TOCONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)**

** **

**NOTE 1 - SUMMARY OF ACCOUNTING POLICIES**

 

**Principles of Consolidation**

 

The unaudited consolidated condensed financial statements containedherein include the accounts of P&F Industries, Inc. and itssubsidiaries (“P&F”, or the “Company”). All significant intercompanybalances and transactions have been eliminated.

 

P&F conducts its business operations through two of its whollyowned subsidiaries: Continental Tool Group, Inc. (“Continental”) andCountrywide Hardware, Inc. (“Countrywide”). In addition, the words “we”, “our”and “us” refer to the Company. Further, P&F operates in two primary linesof business, or segments: (i) tools and other products (“Tools”) and (ii) hardwareand accessories (“Hardware”).

 

**Tools**

 

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

 

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

 

**Hardware**

** **

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

 

Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircasecomponents and kitchen and bath hardware and accessories. Until the closure ofits mill which occurred during the three-month period ended September 30,2008 Pacific Stair manufactured premium stair rail products. Thereafter it willcontinue to distribute Woodmark’s staircase components to the buildingindustry, primarily in southern California and the southwestern region of theUnited States.

 

The Company’s wholly owned subsidiary, Embassy Industries, Inc. (“Embassy”),was engaged 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-real estateassets. Embassy sold its real estate assets in June 2007. The Company’swholly owned subsidiary, Green Manufacturing, Inc. (“Green”), wasprimarily engaged in the manufacture, development and sale of heavy-duty weldedcustom designed hydraulic cylinders, a line of access equipment for thepetro-chemical industry and a line of post hole digging equipment for theagricultural industry until it exited those 

 

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businessesbetween December 2004 and July 2005. The assets and liabilities andresults of operations of Embassy and Green have been segregated and reportedseparately as discontinued operations in the Consolidated Condensed FinancialStatements. Note 13 to the Notes to Consolidated Condensed Financial Statementspresent financial information for the segments of the Company’s business.

 

**Basis of Financial Statement Presentation**

 

The accompanying unaudited consolidated condensed financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information, and with therules and regulations of the Securities and Exchange Commission regardinginterim financial reporting. Accordingly, these interim unaudited consolidatedcondensed financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion of theCompany, these unaudited consolidated condensed financial statements includeall adjustments necessary to present fairly the information set forth therein.All such adjustments are of a normal recurring nature. Results for interimperiods are not necessarily indicative of results to be expected for a fullyear.

 

The results of operations for Embassy and Green have been segregatedfrom continuing operations and are reflected on the unaudited consolidatedcondensed statements of earnings as discontinued operations.

 

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

 

In preparing its unaudited consolidated condensed financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America, the Company is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.On an ongoing basis, the Company evaluates estimates, including those relatedto bad debts, inventory reserves, goodwill and intangible assets. The Companybases its 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 carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from thoseestimates.

 

**NOTE 2 - EARNINGS PER SHARE**

 

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

 

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

 

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

 
| ** **                                                                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Numerator:                                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator for basic and  diluted earnings per common share:                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings from continuing  operations                                                                                |       | $                                                    | 248,000    |                                                | $          | 343,000 |   | $ | 1,050,000 |   | $ | 720,000 |   |
| Discontinued operations, net  of taxes                                                                              |       | 26,000                                               |       | 120,000                                             |       | 81,000 |   | 3,129,000 |   |
| Net earnings                                                                                                        |       | $                                                    | 274,000    |                                                | $          | 463,000 |   | $ | 1,131,000 |   | $ | 3,849,000 |   |
| Denominator:                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Denominator for basic  earnings per share – weighted average common shares outstanding                         |       | 3,626,000                                            |       | 3,635,000                                           |       | 3,634,000 |   | 3,605,000 |   |
| Effect of dilutive  securities:                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Stock options                                                                                                       |       | 175,000                                              |       | 154,000                                             |       | 96,000 |   | 191,000 |   |
| Denominator for diluted  earnings per share – adjusted weighted average common shares and assumed  conversions |       | 3,801,000                                            |       | 3,789,000                                           |       | 3,730,000 |   | 3,796,000 |   |

 

At September 30, 2008 and 2007 and during the three and nine-monthperiods ended September 30, 2008 and 2007, there were outstanding stockoptions whose exercise prices were higher than the average market values of theunderlying Class A Common Stock for the period. These options areantidilutive and are excluded from the computation of earnings per share. Theweighted average antidilutive stock options outstanding were as follows:

 
| ** **                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average antidilutive  stock options outstanding |       | 554,000                                              |       | 30,000                                              |       | 402,000 |   | 30,000 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

** **

Stock-basedCompensation

 

During the nine-month period ended September 30, 2008, the Companygranted 174,000 options to purchase its Class A common stock, of which145,000 were granted to its Chief Executive Officer / President and 25,000 toits Chief Operating Officer / Chief Financial Officer, with the balance to anon-executive employee of the Company. Twenty-percent of the common stockoptions granted to the Chief Executive Officer / President vest on each of thefirst five anniversaries of the date of the grant. One-third of the commonstock options granted to the Chief Operating Officer / Chief Financial Officervest on each of the first three anniversaries of the grant date. The remaining4,000 options were immediately vested on the grant date.  All common stock options granted during thenine-month period ended September 30, 2008 have an exercise price of $4.16and will expire ten years from the date of the grant.

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

 

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

 

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

 

The Company recorded stock-based compensation expense for the threemonth periods ended September 30, 2008 and 2007 of approximately $72,000and $51,000, respectively, and $169,000 and $302,000 for the nine-month periodsended September 30, 2008 and 2007, respectively. The compensation expenseis recognized in the selling, general and administrative expenses line item ofthe Company’s statements of earnings on a straight-line basis over the vestingperiods. There are no capitalized stock-based compensation costs at either September 30,2008 or 2007.

 

As of September 30, 2008, the Company had approximately $456,000of total unrecognized compensation cost related to non-vested awards grantedunder our share-based plans, which we expect to recognize over aweighted-average period of 2.3 years.

** **

The Company did not receive any cash during the nine-month period endedSeptember 30, 2008 from any exercise of stock options, but did receivecash of approximately $122,000 from options exercised during the nine-monthperiod ended September 30, 2007. The Financial Accounting Standards Board(“FASB”) issued Standard of Financial Accounting Statements (“SFAS”)  No. 123(R) which requires that cashflows from tax benefits attributable to tax deductions in excess of thecompensation cost recognized for those options (excess tax benefits) beclassified as financing cash flows. Accordingly, the impact of the cashreceived in 2007 of $84,000 is included in financing activities in theaccompanying consolidated condensed statements of cash flows.

 

StockOption Plan

 

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

 

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The following is a summary of the changes in outstanding options forthe nine months ended September 30, 2008:

 
| ** **                            | ** ** | **Option  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding, January 1,  2008    |       | 533,436            |       | $                                              | 8.58       |                                                                     | 4.5        |                                |       |   |
| Granted                               |       | 174,000            |       | 4.16                                           |       | 9.8                                                                      |       |                                |       |
| Exercised                             |       | —             |       | —                                         |       |                                                                     |       |                                |       |
| Forfeited                             |       | —             |       | —                                         |       |                                                                     |       |                                |       |
| Expired                               |       | (153,500           | )          | 7.90                                           |       |                                                                     |       |                                |       |
| Outstanding,  September 30, 2008 |       | 553,936            |       | 7.38                                           |       | 6.8                                                                      |       | —                              |       |
|                                  |       |               |       |                                           |       |                                                                     |       |                                |       |
| Vested, September 30,  2008      |       | 341,530            |       | 8.60                                           |       | 5.4                                                                      |       | —                              |       |
|                                       |            |                    |            |                                                |            |                                                                          |            |                                     |            |  |

 

The following is a summary of changes innon-vested shares for the nine months ended September 30, 2008:

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

 

The number of shares of Class A common stock reserved for stockoptions available for issuance under the Current Plan as of September 30,2008 was 416,900. Of the options outstanding at September 30, 2008,539,936 were issued under the Current Plan and 14,000 were issued under thePrior Plan.

 

**NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS**

 

**New Accounting Pronouncements**

 

In September 2006, theFASB issued SFAS No. 157, “FairValue Measurements” (“SFAS 157”). SFAS 157 provided a new singleauthoritative definition of fair value and provides enhanced guidance formeasuring the fair value of assets and liabilities and requires additionaldisclosures related to the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. SFAS 157 became effective as of November 15,2007 and became effective for the Company as of January 1, 2008. Theadoption of this statement did not have a material effect on our consolidatedfinancial position or results of operations.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andLiabilities, Including an amendment of FASB Statement No. 115”, (“SFAS 159”).This Statement permits entities to choose to measure many financial instrumentsand certain other items at fair value that are not currently required to bemeasured at fair value. SFAS 159 is effective as of the beginning of fiscal2008. The adoption of this statement did not have a material effect onour consolidated financial position or results of operations, as the Companydid not elect the fair value option for any assets or liabilities.

 

In December 2007, the SEC staff issued SAB 110, “Share BasedPayment”, which amends SAB 107, “Share Based Payment”, to permit publiccompanies, under certain circumstances, to use the simplified method in SAB 107for employee option grants after December 31, 2007. Use of the simplified 

 

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methodafter December 2007 is permitted only for companies whose historical dataabout their employees’ exercise behavior does not provide a reasonable basisfor estimating the expected term of the options. We currently use thesimplified method to estimate the expected term for employee option grants asadequate historical experience is not available to provide a reasonableestimate. 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.

 

In December 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 goodwill, which includes amountsattributable to non-controlling interests. The acquirer will recognize inincome any gain or loss on the remeasurement to acquisition-date fair value ofconsideration transferred or of previously acquired equity interests in theacquiree. Neither the direct costs incurred to effect a business combinationnor the costs the acquirer expects to incur under a plan to restructure anacquired business will be included as part of the business combinationaccounting. As a result, those costs will be charged to expense when incurred,except for debt or equity issuance costs, which will be accounted for inaccordance with other generally accepted accounting principles. Statement 141Rwill also change the accounting for contingent consideration, in processresearch and development, contingencies, and restructuring costs. In addition,changes in deferred tax asset valuation allowances and acquired income taxuncertainties in a business combination that occur after the measurement periodwill impact income taxes under Statement 141R. Statement 141R is effective forfiscal years and interim periods within those fiscal years beginning on orafter December 15, 2008. Early adoption is prohibited. We intend to adoptStatement 141R effective January 1, 2009 and apply its provisionsprospectively. We are evaluating the impact that the adoption of Statement 141Rwill have on our consolidated financial statements.

 

In December 2007, the FASB issuedStatement 160, “Non-controlling Interests in Consolidated Financial Statements:an amendment of ARB No. 51”, (“Statement 160”). The new statement changesthe 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 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 our consolidatedfinancial statements.

 

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**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-TechSellers”). The purchase price consisted of $16,900,000 in cash, subject toadjustments, plus the assumption of certain payables and liabilities and theobligation to make certain contingent payments based on factors described inthe Hy-Tech APA. The purchase price was negotiated on the basis of the Hy-TechSellers’ historical financial performance. The Hy-Tech Purchased Property wasused by the Hy-Tech Sellers in the business of, among other things,manufacturing and selling pneumatic tools and 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.

 

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 AdditionalContingent Consideration can not exceed $1,900,000. Any such additionalpayments for Contingent Consideration or Additional Contingent Consideration,if any, would be payable in accordance with the terms and conditions set forthin the Hy-Tech APA.  Any such paymentswill be treated by the Company as additions to goodwill.

 

Thefollowing table summarizes, on an unaudited pro forma basis, the combinedresults of operations of the Company and Hy-Tech as though the acquisitiontransaction had occurred as of January 1, 2007. The pro forma amounts giveeffect to appropriate adjustments for amortization of intangible assets,interest expense and income taxes. The pro forma amounts presented are notnecessarily indicative of either the actual consolidated operating results hadthe acquisition transaction occurred as of January 1, 2007 or of futureconsolidated operating results.

 
| ** **                         | ** ** | **Three months ended** | ** ** | **Nine Months ended**  | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30, 2007** | ** ** | **September 30, 2007** | ** ** |
| Net revenues                       |       | $                                | 30,353,000 |                             | $          | 88,099,000 |   |
|                               |       |                             |       |                             |       |
| Net earnings                       |       | $                                | 458,000    |                             | $          | 4,026,000 |   |
| Earnings per share of common stock |       |                             |       |                             |       |
| Basic                              |       | $                                | 0.13       |                             | $          | 1.12 |   |
| Diluted                            |       | $                                | 0.12       |                             | $          | 1.06 |   |

 

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**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.  The PurchaserLetter purports to terminate the Contract of Sale based upon Purchaser’sassertion that Embassy had not satisfied certain requirements and demands thatthe escrow agent return the down payment with accrued interest, and further,that Purchaser be reimbursed for the costs 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 theState of New York, County of Suffolk, for breach of contract and return ofdown-payment, seeking $650,000, together with costs of title and survey and interestthereon, and the cost of the action. The down-payment remains in escrow pendingresolution of this matter. Embassy believes the action is without merit and isvigorously defending 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:

 

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| ** **                                                        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Assets held for sale and assets of  discontinued operations:      |       |                             |       |                            |       |
| Current:                                                          |       |                             |       |                            |       |
| Prepaid expenses                                                  |       | $                                | 42,000     |                            | $          | 56,000 |   |
| Subtotal                                                          |       | 42,000                           |       | 56,000                          |       |
| Long-term:                                                        |       |                             |       |                            |       |
| Other receivable                                                  |       | —                           |       | 9,000                           |       |
| Total assets held for sale and assets of  discontinued operations |       | $                                | 42,000     |                            | $          | 65,000 |   |
|                                                              |       |                             |       |                            |       |
| Liabilities of discontinued operations:                           |       |                             |       |                            |       |
| Current:                                                          |       |                             |       |                            |       |
| Accounts payable and accrued expenses                             |       | $                                | 31,000     |                            | $          | 30,000 |   |
| Subtotal                                                          |       | 31,000                           |       | 30,000                          |       |
| Long-term:                                                        |       |                             |       |                            |       |
| Pension obligation                                                |       | 334,000                          |       | 342,000                         |       |
| Total liabilities of discontinued  operations                     |       | $                                | 365,000    |                            | $          | 372,000 |   |

 

Results of operations for Embassy and Green and have been segregatedfrom continuing operations and reflected as discontinued operationsapproximately as follows:

 
| ** **                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Earnings from operation of discontinued  operations, before taxes |       | $                                                    | 39,000     |                                                | $          | 167,000 |   | $ | 122,000 |   | $ | 160,000 |   |
| Income tax expense                                                |       | 13,000                                               |       | 46,000                                              |       | 41,000 |   | 58,000 |   |
| Earnings from operation of discontinued  operations               |       | 26,000                                               |       | 121,000                                             |       | 81,000 |   | 102,000 |   |
|                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Gain on sale of assets held for sale,  before taxes               |       | —                                               |       | —                                              |       | — |   | 5,120,000 |   |
| Income tax expense                                                |       | —                                               |       | —                                              |       | — |   | 2,093,000 |   |
| Gain on sale of assets held for sale                              |       | —                                               |       | —                                              |       | — |   | 3,027,000 |   |
|                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings from discontinued operations                             |       | $                                                    | 26,000     |                                                | $          | 121,000 |   | $ | 81,000 |   | $ | 3,129,000 |   |

 

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

** **

Accounts receivable - net consists of:

 
| ** **                            | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Trade accounts receivable             |       | $                                | 12,791,000 |                            | $          | 13,502,000 |   |
| Less: Allowance for doubtful accounts |       | 497,000                          |       | 619,000                         |       |
|                                  |       | $                                | 12,294,000 |                            | $          | 12,883,000 |   |

 

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**NOTE 8 – INVENTORIES**

 
| ** **                                        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials                                     |       | $                                | 2,507,000  |                            | $          | 2,525,000 |   |
| Work in process                                   |       | 1,758,000                        |       | 2,156,000                       |       |
| Finished Goods                                    |       | 30,353,000                       |       | 29,015,000                      |       |
|                                              |       | 34,618,000                       |       | 33,696,000                      |       |
| Reserve for obsolete and slow moving  inventories |       | (2,270,000                       | )          | (1,960,000                      | )          |
|                                              |       | $                                | 32,348,000 |                            | $          | 31,736,000 |   |

 

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

 

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

** **

Duringthe nine-month period ended September 30, 2008, there was no change to thecarrying value of goodwill.

 

Otherintangible assets were as follows:

 
| ** **                            | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Cost**                         | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible assets:              |       |                             |       |                            |       |   |   |   |   |
| Customer relationships and backlog    |       | $                                | 14,130,000 |                            | $          | 4,778,000 |   | $ | 14,130,000 |   | $ | 4,117,000 |   |
| Non-compete and Employment agreements |       | 810,000                          |       | 787,000                         |       | 810,000 |   | 780,000 |   |
| Trademark/trade name                  |       | 699,000                          |       | —                          |       | 699,000 |   | — |   |
| Engineering drawings                  |       | 290,000                          |       | 24,000                          |       | 290,000 |   | 12,000 |   |
| Licenses                              |       | 105,000                          |       | 29,000                          |       | 105,000 |   | 21,000 |   |
| Total                                 |       | $                                | 16,034,000 |                            | $          | 5,618,000 |   | $ | 16,034,000 |   | $ | 4,930,000 |   |

 

Amortizationexpense for other intangible assets subject to amortization was as follows:

 
| ** ** | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       |                                                     |       |                                                    |       |   |   |   |   |
|       |       | $                                                        | 228,000    |                                                    | $          | 275,000 |   | $ | 687,000 |   | $ | 983,000 |   |
|            |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Amortizationexpense for each of the twelve month periods ending September 30, 2009through September 30, 2013 is estimated to be as follows: 2009 - $916,000;2010 - $917,000; 2011 - $909,000; 2012 - $906,000 and 2013 - $804,000. Theweighted average amortization period for intangible assets was 12.5 years at September 30,2008 and 13.1 years at December 31, 2007.

 

**NOTE 10 - WARRANTY LIABILITY**

 

The Company offers warranties on certain productsagainst product defects for periods primarily ranging from one to three years,with certain kitchen and bath products sold through Woodmark as well as certainitems marketed by Hy-Tech, and commencing in 2008, certain products soldthrough Nationwide having a limited lifetime warranty, depending on thespecific product and terms of the customer purchase agreement. The Company’stypical warranty requires it to repair or replace the defective products duringthe 

 

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warranty period at no cost to the customer. At thetime the product revenue is recognized, the Company records a liability forestimated costs under its warranty program, which costs are estimated based onhistorical experience. The Company periodically assesses the adequacy of itsrecorded warranty liability and adjusts the amounts as necessary. While theCompany believes that its estimated liability for product warranties isadequate, the estimated liability for the product warranties could differmaterially from future actual warranty costs.

 

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

 
| ** **                                                          | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Balance, beginning of period                                        |       | $                                                       | 552,000    |   | $ | 368,000 |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 563,000                                                 |       | 755,000 |   |
| Actual warranty costs incurred                                      |       | (789,000                                                | )          | (729,000 | ) |
| Balance, end of period                                              |       | $                                                       | 326,000    |   | $ | 394,000 |   |

** **

**NOTE 11 – BANK DEBT**

** **

TheCompany entered into a credit agreement, as amended, with two banks in2004.  This agreement includes arevolving credit loan facility, which provides a total of $18,000,000 fordirect borrowings, with various sublimits for letters of credit, bankers’acceptances and equipment loans. There are no commitment fees for any unusedportion of this credit agreement. The credit agreement is subject to review bythe lending banks.  In July 2008,the Company and the banks executed Amendment No.13 to the Credit Agreementwhich, among other things, established new applicable loan margins for both therevolving credit facility as well as for applicable term loan margins, expandedthe definition of eligible inventory, amended certain financial covenants andset November 30, 2008 as the termination date of the revolving credit loanportion of the credit agreement facility. As of the date of this filing, theCompany and the banks are negotiating terms of a further amendment which theCompany believes will extend the term of the revolving portion of the facility,although there can be no assurance this will occur. Direct borrowings under therevolving credit loan facility are secured by the Company’s accountsreceivable, inventories and equipment and are cross-guaranteed by each of theCompany’s subsidiaries. These borrowings bear interest at either LIBOR (LondonInterBank Offered Rate) or the prime interest rate, plus the currentlyapplicable loan margin. At both September 30, 2008 and December 31,2007, the applicable loan margins which are added to LIBOR or the primeinterest rate are 1.75% and 0.5%, respectively. At September 30, 2008 and December 31, 2007, the balances outstandingon the revolving credit loan facility were $15,000,000 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. Borrowingsunder the term loan facility are secured by the Company’s accounts receivable,inventories and equipment and are cross-guaranteed by each of the Company’ssubsidiaries. These borrowings bear interest at either LIBOR or the primeinterest rate, plus the currently applicable loan margin. In connection withthe acquisition of Hy-Tech in February 2007, the Company executed anddelivered an amendment to the credit agreement, which provided a new term loanin the amount of $19,000,000 (the “Hy-Tech term loan”).  During 2007, the Company paid $5,000,000against the Hy-Tech term loan. In January 2008, the Company paid anadditional $5,000,000 against the Hy-Tech term loan through additionalborrowings on the revolving credit loan facility. As a result of theseprincipal payments which aggregated $10,000,000, the Hy-Tech term loan balancewas $14,000,000 at December 31, 2007 and $9,000,000 at the time ofcommencement of the scheduled principal payments.  The Hy-Tech term loan is payable in 25 equalquarterly payments, which commenced January 25, 2008.  As the result of the principal payments madeprior to the commencement of the scheduled payments, the amount of eachquarterly principal payment is $360,000. There was $7,920,000 and $14,000,000outstanding against this term loan at September 30, 2008 and December 31,2007, respectively. In addition, during 2004, the 

 

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Company borrowed $29,000,000 against the term loan facility to financethe Company’s acquisition of Woodmark. The principal amount on this term loanis payable in quarterly installments of $950,000.  At September 30, 2008 and December 31,2007, there was $6,950,000 and $9,800,000, respectively, outstanding againstthis term loan. At both September 30,2008 and December 31, 2007, the applicable loan margin added to LIBOR orthe prime interest rates were 2.00% and 0.25%, respectively.

 

The credit agreement also includes a foreignexchange line (cash flow hedge), which provides for the availability of up to$10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of foreign currencies needed for payments toforeign suppliers. The total amount of foreign currency forward contractsoutstanding under the foreign exchange line at September 30, 2008, basedon that day’s closing spot rate, was approximately $188,000.  All such contracts will expire in the fourthquarter of calendar year 2008.  Theimpact of these cash flow hedge contracts on other comprehensive income is notmaterial for the three and nine months ended September 30, 2008.

 

The Company has mortgages outstanding ofapproximately $2,051,000 and $2,249,000 at September 30, 2008 and December 31,2007, respectively.

 

**NOTE12—RELATED PARTY TRANSACTIONS**

** **

Thepresident of one of our subsidiaries is part owner of one of the subsidiary’svendors. During the nine-month periods ended September 30, 2008 and 2007,the subsidiary purchased approximately $1,014,000 and $637,000 of product fromthis vendor.

 

**NOTE 13 - BUSINESS SEGMENTS**

** **

P&F operates in two primary lines ofbusiness, or segments: (i) tools and other products (“Tools”) and (ii) hardwareand accessories (“Hardware”).  Forreporting purposes, Florida Pneumatic and Hy-Tech are combined in the Toolssegment, while Woodmark, Pacific Stair and Nationwide are combined in theHardware segment. Results for Hy-Tech have been included since its acquisitiondate. The Company evaluates segment performance based primarily on segmentoperating income. The accounting policies of each of the segments are the sameas those described in Note 1.

 

Thefollowing presents financial information by segment for the three andnine-month periods ended September 30, 2008 and 2007. Segment operatingincome excludes general corporate expenses, interest expense and income taxes.Identifiable assets are those assets directly owned or utilized by theparticular business segment.

 

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| **Three months ended September 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                               |       |             |       |      |       |         |       |
| Revenues from unaffiliated  customers                              |       | $                | 22,104,000 |      | $          | 12,253,000   |       | $ | 9,851,000 |   |
|                                                               |       |             |       |      |       |         |       |
| Segment operating income                                           |       | 1,949,000        |       | 1,746,000 |       | 203,000      |       |
| General corporate expense                                          |       | (1,193,000       | )          |      |       |         |       |
| Interest expense – net                                        |       | (406,000         | )     |      |       |         |       |
| Earnings from continuing  operations before income taxes           |       | $                | 350,000    |      |       |         |       |   |
|                                                               |       |             |       |      |       |         |       |
| Segment assets                                                     |       | $                | 75,435,000 |      | $          | 45,334,000   |       | $ | 30,101,000 |   |
| Corporate assets and assets  of discontinued operations            |       | 5,485,000        |       |      |       |         |       |
| Total assets                                                       |       | $                | 80,920,000 |      |       |         |       |   |

 
| **Three months ended September 30, 2007** | ** ** | **Consolidated** | ** **  | **Tools** | ** ** | **Hardware** | ** ** |
|--------------------------------------------------------------------|------------|------------------|-------------|-----------|------------|--------------|------------|
|                                                               |       |             |        |      |       |         |       |
| Revenues from unaffiliated  customers                              |       | $                | 30,353,000  |      | $          | 17,112,000   |       | $ | 13,241,000 |   |
|                                                               |       |             |        |      |       |         |       |
| Segment operating income                                           |       | 2,652,000        |        | $         | 1,156,000  |         | $          | 1,496,000 |   |
| General corporate expense                                          |       | (1,229,000       | )           |      |       |         |       |
| Interest expense – net                                        |       | (739,000         | )           |      |       |         |       |
| Earnings from continuing  operations before income taxes           |       | $                | 684,000     |      |       |         |       |   |
|                                                               |       |             |        |      |       |         |       |
| Segment assets                                                     |       | $                | 109,180,000 |      | $          | 52,792,000   |       | $ | 56,388,000 |   |
| Corporate assets and assets  of discontinued operations            |       | 2,532,000        |        |      |       |         |       |
| Total assets                                                       |       | $                | 111,712,000 |      |       |         |       |   |

 
| **Nine months ended September 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                              |       |             |       |      |       |         |       |
| Revenues from unaffiliated  customers                             |       | $                | 71,983,000 |      | $          | 40,026,000   |       | $ | 31,957,000 |   |
|                                                              |       |             |       |      |       |         |       |
| Segment operating income                                          |       | 6,922,000        |       | $         | 5,111,000  |         | $          | 1,811,000 |   |
| General corporate expense                                         |       | (3,712,000       | )          |      |       |         |       |
| Interest expense – net                                       |       | (1,416,000       | )          |      |       |         |       |
| Earnings from continuing  operations before income taxes          |       | $                | 1,794,000  |      |       |         |       |   |

 
| **Nine months ended September 30, 2007** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                              |       |             |       |      |       |         |       |
| Revenues from unaffiliated  customers                             |       | $                | 85,920,000 |      | $          | 44,511,000   |       | $ | 41,409,000 |   |
|                                                              |       |             |       |      |       |         |       |
| Segment operating income                                          |       | 8,016,000        |       | $         | 3,014,000  |         | $          | 5,002,000 |   |
| General corporate expense                                         |       | (4,436,000       | )          |      |       |         |       |
| Interest expense – net                                       |       | (2,222,000       | )          |      |       |         |       |
| Earnings from continuing  operations before income taxes          |       | $                | 1,358,000  |      |       |         |       |   |

 

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

 

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

 

**General**

 

The Private Securities Litigation Reform Actof 1995 (the “Reform Act”) provides a safe harbor for forward-lookingstatements made by or on behalf of P&F Industries, Inc. andsubsidiaries (“P&F”, or “the Company”). P&F and its representativesmay, from time to time, make written or verbal forward-looking statements,including statements contained in the Company’s filings with the Securities andExchange Commission and in its reports to stockholders. Generally, theinclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,”“will,” and their opposites and similar expressions identify statements thatconstitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 and that are intended to come within the safe harbor protectionprovided by those sections. Any forward-looking statements contained herein,including those related to the Company’s future performance, are based upon theCompany’s historical performance and on current plans, estimates andexpectations. All forward-looking statements involve risks and uncertainties.These risks and uncertainties could cause the Company’s actual results for the2008 fiscal year and beyond to differ materially from those expressed in anyforward-looking statement made by or on behalf of the Company for a number ofreasons, as previously disclosed in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007 in response to Item 1A. to Part I of Form 10-K. Forward-lookingstatements speak only as of the date on which they are made. The Companyundertakes no obligation to update publicly or revise any forward-lookingstatement, whether as a result of new information, future developments orotherwise.

 

**Business**

 

P&F conducts its business operationsthrough 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 of business, or segments: (i) toolsand other products (“Tools”) and (ii) hardware and accessories (“Hardware”).

 

**Tools**

 

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

 

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

 

**Hardware**

 

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

 

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Nationwide is an importerand manufacturer of door, window and fencing hardware. Woodmark is an importerof builders’ hardware, including staircase components and kitchen and bathhardware and accessories. Until the closure of its mill which occurred duringthe three-month period ended September 30, 2008 Pacific Stair manufacturedpremium stair rail products. Thereafter it will continue to distribute Woodmark’sstaircase components to the building industry, primarily in southern Californiaand the southwestern region of the United States.

 

**Overview**

 

Thesignificant factors listed below, which affected our results for the three andnine-month periods ended September 30, 2008, are discussed in furtherdetail in the Results of Operations section:

 

·              ***Net Revenue:****The on-goingdown-turn in the number of new home starts compounded by the overallsluggishness affecting the nation’s economy continues to have an adverse affecton overall performance as evidenced by the 27% reduction in our net sales whencomparing the three-month periods ended September 30, 2008 and 2007;*

 

·              ***Gross margins****: Consolidated gross margins increased3.5 percentage points when comparing the three-month periods ended September 30,2008 and 2007 as well as increasing 2.1 percentage points when comparing thenine month periods ending September 30, 2008 and 2007 primarily due toimproved product mix, reduced costs and improved manufacturing performance;*

 

·              ***Selling, general and administrative expense****: Continued to decrease for the thirdquarter in a row.  The reduction for thethree and nine-month periods ended September 30, 2008 compared to the sameperiod in the prior year were $823,000 and $2,217,000, respectively; and*

 

·              ***Interest expense:**** Decreased $333,000 and $806,000for the three and nine-month periods ended September 30, 2008 compared tothe same periods in the prior year.*

 

**KEY INDICATORS**

 

**Economic Measures**

 

The most critical economic indicator affecting our overall performance,specifically our Hardware segment, has been and will continue to be new homeconstruction data, in particular single home completions, as that is generallythe stage of construction when Woodmark and Pacific Stair products arerequired.  According the U.S. CensusBureau and the Department of Housing and Urban Development, the number of newprivately owned housing starts in September 2008 were at a seasonally adjustedrate of 817,000, down 31.1% from 1,185,000 reported during the same nine-monthperiod in 2007.  Economic indicators forthe Tools segment include general economic conditions and retail sales, whichduring the three-month period ended September 30, 2008, had an adverseimpact on revenue at Florida Pneumatic.

 

Another key economic measure relevant to us is the cost of our rawmaterials, in particular metals, especially various types of steel andaluminum. Lastly, to a lesser extent, we are impacted by the value of the U.S.dollar in relation to the Japanese yen (“yen”) and the Taiwan dollar (“TWD”),as we purchase a significant portion of our products from these two countries.We also make purchases from Chinese sources in U.S. dollars. However, if theChinese currency, the Renminbi (“RMB”), were to be revalued against the dollar,there could be a significant negative impact on the cost of our products.

 

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**Operating Measures**

 

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

 

**Financial Measures**

 

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

 

**CriticalAccounting Policies and Estimates**

 

We prepare our consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America.Certain of these accounting policies require us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and the related disclosure of contingent assets and liabilities, revenues andexpenses. On an ongoing basis, we evaluate estimates, including those relatedto bad debts, inventory reserves, goodwill and intangible assets and warrantyreserves. We base our estimates on historical data and experience, whenavailable, and on various other assumptions that are believed to be reasonableunder the circumstances, the combined results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates.

 

There have been no material changes in our critical accounting policiesand estimates from those discussed in Item 7 of our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**RESULTSOF OPERATIONS**

 

**Net revenue**

 

The table below provides an analysis of our net revenue for the threeand nine-month periods ended September 30, 2008 and 2007.

 
| ** **        | ** ** | **Three-months Ended September 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|-------------------|------------|-----------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **        | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                                          | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             |       |                                                |       |       |       | ** **   | ** ** | ** ** |   |
| Florida Pneumatic |       | $                                                   | 7,211      |       | $          | 12,686       |       | $ | (5,475 | ) | (43.2 | )% |
| Hy-Tech           |       | 5,042                                               |       | 4,426      |       | 616          |       | 13.9 |   |
| Tools Total       |       | $                                                   | 12,253     |       | $          | 17,112       |       | $ | (4,859 | ) | (28.4 | )% |
|              |       |                                                |       |       |       |         |       |   |   |
| Hardware          |       |                                                |       |       |       |         |       |   |   |
| Woodmark          |       | $                                                   | 5,613      |       | $          | 8,188        |       | $ | (2,575 | ) | (31.4 | )% |
| Pacific Stair     |       | 543                                                 |       | 1,042      |       | (499         | )          | (47.9 | ) |
| Nationwide        |       | 3,695                                               |       | 4,011      |       | (316         | )          | (7.9 | ) |
| Hardware Total    |       | $                                                   | 9,851      |       | $          | 13,241       |       | $ | (3,390 | ) | (25.6 | )% |
|              |       |                                                |       |       |       |         |       |   |   |
| Consolidated      |       | $                                                   | 22,104     |       | $          | 30,353       |       | $ | (8,249 | ) | (27.2 | )% |

 

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| ** **        | ** ** | **Nine-months Ended September 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|-------------------|------------|----------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **        | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                                         | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| Florida Pneumatic |       | $                                                  | 25,569     |       | $          | 33,598       |       | $ | (8,029 | ) | (23.9 | )% |
| Hy-Tech           |       | 14,457                                             |       | 10,913     |       | 3,544        |       | 32.5 |   |
| Tools Total       |       | $                                                  | 40,026     |       | $          | 44,511       |       | $ | (4,485 | ) | (10.1 | )% |
|              |       |                                               |       |       |       |         |       |   |   |
| Hardware          |       |                                               |       |       |       |         |       |   |   |
| Woodmark          |       | $                                                  | 18,019     |       | $          | 25,213       |       | $ | (7,194 | ) | (28.5 | )% |
| Pacific Stair     |       | 1,571                                              |       | 3,012      |       | (1,441       | )          | (47.8 | ) |
| Nationwide        |       | 12,367                                             |       | 13,184     |       | (817         | )          | (6.2 | ) |
| Hardware Total    |       | $                                                  | 31,957     |       | $          | 41,409       |       | $ | (9,452 | ) | (22.8 | )% |
|              |       |                                               |       |       |       |         |       |   |   |
| Consolidated      |       | $                                                  | 71,983     |       | $          | 85,920       |       | $ | (13,937 | ) | (16.2 | )% |

 

When comparing the three-month periods ended September 30, 2008and 2007, net revenue reported by our Tools segment decreased $4,859,000.Significant factors contributing to this decrease include a net reduction inrevenue at Florida Pneumatic of $5,475,000, driven primarily by the wind-downof The Home Depot business which accounted for $1,909,000 of the decrease, andlower promotional and carryover sales of approximately $2,810,000 to a majorretail customer. Additionally, we continue to see weakening sales in ourFranklin products line, which decreased $755,000 when comparing the three-monthperiods ended September 30, 2008 and 2007. Hy-Tech however, continues to provide a positive impact to the Toolssegment. Hy-Tech focuses on the industrial sector of the pneumatic toolsmarket, an area which thus far has not been as affected by an overall sluggisheconomy specifically in the retail sector. As illustrated in the table above,when comparing the three-month periods ended September 30, 2008 and 2007,Hy-Tech, reported an increase of $616,000 over the same period in the prioryear.  This increase is primarily attributableto organic growth.

 

As a result of the continuing reduction in the number of new homesbeing constructed, which is the principal driver for the Hardware segment,revenue for the quarter ended September 30, 2008 decreased an aggregate of$3,390,000 when compared to the three-month period ended September 30,2007. Specifically, our Woodmark subsidiary, which primarily markets its stairparts to the southern tier of the United Sates, continues to be hard hit,reporting an aggregate net revenue decrease of $2,575,000.  Within Woodmark, revenue from the sale of itsstair parts and accessories a product line decreased $2,231,000 primarily dueto the diminished number of new housing starts and the loss of a major customer.  Additionally, Woodmark incurred a decrease inits kitchen and bath products line revenue of $344,000 due to a diminishingrecreational vehicle market, which is a key customer group as well as the weakeconomic conditions. Until the downward trend in the number of new housingstarts levels and begins to increase we do not expect to see improvement inWoodmark’s net revenue. As illustrated in the table above, Pacific StairProducts located in Southern California reported a decrease in its net revenueof $499,000 to $543,000 reported for the three-month period ended September 30,2008 from $1,042,000 reported for the same period in the prior year. Thiscontinuing fall-off is primarily attributable to continuing decline in the newhome construction market in southern California and Arizona.  Nationwide, which primarily markets fencingand gate hardware had not, until the second calendar quarter of 2008, beenmaterially affected by either the sluggish home building sector, or the generalslow-down in the overall economy, experienced a decrease in net revenue of$316,000.  Nationwide’s net revenue fromfencing increased a modest $30,000; however, it incurred decreases of $228,000and $118,000 in its OEM and patio business lines, respectively. We anticipatethat competitive pressures and cost increases from our foreign suppliers maycontinue to reduce the beneficial impact of the new products which wereintroduced during the first six months of 2008.

 

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Net revenue for the Tools segment for the nine-month period ended September 30,2008 was $4,485,000 or 10.1% below that of the same period in the prior year.This decrease is primarily the result of the following factors impactingFlorida Pneumatics’ performance: (i) the wind down of business with TheHome Depot; (ii) a reduction of retail sales volume with a major customerand (iii) reduced volume at Franklin. As a result of the aforementionedfactors, we incurred a decrease in net revenue of $8,029,000 at FloridaPneumatic.  The decline in year to datenet revenue at Florida Pneumatic was offset by an increase at Hy-Tech of $3,544,000or 32.5%.  Hy-Tech, acquired in February 2007,offers its products to the industrial sector of the pneumatic tools marketplacewhich has not been as affected by the sluggish economy as has the retailsector.  Its growth continues to beorganic, as it widens both its product line and customer base.

 

Netrevenue for the Hardware segment continues to be severely impacted by theongoing downward trend of new home construction.  This segment reported a decrease of 22.8%when comparing the nine-month period ending September 30, 2008 revenue tothat of the same period in the prior year. Specifically, both Woodmark andPacific Stair Products, whose primary market is new home construction, are down28.5% and 47.8%, respectively, when comparing the nine-month periods ended September 30,2008 and 2007.  It is difficult topredict when the new home starts will begin to improve. Until such time we willcontinue our ongoing efforts to reduce costs and overhead wherever possible tooffset lower revenue.  Lastly, whencomparing the nine-month periods ended September 30, 2008 and 2007, netrevenue at Nationwide decreased $817,000 primarily due to a weakening of thegeneral economy, competitive pressures and costs increases from overseas.

 

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

 

**GrossMargins / Profits**

 

Grossprofits for the three and nine-month periods ended September 30, 2008 and2007:

 
| **Three months ended  September 30,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2008                                                 |       | Gross Profit |       | $                | 6,879,000  |      | $          | 4,231,000    |       | $ | 2,648,000 |   |
|                                                 |       | Gross Margin |       | 31.1             | %          | 34.5      | %          | 26.9         | %          |
|                                                 |       |         |       |             |       |      |       |         |       |
| 2007                                                 |       | Gross Profit |       | $                | 8,368,000  |      | $          | 4,393,000    |       | $ | 3,975,000 |   |
|                                                 |       | Gross Margin |       | 27.6             | %          | 25.7      | %          | 30.0         | %          |

 
| **Nine months ended  September 30,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2008                                                |       | Gross Profit |       | $                | 22,606,000 |      | $          | 13,403,000   |       | $ | 9,203,000 |   |
|                                                |       | Gross Margin |       | 31.4             | %          | 33.5      | %          | 28.8         | %          |
|                                                |       |         |       |             |       |      |       |         |       |
| 2007                                                |       | Gross Profit |       | $                | 25,193,000 |      | $          | 12,357,000   |       | $ | 12,836,000 |   |
|                                                |       | Gross Margin |       | 29.3             | %          | 27.8      | %          | 31.0         | %          |

 

Grossmargins in the Tools segment increased 8.8 percentage points to 34.5% for thethree-month period ended September 30, 2008 from 25.7% for the three-monthperiod ended September 30, 2007. However, gross profit for this segmentdecreased $162,000 as a result of the decrease in revenue.  Specifically, gross margins at FloridaPneumatic increased 5.1 percentage points. Factors contributing to this marginimprovement include: (i) a reduction in the fee arrangement paid to anoverseas trading 

 

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partnerand (ii) continued various cost reductions implemented during 2008.  However, when taken in conjunction with thedecrease in revenue, Florida Pneumatic’s gross profit declined approximately$664,000. Both gross margins and gross profit increased at Hy-Tech whencomparing the three-month periods ended September 30, 2008 and 2007. Grossmargins increased approximately 5.7 percentage points to 37.2% for thethree-month period ended September 30, 2008, from 31.5% reported for thesame period in the prior year. In combination with the increased revenue,Hy-Tech’s gross profit increased $502,000 during the same period. Theseincreases reported in this quarter are primarily due to product mix as well asimproved manufacturing efficiencies.

 

Theoverall gross margin percentage for the Hardware segment continues to beseverely affected by the downturn in home construction. For the three-monthperiod ended September 30, 2008, Hardware segment gross margin was 26.9%reflecting a decrease of 3.1 percentage points when compared to 30.0% for thesame period in the prior year.  Grossprofit for the Hardware segment decreased $1,327,000 to $2,648,000 reported forthe three-month period ended September 30, 2008 from $3,975,000 for thesame period in 2007. Specifically, gross margins for our stair parts businessas well as our kitchen and bath businesses at Woodmark decreased 1.3 and 6.2percentage points, respectively, when comparing the three-month periods ended September 30,2008 and 2007.  These gross margindecreases combined with the reduction in revenue combined to generate areduction of gross profit at Woodmark of $844,000. The gross margin decrease inthe stair parts business was primarily the result of lower absorption of fixedexpenses as a result of lower revenue. The decrease in gross margin for the kitchen and bath product line isdue primarily to a combination of vendor price increases combined with sellingprice concessions.  The gross margin forthe three-month period ended September 30, 2008 at Pacific Stair continuedto reflect the impact of the severely reduced number of new homes being constructedin the Southwestern region of the United States as well as the inability toreduce fixed manufacturing overhead costs as sales levels decrease. For thethree-month period ended September 30, 2008 gross margins at Pacific StairProducts decreased 19.2 percentage points to a deficit of 4.3% compared togross margin of 14.9% reported for the same three-month period in 2007.  In an effort to improve the overall resultsat Pacific Stair, during the three-month period ended September 30, 2008we completed the closure of its mill and consolidated operations into itswarehouse.  As a result of the millclosure, during the three-month period ended September 30, 2008, werecorded in our selling and general and administrative expenses a write down ofcertain assets and inventories aggregating approximately $136,000.  We believe this action should improve thePacific Stair Products’ financial results moving forward, however there can beno assurance that other factors could offset this action.  Gross margins at Nationwide decreased 4.7percentage points to 33.5% for the three-month period ended September 30,2008 from 38.2% reported for the same period in 2007. The gross margin decreasewas primarily due to price increases from overseas suppliers as well as currentcompetitive conditions which, for certain items, necessitated price reductions.Combined with decreased revenue, its gross profit fell $295,000.

 

Theoverall gross margins for the Tools segment for the nine-month period ended September 30,2008 improved over the same period in the prior year by 5.7 percentage pointsto 33.5% for the nine-month period ended September 30, 2008 compared to27.8% for the same nine-month period in the prior year.  Specifically, Hy-Tech improved its grossmargins to 37.5% for the nine-month period ended September 30, 2008 from33.6% reported for the same period in the prior year. Hy-Tech’s gross marginincrease is due in part to an improved product mix, as well as lower variablecosts.  Additionally, during the periodfrom the date of Acquisition through September 30, 2007 Hy-Tech’s cost ofgoods sold included $428,000, which represented the write-up of the then fairvalue of Hy-Tech’s inventory acquired at February 12, 2007.  Gross margins at Florida Pneumatic improvedas well, to 31.0% for the nine-month period ended September 30, 2008 from25.9% reported for the same period in 2007. This improvement is primarily dueto reduced costs from overseas suppliers, and product mix.

 

Grossmargins for the nine-month period ended September 30, 2008 for theHardware segment are down 2.2 percentage points to 28.8% for the nine-monthperiod ended September 30, 2008 from 31.0% reported for the same period in2007.  Woodmark’s overall gross margin isdown 1.7 percentage points to 27.3% for the nine months ended September 30,2008 from 29.0% in the prior year, due in part to less efficient absorption ofwarehouse costs due to lower revenue, as well as general marketconditions.  On a year to date basis,Pacific Stair Products, reported a deficit margin of 9.3% compared to a gross 

 

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marginof 13.5% reported in the nine-month period ended September 30, 2007, principallythe result of under-utilization of the facilities, however, as noted aboveactions have been taken which we believe should help improve its gross marginsin the future.  Gross margins for thenine-month period at Nationwide decreased 3.0 percentage points to 35.8% from38.8%, primarily the result of higher material costs combined with currentcompetitive market conditions.

 

**Selling, General and Administrative Expenses**

 

Selling,general and administrative expenses, (“SG&A”) include salaries and relatedcosts, commissions, travel, administrative facilities expenses, communicationscosts and promotional expenses for our direct sales and marketing staff,administrative and executive salaries and related benefits, legal, accountingand other professional fees as well as general corporate overhead and certainengineering expenses.

 

Duringthe three-month period ended September 30, 2008, our SG&A decreased$823,000 or 11.9% to $6,122,000 when compared to the three-month period ended September 30,2007 amount of $6,945,000.  The primaryfactors driving the decrease are our continued cost cutting measures as well aslower variable costs.  Significantcomponents of the reduction of our SG&A include: (i) reductions insalaries, benefits and bonuses aggregating approximately $333,000; (ii) commissioncosts were lower by $145,000 due primarily to lower revenue; (iii) advertisingand other promotional charges decreased $374,000; (iv) freight expenseswere lower by approximately $119,000 and (v) warranty charges were down$41,000.  Offsetting the above reductionsin our operating expenses was an increase in professional services of $144,000.Additionally, in connection with the closure of the mill at Pacific StairProducts we recorded impairment charges in connection with the write down ofcertain assets and inventory which aggregated to $136,000. We believe theclosure of the mill, which has been significantly under-utilized, should enablePacific Stair Products to improve its overall financial performance in thefuture.

 

OurSG&A for the nine-month period ended September 30, 2008 aggregated$19,396,000, reflecting a reduction of $2,217,000 or 10.3% from the nine-monthperiod ended September 30, 2007 total of $21,613,000.  Key elements contributing to this reductioninclude: (i) a decrease in total salaries, payroll taxes and otheremployee costs aggregating $804,000, most of which is due to the approximately$400,000 compensation charge in connection with the sale of Embassy’s realestate asset which occurred in during 2007; (ii) advertising and otherpromotional charges decreased $632,000; (iii) commission expense decreased$264,000; (iv) freight costs decreased $241,000; (v) depreciation andamortization was lower by $259,000; (vi) warranty expenses decreased$190,000; (vii) product liability decreased $236,000; (viii) stock-basedcompensation decreased $133,000 and (ix) total engineering expensesdecreased $56,000.  Additionally, certainintangible assets related to our acquisition of Nationwide were fully amortizedduring 2007, resulting in a reduction of amortization expense of $133,000 whencomparing the nine-month periods ended September 30, 2008 and 2007.  Lastly, during the first quarter of 2008 wereceived a payment of $165,000 as reimbursement of fees and expenses incurredrelated to a legal matter which was settled in our favor, thus reducingprofessional fees during 2008.  The aboveitems were offset by a one-time severance and equipment write-down of $219,000incurred as a result of the loss of The Home Depot business, as well asimpairment charges resulting from the Pacific Stair Products mill closure of$136,000. Lastly, we incurred additional fees for professional / consultingservices of $154,000 primarily due to additional accounting fees.

 

**Interest- Net**

 

Netinterest expense incurred during the three-month period ended September 30,2008 of $406,000 reflects a decrease of $333,000, compared to $739,000 whichwas incurred during the same three-month period in the prior year.  Interest expense on borrowings under the termloan associated with 

 

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theWoodmark acquisition decreased by approximately $122,000 due primarily to lowerprincipal balances and slightly lower interest rates in effect during thethree-month period ended September 30, 2008 compared to the applicableinterest rates in place during the three months ended September 30,2007.  Interest expense incurred inassociation with the Hy-Tech term loan decreased $163,000 when comparing thethree-month periods ended September 30, 2008 to 2007. Causal affects ofthis interest expense reduction were: (i) ) during both the fourth quarterof 2007 and again in January 2008 we paid down $5,000,000 of this termloan, thus lowering the principal by an aggregate of $10,000,000 for the fiscalthird quarter of 2008 compared to the same period in 2007, and (ii) theaverage interest rates in effect during the three-month period ended September 30,2008 were slightly lower than the average interest rates in effect during thesame three-month period in the prior year.

 

Ournet interest for the nine-month period ended September 30, 2008 was lowerthan the same period in the prior year by $806,000. Key components of thischange include: interest expense incurred in association with the Hy-Tech termloan decreased $318,000; interest expense associated to the Woodmarkacquisition decrease $369,000; and interest on a note payable was lower by$84,000 as this note was paid in full in 2007. The preceding reductions ofinterest expense were partially offset by an increase in the interest expenseincurred on our short-term borrowings, which increased primarily as the resultof the pay-down of long-term debt in January 2008, thus increasing short-termdebt.

 

**IncomeTaxes**

 

Theeffective tax rates applicable to earnings from continuing operations for thethree month periods ended September 30, 2008 and 2007 were 29.1% and49.9%, respectively. The effective tax rates applicable to earnings from continuingoperations for the nine-month periods ended September 30, 2008 and 2007were 41.4% and 47.0%, respectively. During the three-month period ended September 30, 2008, a portionof the Company’s FIN 48 tax accrual expired as the result of the expiration ofthe statute of limitations thus having the effect of lowering the effective taxrate for the periods reported.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash flows from operations can be somewhatcyclical, typically with the greatest demand in the second and third quartersfollowed by positive cashflows in the fourth quarter as receivables and inventories trend down.Additionally, we monitor average days sales outstanding, inventory turnover andcapital expenditures to project liquidity needs and evaluate return on assetsemployed.

 

Wegauge our liquidity and financial stability by various measurements some ofwhich are shown in the following table:

 
| ** **                | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $18,728,000                      |       | $24,000,000                     |       |
| Current Ratio             |       | 1.63 to 1                        |       | 1.95 to 1                       |       |
| Shareholders’ Equity |       | $39,224,000                      |       | $37,986,000                     |       |

 

TheCompany entered into a credit agreement, as amended, with two banks in2004.  This agreement includes arevolving credit loan facility, which provides a total of $18,000,000 for directborrowings, with various sublimits for letters of credit, bankers’ acceptancesand equipment loans. There are no commitment fees for any unused portion ofthis credit agreement. The credit agreement is subject to review by the lendingbanks.  In July 2008, the Companyand the banks executed Amendment No.13 to the Credit Agreement which, amongother things, established new applicable loan margins for both the revolvingcredit facility as well as for applicable term loan margins, expanded thedefinition of eligible inventory, amended certain financial covenants and set November 30,2008 as the termination date of the revolving credit loan portion of the creditagreement facility. As of the date of this filing the Company and the banks arenegotiating terms of a further amendment which the Company believes will extendthe term of the revolving portion of the facility, although there can be noassurance this will occur. Direct borrowings 

 

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underthe revolving credit loan facility are secured by the Company’s accountsreceivable, inventories and equipment and are cross-guaranteed by each of theCompany’s subsidiaries. These borrowings bear interest at LIBOR (LondonInterBank Offered Rate) or the prime interest rate, plus the currentlyapplicable loan margin. At both September 30, 2008 and December 31,2007, the applicable loan margins which are added to LIBOR or the primeinterest rate are 1.75% and 0.5%, respectively. At September 30, 2008 and December 31, 2007, the balancesoutstanding on the revolving credit loan facility were $15,000,000 and$8,000,000, respectively.

 

The Company’s credit agreement also includes aterm loan facility, which provided a maximum commitment of $34,000,000 tofinance acquisitions subject to the approval of the lending banks. Borrowingsunder the term loan facility are secured by the Company’s accounts receivable,inventories and equipment and are cross-guaranteed by each of the Company’ssubsidiaries. These borrowings bear interest at LIBOR or the prime interestrate, plus the currently applicable loan margin. In connection with theacquisition of Hy-Tech in February 2007, the Company executed anddelivered an amendment to the credit agreement, which provided a new term loanin the amount of $19,000,000 (the “Hy-Tech term loan”).  During 2007, the Company paid $5,000,000against the Hy-Tech term loan. In January 2008, the Company paid an additional$5,000,000 against the Hy-Tech term loan through additional borrowings on therevolving credit loan facility. As a result of these principal payments whichaggregated $10,000,000, the Hy-Tech term loan balance was $14,000,000 at December 31,2007 and $9,000,000 at the time of commencement of the scheduled principalpayments.  The Hy-Tech term loan ispayable in 25 equal quarterly payments, which commenced January 25,2008.  As the result of the principalpayments made prior to the commencement of the scheduled payments, the amountof each quarterly principal payment is $360,000. There was $7,920,000 and$14,000,000 outstanding against this term loan at September 30, 2008 and December 31,2007, respectively. In addition, during 2004, the Company borrowed $29,000,000against the term loan facility to finance the Company’s acquisition ofWoodmark. The principal amount on this term loan is payable in quarterlyinstallments of $950,000.  At September 30,2008 and December 31, 2007, there was $6,950,000 and $9,800,000,respectively, outstanding against this term loan. At both September 30, 2008 and December 31,2007, the applicable loan margin added to LIBOR or the prime interest rateswere 2.00% and 0.25%, respectively.

 

The credit agreement also includes a foreignexchange line (cash flow hedge), which provides for the availability of up to$10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of foreign currencies needed for payments toforeign suppliers. The total amount of foreign currency forward contractsoutstanding under the foreign exchange line at September 30, 2008, basedon that day’s closing spot rate, was approximately $188,000.

 

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. Thetotal amount owing at September 30, 2008 and December 31, 2007 was$365,000 and $373,000, respectively, and is reported in Liabilities ofDiscontinued Operations in the consolidated balance sheets. Further, inconnection with our sale of Embassy, we recorded the net present value of areceivable of approximately $90,000, which is scheduled to be collected atapproximately $8,200 per quarter from May 2006 through May 2009.

 

Cashdecreased $384,000, from $1,334,000 as of December 31, 2007 to $950,000 asof September 30, 2008. Our debt levels decreased $2,129,000 to $31,921,000at September 30, 2008 from $34,050,000 at December 31, 2007, dueprimarily to a decrease in working capital needs consistent with lowerrevenue.  The total percent of debt tototal book capitalization (debt plus equity) decreased from 47.3% at December 31,2007 to 44.9% at September 30, 2008.

 

Cashprovided by operating activities of continuing operations for the nine-monthperiods ended 

 

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September 30,2008 and 2007 were approximately $2,387,000, and $4,060,000, respectively,reflecting a decrease of $1,673,000 primarily the result of lower net income.Net cash used in financing activities of continuing operations was $2,190,000reflects the pay down of the term loans. We believe that cash on hand plus future cash derived from operationsalong with cash available through borrowings under our credit facilities whichwe believe will likely be extended should be sufficient to allow us to meet ourforeseeable working capital needs.

 

Capitalspending was approximately $694,000 and $1,028,000 for the nine-month periodsended September 30, 2008 and 2007, respectively.  Capital expenditures for the balance of 2008are expected to be approximately $100,000, 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 productlines and 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 September 30,2008, based on that day’s closing spot rate, was approximately $188,000.

 

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 adverse effect on our results ofoperations or financial position. We believe our most significant foreigncurrency exposures are the Japanese yen, the Taiwan dollar (“TWD”) and theChinese Renminbi (“RMB”). Purchases of product from China and Taiwan are madein U.S. dollars. However, if either or both the TWD or RMB, were to strengthenmaterially in relation to the U.S. dollar, there could be an adverse effect onour business, results of operations or financial position. We are also subjectto currency risk with respect to the Yen; however we generally purchase Yenforward to mitigate the exposure.

 

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

 

Notrequired.

 

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

 

**Evaluation of disclosure controls and procedures**

 

Anevaluation was performed, under the supervision of, and with the participationof, our management including the Principal Executive Officer and PrincipalFinancial Officer, of the effectiveness of the design and operation of ourdisclosure 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 September 30, 2008 were effective. Accordingly,management believes that the consolidated condensed financial statements includedin this Quarterly Report on Form 10-Q fairly present, in all materialrespects, our financial condition, results of operations and cash flows for theperiods presented.

 

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P&Fmanagement is responsible for establishing and maintaining effective internalcontrols. Because of our inherent limitations, internal controls may notprevent or detect misstatements. A control system, no matter how well designedand operated, can only provide reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Also, projections of any evaluation ofeffectiveness as to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with policies and procedures may deteriorate.

 

TheCertifications of our Principal Executive Officer and Principal FinancialOfficer included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Qinclude, in paragraph 4 of such certifications, information concerning ourdisclosure controls and procedures and internal control over financialreporting. 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**

 

Therehave been no significant changes in our internal control over financialreporting during the most recently completed fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover 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**                                                                                                                                                    |
| ** **   | ** ** | ** **                                                                                                                                                                                                          |
|         |       | The  following table presents our repurchase activity of our Class A Common  stock during the three-month period ended September 30, 2008.                                                                |

 
| **Period**      | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Share Purchased as  Part of Publicly  Announced Plan  or Program** | ** ** | **Maximum  Number  of shares  that May Yet  Be Purchased  Under the Plan  or Program  (1)** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
| July, 2008      |       | 500                                                  |       | $                                                | 3.54       |                                                                                                                          | 500        |                                                                                                                           | 148,500    |   |
| August, 2008    |       | 21,400                                               |       | $                                                | 2.60       |                                                                                                                          | 21,400     |                                                                                                                           | 127,100    |   |
| September, 2008 |       | —                                               |       | —                                           |       | —                                                                                                                        |       | 127,100                                                                                                                        |       |

 

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(1)                      On September 12,2008, we publicly announced that our Board of Directors extended the timeduring which we may repurchase up to 150,000 shares of our Class A CommonStock under our repurchase plan from September 30, 2008 through September 30,2009.

 
| **Item 3.** | ** ** | **Defaults Upon Senior Securities**                                           |
|-------------|------------|-------------------------------------------------------------------------------|
|        |       | None.                                                                         |
|        |       |                                                                          |
| **Item 4.** | ** ** | **Submission of Matters to a Vote of Security Holders**                       |
|        |       | None.                                                                         |
|        |       |                                                                          |
| **Item 5.** | ** ** | **Other Information**                                                         |
|        |       | None.                                                                         |
|        |       |                                                                          |
| **Item 6.** | ** ** | **Exhibits**                                                                  |
|        |       | See  “Exhibit Index” immediately following the signature page. |

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| ** **                                                                                            | **P&F INDUSTRIES, INC.**                       |
|-------------------------------------------------------------------------------------------------------|----------------------------------------------------|
|                                                                                                  | (Registrant)                                       |
|                                                                                                  |                                               |
|                                                                                                  |                                               |
|                                                                                                  | By  /s/ Joseph A. Molino, Jr.                 |
|                                                                                                  | Joseph  A. Molino, Jr.                        |
|                                                                                                  | Chief  Financial Officer                           |
| Dated:             November 13, 2008 | (Principal Financial and Chief Accounting Officer) |

 

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Table of Contents

 

**EXHIBITINDEX**

 

The following exhibits are either included in this report orincorporated herein by reference as indicated below:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.1**            |       | Amendment  No. 13 to Credit Agreement, dated as of July 31, 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 (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Current Report on Form 8-K dated July 31, 2008). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **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 Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary

 

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