**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 the Quarterly Period Ended September 30, 2007**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from               to               **

 

**Commission File Number 1 - 5332**

 

**P&F INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

 

| **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 telephone number, including area code: **(631) 694-9800**

 

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Indicateby checkmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days. Yes x   Noo

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (see definition of “acceleratedfiler and large accelerated filer” in rule 12b-2 of the Exchange Act).

LargeAccelerated Filer o  Accelerated Filer o  Non-Accelerated Filer x

 

Indicateby checkmark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o   No x

 

Asof November 12, 2007, there were 3,956,431 shares of the registrant’s Class ACommon Stock outstanding.

 

 

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**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**

 

**TABLE OF CONTENTS**

 
| **PART I –  FINANCIAL INFORMATION** |                                                                                                                           |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                           |   |
| Item 1.                                  | Financial  Statements (unaudited)                                                                                              | 1 |
|                                     |                                                                                                                           |   |
|                                     | Consolidated Condensed Balance Sheets as of  September 30, 2007 and December 31, 2006                                          | 1 |
|                                     |                                                                                                                           |   |
|                                     | Consolidated Condensed Statements of  Earnings for the three months and nine months ended September 30, 2007 and 2006          | 3 |
|                                     |                                                                                                                           |   |
|                                     | Consolidated Condensed Statement of  Shareholders’ Equity for the period from January 1, 2007 to September 30,  2007 | 4 |
|                                     |                                                                                                                           |   |
|                                     | Consolidated Condensed Statements of Cash  Flows for the nine months ended September 30, 2007 and 2006                         | 5 |
|                                     |                                                                                                                           |   |
|                                     | Notes to Consolidated Condensed Financial Statements                                                                           | 8 |
|                                     |                                                                                                                           |   |
| Item 2.                                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    | 23 |
|                                     |                                                                                                                           |   |
| Item 3.                                  | Quantitative and  Qualitative Disclosures About Market Risk                                                                    | 36 |
|                                     |                                                                                                                           |   |
| Item 4.                                  | Controls and  Procedures                                                                                                       | 37 |
|                                     |                                                                                                                           |   |
| **PART II – OTHER INFORMATION**     | 38                                                                                                                             |
|                                     |                                                                                                                           |   |
| Item 1.                                  | Legal Proceedings                                                                                                              | 38 |
|                                     |                                                                                                                           |   |
| Item 1A.                                 | Risk Factors                                                                                                                   | 38 |
|                                     |                                                                                                                           |   |
| Item 2.                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   | 38 |
|                                     |                                                                                                                           |   |
| Item 3.                                  | Defaults Upon  Senior Securities                                                                                               | 38 |
|                                     |                                                                                                                           |   |
| Item 4.                                  | Submission of  Matters to a Vote of Security Holders                                                                           | 38 |
|                                     |                                                                                                                           |   |
| Item 5.                                  | Other Information                                                                                                              | 38 |
|                                     |                                                                                                                           |   |
| Item 6.                                  | Exhibits                                                                                                                       | 38 |
|                                     |                                                                                                                           |   |
| **Signature**                            |                                                                                                                           | 39 |
|                                     |                                                                                                                           |   |
| **Exhibit Index**                        |                                                                                                                           | 40 |

 

i

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.             FinancialStatements**

 

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

 

**CONSOLIDATEDCONDENSED BALANCE SHEETS**

** **
| ** **                                      | ** ** | **September 30,  2007** | ** **  | **D****ecember 31,  2006**                             | ** ** |
|-------------------------------------------------|------------|------------------------------|-------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**              | ** **  | **(derived from  audited financial  statements)** | ** ** |
| **ASSETS**                                      |       |                         |        |                                                        |       |
| CURRENT                                         |       |                         |        |                                                        |       |
| Cash and cash equivalents                       |       | $                            | 1,018,653   |                                                        | $          | 1,339,882 |   |
| Accounts receivable – net                  |       | 18,776,711                   |        | 12,685,388                                                  |       |
| Notes and other receivables                     |       | 381,982                      |        | 1,206,600                                                   |       |
| Inventories – net                          |       | 35,071,747                   |        | 26,692,615                                                  |       |
| Deferred income taxes – net                |       | 980,000                      |        | 980,000                                                     |       |
| Assets held for sale                            |       | —                       |        | 576,535                                                     |       |
| Assets of discontinued operations               |       | 32,266                       |        | 300,339                                                     |       |
| Income tax refund receivable                    |       | 457,463                      |        | 1,356,310                                                   |       |
| Prepaid expenses and other current assets       |       | 1,036,024                    |        | 1,369,403                                                   |       |
| TOTAL CURRENT ASSETS                            |       | 57,754,846                   |        | 46,507,072                                                  |       |
|                                            |       |                         |        |                                                        |       |
| PROPERTY AND EQUIPMENT                          |       |                         |        |                                                        |       |
| Land                                            |       | 1,549,773                    |        | 1,174,773                                                   |       |
| Buildings and improvements                      |       | 7,552,467                    |        | 5,716,144                                                   |       |
| Machinery and equipment                         |       | 15,435,092                   |        | 9,249,720                                                   |       |
|                                            |       | 24,537,332                   |        | 16,140,637                                                  |       |
| Less accumulated depreciation and  amortization |       | 9,549,934                    |        | 8,411,447                                                   |       |
| NET PROPERTY AND EQUIPMENT                      |       | 14,987,398                   |        | 7,729,190                                                   |       |
|                                            |       |                         |        |                                                        |       |
| GOODWILL                                        |       | 25,186,199                   |        | 24,921,473                                                  |       |
|                                            |       |                         |        |                                                        |       |
| OTHER INTANGIBLE ASSETS – net              |       | 13,573,399                   |        | 10,897,333                                                  |       |
|                                            |       |                         |        |                                                        |       |
| ASSETS OF DISCONTINUED OPERATIONS               |       | 17,345                       |        | 40,436                                                      |       |
|                                            |       |                         |        |                                                        |       |
| OTHER ASSETS – net                         |       | 192,765                      |        | 311,721                                                     |       |
|                                            |       |                         |        |                                                        |       |
| TOTAL ASSETS                                    |       | $                            | 111,711,952 |                                                        | $          | 90,407,225 |   |

 

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

 

1

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| ** **                                                                                                                                           | ** ** | **September 30,  2007** | ** **  | **D****ecember 31,  2006**                                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(unaudited)**              | ** **  | **(derived from audited  financial statements)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                        |       |                         |        |                                                            |       |
| CURRENT LIABILITIES                                                                                                                                  |       |                         |        |                                                            |       |
| Short-term borrowings                                                                                                                                |       | $                            | 10,000,000  |                                                            | $          | 3,000,000 |   |
| Accounts payable                                                                                                                                     |       | 10,865,199                   |        | 7,691,869                                                       |       |
| Income taxes payable                                                                                                                                 |       | 1,184,067                    |        | 435,237                                                         |       |
| Accrued compensation                                                                                                                                 |       | 2,087,738                    |        | 2,158,279                                                       |       |
| Other accrued liabilities                                                                                                                            |       | 2,968,569                    |        | 3,068,036                                                       |       |
| Current maturities of long-term debt                                                                                                                 |       | 5,742,334                    |        | 7,559,681                                                       |       |
| Liabilities of discontinued operations                                                                                                               |       | 174,329                      |        | 1,426,222                                                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                            |       | 33,022,236                   |        | 25,339,324                                                      |       |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| LONG-TERM DEBT, less current maturities                                                                                                              |       | 21,332,851                   |        | 12,059,758                                                      |       |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                                                               |       | 345,081                      |        | 352,971                                                         |       |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| DEFERRED INCOME TAXES – net                                                                                                                     |       | 1,134,000                    |        | 1,134,000                                                       |       |
| TOTAL LIABILITIES                                                                                                                                    |       | 55,834,168                   |        | 38,886,053                                                      |       |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                        |       |                         |        |                                                            |       |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| SHAREHOLDERS’ EQUITY                                                                                                                            |       |                         |        |                                                            |       |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares outstanding                                                                     |       | —                       |        | —                                                          |       |
| Common stock                                                                                                                                         |       |                         |        |                                                            |       |
| Class A - $1 par; authorized - 7,000,000  shares; issued - 3,956,431 and 3,850,367 shares at September 30, 2007 and  December 31, 2006, respectively |       | 3,956,431                    |        | 3,850,367                                                       |       |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued                                                                                   |       | —                       |        | —                                                          |       |
| Additional paid-in capital                                                                                                                           |       | 10,116,070                   |        | 9,191,598                                                       |       |
| Retained earnings                                                                                                                                    |       | 44,699,071                   |        | 40,850,384                                                      |       |
| Treasury stock, at cost – 318,969 and  272,607 shares at September 30, 2007 and December 31, 2006, respectively                                 |       | (2,893,788                   | )           | (2,371,177                                                      | )          |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                      |       | 55,877,784                   |        | 51,521,172                                                      |       |
|                                                                                                                                                 |       |                         |        |                                                            |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                      |       | $                            | 111,711,952 |                                                            | $          | 90,407,225 |   |

 

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

 

2

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

**CONSOLIDATEDCONDENSED STATEMENTS OF EARNINGS (unaudited)**

** **
| ** **                                                                                                                                                                   | ** ** | **Three months  ended September 30,** | ** ** | **Nine months  ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                                                                                                                                                                 |       | $                                                    | 30,353,224 |                                                | $          | 32,318,961 |   | $ | 85,919,975 |   | $ | 88,028,825 |   |
| Cost of sales                                                                                                                                                                |       | 21,985,036                                           |       | 22,617,245                                          |       | 60,727,299 |   | 60,671,557 |   |
| Gross profit                                                                                                                                                                 |       | 8,368,188                                            |       | 9,701,716                                           |       | 25,192,676 |   | 27,357,268 |   |
| Selling, general and administrative  expenses                                                                                                                                |       | 6,945,008                                            |       | 6,715,792                                           |       | 21,612,654 |   | 19,763,637 |   |
| Operating income                                                                                                                                                             |       | 1,423,180                                            |       | 2,985,924                                           |       | 3,580,022 |   | 7,593,631 |   |
| Interest expense – net                                                                                                                                                  |       | 739,475                                              |       | 493,495                                             |       | 2,222,214 |   | 1,507,507 |   |
| Earnings from continuing operations before  income taxes                                                                                                                     |       | 683,705                                              |       | 2,492,429                                           |       | 1,357,808 |   | 6,086,124 |   |
| Income taxes                                                                                                                                                                 |       | 341,000                                              |       | 997,000                                             |       | 638,000 |   | 2,435,000 |   |
|                                                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings from continuing operations                                                                                                                                          |       | 342,705                                              |       | 1,495,429                                           |       | 719,808 |   | 3,651,124 |   |
|                                                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings (loss) from operation of  discontinued operations (net of tax expense (benefit) of $(46,000) and  $(58,000) for 2007 and $34,000 and $3,000 for 2006, respectively) |       | 120,620                                              |       | (51,491                                             | )          | 102,319 |   | (6,030 | ) |
| Gain on sale of assets of discontinued  operations (net of tax expense of $2,093,000 for 2007)                                                                               |       | —                                               |       | —                                              |       | 3,026,560 |   | — |   |
| Earnings (loss) from discontinued  operations                                                                                                                                |       | 120,620                                              |       | (51,491                                             | )          | 3,128,879 |   | (6,030 | ) |
|                                                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net earnings                                                                                                                                                                 |       | $                                                    | 463,325    |                                                | $          | 1,443,938 |   | $ | 3,848,687 |   | $ | 3,645,094 |   |
|                                                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings per common share:                                                                                                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                                                                                                                                        |       | $                                                    | 0.10       |                                                | $          | 0.42 |   | $ | 0.20 |   | $ | 1.02 |   |
| Discontinued operations                                                                                                                                                      |       | 0.03                                                 |       | (0.02                                               | )          | 0.87 |   | — |   |
|                                                                                                                                                                         |       | $                                                    | 0.13       |                                                | $          | 0.40 |   | $ | 1.07 |   | $ | 1.02 |   |
|                                                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings per common share:                                                                                                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                                                                                                                                        |       | $                                                    | 0.09       |                                                | $          | 0.40 |   | $ | 0.19 |   | $ | 0.96 |   |
| Discontinued operations                                                                                                                                                      |       | 0.03                                                 |       | (0.01                                               | )          | 0.82 |   | — |   |
|                                                                                                                                                                         |       | $                                                    | 0.12       |                                                | $          | 0.39 |   | $ | 1.01 |   | $ | 0.96 |   |
|                                                                                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average common shares outstanding:                                                                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                                                                                                                        |       | 3,635,075                                            |       | 3,577,760                                           |       | 3,604,630 |   | 3,579,798 |   |
| Diluted                                                                                                                                                                      |       | 3,789,357                                            |       | 3,741,052                                           |       | 3,796,363 |   | 3,799,522 |   |

 

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

 

3

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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, 2007**                                    |       | $          | 51,521,172 |                                                  | 3,850,367  |                    | $          | 3,850,367    |       | $                       | 9,191,598  |   | $ | 40,850,384 |   | (272,607 | ) | $ | (2,371,177 | ) |
|                                                             |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Net earnings                                                     |       | 3,848,687  |       | —                                                |       | —                  |       | —       |       | 3,848,687               |       | — |   | — |   |
| Stock-based  compensation                                        |       | 301,569    |       | —                                                |       | —                  |       | 301,569      |       | —                  |       | — |   | — |   |
| Tax benefits from  exercise of stock options                     |       | 84,000     |       | —                                                |       | —                  |       | 84,000       |       | —                  |       | — |   | — |   |
| Shares  surrendered as payment for exercise of stock options     |       | (522,611   | )          | —                                                |       | —                  |       | —       |       | —                  |       | (46,362 | ) | (522,611 | ) |
| Issuance of Class  A common stock upon exercise of stock options |       | 644,967    |       | 106,064                                               |       | 106,064                 |       | 538,903      |       | —                  |       | — |   | — |   |
| **Balance,  September 30, 2007**                                 |       | $          | 55,877,784 |                                                  | 3,956,431  |                    | $          | 3,956,431    |       | $                       | 10,116,070 |   | $ | 44,699,071 |   | (318,969 | ) | $ | (2,893,788 | ) |

 

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

 

4

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

 

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

 
| ** **                                                                                                    | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Cash Flows from Operating Activities of  Continuing Operations:                                               |       |                                                    |       |   |   |
| Net earnings                                                                                                  |       | $                                                       | 3,848,687  |   | $ | 3,645,094 |   |
| (Earnings) loss from discontinued  operations – net of taxes                                             |       | (3,128,879                                              | )          | 6,030 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities of continuing operations: |       |                                                    |       |   |   |
| Non-cash charges                                                                                              |       |                                                    |       |   |   |
| Depreciation and amortization                                                                                 |       | 1,138,487                                               |       | 680,375 |   |
| Amortization of other intangible assets                                                                       |       | 982,934                                                 |       | 898,124 |   |
| Amortization of other assets                                                                                  |       | 12,417                                                  |       | 3,000 |   |
| Provision for losses on accounts receivable  - net                                                            |       | 90,017                                                  |       | 3,051 |   |
| Stock-based compensation                                                                                      |       | 301,569                                                 |       | 53,372 |   |
| Changes in operating assets and  liabilities, net of assets and liabilities acquired:                         |       |                                                    |       |   |   |
| Accounts receivable                                                                                           |       | (3,039,924                                              | )          | (5,568,735 | ) |
| Notes and other receivables                                                                                   |       | 824,618                                                 |       | 1,890,137 |   |
| Inventories                                                                                                   |       | (1,164,439                                              | )          | (837,541 | ) |
| Income tax refund receivable                                                                                  |       | 898,847                                                 |       | — |   |
| Prepaid expenses and other current assets                                                                     |       | 387,714                                                 |       | (398,417 | ) |
| Other assets                                                                                                  |       | 201,539                                                 |       | 298,428 |   |
| Accounts payable                                                                                              |       | 3,173,330                                               |       | 6,327,559 |   |
| Accruals and other                                                                                            |       | (466,423                                                | )          | 733,776 |   |
| Total adjustments                                                                                             |       | 211,807                                                 |       | 4,089,159 |   |
| Net cash provided by operating activities  of continuing operations                                           |       | $                                                       | 4,060,494  |   | $ | 7,734,253 |   |

 

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

 

5

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| ** **                                                                               | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Cash Flows from Investing Activities of  Continuing Operations:                          |       |                                                    |       |   |   |
| Capital expenditures                                                                     |       | $                                                       | (1,027,724 | ) | $ | (1,257,153 | ) |
| Purchase of certain assets, net of certain  liabilities, of Hy-Tech Machine, Inc.        |       | (20,752,896                                             | )          | — |   |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products, Inc. |       | —                                                  |       | (5,402,218 | ) |
| Net cash used in investing activities of  continuing operations                          |       | (21,780,620                                             | )          | (6,659,371 | ) |
|                                                                                     |       |                                                    |       |   |   |
| Cash Flows from Financing Activities of  Continuing Operations:                          |       |                                                    |       |   |   |
| Proceeds from short-term borrowings                                                      |       | 16,500,000                                              |       | 11,000,000 |   |
| Repayments of short-term borrowings                                                      |       | (9,500,000                                              | )          | (8,500,000 | ) |
| Proceeds from term loan                                                                  |       | 19,000,000                                              |       | — |   |
| Repayments of term loan                                                                  |       | (7,850,000                                              | )          | (2,850,000 | ) |
| Principal payments on other long-term debt                                               |       | (3,694,254                                              | )          | (158,838 | ) |
| Proceeds from exercise of stock options                                                  |       | 122,356                                                 |       | 146,730 |   |
| Tax benefits from the exercise of stock  options                                         |       | 84,000                                                  |       | — |   |
| Purchase of Class A common stock                                                         |       | —                                                  |       | (294,196 | ) |
| Net cash provided by (used in) financing  activities of continuing operations            |       | 14,662,102                                              |       | (656,304 | ) |
|                                                                                     |       |                                                    |       |   |   |
| Cash Flows from Discontinued Operations:                                                 |       |                                                    |       |   |   |
| Net cash provided by (used in) operating  activities                                     |       | 387,817                                                 |       | (732,205 | ) |
| Net cash provided by investing activities                                                |       | 3,603,095                                               |       | — |   |
| Net cash used in financing activities                                                    |       | (1,254,117                                              | )          | (84,865 | ) |
| Net cash provided by (used in) discontinued  operations                                  |       | 2,736,795                                               |       | (817,070 | ) |
|                                                                                     |       |                                                    |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                |       | (321,229                                                | )          | (398,492 | ) |
| Cash and cash equivalents at beginning of  period                                        |       | 1,339,882                                               |       | 1,771,624 |   |
| Cash and cash equivalents at end of period                                               |       | $                                                       | 1,018,653  |   | $ | 1,373,132 |   |

 

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

 

6

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**Supplementaldisclosures of cash flow information:**

 
| ** **     | ** ** | **Nine months ended September 30,** | ** ** |
|----------------|------------|---------------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Cash paid for: |       |                                                    |       |   |   |
| Interest       |       | $                                                       | 2,412,000  |   | $ | 1,367,000 |   |
| Income taxes   |       | $                                                       | 1,610,000  |   | $ | 3,645,000 |   |

 

Non-cashinvesting and financing activities were as follows:

 

During the nine months ended September 30, 2007, theCompany received 46,362 shares of Class A Common Stock in connection with theexercise of options to purchase 96,664 shares of Class A Common Stock. Thevalue of these shares was recorded at $522,611.

 

During the nine months ended September 30, 2006, theCompany received 5,000 shares of Class A Common Stock in connection with theexercise of options to purchase 15,000 shares of Class A Common Stock. Thevalue of these shares was recorded at $61,850.

 

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

 

7

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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**

 

Theunaudited consolidated condensed financial statements contained herein includethe accounts of P&F Industries, Inc. and its subsidiaries (“P&F”). Allsignificant intercompany balances and transactions have been eliminated.

 

P&Fconducts its business operations through two of its wholly-owned subsidiaries:Continental Tool Group, Inc. (“Continental”) and Countrywide Hardware, Inc. (“Countrywide”).On June 29, 2007, P&F transferred its sole and direct ownership interest inFlorida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) toContinental. P&F and its subsidiaries are herein referred to collectivelyas the “Company.” In addition, the words “we”, “our” and “us” refer to theCompany.

 

Continentalconducts its business operations through Florida Pneumatic and Hy-Tech Machine,Inc., (“Hy-Tech”). Florida Pneumatic is engaged in the importation, manufactureand sale of pneumatic hand tools, primarily for the industrial, retail andautomotive markets, and the importation and sale of compressor air filters.Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of pipe cutting and threading tools, wrenches and replacement 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, Hy-Techacquired substantially all of the operating assets of Hy-Tech Machine, Inc., aPennsylvania corporation, and Quality Gear & Machine, Inc. and certain realproperty from HTM Associates. Hy-Tech is primarily engaged in the manufactureand distribution of pneumatic tools and parts for industrial applications.

 

Countrywideconducts its business operations through Nationwide Industries, Inc. (“Nationwide”),Woodmark International, L.P. (“Woodmark”), a limited partnership betweenCountrywide and WILP Holdings, Inc., a subsidiary of P&F, and Pacific StairProducts, Inc. (“Pacific Stair”). Nationwide is an importer and manufacturer ofdoor, window and fencing hardware. Woodmark is an importer of builders’hardware, including staircase components and kitchen and bath hardware andaccessories. Pacific Stair manufactures premium stair rail products anddistributes Woodmark’s staircase components to the building industry, primarilyin southern California and the southwestern region of the United States.

 

TheCompany’s wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), wasengaged in the manufacture and sale of baseboard heating products and theimportation and sale of radiant heating systems until it exited that businessin October 2005 through the sale of substantially all of its non-real estateassets. Embassy sold its real estate assets in June 2007. The Company’swholly-owned subsidiary, Green Manufacturing, Inc. (“Green”), was primarilyengaged in the manufacture, development and sale of heavy-duty welded customdesigned hydraulic cylinders, a line of access equipment for the petro-chemicalindustry and a line of post hole digging equipment for the agriculturalindustry until it exited those businesses between December 2004 and July 2005.The assets and liabilities and results of operations of Embassy and Green havebeen segregated and reported separately as discontinued operations in theConsolidated Condensed Financial Statements. Note 13 to the Notes toConsolidated Condensed Financial Statements presents financial information forthe segments of the Company’s business.

 

8

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**Basis of Financial Statement Presentation**

 

Theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information, and with the rulesand regulations of the Securities and Exchange Commission regarding interimfinancial reporting. Accordingly, these interim financial statements do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of the Company, these unaudited consolidatedcondensed financial statements include all adjustments necessary to presentfairly the information set forth therein. All such adjustments are of a normalrecurring nature. Results for interim periods are not necessarily indicative ofresults to be expected for a full year.

 

Theresults of operations for Embassy and Green have been segregated fromcontinuing operations and are reflected on the consolidated condensedstatements of earnings as discontinued operations.

 

Theunaudited consolidated condensed balance sheet information as of December 31,2006 was derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006. The interimfinancial statements contained herein should be read in conjunction with thatReport.

 

Inpreparing its unaudited consolidated condensed financial statements inconformity with accounting principles generally accepted in the United States ofAmerica, the Company is required to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. On an ongoingbasis, the Company evaluates estimates, including those related to bad debts,inventory reserves, goodwill and intangible assets. The Company bases itsestimates on historical data and experience, when available, and on variousother assumptions that are believed to be reasonable under the circumstances,the combined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results could differ from those estimates.

 

**Income Taxes**

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes”.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 was effective for fiscal yearsbeginning after December 15, 2006. The adoption of this statement did not havea material effect on the Company’s financial position or results of operations.

 

TheCompany files a consolidated Federal tax return. P&F Industries, Inc. andeach of its subsidiaries file separate state and local tax returns.

 

In2007, the Internal Revenue Service completed its examination of the Company’sFederal tax returns for the years 2003 and 2004 and issued a Revenue Agent’sReport that reported no change to the returns as filed. All examinations of taxyears prior to 2003 have been previously completed.

 

In addition, the Company and certain of its subsidiaries file taxreturns in the states of New York and Florida that are currently under auditfor years ranging from 2001 through 2005. At December 31, 2006, the Company hadrecorded approximately $395,000 in tax liabilities related to an uncertainincome tax position resulting from the pending state audit by Florida. TheCompany does not expect  that thecompletion of these audits would have a material effect on its financialposition or results of operations. As the result of the expiration of thestatute of limitations related to certain years subject to the Florida taxaudit, we accordingly reduced the tax accrual by approximately $79,000, duringthe quarter ended September 30, 2007.

 

 

9

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TheCompany accounts for interest and penalties related to income tax matters inincome tax expense. The Company had accrued interest of approximately $165,000as of December 31, 2006. During the nine months ended September 30, 2007, asthe result of the expiration of the statute of limitations related to certainyears subject to the Florida tax audit, we reduced the accrued interest byapproximately $5,000.

 

InJune 2006, the FASB ratified the consensus reached by the Emerging Issues TaskForce (“EITF”) on Issue No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation)”,(“ EITF 06-3”). EITF 06-3 includes any tax assessed by a governmental authoritythat is directly imposed on a revenue-producing transaction between a sellerand a customer and may include, but is not limited to, sales, use, value added,and some excise taxes. EITF 06-3 concludes that the presentation of taxes oneither a gross (included in revenues and costs) or a net (excluded fromrevenues) basis is an accounting policy decision that should be disclosed. Inaddition, for any such taxes that are reported on a gross basis, a companyshould disclose the amounts of those taxes in interim and annual financialstatements for each period for which an income statement is presented if thoseamounts are significant. The provisions of EITF 06-3 are to be applied tofinancial reports for interim and annual reporting periods beginning afterDecember 15, 2006. The adoption of this statement did not have a materialeffect on the Company’s financial position or results of operations.

 

**Reclassifications**

 

Certainamounts in the Consolidated Condensed Financial Statements at December 31, 2006have been reclassified to conform to the current period’s presentation.

 

**NOTE 2 - EARNINGS PER SHARE**

 

Basicearnings per common share is based only on the average number of shares ofcommon stock outstanding for the periods. Diluted earnings per common sharereflects the effect of shares of common stock issuable upon the exercise ofoptions, unless the effect on earnings is antidilutive.

 

Dilutedearnings per common share is computed using the treasury stock method. Underthis method, the aggregate number of shares of common stock outstandingreflects the assumed use of proceeds from the hypothetical exercise of anyoutstanding 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.

 

10

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Thefollowing table sets forth the computation of basic and diluted earnings percommon share:

 
| ** **                                                                                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator for basic and diluted earnings  per common share:                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings from continuing operations                                                                                |       | $                                                    | 343,000    |                                                | $          | 1,495,000 |   | $ | 720,000 |   | $ | 3,651,000 |   |
| Discontinued operations, net of taxes                                                                              |       | 120,000                                              |       | (51,000                                             | )          | 3,129,000 |   | (6,000 | ) |
| Net earnings                                                                                                       |       | $                                                    | 463,000    |                                                | $          | 1,444,000 |   | $ | 3,849,000 |   | $ | 3,645,000 |   |
|                                                                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Denominator:                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Denominator for basic earnings per share – weighted average common  shares outstanding                        |       | 3,635,000                                            |       | 3,578,000                                           |       | 3,605,000 |   | 3,580,000 |   |
| Effect of dilutive securities:                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Stock options                                                                                                      |       | 154,000                                              |       | 163,000                                             |       | 191,000 |   | 220,000 |   |
| Denominator for diluted earnings per share – adjusted weighted  average common shares and assumed conversions |       | 3,789,000                                            |       | 3,741,000                                           |       | 3,796,000 |   | 3,800,000 |   |

 

AtSeptember 30, 2007 and 2006 and during the three-month and nine-month periodsended September 30, 2007 and 2006, there were outstanding stock options whoseexercise prices were higher than the average market values of the underlyingClass A Common Stock for the period. These options are antidilutive and areexcluded from the computation of earnings per share. The weighted averageantidilutive stock options outstanding were as follows:

 
| ** **                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average antidilutive stock options  outstanding |       | 30,000                                               |       | 29,500                                              |       | 29,667 |   | 29,500 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

 

Stock-basedCompensation

 

OnJanuary 1, 2006, the Company adopted the provisions of FASB Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment” (“Statement 123(R)”), which revises FASB SFAS No. 123, “Accounting forStock-Based Compensation”, and supersedes APB Opinion 25, “Accounting for StockIssued to Employees”. Statement 123(R) requires the Company to recognizeexpense related to the fair value of our stock-based compensation awards,including employee stock options.

 

Duringthe nine months ended September 30, 2007 and 2006, the Company granted optionsto purchase 92,500 and nil shares, respectively, of the Company’s common stock.The total intrinsic value of stock options exercised during the nine monthsended September 30, 2007 and 2006 was $566,000 and $223,000, respectively.

 

Asa result of adopting Statement 123(R), the Company recorded stock-based compensationexpense for the three-month periods ended September 30, 2007 and 2006 ofapproximately $51,000 and $17,000, respectively, and for the nine-month periodsended September 30, 2007 and 2006 of approximately $302,000 and $53,000,respectively. Compensation expense is recognized in the selling general andadministrative expenses line item of the Company’s statements of earnings on astraight-line basis over the vesting periods. There are no capitalizedstock-based compensation costs at September 30, 2007 and 2006. The adoption ofStatement 123(R) had no material impact on our basic and diluted earnings percommon share for the three-month and nine-month periods ended September 30,2006. However, the adoption of Statement 123(R) affected the Company’s basicand diluted earnings per common share for the three-month and nine-monthperiods ended September 30, 2007, by reductions to diluted earnings per shareof $0.01 and $0.08, respectively. TheCompany recognizes compensation cost over the requisite service period.However, the exercisability of the respective non-vested options, which are atpre-determined dates on a calendar year, do not necessarily correspond to theperiod(s) in which straight-line amortization of compensation cost is recorded.As of September 30, 2007, the Company had approximately $254,000 oftotal unrecognized compensation cost related to non-vested awards granted underour share-based plans, which we expect to recognize over a weighted-averageperiod of 2.9 years.

 

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TheCompany received cash of approximately $122,000 and $147,000 from optionsexercised during the nine months ended September 30, 2007 and 2006,respectively. The impact of these cash receipts is included in financing activitiesin the accompanying consolidated condensed statements of cash flows. Statement123(R) requires that cash flows from tax benefits attributable to taxdeductions in excess of the compensation cost recognized for those options(excess tax benefits) be classified as financing cash flows.

 

Therewere no options granted during fiscal 2006. The fair values of the optionsgranted during the nine month period ended September 30, 2007 were estimated onthe date of the grant using the Black-Scholes option-pricing model on the basisof the following weighted average assumptions:

 
| ** **                                      | ** **     | **September 30, 2007** | ** **     |
|-------------------------------------------------|----------------|----------------------------------|----------------|
| Risk-free interest rate                         | **** **** | ****5.2****                      | ****%****      |
| Expected term (in years)                        | **** **** | ****8.2****                      | **** **** |
| Volatility                                      | **** **** | ****34.9****                     | ****%****      |
| Dividend yield                                  | **** **** | ****0****                        | ****%****      |
| Weighted-average fair value of options  granted | **** **** | ****$****                        | **5.68**       | **** **** |
|                                                 |                |                                  |                |  |

 

Theexpected term was based on historical exercises and terminations. Thevolatility for the periods with the expected term of the options is determinedusing historical volatilities based on historical stock prices. The dividendyield is 0% as the Company has historically not declared dividends and does notexpect to declare any in the future.

 

StockOption Plan

 

TheCompany’s 2002 Incentive Stock Option Plan (the “Current Plan”) authorizes theissuance, to employees and directors, of options to purchase a maximum of1,100,000 shares of Class A Common Stock. These options must be issued withinten years of the effective date of the Plan and are exercisable for a ten yearperiod from the date of grant, at prices not less than 100% of the market valueof the Class A Common Stock on the date the option is granted. Incentive stockoptions granted to any 10% stockholder are exercisable for a five year periodfrom the date of grant, at prices not less than 110% of the market value of theClass A Common Stock on the date the option is granted. Pursuant to the CurrentPlan, the Stock Option Committee has the discretion to award non-qualifiedstock option grants. Options have vesting periods of immediate to three years.In the event options granted contain a vesting schedule over a period of years,the Company recognizes compensation cost for these awards on a straight-linebasis over the service period. The Current Plan, which terminates in 2012, isthe successor to the Company’s 1992 Incentive Stock Option Plan (the “PriorPlan”).

 

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Thefollowing is a summary of the changes in outstanding options for the ninemonths ended September 30, 2007:

 
| ** **                      | ** ** | **Option Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, January 1, 2007    |       | 560,900                |       | $                                      | 7.69       |                                                                 | 3.7        |                            |       |   |
| Granted                         |       | 92,500                 |       | $                                      | 11.20      |                                                                 | —     |                            |       |   |
| Exercised                       |       | (106,064               | )          | $                                      | 6.08       |                                                                 | —     |                            |       |   |
| Forfeited                       |       | —                 |       | —                                 |       | —                                                               |       |                            |       |
| Expired                         |       | (11,400                | )          | $                                      | 7.82       |                                                                 | —     |                            |       |   |
| Outstanding, September 30, 2007 |       | 535,936                |       | $                                      | 8.61       |                                                                 | 4.7        |                            | $          | 1,465,000 |   |
|                            |       |                   |       |                                   |       |                                                                 |       |                            |       |
| Vested, September 30, 2007      |       | 464,109                |       | $                                      | 8.31       |                                                                 | 4.4        |                            | $          | 1,531,000 |   |

 

The following is a summary of changes in non-vestedshares for the nine months ended September 30, 2007:

 
| ** **                            | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-Date  Fair Value** | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|
| Non-vested shares, January 1, 2007    |       | 49,488                 |       | $                                                          | 3.77       |   |
| Granted                               |       | 45,000                 |       | $                                                          | 6.52       |   |
| Vested                                |       | (22,661                | )          | $                                                          | 4.68       |   |
| Forfeited                             |       | —                 |       | —                                                     |       |
| Non-vested shares, September 30, 2007 |       | 71,827                 |       | $                                                          | 5.20       |   |

 

Thenumber of shares of Class A common stock reserved for stock options availablefor issuance under the Current Plan as of September 30, 2007 was 590,900. Ofthe options outstanding at September 30, 2007, 369,436 were issued under theCurrent Plan and 166,500 were issued under the Prior Plan.

 

**NOTE 4 - FOREIGN CURRENCY TRANSACTIONS**

 

**Derivative Financial Instruments**

 

TheCompany uses derivatives to reduce its exposure to fluctuations in foreigncurrencies, principally Japanese yen. Derivative products, specifically foreigncurrency forward contracts, are used to hedge the foreign currency marketexposures underlying certain debt and forecasted transactions with foreignvendors. The Company does not enter into such contracts for speculativepurposes.

 

Forderivative instruments that are designated and qualify as fair value hedges(i.e., hedging the exposure to changes in the fair value of an asset or aliability or an identified portion thereof that is attributable to a particularrisk), the gain or loss on the derivative instrument as well as the offsettinggain or loss on the hedge item attributable to the hedged risk are recognizedin earnings in the current period. For derivative instruments that aredesignated and qualify as a cash flow hedge (i.e., hedging the exposure ofvariability in the expected future cash flows that would be attributable to aparticular risk), the effective portion of the gain or loss on the derivativeinstrument is reported as a component of accumulated comprehensive loss (acomponent of shareholders’ equity) and reclassified into earnings in the sameperiod or periods during which the hedged transaction affects earnings. Theremaining gain or loss on the derivative instrument, if any (i.e., theineffective portion and any portion of the derivative instrument excluded fromthe assessment of effectiveness), is recognized in earnings in the currentperiod. For derivative instruments not designated as hedging instruments,changes in the fair market values are recognized in earnings as a component ofcost of sales. At September 30, 2007 and 2006, all of the Company’s derivativeinstruments are designated as fair-value hedging instruments.

 

TheCompany accounts for changes in the fair value of its foreign currencycontracts by marking them to

 

13

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marketand recognizing any resulting gains or losses through its statement ofearnings. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statement of earnings. AtSeptember 30, 2007, the Company had foreign currency forward contracts,maturing in 2007, to purchase Japanese yen at contracted forward rates. Thevalue of these contracts at September 30, 2007, based on that day’s closingspot rate, was approximately $545,000. During the three-month periods endedSeptember 30, 2007 and 2006, the Company recorded in its cost of sales realizedgains (losses) of approximately $3,000 and $(14,000), respectively, on foreigncurrency transactions. During the nine-month periods ended September 30, 2007and 2006, the Company recorded in its cost of sales realized losses ofapproximately $(24,000) and $(10,000), respectively, on foreign currencytransactions. At September 30, 2007 and 2006, the Company had unrealized(losses) gains of $(26,000) and $12,000, respectively, on foreign currencytransactions.

 

**NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS**

 

**Adoption of New Accounting Pronouncements**

 

InMarch 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of FinancialAssets - an amendment of SFAS No. 140.” SFAS No. 156 requires therecognition of a servicing asset or liability each time a company undertakes anobligation to service a financial asset in certain situations. It requires allseparately recognized servicing assets and liabilities to be initially measuredat fair value, if practical. SFAS No. 156 was effective as of the beginning ofa company’s first fiscal year that began after September 15, 2006. Theadoption of this statement did not have a material effect on our financialposition or results of operations.

 

InFebruary 2006, FASB issued SFAS No. 155, “Accounting for Certain HybridFinancial Instruments - an amendment of SFAS No. 133 and 140.” SFAS No. 155allows companies to elect to measure at fair value entire financial instrumentscontaining embedded derivatives that would otherwise have to be accounted forseparately. It also requires companies to identify interests in securitizedfinancial assets that are freestanding derivatives or contain embeddedderivatives that would have to be accounted for separately, clarifies whichinterest- and principal-only strips are subject to SFAS No. 133, and amendsSFAS No. 140 to revise the conditions of a qualifying special purpose entitydue to the new requirement to identify whether interests in securitizedfinancial assets are freestanding derivatives or contain embedded derivatives.SFAS No. 155 was effective for all financial instruments acquired, issued orsubject to a remeasurement event after the beginning of a company’s firstfiscal year that began after September 15, 2006. The adoption of thisstatement did not have a material effect on our financial position or resultsof operations.

 

**Effect of Newly Issued But Not Yet EffectiveAccounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a newsingle authoritative definition of fair value and provides enhanced guidancefor measuring 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 is effective for us asof January 1, 2008. The Company is currently evaluating the impact that theadoption of SFAS 157 will have on its results of operations and financialposition. 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Liabilities, Including anamendment of FASB Statement No. 115”, (“SFAS 159”). This Statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue. SFAS 159 is effective as of the beginning of fiscal 2008. The Company iscurrently evaluating the impact that the adoption of SFAS 159 will have on itsresults of operations and financial position.

 

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**NOTE 6 – ACQUISITION**

 

Hy-TechMachine, Inc.

 

OnFebruary 14, 2007, pursuant to an Asset Purchase Agreement (the “Hy-Tech APA”)effective as of February 12, 2007, Hy-Tech, a Delaware corporation and awholly-owned subsidiary of Continental, acquired substantially all of theassets (the “Hy-Tech Purchased Property”) of Hy-Tech Machine, Inc., aPennsylvania corporation, and Quality Gear & Machine, Inc., a Pennsylvaniacorporation (collectively, the “Hy-Tech Sellers”). The purchase price consistedof $16,900,000 in cash, subject to adjustments, plus the assumption of certainpayables and liabilities and the obligation to make certain contingent paymentsbased on factors described in the Hy-Tech APA. The purchase price wasnegotiated on the basis of the Hy-Tech Sellers’ historical financialperformance. The Hy-Tech Purchased Property was used by the Hy-TechSellers in the business of, among other things, manufacturing and sellingpneumatic tools and other tool products.

 

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

 

TheCompany also agreed to make additional payments (“Contingent Consideration”) tothe 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 may not exceed $1,900,000. Any such additionalpayments for Contingent Consideration or Additional Contingent Consideration,if any, would be payable on or about ninety days subsequent to the secondanniversary of the acquisition date and will be treated by the Company asadditions to goodwill.

 

Contemporaneouslywith this acquisition, the Company executed and delivered Amendment No. 7 toCredit Agreement with the two banks. The amendment, among other things, addedContinental and Hy-Tech as additional co-borrowers and provides for new termloans in amounts not to exceed $19,000,000. The principal on the new term loannotes are payable in 25 consecutive quarterly installments of 1/25 of theaggregate principal amount outstanding on January 31, 2008, commencing onJanuary 31, 2008. From the date of the amendment through January 31, 2008,monthly payments shall be made of interest only. The Company and theco-borrowers have the option to pay interest at a rate based on either thefluctuating prime rate, LIBOR or a combination of the two rates. The new termloan notes shall mature on January 31, 2014. The amendment also provided forthe amendment and restatement of certain existing term loan notes. Therevolving credit loan facility provides for a maximum of $18,000,000, withvarious sublimits, for direct borrowings, letters of credit, bankers’acceptances and equipment loans.

 

The purchase price for this acquisition was asfollows:

 
| Cash paid at closing from new borrowings                      |   | $          | 19,100,000 |   |
|---------------------------------------------------------------|--------|------------|------------|--------|
| Estimated direct acquisition costs                            |   | 900,000    |       |
| Total estimated purchase price prior to net  asset adjustment |   | 20,000,000 |       |
| Estimated net asset adjustment                                |   | 753,000    |       |
| Total estimated purchase price                                |   | $          | 20,753,000 |   |

 

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The following table presentsthe estimated fair values of the net assets acquired and the amount allocatedto goodwill:

 
| Accounts receivable, net                |   |      |   | $          | 3,141,000  |   |
|-----------------------------------------|--------|-----------|--------|------------|------------|--------|
| Inventories, net                        |   |      |   | 7,215,000  |       |
| Other current assets                    |   |      |   | 54,000     |       |
| Other assets                            |   |      |   | 95,000     |       |
| Property and equipment                  |   |      |   | 7,369,000  |       |
| Identifiable intangible assets:         |   |      |   |       |       |
| Backlog                                 |   | $         | 94,000 |       |       |   |
| Customer relationships                  |   | 3,076,000 |   |       |       |
| Trademark                               |   | 199,000   |   |       |       |
| Engineering drawings                    |   | 290,000   |   | 3,659,000  |       |
|                                    |   |      |   | 21,533,000 |       |
| Less: liabilities assumed               |   |      |   | 1,045,000  |       |
| Total fair value of net assets acquired |   |      |   | 20,488,000 |       |
| Goodwill                                |   |      |   | 265,000    |       |
| Total estimated purchase price          |   |      |   | $          | 20,753,000 |   |
|                                         |        |           |        |            |            |        |  |

 

The Company obtained apreliminary valuation of the identifiable intangible assets through anindependent third-party and may be subject to change. The excess of thetotal purchase price over the fair value of the net assets acquired, includingthe value of the identifiable intangible assets, has been allocated togoodwill. Goodwill will be amortized, for fifteen years, for tax purposes butnot for financial reporting purposes. Thefair values and estimated lives of the identifiable intangible assets are basedon current information and are subject to change. The intangible assets subjectto amortization will be amortized over fifteen years for tax purposes. Forfinancial reporting purposes, useful lives have been assigned as follows:

 
| Backlog                |   | 6 months   |   |
|------------------------|--------|------------|--------|
| Customer relationships |   | 6-13 years |   |
| Trademark              |   | Indefinite |   |
| Engineering drawings   |   | 20 years   |   |

 

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, 2006. 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, 2006 or of futureconsolidated operating results.

 
| ** **                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                       |       | $                                | 30,353,000 |                            | $          | 36,799,000 |   | $ | 88,099,000 |   | $ | 101,468,000 |   |
|                               |       |                             |       |                            |       |   |   |   |   |
| Net earnings                       |       | $                                | 458,000    |                            |       | 1,623,000 |   | $ | 4,026,000 |   | $ | 4,181,000 |   |
| Earnings per share of common stock |       |                             |       |                            |       |   |   |   |   |
| Basic                              |       | $                                | 0.13       |                            | $          | 0.45 |   | $ | 1.12 |   | $ | 1.17 |   |
| Diluted                            |       | $                                | 0.12       |                            | $          | 0.43 |   | $ | 1.06 |   | $ | 1.10 |   |

 

16

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**NOTE 7 – DISCONTINUED OPERATIONS**

 

Embassy Industries, 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”), Embassy soldsubstantially all of its operating assets to EMI. The assets sold pursuant tothe Embassy APA include, among others, machinery and equipment, inventory,accounts receivable and certain intangibles. Certain assets were retained byEmbassy, including, but not limited to, cash and title to any real propertyowned by Embassy at the consummation of the sale to EMI. Embassy has effectivelyceased all operating activities.

 

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

 

ThePurchaser Letter purports to terminate the Contract of Sale based uponPurchaser’s assertion that Embassy had not satisfied certain requirements anddemands that the escrow agent return the down-payment with accrued interest,and 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, Purchaserinstituted an action against Embassy in the Supreme Court of the State of NewYork, County of Suffolk, for breach of contract and return of down-payment,seeking $650,000, together with costs of title and survey and interest thereon,and the cost of the action. The down-payment remains in escrow pendingresolution of this matter. Embassy believes the action is without merit andintends to vigorously defend it.

 

Embassyentered into a new contract of sale, dated as of February 26, 2007, on theFarmingdale Premises with Tell Realty LLC, an affiliated entity of Sam Tell& Son, Inc., for a purchase price of $6.3 million. Embassy sold theFarmingdale Premises in June 2007 and used the after-tax proceeds from the saleto satisfy the mortgage on the building of approximately $1.2 million and toreduce its long-term debt. The Company recorded a pre-tax gain from the sale ofapproximately $5.1 million.

 

17

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Thefollowing amounts related to discontinued operations have been segregated fromthe Company’s continuing operations and are reported as assets held for saleand assets and liabilities of discontinued operations in the consolidatedcondensed balance sheets:

 
| ** **                                                        | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Assets held for sale and assets of  discontinued operations:      |       |                             |       |                            |       |
| Current:                                                          |       |                             |       |                            |       |
| Prepaid expenses                                                  |       | $                                | 32,000     |                            | $          | 300,000 |   |
| Assets held for sale                                              |       | —                           |       | 577,000                         |       |
| Subtotal                                                          |       | 32,000                           |       | 877,000                         |       |
| Long-term:                                                        |       |                             |       |                            |       |
| Other receivable                                                  |       | 18,000                           |       | 40,000                          |       |
| Total assets held for sale and assets of  discontinued operations |       | $                                | 50,000     |                            | $          | 917,000 |   |
|                                                              |       |                             |       |                            |       |
| Liabilities of discontinued operations:                           |       |                             |       |                            |       |
| Current:                                                          |       |                             |       |                            |       |
| Accounts payable and accrued expenses                             |       | $                                | 174,000    |                            | $          | 172,000 |   |
| Mortgage payable                                                  |       | —                           |       | 1,254,000                       |       |
| Subtotal                                                          |       | 174,000                          |       | 1,426,000                       |       |
| Long-term:                                                        |       |                             |       |                            |       |
| Pension obligation                                                |       | 345,000                          |       | 353,000                         |       |
| Total liabilities of discontinued  operations                     |       | $                                | 519,000    |                            | $          | 1,779,000 |   |

 

**NOTE 8 - ****ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS******

 

Accounts receivable -net consists of:

 
| ** **                      | ** ** | **September 30,  2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------|------------|------------------------------|------------|----------------------------|------------|
| Trade accounts receivable       |       | $                            | 19,126,000 |                       | $          | 12,908,000 |   |
| Allowance for doubtful accounts |       | (349,000                     | )          | (223,000                   | )          |
|                            |       | $                            | 18,777,000 |                       | $          | 12,685,000 |   |

 

**NOTE 9 - INVENTORIES**

 
| ** **                                        | ** ** | **September 30,  2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| Raw material                                      |       | $                            | 2,584,000  |                       | $          | 2,537,000 |   |
| Work in process                                   |       | 1,877,000                    |       | 334,000                    |       |
| Finished goods                                    |       | 34,282,000                   |       | 25,651,000                 |       |
|                                              |       | 38,743,000                   |       | 28,522,000                 |       |
| Reserve for obsolete and slow-moving  inventories |       | (3,671,000                   | )          | (1,829,000                 | )          |
|                                              |       | $                            | 35,072,000 |                       | $          | 26,693,000 |   |

 

Inventories- net consist of:

 

18

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**NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Thechanges in the carrying amounts of goodwill for the nine months ended September30, 2007 are as follows:

 
| ** **                  | ** ** | **Consolidated** | ** ** | **Tools and other  products** | ** ** | **Hardware** | ** ** |
|-----------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Balance, January 1, 2007    |       | $                | 24,921,000 |                                    | $          | 2,394,000    |       | $ | 22,527,000 |   |
| Acquisition of Hy-Tech      |       | 265,000          |       | 265,000                                 |       | —       |       |
| Balance, September 30, 2007 |       | $                | 25,186,000 |                                    | $          | 2,659,000    |       | $ | 22,527,000 |   |

 

Otherintangible assets were as follows:

 
| ** **                            | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Cost**                         | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible assets:              |       |                             |       |                            |       |   |   |   |   |
| Customer relationships and backlog    |       | $                                | 14,130,000 |                            | $          | 3,897 ,000 |   | $ | 10,960,000 |   | $ | 3,055,000 |   |
| Vendor relationship                   |       | 890,000                          |       | 289,000                         |       | 890,000 |   | 223,000 |   |
| Non-compete and Employment agreements |       | 810,000                          |       | 778,000                         |       | 810,000 |   | 719,000 |   |
| Trademark/tradename                   |       | 2,339,000                        |       | —                          |       | 2,140,000 |   | — |   |
| Engineering drawings                  |       | 290,000                          |       | 9,000                           |       | — |   | — |   |
| Licensing                             |       | 105,000                          |       | 18,000                          |       | 105,000 |   | 11,000 |   |
| Total                                 |       | $                                | 18,564,000 |                            | $          | 4,991,000 |   | $ | 14,905,000 |   | $ | 4,008,000 |   |

 

Amortizationexpense for intangible assets subject to amortization was as follows:

 
| ** ** | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|       |       | $                                                        | 275,000    |                                                    | $          | 299,000 |   | $ | 983,000 |   | $ | 898,000 |   |
|            |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

Amortizationexpense for each of the twelve-month periods ending September 30, 2008 throughthe twelve-month period ending September 30, 2012, is estimated to be asfollows: 2008 - $1,005,000; 2009 - $1,006,000; 2010 - $1,005,000; 2011 -$998,000 and 2012 - $996,000. The weighted average amortization period forintangible assets was 12.9 years at September 30, 2007 and 14.1 years atDecember 31, 2006.

 

**NOTE 11 - WARRANTY LIABILITY**

 

The Company offers to its customers warrantiesagainst product defects for periods primarily ranging from one to three years,with certain faucet hardware having a limited lifetime warranty, depending onthe specific product and terms of the customer purchase agreement. The Company’stypical warranties require it to repair or replace the defective productsduring the warranty period at no cost to the customer. At the time the productrevenue is recognized, the Company records a liability for estimated costsunder its warranties, which costs are estimated based on historical experience.The Company periodically assesses the adequacy of its recorded warrantyliability and adjusts the amounts as necessary. While the Company believes thatits estimated liability for product warranties is adequate, the estimatedliability for the product warranties could differ materially from future actualwarranty costs.

 

19

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

 
| ** **                                                          | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Balance, beginning of period                                        |       | $                                                       | 368,000    |   | $ | 419,000 |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 755,000                                                 |       | 530,000 |   |
| Actual warranty costs incurred                                      |       | (729,000                                                | )          | (491,000 | ) |
| Balance, end of period                                              |       | $                                                       | 394,000    |   | $ | 458,000 |   |

 

**NOTE 12 – BANK DEBT**

 

TheCompany entered into a credit agreement, as amended, with two banks in 2004. Thisagreement includes a revolving credit loan facility, which provides a total of$18,000,000 for direct borrowings, with various sublimits for letters ofcredit, bankers’ acceptances and equipment loans. There are no commitment feesfor any unused portion of this credit facility. The credit agreement, asamended, expires in June 2008 and is subject to annual review by the lendingbanks. Direct borrowings under the revolving credit loan facility are securedby the Company’s accounts receivable, inventory and equipment and arecross-guaranteed by each of the Company’s subsidiaries. These borrowings bearinterest at either LIBOR (London InterBank Offered Rate) plus the currentlyapplicable loan margin or the prime interest rate. At September 30, 2007 andDecember 31, 2006, the applicable loan margins added to LIBOR were 1.75% and1.45%, respectively. At September 30, 2007, and December 31, 2006, the balance outstandingon the revolving credit loan facility were $10,000,000 and $3,000,000,respectively.

 

The Company’s credit agreement also includes a termloan facility, whichprovides a maximum commitment of $34,000,000 to finance acquisitions subject tothe approval of the lending banks. There are no commitment fees for any unusedportion of this credit facility. Direct borrowings under the term loan aresecured by the Company’s accounts receivable, inventory and equipment and arecross-guaranteed by each of the Company’s subsidiaries. These borrowings bearinterest at either LIBOR plus the currently applicable loan margin or the primeinterest rate. The applicable loan margins added to LIBOR at September 30, 2007and December 31, 2006, were 2.00% and 1.50%, respectively. At September 30,2007 and December 31, 2006 there was $24,750,000 and $13,600,000, respectively,outstanding against the term loan facility.

 

Underthe terms of the credit agreement, the Company is required to adhere to certainfinancial covenants. At September 30, 2007, the Company was not in compliancewith one of the financial covenants. Subsequent to September 30, 2007, theCompany and the banks executed Amendment No.9 and Waiver to Credit Agreement,pursuant to which, among other things, the banks waived compliance with suchfinancial covenant at September 30, 2007, and amended the financial covenantfor future periods.

 

The Company anticipates that it may not be in compliance with afinancial covenant which is measured annually at December 31, 2007. Basedupon discussions with the banks, the Company is confident that the banks willwaive the Company's noncompliance of this financial covenant at December 31,2007. Accordingly the Company has not reclassified to current liabilities thelong-term portions of its bank debts. However, there can be no assurances that the Company will be able tosecure such a waiver in the future.

 

Thecredit agreement also includes a foreign exchange line, which provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. The total amount of foreign currencyforward contracts outstanding under the foreign exchange line at September 30,2007, based on that day’s closing spot rate, was approximately $545,000.

 

20

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**NOTE 13 - BUSINESS SEGMENTS**

 

TheCompany has organized its business into two reportable business segments: Toolsand other products, and Hardware. The Company is organized around these twodistinct product segments, each of which has very different end users. Forreporting purposes, Florida Pneumatic and Hy-Tech are combined in the “tools andother products” segment, while Woodmark, Pacific Stair and Nationwide arecombined in the “Hardware” segment. Results for Hy-Tech have been includedsince its respective acquisition date. The Company evaluates segmentperformance based primarily on segment operating income. The accountingpolicies of each of the segments are the same as those described in Note 1.

 

Thefollowing presents financial information by segment for the three-month periodsended September30, 2007 and 2006. Segment operating income excludes generalcorporate expenses, interest expense and income taxes. Identifiable assets arethose assets directly owned or utilized by the particular business segment.

 
| **Three months ended September 30, 2007** | ** ** | **Consolidated** | ** **  | **Tools and  other  products** | ** ** | **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 |                                |       |         |       |   |

 
| **Three months ended September 30, 2006** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|------------------------------------|------------|--------------|------------|
|                                                               |       |             |       |                               |       |         |       |
| Revenues from unaffiliated customers                               |       | $                | 32,319,000 |                               | $          | 15,043,000   |       | $ | 17,276,000 |   |
|                                                               |       |             |       |                               |       |         |       |
| Segment operating income                                           |       | $                | 4,287,000  |                               | $          | 1,608,000    |       | $ | 2,679,000 |   |
| General corporate expense                                          |       | (1,302,000       | )          |                               |       |         |       |
| Interest expense – net                                        |       | (493,000         | )          |                               |       |         |       |
| Earnings from continuing operations before  income taxes           |       | $                | 2,492,000  |                               |       |         |       |   |
|                                                               |       |             |       |                               |       |         |       |
| Segment assets                                                     |       | $                | 91,571,000 |                               | $          | 29,575,000   |       | $ | 61,996,000 |   |
| Corporate assets and assets of discontinued  operations            |       | 4,748,000        |       |                               |       |         |       |
| Total assets                                                       |       | $                | 96,319,000 |                               |       |         |       |   |

 

21

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| **Nine months ended September 30, 2007** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **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  |                                    |       |         |       |   |

 
| **Nine months ended September, 2006** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
|                                                      |       |             |       |                                    |       |         |       |
| Revenues from unaffiliated customers                      |       | $                | 88,029,000 |                                    | $          | 34,071,000   |       | $ | 53,958,000 |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment operating income                                  |       | 11,755,000       |       | $                                       | 2,910,000  |         | $          | 8,845,000 |   |
| General corporate expense                                 |       | (4,161,000       | )          |                                    |       |         |       |
| Interest expense – net                               |       | (1,508,000       | )          |                                    |       |         |       |
| Earnings from continuing operations before  income taxes  |       | $                | 6,086,000  |                                    |       |         |       |   |

 

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

 

**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**General**

 

ThePrivate Securities Litigation Reform Act of 1995 (the “Reform Act”) provides asafe harbor for forward-looking statements made by or on behalf of P&FIndustries, Inc. and subsidiaries. The Company and its representatives may,from time to time, make written or verbal forward-looking statements, includingstatements contained in the Company’s filings with the Securities and ExchangeCommission and in its reports to stockholders. Generally, the inclusion of thewords “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” and theiropposites and similar expressions identify statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934 and that are intended tocome within the safe harbor protection provided by those sections. Anyforward-looking statements contained herein, including those related to theCompany’s future performance, are based upon the Company’s historicalperformance and on current plans, estimates and expectations. Allforward-looking statements involve risks and uncertainties. These risks anduncertainties could cause the Company’s actual results for the 2007 fiscal yearand beyond to differ materially from those expressed in any forward-lookingstatement made by or on behalf of the Company for a number of reasons, as previously disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006 in response to Item1A. to Part I of Form 10-K. Forward-looking statements speak only as ofthe date on which they are made. The Company undertakes no obligation to updatepublicly or revise any forward-looking statement, whether as a result of newinformation, future developments or otherwise.

 

**Business**

 

P&Fconducts its business operations through two of its wholly-owned subsidiaries:Continental Tool Group, Inc. (“Continental”) and Countrywide Hardware, Inc. (“Countrywide”).On June 29, 2007, P&F transferred its sole and direct ownership interest inFlorida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) toContinental. P&F and its subsidiaries are herein referred to collectivelyas the “Company.” In addition, the words “we”, “our” and “us” refer to theCompany.

 

Continentalconducts its business operations through Florida Pneumatic and Hy-Tech Machine,Inc., a Delaware corporation (“Hy-Tech”). Florida Pneumatic is engaged in theimportation, manufacture and sale of pneumatic hand tools, primarily for theindustrial, retail and automotive markets, and the importation and sale of compressorair filters. Florida Pneumatic also markets, through its Berkley Tool division(“Berkley”), a line of pipe cutting and threading tools, wrenches andreplacement electrical components for a widely-used brand of pipe cutting andthreading machines. In addition, through its Franklin Manufacturing (“Franklin”)division, Florida Pneumatic imports a line of door and window hardware. InFebruary 2007, Hy-Tech acquired substantially all of the operating assets ofHy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc. and certain real property from HTM Associates. Hy-Tech isprimarily engaged in the manufacture and distribution of pneumatic tools andparts for industrial applications.

 

23

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Countrywideconducts its business operations through Nationwide Industries, Inc. (“Nationwide”),Woodmark International, L.P. (“Woodmark”), a limited partnership betweenCountrywide and WILP Holdings, Inc., a subsidiary of P&F, and Pacific StairProducts, Inc. (“Pacific Stair”). Nationwide is an importer and manufacturer ofdoor, window and fencing hardware. Woodmark is an importer of builders’hardware, including staircase components and kitchen and bath hardware andaccessories. Pacific Stair manufactures premium stair rail products anddistributes Woodmark’s staircase components to the building industry, primarilyin southern California and the southwestern region of the United States.

 

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

 

**Overview**

 

Key factors affecting current quarter resultsof operations include:

 

•                  The acquisition of Hy-Tech in February ofthis year has provided added revenue, profits and cash flows. Year to date, Hy-Techhas contributed revenues of approximately $10,913,000, income from operationsof approximately $1,592,000 and net cash from operating activities ofapproximately $1,012,000.

 

•                  The on-going down-turn in the new homeconstruction sector of the nation’s economy continues to have an adverse affecton our overall results of operations

 

The table below provides asummary of our sales.

 
| **(In Thousands $)** | ** ** | **Three-months Ended September 30,** | ** ** | **Nine-months Ended September 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Continental                    |       |                                                |       |                                               |       |   |   |   |   |
| Florida Pneumatic              |       | $                                                   | 12,686     |                                               | $          | 15,043 |   | $ | 33,598 |   | $ | 34,071 |   |
| Hy-Tech                        |       | 4,426                                               |       | —                                             |       | 10,913 |   | — |   |
| Continental - Total            |       | $                                                   | 17,112     |                                               | $          | 15,043 |   | $ | 44,511 |   | $ | 34,071 |   |
|                           |       |                                                |       |                                               |       |   |   |   |   |
| Countrywide                    |       |                                                |       |                                               |       |   |   |   |   |
| Woodmark                       |       | $                                                   | 8,188      |                                               | $          | 11,245 |   | $ | 25,213 |   | $ | 34,043 |   |
| Pacific  Stair                 |       | 1,042                                               |       | 1,526                                              |       | 3,012 |   | 4,883 |   |
| Nationwide                     |       | 4,011                                               |       | 4,505                                              |       | 13,184 |   | 15,032 |   |
| Countrywide - Total            |       | $                                                   | 13,241     |                                               | $          | 17,276 |   | $ | 41,409 |   | $ | 53,958 |   |
|                           |       |                                                |       |                                               |       |   |   |   |   |
| Consolidated                   |       | $                                                   | 30,353     |                                               | $          | 32,319 |   | $ | 85,920 |   | $ | 88,029 |   |

 

Consolidatedgross profit decreased $1,334,000, or 13.7%, and $2,164,000 or 7.9%, whencomparing the three and nine month periods ended September 30, 2007, to thesame periods in the prior year. Likewise, consolidated earnings from continuingoperations decreased $1,153,000, or 77.1% and $2,931,000 or 80.3%, whencomparing the three and nine month periods ended September 30, 2007, to thesame periods in the prior year.

 

24

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**Critical Accounting Policies andEstimates**

 

TheCompany prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America.Certain of these accounting policies require the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and the related disclosure of contingent assets and liabilities,revenues and expenses. On an ongoing basis, the Company evaluates estimates,including those related to bad debts, inventory reserves, goodwill andintangible assets and warranty reserves. The Company bases its estimates onhistorical data and experience, when available, and on various other assumptionsthat are believed to be reasonable under the circumstances, the combinedresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates.

 

Therehave been no material changes in the Company’s critical accounting policies andestimates from those discussed in Item 7 of the Company’s Annual Report on Form10-K for the year ended December 31, 2006.

 

**ACQUISITION**

 

Resultsof operations are included in the Consolidated Condensed Financial Statementsfrom the date of acquisition.

 

Hy-Tech Machine, Inc.

 

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

 

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

 

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

 

25

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Contemporaneouslywith this acquisition, the Company executed and delivered Amendment No. 7 toCredit Agreement with the banks. The amendment, among other things, addsContinental and Hy-Tech as additional co-borrowers and provides for new termloans in amounts not to exceed $19,000,000. The principal on the new term loannotes are payable in 25 consecutive quarterly installments of 1/25 of theaggregate principal amount outstanding on January 31, 2008, commencing onJanuary 31, 2008. From the date of the amendment through January 31, 2008, monthlypayments shall be made of interest only. The Company and the co-borrowers havethe option to pay interest at a rate based on either the fluctuating primerate, LIBOR or a combination of the two rates. The new term loan notes shallmature on January 31, 2014. The amendment also provides for the amendment andrestatement of certain existing term loan notes. The revolving credit loanfacility provides for a maximum of $18,000,000, with various sublimits, fordirect borrowings, letters of credit, bankers’ acceptances and equipment loans.

 

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, 2006. 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, 2006 or of futureconsolidated operating results.

 

| ** **                         | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                         | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                       |       | $                      | 30,353,000 |                   | $          | 36,799,000 |   | $ | 88,099,000 |   | $ | 101,468,000 |   |
|                               |       |                   |       |                   |       |   |   |   |   |
| Net earnings                       |       | $                      | 458,000    |                   | $          | 1,623,000 |   | $ | 4,026,000 |   | $ | 4,181,000 |   |
| Earnings per share of common stock |       |                   |       |                   |       |   |   |   |   |
| Basic                              |       | $                      | 0.13       |                   | $          | 0.45 |   | $ | 1.12 |   | $ | 1.17 |   |
| Diluted                            |       | $                      | 0.12       |                   | $          | 0.43 |   | $ | 1.06 |   | $ | 1.10 |   |

 

**DISCONTINUED OPERATIONS**

 

Embassy Industries, 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”), Embassy soldsubstantially all of its operating assets to EMI. The assets sold pursuant tothe Embassy APA include, among others, machinery and equipment, inventory,accounts receivable and certain intangibles. Certain assets were retained byEmbassy, including, but not limited to, cash and title to any real propertyowned 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”) from counselto J. D’Addario & Company, Inc., a New York corporation (“Purchaser”),purporting to terminate that certain contract entered into by Embassy andPurchaser on January 13, 2006 (the “Agreement”, and as amended, the “Contractof Sale”). Pursuant to the Contract of Sale, Embassy agreed to sell itsFarmingdale, New York premises (the “Farmingdale Premises”) to Purchaser for apurchase price of $6,403,000.

 

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

 

26

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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, Purchaserinstituted an action against Embassy in the Supreme Court of the State of NewYork, County of Suffolk, for breach of contract and return of downpayment,seeking $650,000, together with costs of title and survey and interest thereon,and the cost of the action. The downpayment remains in escrow pendingresolution of this matter. Embassy believes the action is without merit andintends to vigorously defend it.

 

Embassyentered into a new contract of sale, dated as of February 26, 2007, on theFarmingdale Premises with Tell Realty LLC, an affiliated entity of Sam Tell& Son, Inc., for a purchase price of $6.3 million. Embassy sold theFarmingdale Premises in June 2007 and used the after-tax proceeds from the saleto satisfy the mortgage on the building of approximately $1.2 million and toreduce its long-term debt. The Company recorded a pre-tax gain from the sale ofapproximately $5.1 million.

 

Thefollowing amounts related to discontinued operations have been segregated fromthe Company’s continuing operations and are reported as assets held for saleand assets and liabilities of discontinued operations in the consolidatedcondensed balance sheets:

 
| ** **                                                        | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Assets held for sale and assets of  discontinued operations:      |       |                             |       |                            |       |
| Current:                                                          |       |                             |       |                            |       |
| Prepaid expenses                                                  |       | $                                | 32,000     |                            | $          | 300,000 |   |
| Assets held for sale                                              |       | —                           |       | 577,000                         |       |
| Subtotal                                                          |       | 32,000                           |       | 877,000                         |       |
| Long-term:                                                        |       |                             |       |                            |       |
| Other receivable                                                  |       | 18,000                           |       | 40,000                          |       |
| Total assets held for sale and assets of  discontinued operations |       | $                                | 50,000     |                            | $          | 917,000 |   |
|                                                              |       |                             |       |                            |       |
| Liabilities of discontinued operations:                           |       |                             |       |                            |       |
| Current:                                                          |       |                             |       |                            |       |
| Accounts payable and accrued expenses                             |       | $                                | 174,000    |                            | $          | 172,000 |   |
| Mortgage payable                                                  |       | —                           |       | 1,254,000                       |       |
| Subtotal                                                          |       | 174,000                          |       | 1,426,000                       |       |
| Long-term:                                                        |       |                             |       |                            |       |
| Pension obligation                                                |       | 345,000                          |       | 353,000                         |       |
| Total liabilities of discontinued  operations                     |       | $                                | 519,000    |                            | $          | 1,779,000 |   |

 

27

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**RESULTS OF OPERATIONS**

 

**Quarters ended September 30, 2007and 2006**

 

**Revenues**

 

Revenuesfor the quarters ended September 30, 2007 and 2006 were approximately asfollows:

 
| **Three months ended September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                                 |       | $                | 30,353,000 |                                    | $          | 17,112,000   |       | $ | 13,241,000 |   |
|                                                     |       |             |       |                                    |       |         |       |
| **2006**                                                 |       | $                | 32,319,000 |                                    | $          | 15,043,000   |       | $ | 17,276,000 |   |
|                                                     |       |             |       |                                    |       |         |       |
| **(decrease)  increase $**                               | ** ** | $                | (1,966,000 | )                                       | $          | 2,069,000    |       | $ | (4,035,000 | ) |
|                                                     |       |             |       |                                    |       |         |       |
| **(decrease)  increase %**                               |       | (6.1             | )%         | 13.8                                    | %          | (23.4        | )%         |

 

Theacquisition of Hy-Tech, consummated in February 2007, continues to provide apositive impact. Specifically, included in the Tools and other productssegment, during the three-month period ended September 30, 2007, Hy-Techgenerated $4,425,000 in revenue. Offsetting the above mentioned increase weencountered a reduction in revenue at Florida Pneumatic of $2,356,000. Primaryfactors contributing to the decrease at Florida Pneumatic include a reductionin the revenue generated from new products, a reduction in the sales of base orrecurring items and a reduction in promotional business.

 

Asa result of the continued weakness in the new home construction market, whichis the principal driver for the Hardware group, revenue for the quarter endedSeptember 30, 2007 decreased an aggregate of $4,035,000 when compared to thethree-month period ended September 30, 2006. Woodmark’s revenue decreased anaggregate of $3,057,000. Specifically, in the kitchen/bath sector, in additionto sluggish sales as the result of current market conditions, our salesdecreased as the result of the loss of a significant customer who during 2007began sourcing its products from other vendors. Nationwide’s revenues decreasedby approximately $494,000, or 11%, which consisted primarily of decreases infencing - $50,000; sales of OEM products - $256,000 and patio products - $188,000,all the result of overall market segment competition and industryconsolidation. Pacific Stair’s revenues decreased by approximately $484,000, or32%, primarily attributable to significant softness in the new homeconstruction market in southern California and Arizona.

 

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

 

28

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**Gross Profits**

 

Grossprofits for the three month periods ended September 30, 2007 and 2006:

 
| **Three months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                             |       | $                | 8,368,000  |                                    | $          | 4,393,000    |       | $ | 3,975,000 |   |
|                                                 |       | 27.6             | %          | 25.6                                    | %          | 30.0         | %          |
|                                                 |       |             |       |                                    |       |         |       |
| **2006**                                             |       | $                | 9,702,000  |                                    | $          | 4,177,000    |       | $ | 5,525,000 |   |
|                                                 |       | 30.0             | %          | 27.8                                    | %          | 32.0         | %          |

 

Theprimary factors for the overall decrease in our gross profit percentage in theTools and other products segment of 2.2 percentage points from 27.8% forthe three-month period ended September 30, 2006 to 25.6% reported for thethree-months ended September 30, 2007 are the price concessions granted to amajor retail customer, as well as price increases of raw materials. Theacquisition in February 2007 of Hy-Tech favorably impacted this segment’s grossprofit. Hy-Tech’s gross profit percentage is generally higher than the rest ofthis segment.

 

Ourhardware segment remains directly affected by the down-turn in the homeconstruction sector. The loss of a major high gross margin customer adverselyaffected our gross margin for this segment. The gross margin percentagedecrease was partially offset by a favorable product mix at Woodmark as agreater percentage of its sales were generated from its warehouse whichgenerate higher margins and lower percentage of the sales total from directshipments which generate lower gross margins. As a result of this sluggishmarket and further compounded by competitive pressures we were forced toimplement price reductions at Nationwide. Additionally we absorbed costincreases from Asian suppliers for which we are not able to pass through to ourcustomers. Our gross margin at Pacific Stair was adversely impacted from theinability to reduce fixed overhead costs as production levels decreased combinedwith decreases in sales.

 

**Selling,General and Administrative Expenses**

 

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

 

Duringthe three-month period ended September 30, 2007, SG&A increased $229,000 or3.4%  when compared to the three-monthperiod ended September 30, 2006. Further, as a percentage of revenue, SG&Aincreased to 22.9% for the three-month period ended September 30, 2007 from20.8% for the same period in the prior year. SG&A includes expenses ofHy-Tech which, acquired in February 2007, contributed approximately $850,000.As such, excluding Hy-Tech’s impact, our SG&A for the three-month periodended September 30, 2007 decreased approximately $620,000 or 9.2% when comparedto the same period in the prior year.

 

**Interest- Net**

 

Netinterest expense incurred during the three-month period ended September 30,2007 was $739,000, an increase of $245,000 or 49.6% compared to $494,000 whichwas incurred during the same three month period in the prior year. Interestexpense on borrowings under the term loan facility increased by approximately$195,000 due to additional borrowings related to the acquisition of Hy-Tech. Interestexpense on borrowings under the Company’s revolving credit loan facilityincreased by approximately $65,000, as higher average borrowings were furtheradversely affected by higher average interest rates.

 

29

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**IncomeTaxes**

 

Theeffective tax rates applicable to earnings from continuing operations for thequarters ended September 30, 2007 and 2006 were 49.9% and 40.0%, respectively. Theeffective tax rate increased for the three-month period ended September 30,2007, primarily as a result of expenses not deductible for tax purposesadversely affecting the determination of the full year effective tax rate.

 

**Nine-monthperiods ended September 30, 2007 and 2006**

 

**Revenues**

 

Revenuesfor the nine-month periods ended September 30, 2007 and 2006 were approximatelyas follows:

 
| **Nine months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                            |       | $                | 85,920,000 |                                    | $          | 44,511,000   |       | $ | 41,409,000 |   |
|                                                |       |             |       |                                    |       |         |       |
| **2006**                                            |       | $                | 88,029,000 |                                    | $          | 34,071,000   |       | $ | 53,958,000 |   |
|                                                |       |             |       |                                    |       |         |       |
| **(decrease) increase - $**                         | ** ** | $                | (2,109,000 | )                                       | $          | 10,440,000   |       | $ | (12,549,000 | ) |
|                                                |       |             |       |                                    |       |         |       |
| **(decrease) increase - %**                         |       | (2.4             | )%         | 30.6                                    | %          | (23.3        | )%         |

 

Revenuesfrom the Tools and other products segment increased $10,440,000, more than 30%.This segment includes revenues from the February 2007 acquisition of Hy-Techwhich, on a year to date basis contributed approximately $10,913,000, whilerevenues from Florida Pneumatic decreased approximately $473,000 from$34,070,000 for the nine months ended September 30, 2006 to $33,597,000 duringthe same period this year. Significant components of the net decrease in salesat Florida Pneumatic include a reduction in revenues of $1,874,000 due to adecrease in base sales from a significant customer, along with decreases inrevenue of approximately $190,000, $190,000 and $120,000, in our Berkleydivision, automotive product line and catalog businesses, respectively. Thesedecreases were partially offset by increases in sales to a major retailcustomer of approximately $1,849,000 due primarily to new products as well asan increase in sales at from our Franklin division of $151,000.

 

Revenuesfrom the Hardware segment decreased at each of our units in this groupprimarily due to softness in the new home construction market, the principaldriver for this group an aggregate of $12,549,000. Woodmark itself had revenuesdecrease approximately $8,830,000, or 26%. Specifically, revenues from the saleof staircase components decreased during the nine-month period ended September30, 2007 when compared to the same period in the prior year by approximately$5,785,000 or 22%, due primarily to softness in the new home constructionmarket. Further, revenues in our kitchen and bath products sold into the mobilehome and remodeling markets have decreased by approximately $3,045,000, or 45%.Sales to one significant customer, which serves the manufactured housingmarket, were adversely impacted by market conditions and sales to anothersignificant customer decreased as they began sourcing products from other vendors.Nationwide’s revenues decreased by approximately $1,848,000, or 12%, primarilyattributable to a decrease of approximately $332,000, or 4%, in sales offencing products due to market weakness and competition, a decrease ofapproximately $518,000, or 14%, in OEM products from market weakness and thetiming of certain customer orders and a decrease of approximately $998,000, orapproximately 45%, in sales of patio products due primarily to market weakness,competition and industry consolidation. Pacific Stair’s revenues decreased byapproximately $1,872,000, or 38%, primarily attributable to significantsoftness in the new home construction market in southern California andArizona.

 

30

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

 

**GrossProfits**

 

Grossprofits for the nine-month periods ended September 30, 2007 and 2006 wereapproximately as follows:

 
| **Nine months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                            |       | $                | 25,193,000 |                                    | $          | 12,357,000   |       | $ | 12,836,000 |   |
|                                                |       | 29.3             | %          | 27.7                                    | %          | 31.0         | %          |
|                                                |       |             |       |                                    |       |         |       |
| **2006**                                            |       | $                | 27,357,000 |                                    | $          | 10,239,000   |       | $ | 17,118,000 |   |
|                                                |       | 31.1             | %          | 30.1                                    | %          | 31.7         | %          |

 

Thedecrease in the gross profit percentage from tools and other products was dueprimarily to a decrease in gross profit margin at Florida Pneumatic as a resultof certain price reductions to a significant retail customer and material costincreases of various metals purchased by the Franklin division. This margindecrease was partially offset by certain price increases implemented in theindustrial and automotive businesses. In addition, this segment’s gross profitmargin was favorably impacted by the newly-acquired Hy-Tech, which operates inthe industrial tool business at higher margins than Florida Pneumatics’sbusiness.

 

Thedecrease in gross margin percentage from hardware was due primarily to (a)selling price reductions at Nationwide from competitive pressures and marketsoftness, as well as some cost increases from Asian suppliers that were notoffset by selling price increases, and (b) the adverse impact from theinability to reduce fixed overhead expenses as production levels decreasedcombined with revenue decreases at Pacific Stair. The gross margin percentagedecrease was partially offset by a favorable product mix at Woodmark as asignificant portion of revenue decreases were associated with its lower-margin,direct container business.

 

**Selling,General and Administrative Expenses**

 

Duringthe nine-month period ended September 30, 2007, SG&A increased $1,849,000or 9.4% when compared to the same period in the prior year. Further, as apercentage of revenue, SG&A increased to 25.2% for the nine-month periodended September 30, 2007 from 22.5% for the same period in the prior year.SG&A includes expenses of Hy-Tech which, acquired in February 2007,contributed approximately $2,140,000. As such, excluding Hy-Tech’s impact, ourSG&A for the nine-month period ended September 30, 2007 decreased slightly,$291,000, or 1.5% when compared to the same period in the prior year.

 

**Interest - Net**

 

Netinterest expense increased $714,000, or 47.3%, from approximately $1,508,000 toapproximately $2,222,000. Interest expense on borrowings under the term loanfacility increased by approximately $592,000 due to additional borrowingsrelated to the acquisition of Hy-Tech. Interest expense on borrowings under therevolving credit loan facility increased by approximately $115,000, as higheraverage borrowings were further adversely affected by higher average interestrates.

 

31

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**Income Taxes**

 

Theeffective tax rates applicable to earnings from continuing operations for thenine months ended September 30, 2007 and 2006 were 47.0% and 40.0%,respectively. The effective tax rate increased for the nine-month period endedSeptember 30, 2007, primarily as a result of expenses not deductible for taxpurposes adversely affecting the determination of the full year effective tax rate.

 

**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. Due to ourstrong asset base, predictable cash flows and favorable banking relationships,we believe we have adequate access to capital, if and when needed. Additionally,we monitor average days sales outstanding, inventory turns and capitalexpenditures to project liquidity needs and evaluate return on assets employed.

 

Wegauge our liquidity and financial stability by the measurements shown in thefollowing table (dollar amounts in thousands):

 
| ** **                | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                                | 24,733     |                            | $          | 21,168 |   |
| Current Ratio             |       | 1.75 to 1                        |       | 1.84 to 1                       |       |
| Shareholders’ Equity |       | $                                | 55,878     |                            | $          | 51,521 |   |

 

Inconnection with the Woodmark acquisition transaction in June 2004, we arepotentially liable for additional payments to the sellers. The amount of thesepayments, which could be made as of either June 30, 2007 or June 30, 2009, areto be based on increases in earnings before interest and taxes, for the yearended on the respective date, over a base of $5,100,000. Woodmark had theoption to make a payment as of June 30, 2007 in an amount equal to 48% of thisincrease, but opted not to make this payment. The Sellers may demand payment asof June 30, 2009 in an amount equal to 40% of the increase. Any such additionalpayments will be treated as additions to goodwill.

 

OnJune 30, 2004, in conjunction with the Woodmark acquisition transaction, weentered into a credit agreement with two banks. These agreements, as amendedfrom time to time, provided us with various credit facilities, includingrevolving credit loans, term loans for acquisitions and a foreign exchangeline. The term loan facility provided a maximum commitment of $34,000,000 tofinance acquisitions subject to the approval of the lending banks. There are nocommitment fees for any unused portion of this credit facility. We borrowed$29,000,000 against this facility to finance the Woodmark acquisitiontransaction in June 2004, and there was $13,600,000 and $10,750,000, includingamounts rolled over from the prior term loan facility, outstanding against theterm loan facility at December 31, 2006 and September 30, 2007, respectively.

 

Contemporaneouslywith the acquisition of Hy-Tech in February 2007, we executed and deliveredAmendment No. 7 to Credit Agreement with the banks. The amendment, among otherthings, added Continental Tool Group, Inc. and Hy-Tech Machine, Inc. asadditional co-borrowers and provides for new term loans in amounts not toexceed $19,000,000. The principal on the new term loan notes are payable in 25consecutive quarterly installments of 1/25 of the aggregate principal amountoutstanding on January 31, 2008, commencing on January 31, 2008. From the dateof the amendment through January 31, 2008, monthly payments shall be made ofinterest only. We and the co-borrowers have the option to pay interest at arate based on either the fluctuating prime rate, LIBOR or a combination of thetwo rates. The new term loan notes shall mature on January 31, 2014. Theamendment also provides for the amendment and restatement of certain existingterm loan notes. The revolving credit loan facility provides for a maximum of$18,000,000, with various sublimits, for direct borrowings, letters of credit,bankers’ acceptances and equipment loans. At September 30, 2007, there was$10,000,000 outstanding against the revolving credit loan facility, and therewere no open letters of credit. There are no commitment fees for any unusedportion of this credit facility.

 

32

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Thecredit agreement, as amended, expires in June 2008 and is subject to annualreview by the lending banks. Direct borrowings under the revolving credit loanfacility are secured by the Company’s accounts receivable, inventory andequipment and are cross-guaranteed by each of the Company’s subsidiaries. Theseborrowings bear interest at either LIBOR (London InterBank Offered Rate) plusthe currently applicable loan margin or the prime interest rate. At September30, 2007 and December 31, 2006, the applicable loan margins added to LIBOR were1.75% and 1.45%, respectively. At September 30, 2007, and December 31, 2006,the balances outstanding on the revolving credit loan facility were $10,000,000and $3,000,000, respectively.

 

Underthe terms of the credit agreement, we were required to adhere to certainfinancial covenants. At September 30, 2007, we were not in compliance with oneof the financial covenants. Subsequent to September 30, 2007, we, along withthe banks, executed Amendment No.9 and Waiver to Credit Agreement, pursuant towhich, among other things, the banks waived compliance with such financialcovenant at September 30, 2007, and amended the financial covenant for futureperiods.

 

The Company anticipates that it may not be in compliance with afinancial covenant which is measured annually at December 31, 2007. Based upondiscussions with the banks, the Company is confident that the banks will waivethe Company’s noncompliance of this financial covenant at December 31, 2007.Accordingly the Company has not reclassified to current liabilities thelong-term portions of its bank debts. However, there can be no assurances thatthe Company will be able to secure such a waiver in the future.

 

Theforeign 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 Japanese yen needed for payments to foreign suppliers. Thetotal amount of foreign currency forward contracts outstanding under theforeign exchange line at September 30, 2007, based on that day’s closing spotrate, was approximately $545,000.

 

Embassyparticipated in a multi-employer pension plan until it sold substantially allof its operating assets in October 2005. This plan provided defined benefits toall of its union workers. Contributions to this plan were determined by theunion contract. Embassy does not administer the plan funds and does not haveany control over the plan funds. As a result of Embassy’s withdrawal from theplan, it has estimated and recorded a withdrawal liability of approximately$369,000, which is payable in quarterly installments of approximately $8,200from May 2006 through February 2026.

 

Embassyentered into a contract of sale, dated as of February 26, 2007, on theFarmingdale Premises with Tell Realty LLC, an affiliated entity of Sam Tell& Son, Inc., for a purchase price of $6,300,000. Embassy sold theFarmingdale Premises in June 2007 and used the after-tax proceeds from the saleto satisfy the mortgage on the building of approximately $1,200,000 and toreduce its long-term debt. We reported a pre-tax gain from the sale ofapproximately $5,100,000.

 

Cashdecreased $321,000 from $1,340,000 as of December 31, 2006 to $1,019,000 as ofSeptember 30, 2007. Our debt levels increased from $22,619,000 at December 31,2006 to $37,075, 000 at September 30, 2007, due primarily to borrowings inconnection with the acquisition of Hy-Tech. The total percent of debt to totalbook capitalization (debt plus equity) increased from 30.5% at December 31,2006 to 39.9% at September 30, 2007.

 

Cashprovided by operating activities of continuing operations for the nine monthperiods ended June 30, 2007 and 2006 were approximately $4,060,000, and$7,734,000, respectively. We believe that cash on hand derived from operationsand cash available through borrowings under its credit facilities will besufficient to allow us to meet our foreseeable working capital needs.

 

33

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Capitalspending was approximately $1,028,000 and $1,257,000 for the nine monthsperiods ended September 30, 2007 and 2006, respectively. Capital expendituresfor the balance of 2007 are expected to be approximately $300,000, some ofwhich may be financed through our credit facilities. Included in the expectedtotal for 2007 are capital expenditures relating to new products, expansion ofexisting product lines and replacement of equipment.

 

**OFF-BALANCE SHEET 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 September30, 2007, based on that day’s closing spot rate, was approximately $545,000.

 

FloridaPneumatic, imports approximately 7% of its purchases from Japan, with paymentdue in Japanese yen. As a result, we are subject to the effects of foreigncurrency exchange fluctuations. We use a variety of techniques to protectourselves from any adverse effects from these fluctuations, includingincreasing selling prices, obtaining price reductions from our overseassuppliers, using alternative supplier sources and entering into foreigncurrency forward contracts. The decrease in the strength of the Japanese yenand the TWD versus the U.S. dollar from 2005 to 2006 had a positive effect onour results of operations and financial position. During the nine months endedSeptember 30, 2007, the relative values of the U.S dollar in relation to theJapanese yen, and to a lesser extent the TWD, were above fiscal 2006 averages.There can be no assurance as to the future trend of this value. (See “Item 3 -Quantitative and Qualitative Disclosures About Market Risk.”)

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

**Adoption of New Accounting Pronouncements**

 

InMarch 2006, the FASB issued SFAS No. 156, “Accounting for Servicing ofFinancial Assets - an amendment of SFAS No. 140.” SFAS No. 156requires the recognition of a servicing asset or liability each time a companyundertakes an obligation to service a financial asset in certain situations. Itrequires all separately recognized servicing assets and liabilities to beinitially measured at fair value, if practical. SFAS No. 156 was effective asof the beginning of a company’s first fiscal year that began after September15, 2006. The adoption of this statement did not have a material effecton our financial position or results of operations.

 

InFebruary 2006, FASB issued SFAS No. 155, “Accounting for Certain HybridFinancial Instruments - an amendment of SFAS No. 133 and 140.” SFAS No. 155allows companies to elect to measure at fair value entire financial instrumentscontaining embedded derivatives that would otherwise have to be accounted forseparately. It also requires companies to identify interests in securitizedfinancial assets that are freestanding derivatives or contain embeddedderivatives that would have to be accounted for separately, clarifies whichinterest- and principal-only strips are subject to SFAS No. 133, and amendsSFAS No. 140 to revise the conditions of a qualifying special purpose entitydue to the new requirement to identify whether interests in securitizedfinancial assets are freestanding derivatives or contain embedded derivatives.SFAS No. 155 was effective for all financial instruments acquired, issued orsubject to a remeasurement event after the beginning of a company’s first fiscalyear that began after September 15, 2006. The adoption of this statementdid not have a material effect on our financial position or results ofoperations.

 

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**Effect of Newly Issued But Not Yet EffectiveAccounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).SFAS 157 provides a new single authoritative definition of fair value andprovides enhanced guidance for measuring the fair value of assets andliabilities and requires additional disclosures related to the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 is effective for us as of January 1, 2008. We are currently evaluating theimpact that the adoption of SFAS 157 may have on our financial position orresults of operations.

 

In February 2007, theFASB issued (‘‘SFAS’’) No. 159, ‘‘The Fair Value Option for Financial Assetsand Liabilities, Including an amendment of FASB Statement No. 115’’, (‘‘SFAS159’’). This Statement permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. SFAS 159 is effective as of thebeginning of fiscal 2008. We are currently evaluating the impact that theadoption of SFAS 159 may have on our financial position or results ofoperations.

 

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

 

Weare exposed to market risks, which include changes in U.S. and internationalexchange rates, the prices of certain commodities and currency rates asmeasured against the U.S. dollar and each other. We attempt to reduce the risksrelated to foreign currency fluctuation by utilizing financial instruments,pursuant to our policy.

 

Thevalue of the U.S. dollar affects our financial results. Changes in exchangerates may positively or negatively affect our gross margins through itsinventory purchases and operating expenses through realized foreign exchangegains or losses. We engage in hedging programs aimed at limiting, in part, theimpact of currency fluctuations. Using primarily forward exchange contracts, wehedge some of those transactions that, when re-measured according to accountingprinciples generally accepted in the United States of America, impact thestatement of operations. Factors that could impact the effectiveness of our programsinclude volatility of the currency markets and availability of hedginginstruments. All currency contracts that are entered into by us are componentsof hedging programs and are entered into not for speculation but for the solepurpose of hedging an existing or anticipated currency exposure. We do not buyor sell financial instruments for trading purposes. Although we maintain theseprograms to reduce the impact of changes in currency exchange rates, when theU.S. dollar sustains a weakening exchange rate against currencies in which weincurs costs, our costs are adversely affected.

 

Weaccount for changes in the fair value of its foreign currency contracts bymarking them to market and recognizing any resulting gains or losses throughits statement of earnings. We also mark our yen-denominated payables to market,recognizing any resulting gains or losses in our statement of earnings. AtSeptember 30, 2007, we had foreign currency forward contracts, maturing in2007, to purchase Japanese yen at contracted forward rates. The value of thesecontracts at September 30, 2007, based on that day’s closing spot rate, wasapproximately $545,000. During the three-month periods ended September 30, 2007and 2006, we recorded in our cost of sales realized gains (losses) ofapproximately $3,000 and $(14,000), respectively, on foreign currencytransactions. During the nine-month periods ended September 30, 2007 and 2006,we recorded in our cost of sales realized (losses) of approximately $(24,000)and $(10,000), respectively, on foreign currency transactions. At September 30,2007 and 2006, we had unrealized (losses) gains of $(26,000) and $12,000,respectively, on foreign currency transactions.

 

Thepotential loss in value of our net investment in foreign currency forwardcontracts resulting from a hypothetical 10 percent adverse change inforeign currency exchange rates at September 30, 2007 was approximately$58,000.

 

Wehave various debt instruments that bear interest at variable rates tied toLIBOR (London Inter-Bank Offered Rate). Any increase in LIBOR would have anadverse effect on our interest costs. In addition to affecting operatingresults, adverse changes in interest rates could impact our access to capital,certain merger and acquisition strategies and the level of capitalexpenditures.

 

Thecarrying amounts reported in the consolidated balance sheets for cash and cashequivalents, accounts receivable, accounts payable and short-term debt,approximate fair value as of September 30, 2007 because of the relativelyshort-term maturity of these financial instruments. The carrying amountsreported for long-term debt approximate fair value as of September 30, 2007because, in general, the interest rates underlying the instruments fluctuatewith market rates.

 

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**Item 4.****                   ****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) and 15d-15(e)to the Securities and Exchange Act of 1934). Based on that evaluation, ourmanagement, including the Principal Executive Officer and Principal FinancialOfficer, concluded that our disclosure controls and procedures as of September30, 2007 were effective. Accordingly, management believes that the consolidatedcondensed financial statements included in this Quarterly Report on Form 10-Qfairly present, in all material respects, our financial condition, results ofoperations and cash flows for the periods presented.

 

P&Fmanagement is responsible for establishing and maintaining effective internalcontrols. Because of its 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 the controlsystem’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 Form10-Q include, 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**

 

Weare a defendant or co-defendant in various actions brought about in theordinary course of conducting our business. We do not believe that any of theseactions are material to our financial condition.

 

**Item 1A.****        ****Risk Factors**

 

There were no material changes from risk factorspreviously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2006 in response to Item 1A. to Part I of Form 10-K.

 

**Item 2.****           ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item 3.****           ****Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****           ****Submission of Matters to aVote of Security Holders**

 

None.

 

**Item 5.****           ****Other Information**

 

OnNovember 8, 2007, the Company and its subsidiaries, Florida PneumaticManufacturing Corporation (“Florida Pneumatic”), Embassy Industries, Inc. (“Embassy”),Green Manufacturing, Inc. (“Green”), Countrywide Hardware, Inc. (“Countrywide”),Nationwide Industries, Inc. (“Nationwide”), Woodmark International, L.P. (“Woodmark”),Pacific Stair Products, Inc. (“Pacific”), WILP Holdings, Inc. (“WILP”),Continental Tool Group, Inc. (“Continental”) and Hy-Tech Machine, Inc. (“Hy-Tech”,and collectively with the Company, Florida Pneumatic, Embassy, Green,Countrywide, Nationwide, Woodmark, Pacific, WILP and Continental, the “Co-Borrowers”),Citibank, N.A. and HSBC Bank USA, National Association (collectively, the “Lenders”)and Citibank, N.A., as Administrative Agent for the Lenders, entered into anamendment and waiver (the “Amendment”) to the Credit Agreement, dated as ofJune 30, 2004, by and among the Co-Borrowers, the Lenders and the AdministrativeAgent, as previously amended (the “Credit Agreement”). The Amendment waivedcompliance with a financial covenant that the Company was not in compliance inon September 30, 2007 and amended such financial covenant for future periods.

 

Theforegoing summary of the Amendment is qualified in its entirety by the termsand provisions of the Amendment, a copy of which is attached hereto as Exhibit10.1 and incorporated herein by reference.

 

**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 12, 2007 | (Principal Financial and Chief Accounting Officer) |

 

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**EXHIBIT INDEX**

 

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. 9 and Waiver to Credit Agreement, dated as of November 9, 2007, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc.,  Nationwide Industries, Inc., Woodmark International L.P., Pacific Stair  Products, Inc., WILP Holdings, Inc., Continental Tool Group, Inc., and  Hy-Tech Machine, Inc. as Co-Borrowers, Citibank, N.A., as Administrative  Agent and the lenders party thereto. |
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **31.1**              |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                            |
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **31.2**              |       | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                            |
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **32.1**              |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                            |
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **32.2**              |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                          |

 

A copy of any of the foregoing exhibits to this Quarterly Report onForm 10-Q may be obtained, upon payment of the Registrant’s reasonable expensesin furnishing such exhibit, by writing to P&F Industries, Inc., 445Broadhollow Road, Suite 100, Melville New York 11747, Attention: CorporateSecretary.

 

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