Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Quarterly Period Ended June 30, 2008**

 

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

**OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For thetransition period from             to             **

 

**Commission File Number 1 - 5332**

 

**P&FINDUSTRIES, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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

 

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

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

 

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

 

As of August 12, 2008 there were 3,627,562 shares of theregistrant’s Class A Common Stock outstanding.

 

 

 

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Table ofContents

 

**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008**

 

**TABLE OF CONTENTS**

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

 

i

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Table ofContents

 

**PART I - FINANCIAL INFORMATION**

 

**Item 1.             Financial Statements**

 

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

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                     | ** ** | **June 30, 2008** | ** ** | **December 31, 2007**                                 | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**             | ** ** | **(derived from audited  financial statements)** | ** ** |
| **ASSETS**                                     |       |                        |       |                                                            |       |
| CURRENT                                        |       |                        |       |                                                            |       |
| Cash and cash equivalents                      |       | $                           | 592,699    |                                                            | $          | 1,334,167 |   |
| Accounts receivable – net                 |       | 14,387,353                  |       | 12,883,095                                                      |       |
| Notes and other receivables                    |       | 119,281                     |       | 393,525                                                         |       |
| Inventories – net                         |       | 31,409,934                  |       | 31,736,103                                                      |       |
| Deferred income taxes – net               |       | 1,397,000                   |       | 1,397,000                                                       |       |
| Assets of discontinued operations              |       | 41,807                      |       | 56,142                                                          |       |
| Income tax refund receivables                  |       | 219,059                     |       | 225,524                                                         |       |
| Prepaid expenses and other current assets      |       | 1,097,885                   |       | 1,171,279                                                       |       |
| TOTAL CURRENT ASSETS                           |       | 49,265,018                  |       | 49,196,835                                                      |       |
|                                           |       |                        |       |                                                            |       |
| PROPERTY AND EQUIPMENT                         |       |                        |       |                                                            |       |
| Land                                           |       | 1,549,773                   |       | 1,549,773                                                       |       |
| Buildings and improvements                     |       | 7,613,514                   |       | 7,613,514                                                       |       |
| Machinery and equipment                        |       | 15,740,733                  |       | 15,563,078                                                      |       |
|                                           |       | 24,904,020                  |       | 24,726,365                                                      |       |
| Less accumulated depreciation and amortization |       | 10,608,714                  |       | 10,010,179                                                      |       |
| NET PROPERTY AND EQUIPMENT                     |       | 14,295,306                  |       | 14,716,186                                                      |       |
|                                           |       |                        |       |                                                            |       |
| GOODWILL                                       |       | 4,594,028                   |       | 4,594,028                                                       |       |
|                                           |       |                        |       |                                                            |       |
| OTHER INTANGIBLE ASSETS – net             |       | 10,645,303                  |       | 11,103,534                                                      |       |
|                                           |       |                        |       |                                                            |       |
| DEFERRED INCOME TAXES -net                     |       | 3,111,000                   |       | 3,445,000                                                       |       |
|                                           |       |                        |       |                                                            |       |
| ASSETS OF DISCONTINUED OPERATIONS              |       | —                      |       | 9,400                                                           |       |
|                                           |       |                        |       |                                                            |       |
| OTHER ASSETS – net                        |       | 179,728                     |       | 204,684                                                         |       |
|                                           |       |                        |       |                                                            |       |
| TOTAL ASSETS                                   |       | $                           | 82,090,383 |                                                            | $          | 83,269,667 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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| ** **                                                                                                                               | ** ** | **June 30, 2008** | ** ** | **December 31, 2007**                                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **(unaudited)**             | ** ** | **(derived from audited  financial statements)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                           |       |                        |       |                                                            |       |
| CURRENT LIABILITIES                                                                                                                      |       |                        |       |                                                            |       |
| Short-term borrowings                                                                                                                    |       | $                           | 13,000,000 |                                                            | $          | 8,000,000 |   |
| Accounts payable                                                                                                                         |       | 7,360,676                   |       | 5,042,046                                                       |       |
| Income taxes payable                                                                                                                     |       | 185,080                     |       | 524,780                                                         |       |
| Accrued compensation                                                                                                                     |       | 1,176,309                   |       | 1,805,120                                                       |       |
| Other accrued liabilities                                                                                                                |       | 2,767,251                   |       | 3,489,703                                                       |       |
| Current maturities of long-term debt                                                                                                     |       | 5,509,543                   |       | 6,305,423                                                       |       |
| Liabilities of discontinued operations                                                                                                   |       | 30,494                      |       | 30,236                                                          |       |
| TOTAL CURRENT LIABILITIES                                                                                                                |       | 30,029,353                  |       | 25,197,308                                                      |       |
|                                                                                                                                     |       |                        |       |                                                            |       |
| LONG-TERM DEBT, less current maturities                                                                                                  |       | 12,788,139                  |       | 19,744,173                                                      |       |
|                                                                                                                                     |       |                        |       |                                                            |       |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                                                   |       | 336,809                     |       | 342,367                                                         |       |
|                                                                                                                                     |       |                        |       |                                                            |       |
| TOTAL LIABILITIES                                                                                                                        |       | 43,154,301                  |       | 45,283,848                                                      |       |
|                                                                                                                                     |       |                        |       |                                                            |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                            |       |                        |       |                                                            |       |
|                                                                                                                                     |       |                        |       |                                                            |       |
| SHAREHOLDERS’ EQUITY                                                                                                                |       |                        |       |                                                            |       |
| Preferred stock - $10 par; authorized - 2,000,000 shares; no shares  issued                                                              |       | —                      |       | —                                                          |       |
| Common stock                                                                                                                             |       |                        |       |                                                            |       |
| Class A - $1 par; authorized - 7,000,000 shares; issued -  3,956,431 at June 30, 2008 and December 31, 2007, respectively |       | 3,956,431                   |       | 3,956,431                                                       |       |
| Class B - $1 par; authorized - 2,000,000 shares; no shares  issued                                                                  |       |                        |       | —                                                          |       |
| Additional paid-in capital                                                                                                               |       | 10,263,897                  |       | 10,166,662                                                      |       |
| Retained earnings                                                                                                                        |       | 27,613,852                  |       | 26,756,514                                                      |       |
| Treasury stock, at cost – 319,969 and 318,969 shares at June 30,  2008 and December 31, 2007, respectively                |       | (2,898,098                  | )          | (2,893,788                                                      | )          |
|                                                                                                                                     |       |                        |       |                                                            |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                          |       | 38,936,082                  |       | 37,985,819                                                      |       |
|                                                                                                                                     |       |                        |       |                                                            |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                          |       | $                           | 82,090,383 |                                                            | $          | 83,269,667 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

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

** **
| ** **                                                                                                                                                    | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                                                                                                                                                  |       | $                                               | 25,554,114 |                                          | $          | 30,607,864 |   | $ | 49,878,869 |   | $ | 55,566,751 |   |
| Cost of sales                                                                                                                                                 |       | 17,499,081                                      |       | 21,530,979                                    |       | 34,151,353 |   | 38,742,263 |   |
| Gross profit                                                                                                                                                  |       | 8,055,033                                       |       | 9,076,885                                     |       | 15,727,516 |   | 16,824,488 |   |
| Selling, general and administrative expenses                                                                                                                  |       | 6,763,417                                       |       | 7,814,457                                     |       | 13,273,763 |   | 14,667,646 |   |
| Operating income                                                                                                                                              |       | 1,291,616                                       |       | 1,262,428                                     |       | 2,453,753 |   | 2,156,842 |   |
| Interest expense – net                                                                                                                                   |       | 451,796                                         |       | 831,081                                       |       | 1,010,160 |   | 1,482,739 |   |
| Earnings from continuing operations before income taxes                                                                                                       |       | 839,820                                         |       | 431,347                                       |       | 1,443,593 |   | 674,103 |   |
| Income taxes                                                                                                                                                  |       | 387,000                                         |       | 201,000                                       |       | 641,000 |   | 297,000 |   |
| Earnings from continuing operations                                                                                                                           |       | 452,820                                         |       | 230,347                                       |       | 802,593 |   | 377,103 |   |
|                                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Earnings (loss) from discontinued operations (net of tax expense  (benefit) of $19,000 and $28,000 for 2008 and $2,000 and $(12,000) for 2007,  respectively) |       | 42,037                                          |       | 2,666                                         |       | 54,745 |   | (18,301 | ) |
| Gain on sale of assets of discontinued operations (net of tax expense  of $2,093,000)                                                                         |       | —                                          |       | 3,026,560                                     |       | — |   | 3,026,560 |   |
| Earnings from discontinued operations                                                                                                                         |       | 42,037                                          |       | 3,029,226                                     |       | 54,745 |   | 3,008,259 |   |
| Net earnings                                                                                                                                                  |       | $                                               | 494,857    |                                          | $          | 3,259,573 |   | $ | 857,338 |   | $ | 3,385,362 |   |
|                                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Basic earnings per common share:                                                                                                                              |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                                                                                         |       | $                                               | 0.13       |                                          | $          | 0.07 |   | $ | 0.22 |   | $ | 0.10 |   |
| Discontinued operations                                                                                                                                       |       | 0.01                                            |       | 0.84                                          |       | 0.02 |   | 0.84 |   |
| Net earnings                                                                                                                                                  |       | $                                               | 0.14       |                                          | $          | 0.91 |   | $ | 0.24 |   | $ | 0.94 |   |
|                                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Diluted earnings per common share:                                                                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                                                                                         |       | $                                               | 0.12       |                                          | $          | 0.06 |   | $ | 0.22 |   | $ | 0.10 |   |
| Discontinued operations                                                                                                                                       |       | 0.01                                            |       | 0.80                                          |       | 0.01 |   | 0.79 |   |
| Net earnings                                                                                                                                                  |       | $                                               | 0.13       |                                          | $          | 0.86 |   | $ | 0.23 |   | $ | 0.89 |   |
|                                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average common shares outstanding:                                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                                                                         |       | 3,637,277                                       |       | 3,596,703                                     |       | 3,637,370 |   | 3,589,155 |   |
| Diluted                                                                                                                                                       |       | 3,713,440                                       |       | 3,796,962                                     |       | 3,694,338 |   | 3,799,613 |   |

 

See accompanying notes to consolidatedcondensed financial statements (unaudited).

 

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

 

**CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY(unaudited)**

 
| ** **                 | ** ** | ** ** | ** ** | **Class A Common  Stock, $1 Par** | ** ** | **Additional  paid-in** | ** ** | **Retained** | ** ** | **Treasury stock** | ** ** |
|----------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| ** **                 | ** ** | **Total**  | ** ** | **Shares**                                            | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** **                                            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, January 1, 2008   |       | $          | 37,985,819 |                                                  | 3,956,431  |                    | $          | 3,956,431    |       | $                       | 10,166,662 |   | $ | 26,756,514 |   | (318,969 | ) | $ | (2,893,788 | ) |
|                       |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Net earnings               |       | 362,481    |       |                                                  |       |                    |       |         |       | 362,481                 |       |   |   |   |   |
| Stock-based compensation   |       | 46,534     |       | —                                                |       | —                  |       | 46,534       |       | —                  |       | — |   | — |   |
| Balance, March 31, 2008    |       | 38,394,834 |       | 3,956,431                                             | ** ** | 3,956,431               | ** ** | 10,213,196   | ** ** | 27,118,995              | ** ** | (318,969 | ) | (2,893,788 | ) |
|                       |       |       |       |                                                  | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings               |       | $          | 494,857    |                                                  |       |                    |       | ** **   | ** ** | ** **              | $          | 494,857 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based compensation   |       | 50,701     |       |                                                  |       |                    |       | 50,701       |       |                    |       |   |   |   | ** ** |
| Purchase of Treasury stock |       | (4,310     | )          | —                                                |       | —                  |       | —       |       | —                  |       | (1,000 | ) | (4,310 | ) |
| Balance, June 30, 2008     |       | $          | 38,936,082 |                                                  | 3,956,431  | ** **              | $          | 3,956,431    | ** ** | $                       | 10,263,897 | ** ** | $ | 27,613,852 | ** ** | (319,969 | ) | $ | (2,898,098 | ) |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

 

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

 
| ** **                                                                                                    | ** ** | **Six months  ended June 30** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
| Cash Flows from Operating Activities of Continuing Operations:                                                |       |                                         |       |   |   |
| Net earnings                                                                                                  |       | $                                            | 857,338    |   | $ | 3,385,362 |   |
| Earnings from discontinued operations – net of taxes                                                     |       | (54,745                                      | )          | (3,008,259 | ) |
| Adjustments to reconcile net earnings to net cash provided by  operating activities of continuing operations: |       |                                         |       |   |   |
| Noncash charges:                                                                                              |       |                                         |       |   |   |
| Depreciation and amortization                                                                                 |       | 856,145                                      |       | 729,442 |   |
| Amortization of other intangible assets                                                                       |       | 458,231                                      |       | 708,069 |   |
| Amortization of other assets                                                                                  |       | 4,893                                        |       | 2,631 |   |
| Provision for losses on accounts receivable - net                                                             |       | (99,379                                      | )          | 72,747 |   |
| Stock-based compensation                                                                                      |       | 97,235                                       |       | 250,976 |   |
| Deferred income taxes - net                                                                                   |       | 334,000                                      |       | — |   |
| Loss on write-down of fixed asset                                                                             |       | 126,646                                      |       | — |   |
| Changes in operating assets and liabilities, net of assets and  liabilities acquired:                         |       |                                         |       |   |   |
| Accounts receivable                                                                                           |       | (1,404,879                                   | )          | (915,284 | ) |
| Notes and other receivables                                                                                   |       | 274,244                                      |       | 838,056 |   |
| Inventories                                                                                                   |       | 326,169                                      |       | (217,967 | ) |
| Income tax refund receivable                                                                                  |       | 6,465                                        |       | 1,011,795 |   |
| Prepaid expenses and other current assets                                                                     |       | 73,394                                       |       | 340,910 |   |
| Other assets                                                                                                  |       | 20,063                                       |       | 209,878 |   |
| Accounts payable                                                                                              |       | 2,318,630                                    |       | 841,448 |   |
| Accruals and other                                                                                            |       | (1,351,263                                   | )          | (282,523 | ) |
| Income taxes payable                                                                                          |       | (339,700                                     | )          | — |   |
| Total adjustments                                                                                             |       | 1,646,149                                    |       | 581,919 |   |
| Net cash provided by operating activities of continuing operations                                            |       | $                                            | 2,503,487  |   | $ | 3,967,281 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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| ** **                                                                             | ** ** | **Six months  ended June 30** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                     | ** ** | **2007** | ** ** |
| Cash Flows from Investing Activities of Continuing Operations:                         |       |                                         |       |   |   |
| Capital expenditures                                                                   |       | $                                            | (561,911   | ) | $ | (958,687 | ) |
| Purchase of certain assets, net of certain liabilities, of Hy-Tech  Machine, Inc. |       | —                                       |       | (20,749,066 | ) |
| Net cash used in investing activities of continuing operations                         |       | (561,911                                     | )          | (21,707,753 | ) |
|                                                                                   |       |                                         |       |   |   |
| Cash Flows from Financing Activities of Continuing Operations:                         |       |                                         |       |   |   |
| Proceeds from short-term borrowings                                                    |       | 9,000,000                                    |       | 8,000,000 |   |
| Repayments of short-term borrowings                                                    |       | (4,000,000                                   | )          | (5,500,000 | ) |
| Proceeds from term loan                                                                |       | —                                       |       | 19,000,000 |   |
| Repayments of term loan                                                                |       | (7,620,000                                   | )          | (6,900,000 | ) |
| Principal payments on long-term debt                                                   |       | (131,914                                     | )          | (117,768 | ) |
| Proceeds from exercise of stock options                                                |       | —                                       |       | 122,356 |   |
| Tax benefits from the exercise of stock options                                        |       | —                                       |       | 100,000 |   |
| Purchase of treasury stock                                                             |       | (4,310                                       | )          | — |   |
| Net cash (used in) provided by financing activities of continuing  operations          |       | (2,756,224                                   | )          | 14,704,588 |   |
|                                                                                   |       |                                         |       |   |   |
| Cash Flows from Discontinued Operations:                                               |       |                                         |       |   |   |
| Net cash provided by operating activities                                              |       | 73,180                                       |       | 520,939 |   |
| Net cash provided by investing activities                                              |       | —                                       |       | 3,603,095 |   |
| Net cash used in financing activities                                                  |       | —                                       |       | (1,254,117 | ) |
| Net cash provided by discontinued operations                                           |       | 73,180                                       |       | 2,869,917 |   |
|                                                                                   |       |                                         |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                              |       | (741,468                                     | )          | (165,967 | ) |
| Cash and cash equivalents at beginning of period                                       |       | 1,334,167                                    |       | 1,339,882 |   |
| Cash and cash equivalents at end of period                                             |       | $                                            | 592,699    |   | $ | 1,173,915 |   |

 

**Supplemental disclosures of cash flow information:**

 
| ** **     | ** ** | **Six months ended June 30,** | ** ** |
|----------------|------------|---------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Cash paid for: | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Interest       |       | $                                                 | 1,085,000  |   | $ | 1,297,000 |   |
| Income taxes   |       | $                                                 | 741,000    |   | $ | 185,000 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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

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

 

**NOTE 1 - SUMMARY OF ACCOUNTINGPOLICIES**

 

**Principles of Consolidation**

 

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

 

P&F conducts its business operations through twoof its wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.

 

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

 

**Tools**

 

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

 

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. 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,the Company acquired substantially all of the operating assets of Hy-TechMachine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc. and certain real property from HTM Associates, whichcollectively comprise Hy-Tech. Hy-Tech, is primarily engaged in the manufactureand distribution of pneumatic tools and parts for industrial applications.

 

**Hardware**

 

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

 

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

 

The Company’s wholly-owned subsidiary, EmbassyIndustries, Inc. (“Embassy”), was engaged in the manufacture and sale ofbaseboard heating products and the importation and sale of radiant heatingsystems until it exited that business in October 2005 through the sale ofsubstantially all of its non-real estate assets. Embassy sold its real estateassets in June 2007. The Company’s wholly-owned subsidiary, GreenManufacturing, 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 

 

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industry 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 for thesegments of the Company’s business.

 

**Basis of Financial Statement Presentation**

 

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

 

The results of operations for Embassy and Green havebeen segregated from continuing operations and are reflected on theconsolidated condensed statements of earnings as discontinued operations.

 

The unaudited consolidated condensed balance sheetinformation as of December 31, 2007 was derived from the audited financialstatements included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007. The interim financial statements containedherein should be read in conjunction with that Report.

 

In preparing its unaudited consolidated condensedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, the Company is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an ongoing basis, the Company evaluatesestimates, including those related to bad debts, inventory reserves, goodwilland intangible assets. The Company bases its estimates on historical data andexperience, when available, and on various other assumptions that are believedto be reasonable under the circumstances, the combined results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from those estimates.

 

**NOTE 2 - EARNINGS PER SHARE**

 

Basic earnings per common share is based only on theaverage number of shares of common stock outstanding for the periods. Dilutedearnings per common share reflects the effect of shares of common stockissuable upon the exercise of options, unless the effect on earnings isantidilutive.

 

Diluted earnings per common share is computed usingthe treasury stock method. Under this method, the aggregate number of shares ofcommon stock outstanding reflects the assumed use of proceeds from thehypothetical exercise of any outstanding options or warrants to purchase sharesof the Company’s Class A Common Stock. The average market value for theperiod is used as the assumed purchase price.

 

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

 
| ** **                                                                                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Numerator:                                                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Numerator for basic and diluted earnings per common share:                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Earnings from continuing operations                                                                                |       | $                                               | 453,000    |                                          | $          | 231,000 |   | $ | 802,000 |   | $ | 377,000 |   |
| Discontinued operations, net of taxes                                                                              |       | 42,000                                          |       | 3,029,000                                     |       | 55,000 |   | 3,008,000 |   |
| Net earnings                                                                                                       |       | $                                               | 495,000    |                                          | $          | 3,260,000 |   | $ | 857,000 |   | $ | 3,385,000 |   |
|                                                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Denominator:                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Denominator for basic earnings per share – weighted average common  shares outstanding                        |       | 3,637,000                                       |       | 3,597,000                                     |       | 3,637,000 |   | 3,589,000 |   |
| Effect of dilutive securities:                                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Stock options                                                                                                      |       | 76,000                                          |       | 200,000                                       |       | 57,000 |   | 211,000 |   |
| Denominator for diluted earnings per share – adjusted weighted  average common shares and assumed conversions |       | 3,713,000                                       |       | 3,797,000                                     |       | 3,694,000 |   | 3,800,000 |   |

 

At June 30, 2008 and 2007 and during the threeand six-month periods ended June 30, 2008 and 2007, there were outstandingstock options whose exercise prices were higher than the average market valuesof the underlying Class A Common Stock for the period. These options areantidilutive and are excluded from the computation of earnings per share. Theweighted average antidilutive stock options outstanding were as follows:

 
| ** **                                              | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average antidilutive stock options outstanding |       | 380,936                                         |       | 29,500                                        |       | 326,218 |   | 29,500 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

During the six-month period ended June 30, 2008, the Companygranted 174,000 options to purchase its Class A common stock, of which145,000 were granted to its Chief Executive Officer / President and 25,000 toits Chief Operating Officer / Chief Financial Officer, with the balance to anon-executive employee of the Company. Twenty percent of the common stockoptions granted to the Chief Executive Officer / President vest on the firstfive anniversaries of the date of the grant. One third of the common stockoptions granted to the Chief Operating Officer / Chief Financial Officer vestone the first three anniversaries of the grant date. The remaining 4,000options were immediately vested on the grant date.  All common stock options granted herein havean exercise price of $4.16 and will expire ten years from the date of thegrant.

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

 

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

 

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

 

TheCompany recorded stock-based compensation expense for the three month periodsended June 30, 2008 and 2007 of approximately $51,000 and $245,000,respectively, and $97,000 and $251,000 for the six-month periods ended June 30,2008 and 2007, respectively. The compensation expense is recognized in theselling, general and administrative expenses line item of the Company’sstatements of earnings on a straight-line basis over the vesting periods. Thereare no capitalized stock-based compensation costs at either June 30, 2008or 2007.

 

Asof June 30, 2008, the Company had approximately $528,000 of totalunrecognized compensation cost related to non-vested awards granted under ourshare-based plans, which we expect to recognize over a weighted-average periodof 2.3 years.

 

The Company did not receive any cash during thesix-month period ended June 30, 2008 from any exercise of stock options,but did receive cash of approximately $122,000 from options exercised duringthe six-month period ended June 30, 2007. Statement 123(R) requiresthat cash flows from tax benefits attributable to tax deductions in excess ofthe compensation cost recognized for those options (excess tax benefits) beclassified as financing cash flows. Accordingly, the impact of the cashreceived in 2007 is included in financing activities in the accompanyingconsolidated condensed statements of cash flows.

 

Stock Option Plan

 

The Company’s 2002 Incentive Stock Option Plan (the “CurrentPlan”) authorizes the issuance, to employees and directors, of options topurchase a maximum of 1,100,000 shares of Class A Common Stock. Theseoptions must be issued within ten years of the effective date of the Plan andare exercisable for a ten year period from the date of grant, at prices notless than 100% of the market value of the Class A Common Stock on the datethe option is granted. Incentive stock options granted to any 10% stockholderare exercisable for a five year period from the date of grant, at prices notless than 110% of the market value of the Class A Common Stock on the datethe option is granted. Pursuant to the Current Plan, the Stock Option Committeehas the discretion to award non-qualified stock option grants. Options havevesting periods of immediate to five years. In the event options grantedcontain a vesting schedule over a period of years, the Company recognizescompensation cost for these awards on a straight-line basis over the serviceperiod. The Current Plan, which terminates in 2012, is the successor to theCompany’s 1992 Incentive Stock Option Plan (the “Prior Plan”).

 

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The following is a summary of the changes inoutstanding options for the six months ended June 30, 2008:

 
| ** **                        | ** ** | **Option  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|--------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding, January 1, 2008 |       | 533,436            |       | $                                              | 8.58       |                                                                     | 4.5        |                                |       |   |
| Granted                           |       | 174,000            |       | 4.16                                           |       | 10.0                                                                     |       |                                |       |
| Exercised                         |       | —             |       | —                                         |       |                                                                     |       |                                |       |
| Forfeited                         |       | —             |       | —                                         |       |                                                                     |       |                                |       |
| Expired                           |       | (152,500           | )          | 7.88                                           |       |                                                                     |       |                                |       |
| Outstanding, June 30, 2008   |       | 554,936            |       | $                                              | 7.38       |                                                                     | 7.1        |                                | —     |   |
|                              |       |               |       |                                           |       |                                                                     |       |                                |       |
| Vested, June 30, 2008        |       | 342,530            |       | $                                              | 8.60       |                                                                     | 5.6        |                                | —     |   |

 

The following is a summaryof changes in non-vested shares for the six months ended June 30, 2008:

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

 

The number of shares of Class A common stockreserved for stock options available for issuance under the Current Plan as of June 30,2008 was 416,900. Of the options outstanding at June 30, 2008, 540,936were issued under the Current Plan and 14,000 were issued under the Prior Plan.

 

**NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS**

 

**New Accounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStandard of Financial Accounting Statements (“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 became effective as of November 15, 2007 and became effective for theCompany January 1, 2008. The adoption of thisstatement did not have a material effect on our consolidated financial positionor results of operations.

 

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

 

InDecember 2007, the SEC staff issued SAB 110, “Share Based Payment”, whichamends SAB 107, Share Based Payment, to permit public companies, under certaincircumstances, to use the simplified method in SAB 107 for employee optiongrants after December 31, 2007. Use of the simplified method after December 2007is permitted only for companies whose historical data about their employees’exercise behavior does not provide a reasonable basis for estimating theexpected term of the options. We currently use the simplified method toestimate the expected term for employee option grants as adequate 

 

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historicalexperience is not available to provide a reasonable estimate. SAB 110 iseffective for employee options granted after December 31, 2007. We adoptedSAB 110 effective January 1, 2008 and continue applying the simplifiedmethod until enough historical experience is readily available to provide areasonable estimate of the expected term for employee option grants.

 

InDecember 2007, the FASB issued Statement 141 (revised 2007), “BusinessCombinations” (“Statement 141R”) to change how an entity accounts for theacquisition of a business. When effective, Statement 141R will replace existingStatement 141 in its entirety. Statement 141R carries forward the existingrequirements to account for all business combinations using the acquisitionmethod (formerly called the purchase method). In general, Statement 141R willrequire acquisition-date fair value measurement of identifiable assetsacquired, liabilities assumed, and non-controlling interests in the acquiree.Statement 141R will eliminate the current cost based purchase method underStatement 141. The new measurement requirements will result in the recognitionof the full amount of acquisition-date goodwill, which includes amountsattributable to non-controlling interests. The acquirer will recognize inincome any gain or loss on the remeasurement to acquisition-date fair value ofconsideration transferred or of previously acquired equity interests in theacquiree. Neither the direct costs incurred to effect a business combinationnor the costs the acquirer expects to incur under a plan to restructure anacquired business will be included as part of the business combinationaccounting. As a result, those costs will be charged to expense when incurred,except for debt or equity issuance costs, which will be accounted for inaccordance with other generally accepted accounting principles. Statement 141Rwill also change the accounting for contingent consideration, in processresearch and development, contingencies, and restructuring costs. In addition,changes in deferred tax asset valuation allowances and acquired income taxuncertainties in a business combination that occur after the measurement periodwill impact income taxes under Statement 141R. Statement 141R is effective forfiscal years and interim periods within those fiscal years beginning on orafter December 15, 2008. Early adoption is prohibited. We intend to adoptStatement 141R effective January 1, 2009 and apply its provisionsprospectively. We are evaluating the impact that the adoption of Statement 141Rwill have on our consolidated financial statements.

 

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

 

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**NOTE 5 – ACQUISITION**

 

Hy-TechMachine, Inc.

 

OnFebruary 14, 2007, pursuant to an Asset Purchase Agreement (the “Hy-TechAPA”) effective as of February 12, 2007, Hy-Tech, acquired substantiallyall of the assets (the “Hy-Tech Purchased Property”) of Hy-Tech Machine, Inc.and Quality Gear & Machine, Inc., (collectively, the “Hy-TechSellers”). The purchase price consisted of $16,900,000 in cash, subject toadjustments, plus the assumption of certain payables and liabilities and theobligation to make certain contingent payments based on factors described inthe Hy-Tech APA. The purchase price was negotiated on the basis of the Hy-TechSellers’ historical financial performance. The Hy-Tech Purchased Property wasused by the Hy-Tech Sellers in the business of, among other things,manufacturing and selling pneumatic tools and other tool products.

 

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

 

TheCompany also agreed to make additional payments (“Contingent Consideration”) tothe Hy-Tech Sellers. The amount of Contingent Consideration is to be based on apercentage of the average increase in earnings before interest, taxes,depreciation and amortization (“EBITDA”) over a two-year period from the dateof acquisition, over a base year EBITDA of $4,473,000. In addition, the Companyhas agreed to make a further additional payment (“Additional ContingentConsideration”), subject to certain conditions related to an exclusive supplyagreement with a major customer and, to a certain extent and subject to certainprovisions, the achievement of Contingent Consideration. This AdditionalContingent Consideration can not exceed $1,900,000. Any such additionalpayments for Contingent Consideration or Additional Contingent Consideration,if any, would be payable in accordance with the terms and conditions set forthin the Hy-Tech APA.  Any such paymentswill be treated by the Company as additions to goodwill.

 

The following table summarizes, on an unaudited pro forma basis, thecombined results of operations of the Company and Hy-Tech as though theacquisition transaction had occurred as of January 1, 2007. The pro formaamounts give effect to appropriate adjustments for amortization of intangibleassets, interest expense and income taxes. The pro forma amounts presented arenot necessarily indicative of either the actual consolidated operating resultshad the acquisition transaction occurred as of January 1, 2007 or offuture consolidated operating results.

 
| ** **                         | ** ** | **Three months ended** | ** ** | **Six Months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30, 2007**      | ** ** | **June 30, 2007**    | ** ** |
| Net revenues                       |       | $                                | 30,608,000 |                           | $          | 57,746,000 |   |
|                               |       |                             |       |                           |       |
| Net earnings                       |       | $                                | 3,260,000  |                           | $          | 3,568,000 |   |
| Earnings per share of common stock |       |                             |       |                           |       |
| Basic                              |       | $                                | 0.91       |                           | $          | 0.99 |   |
| Diluted                            |       | $                                | 0.86       |                           | $          | 0.94 |   |

 

**NOTE 6 –DISCONTINUED OPERATIONS**

 

*EmbassyIndustries, Inc.*

 

Pursuantto an Asset Purchase Agreement (the “Embassy APA”), dated as of October 11,2005, 

 

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amongP&F, Embassy, Mestek, Inc. (“Mestek”) and Embassy Manufacturing, Inc.,a wholly owned subsidiary of Mestek (“EMI”), Embassy sold substantially all ofits operating assets to EMI. Certain assets were retained by Embassy, including,but not limited to, cash and title to any real property owned by Embassy at theconsummation of the sale to EMI. Embassy has effectively ceased all operatingactivities.

 

OnJuly 24, 2006, Embassy received a letter (the “Purchaser Letter”) fromcounsel to J. D’Addario & Company, Inc., a New York corporation (“Purchaser”),purporting to terminate that certain contract entered into by Embassy andPurchaser on January 13, 2006 (the “Agreement”, and as amended, the “Contractof Sale”). Pursuant to the Contract of Sale, Embassy agreed to sell itsFarmingdale, New York premises (the “Farmingdale Premises”) to Purchaser for apurchase price of $6,403,000.  ThePurchaser Letter purports to terminate the Contract of Sale based uponPurchaser’s assertion that Embassy had not satisfied certain requirements anddemands that the escrow agent return the Embassy Industries, Inc. down-paymentwith accrued interest, and that Purchaser be reimbursed for the costs of surveyand title examination.

 

ThePurchases Letter purports to terminate the Contract of Sale based uponPurchaser’s assertion the 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 the survey and titleexaminations.

 

Embassyinformed Purchaser that its purported termination of the Contract of Sale wasin default of its obligation to consummate the purchase of the FarmingdalePremises under the terms of the Contract of Sale. On August 2, 2006,Purchaser instituted an action against Embassy in the Supreme Court of theState of New York, County of Suffolk, for breach of contract and return ofdown-payment, seeking $650,000, together with costs of title and survey andinterest thereon, and the cost of the action. The down-payment remains inescrow pending resolution of this matter. Embassy believes the action iswithout merit and intends to vigorously defend it.

 

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

 

*Green*

 

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

 

Thefollowing amounts pertain to the Company’s discontinued operations and havebeen segregated from the Company’s continuing operations and are reported asassets held for sale and assets and liabilities of discontinued operations inthe consolidated condensed balance sheets:

 

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| ** **                                                       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Assets held for sale and assets of discontinued operations:      |       |                        |       |                            |       |
| Current:                                                         |       |                        |       |                            |       |
| Prepaid expenses                                                 |       | $                           | 42,000     |                            | $          | 56,000 |   |
| Subtotal                                                         |       | 42,000                      |       | 56,000                          |       |
| Long-term:                                                       |       |                        |       |                            |       |
| Other receivable                                                 |       | —                      |       | 9,000                           |       |
| Total assets held for sale and assets of discontinued operations |       | $                           | 42,000     |                            | $          | 65,000 |   |
|                                                             |       |                        |       |                            |       |
| Liabilities of discontinued operations:                          |       |                        |       |                            |       |
| Current:                                                         |       |                        |       |                            |       |
| Accounts payable and accrued expenses                            |       | $                           | 30,000     |                            | $          | 30,000 |   |
| Subtotal                                                         |       | 30,000                      |       | 30,000                          |       |
| Long-term:                                                       |       |                        |       |                            |       |
| Pension obligation                                               |       | 337,000                     |       | 342,000                         |       |
| Total liabilities of discontinued operations                     |       | $                           | 367,000    |                            | $          | 372,000 |   |

 

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

 
| ** **                                                               | ** ** | **Three Months Ended June  30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                        | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Earnings (loss) from operation of discontinued operations, before  taxes |       | $                                               | 61,000     |                                              | $          | 5,000 |   | $ | 83,000 |   | $ | (30,000 | ) |
| Gain on sale of assets of discontinued operations                        |       | —                                          |       | 5,119,000                                         |       | — |   | 5,119,000 |   |
|                                                                     |       | 61,000                                          |       | 5,124,000                                         |       | 83,000 |   | 5,089,000 |   |
| Income tax expense                                                       |       | (19,000                                         | )          | (2,095,000                                        | )          | (28,000 | ) | (2,081,000 | ) |
|                                                                     |       |                                            |       |                                              |       |   |   |   |   |
| Earnings from discontinued operations                                    |       | $                                               | 42,000     |                                              | $          | 3,029,000 |   | $ | 55,000 |   | $ | 3,008,000 |   |

 

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

 

Accounts receivable -net consists of:

 
| ** **                            | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Trade accounts receivable             |       | $                           | 14,906,000 |                            | $          | 13,502,000 |   |
| Less: Allowance for doubtful accounts |       | 519,000                     |       | 619,000                         |       |
|                                  |       | $                           | 14,387,000 |                            | $          | 12,883,000 |   |

 

**NOTE 8 – INVENTORIES**

 

Inventories - net consist of:

 
| ** **                                       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw material                                     |       | $                           | 2,593,000  |                            | $          | 2,525,000 |   |
| Work in process                                  |       | 1,672,000                   |       | 2,156,000                       |       |
| Finished goods                                   |       | 29,366,000                  |       | 29,015,000                      |       |
|                                             |       | 33,631,000                  |       | 33,696,000                      |       |
| Reserve for obsolete and slow-moving inventories |       | (2,221,000                  | )          | (1,960,000                      | )          |
|                                             |       | $                           | 31,410,000 |                            | $          | 31,736,000 |   |

 

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

 

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

 

During the six-month period ended June 30, 2008there was no change to the carrying value of goodwill.

 

Other intangible assets were as follows:

 
| ** **                            | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Cost**                    | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible assets:              |       |                        |       |                            |       |   |   |   |   |
| Customer relationships and backlog    |       | $                           | 14,130,000 |                            | $          | 4,557,000 |   | $ | 14,130,000 |   | $ | 4,117,000 |   |
| Vendor relationship                   |       | —                      |       | —                          |       | — |   | — |   |
| Non-compete and Employment agreements |       | 810,000                     |       | 785,000                         |       | 810,000 |   | 780,000 |   |
| Trademark/trade name                  |       | 699,000                     |       | —                          |       | 699,000 |   | — |   |
| Engineering drawings                  |       | 290,000                     |       | 20,000                          |       | 290,000 |   | 12,000 |   |
| Licensing                             |       | 105,000                     |       | 27,000                          |       | 105,000 |   | 21,000 |   |
| Total                                 |       | $                           | 16,034,000 |                            | $          | 5,389,000 |   | $ | 16,034,000 |   | $ | 4,930,000 |   |

 

Amortization expense for intangible assets subjectto amortization was as follows:

 
| ** ** | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       | $                                                   | 230,000    |                                              | $          | 343,000 |   | $ | 459,000 |   | $ | 708,000 |   |
|            |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

Amortization expense for each of the twelve-monthperiods ending June 30, 2009 through the twelve-month period ending June 30,2013, is estimated to be as follows: 2009 - $916,000; 2010 - $917,000; 2011 -$911,000; 2012 - $907,000 and 2013 - $844,000. The weighted averageamortization period for intangible assets was 12.7 years at June 30, 2008and 13.1 years at December 31, 2007.

 

**NOTE 10 - WARRANTY LIABILITY**

 

The Company offerswarranties on certain products against product defects for periods primarilyranging from one to three years, with certain faucet hardware having a limitedlifetime warranty, depending on the specific product and terms of the customerpurchase agreement. The Company’s typical warranty requires it to repair orreplace the defective products during the warranty period at no cost to thecustomer. At the time the product revenue is recognized, the Company records aliability for estimated costs under its warranty program, which costs areestimated based on historical experience. The Company periodically assesses theadequacy of its recorded warranty liability and adjusts the amounts asnecessary. While the Company believes that its estimated liability for productwarranties is adequate, the estimated liability for the product warrantiescould differ materially from future actual warranty costs.

 

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

 
| ** **                                                          | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Balance, beginning of period                                        |       | $                                                 | 552,000    |   | $ | 368,000 |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 406,000                                           |       | 555,000 |   |
| Actual warranty costs incurred                                      |       | (487,000                                          | )          | (556,000 | ) |
| Balance, end of period                                              |       | $                                                 | 471,000    |   | $ | 367,000 |   |

 

**NOTE 11 – 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 agreement. The credit agreement, issubject to annual review by the lending banks. Prior to June 30, 2008 theCompany and the banks amended the agreement to extend the termination date ofthe revolving credit loan portion of the credit agreement facility from June 30,2008 to July 31, 2008. In July 2008 the Company and the banksexecuted Amendment No.13 to the Credit Agreement which, among other things,established new applicable loan margins for both the revolving credit facilityas well as for applicable term loan margins, expanded the definition ofeligible inventory, amended certain financial covenants and set November 30,2008 as the termination date of the revolving credit loan portion of the creditagreement facility. It should be noted that the new applicable loan marginswill only apply when the Company’s senior debt to its earnings before interest,taxes, depreciation and amortization (“EBITDA”) is greater than 4.25 to 1.Direct borrowings under the revolving credit loan facility are secured by theCompany’s accounts receivable, inventory and equipment and are cross-guaranteedby each of the Company’s subsidiaries. These borrowings bear interest at eitherLIBOR (London InterBank Offered Rate) or the prime interest rate, plus thecurrently applicable loan margin. At both June 30, 2008 and December 31,2007, the applicable loan margin added to LIBOR was 1.75%. At June 30,2008 and December 31, 2007, the balances outstanding on the revolvingcredit loan facility were $13,000,000 and $8,000,000, respectively.

 

TheCompany’s credit agreement also includes a term loan facility, which provided amaximum commitment of $34,000,000 to finance acquisitions subject to theapproval of the lending banks. Borrowings under the term loan facility 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 or the prime interest rate, plus the currentlyapplicable loan margin. In connection with the acquisition of Hy-Tech in February 2007,the Company executed and delivered an amendment to the credit agreement, which,among other things, added Continental and Hy-Tech as additional co-borrowersand provided for new term loans in amounts not to exceed $19,000,000. During2007, the Company paid down $5,000,000 against the Hy-Tech term loan. In January 2008,the Company paid down an additional $5,000,000 against this term loan, throughadditional borrowings on the revolving credit loan facility. There was$8,280,000 and $14,000,000 outstanding against this term loan at June 30,2008 and December 31, 2007, respectively. At both June 30, 2008 and December 31,2007, the applicable loan margin added to LIBOR was 2.00%. In 2004, the Companyborrowed $29,000,000 against the term loan facility to finance the Woodmarkacquisition transaction. At June 30, 2008 and December 31, 2007,there was $7,900,000 and $9,800,000, respectively, outstanding against thisterm loan. The principalamounts on these term loans are payable in quarterly installments of $360,000and $950,000 respectively, over the term of the respective loans.

 

Thecredit agreement also includes a foreign exchange line (cash flow hedge), whichprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases of foreigncurrencies needed for payments to foreign suppliers. The total amount offoreign currency forward contracts outstanding under the foreign exchange lineat June 30, 2008, based on 

 

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thatday’s closing spot rate, was approximately $446,000. All such contracts willexpire in the fourth quarter of calendar year 2008. The impact of these cashflow hedge contracts on other comprehensive income is not material for thethree and six months ended June 30, 2008.

 

TheCompany has mortgages outstanding of approximately $2,100,000 and $2,249,000 atJune 30, 2008 and December 31, 2007, respectively.

 

**NOTE 12—RELATED PARTY TRANSACTIONS**

 

The president of one of our subsidiaries is part owner of one of thesubsidiary’s vendors. During the six-month periods ended June 30, 2008 and2007, the subsidiary purchased approximately $549,000 and $959,000 of productfrom thisvendor.

 

**NOTE 13 - BUSINESS SEGMENTS**

 

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

 

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

 
| **Three months ended June 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                                    |       |             |       |      |       |         |       |
| Revenues from unaffiliated customers                          |       | $                | 25,554,000 |      | $          | 14,487,000   |       | $ | 11,067,000 |   |
|                                                          |       |             |       |      |       |         |       |
| Segment operating income                                      |       | 2,511,000        |       | 1,725,000 |       | 786,000      |       |
| General corporate expense                                     |       | (1,220,000       | )          |      |       |         |       |
| Interest expense – net                                   |       | (452,000         | )          |      |       |         |       |
| Earnings from continuing operations before  income taxes      |       | $                | 839,000    |      |       |         |       |   |
|                                                          |       |             |       |      |       |         |       |
| Segment assets                                                |       | $                | 76,601,000 |      | $          | 45,834,000   |       | $ | 30,767,000 |   |
| Corporate assets and assets of discontinued  operations       |       | 5,489,000        |       |      |       |         |       |
| Total assets                                                  |       | $                | 82,090,000 |      |       |         |       |   |

 

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| **Three months ended June 30, 2007** | ** ** | **Consolidated** | ** **  | **Tools** | ** ** | **Hardware** | ** ** |
|---------------------------------------------------------------|------------|------------------|-------------|-----------|------------|--------------|------------|
| ** **                                                    |       |             |        |      |       |         |       |
| Revenues from unaffiliated customers                          |       | $                | 30,608,000  |      | $          | 15,786,000   |       | $ | 14,822,000 |   |
|                                                          |       |             |        |      |       |         |       |
| Segment operating income                                      |       | 3,327,000        |        | $         | 1,001,000  |         | $          | 2,326,000 |   |
| General corporate expense                                     |       | (2,065,000       | )           |      |       |         |       |
| Interest expense – net                                   |       | (831,000         | )           |      |       |         |       |
| Earnings from continuing operations before  income taxes      |       | $                | 431,000     |      |       |         |       |   |
|                                                          |       |             |        |      |       |         |       |
| Segment assets                                                |       | $                | 107,262,000 |      | $          | 48,527,000   |       | $ | 58,735,000 |   |
| Corporate assets and assets of discontinued  operations       |       | 2,094,000        |        |      |       |         |       |
| Total assets                                                  |       | $                | 109,356,000 |      |       |         |       |   |

 
| **Six months ended June 30, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                                  |       |             |       |      |       |         |       |
| Revenues from unaffiliated customers                        |       | $                | 49,879,000 |      | $          | 27,773,000   |       | $ | 22,106,000 |   |
|                                                        |       |             |       |      |       |         |       |
| Segment operating income                                    |       | 4,972,000        |       | $         | 3,365,000  |         | $          | 1,607,000 |   |
| General corporate expense                                   |       | (2,518,000       | )          |      |       |         |       |
| Interest expense – net                                 |       | (1,010,000       | )          |      |       |         |       |
| Earnings from continuing operations before  income taxes    |       | $                | 1,444,000  |      |       |         |       |   |

 
| **Six months ended June 30, 2007** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
| ** **                                                  |       |             |       |      |       |         |       |
| Revenues from unaffiliated customers                        |       | $                | 55,567,000 |      | $          | 27,398,000   |       | $ | 28,169,000 |   |
|                                                        |       |             |       |      |       |         |       |
| Segment operating income                                    |       | 5,364,000        |       | $         | 1,858,000  |         | $          | 3,506,000 |   |
| General corporate expense                                   |       | (3,207,000       | )          |      |       |         |       |
| Interest expense – net                                 |       | (1,483,000       | )          |      |       |         |       |
| Earnings from continuing operations before  income taxes    |       | $                | 674,000    |      |       |         |       |   |

 

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

 

**Item 2.****          ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

**General**

 

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”)provides a safe harbor for forward-looking statements made by or on behalf ofP&F Industries, Inc. and subsidiaries (“P&F”, or “the Company”).P&F and its representatives may, from time to time, make written or verbalforward-looking statements, including statements contained in the Company’sfilings with the Securities and Exchange Commission and in its reports tostockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,”“estimate,” “anticipate,” “will,” and their opposites and similar expressionsidentify statements that constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and that are intended to come within thesafe harbor protection provided by those sections. Any forward-lookingstatements contained herein, including those related to the Company’s futureperformance, are based upon the Company’s historical performance and on currentplans, estimates and expectations. All forward-looking statements involve risksand uncertainties. These risks and uncertainties could cause the Company’sactual results for the 2008 fiscal year and beyond to differ materially fromthose expressed in any forward-looking statement made by or on behalf of theCompany for a number of reasons, as previouslydisclosed in the Company’s Annual Report on Form 10-K for the year ended December 31,2007 in response to Item 1A. to Part I of Form 10-K. Forward-lookingstatements speak only as of the date on which they are made. The Companyundertakes no obligation to update publicly or revise any forward-lookingstatement, whether as a result of new information, future developments orotherwise.

 

**Business**

 

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

 

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

 

**Tools**

 

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

 

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

 

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**Hardware**

 

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

 

Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircasecomponents and kitchen and bath hardware and accessories. Pacific Stairmanufactures premium stair rail products and distributes Woodmark’s staircasecomponents to the building industry, primarily in southern California and thesouthwestern region of the United States.

 

**Overview**

 

Thesignificant factors listed below, which affected our results for the three andsix-month period ended June 30, 2008, are discussed in further detail inthe Results of Operations section:

 

·              ***NetRevenue:****The on-going down-turn inthe new home construction sector of the nation’s economy continues to have anadverse affect on Countrywide’s operating performance;*

 

·              ***Grossmargins****: Consolidatedgross margins increased 1.8 percentage points when comparing the three-monthperiods ended June 30, 2008 and 2007 primarily due to improved productmix;*

 

·              ***Selling,general and administrative expense****: Continuedtodecrease for the second quarter in a row. The reduction for thethree-month period ended June 30, 2008 compared to the same period in theprior year was $1,051,000 or 13.4%; and*

 

·              ***Interestexpense:**** Decreased $379,000.*

 

**KEY INDICATORS**

 

**Economic Measures**

 

Themost critical economic indicator affecting our Hardware segment’s overallperformance has been and will continue to be new housing starts.  For the six-month period ended June 30,2008 revenue for our Hardware segment fell proportionate to the decrease in newhousing starts. Economic indicators for the Tools segment include generaleconomic conditions, specifically retail sales.

 

Anotherkey economic measure relevant to us is the cost of metals, especially varioustypes of steel and aluminum. Also important is the value of the dollar inrelation to the Japanese yen (“yen”) and the Taiwan dollar (“TWD”), as wepurchase a significant portion of its products from these two countries.Purchases from Chinese sources are made in U.S. dollars. However, if theChinese currency, the Renminbi (“RMB”), were to be revalued against the dollar,there could be a significant negative impact on the cost of our products.

 

**Operating Measures**

 

Keyoperating measures we use to manage our operating segments are: orders;shipments; development of new products; controlling customer retention;inventory levels and productivity. These measures are recorded and monitored atvarious intervals, including daily, weekly and monthly. To the extent thesemeasures are relevant; they are discussed in the detailed sections for eachoperating segment.

 

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**Financial Measures**

 

Keyfinancial measures we use to evaluate the results of our business include:revenue; gross margin; selling, general and administrative expenses; earningsbefore interest; taxes and bonus; operating cash flows and capitalexpenditures; return on sales; return on assets; days sales outstanding andinventory turns. These measures are reviewed at monthly, quarterly and annual intervalsand are compared to historical periods as well as established objectives. Tothe extent that these measures are relevant, they are discussed in the detailedsections for each operating segment below.

 

**CriticalAccounting Policies and Estimates**

 

Weprepare our consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America. Certain of theseaccounting policies require us to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities, revenues and expenses. On anongoing basis, we evaluate estimates, including those related to bad debts,inventory reserves, goodwill and intangible assets and warranty reserves. Webase our estimates on historical data and experience, when available, and onvarious other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimates.

 

Therehave been no material changes in our critical accounting policies and estimatesfrom those discussed in Item 7 of our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

**RESULTSOF OPERATIONS**

 

**Net revenue**

 

Thetable below provides an analysis of our net revenue for the three and six monthperiods ended June 30, 2008 and 2007.

 
| ** **        | ** ** | **Three-months Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|-------------------|------------|------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **        | ** ** | **2008**                                       | ** ** | **2007**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                                     | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             |       |                                           |       |       |       |         |       |   |   |
| Florida Pneumatic |       | $                                              | 9,450,000  |       | $          | 11,478,000   |       | $ | (2,028,000 | ) | (17.7 | )% |
| Hy-Tech           |       | 5,037,000                                      |       | 4,308,000  |       | 729,000      |       | 16.9 |   |
| Tools Total       |       | 14,487,000                                     |       | 15,786,000 |       | (1,299,000   | )          | (8.2 | ) |
|              |       |                                           |       |       |       |         |       |   |   |
| Hardware          |       |                                           |       |       |       |         |       |   |   |
| Woodmark          |       | 5,968,000                                      |       | 8,509,000  |       | (2,541,000   | )          | (29.9 | ) |
| Pacific  Stair    |       | 557,000                                        |       | 1,031,000  |       | (474,000     | )          | (46.0 | ) |
| Nationwide        |       | 4,542,000                                      |       | 5,282,000  |       | (740,000     | )          | (14.0 | ) |
| Hardware Total    |       | 11,067,000                                     |       | 14,822,000 |       | (3,755,000   | )          | (25.3 | ) |
|              |       |                                           |       |       |       |         |       |   |   |
| Consolidated      |       | $                                              | 25,554,000 |       | $          | 30,608,000   |       | $ | (5,054,000 | ) | (16.5 | )% |

 

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| ** **        | ** ** | **Six-months Ended June 30,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|-------------------|------------|----------------------------------------------|------------|------------|------------|--------------|------------|
| ** **        | ** ** | **2008**                                     | ** ** | **2007**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                                   | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             |       |                                         |       |       |       |         |       |   |   |
| Florida Pneumatic |       | $                                            | 18,357,000 |       | $          | 20,911,000   |       | $ | (2,554,000 | ) | (12.2 | )% |
| Hy-Tech           |       | 9,416,000                                    |       | 6,487,000  |       | 2,929,000    |       | 45.2 |   |
| Tools Total       |       | 27,773,000                                   |       | 27,398,000 |       | 375,000      |       | 1.4 |   |
|              |       |                                         |       |       |       |         |       |   |   |
| Hardware          |       |                                         |       |       |       |         |       |   |   |
| Woodmark          |       | 12,406,000                                   |       | 17,025,000 |       | (4,619,000   | )          | (27.1 | )% |
| Pacific  Stair    |       | 1,028,000                                    |       | 1,970,000  |       | (942,000     | )          | (47.8 | ) |
| Nationwide        |       | 8,672,000                                    |       | 9,174,000  |       | (502,000     | )          | (5.5 | ) |
| Hardware Total    |       | 22,106,000                                   |       | 28,169,000 |       | (6,063,000   | )          | (21.5 | ) |
|              |       |                                         |       |       |       |         |       |   |   |
| Consolidated      |       | $                                            | 49,879,000 |       | $          | 55,567,000   |       | $ | (5,688,000 | ) | (10.2 | )% |

 

Whencomparing the three-month periods ended June 30, 2008 and 2007, netrevenue reported by our Tools segment decreased $1,299,000. Significant factorscontributing to this decrease in net revenue include: (i) a net reductionin retail revenue at Florida Pneumatic of $1,624,000, of which $471,000 is dueto the wind-down of The Home Depot business, the reduced volume of promotionalsales of approximately $651,000 and lower sales of basic retail productsaggregating $502,000 to a major customer; and (ii) our Franklin hardwareproduct line revenue decreased $520,000, primarily the result of the loss  of its business with The Home Depot. Theabove declines in product line revenues were offset by a net increase of$116,000 reported by our Berkley, filters and automotive lines.

 

Theacquisition of Hy-Tech, consummated as of February 12, 2007, continues toprovide a positive impact. Hy-Tech focuses on the industrial sector of thepneumatic tools market, an area which thus far has not been as affected by thesluggish economy as the retail sector. As illustrated in the table above, whencomparing the three-month periods ended June 30, 2008 and 2007, Hy-Tech,reported an increase of $729,000 to the Tools segment. This increase isprimarily attributable to organic growth.

 

Asa result of the continuing reduction in the number of new homes beingconstructed, which is the principal driver for the Hardware segment, revenuefor the quarter ended June 30, 2008 decreased an aggregate of $3,755,000when compared to the three-month period ended June 30, 2007. Our Woodmarksubsidiary, which primarily services the southern tier of the United Sates,continues to be hard hit, reporting an aggregate net revenue decrease of$2,541,000. Within Woodmark, revenue from the sale of its stair parts andaccessories decreased $2,321,000. Additionally, Woodmark’s kitchen/bath productline witnessed a decrease in revenue of $220,000 due to a lagging recreationalvehicle market, the loss of a large customer, as well as the weak economicconditions. Until the downward trend in the number of new housing starts levelsand begins to increase we do not expect to see improvement in Woodmark’s netrevenue.

 

PacificStair’s decrease in revenue of approximately $474,000 is primarily attributableto continuing decline in the new home construction market in southernCalifornia and Arizona.

 

Nationwide,which primarily markets fencing and gate hardware has, until this quarter notbeen materially affected by the sluggish home building sector, experienced adecrease of $740,000. Nationwide’s net revenue for fencing decreased $237,000.Further, Nationwide’s OEM products and patio product lines decreased as well,by $281,000 and $222,000, respectively. We anticipate that competitivepressures and cost increases from our foreign suppliers may continue to reducethe beneficial impact of the new products which were introduced during thefirst three months of 2008.

 

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NetRevenue for the Tools segment for the six-month period ended June 30, 2008was just slightly better than the same period in 2007 due primarily torecognizing a full six months of revenue for Hy-Tech, compared to approximatelyfour and one half months in 2007, as well as revenue growth at Hy-Tech duringthe second quarter, which together generated a $2,929,000 increase over the sixmonth period ended June 30, 2007. This increase was offset by a decreaseon year to date revenue reported by Florida Pneumatic. The decrease at FloridaPneumatic of $2,554,000 was due to lower than expected retail sales.

 

Netrevenue for the Hardware segment continues to be severely impacted by theongoing downward trend of new home construction. Both Woodmark and PacificStair Products whose primary market is new home construction are down 27.1% and47.8%, respectively when comparing the six-month periods ended June 30,2008 and 2007. It is difficult to predict when the new home starts will beginto improve. Until such time we will continue our ongoing efforts to reducecosts and overhead wherever possible to offset lower revenue. When comparingthe six-month periods ended June 30, 2008 and 2007 net revenue atNationwide decreased $502,000 primarily due to competitive pressures and costsincreases from overseas.

 

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

 

**GrossMargins / Profits**

 

Grossprofits for the three and six-month periods ended June 30, 2008 and 2007:

 
| **Three months ended  June 30,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-------------------------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2008                                            |       | Gross Profit |       | $                | 8,055,000  |      | $          | 4,761,000    |       | $ | 3,294,000 |   |
|                                            |       | Gross Margin |       | 31.5             | %          | 32.9      | %          | 29.8         | %          |
|                                            |       |         |       |             |       |      |       |         |       |
| 2007                                            |       | Gross Profit |       | $                | 9,077,000  |      | $          | 4,252,000    |       | $ | 4,825,000 |   |
| ** **                                      |       | Gross Margin |       | 29.7             | %          | 26.9      | %          | 32.6         | %          |

 
| **Six months ended  June 30,** | ** ** | ** **   | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2008                                          |       | Gross Profit |       | $                | 15,728,000 |      | $          | 9,173,000    |       | $ | 6,555,000 |   |
|                                          |       | Gross Margin |       | 31.5             | %          | 33.0      | %          | 29.7         | %          |
|                                          |       |         |       |             |       |      |       |         |       |
| 2007                                          |       | Gross Profit |       | $                | 16,824,000 |      | $          | 7,964,000    |       | $ | 8,860,000 |   |
| ** **                                    |       | Gross Margin |       | 30.3             | %          | 29.1      | %          | 31.5         | %          |

 

Grossmargins in the Tools segment increased 6.0 percentage points from 26.9% for thethree-month period ended June 30, 2007 to 32.9% reported for thethree-months ended June 30, 2008. When comparing the three month periodsended June 30, 2008 and 2007, gross profit for this segment increased$509,000. Specifically, gross margins at Florida Pneumatic increased 5.1%points primarily the result of a reduction in the fees paid to an overseastrading partner, as well as various cost reductions implemented during thequarter. However when taken in conjunction with the decrease in revenue,Florida Pneumatics’ gross profit declined approximately $28,000. Both grossmargins and gross profit increased at Hy-Tech when comparing the three-monthperiods ended June 30, 2008 and 2007. Gross margins increased 5.3% to36.9% for the three-month period ended June 30, 2008. Similarly grossprofit increased $495,000 during the same period. These increases reported inthis quarter are primarily due to product mix as well as improved manufacturingefficiencies.

 

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Grossprofit for the Hardware segment continues to be severely affected by thedownturn in home construction; decreasing $1,531,000 from $4,825,000 reportedfor the three-month period ended June 30, 2007 to $3,294,000 for the sameperiod in 2008. Further, the gross margin percentage for the Hardware segmentdecreased 2.8% when comparing the same periods. Specifically, gross margins forour stair parts business as well as our kitchen and bath businesses at Woodmarkdecreased 2.7% and 1.1%, respectively when comparing the three-month periodsended June 30, 2008 and 2007. These gross margin decreases combined withthe reduction in revenue combined to generate a reduction of gross profit atWoodmark of $904,000. The gross margin decrease in the stair parts business wasprimarily the result of lower absorption of fixed expenses as a result of lowerrevenue. Our gross margin at Pacific Stair was severely impacted by thecontinued weak market , decreasing 25.4% from 13.5% reported for thethree-month period ended June 30, 2007 to a deficit of 11.9% reported forthe same period in 2008, essentially due to the inability to reduce fixedoverhead costs as sales levels decreased. Gross margins at Nationwide decreased2.6% when comparing the three month periods ended June 30, 2008 and 2007.Combined with decreased revenue, its gross profit fell $421,000. The gross margindecrease was primarily due to price increases from overseas suppliers as wellas current competitive conditions which, for certain items, necessitated pricereductions.

 

Theoverall gross margins for the Tools segment for the six-month period ended June 30,2008 was slightly higher – 1.9 percentage points - than the prior year. Specifically,Hy-Tech’s improved gross margins are due primarily to an improved product mix,as well as lower variable costs. Gross margins at Florida Pneumatic improved aswell, primarily due to reduced costs from overseas suppliers, and product mix.

 

Grossmargins for the six-month period ended June 30, 2008 for the Hardwaresegment are down 1.8 percentage points when compared to the same time period inthe prior year. Woodmark’s gross margin is down 1.4% due in part to lessefficient absorption of warehouse costs due to lower revenue. At Pacific StairProducts, gross margins for the six-month period ended June 30, 2008 arerunning at a deficit principally the result of under-utilization of thefacilities. Gross margins for the six-month period at Nationwide were 2.3percentage points lower than the same period in 2007, primarily the result ofhigher material costs combined with current competitive market conditions.

 

**Selling, General and Administrative Expenses**

 

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

 

Duringthe three-month period ended June 30, 2008, SG&A decreased $1,051,000or 13.4% when compared to the three-month period ended June 30, 2007. Theprimary factors driving the decrease are our continued cost cutting measures aswell as lower variable costs. Significant components of the reduction of ourSG&A include: (i) reductions in salaries, benefits and bonusesaggregating approximately $779,000. This reduction is due primarily to aone-time compensation charge incurred during the three-month period ended June 30,2007 of approximately $400,000 related to the sale of Embassy’s real estateasset; (ii) advertising decreased $136,000; (iii) stock-basedcompensation decreased $194,000 and (iv) warranty and freight expenses inthe aggregate were lower by approximately $96,000  Additionally, certain intangible assets relatedto our acquisition of Nationwide were fully amortized during 2007, resulting ina reduction of amortization expense of $133,000 when comparing the three-monthperiods ended June 30, 2008 and 2007. Offsetting the above reductions inour operating expenses was an increase in professional services of $122,000, 

 

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primarilyattributable to funds received during the three-month period ended June 30,2007 resulting from a favorable legal settlement with a former employee.Additionally, as part of the previously disclosed loss of the Home Depotbusiness we incurred a one-time aggregate charge of $219,000 consisting ofseverance and other employee related expenses of $101,000 as the result ofreducing our warehouse and manufacturing staff and $118,000 due to a write-downin the value of certain machinery and equipment used solely for The Home Depot.

 

OurSG&A for the six-month period ended June 30, 2008 aggregated$13,274,000, reflecting a reduction of $1,394,000 from the six-month periodended June 30, 2007 total of $14,668,000. Key elements contributing tothis reduction include: (i) total salaries, payroll taxes and otheremployee costs aggregating $484,000, most of which is due to the approximately$400,000 compensation charge in connection with the sale of Embassy’s realestate asset which occurred in the six-month period ended June 30, 2007; (ii) advertisingand promotions decreased $258,000; (iii) commission expense decreased$120,000; (iv) freight costs decreased $122,000; (v) depreciation andamortization was lower by $220,000; (vi) warranty expenses decreased$149,000; (vii) product liability decreased $211,000 and (viii) stock-basedcompensation decreased $154,000. The above items were offset by a one-timeseverance and equipment write-down of $219,000 incurred as a result of the lossof The Home Depot business. Additionally, we received a payment of $165,000 asreimbursement of fees and expenses incurred related to a legal matter which wassettled in our favor.

 

**Interest -Net**

 

Netinterest expense incurred during the three-month period ended June 30,2008 of $452,000, reflects a decrease of $379,000, or 45.6% compared to$831,000 which was incurred during the same three-month period in the prioryear. Interest expense on borrowings under the term loan associated with theWoodmark acquisition decreased by approximately $117,000 due primarily to lowerinterest rates in effect during the three-month period ended June 30, 2008compared to the applicable interest rates in place during the three monthsended June 30, 2007. Interest expense associated with the above loan wasfurther reduced due to a lower principal balance. Interest expense incurred inassociation with the Hy-Tech term loan decreased $205,000 when comparing thethree-month periods ended June 30, 2008 to 2007. The causal affects ofthis interest expense reduction were: (i) the average interest rates in effectduring the three-month period ended June 30, 2008 were lower than theaverage interest rates in effect during the same three-month period in theprior year and (ii) during the fourth quarter of 2007 and again in January 2008we paid down $5,000,000 in each instance of this term loan, thus lowering theprincipal by an aggregate of $10,000,000 for the fiscal second quarter of 2008compared to the same period in 2007. During 2007 we paid in full, notes payableto the former owners of Woodmark, which resulted in a reduction in interestexpense of $52,000 when comparing the three-month periods ended June 30,2008 and 2007.

 

Ournet interest for the six-month period ended June 30, 2008 was lower thanthe same period in the prior year by $473,000. Key components of this changeinclude: interest expense incurred in association with the Hy-Tech term loandecreased $216,000; interest expense associated to the Woodmark acquisitiondecrease $196,000; and interest on long-term debt was lower by $95,000. Thepreceding reductions of interest expense were partially offset by an increasein the interest expense incurred on our short-term borrowings, which roseapproximately $65,000 primarily as the pay-down of long-term debt in January 2008while increasing short-term debt.

 

**IncomeTaxes**

 

Theeffective tax rates applicable to earnings from continuing operations for thethree month periods ended June 30, 2008 and 2007 were 46.1% and 46.6%,respectively. The effective tax rates applicable to earnings from continuingoperations for the six month periods ended June 30, 2008 and 2007 were44.4% and 44.1%, respectively

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash flows from operations can besomewhat cyclical, typically with the greatest demand in the second and thirdquarters followed by positive cash flows in the fourth quarter as receivables and inventories trenddown. Additionally, we monitor average day’s sales outstanding, inventory turnsand capital expenditures to project liquidity needs and evaluate return onassets employed.

 

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

 
| ** **                | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $19,000,000                 |       | $24,000,000                     |       |
| Current Ratio             |       | 1.64 to 1                   |       | 1.95 to 1                       |       |
| Shareholders’ Equity |       | $38,936,000                 |       | $37,986,000                     |       |

 

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 agreement. The credit agreement, issubject to annual review by the lending banks. Prior to June 30, 2008, theCompany and the banks amended the agreement to extend the termination date ofthe revolving credit loan portion of the credit agreement facility from June 30,2008 to July 31, 2008. In July 2008, the Company and the banksexecuted Amendment No.13 to Credit Agreement which, among other things,established new applicable loan margins for both the revolving credit facilityas well as for applicable term loan margins, expanded the definition ofeligible inventory, amended certain financial covenants and set November 30,2008 as the termination date of the revolving credit loan portion of the creditagreement facility. It should be noted that the new applicable loan marginswill only apply when the Company’s senior debt to its earnings before interest,taxes, depreciation and amortization (“EBITDA”) is greater than 4.25 to 1.Direct borrowings under the revolving credit loan facility are secured by theCompany’s accounts receivable, inventory and equipment and are cross-guaranteedby each of the Company’s subsidiaries. These borrowings bear interest at eitherLIBOR (London InterBank Offered Rate) or the prime interest rate, plus thecurrently applicable loan margin. At both June 30, 2008 and December 31,2007, the applicable loan margin added to LIBOR was 1.75%. At June 30,2008 and December 31, 2007, the balances outstanding on the revolvingcredit loan facility were $13,000,000 and $8,000,000, respectively.

 

TheCompany’s credit agreement also includes a term loan facility, which provided amaximum commitment of $34,000,000 to finance acquisitions subject to theapproval of the lending banks. Borrowings under the term loan facility 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 or the prime interest rate, plus the currentlyapplicable loan margin. In connection with the acquisition of Hy-Tech in February 2007,the Company executed and delivered an amendment to the credit agreement, which,among other things, added Continental and Hy-Tech as additional co-borrowersand provided for new term loans in amounts not to exceed $19,000,000. During2007, the Company paid down $5,000,000 against the Hy-Tech term loan. In January 2008,the Company paid down an additional $5,000,000 against this term loan, throughadditional borrowings on the revolving credit loan facility. There was$8,280,000 and $14,000,000 outstanding against this term loan at June 30,2008 and December 31, 2007, respectively. At both June 30, 2008 and December 31,2007, the applicable loan margin added to LIBOR was 2.00%. In 2004, the Companyborrowed $29,000,000 against the term loan facility to finance the Woodmarkacquisition transaction. At June 30, 2008 and December 31, 2007,there was $7,900,000 and $9,800,000, respectively, outstanding against thisterm loan. The principalamounts on these term loans are payable in quarterly installments of $360,000and $950,000 respectively, over the term of the respective loans.

 

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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 June 30,2008, based on that day’s closing spot rate, was approximately $446,000.

 

Embassyparticipated in a multi employer pension plan until it sold substantially allof its operating assets in October 2005. This plan provided definedbenefits to all of its union workers. Contributions to this plan weredetermined by the union contract. Embassy does not administer the plan fundsand does not have any control over the plan funds. As a result of Embassy’swithdrawal from the plan, it recorded the net present value of a withdrawalliability of approximately $369,000, which is payable in quarterly installmentsof approximately $8,200 from May 2006 through February 2026. Thebalance at June 30, 2008 and December 31, 2007 was $337,000 and$342,000, respectively and is reported in Liabilities of DiscontinuedOperations. Further, in connection with our sale of Embassy, we recorded thenet present value of a receivable of approximately $90,000, which is scheduledto be collected at approximately $8,200 per quarter from May 2006 through May 2009.

 

Cashdecreased $741,000, from $1,334,000 as of December 31, 2007 to $593,000 asof June 30, 2008. Our debt levels decreased from $34,050,000 at December 31,2007 to $31,298,000 at June 30, 2008, due primarily to a decrease inworking capital needs consistent with lower revenue. The total percent of debtto total book capitalization (debt plus equity) increased from 47.3% at December 31,2007 to 44.6% at June 30, 2008.

 

Cashused in operating activities of continuing operations for the six-month periodsended June 30, 2008 and 2007 were approximately $2,503,000, and$3,967,000, respectively. We believe that cash on hand derived from operationsand cash available through borrowings under our credit facilities will besufficient to allow us to meet our foreseeable working capital needs.

 

Capitalspending was approximately $562,000 and $959,000 for the six-month periodsended June 30, 2008 and 2007, respectively. Capital expenditures for thebalance of 2008 are expected to be approximately $400,000, some of which may befinanced through our credit facilities. Included in the expected total for 2008are capital expenditures relating to new products, expansion of existingproduct lines and replacement of equipment.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

Ourforeign exchange line provides for the availability of up to $10,000,000 inforeign currency forward contracts. These contracts fix the exchange rate onfuture purchases of foreign currencies needed for payments to foreignsuppliers. We have not purchased forward contracts on New Taiwan dollars (“TWD”).The total amount of foreign currency forward contracts outstanding at June 30,2008, based on that day’s closing spot rate, was approximately $446,000.

 

Amajority of our products are manufactured outside the United States, of which asignificant amount is purchased in the local currency. As a result, we areexposed to movements in the exchange rates of various currencies against theUnited States dollar which could have an adverse effect on our results ofoperations or financial position. We believe our most significant foreigncurrency exposures are the Japanese yen, the Taiwan dollar (“TWD”) and theChinese Renminbi (“RMB”). Purchases of product from China and Taiwan are made inU.S. dollars. However, if either or both the TWD or RMB, were to strengthenmaterially in relation to the U.S. dollar, there could be an adverse effect onour business, results of operations or financial position. We are also subjectto currency risk with respect to the Yen; however we generally purchase Yenforward to mitigate the exposure.

 

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

 

Notrequired

 

**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) and15d-15(e) to the Securities and Exchange Act of 1934). Based on thatevaluation, our management, including the Principal Executive Officer andPrincipal Financial Officer, concluded that our disclosure controls andprocedures as of June 30, 2008 were effective. Accordingly, managementbelieves that the consolidated condensed financial statements included in thisQuarterly Report on Form 10-Q fairly present, in all material respects,our financial condition, results of operations and cash flows for the periodspresented.

 

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

 

TheCertifications of our Principal Executive Officer and Principal FinancialOfficer included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Qinclude, in paragraph 4 of such certifications, information concerning ourdisclosure controls and procedures and internal control over financialreporting. Such certifications should be read in conjunction with theinformation contained in this Item 4 - Controls and Procedures for a morecomplete understanding of the matters covered by such certifications.

 

**Changes in Internal Control Over Financial Reporting**

 

Therehave been no significant changes in our internal control over financialreporting during the most recently completed fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.****                   ****Legal Proceedings**

 

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 ended December 31,2007 in response to Item 1A. to Part I of Form 10-K.

 

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

 

Thefollowing table presents our repurchase activity of our Class A Commonstock during the three-month period ended June 30, 2008.

 
| ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** **                        | ** ** | **Maximum**                  | ** ** |
|-----------------------|------------|-------------------------------|------------|------------------------------|------------|-----------------------------------|------------|------------------------------|------------|
| ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** **                        | ** ** | **Number**                   | ** ** |
| ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** **                        | ** ** | **of shares**           | ** ** |
| ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Total Number of**     | ** ** | **that May Yet**   | ** ** |
| ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Shares Purchased as** | ** ** | **Be Purchased**        | ** ** |
| ** **            | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Part of Publicly**    | ** ** | **Under the Plan** | ** ** |
| ** **            | ** ** | **Total Number of** | ** ** | **Average Price**       | ** ** | **Announced Plan**           | ** ** | **or Program**          | ** ** |
| **Period**            | ** ** | **Shares Purchased**     | ** ** | **Paid per Share** | ** ** | **or Program**               | ** ** | **(1)**                      | ** ** |
| April  2008 |       | —                        |       | —                       |       | —                            |       | 150,000                      |       |
| May  2008   |       | 200                           |       | 4.26                         |       | 200                               |       | 149,800                      |       |
| June  2008  |       | 800                           |       | 4.32                         |       | 800                               |       | 149,000                      |       |

 

----

(1)       On September 8,2007, we publicly announced that our Board of Directors extended the timeduring which we may repurchase shares of our Class A Common Stock underour repurchase plan from September 30, 2007 to September 30, 2008. Weare authorized to purchase up to 150,000 shares under such plan.

 

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

 

None.

 

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

 

OnMay 29, 2008, we held our Annual Meeting of Stockholders, at which theelection of certain members of our Board of Directors were voted upon. Thefollowing persons were duly elected to serve, subject to our Bylaws, asdirectors of P&F Industries, Inc until the 2011 Annual Meeting ofStockholders, or until the election and qualification of their successor(s):

 
| **Name of Director** | ** ** | **votes in favor** | ** ** | **votes withheld** | ** ** | **votes abstained** | ** ** |
|--------------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Robert L. Dubofsky             |       | 2,535,499                    |       | 890,330                 |       | 0                        |       |
| Kenneth M. Scheriff            |       | 2,666,289                    |       | 759,540                 |       | 0                        |       |
| Mitchell A. Solomon            |       | 2,662,484                    |       | 763,345                 |       | 0                        |       |
| Marc A. Utay                   |       | 2,661,792                    |       | 764,037                 |       | 0                        |       |

 

Theterms of office of Jeffrey D. Franklin, Alan I. Goldberg, Richard A. Horowitz,Dennis Kalick, Sidney Horowitz and Robert M. Steinberg as directors of theRegistrant continued after the Annual Meeting of Stockholders.

 

Therewere no broker non-votes pertaining to this proposal.

 

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

 

                                None

 

**Item 6.****                   ****Exhibits**

 

                                See “Exhibit Index” immediatelyfollowing 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: August 13, 2008 | (Principal Financial and Chief Accounting Officer)  |

 

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**EXHIBIT INDEX**

 

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

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.1**            |       | Amendment  No. 12 to Credit Agreement, dated as of June 27, 2008, by and among P & F  Industries, Inc., Florid 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. and HSBC Bank USA, National  Association as Lenders, and Citibank, N.A., as Administrative Agent for the  Lenders (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Current Report on Form 8-K dated June 27, 2008). |
| ** **          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **10.2**            |       | Amendment  No. 13 to Credit Agreement, dated as of July 31, 2008, by and among  the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International  L.P., Pacific Stair Products, Inc., WILP Holdings, Inc.,  Continental Tool Group, Inc., and Hy-Tech Machine, Inc. as  Co-Borrowers, Citibank, N.A., as Administrative Agent and the lenders party  thereto (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Current Report on Form 8-K dated July 31, 2008).    |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **31.1**            |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **31.2**            |       | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **32.1**            |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **32.2**            |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

Acopy of any of the foregoing exhibits to this Quarterly Report on Form 10-Qmay be obtained, upon payment of the Registrant’s reasonable expenses infurnishing such exhibit, by writing to P&F Industries, Inc., 445Broadhollow Road, Suite 100, Melville New York 11747, Attention: CorporateSecretary.

 

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