**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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| **x**      |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**       |
|------------|--------|------------------------------------------------------------------------------------------------------------|
| ** ** |   | **For the  Fiscal Year Ended December 31, 2006**                                                      |
| **or**     |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF****THE SECURITIES EXCHANGE ACT OF 1934** |

**CommissionFile Number 1 - 5332**

**P&F INDUSTRIES, INC.**(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) ofthe Act:

| **Class A Common Stock,  $1.00 par value** |   | **The  NASDAQ Stock Market LLC**             |
|-------------------------------------------------|--------|----------------------------------------------|
| (Title of each  class)                          |   | (Name of each  exchange on which registered) |

Securities registered pursuant to Section 12(g) ofthe Act:  **NONE**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  YES  o   NO  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  YES  o   NO  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES  x   NO  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (see definition of “accelerated filer and largeaccelerated filer” in rule 12b-2 of the Exchange Act).

Large Accelerated Filer  o Accelerated Filer  o  Non-AcceleratedFiler  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).YES  o    NO  x

The aggregate market valueof the registrant’s Class A Common Stock held by non-affiliates of theregistrant, based on the last sale price on June 30, 2006 (the lastbusiness day of the registrant’s most recently completed second fiscalquarter), was approximately $26,863,000.

As of March 28, 2007,there were 3,587,160 shares of the registrant’s Class A Common Stockoutstanding.

**Documents Incorporated byReference**

Part IIIof this Annual Report on Form 10-K incorporates by referenceinformation from the registrant’s definitive Proxy Statement for its AnnualMeeting of Stockholders to be held during 2007.

 

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**P&F INDUSTRIES,INC.**

**FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2006**

**TABLEOF CONTENTS**

|                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                               |       |     |
| Item 1.           |       | Business                                                                                                           |       | 2        |
| Item 1A.          |       | Risk  Factors                                                                                                      |       | 6        |
| Item 1B.          |       | Unresolved Staff Comments                                                                                          |       | 8        |
| Item 2.           |       | Properties                                                                                                         |       | 8        |
| Item 3.           |       | Legal  Proceedings                                                                                                 |       | 9        |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                |       | 9        |
| **PART II**  |       |                                                                                                               |       |     |
| Item 5.           |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 10       |
| Item  6.          |       | Selected  Financial Data                                                                                           |       | 11       |
| Item 7.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       | 12       |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       | 27       |
| Item 8.           |       | Financial Statements and Supplementary Data                                                                        |       | 28       |
| Item 9.           |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       | 66       |
| Item 9A.          |       | Controls and Procedures                                                                                            |       | 66       |
| Item  9B.         |       | Other  Information                                                                                                 |       | 67       |
| **PART III** |       |                                                                                                               |       |     |
| Item 10.          |       | Directors, Executive Officers and Corporate Governance                                                             |       | 68       |
| Item 11.          |       | Executive Compensation                                                                                             |       | 68       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       | 68       |
| Item 13.          |       | Certain Relationships and Related Transactions, and  Director Independence                                         |       | 68       |
| Item 14.          |       | Principal Accountant Fees and Services                                                                             |       | 68       |
| **PART IV**  |       |                                                                                                               |       |     |
| Item 15.          |       | Exhibits and Financial Statement Schedules                                                                         |       | 69       |
|              |       | Signatures                                                                                                         |       | 73       |

 

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**FORWARD LOOKINGSTATEMENTS**

The Private SecuritiesLitigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor forforward-looking statements made by or on behalf of P&F Industries, Inc.and subsidiaries (the “Company”). The Company and its representatives may, fromtime to time, make written or verbal forward-looking statements, includingstatements contained in the Company’s filings with the Securities and ExchangeCommission and in its reports to stockholders. Generally, the inclusion of thewords “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” theiropposites and similar expressions identify statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934 and that areintended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein,including those related to the Company’s future performance, are based upon theCompany’s historical performance and on current plans, estimates andexpectations. Such forward-looking statements are subject to various risks anduncertainties, including those identified in Item 1A, which may cause actualresults to differ materially from the forward looking statements.Forward-looking statements speak only as of the date on which they are made,and the Company undertakes no obligation to update publicly or revise anyforward-looking statement, whether as a result of new information, futuredevelopments or otherwise.

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**PART I**

**ITEM 1.**                Business

P&F Industries, Inc. (“P&F”) is aDelaware corporation incorporated on April 19, 1963. P&F conducts itsbusiness operations through three of its wholly-owned subsidiaries:Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”), CountrywideHardware, Inc. (“Countrywide”) and Continental Tool Group, Inc. (“Continental”).As of December 31, 2006, P&F conducted its business operations throughtwo of its wholly-owned subsidiaries: Florida Pneumatic and Countrywide.P&F and its subsidiaries are herein referred to collectively as the “Company.”In addition, the words “we”, “our” and “us” refer to the Company.

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. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”) andthrough Woodmark International, L.P. (“Woodmark”), a limited partnershipbetween Countrywide and WILP Holdings, Inc., a subsidiary of P&F. (SeeNote 2 to the Notes to Consolidated Financial Statements for informationregarding the June 2004 Woodmark acquisition transaction.) Nationwide isan importer and manufacturer of door, window and fencing hardware. Woodmark isan importer of builders’ hardware, including staircase components and kitchenand bath hardware and accessories. In January 2006, Countrywide, through anewly-formed subsidiary, acquired substantially all of the operating assets ofPacific Stair Products, Inc. (“Pacific Stair”). Pacific Stair is amanufacturer of premium stair rail products and a distributor of Woodmark’sstaircase components to the building industry, primarily in southern Californiaand the southwestern region of the United States. In February 2007,Hy-Tech Machine, Inc., a Delaware corporation (“Hy-Tech”), wholly-ownedsubsidiary of Continental, acquired substantially all of the operating assetsof Hy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc. and certain real property from HTM Associates. Hy-Tech isprimarily engaged in the manufacture and distribution of pneumatic tools andparts for industrial applications. (See Note 16 to the Notes to ConsolidatedFinancial Statements.)

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. (See Note 3 to the Notes toConsolidated Financial Statements.) The Company’s wholly-owned subsidiary,Green Manufacturing, Inc. (“Green”), was primarily engaged in themanufacture, development and sale of heavy-duty welded custom designedhydraulic cylinders until it exited that business in December 2004 throughthe sale of certain assets. Green also manufactured a line of access equipmentfor the petro-chemical industry until it exited that business in February 2005through the sale of certain assets and a line of post hole digging equipmentfor the agricultural industry until it exited that business in July 2005through the sale of certain assets. Green has effectively ceased all operatingactivities. The assets and liabilities and results of operations of Embassy andGreen have been segregated and reported separately as discontinued operationsin the Consolidated Financial Statements. (See Note 3 to the Notes toConsolidated Financial Statements.) Note 14 to the Notes to ConsolidatedFinancial Statements presents financial information for the segments of theCompany’s business.

Sears, Roebuck and Co.accounted for 17.8%,****16.5% and24.3% of consolidated revenues for the years ended December 31, 2006, 2005and 2004, respectively. The Home Depot, Inc. accounted for 9.8%, 15.2% and19.4% of consolidated revenues for the years ended December 31, 2006, 2005and 2004, 

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respectively.Revenues derived from countries outside of the United States were immaterialfor the years ended December 31, 2006, 2005 and 2004.

**Florida Pneumatic**

Florida Pneumatic imports or manufacturesapproximately fifty types of pneumatic hand tools, most of which are sold atprices ranging from $50 to $1,000, under the names “Florida Pneumatic” and “UniversalTool,” as well as under the trade names or trademarks of several private labelcustomers. This line of products includes sanders, grinders, drills, saws andimpact wrenches. These tools are similar in appearance and function to electrichand tools, but are powered by compressed air, rather than directly by electricity.Air tools, as they are also called, are generally less expensive to operate,offer better performance and weigh less than their electrical counterparts.

Berkley markets a product line consisting of pipe andbolt dies, pipe taps, pipe and tubing cutter wheels and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines.Florida Pneumatic markets Berkley’s products through industrial distributorsand contractors.

Franklin imports and packages approximately 275 typesof hardware products, including locksets, deadbolts, door and window securityhardware, rope-related hardware products and fire escape ladders. Franklin’sproducts generally range in price from under $1.00 to $30.00, and are sold toretailers, wholesalers and private label accounts through manufacturers’representatives and in-house sales support personnel. Nearly all of Franklin’ssales are of products imported from China.

Florida Pneumatic’s products are sold to distributors,retailers and private label customers through in-house sales personnel andmanufacturers’ representatives. Users of Florida Pneumatic’s hand tools includeindustrial maintenance and production staffs, do-it-yourself mechanics,automobile mechanics and auto body personnel.

The primary competitive factors in the pneumatic toolmarket are price, service and brand-name awareness. The primary competitivefactors in Franklin’s business are price, service, skill in packaging andpoint-of-sale marketing. The primary competitive factors in Berkley’s businessare price and service.

Florida Pneumatic’s products are sold off the shelf,and no material backlog of orders exists. The business is not seasonal, but itmay be subject to significant periodic changes resulting from holiday salespromotions by customers.

Florida Pneumatic purchases nearly 90% of itspneumatic tools from a Far East trading company that owns or represents 21individual factories in Japan, Taiwan and China. Of the total pneumatic toolpurchases in 2006, approximately 16% are bought from Japan, 31% from Taiwan and52% from China. Florida Pneumatic manufactures high-speed rotary andreciprocating pneumatic tools at its factory in Jupiter, Florida and importsair filters. There are redundant sources for every product purchased andmanufactured.

Two customers accountedfor 44.5% and 24.6%, 36.7% and 34.0% and 41.3% and 33.0% of Florida Pneumatic’srevenues for the years ended December 31, 2006, 2005 and 2004,respectively.

**Countrywide**

Countrywide conducts its business through NationwideIndustries, Inc. (“Nationwide”), Woodmark International LP (“Woodmark”),and, since January 3, 2006, Pacific Stair Products, Inc. (“PacificStair”).

Nationwide is an importer and manufacturer of door,window and fencing hardware, including rollers, hinges, window operators, sashlocks, custom zinc castings and door closers.

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Most of Nationwide’s sales are of products importedfrom Taiwan and China. Nationwide currently purchases approximately 85% of itsproduct from several foreign suppliers operating in several factories. Thereare redundant sources for every product purchased and manufactured. Nationwidemanufactures rollers, hinges and pool enclosure products at its factory inTampa, Florida and distributes products to the west coast through Pacific Stair’sCalifornia warehouse.

Nationwide’s products are sold through in-house salespersonnel and manufacturers’ representatives to distributors, retailers and OEMcustomers. End users of Nationwide’s products include contractors, homebuilders, pool and patio distributors, OEM/private label customers and generalconsumers.

One customer accounted for 9.9%, 11.2% and 10.9% ofNationwide’s revenues for the years ended December 31, 2006, 2005 and2004, respectively.

Nationwide’s sales are somewhat seasonal, withrevenues increasing approximately 35% during the spring and summer months. Themajority of Nationwide’s products are sold off the shelf. The backlog at December 31,2006, of approximately 25.9% of annual sales, results primarily from blanketcustomer orders.

The primary competitive factors in Nationwide’sbusiness are price, quality, product availability and service.

Woodmark is an importer of iron and wood stair partsand residential plumbing fixtures and other accessories for new constructionand home improvement applications.

Woodmark purchases all of its stair parts and kitchenand bath products through a longstanding relationship with a Far East tradepartner that owns or represents 9 individual factories in China, Taiwan andIndonesia. Of the total stair parts and kitchen and bath product purchases,approximately 59% are bought from China and 38% from Taiwan. There areredundant sources for every product purchased and manufactured.

Woodmark’s stair products are sold through in-housesales personnel and manufacturers’ representatives to: a) traditional one- andtwo-step distributors of construction components who in turn sell tocarpenters, home builders and the retail channel; b) distributors whospecialize in stair parts and staircase installation; and c) stair partsmanufacturers who outsource certain components from other manufacturers.Woodmark’s residential plumbing fixtures are sold through in-house salespersonnel and manufacturers’ representatives to plumbing wholesalers anddistributors, purchasing cooperatives and OEMs in the manufactured housing andrecreational vehicle industry.

No customer accounted for more than 10% of Woodmark’srevenues for the years ended December 31, 2006 and 2005 or for thesix-month period since its acquisition through December 31, 2004.

The primary competitive factors in Woodmark’s businessare price, quality and product availability.

Pacific Stair is amanufacturer of premium stair rail products and a distributor of staircasecomponents for Woodmark to the building industry, primarily in southernCalifornia and the southwestern region of the United States.

Pacific Stair’s products are sold through in-housesales personnel to: a) traditional one- and two-step distributors ofconstruction components who in turn sell to carpenters, home builders and theretail channel; b) distributors who specialize in stair parts and staircaseinstallation; and c) stair parts manufacturers who outsource certain componentsfrom other manufacturers.

Two customers accounted for 21.9% and 16.1% of PacificStair’s revenues for the year ended December 31, 2006 since itsacquisition on January 3, 2006.

The primary competitivefactors in Pacific Stair’s business are price, quality and productavailability.

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**Continental**

Continental conducts its business, since February 12,2007, through Hy-Tech. (See “Acquisitions” in Item 7.) Hy-Tech manufactures anddistributes pneumatic tools and parts for industrial applications. Hy-Techmanufactures approximately sixty types of industrial pneumatic tools, most ofwhich are sold at prices ranging from $300 to $7,000, under the names “ATP”, “Thaxton”,“THOR” and “Eureka”, as well as under the trade names or trademarks of otherprivate label customers. This line of products includes grinders, drills, saws,impact wrenches and pavement breakers. These tools are similar in appearanceand function to electric tools, but are powered by compressed air, rather thandirectly by electricity. Air tools, as they are also called, are generally lessexpensive to operate, offer better performance and weigh less than theirelectrical counterparts.

Hy-Tech’s products are sold to distributors andprivate label customers through in-house sales personnel and manufacturers’representatives. Users of Hy-Tech’s tools include refineries, chemical plants,power generation facilities, the heavy construction industry, oil and miningcompanies and heavy industry.

The primary competitive factors in the industrialpneumatic tool market are quality, range and availability of products, customerservice and technical support.

Hy-Tech’s products are sold off the shelf, and arealso produced to customer’s orders for just-in-time delivery. The business isnot seasonal, but it may be subject to significant periodic changes resultingfrom scheduled shutdowns in refineries, power generation facilities andchemical plants.

Results for Hy-Tech havenot been included as of December 31, 2006 as these assets were purchasedeffective February 12, 2007.

**Green**

Green was primarily engaged in the manufacture, developmentand sale of heavy-duty welded custom designed hydraulic cylinders until itexited the cylinder business in December 2004 through the sale of certainof its assets, including property, equipment and certain inventories, to anon-affiliated third party in the industry. (See Note 3 to the Notes toConsolidated Financial Statements.) Prior to the sale, all of Green’s hydrauliccylinders were sold for use as integrated components on a variety of equipmentand machinery manufactured by others.

Until February 2005, Green manufactured a line ofaccess equipment for the petro-chemical and bulk storage industries. Thisproduct line consisted of bridges, platforms, walkways and stairways,constructed of steel or aluminum and generally installed outdoors. In February 2005,Green exited the access equipment business and sold certain of its assets,including equipment, inventories and certain accounts receivable, to anon-affiliated third party. (See Note 3 to the Notes to Consolidated FinancialStatements.)

Until July 2005,Green marketed a small line of diggers used primarily as attachments to smalltractors for light farm work. This product line was marketed through farmequipment dealers and wholesalers. In July 2005, Green exited theagricultural products business and sold certain of its assets, includingequipment and inventories, to the non-affiliated third purchaser of the Accessassets. No customer accounted for greater than 10% of Green’s revenues for theyears ended December 31, 2005 or 2004. (See Note 3 to the Notes toConsolidated Financial Statements.)

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**Embassy**

Until October 2005, Embassy’s baseboard heatingproducts were sold nationally, under the Embassy name and under itsPanel-Track, Commercial-Pak, Ambassador, System 6 and Hide-a-Vector trademarks,for use in hot-water heating systems installed in single family homes,multi-unit dwellings and commercial and industrial buildings. Embassy’sproducts were sold principally to wholesalers by manufacturers’ representativesand in-house sales personnel. Embassy’s products were also sold to othermanufacturers for incorporation into their products and for distribution on aprivate-label basis.

Embassy also imported a line of radiant heatingsystems. These systems are different from baseboard heating systems in that theradiant heating systems radiate heat provided by hot water circulating throughplastic tubing, which is generally installed beneath the surface of the floor.These systems include the tubing, manifolds, controls and installationsupplies. Embassy also provided computer software that aids in the design ofthe system. No customer accounted for greater than 10% of Embassy’s revenuesfor the years ended December 31, 2005 or 2004.

In October 2005,Embassy sold substantially all of its operating assets, including, amongothers, machinery and equipment, inventory, accounts receivable and certainintangibles, to a non-affiliated third party. Certain assets were retained byEmbassy, including, but not limited to, cash and title to any real propertyowned by Embassy. Embassy is presently undercontract for the sale of its real property. (See Note 3 to the Notes toConsolidated Financial Statements.)

**Employees**

The Company employed 192persons as of December 31, 2006, including eight at corporateheadquarters. Countrywide had no employees. Florida Pneumatic had 74 employees,Nationwide had 33 employees, Woodmark had 60 employees and Pacific Stair had 17employees. These employees are not represented by a union. The Company believesthat its relationships with its employees are satisfactory.

**ITEM 1A.**        RiskFactors

A wide range offactors could materially affect our performance. In addition to the factorsaffecting specific business operations identified in connection with thedescription of these operations and the financial results of these operationselsewhere in this report, the following factors, among others, could adverselyaffect our results of operations or financial position:

·       *The strength of the retail economy in the United States.*   Ourbusiness is subject to economic conditions in its major markets, includingrecession, inflation, deflation, general weakness in retail, industrial, andhousing markets. Such economic conditions could have an adverse effect on ourresults of operations or financial position.

·       *Our ability to maintain mutually beneficial relationships with keycustomers.*   We have several significant customers, includingtwo customers that, in the aggregate, constituted approximately 28% of ourconsolidated revenues for 2006. The loss of either of these significantcustomers or a material negative change in our relationships with thesesignificant customers could have a material adverse effect on our business,results of operations or financial position.

·       *Adverse changes in currency exchange rates or raw material commodityprices.*   A significant amount of our products are manufacturedoutside the United States and purchased in the local currency. As a result, weare exposed to movements in the exchange rates of various currencies againstthe United 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 and the Taiwan dollar (“TWD”).Additionally, we purchase approximately $37 million of products from China. Thesepurchases are made in U.S. dollars. However, if the Chinese currency, theRenminbi 

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(“RMB”), were to berevalued against the dollar, there could be a material adverse effect on ourbusiness, results of operations or financial position.

·       *Unforeseen inventory adjustments or changes in purchasing patterns bymajor customers and the resultant impact on manufacturing volumes and inventorylevels*.   We make purchasing decisions based upon a number offactors including an assessment of market needs and preferences, manufacturinglead times and cash flow considerations. To the extent that our assumptionsresult in inventory levels being too high or too low, there could be a materialadverse effect on our business, results of operations or financial position.

·       *Unforeseen interruptions in the manufacturing ability of certainforeign suppliers.*   Our foreign suppliers may encounterinterruption in their ability to continue to provide us with products on ashort-term or long-term basis. Although we believe that there are redundantsources available and maintain multiple sources for certain of our products,there may be costs and delays associated with securing such sources and therecan be no assurance that such sources would provide the same quality of productat similar prices.

·       *Market acceptance of new products.*   There can be noassurance that the market continues its acceptance of the new products weintroduced in 2006 or will accept new products scheduled for introduction in2007. Nor can there be assurance that the level of sales generated from thesenew products relative to our expectations, based on existing investments inproductive capacity and commitments by us to fund advertising and productpromotions in connection with the introduction of these new products willmaterialize.

·       *Impairment of long-lived assets and goodwill.*   Theinability of certain of our subsidiaries to generate future cash flowssufficient to support the recorded amounts of goodwill, other intangible assetsand other long-lived assets related to those subsidiaries could result infuture impairment charges.

·       *Increased competition.*   The domestic markets in whichwe sell our products are highly competitive on the basis of price, quality,availability, post-sale service and brand-name awareness. A number of competingcompanies are well-established manufacturers that compete on a global basis.

·       *Price reductions.*   Price reductions taken by us inresponse to customer and competitive pressures, as well as price reductions orpromotional actions taken in order to drive demand, may not result inanticipated sales necessary to offset the associated costs.

·       *Interest rates.*   Interest rate fluctuations and othercapital market conditions could have a material adverse effect on our business,results of operations or financial position.

·       *Litigation.*   The effects of litigation and productliability exposures, as well as other risks and uncertainties described fromtime to time in our filings with the Securities and Exchange Commission andpublic announcements could have a material adverse effect on our business,results of operations or financial position. Further, while the Companymaintains insurance policies to protect against most potential exposures,events may arise against which the Company may not be adequately insured. (See “Item3—Legal Proceedings”.)

·       *Substantial debt and debt service requirements*.   Theamount of our debt could have important consequences. For example, it could:increase our vulnerability to general adverse economic and industry conditions;limit our ability to fund future capital expenditures, working capital andother general corporate requirements; require us to dedicate a substantialportion of our cash flow from operations to make interest and principalpayments on our debt; limit our flexibility in planning for, or reacting to,changes in our business; place us at a competitive disadvantage compared withcompetitors that have less debt; and limit our ability to borrow additionalfunds, even when necessary to maintain adequate liquidity.

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·       *Retention of key personnel*.   Our success depends to asignificant extent upon the abilities and efforts of our key personnel. Theloss of the services of any of our key personnel or our inability to attractand retain qualified personnel in the future could have a material adverse effecton our business, results of operations or financial position.

·       *Acquisition of businesses.*   Part of our businessstrategy is to opportunistically acquire complementary businesses and disposeof non-complementary businesses. If we fail to develop and integrate anyacquired business or dispose of any businesses effectively, our earnings may beadversely affected. In addition, the Company’s management team will need todevote substantial time and attention to the acquisition and integration of theacquired businesses, which could distract them from their other duties andresponsibilities.

·       *Regulatory environment.*   We cannot anticipate theimpact of changes in laws and regulations, including changes in accountingstandards, taxation requirements, including tax rate changes, new tax laws andrevised tax law interpretations, and environmental laws, in both domestic andforeign jurisdictions.

·       *Unforeseen events*.   We cannot anticipate the impact ofunforeseen events, including war or terrorist activities, on economicconditions and consumer confidence on our business.

The risk factors describedabove are not intended to be all-inclusive. There can be no assurance that wehave correctly identified and appropriately assessed all factors affecting ourbusiness or that the publicly available and other information with respect tothese matters is complete and correct. Additional risks and uncertainties notpresently known to us or that we currently believe to be immaterial also mayadversely impact us. Should any risks and uncertainties develop into actualevents, these developments could have a material adverse effect on our business,results of operations or financial position.

**ITEM 1B.**       UnresolvedStaff Comments

None

**ITEM 2.**                Properties

Countrywide owns the real property in which Nationwideconducts its business. Countrywide leases part of its facility to anon-affiliated tenant. Florida Pneumatic owns the plant facility that itoccupies. Each of these facilities is subject to a mortgage. Woodmark leasestwo plant facilities from non-affiliated landlords with lease terms expiring inJune 2008 and May 2010, respectively, and a third plant facility froma non-affiliated landlord on a month-to-month basis. Pacific Stair leases itstwo plant facilities; a warehouse from a non-affiliated landlord with the leaseterm expiring in July 2008 and a manufacturing facility leased from its Presidentand former owner of the company, the assets of which were purchased by PacificStair, with a lease term expiring in August 2008. Hy-Tech owns one plantfacility that it occupies and leases another from its President and otherowners of a related entity of the former Hy-Tech. Embassy is presently undercontract to sell its facility.

Florida Pneumatic’s 72,000square foot plant facility is located in Jupiter, Florida. Nationwide’s 56,250square foot plant facility is located in Tampa, Florida. Woodmark’s 55,000square foot and 17,500 square foot plant facilities are located in Plano,Texas, and its 46,000 square foot plant facility is located in Austell,Georgia. Pacific Stair’s 25,000 square foot warehouse facility and 13,000square foot manufacturing facility are both located in Vista, California.Hy-Tech’s 51,000 square foot facility is located in Cranberry Township,Pennsylvania and its 10,000 square foot facility is located in Punxsutawney,Pennsylvania. Embassy’s 75,000 square foot plant facility is located inFarmingdale, New York. Each facility either provides adequate space for theoperations of the respective subsidiary for the foreseeable future or can bemodified or expanded to provide additional space. The Company’s executiveoffices of approximately 5,000 

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squarefeet are located in an office building in Melville, New York leased from anon-affiliated landlord with a lease term expiring in March 2013.

**ITEM 3.**                LegalProceedings

The Company is a defendantor co-defendant in various actions brought about in the ordinary course ofconducting its business. The Company does not believe that any of these actionsare material to the financial position of the Company.

**ITEM 4.**                Submissionof Matters to a Vote of Security Holders

No matters were submittedto a vote of security holders during the last quarter of the period covered bythis Annual Report on Form 10-K.

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**PART II**

**ITEM5.**                Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities

The Company’s Class ACommon Stock trades on the Nasdaq Global Market under the symbol PFIN. Therange of high and low sales prices for the Company’s Class A Common Stockduring the last two fiscal years was as follows:

| **2006**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $          | 14.73      |     | $          | 11.10   |       |
| Second Quarter |       | 14.91      |       | 11.90    |       |
| Third Quarter  |       | 12.28      |       | 9.01     |       |
| Fourth Quarter |       | 12.46      |       | 9.90     |       |
|                |            |            |            |          |            |         |            |  |  |

 

| **2005**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $          | 17.38      |     | $          | 12.62   |       |
| Second Quarter |       | 16.99      |       | 12.25    |       |
| Third Quarter  |       | 17.40      |       | 14.06    |       |
| Fourth Quarter |       | 16.71      |       | 10.85    |       |
|                |            |            |            |          |            |         |            |  |  |

 

As of March 28, 2007,there were approximately 1,100 holders of record of the Company’s Class ACommon Stock and the last sale price of the Company’s stock as reported by theThe Nasdaq Global Market was $13.94. The Company has not declared any cashdividends on its Class A Common Stock since its incorporation in 1963 andhas no plans to declare any cash dividends in the foreseeable future.

***Issuer Purchases of Equity Securities***

There were no repurchasesof equity securities by the Company during the fourth quarter of 2006. On September 14,2006, the Company issued a press release announcing that its Board of Directorshad extended the time during which the Company may purchase shares under itspreviously announced share repurchase program to September 30, 2007, andhad authorized the repurchase of an additional 37,450 shares, increasing thetotal share repurchase authorization to an aggregate of up to 150,000 shares ofClass A Common Stock.

***Stockholder Return Performance Presentation***

The following performance graph compares the five-yearcumulative return of the Class A Common Stock to the total returns of (a) theNASDAQ Market Index (U.S.), and (b) a self-determined peer group comprisedof publicly-traded companies with similar industry classifications and similarmarket capitalization as the Company at December 31, 2006 (the “Peer Group”).The Peer Group was used because the Company, through its operatingsubsidiaries, engages in several different lines of business, and managementbelieves that an applicable published industry or line-of-business index doesnot exist. ACR Group, Inc., Patrick Industries, Inc. and QEP Company, Inc.comprise the Peer Group. Each case assumes a $100 investment on January 1,2002 and reinvestment of any dividends. Cumulative returns are at December 31of each year.

| ** **                  | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| P&F  INDUSTRIES, INC.   |       | 100.00   |       | 95.11    |       | 122.21   |       | 212.70   |       | 167.60   |       | 153.63   |       |
| PEER GROUP INDEX            |       | 100.00   |       | 112.83   |       | 175.45   |       | 263.22   |       | 244.19   |       | 284.94   |       |
| NASDAQ MARKET INDEX  (U.S.) |       | 100.00   |       | 69.97    |       | 106.36   |       | 115.98   |       | 120.15   |       | 134.80   |       |

 

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**ITEM 6.**                SelectedFinancial Data

The followingselected consolidated financial data has been derived from the Company’saudited Consolidated Financial Statements for the five years ended December 31,2006. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, found in Item 7 of this report, for informationregarding business acquisitions, discontinued operations, critical accountingpolicies and items affecting comparability of the amounts below. The selectedfinancial information should be read in conjunction with the ConsolidatedFinancial Statements included in Item 8 of this report.

| ** **                                                                                                                   | ** ** | **Year ended December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                   | ** ** | **2006**                                   | ** **  | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net revenues                                                                                                                 |       | $                                          | 111,732,731 |   | $ | 107,977,661 |   | $ | 88,063,861 |   | $ | 64,267,009 |   | $ | 55,805,823 |   |
| Earnings from  continuing operations before discontinued operations and cumulative effect of  change in accounting principle |       | $                                          | 3,810,864   |   | $ | 4,846,988 |   | $ | 3,911,202 |   | $ | 3,622,837 |   | $ | 3,122,518 |   |
| Discontinued  operations, net of taxes                                                                                       |       | 70,401                                     |        | 1,723,603 |   | 127,361 |   | (259,888 | ) | (259,667 | ) |
| Earnings before  cumulative effect of change in accounting principle                                                         |       | 3,881,265                                  |        | 6,570,591 |   | 4,038,563 |   | 3,362,949 |   | 2,862,851 |   |
| Cumulative effect  of change in accounting principle, net of taxes                                                           |       | —                                     |        | — |   | — |   | — |   | (3,239,118 | ) |
| Net earnings  (loss)                                                                                                         |       | $                                          | 3,881,265   |   | $ | 6,570,591 |   | $ | 4,038,563 |   | $ | 3,362,949 |   | $ | (376,267 | ) |
| Earnings (loss) per  common share:                                                                                           |       |                                       |        |   |   |   |   |   |   |   |   |
| Basic:                                                                                                                       |       |                                       |        |   |   |   |   |   |   |   |   |
| Net earnings from  continuing operations                                                                                     |       | $                                          | 1.06        |   | $ | 1.36 |   | $ | 1.11 |   | $ | 1.03 |   | $ | .89 |   |
| Discontinued  operations, net                                                                                                |       | .02                                        |        | .48 |   | .04 |   | (.07 | ) | (.07 | ) |
| Change in  accounting principle, net                                                                                         |       | —                                     |        | — |   | — |   | — |   | (.93 | ) |
| Net earnings  (loss) per common share—basic                                                                             |       | $                                          | 1.08        |   | $ | 1.84 |   | $ | 1.15 |   | $ | .96 |   | $ | (.11 | ) |
| Diluted:                                                                                                                     |       |                                       |        |   |   |   |   |   |   |   |   |
| Net earnings from  continuing operations                                                                                     |       | $                                          | 1.01        |   | $ | 1.25 |   | $ | 1.07 |   | $ | 1.01 |   | $ | .87 |   |
| Discontinued  operations, net                                                                                                |       | .02                                        |        | .45 |   | .03 |   | (.07 | ) | (.07 | ) |
| Change in  accounting principle, net                                                                                         |       | —                                     |        | — |   | — |   | — |   | (.91 | ) |
| Net earnings  (loss) per common share—assuming dilution                                                                 |       | $                                          | 1.03        |   | $ | 1.70 |   | $ | 1.10 |   | $ | .94 |   | $ | (.11 | ) |
| Total assets                                                                                                                 |       | $                                          | 90,316,990  |   | $ | 86,833,547 |   | $ | 90,844,367 |   | $ | 58,331,924 |   | $ | 59,167,556 |   |
| Long-term  obligations, less current maturities                                                                              |       | $                                          | 12,059,758  |   | $ | 19,572,651 |   | $ | 30,480,327 |   | $ | 7,242,901 |   | $ | 9,788,178 |   |
| Cash dividends  declared per common share                                                                                    |       | $                                          | —      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

** **

**ITEM 7.**                Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**OVERVIEW**

Consolidated revenues forthe year ended December 31, 2006 increased $3.7 million, or 3.5%, from$108.0 million to $111.7 million. Revenues increased approximately $7.5million, or 12.5%, at Countrywide, which includes revenues at Woodmark, PacificStair and Nationwide. The increase at Countrywide resulted primarily from theinclusion of Pacific Stair’s revenues of $6.2 million since the acquisition ofcertain assets on January 3, 2006, as well as an increase in revenues fromWoodmark of $2.5 million, or 6.1%, from $40.5 million in 2005 to $42.9 million.These increases were offset by a decrease in revenues at Nationwide of $1.2million, or 6.1%, from $19.1 million in fiscal 2005 to $17.9 million. Revenuesat Florida Pneumatic decreased $3.7 million, or 7.7%, to $44.7 million from theprior fiscal year primarily due to decreases in base product sales andreduction in retail promotions. Gross profit decreased $178,000, or .5%, forfiscal 2006. Overall gross profit margin decreased from 31.6% in 2005 to 30.4%.Consolidated earnings from continuing operations decreased $1.0 million, or21.4%, from $4.8 million to $3.8 million, for the year ended December 31,2006.

** **

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**KEY INDICATORS**

**Economic Measures**

Key economic measures relevant to the Company includethe cost of metals, especially various types of steel and aluminum. Alsoimportant is the value of the dollar in relation to the Japanese yen and theTaiwan Dollar (“TWD”), as the Company spends approximately $9 million in thesecurrencies annually. Additionally, the Company purchases approximately $37million of products from China. These purchases are made in U.S. dollars.However, if the Chinese currency, the Renminbi (“RMB”), were to be revaluedagainst the dollar, there could be a significant negative impact on the cost ofthe Company’s products. Key elements for the demand for the Company’s productsinclude retail sales and housing starts.

The decrease in the strength of the Japanese yen andTWD versus the U.S. dollar from 2005 to 2006 had a positive effect on theCompany’s results of operations and its financial position. During 2006, therelative value of the U.S. dollar in relation to the Japanese yen and TWD increasedover fiscal 2005 averages. When comparing the change in the weighted averagevalue of the Company’s foreign currency purchases in 2006 compared to 2005, theincrease in the value of the dollar was approximately 8.3% in relation to theJapanese yen and 1.4% in relation to the TWD. Based on our purchases from thesecountries, the net strengthening of the U.S. dollar in Japan and Taiwanresulted in a decrease in the cost of imported product in 2006 of approximately$391,000. Although there can be no certainty, the Company does not expect theserates to vary significantly in the next year.

In 2006, retail salesimproved over 2005, but housing starts weakened, particularly in the northeast,west and south where the Company operates. Housing starts for the 2006 yeardecreased approximately 13% from the prior year. Housing starts are a strongdriver of demand for Woodmark, Pacific Stair and Nationwide. Overall retailsales in 2006 were up approximately 6% over 2005. This is generally a goodindicator of the market in which Florida Pneumatic sells its products. Anychange in the trend for these indicators in 2007 is likely to have an impact onresults.

**Operating Measures**

Key operating measuresutilized by the Company to manage its operating segments are orders, sales,development projects pipeline, potential customer lists, inventory levels andproductivity. These measures are recorded and monitored at various intervals,including daily, weekly and monthly. To the extent these measures are relevant,they are discussed in the detailed sections for each operating segment.

**Financial Measures**

Key financial measuresutilized by the Company to evaluate the results of its business include: sales,gross margin, selling, general and administrative expenses, earnings before interest,taxes and bonus, operating cash flows and capital expenditures, return onsales, return on assets, days sales outstanding and inventory turns. Thesemeasures are reviewed at monthly, quarterly and annual intervals and comparedto historical periods as well as established objectives. To the extent thatthese measures are relevant, they are discussed in the detailed sections foreach operating segment.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The Company prepares itsconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America. Certain of these accountingpolicies require the Company 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, the Company evaluates estimates, including those related to baddebts, inventory reserves, goodwill and intangible assets and warranty reserves.The Company bases its estimates on historical data 

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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 resultsmay differ from these estimates. The Company’s critical accounting policiesinclude:

**Revenue Recognition**

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been provided, the sale price is fixed ordeterminable, and collectibility is reasonably assured. The Company sells itsgoods on terms which transfer title and risk of loss at a specified location,typically shipping point, port of loading or port of discharge, depending onthe final destination of the goods. Revenue recognition from product salesoccurs when all factors are met, including transfer of title and risk of loss, whichoccurs either upon shipment by the Company or upon receipt by customers at thelocation specified in the terms of sale. Other than standard product warrantyprovisions, the Company’s sales arrangements provide for no other, orinsignificant, post-shipment obligations. The Company does offer rebates andother sales incentives, promotional allowances or discounts, from time to timeand for certain customers, typically related to customer purchase volume, allof which are fixed or determinable and are classified as a reduction of revenueand recorded at the time of sale. The Company periodically evaluates whether anallowance for sales returns is necessary. Historically, the Company hasexperienced little, if any, sales returns. If the Company believes there arepotential sales returns, the Company would provide any necessary provisionagainst sales.

**Accounts Receivableand Allowance for Doubtful Accounts**

Senior management reviews accounts receivable on amonthly basis to determine if any receivables will potentially beuncollectible. Analysis of customer history, financial data and the overalleconomic environment is performed. In addition, balances outstanding for morethan 90 days are evaluated for possible inclusion in the accounts receivablereserve. Collection agencies may also be utilized if management so determines.

The Company records anallowance for doubtful accounts based on specifically identified amounts thatare believed to be uncollectible. The Company also records as an additionalallowance a certain percentage of aged accounts receivable, based on historicalexperience and the Company’s assessment of the general financial conditionsaffecting its customer base. If actual collection experience changes, revisionsto the allowance may be required. The Company has a limited number of customerswith individually large amounts due at any given balance sheet date. Anyunanticipated change in the creditworthiness of any of these customers couldhave a material affect on the Company’s results of operations in the period inwhich such changes or events occur. After all reasonable attempts to collect anaccount receivable have failed, the amount of the receivable is written offagainst the allowance. Based on the information available, the Company believesthat its allowance for doubtful accounts as of December 31, 2006 wasadequate. However, actual write-offs might exceed the recorded allowance.

**Inventories**

Inventories are valued atthe lower of cost or market. Cost is determined by the first-in, first-outmethod. The inventory balance, which includes materials, labor andmanufacturing overhead costs, is recorded net of an allowance for obsolete orunmarketable inventory. Such allowance is based upon both historical experienceand management’s understanding of market conditions and forecasts of futureproduct demand. In addition, items in inventory in excess of one year’s usageare compared to the allowance for adequacy. If the actual amount of obsolete orunmarketable inventory significantly exceeds the estimated allowance, theCompany’s cost of sales, gross profit and net earnings would be significantlyaffected.

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**Goodwill and OtherIntangible Assets**

Goodwill is carried at cost. Goodwill is not amortizedbut is subject to an annual test for impairment at the reporting unit level(operating segment or one level below an operating segment) and between annualtests in certain circumstances. The performance of the test involves a two-stepprocess. The first step of the impairment test involves comparing the fair valueof the Company’s reporting units with the reporting unit’s carrying amount,including goodwill. The Company generally determines the fair value of itsreporting units using the expected present value of future cash flows and themarket valuation approach. If the carrying amount of a reporting unit exceedsthe reporting unit’s fair value, the Company performs the second step of thegoodwill impairment test to determine the amount of impairment loss. The secondstep of the goodwill impairment test involves comparing the implied fair valueof the reporting unit’s goodwill with the carrying amount of that goodwill.

Intangible assets otherthan goodwill are carried at cost less accumulated amortization. Intangibleassets are generally amortized on a straight-line basis over the useful livesof the respective assets, generally five to fifteen years. Long-lived assetsand certain identifiable intangible assets to be held and used are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of such assets may not be recoverable. Determination ofrecoverability is based on an estimate of undiscounted future cash flowsresulting from the use of the asset and its eventual disposition. Measurementof any impairment loss for long-lived assets and certain identifiableintangible assets that management expects to hold and use is based on theamount the carrying value exceeds the fair value of the asset.

**ACQUISITIONS**

Results of operations for our businesses acquired arereported in the Consolidated Financial Statements from the date of acquisition.Results for Hy-Tech have not been included as of December 31, 2006 asthese assets were purchased effective February 12, 2007. Results forPacific Stair have been included since January 3, 2006 and results forWoodmark have been included from the date of acquisition.

*Hy-Tech Machine, Inc.*

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

In connection with thisacquisition, Hy-Tech contemporaneously entered into an Agreement of Sale withHTM Associates, a Pennsylvania general partnership comprised of certainshareholders of the Hy-Tech Sellers (“HTM”), pursuant to which Hy-Techpurchased certain real property located in Cranberry Township, Pennsylvaniafrom HTM for $2,200,000 in cash. The acquisition of the Hy-Tech PurchasedProperty and the real property was financed through the Company’s senior creditfacility. (See Note 9 to the Notes to Consolidated Financial Statements.)

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Contemporaneously with theacquisition, the Company executed and delivered Amendment No. 7 to CreditAgreement with Citibank and another bank. The amendment, among other things,adds Continental and Hy-Tech as additional co-borrowers and provides for new termloans in amounts not to exceed $19,000,000. The principal on the new term loannotes are payable in 25 consecutive quarterly installments of $760,000,commencing on January 31, 2008. From the date of the amendment through January 31,2008, monthly payments shall be made of interest only. The Company and theco-borrowers have the option to pay interest at a rate based on either thefluctuating prime rate, LIBOR or a combination of the two rates. The new termloan notes shall mature on January 31, 2014. The amendment also providesfor the amendment and restatement of certain existing term loan notes. Therevolving credit loan facility provides for a maximum of $18,000,000, withvarious sublimits, for direct borrowings, letters of credit, bankers’ acceptancesand equipment loans. (See Note 16 to the Notes to Consolidated FinancialStatements.)

*Pacific Stair Products, Inc.*

Pursuant to an AssetPurchase Agreement (the “PSP APA”), dated December 20, 2005, betweenPacific Stair Products, a California corporation (“Old PSP”), and Pacific StairProducts, Inc., a newly-formed Delaware corporation (“Pacific Stair”) anda wholly-owned subsidiary of Countrywide, effective January 3, 2006,Pacific Stair purchased substantially all of the operating assets of Old PSP.The total purchase price for the assets was approximately $5,233,000, subjectto adjustments, plus the assumption of certain liabilities and obligations byPacific Stair. The assets purchased pursuant to the PSP APA include, amongothers, accounts receivable, inventory, machinery and equipment and certainintangibles. Certain assets were retained by Old PSP including cash and titleto any real property. (See Note 2 to the Notes to Consolidated FinancialStatements.) Pacific Stair is a manufacturer of premium stair rail products anda distributor of staircase components to the building industry, primarily insouthern California and the southwestern region of the United States. As aresult of this transaction, Countrywide has increased its purchasing power and geographicdistribution. The acquisition was financed through the Company’s creditfacility. (See Note 9 to the Notes to Consolidated Financial Statements.)

*Woodmark International L.P.*

On June 30, 2004,pursuant to an Asset Purchase Agreement (the “Woodmark APA”) dated as of suchdate, Woodmark, a Delaware limited partnership now owned by Countrywide andWILP Holdings, Inc., acquired certain assets (the “Woodmark PurchasedProperty”) comprising the business of the former Woodmark International L.P., aTexas limited partnership, and its wholly-owned subsidiary, the former StairHouse, Inc., a Georgia corporation (collectively, the “Woodmark Sellers”),and assumed certain of the Woodmark Sellers’ related liabilities. Woodmark paid$31,898,000 to acquire the Woodmark Purchased Property, which purchase priceconsisted primarily of $27,160,000 in cash and certain subordinated notes inthe aggregate principal amount of $3,408,000. The purchase price was negotiatedon the basis of Woodmark’s historical financial performance. Subject to certainconditions, Woodmark also agreed to pay additional cash consideration to theWoodmark Sellers after the third or the fifth anniversary of the closing of theacquisition if certain financial targets described in the Woodmark APA are met.The acquisition of the Woodmark Purchased Property was financed through theCompany’s senior credit facility. (See Notes 2 and 9 to the Notes toConsolidated Financial Statements.)

**DISCONTINUED OPERATIONS**

*Embassy Industries, Inc.*

Pursuant to an AssetPurchase Agreement (the “Embassy APA”), dated as of October 11, 2005,among P&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. The assets sold pursuant to the Embassy APAinclude, among others, machinery and equipment, inventory, accounts 

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receivableand certain intangibles. 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. The consideration paid by EMI for the assetsacquired pursuant to the Embassy APA was approximately $8,433,000 plus theassumption of certain liabilities and obligations of Embassy by EMI.

Pursuant to a Lease, datedas of October 11, 2005, between Embassy, as landlord and EMI, as tenant(the “EMI Lease”), Embassy agreed to lease certain space (approximately 60,000rentable square feet) in the building located at 300 Smith Street, Farmingdale,New York to EMI in connection with the operation of EMI’s business, at anannual rental rate of $480,000, payable in monthly installments of $40,000each. The term of the EMI Lease was for a period of six (6) monthscommencing October 11, 2005 and terminating April 10, 2006; providedhowever, that, in the event EMI served notice on Embassy by December 31,2005, the Lease could be extended on a month to month basis to, and including, June 30,2006. EMI served notice on Embassy to extend the EMI Lease through May 31,2006.

Embassyhas effectively ceased all operating activities. The Company recognizeda gain on the sale of these assets of approximately $1,467,000, net of taxes,during the fourth quarter of fiscal 2005.

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

The sale of theFarmingdale Premises was contingent upon completion of due diligence and otherconditions set forth in the Contract of Sale, including, without limitation,that upon the expiration of the Investigation Period (as defined in theContract of Sale), Embassy was to proceed with certain environmentalremediation at the Farmingdale Premises (the “Required EnvironmentalRemediation”) to the satisfaction of the Suffolk County Department of HealthServices (“SCDHS”), to obtain a “No Further Action” letter from SCDHS, and toprovide a copy of said letter to Purchaser upon Embassy’s receipt thereof.

Upon the expiration of theInvestigation Period, Embassy completed the Required Environmental Remediation.On May 30, 2006, SCDHS issued a letter (the “SCDHS Letter”) stating thatno further remediation will be required by SCDHS at such time with respect tothe Required Environmental Remediation. The SCDHS Letter also noted thatlaboratory data provided for the upgradient groundwater sample (the “Sample”)indicated that groundwater contamination exists, and that, due to the significantexceedences noted, this information was reported to the New York StateDepartment of Environmental Conservation (“NYSDEC”) Spills Unit, and a NYSDECSpill Number (the “DEC Spill Number”) was assigned. Embassy delivered a copy ofthe SCDHS Letter to Purchaser pursuant to the terms of the Contract of Sale.

The Sample wascontaminated with petroleum, and, to the Company’s knowledge, no petroleumproducts were used, stored or handled by Embassy at the Farmingdale Premises ator near the location where the Sample was collected. The Sample was collectedfrom an upgradient location near the northern border of the FarmingdalePremises, which is in close proximity to a neighboring property thatexperienced a petroleum release. Shortly following receipt of the SCDHS Letter,NYSDEC verbally advised Embassy that it approved an investigation work-plansubmitted by Embassy; the purpose of the investigation was to confirm that thecontamination does not originate at the Farmingdale Premises. The investigationwas completed on August 2, 2006 and the investigation results, whichconfirmed that the source of the petroleum contamination is not the FarmingdalePremises, were submitted to the NYSDEC on August 7, 2006. On August 11,2006, the NYSDEC advised Embassy that, based on the results of theinvestigation, it is apparent that the Farmingdale Premises is not the sourceof groundwater contamination that was 

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discoveredbased on the Sample, and that therefore the NYSDEC database has been modifiedto remove the Farmingdale Premises as the source of the contamination.

The Purchaser Letterpurports to terminate the Contract of Sale based upon Purchaser’s assertionthat the SCDHS Letter does not constitute a “No Further Action” letter asrequired by the Contract of Sale, and demands that the escrow agent return thedownpayment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

Embassy has informedPurchaser that, in light of the contents of the SCDHS Letter, Purchaser’spurported termination of the Contract of Sale is without effect, and thatPurchaser is in default of its obligation to consummate the purchase of theFarmingdale Premises under the terms of the Contract of Sale. On August 2,2006, Purchaser instituted an action against Embassy in the Supreme Court ofthe State of New York, County of Suffolk, for breach of contract and return ofdownpayment, seeking $650,000, together with costs of title and survey andinterest thereon, and the cost of the action. Embassy believes the action iswithout merit and intends to vigorously defend it.

Embassy has entered into anew contract of sale, dated as of February 26, 2007, on the FarmingdalePremises with Tell Realty LLC, an affiliated entity of Sam Tell & Son, Inc.,for a purchase price of $6,300,000. The contract is subject to cancellation atthe purchaser’s sole discretion during a forty-five (45) day investigationperiod which commenced February 26, 2007. Assuming the purchaser hassatisfied itself during the investigation period, the contract is expected toclose in the latter part of the Company’s second fiscal quarter of 2007. TheCompany intends to use the net proceeds from this sale to satisfy an existingmortgage on the building of approximately $1.2 million and to reduce its otherdebt. The Company expects to report a pre-tax gain from the sale of thebuilding of approximately $5.0 million.

*Green Manufacturing, Inc. - Agricultural ProductsDivision*

Pursuant to an AssetPurchase Agreement (the “Agricultural APA”), dated as of July 14, 2005,between Green and Benko Products, Inc. (“Benko”), Green sold certain ofits assets comprising its Agricultural Products Division (the “AgriculturalDivision”) to Benko. The assets sold pursuant to the Agricultural APA include,among others, certain machinery and equipment. Certain assets of theAgricultural Division were retained by Green, including, but not limited to,certain of the Agricultural Division’s accounts receivable and inventoriesexisting at the consummation of the sale to Benko (the “Agricultural Closing”).

The purchase price paid by Benko in consideration forthe assets acquired pursuant to the Agricultural APA was $530,000, consistingof (a) a payment to Green at the Agricultural Closing of $225,000; (b) $25,000payable pursuant to the terms of a Promissory Note (“Agricultural Note 1”),dated July 14, 2005, payable in equal monthly amounts over a five (5) monthperiod commencing as of the Agricultural Closing; and (c) $280,000 payablepursuant to the terms of a Promissory Note (collectively with Agricultural Note1, the “Agricultural Notes”), dated July 14, 2005, payable in equal monthlyamounts over a four (4) year period commencing as of the Agricultural Closing.In addition, Benko assumed certain of Green’s contractual obligations. Theobligations of Benko under the Agricultural APA and the Agricultural Notes wereguaranteed by each of a principal shareholder and an affiliate of Benko, andpartially secured by certain collateral.

In connection with the transaction, Green and Benkoentered into an agreement which provided for Benko to purchase from Green 100%of Benko’s requirements for products of the type that constitute part ofGreen’s inventory of raw materials and finished goods as of the acquisitiondate with all purchases by Benko being binding and non-cancelable atpre-established prices. The term was for a period of one year from theacquisition date. All of Green’s inventory was purchased by Benko.

The Company recognized a gain on the sale of theseassets of approximately $312,000, net of taxes, in fiscal 2005. At December 31,2006, there are no outstanding balances due to the Company from Benko.

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*GreenManufacturing, Inc.—Access Division*

Pursuant to an Asset Purchase Agreement (the “AccessAPA”), dated as of February 2, 2005, between Green and Benko, Green soldcertain of its assets comprising its Access Division (the “Access Division”) toBenko. The assets sold pursuant to the Access APA include, among others,certain machinery and equipment, accounts receivable, inventory, intellectualproperty and other intangibles. Certain assets of the Access Division wereretained by Green, including, but not limited to, certain of the AccessDivision’s accounts receivable existing at the consummation of the sale toBenko (the “Access Closing”).

The purchase price agreed to by Benko in considerationfor the assets acquired pursuant to the Access APA, giving effect to certainadjustments, was approximately $1,756,655, consisting of (a) a payment to Greenat the Access Closing of approximately $880,069; (b) $755,724 payable pursuantto the terms of a Promissory Note (“Access Note 1”), dated February 2, 2005,payable in various amounts over a twenty-one (21) month period commencing as ofthe Access Closing; and (c) $120,862 payable pursuant to the terms of aPromissory Note (collectively with Access Note 1, the “Access Notes”), datedFebruary 2, 2005, payable in various amounts over a four (4) month periodcommencing as of the Access Closing. Benko agreed to pay additionalconsideration on an annual basis for the two (2) successive twelve (12) monthperiods commencing as of the Access Closing, dependent on certain sales byBenko, subject to certain other conditions. In addition, Benko assumed certainof Green’s contractual obligations. The obligations of Benko under the AccessAPA and the Access Notes were guaranteed by each of a principal shareholder andan affiliate of Benko, and partially secured by certain collateral.

Benko had withheld certain payments regarding itsoutstanding Access Note as a result of a disagreement regarding certainrepresentations made by the Company in the Access APA. As such, the Company recordeda reserve of $150,000 at December 31, 2005. In August 2006, the Company andBenko negotiated a settlement under both the Access Note and the outstandingAgricultural Note and received a payment of approximately $477,000 to resolvethe matter. At December 31, 2006, there are no outstanding balances due to theCompany from Benko.

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes, infiscal 2005.

*GreenManufacturing, Inc.—Hydraulic Cylinder Division*

In December 2004, pursuant to an Asset PurchaseAgreement and other related documents (collectively, the “Cylinder APA”), amongP&F, Green and Rosenboom Machine & Tool, Inc. (“RMT”) (an unaffiliatedthird party), Green sold certain of its assets comprising its HydraulicCylinder Division to RMT. The assets sold pursuant to the Cylinder APA include,among others, property, machinery and equipment, raw materials, work-in processinventory and certain intangibles. Green also sold the land and building inwhich the division was housed to RMT in connection with this transaction. Greenreceived net cash proceeds of approximately $3,679,000 and a promissory note ofapproximately $686,000 at the closing, which note was satisfied in December2005. In addition, Green may receive additional consideration in the form ofcommissions through December 2009 based upon certain future sales by RMT. Infiscal 2005 and 2004, Green received approximately $433,000 and $11,000,respectively, in additional consideration. In addition, RMT agreed to hire allGreen Hydraulic Cylinder Division employees in Bowling Green, Ohio and, as aresult of the transaction, Green has effectively exited the hydraulic cylinderbusiness.

The Company recognized a gain on the sale of theseassets of approximately $88,000, net of taxes of $46,000, in fiscal 2004. Greenhas effectively ceased all operating activities.

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Thefollowing amounts related to Embassy and Green have been segregated from theCompany’s continuing operations and are reported as assets held for sale andassets and liabilities of discontinued operations in the consolidated balancesheets:

| ** **                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Assets held for sale and  assets of discontinued operations:      |       |                  |       |   |   |
| Prepaid expenses                                                  |       | $                     | 300,000    |   | $ | 77,000 |   |
| Assets held for  sale                                             |       | 577,000               |       | 623,000 |   |
| Total assets held  for sale and assets of discontinued operations |       | $                     | 877,000    |   | $ | 700,000 |   |
| Liabilities of  discontinued operations:                          |       |                  |       |   |   |
| Accounts payable  and accrued expenses                            |       | $                     | 435,000    |   | $ | 991,000 |   |
| Mortgage payable                                                  |       | 1,254,000             |       | 1,367,000 |   |
| Total liabilities of  discontinued operations                     |       | $                     | 1,689,000  |   | $ | 2,358,000 |   |

 

Results of operations for Embassy and Green areincluded from the beginning of each fiscal period presented through therespective dates of asset disposition, and have been segregated from continuingoperations and reflected as discontinued operations approximately as follows: 
|                                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues                                                                                                 |       | $                                          | —     |   | $ | 9,087,000 |   | $ | 25,894,000 |   |
| Earnings (loss)  from operation of discontinued operations, before taxes       |       | $                                          | 17,000     |   | $ | (208,000 | ) | $ | 59,000 |   |
| Income tax  (expense) benefit                                                                                |       | 53,000                                     |       | 82,000 |   | (20,000 | ) |
| Earnings (loss)  from operation of discontinued operations                                                   |       | 70,000                                     |       | (126,000 | ) | 39,000 |   |
| Gain on sale of  discontinued operations, before taxes                                                       |       | —                                     |       | 2,919,000 |   | 134,000 |   |
| Income tax  expense                                                                                          |       | —                                     |       | (1,069,000 | ) | (46,000 | ) |
| Gain on sale of  discontinued operations                                                                     |       | —                                     |       | 1,850,000 |   | 88,000 |   |
| Earnings from  discontinued operations                                                                       |       | $                                          | 70,000     |   | $ | 1,724,000 |   | $ | 127,000 |   |

 

**RESULTS OFOPERATIONS**

**2006 Compared to2005**

**Revenues**

Revenuesfor the years ended December 31, 2006 and 2005 were as follows:

| **Year ended December 31,** | ** ** | ** ** | ** **  | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|--------------------------------------------|------------|------------|-------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| 2006                                       |       | $          | 111,733,000 |             |       | $                                       | 44,657,000 |         |       | $ | 67,076,000 |   |
| 2005                                       |       | $          | 107,978,000 |             |       | $                                       | 48,378,000 |         |       | $ | 59,600,000 |   |
| % increase                                 |       | 3.5        | %           |             | (7.7       | )%                                      |       | 12.5         | %          |

 

Revenues from tools and other products decreased dueprimarily to approximately $3,103,000 less in retail promotions in the period,as well as a decrease in base sales of approximately $3,728,000. Base salesdecreased as a result of decreased purchasing activity of approximately$3,252,000 from a significant customer as part of a program to reduce itsoverall inventory levels, which was further impacted by a 

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$476,000 decrease in basesales from another significant customer. Decreases in revenues of approximately$265,000 at Franklin were due primarily to decreased shipments to a fewcustomers related to weak in-store sales and supply-related issues. Decreasesin OEM sales of approximately $461,000 resulted from decreased activity with acertain customer. Partially offsetting these decreases were incrementalrevenues from new products in the retail channel of approximately $3,711,000and increases in Berkley revenues of approximately $282,000 due to bettermarket penetration.

Revenues from hardware increased at Woodmark,decreased at Nationwide and include revenues from the recently-acquired PacificStair. Woodmark’s revenues increased $2,456,000, or 6.1%. Revenues from thesale of staircase components increased by approximately $796,000, or 2.4%,benefiting from better customer penetration. Further, revenues in our kitchenand bath products sold into the mobile home and remodeling markets haveincreased approximately $1,660,000, or 21.5%, as sales to a large customer haverebounded to 2004 levels after experiencing a decline in 2005. In addition, wehave strengthened relationships with other customers. Pacific Stair’s revenueswere $6,178,000 for the year ended December 31, 2006. Moreover, Nationwide’srevenues decreased by approximately $1,159,000, or 6.1%, primarily attributableto a decreases in revenues of approximately $280,000 in fencing products,primarily from new competition and a decline in the housing market, $523,000 inthe OEM business primarily from a decline in the housing market and $356,000from patio products that resulted from the discontinuation of the productionand sale of screen doors, respectively.

All revenues are generatedin U.S. dollars and are not impacted by changes in foreign currency exchangerates.

**Gross Profit**

Grossprofit for the years ended December 31, 2006 and 2005 was as follows:

| **Year ended December 31,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| 2006                                       |       | $          | 33,981,000 |             |       | $                                       | 13,129,000 |         |       | $ | 20,852,000 |   |
|                                       |       | 30.4       | %          |             | 29.4       | %                                       |       | 31.1         | %          |
| 2005                                       |       | $          | 34,159,000 |             |       | $                                       | 13,972,000 |         |       | $ | 20,187,000 |   |
|                                       |       | 31.6       | %          |             | 28.9       | %                                       |       | 33.9         | %          |

 

The increase in the grossprofit percentage from tools and other products was due primarily to a lowerproportionate amount of retail promotional sales in the current period, whichhistorically have lower average margins, versus the prior-year period, a shiftto high-quality, lower-cost suppliers for some products and the strength of theU.S. dollar in relation to the Japanese yen and the Taiwan dollar compared tothe prior-year period. The decrease in the gross profit percentage fromhardware was due primarily to (a) some cost increases from Asian suppliers dueto increases in the cost of metals that were not fully offset by generalselling price increases in the third quarter of 2006, (b) the impact fromsignificant revenue increases in the lower-margin direct container business atWoodmark, (c) competitive pricing pressures on stair products in certainmarkets and (d) the inclusion of Pacific Stair, which operates at a lower grossmargin than the rest of the group. The gross margin percentage decrease waspartially offset by a favorable product mix in fencing revenues and a shift byNationwide to high-quality, lower-cost suppliers for some products.

 

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**Selling, Generaland Administrative Expenses**

Consolidated selling,general and administrative (“SG&A”) expenses increased $1,244,000, or 5.1%,from $24,285,000 to $25,529,000. SG&A expenses grew at a faster rate thanthe consolidated revenue increase for the year ended December 31, 2006. Thisexpense growth was driven by several factors, including stock-basedcompensation expense, certain corporate non-recurring professional and taxfees, the non-recurring cost of the move of the Company’s corporate headquarters,increased freight costs due to the rising price of oil and planned increases insales and marketing expenses that are intended to generate additional revenuein the coming periods. SG&A expenses as a percentage of revenues increasedfrom 22.5% to 22.9%.

**Interest—Net**

Net interest expense increased $77,000, or 4.1%, fromapproximately $1,896,000 to approximately $1,973,000. Interest expense onborrowings under the Company’s revolving credit loan facility increased byapproximately $43,000, as lower average borrowings were adversely impacted byhigher average interest rates. Interest expense on trade financing at FloridaPneumatic increased approximately $65,000 as a result of higher averageborrowings and higher interest rates. Interest expense on borrowings under theterm loan facility decreased by approximately $80,000 as lower averageborrowings during the period due to repayments were offset by higher averageinterest rates. Interest expense on Woodmark’s acquisition-related notesincreased by approximately $35,000 due to higher average interest rates.

**Income Taxes**

The effective tax ratesapplicable to earnings from continuing operations for the years ended December 31,2006 and 2005 were 41.2% and 39.2%, respectively. The increase in the effectivetax rate is primarily attributable to an unexpected accrual for an uncertaintax position resulting from a pending state audit, partially offset by thedeductibility of certain compensation expenses in 2006 that were not deductiblein 2005, primarily related to the approval by stockholders in May 2006 ofthe Executive 162(m) Bonus Plan.

**2005 Compared to2004**

**Revenues**

Revenuesfor the years ended December 31, 2005 and 2004 were as follows:

| **Year ended December 31,** | ** ** | ** ** | ** **  | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|--------------------------------------------|------------|------------|-------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| 2005                                       |       | $          | 107,978,000 |             |       | $                                       | 48,378,000 |         |       | $ | 59,600,000 |   |
| 2004                                       |       | $          | 88,064,000  |             |       | $                                       | 51,868,000 |         |       | $ | 36,196,000 |   |
| % increase                                 |       | 22.6       | %           |             | (6.7       | )%                                      |       | 64.7         | %          |

 

Revenues from tools and other products decreased dueprimarily to approximately $1,670,000 less in retail promotions in the period,as well as a decrease in base sales of approximately $2,386,000, offset by anincrease of approximately $1,767,000 related to new product introductions. Basesales decreased as a result of decreased purchasing activity of approximately$1,373,000 from a significant customer as part of a program to reduce itsoverall inventory levels. Decreases in automotive revenues of approximately$933,000 were due primarily to the lack of inventory-stocking accounts thatwere obtained in 2004, as well as no significant new product introductions inthis area in 2005. Decreases in revenues of approximately $200,000 at Franklinwere due primarily to a significant customer that reduced its ordering.Further, 

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revenues decreased incatalog sales of approximately $197,000, OEM products of approximately $120,000and a decrease of approximately $288,000 attributable to the loss of a majorcustomer in early 2004. Reduction of sales commission revenues of approximately$89,000 related to a product no longer being sold. These decreases were offsetby an increase in revenues of approximately $353,000 in industrial sales andapproximately $279,000 in Berkley sales. The Franklin Manufacturing division,formerly included in the hardware segment, relocated its operations to FloridaPneumatic in the first quarter of 2005 and is now included in the “Tools andother products” segment. Prior period amounts have been reclassified to reflectthis change. The primary reasons for taking this action were for, among otherthings, synergies between the companies in the retail channel, principallyselling to the same significant customer, and other operational synergies.

Revenues from hardware increased significantly as aresult of the acquisition of Woodmark, which recorded a full year of revenuesof approximately $40,483,000 in fiscal 2005 versus approximately $19,721,000 inrevenues during second half of 2004. Revenues from the sale of staircasecomponents continue to increase, benefiting from strong new housing starts. Theserevenues have more than offset weakness in demand for our kitchen and bathproducts sold into the mobile home and remodeling markets. Moreover, Nationwide’srevenues increased by approximately $2,642,000, or 16.0%, primarilyattributable to an increase of approximately $1,297,000 in sales of fencingproducts and an increase of approximately $1,229,000 in OEM, which was dueprimarily to the addition of new OEM customers.

All revenues are generatedin U.S. dollars and are not impacted by changes in foreign currency exchangerates.

**Gross Profit**

Grossprofit for the years ended December 31, 2005 and 2004 was as follows:

| **Year ended December 31,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|--------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| 2005                                       |       | $          | 34,159,000 |             |       | $                                       | 13,972,000 |         |       | $ | 20,187,000 |   |
|                                       |       | 31.6       | %          |             | 28.9       | %                                       |       | 33.9         | %          |
| 2004                                       |       | $          | 27,795,000 |             |       | $                                       | 15,509,000 |         |       | $ | 12,286,000 |   |
|                                       |       | 31.6       | %          |             | 30.0       | %                                       |       | 33.9         | %          |

 

The decrease in the grossprofit percentage from tools and other products was due primarily to the impactof the weakness of the U.S. dollar in relation to the Taiwan dollar and by aless favorable product mix, offset by other cost reductions and productivityimprovements. The gross profit percentage from hardware products remainedconsistent. Some cost increases from Asian suppliers, due to increases in thecost of metals, were offset by a favorable product mix and a shift byNationwide to lower-cost suppliers for some products.

**Selling, Generaland Administrative Expenses**

Consolidated selling,general and administrative (“SG&A”) expenses increased $4,415,000, or 22.2%,from $19,870,000 to $24,285,000. Increased SG&A expenses are associatedwith a 22.6% increase in revenues and were due primarily to increasedpersonnel-related expenses from additional personnel and west-coast expansionat Countrywide to support growth, increased freight costs due to fuelsurcharges and sales territory expansion and increases related to professionalfees principally for certain non-recurring M&A activities and corporatecompliance and reporting requirements, offset by a reduction in certainwarranty expenses. Due to increases in revenues, SG&A expenses as apercentage of revenues decreased from 22.6% to 22.5%.

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**Interest—Net**

Net interest expenseincreased $747,000, or 65.1%, from $1,149,000 to $1,896,000, due primarily to afull year of interest related to the amounts borrowed under the Company’s termloan facility to finance the Woodmark acquisition transaction on June 30,2004, as well as the issuance and assumption of certain notes related thereto.Interest expense on borrowings under the term loan facility increased byapproximately $507,000, which had lower average borrowings during the year dueto repayments, offset by higher average interest rates. Interest expense on theacquisition-related notes increased by approximately $57,000. Interest expenseon borrowings under the Company’s revolving credit loan facility increased byapproximately $170,000, as higher average borrowings were further impacted byhigher average interest rates.

**Income Taxes**

The effective tax ratesfor the years ended December 31, 2005 and 2004 were 39.2% and 42.3%,respectively. The net decrease in the effective tax rate was due primarily toan adjustment for taxes no longer required and an increase in expenses that arenot deductible for tax purposes, including executive compensation in excess of$1,000,000. (See Note 12 to the Notes to Consolidated Financial Statements.)

**LIQUIDITY ANDCAPITAL RESOURCES**

The Company’s 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 receivablesand inventories trend down. Due to its strong asset base, predictable cashflows and favorable banking relationships, the Company believes it has adequateaccess to capital, if and when needed. The Company monitors average days salesoutstanding, inventory turns and capital expenditures to project liquidityneeds and evaluate return on assets employed.

TheCompany gauges its liquidity and financial stability by the measurements shownin the following table (dollar amounts in thousands):

| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Working Capital           |       | $                     | 20,855     |   | $ | 27,981 |   | $ | 29,530 |   |
| Current Ratio             |       | 1.81 to 1             |       | 2.51 to 1 |   | 2.69 to 1 |   |
| Shareholders’ Equity |       | $                     | 51,521     |   | $ | 47,716 |   | $ | 41,168 |   |

 

On January 3, 2006, Pacific Stair acquiredcertain assets comprising the business of the former Pacific Stair Products andassumed certain related liabilities.

On June 30, 2004, Woodmark acquired certainassets comprising the business of the former Woodmark International L.P. andits wholly-owned subsidiary, the former Stair House, Inc., and assumedcertain related liabilities.

In connection with the Woodmark acquisitiontransaction, the Company is liable for additional payments to the sellers. Theamount of these payments, which would be made as of either June 30, 2007or June 30, 2009, are to be based on increases in earnings before interestand taxes, for the year ended on the respective date, over a base of$5,100,000. Woodmark has the option to make a payment as of June 30, 2007in an amount equal to 48% of this increase. If Woodmark does not make thispayment as of June 30, 2007, the Sellers may demand payment as of June 30,2009 in an amount equal to 40% of the increase. Any such additional paymentswill be treated as additions to goodwill.

On June 30, 2004, in conjunction with theWoodmark acquisition transaction, the Company entered into a credit agreementwith Citibank and another bank. This agreement, as amended from time to time, 

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provides the Company withvarious credit facilities, including revolving credit loans, term loans foracquisitions and a foreign exchange line. (See Notes 7 and 9 to the Notes toConsolidated Financial Statements.)

At December 31, 2006, the revolving credit loanfacility provided a maximum of $12,000,000, with various sublimits, for directborrowings, letters of credit, bankers’ acceptances and equipment loans. Thereare no commitment fees for any unused portion of this credit facility. At December 31,2006, there was $3,000,000 outstanding against the revolving credit loanfacility, and there were no open letters ofcredit.

At December 31, 2006, the term loan facilityprovided a maximum commitment of $34,000,000 to finance acquisitions subject to the approval of the lending banks.There are no commitment fees for any unused portion of this credit facility.The Company borrowed $29,000,000 against this facility to finance the Woodmarkacquisition transaction in June 2004, and there was $13,600,000, includingamounts rolled over from the prior term loan facility, outstanding against theterm loan facility at December 31, 2006.

The foreign exchange line provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of Japanese yen needed forpayments to foreign suppliers. The total amount of foreign currency forwardcontracts outstanding under the foreignexchange line at December 31, 2006, based on that day’s closingspot rate, was approximately $301,000.

Under the terms of the Company’s credit agreement, theCompany is required to adhere to certain financial covenants. The Companyreceived a waiver for one covenant with which it was not in compliance at December 31,2006 and another covenant with respect to the period from October 1, 2006through March 30, 2007. Management expects to be in full compliance withthe financial covenants of the credit agreement, as amended in February 2007,on March 31, 2007. The revolving credit loan facility under the creditagreement expires in June 2007 and is subject to annual review by thelending banks.

Contemporaneously with the acquisition of Hy-Tech, theCompany executed and delivered Amendment No. 7 to Credit Agreement withCitibank and another bank. The amendment, among other things, adds ContinentalTool Group, Inc. and Hy-Tech Machine, Inc. as additional co-borrowersand provides for new term loans in amounts not to exceed $19,000,000. Theprincipal on the new term loan notes are payable in 25 consecutive quarterlyinstallments of $760,000, commencing on January 31, 2008. From the date ofthe amendment through January 31, 2008, monthly payments shall be made ofinterest only. The Company and the co-borrowers have the option to pay interestat a rate based on either the fluctuating prime rate, LIBOR or a combination ofthe two rates. The new term loan notes shall mature on January 31, 2014.The amendment also provides for the amendment and restatement of certainexisting term loan notes. The revolving credit loan facility provides for amaximum of $18,000,000, with various sublimits, for direct borrowings, lettersof credit, bankers’ acceptances and equipment loans. (See Note 16 to the Notesto Consolidated Financial Statements.)

In connection with the sale of certain assets ofEmbassy in October 2005, the Company recorded a receivable ofapproximately $1,233,000, comprised of a working capital adjustment ofapproximately $433,000 and approximately $800,000 of escrow monies due, subjectto certain conditions of release. In January 2006, the Company receivedapproximately $833,000 in cash relating to the working capital adjustment and apartial release of escrow monies. The balance of the escrow monies due areexpected to be paid to the Company in June 2007.

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Embassy participated in amulti-employer pension plan until it sold substantially all of its operatingassets in October 2005. This plan provided defined benefits to all of itsunion workers. Contributions to this plan were determined by the union contract.The Company does not administer the plan funds and does not have any controlover the plan funds. As a result of Embassy’s withdrawal from the plan, it hasestimated and recorded a withdrawal liability of approximately $279,000, whichis payable in quarterly installments of approximately $8,200 from May 2006through February 2026.

Embassy has entered into acontract of sale, dated as of February 26, 2007, on the FarmingdalePremises with Tell Realty LLC, an affiliated entity of Sam Tell & Son, Inc.,for a purchase price of $6,300,000. The contract is subject to cancellation atthe purchaser’s sole discretion during a forty-five (45) day investigationperiod which commenced February 26, 2007. Assuming the purchaser hassatisfied itself during the investigation period, the contract is expected toclose in the latter part of the Company’s second fiscal quarter of 2007. TheCompany intends to use the net proceeds from this sale to satisfy an existingmortgage on the building of approximately $1.2 million and to reduce its otherdebt. The Company expects to report a pre-tax gain from the sale of thebuilding of approximately $5.0 million.

Cash decreased $432,000from $1,772,000 as of December 31, 2005 to $1,340,000, as of December 31,2006. The Company’s debt levels decreased from $23,631,000 at December 31,2005 to $19,619,000 at December 31, 2006, due primarily to repayments fromearnings. The Company’s total percent of debt to total book capitalization(debt plus equity) decreased from 35.8% at December 31, 2005 to 30.5% at December 31,2006.

Cash provided by operatingactivities of continuing operations for 2006, 2005 and 2004 was approximately$11,553,000, $3,836,000 and $6,176,000, respectively. The Company believes thatcash on hand derived from operations and cash available through borrowingsunder its credit facilities will be sufficient to allow the Company to meet itsforeseeable working capital needs.

At December 31, 2006,accounts receivable increased by approximately $118,000 compared to the prioryear. Increases (decreases) were approximately $(790,000) and $331,000 atFlorida Pneumatic and Countrywide, respectively. The decrease in FloridaPneumatic’s net accounts receivable resulted lower sales in the fourth quarterof 2006 compared to the prior year. The increase at Countrywide was dueprimarily to increase in revenues of Woodmark during the year, as well as theinclusion of Pacific Stair, which reported approximately $577,000 in netaccounts receivable at the acquisition date that increased during the year byapproximately $26,000. These increases were partially offset by decreases atNationwide where revenues declined.

At December 31, 2006,inventories increased by approximately $519,000 compared to the prior year.Increases (decreases) were approximately $(1,588,000) and $1,769,000 at FloridaPneumatic and Countrywide, respectively. Inventory levels at Florida Pneumaticdecreased as a result of a shift to high-quality, lower cost suppliers thatrequire less lead times for inventory purchases, reducing the need to carry thesame levels of inventory as in the prior year. The increase at Countrywide wasdue primarily to the inclusion of Pacific Stair, which reported approximately$338,000 in inventories at the acquisition date that increased during the yearby approximately $693,000 and an increase at Nationwide of approximately$1,797,000, offset by a decrease at Woodmark of approximately $721,000.

At December 31, 2006,short-term borrowings remained flat from the prior year.

At December 31, 2006,accounts payable increased by approximately $4,765,000 compared to the prioryear. Increases (decreases) were approximately $4,139,000 and $623,000 atFlorida Pneumatic and Countrywide, respectively. The increase at FloridaPneumatic was due primarily to the impact from a major foreign supplier thathas granted more favorable payment terms. The increase at Countrywide was dueprimarily to increases of approximately $147,000 and $448,000 at Nationwide andWoodmark, respectively, and the inclusion of Pacific Stair, which reportedapproximately $2,000 in accounts payable at the acquisition date that increasedduring the year by approximately $28,000.

Capital spending wasapproximately $1,549,000, $600,000 and $418,000 in 2006, 2005 and 2004,respectively, which amounts were provided from working capital. Capitalexpenditures for 2007 are 

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expectedto be approximately $1,300,000, some of which may be financed through theCompany’s credit facilities. Included in the expected total for 2007 arecapital expenditures relating to new products, expansion of existing productlines and replacement of equipment.

**OFF-BALANCE SHEET ARRANGEMENTS**

The Company’s foreignexchange line provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. TheCompany has not purchased forward contracts on New Taiwan dollars. The totalamount of foreign currency forward contracts outstanding at December 31,2006, based on that day’s closing spot rate, was approximately $301,000.

The Company, throughFlorida Pneumatic, imports 16% of its purchases from Japan, with payment due inJapanese yen. As a result, the Company is subject to the effects of foreigncurrency exchange fluctuations. The Company uses a variety of techniques toprotect itself from any adverse effects from these fluctuations, includingincreasing its selling prices, obtaining price reductions from its overseassuppliers, using alternative supplier sources and entering into foreigncurrency forward contracts. The decrease in the strength of the Japanese yenand TWD versus the U.S. dollar from 2005 to 2006 had a positive effect on theCompany’s results of operations and its financial position. Since December 31,2005, the relative value of the U.S dollar in relation to the Japanese yen hascontinued to increase over fiscal 2005 averages. There can be no assurance asto the future trend of this value. (See “Item 7A. Quantitative and QualitativeDisclosures About Market Risk.”)

**IMPACT OF INFLATION**

The Company believes thatthe effects of changing prices and inflation on its financial position and itsresults of operations are immaterial.

**ENVIRONMENTAL MATTERS**

Although it is difficultto identify precisely the portion of capital expenditures or other costsattributable to compliance with environmental laws and regulations, the Companydoes not expect such expenditures or other costs to have a material adverseeffect on its financial position and its results of operations.

**CONTRACTUAL OBLIGATIONS**

At December 31,2006, the Company had certain contractual obligations as set forth in thefollowing tables:

| **Contractual Obligations**    | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1–3 years** | ** ** | **4–5 years** | ** ** | **More than   5 years** | ** ** |
| Long-term debt  obligations(a) |       | $                          | 23,796,000 |   | $ | 10,389,000 |   | $ | 10,304,000 |   | $ | 2,661,000 |   | $ | 442,000 |   |
| Purchase  obligations(b)       |       | 9,919,000                  |       | 9,919,000 |   | — |   | — |   | — |   |
| Operating lease  obligations   |       | 2,816,000                  |       | 1,046,000 |   | 1,071,000 |   | 453,000 |   | 246,000 |   |
| Total                          |       | $                          | 36,531,000 |   | $ | 21,354,000 |   | $ | 11,375,000 |   | $ | 3,114,000 |   | $ | 688,000 |   |

----

(a)           Long-termdebt includes a term loan, notes payable related to the Woodmark acquisitionand mortgage loans. Embassy’s mortgage loan, which was approximately $1.3million at December 31, 2006, is included in “Liabilities of DiscontinuedOperations” on the consolidated balance sheets. The amounts shown in the tableinclude expected interest payments. For long-term debt not subject to apre-determined fixed rate of interest, the expected interest payments werecalculated on the basis of the Company’s borrowing rate of 6.85% at December 31,2006. (See Note 9 to the Notes to Consolidated Financial Statements.)

26

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(b)          TheCompany enters into contractual arrangements for purchase commitments in theordinary course of business to ensure adequate levels of inventories, includingraw material and sourced products. (See Note 13 to the Notes to ConsolidatedFinancial Statements.)

**NEW ACCOUNTING PRONOUNCEMENTS**

See Note 1 to the Notes toConsolidated Financial Statements included in Item 8 of this report.

**ITEM7A.**        Quantitative AndQualitative Disclosures About Market Risk

The Company is exposed tomarket risks, which include changes in U.S. and international exchange rates,the prices of certain commodities and currency rates as measured against theU.S. dollar and each other, as well as fluctuations in interest rates. TheCompany attempts to reduce the risks related to foreign currency fluctuation byutilizing financial instruments, pursuant to Company policy.

The value of the U.S.dollar affects the Company’s financial results. Changes in exchange rates maypositively or negatively affect the Company’s gross margins through itsinventory purchases and operating expenses through realized foreign exchangegains or losses. The Company engages in hedging programs aimed at limiting, inpart, the impact of currency fluctuations. Using primarily forward exchangecontracts, the Company hedges some of those transactions that, when remeasuredaccording to accounting principles generally accepted in the United States ofAmerica, impact the statement of earnings. Factors that could impact theeffectiveness of the Company’s programs include volatility of the currencymarkets and availability of hedging instruments. All currency contracts thatare entered into by the Company are components of hedging programs and areentered into not for speculation but for the sole purpose of hedging anexisting or anticipated currency exposure. The Company does not buy or sellfinancial instruments for trading purposes. Although the Company maintainsthese programs to reduce the impact of changes in currency exchange rates, whenthe U.S. dollar sustains a weakening exchange rate against currencies in whichthe Company incurs costs, the Company’s costs are adversely affected.

The Company accounts forchanges in the fair value of its foreign currency contracts by marking them tomarket and recognizing any resulting gains or losses through its statements ofearnings. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statements of earnings. At December 31,2006, the Company had foreign currency forward contracts, maturing in 2007, topurchase Japanese yen at contracted forward rates. The value of these contractsat December 31, 2006, based on that day’s closing spot rate, wasapproximately $301,000, which was the approximate value of the Company’scorresponding yen-denominated accounts payable. During the years ended December 31,2006, 2005 and 2004, the Company recorded in its cost of sales a net realizedgain (loss) of approximately $39,000, $(135,000) and $(96,000), respectively,on foreign currency transactions. At December 31, 2006 and 2005, theCompany had no material unrealized gains or losses on foreign currencytransactions.

The potential loss invalue of the Company’s net investment in foreign currency forward contractsresulting from a hypothetical 10 percent adverse change in foreign currencyexchange rates at December 31, 2006 was approximately $34,000. (See Note 1to the Notes to Consolidated Financial Statements.)

The Company has variousdebt instruments that bear interest at variable rates tied to LIBOR (LondonInterBank Offered Rate). Any increase in LIBOR would have an adverse effect onthe Company’s interest costs. In addition to affecting operating results,adverse changes in interest rates could impact the Company’s access to capital,certain merger and acquisition strategies and the level of capital expenditures.

The carrying amountsreported in the consolidated balance sheets for cash and cash equivalents,accounts receivable, accounts payable and short-term debt, approximate fairvalue as of December 31, 2006 and 2005 because of the relatively short-termmaturity of these financial instruments. The carrying amounts reported forlong-term debt approximate fair value as of December 31, 2006 and 2005because, in general, the interest rates underlying the instruments fluctuatewith market rates.

27

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**ITEM 8.**                FinancialStatements and Supplementary Data

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

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

| ** **                                                                                                                    | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Reports of Independent Registered Public Accounting  Firms                                                                    |       | 29       |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                            |       | 31       |
| Consolidated Statements of Earnings for each of the  three years ended December 31, 2006, 2005 and 2004                  |       | 32       |
| Consolidated Statements of Shareholders’ Equity for  each of the three years ended December 31, 2006, 2005 and 2004 |       | 33       |
| Consolidated Statements of Cash Flows for each of the  three years ended December 31, 2006, 2005 and 2004                |       | 34       |
| Notes to Consolidated Financial Statements                                                                                    |       | 36       |
| Schedule II—Valuation and Qualifying Accounts for each  of the three years ended December 31, 2006, 2005 and 2004   |       | 65       |

 

28

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders and Board of DirectorsP&F Industries, Inc.

We have audited the accompanying consolidated balancesheets of P&F Industries, Inc. and Subsidiaries (the “Company”) as of December 31,2006 and 2005, and the related consolidated statements of earnings,shareholders’ equity and cash flows for the years then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financial positionof P&F Industries, Inc. andSubsidiaries as of December 31, 2006 and 2005, and the consolidatedresults of their operations and their cash flows for the years then ended, inconformity with accounting principles generally accepted in the United Statesof America.

As described in Note 1 of the notes to theconsolidated financial statements, the Company has adopted Financial AccountingStandards Board Statement No. 123(R), Share Based Payments on January 1,2006.

Ouraudits were conducted for the purpose of forming an opinion on the basicfinancial statements taken as a whole. Schedule II—Valuation and QualifyingAccounts, as of and for the years ended December 31, 2006 and 2005, ispresented for purposes of additional analysis and is not a required part of thebasic financial statements. This schedule has been subjected to the auditingprocedures applied in our audits of the basic financial statements and, in ouropinion, is fairly stated in all material respects in relation to the basicfinancial statements taken as a whole.
| /s/ GRANT  THORNTON LLP |   |
|-------------------------|--------|
| Grant Thornton LLP      |   |

 

Melville, New YorkMarch 29, 2007

29

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders and Board of Directors ofP&F Industries, Inc.Melville, New York

We have audited the accompanying consolidatedstatements of earnings, shareholders’ equity and cash flows of P&F Industries, Inc.and Subsidiaries (the “Company”) for the year ended December 31, 2004. Wehave also audited the schedule listed in the accompanying index for the yearended December 31, 2004. These consolidated financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated financial statements andschedule based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements and schedule are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements andschedule, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall presentation of thefinancial statements and schedule. We believe that our audit provides a reasonablebasis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the results ofoperations of P&F Industries, Inc. and Subsidiaries and their cashflows for the year ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States.

Also,in our opinion, the schedule presents fairly, in all material respects, theinformation set forth therein.
| /s/ BDO  SEIDMAN, LLP |   |
|-----------------------|--------|
| BDO Seidman, LLP      |   |

 

New York, New YorkMarch 21, 2005 (except for Note 3, as to which the date is March 30,2006)

30

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

**CONSOLIDATEDBALANCE SHEETS**

| ** **                                                                                              | ** ** | **December 31,** | ** ** |       |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|
| ** **                                                                                              | ** ** | **2006**              | ** ** | **2005**   | ** ** |   |
| **ASSETS**                                                                                              |       |                  |       |       |   |   |
| CURRENT                                                                                                 |       |                  |       |       |   |   |
| Cash and cash equivalents                                                                               |       | $                     | 1,339,882  |       | $ | 1,771,624 |   |   |
| Accounts receivable—net                                                                            |       | 12,685,388            |       | 12,567,256 |   |   |
| Notes and other receivables                                                                             |       | 1,156,801             |       | 2,727,393  |   |   |
| Inventories—net                                                                                    |       | 26,692,615            |       | 26,173,990 |   |   |
| Deferred income taxes—net                                                                          |       | 980,000               |       | 1,496,000  |   |   |
| Assets held for sale                                                                                    |       | 576,535               |       | 623,519    |   |   |
| Assets of discontinued  operations                                                                      |       | 300,339               |       | 76,538     |   |   |
| Income tax refund  receivable                                                                           |       | 1,356,310             |       | —     |   |   |
| Prepaid expenses and  other current assets                                                              |       | 1,369,403             |       | 1,111,164  |   |   |
| TOTAL CURRENT ASSETS                                                                                    |       | 46,457,273            |       | 46,547,484 |   |   |
| PROPERTY AND EQUIPMENT                                                                                  |       |                  |       |       |   |   |
| Land                                                                                                    |       | 1,174,773             |       | 1,174,773  |   |   |
| Buildings and  improvements                                                                             |       | 5,716,144             |       | 5,219,993  |   |   |
| Machinery and equipment                                                                                 |       | 9,249,720             |       | 8,087,469  |   |   |
|                                                                                                    |       | 16,140,637            |       | 14,482,235 |   |   |
| Less accumulated  depreciation and amortization                                                         |       | 8,411,447             |       | 7,620,626  |   |   |
| NET PROPERTY AND  EQUIPMENT                                                                             |       | 7,729,190             |       | 6,861,609  |   |   |
| GOODWILL                                                                                                |       | 24,921,473            |       | 23,821,240 |   |   |
| OTHER INTANGIBLE ASSETS—net                                                                        |       | 10,897,333            |       | 8,794,833  |   |   |
| OTHER ASSETS—net                                                                                   |       | 311,721               |       | 808,381    |   |   |
| TOTAL ASSETS                                                                                            |       | $                     | 90,316,990 |       | $ | 86,833,547 |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                            |       |                  | ** ** |       |   |
| CURRENT LIABILITIES                                                                                     |       |                  | ** ** |       |   |
| Short-term borrowings                                                                                   |       | $                     | 3,000,000  |       | $ | 3,000,000 |   |
| Accounts payable                                                                                        |       | 7,691,869             |       | 2,927,133  |   |
| Income taxes payable                                                                                    |       | 435,237               |       | 1,366,146  |   |
| Accrued compensation                                                                                    |       | 2,158,279             |       | 2,518,196  |   |
| Other accrued liabilities                                                                               |       | 3,068,036             |       | 2,338,909  |   |
| Current maturities of  long-term debt                                                                   |       | 7,559,681             |       | 4,058,729  |   |
| Liabilities of  discontinued operations                                                                 |       | 1,688,958             |       | 2,357,573  |   |
| TOTAL CURRENT LIABILITIES                                                                               |       | 25,602,060            |       | 18,566,686 |   |
| LONG-TERM DEBT, less  current maturities                                                                |       | 12,059,758            |       | 19,572,651 |   |
| DEFERRED INCOME TAXES—net                                                                          |       | 1,134,000             |       | 978,000    |   |
| TOTAL LIABILITIES                                                                                       |       | 38,795,818            |       | 39,117,337 |   |
| COMMITMENTS AND CONTINGENCIES                                                                           |       |                  |       |       |   |
| SHAREHOLDERS’ EQUITY                                                                               |       |                  |       |       |   |
| Preferred stock—$10 par;  authorized—2,000,000 shares; no shares outstanding                  |       | —                |       | —     |   |
| Common stock                                                                                            |       |                  |       |       |   |
| Class A—$1 par;  authorized—7,000,000 shares; issued—3,850,367 and 3,814,367 shares |       | 3,850,367             |       | 3,814,367  |   |
| Class B—$1 par;  authorized—2,000,000 shares; no shares issued                           |       | —                |       | —     |   |
| Additional paid-in  capital                                                                             |       | 9,191,598             |       | 8,947,855  |   |
| Retained earnings                                                                                       |       | 40,850,384            |       | 36,969,119 |   |
| Treasury stock, at cost  (272,607 and 244,576 shares)                                                   |       | (2,371,177            | )          | (2,015,131 | ) |
| TOTAL SHAREHOLDERS’ EQUITY                                                                         |       | 51,521,172            |       | 47,716,210 |   |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                        |       | $                     | 90,316,990 |       | $ | 86,833,547 |   |
|                                                                                                         |            |                       |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

31

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

**CONSOLIDATEDSTATEMENTS OF EARNINGS**

| ** **                                                                                                                                                          | ** ** | **Year Ended December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                                                          | ** ** | **2006**                                   | ** **  | **2005** | ** ** | **2004** | ** ** |
| Net revenues                                                                                                                                                        |       | $                                          | 111,732,731 |   | $ | 107,977,661 |   | $ | 88,063,861 |   |
| Cost of sales                                                                                                                                                       |       | 77,751,900                                 |        | 73,818,395 |   | 60,268,610 |   |
| Gross profit                                                                                                                                                        |       | 33,980,831                                 |        | 34,159,266 |   | 27,795,251 |   |
| Selling, general and administrative expenses                                                                                                                        |       | 25,528,659                                 |        | 24,285,013 |   | 19,870,464 |   |
| Operating income                                                                                                                                                    |       | 8,452,172                                  |        | 9,874,253 |   | 7,924,787 |   |
| Interest expense—net                                                                                                                                           |       | 1,973,308                                  |        | 1,896,265 |   | 1,148,585 |   |
| Earnings from continuing operations before income  taxes                                                                                                            |       | 6,478,864                                  |        | 7,977,988 |   | 6,776,202 |   |
| Income taxes                                                                                                                                                        |       | 2,668,000                                  |        | 3,131,000 |   | 2,865,000 |   |
| Earnings from  continuing operations before discontinued operations                                                                                                 |       | 3,810,864                                  |        | 4,846,988 |   | 3,911,202 |   |
| Discontinued operations  (net of taxes):                                                                                                                            |       |                                       |        |   |   |   |   |
| Earnings (loss) from operation of discontinued  operations (net of tax expense (benefit) of $(53,000), $(82,000) and $20,000  in 2006, 2005 and 2004, respectively) |       | 70,401                                     |        | (126,592 | ) | 39,534 |   |
| Gain on sale of discontinued operations (net of tax  expense of $1,069,000 and $46,000 in 2005 and  2004, respectively)                                             |       | —                                     |        | 1,850,195 |   | 87,827 |   |
| Earnings from discontinued operations                                                                                                                               |       | 70,401                                     |        | 1,723,603 |   | 127,361 |   |
| Net earnings                                                                                                                                                        |       | $                                          | 3,881,265   |   | $ | 6,570,591 |   | $ | 4,038,563 |   |
| Basic earnings  per common share:                                                                                                                                   |       |                                       |        |   |   |   |   |
| Continuing operations                                                                                                                                               |       | $                                          | 1.06        |   | $ | 1.36 |   | $ | 1.11 |   |
| Discontinued operations                                                                                                                                             |       | .02                                        |        | .48 |   | .04 |   |
|                                                                                                                                                                |       | $                                          | 1.08        |   | $ | 1.84 |   | $ | 1.15 |   |
| Diluted earnings  per common share:                                                                                                                                 |       |                                       |        |   |   |   |   |
| Continuing operations                                                                                                                                               |       | $                                          | 1.01        |   | $ | 1.25 |   | $ | 1.07 |   |
| Discontinued operations                                                                                                                                             |       | .02                                        |        | .45 |   | .03 |   |
|                                                                                                                                                                |       | $                                          | 1.03        |   | $ | 1.70 |   | $ | 1.10 |   |
| Weighted average  common shares outstanding:                                                                                                                        |       |                                       |        |   |   |   |   |
| Basic                                                                                                                                                               |       | 3,579,254                                  |        | 3,571,785 |   | 3,522,094 |   |
| Diluted                                                                                                                                                             |       | 3,783,728                                  |        | 3,874,008 |   | 3,670,882 |   |

 

 

See accompanying notes to consolidated financial statements.

32

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**P&F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

| **Years Ended  December 31,**                                    | ** ** | ** ** | ** ** | **Class A Common   Stock, $1 Par** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-------------------------|------------|--------------|------------|--------------------|------------|
| **2006, 2005 and 2004**                                | ** ** | ** ** | ** ** | **Total**                               | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**        | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| **Balance, January 1,   2004**                                   |       | $          | 36,978,331 |                                    | 3,735,367  |                    | $          | 3,735,367    |       | $                  | 8,609,840  |   | $ | 26,359,965 |   | (223,736 | ) | $ | (1,726,841 | ) |
| Net earnings                                                          |       | 4,038,563  |       | —                                  |       | —                  |       | —       |       | 4,038,563          |       | — |   | — |   |
| Issuance of Class A common stock upon exercise  of stock options |       | 150,610    |       | 42,000                                  |       | 42,000                  |       | 108,610      |       | —             |       | — |   | — |   |
| **Balance, December 31, 2004**                                   |       | 41,167,504 |       | 3,777,367                               |       | 3,777,367               |       | 8,718,450    |       | 30,398,528         |       | (223,736 | ) | (1,726,841 | ) |
| Net earnings                                                          |       | 6,570,591  |       | —                                  |       | —                  |       | —       |       | 6,570,591          |       | — |   | — |   |
| Issuance of Class A common stock upon exercise of  stock options |       | 266,405    |       | 37,000                                  |       | 37,000                  |       | 229,405      |       | —             |       | — |   | — |   |
| Purchase of Class A common stock                                 |       | (181,050   | )          | —                                  |       | —                  |       | —       |       | —             |       | (14,422 | ) | (181,050 | ) |
| Shares surrendered as payment for exercise of stock  options          |       | (107,240   | )          | —                                  |       | —                  |       | —       |       | —             |       | (6,418 | ) | (107,240 | ) |
| **Balance, December 31, 2005**                                   |       | 47,716,210 |       | 3,814,367                               |       | 3,814,367               |       | 8,947,855    |       | 36,969,119         |       | (244,576 | ) | (2,015,131 | ) |
| Net earnings                                                          |       | 3,881,265  |       | —                                  |       | —                  |       | —       |       | 3,881,265          |       | — |   | — |   |
| Issuance of Class A common stock upon exercise  of stock options |       | 208,580    |       | 36,000                                  |       | 36,000                  |       | 172,580      |       | —             |       | — |   | — |   |
| Shares surrendered as payment for exercise of stock  options          |       | (61,850    | )          | —                                  |       | —                  |       | —       |       | —             |       | (5,000 | ) | (61,850 | ) |
| Purchase of Class A common stock                                 |       | (294,196   | )          | —                                  |       | —                  |       | —       |       | —             |       | (23,031 | ) | (294,196 | ) |
| Stock-based compensation                                              |       | 71,163     |       | —                                  |       | —                  |       | 71,163       |       | —             |       | — |   | — |   |
| **Balance,  December 31, 2006**                                  |       | $          | 51,521,172 |                                    | 3,850,367  |                    | $          | 3,850,367    |       | $                  | 9,191,598  |   | $ | 40,850,384 |   | (272,607 | ) | $ | (2,371,177 | ) |
|                                                                       |            |            |            |                                         |            |                         |            |              |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

33

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**P&F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash Flows from  Operating Activities of Continuing Operations:                      |       |                                       |       |   |   |   |   |
| Net earnings                                                                         |       | $                                          | 3,881,265  |   | $ | 6,570,591 |   | $ | 4,038,563 |   |
| Earnings from discontinued operations—net of taxes                              |       | (70,401                                    | )          | (1,723,603 | ) | (127,361 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Non-cash charges  and credits:                                                       |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 902,696                                    |       | 812,566 |   | 751,239 |   |
| Amortization of other intangible assets                                              |       | 1,197,500                                  |       | 1,105,000 |   | 818,500 |   |
| Amortization of other assets                                                         |       | 6,000                                      |       | 6,000 |   | 6,000 |   |
| Recovery (provision) for losses on accounts  receivable—net                     |       | 33,491                                     |       | (28,084 | ) | (49,967 | ) |
| Stock-based compensation                                                             |       | 71,163                                     |       | — |   | — |   |
| Deferred income taxes—net                                                       |       | 672,000                                    |       | 215,000 |   | (385,000 | ) |
| (Gain) loss on disposal of fixed assets                                              |       | (29,763                                    | )          | — |   | 12,062 |   |
| Changes in:                                                                          |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                  |       | 425,371                                    |       | (1,461,976 | ) | 729,060 |   |
| Notes and other receivables                                                          |       | 1,570,592                                  |       | 1,128,952 |   | (377,599 | ) |
| Inventories                                                                          |       | (180,350                                   | )          | (2,796,634 | ) | (2,475,549 | ) |
| Prepaid expenses and other current assets                                            |       | (1,618,013                                 | )          | 91,412 |   | 465,053 |   |
| Other assets                                                                         |       | 490,660                                    |       | (87,844 | ) | 574,914 |   |
| Accounts payable                                                                     |       | 4,762,596                                  |       | (204,405 | ) | 43,186 |   |
| Accruals and other                                                                   |       | (561,699                                   | )          | 209,473 |   | 2,152,616 |   |
| Total adjustments                                                                    |       | 7,671,843                                  |       | (2,734,143 | ) | 2,137,154 |   |
| Net cash provided  by operating activities ofcontinuing operations                   |       | $                                          | 11,553,108 |   | $ | 3,836,448 |   | $ | 6,175,717 |   |

 

See accompanying notes to consolidated financial statements.

34

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

| ** **                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash Flows from  Investing Activities of Continuing Operations:                               |       |                                       |       |   |   |   |   |
| Capital expenditures                                                                          |       | $                                          | (1,549,264 | ) | $ | (600,023 | ) | $ | (418,028 | ) |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products, Inc. |       | (5,232,916                                 | )          | — |   | — |   |
| Purchase of certain assets, net of certain  liabilities, of Woodmark International, L.P.      |       | —                                     |       | — |   | (27,160,000 | ) |
| Additional payments for acquisition-related expenses                                          |       | (364,595                                   | )          | — |   | (989,385 | ) |
| Additional purchase price adjustment                                                          |       | 37,613                                     |       | — |   | (340,357 | ) |
| Proceeds from sale of certain assets of Green’s  Access Division                         |       | —                                     |       | 880,069 |   | — |   |
| Proceeds from sale of certain assets of Green’s  Agricultural Division                   |       | —                                     |       | 225,000 |   | — |   |
| Proceeds from sale of certain assets of Embassy Industries, Inc.                         |       | —                                     |       | 7,200,000 |   | — |   |
| Proceeds from sale of certain assets of Green’s  Cylinder Division                       |       | —                                     |       | — |   | 3,678,514 |   |
| Additional payments for purchase of Nationwide  Industries, Inc.                         |       | —                                     |       | (944,219 | ) | (488,797 | ) |
| Proceeds from disposal of fixed assets                                                        |       | 58,750                                     |       | — |   | 7,500 |   |
| Net cash provided by (used in) investing activities  of continuing operations                 |       | (7,050,412                                 | )          | 6,760,827 |   | (25,710,553 | ) |
| Cash Flows from  Financing Activities of Continuing Operations:                               |       |                                       |       |   |   |   |   |
| Proceeds from short-term borrowings                                                           |       | 13,500,000                                 |       | 17,000,000 |   | 14,000,000 |   |
| Repayments of short-term borrowings                                                           |       | (13,500,000                                | )          | (18,000,000 | ) | (13,000,000 | ) |
| Proceeds from term loan                                                                       |       | —                                     |       | — |   | 34,000,000 |   |
| Repayments of term loan                                                                       |       | (3,800,000                                 | )          | (9,600,000 | ) | (12,250,000 | ) |
| Principal payments on long-term debt                                                          |       | (211,941                                   | )          | (198,275 | ) | (204,305 | ) |
| Proceeds from exercise of stock options                                                       |       | 146,730                                    |       | 159,165 |   | 150,610 |   |
| Purchase of Class A common stock                                                         |       | (294,196                                   | )          | (181,050 | ) | — |   |
| Net cash provided  by (used in) financing activities of continuing operations                 |       | (4,159,407                                 | )          | (10,820,160 | ) | 22,696,305 |   |
|                                                                                               |            |                                            |            |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Continued)**

| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash Flows from  Discontinued Operations:               |       |                                       |       |   |   |   |   |
| Net cash provided  by (used in) operating activities    |       | (661,878                                   | )          | 1,907,584 |   | (419,760 | ) |
| Net cash used in  investing activities                  |       | —                                     |       | (989,790 | ) | (1,472,096 | ) |
| Net cash used in  financing activities                  |       | (113,153                                   | )          | (113,154 | ) | (293,153 | ) |
| Net cash provided  by (used in) discontinued operations |       | (775,031                                   | )          | 804,640 |   | (2,185,009 | ) |
| NET INCREASE  (DECREASE) IN CASH                        |       | (431,742                                   | )          | 581,755 |   | 976,460 |   |
| Cash and cash  equivalents at beginning of year         |       | 1,771,624                                  |       | 1,189,869 |   | 213,409 |   |
| Cash and cash equivalents at end of year                |       | $                                          | 1,339,882  |   | $ | 1,771,624 |   | $ | 1,189,869 |   |
|                                                         |            |                                            |            |  |  |  |  |  |  |  |

 

**Supplementaldisclosures of cash flow information:**

| Cash paid for: |   |   |      |   |   |      |   |
|----------------|--------|--------|-----------|--------|--------|-----------|--------|
| Interest       |   | $      | 1,916,000 |   | $      | 1,871,000 |   | $ | 1,060,000 |   |
| Income taxes   |   | $      | 4,586,000 |   | $      | 4,033,000 |   | $ | 1,366,000 |   |

 

Non-cash investing and financing activities were asfollows:

During 2006, the Company received 5,000 shares of Class ACommon Stock in connection with the exercise of options to purchase 15,000shares of Class A Common Stock. The value of these shares was recorded at$61,850. During 2005, the Company received 6,418 shares of Class A CommonStock in connection with the exercise of options to purchase 14,000 shares of Class ACommon Stock. The value of these shares was recorded at $107,240.

In connection with the sale of certain assets ofEmbassy in October 2005, the Company recorded a receivable ofapproximately $1,233,000 related to escrow monies due, subject to certainconditions of release, and a working capital adjustment. During 2006, theCompany received approximately $833,000.

In connection with the sale of certain assets of Green’sAgricultural Division in July 2005, the Company received interest-bearingpromissory notes of approximately $305,000, as adjusted. During 2006, thesenotes were paid in full.

In connection with the sale of certain assets of Green’sAccess Division in February 2005, the Company received interest-bearingpromissory notes of approximately $877,000, as adjusted. During 2006, thesenotes were paid in full.

In connection with the sale of certain assets of Green’sCylinder Division in December 2004, the Company received an interestbearing promissory note of approximately $686,000, payable monthly through December 2005.In addition, the Company entered into a finished goods inventory purchaseagreement with the buyer and recorded a receivable of approximately $889,000.

In connection with the Woodmarkacquisition transaction in June 2004, the Company issued a note payable tothe sellers in the amount of $1,218,000. The Company also assumed a notepayable to the sellers in the amount of $2,190,000.

See accompanying notes to consolidated financial statements.

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2006,2005 and 2004**

**NOTE 1—SUMMARY OF ACCOUNTING POLICIES**

**Principles ofConsolidation**

The consolidated financial statements contained hereininclude the accounts of P&F Industries, Inc. and its subsidiaries (“P&F”).All significant intercompany balances and transactions have been eliminated.

P&F conducts its business operations through twoof its wholly-owned subsidiaries: Florida Pneumatic Manufacturing Corporation (“FloridaPneumatic”) and Countrywide Hardware, Inc. (“Countrywide”). P&F andits subsidiaries are herein referred to collectively as the “Company.” Inaddition, the words “we”, “our” and “us” refer to the Company.

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. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”) andthrough Woodmark International, L.P. (“Woodmark”), a limited partnershipbetween Countrywide and WILP Holdings, Inc., a subsidiary of P&F.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. In January 2006,Countrywide, through a newly-formed subsidiary, acquired substantially all ofthe operating assets of Pacific Stair Products, Inc. (“Pacific Stair”).Pacific Stair is a manufacturer of premium stair rail products and adistributor of Woodmark’s staircase components to the building industry,primarily in southern California and the southwestern region of the UnitedStates. (See Note 2 regarding the Woodmark and Pacific Stair acquisitiontransactions.)

The Company’s wholly-ownedsubsidiary, Embassy Industries, Inc. (“Embassy”), was engaged in themanufacture and sale of baseboard heating products and the importation and saleof radiant heating systems until it exited that business in October 2005through the sale of substantially all of its non-real estate assets (see Note3). The Company’s wholly-owned subsidiary, Green Manufacturing, Inc. (“Green”),was primarily engaged in the manufacture, development and sale of heavy-dutywelded custom designed hydraulic cylinders until it exited that business in December 2004through the sale of certain assets. Green also manufactured a line of accessequipment for the petro-chemical industry until it exited that business in February 2005through the sale of certain assets and a line of post hole digging equipmentfor the agricultural industry until it exited that business in July 2005through the sale of certain assets. Green has effectively ceased all operatingactivities. The assets and liabilities and results of operations of Embassy andGreen have been segregated and reported separately as discontinued operationsin the consolidated financial statements (see Note 3).

**Basis of FinancialStatement Presentation**

The Company prepares itsconsolidated financial statements in accordance with generally acceptedaccounting principles in the United States. Certain of these accountingpolicies require the Company to make estimates and judgments that affect thereported amounts of assets, liabilities and the related disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, the Company 

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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 and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates.

**Revenue Recognition**

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been provided, the sale price is fixed ordeterminable, and collectibility is reasonably assured. The Company sells itsgoods on terms which transfer title and risk of loss at a specified location,typically shipping point, port of loading or port of discharge, depending onthe final destination of the goods. Revenue recognition from product salesoccurs when all factors are met, including transfer of title and risk of loss,which occurs either upon shipment by the Company or upon receipt by customersat the location specified in the terms of sale. Other than standard productwarranty provisions, the Company’s sales arrangements provide for no other, orinsignificant, post-shipment obligations. The Company does offer rebates andother sales incentives, promotional allowances or discounts, from time to timeand for certain customers, typically related to customer purchase volume, allof which are fixed or determinable and are classified as a reduction of revenueand recorded at the time of sale. The Company periodically evaluates whether anallowance for sales returns is necessary. Historically, the Company hasexperienced little, if any, sales returns. If the Company believes there arepotential sales returns, the Company would provide any necessary provisionagainst sales.

**Shipping andHandling Costs**

The Company generally doesnot bill customers for shipping and handling costs. Expenses for shipping andhandling costs are included in selling, general and administrative expenses,and totaled approximately $2,723,000, $1,971,000 and $1,366,000 for the yearsended December 31, 2006, 2005 and 2004, respectively.

**Cash and CashEquivalents**

Cash and cash equivalentsinclude cash on hand, demand deposits, and short-term investments withmaturities of three months or less from the date of acquisition.

**FinancialInstruments**

The carrying amountsreported in the consolidated balance sheets for cash and cash equivalents,accounts receivable, notes receivables, accounts payable and short-term debt,approximate fair value as of December 31, 2006 and 2005 because of therelatively short-term maturity of these financial instruments. The carryingamounts reported for long-term debt approximate fair value as of December 31,2006 and 2005 because, in general, the interest rates underlying the instrumentsfluctuate with market rates.

**Accounts Receivableand Allowance for Doubtful Accounts**

Accounts receivable are customer obligations due undernormal trade terms. The Company sells its products to retailers, distributorsand original equipment manufacturers involved in a variety of industries,hardware, tools and mobile equipment. The Company performs continuing creditevaluations of its customers’ financial condition, and although the Companygenerally does not require collateral, letters of credit may be required fromcustomers in certain circumstances.

Senior management reviewsaccounts receivable on a monthly basis to determine if any receivables willpotentially be uncollectible. Analysis of customer history, financial data andthe overall economic environment is performed. In addition, balancesoutstanding for more than 90 days are evaluated for 

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possibleinclusion in the accounts receivable reserve. Collection agencies may also beutilized if management so determines.

The Company records an allowancefor doubtful accounts based on specifically identified amounts that arebelieved to be uncollectible. The Company also records as an additionalallowance a certain percentage of aged accounts receivable, based on historicalexperience and the Company’s assessment of the general financial conditionsaffecting its customer base. If actual collection experience changes, revisionsto the allowance may be required. The Company has a limited number of customerswith individually large amounts due at any given balance sheet date. Anyunanticipated change in the creditworthiness of any of these customers couldhave a material affect on the Company’s results of operations in the period inwhich such changes or events occur. After all reasonable attempts to collect anaccount receivable have failed, the amount of the receivable is written offagainst the allowance. Based on the information available, the Company believesthat its allowance for doubtful accounts as of December 31, 2006 wasadequate. However, actual write-offs might exceed the recorded allowance.

**Concentrations of Credit Risk**

Financial instruments thatpotentially subject the Company to concentration of credit risk consistprincipally of temporary cash investments, accounts receivable and notes receivables.The Company places its cash in overnight money market instruments with highquality financial institutions, which, by policy, limit the amount of creditexposure in any one financial instrument. The Company principally sells itsproducts domestically to customers in diversified industries and therefore, hasno other significant concentrations of credit risk other than with two majorcustomers (see Note 14).

**Inventories**

Inventories are valued atthe lower of cost or market. Cost is determined by the first-in, first-outmethod. The inventory balance, which includes materials, labor andmanufacturing overhead costs, is recorded net of an allowance for obsolete orunmarketable inventory. Such allowance is based upon both historical experienceand management’s understanding of market conditions and forecasts of futureproduct demand. If the actual amount of obsolete or unmarketable inventorysignificantly exceeds the estimated allowance, the Company’s cost of sales,gross profit and net earnings would be significantly affected.

**Property and Equipment and Depreciation andAmortization**

Property and equipment arestated at cost less accumulated depreciation and amortization. The Companycapitalizes items in excess of $1,000. Minor replacements and maintenance andrepair items are charged to expense as incurred. Upon disposal or retirement ofassets, the cost and related accumulated depreciation are removed from theCompany’s consolidated balance sheet.

Depreciationand amortization are computed by using the straight-line method for financialreporting purposes and the straight-line and accelerated methods for income taxpurposes. The estimated useful lives for financial reporting purposes are asfollows:

| Buildings and improvements |   | 10–31.5 years          |
|----------------------------|--------|-----------------------------|
| Machinery and  equipment   |   |   3–12 years |

 

**Long-Lived Assets**

The Company reviewslong-lived assets whenever events or changes in circumstances indicate that thecarrying value of any of these assets may not be recoverable. In that regard,the Company will assess the recoverability of such assets based upon estimatedundiscounted cash flow forecasts. If an asset impairment is identified, theasset is written down to fair value based on discounted cash flow or anotherfair value measure.

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**Goodwill and Other Intangible Assets**

Goodwill is carried atcost. Goodwill is not amortized but is subject to an annual test for impairmentat the reporting unit level (operating segment or one level below an operatingsegment) and between annual tests in certain circumstances. The performance ofthe test involves a two-step process. The first step of the impairment testinvolves comparing the fair value of the Company’s reporting units with thereporting unit’s carrying amount, including goodwill. The Company generallydetermines the fair value of its reporting units using the expected presentvalue of future cash flows and the market valuation approach. If the carryingamount of a reporting unit exceeds the reporting unit’s fair value, the Companyperforms the second step of the goodwill impairment test to determine theamount of impairment loss. The second step of the goodwill impairment testinvolves comparing the implied fair value of the reporting unit’s goodwill withthe carrying amount of that goodwill.

Intangible assets otherthan goodwill are carried at cost less accumulated amortization. Intangibleassets are generally amortized on a straight-line basis over the useful livesof the respective assets, generally five to fifteen years. Long-lived assetsand certain identifiable intangible assets to be held and used are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of such assets may not be recoverable. Determination ofrecoverability is based on an estimate of undiscounted future cash flowsresulting from the use of the asset and its eventual disposition. Measurementof any impairment loss for long-lived assets and certain identifiableintangible assets that management expects to hold and use is based on the amountthe carrying value exceeds the fair value of the asset.

**Warranty Liability**

The Company offers itscustomers certain warranties against product defects for periods ranging fromone to three years, depending on the specific product and terms of the customerpurchase agreement. However, certain products were sold in the past withlifetime warranties. The Company’s typical warranties require 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 warranties. The costs are estimatedbased on historical experience. The Company periodically assesses the adequacyof its recorded warranty liability and adjusts the amounts necessary. While theCompany believes that its estimated liability for product warranties isadequate and that the judgment applied is appropriate, the estimated liabilityfor the product warranties could differ materially from future actual warrantycosts.

**Income Taxes**

The Company files aconsolidated Federal tax return. P&F Industries, Inc. and each of itssubsidiaries file separate state and local tax returns.

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and any operating loss or taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of any change in the tax rate isrecognized in income in the period that includes the enactment date of suchchange. Income tax-related interest and penalties are recorded as a componentof the provision for income taxes.

**Advertising**

The Company expenses itscosts of advertising in the period in which they are incurred. Advertisingcosts for the years ended December 31, 2006, 2005 and 2004 were$1,844,000, $2,109,000 and $1,862,000, respectively.

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**Earnings Per Common Share**

Basic earnings per commonshare is based only on the average number of shares of common stock outstandingfor the year. Diluted earnings per common share reflects the effect of sharesof common stock issuable upon the exercise of options, unless the effect onearnings is antidilutive.

Diluted earnings percommon share is computed using the treasury stock method. Under this method,the aggregate number of shares of common stock outstanding reflects the assumeduse of proceeds from the hypothetical exercise of any outstanding options orwarrants to purchase shares of the Company’s Class A Common Stock. The averagemarket value for the period is used as the assumed purchase price.

The following table setsforth the computation of basic and diluted earnings per common share:

| ** **                                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                                                                                        |       |                                       |       |   |   |   |   |
| Numerator for basic and diluted earnings per common  share:                                                       |       |                                       |       |   |   |   |   |
| Earnings from continuing  operations                                                                              |       | $                                          | 3,811,000  |   | $ | 4,847,000 |   | $ | 3,911,000 |   |
| Discontinued operations,  net of taxes                                                                            |       | 70,000                                     |       | 1,724,000 |   | 128,000 |   |
| Net earnings                                                                                                      |       | $                                          | 3,881,000  |   | $ | 6,571,000 |   | $ | 4,039,000 |   |
| Denominator:                                                                                                      |       |                                       |       |   |   |   |   |
| Denominator for basic  earnings per share—weighted average common shares outstanding                         |       | 3,579,000                                  |       | 3,572,000 |   | 3,522,000 |   |
| Effect of  dilutive securities:                                                                                   |       |                                       |       |   |   |   |   |
| Stock options                                                                                                     |       | 205,000                                    |       | 302,000 |   | 149,000 |   |
| Denominator for  diluted earnings per share—adjusted weighted average common shares and  assumed conversions |       | 3,784,000                                  |       | 3,874,000 |   | 3,671,000 |   |

 

At December 31, 2006,2005 and 2004, and during the years then ended, there were outstanding stockoptions whose exercise prices were higher than the average market values forthe respective periods. These options are anti-dilutive and are excluded fromthe computation of earnings per share. The weighted average anti-dilutiveoptions outstanding for the years ended December 31, 2006, 2005 and 2004were 29,000, 14,250 and 20,453, respectively.

**Stock-Based Compensation**

On January 1, 2006,the Company adopted the provisions of Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment” (“Statement 123(R)”), which revises FASB SFAS No. 123, “Accountingfor Stock-Based Compensation” (“Statement 123”), and supersedes APB Opinion 25,“Accounting for Stock Issued to Employees”. Statement 123(R) requires theCompany to recognize expense related to the fair value of our stock-basedcompensation awards, including employee stock options.

Prior to the adoption ofStatement 123(R), the Company accounted for stock-based compensation awardsusing the intrinsic value method of APB Opinion 25. Accordingly, the Companydid not recognize compensation expense in its statement of earnings for optionsgranted that had an exercise price at least equal to the market value of theunderlying common stock on the date of grant. As required by Statement 123, theCompany also provided certain pro forma disclosures for stock-based awards asif the fair-value-based approach of Statement 123 had been applied.

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The Company has elected touse the modified prospective transition method as permitted by Statement 123(R) andtherefore has not restated its financial results for prior periods. Under thistransition method, the Company applied the provisions of Statement 123(R) tonew awards and to awards modified, repurchased, or cancelled after January 1,2006. Additionally, the Company recognized compensation cost for the portion ofthe awards for which the requisite service had not been rendered (unvestedawards), as of January 1, 2006, as the remaining service is rendered. Thecompensation cost the Company records for these awards is based on theirgrant-date fair value as calculated for the pro forma disclosures required byStatement 123.

No stock-basedcompensation cost related to stock options was recognized in the statements ofearnings for the years ended December 31, 2005 and 2004, as all optionsgranted in these periods had an exercise price equal to the market price at thedate of grant. As a result of adopting Statement 123(R), the Company’s netearnings for the year ended December 31, 2006 were approximately $71,000lower than if we had continued to account for stock-based compensation underAPB Opinion 25. Compensation expense is recognized in the selling, general andadministrative expenses line item of the Company’s statements of earnings on astraight-line basis over the vesting periods. There are no capitalizedstock-based compensation costs at December 31, 2006. The adoption ofStatement 123(R) had no material impact on our basic and dilutive earningsper common share for the year ended December 31, 2006.

SFAS123 required the Company to provide pro forma information regarding netearnings and earnings per share as if compensation cost for its incentive stockoption plan had been determined in accordance with the fair value methodprescribed by SFAS 123. The Company estimates the fair value of each stockoption at the grant date by using the Black-Scholes option-pricing model withthe following weighted-average assumptions: 

| ** **               | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Risk-free  interest rate |       | 4.0                                    | %          | 4.5 | % |
| Volatility               |       | 37.0                                   | %          | 35.0 | % |
| Expected life (years)    |       | 10                                     |       | 9.3 |   |

 

Thefollowing table illustrates the effect on net earnings after tax and netearnings per common share as if we had applied the fair value recognitionprovisions of Statement 123 to stock-based compensation for the years ended December 31,2005 and 2004:

| ** **                                                                                                               | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net earnings as  reported                                                                                                |       | $                                      | 6,571,000  |   | $ | 4,039,000 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method,  net of related tax effects |       | (161,000                               | )          | (400,000 | ) |
| Pro forma net  earnings                                                                                                  |       | $                                      | 6,410,000  |   | $ | 3,639,000 |   |
| Basic earnings  per common share:                                                                                        |       |                                   |       |   |   |
| As reported                                                                                                              |       | $                                      | 1.84       |   | $ | 1.15 |   |
| Pro forma                                                                                                                |       | $                                      | 1.79       |   | $ | 1.03 |   |
| Diluted earnings  per common share:                                                                                      |       |                                   |       |   |   |
| As reported                                                                                                              |       | $                                      | 1.70       |   | $ | 1.10 |   |
| Pro forma                                                                                                                |       | $                                      | 1.66       |   | $ | .99 |   |

 

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The weighted-average fairvalue of options for which the exercise price equaled the market price on thegrant date was $9.09 and $4.43 in 2005 and 2004, respectively. Theweighted-average fair value of options for which the exercise price exceededthe market price on the grant date was $2.50 in 2004. No options for which theexercise price exceeded the market price on the grant date were granted in2005. No options were granted in 2006.

**Treasury Stock**

Treasury stock is recordedat net acquisition cost. Gains and losses on disposition are recorded asincreases or decreases to additional paid-in capital with losses in excess ofpreviously recorded gains charged directly to retained earnings.

**DerivativeFinancial Instruments**

The Company uses derivatives to reduce its exposure tofluctuations in foreign currencies, principally Japanese yen. Derivativeproducts, specifically foreign currency forward contracts, are used to hedgethe foreign currency market exposures underlying certain debt and forecastedtransactions with foreign vendors. The Company does not enter into suchcontracts for speculative purposes.

For derivative instruments that are designated andqualify as fair value hedges (i.e., hedging the exposure to changes in the fairvalue of an asset or a liability or an identified portion thereof that isattributable to a particular risk), the gain or loss on the derivativeinstrument as well as the offsetting gain or loss on the hedge itemattributable to the hedged risk are recognized in earnings in the currentperiod. For derivative instruments that are designated and qualify as a cashflow hedge (i.e., hedging the exposure of variability in the expected futurecash flows that would be attributable to a particular risk), the effectiveportion of the gain or loss on the derivative instrument is reported as acomponent of accumulated comprehensive loss (a component of shareholders’equity) and reclassified into earnings in the same period or periods duringwhich the hedged transaction affects earnings. The remaining gain or loss onthe derivative instrument, if any (i.e., the ineffective portion and anyportion of the derivative instrument excluded from the assessment ofeffectiveness), is recognized in earnings in the current period. For derivativeinstruments not designated as hedging instruments, changes in the fair marketvalues are recognized in earnings as a component of cost of sales. At December 31,2006 and 2005, all of the Company’s derivative instruments are not designatedas hedging instruments.

The Company accounts forchanges in the fair value of its foreign currency contracts by marking them tomarket and recognizing any resulting gains or losses through its statements ofearnings. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statements of earnings. At December 31,2006, the Company had foreign currency forward contracts, maturing in 2006, topurchase Japanese yen at contracted forward rates. The value of these contractsat December 31, 2006, based on that day’s closing spot rate, wasapproximately $301,000, which was the approximate value of the Company’syen-denominated accounts payable. During the years ended December 31,2006, 2005 and 2004, the Company recorded in its cost of sales a net realizedgain (loss) of approximately $39,000, $(135,000) and $(96,000), respectively,on foreign currency transactions. At December 31, 2006 and 2005, theCompany had no material unrealized gains or losses on foreign currencytransactions.

**Adoption of NewAccounting Pronouncements**

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 was issued to provide consistency between howregistrants quantify financial statement misstatements. The Company applied SAB108 using the cumulative effect transition method in 

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connection with thepreparation of our annual financial statements for the year ending December 31,2006 and did not record any adjustments.

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3” (“SFAS 154”). This Statement replaces APB Opinion No. 20,“Accounting Changes,” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 changes the requirements forthe accounting for and reporting of a change in accounting principle. Theadoption of this statement did not have a material effect on our financialposition or results of operations.

In March 2005, the SEC issued Staff AccountingBulletin No. 107, “Share-Based Payments” (“SAB 107”). SAB 107 expressesviews of the SEC regarding the interaction between SFAS 123R and certain SEC rules andregulations and provides the SEC’s views regarding the valuation of share-basedcompensation for public companies. The Company applied the principles of SAB107 in conjunction with our adoption of SFAS 123R.

In March 2005, the FASB issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional AssetRetirement Obligations.” FIN 47 clarifies that the term “conditional assetretirement obligation” as used in SFAS No. 143, “Accounting for AssetsRetirements Obligations,” refers to a legal obligation to perform an assetretirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity. Furthermore, the uncertainty about the timing and or method ofsettlement of a conditional asset retirement obligation should be factored intothe measurement of the liability when sufficient information exists. FIN 47clarifies that an entity is required to recognize the liability for the fairvalue of a conditional asset obligation when incurred if the liability’s fairvalue can be reasonably estimated. The adoption of this statement, which wasimplemented in the first quarter of 2006, did not have a material effect on ourfinancial position or results of operations.

In December 2004, the FASB issued SFAS 151, “Inventory Costs,” which is effectivefor inventory costs incurred during fiscal years beginning after June 15,2005*.*This statement amends ARB No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs and wasted material(spoilage). SFAS 151 requires that these items be recognized as current-periodcharges regardless of whether they meet the criterion of “so abnormal”. Inaddition, allocation of fixed production overheads to the costs of conversionmust be based on the normal capacity of the production facilities. The adoptionof this statement did not have a material effect on our financial position orresults of operations.

Effective January 1,2006, the Company adopted SFAS 123R, “Share-BasedPayment.” See Stock-Based Compensation above for the effect of adoptingthis pronouncement.

**Effect of NewlyIssued But Not Yet Effective Accounting Pronouncements**

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS157”). SFAS 157 provides a new single authoritative definition of fair valueand provides enhanced guidance for measuring the fair value of assets andliabilities and requires additional disclosures related to the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 is effective for us as of January 1, 2008. The Company is currentlyevaluating the impact that the adoption of SFAS 157 may have on our financialposition or results of operations.

In June 2006, the FASB ratified the consensusreached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-3,“How Taxes Collected from Customers and Remitted to Governmental Authorities 

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Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)”, (“ EITF 06-3”).EITF 06-3 includes any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer and may include, but is not limited to, sales, use, value added, andsome excise taxes. EITF 06-3 concludes that the presentation of taxes oneither a gross (included in revenues and costs) or a net (excluded fromrevenues) basis is an accounting policy decision that should be disclosed. Inaddition, for any such taxes that are reported on a gross basis, a companyshould disclose the amounts of those taxes in interim and annual financialstatements for each period for which an income statement is presented if thoseamounts are significant. The provisions of EITF 06-3 should be applied tofinancial reports for interim and annual reporting periods beginning after December 15,2006, with earlier adoption permitted. The Company is currently evaluating theimpact that the adoption of EITF 06-3 may have on our financial positionor results of operations.

In June 2006, the FASB issued Interpretation, orFIN, No. 48, “Accounting for Uncertainty in Income Taxes”. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes”. FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. This interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. Earlierapplication of the provisions of this Interpretation is encouraged if theenterprise has not yet issued financial statements, including interimstatements, in the period this Interpretation is adopted. The Company ispresently evaluating the effect of  theadoption of this interpretation on its results of operations or financialposition.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets - an amendment of SFAS No. 140.”SFAS No. 156 requires the recognition of a servicing asset or liabilityeach time a company undertakes an obligation to service a financial asset incertain situations. It requires all separately recognized servicing assets andliabilities to be initially measured at fair value, if practical. SFAS No. 156is effective as of the beginning of a company’s first fiscal year that beginsafter September 15, 2006. The Company does not expect adoption of SFAS No. 156to have a material effect on its results of operations or financial position.

In February 2006,FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of SFAS No. 133 and 140.” SFAS No. 155allows companies to elect to measure at fair value entire financial instrumentscontaining embedded derivatives that would otherwise have to be accounted forseparately. It also requires companies to identify interests in securitizedfinancial assets that are freestanding derivatives or contain embeddedderivatives that would have to be accounted for separately, clarifies whichinterest- and principal-only strips are subject to SFAS No. 133, andamends SFAS No. 140 to revise the conditions of a qualifying specialpurpose entity due to the new requirement to identify whether interests insecuritized financial assets are freestanding derivatives or contain embeddedderivatives. SFAS No. 155 is effective for all financial instrumentsacquired, issued or subject to a remeasurement event after the beginning of acompany’s first fiscal year that begins after September 15, 2006. TheCompany does not expect adoption of SFAS No. 155 to have a material effecton its results of operations or financial position.

**NOTE 2—ACQUISITIONS**

*Pacific Stair Products, Inc.*

Pursuant to an Asset Purchase Agreement (the “PSP APA”),dated December 20, 2005, between Pacific Stair Products, a Californiacorporation (“Old PSP”), and Pacific Stair Products, Inc., a newly-formedDelaware corporation (“Pacific Stair”) and a wholly-owned subsidiary ofCountrywide, effective 

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January 3, 2006,Pacific Stair purchased substantially all of the operating assets of Old PSP.The total purchase price for the assets was approximately $5,233,000, subjectto adjustments, plus the assumption of certain liabilities and obligations byPacific Stair. The assets purchased pursuant to the PSP APA include, amongothers, accounts receivable, inventory, machinery and equipment and certainintangibles. Certain assets were retained by Old PSP including cash and titleto any real property. Pacific Stair is a manufacturer of premium stair railproducts and a distributor of staircase components to the building industry,primarily in southern California and the southwestern region of the United States.As a result of this transaction, Countrywide has increased its purchasing powerand geographic distribution. The acquisition was financed through the Company’scredit facility with Citibank. The consolidated financial statements presentedherein include the results of operations for Pacific Stair from the date ofacquisition.

Thepurchase price for this acquisition, negotiated on the basis of Pacific Stair’shistorical financial performance, was as follows:

| Cash paid at  closing from short-term borrowings         |   | $       | 5,233,000 |   |
|----------------------------------------------------------|--------|---------|-----------|--------|
| Purchase price  reduction for working capital adjustment |   | (38,000 | )         |
| Direct  acquisition costs                                |   | 214,000 |      |
| Total purchase price                                     |   | $       | 5,409,000 |   |

 

Thefollowing table presents the estimated fair values of the net assets acquiredand the amount allocated to goodwill:

| Accounts  receivable                     |   |      |      | $         | 576,000   |   |
|------------------------------------------|--------|-----------|-----------|-----------|-----------|--------|
| Inventories                              |   |      |      | 335,000   |      |
| Property and  equipment                  |   |      |      | 250,000   |      |
| Identifiable intangible  assets:         |   |      |      |      |      |
| Customer relationships                   |   | $         | 1,800,000 |      |      |   |
| Tradename                                |   | 1,450,000 |      |      |      |
| Non-compete and employment agreements    |   | 50,000    |      | 3,300,000 |      |
|                                     |   |      |      | 4,461,000 |      |
| Less: liabilities  assumed               |   |      |      | 2,000     |      |
| Total fair value  of net assets acquired |   |      |      | 4,459,000 |      |
| Goodwill                                 |   |      |      | 950,000   |      |
| Total purchase price                     |   |      |      | $         | 5,409,000 |   |
|                                          |        |           |           |           |           |        |  |

 

TheCompany obtained an independent third-party valuation of the identifiableintangible assets. The excess of the total purchase price over the fair valueof the net assets acquired, including the value of the identifiable intangibleassets, has been allocated to goodwill. Goodwill will be amortized, for fifteenyears, for tax purposes but not for financial reporting purposes. The fairvalues of the identifiable intangible assets are based on current informationand are subject to change. The intangible assets subject to amortization willbe amortized over fifteen years for tax purposes. For financial reportingpurposes, useful lives have been assigned as follows:

| Customer  relationships                |   | 25 years   |   |
|----------------------------------------|--------|------------|--------|
| Tradename                              |   | Indefinite |   |
| Non-compete and  employment agreements |   | 5 years    |   |

 

 

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Thefollowing unaudited pro forma financial information presents the combinedresults of operations of the Company and its Pacific Stair acquisition as if ithad occurred at the beginning of the periods presented. The pro forma financialinformation reflects appropriate adjustments for amortization of intangibleassets, additional compensation related to an employment agreement, interestexpense and income taxes. The pro forma financial information presented is notnecessarily indicative of either the actual consolidated operating results hadthe acquisition been completed at the beginning of each period or futureoperating results of the consolidated entities.

| ** **                                             | ** ** | **Year Ended December 31,** | ** **  |
|--------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                             | ** ** | **2005**                                   | ** **  | **2004** | ** ** |
| Net revenues                                           |       | $                                          | 113,505,000 |   | $ | 93,181,000 |   |
| Net earnings from  continuing operations               |       | $                                          | 5,431,000   |   | $ | 4,266,000 |   |
| Earnings per common  share from continuing operations: |       |                                       |        |   |   |
| Basic                                                  |       | $                                          | 1.52        |   | $ | 1.21 |   |
| Diluted                                                |       | $                                          | 1.40        |   | $ | 1.16 |   |

 

*WoodmarkInternational L.P.*

On June 30, 2004, Woodmark,a Delaware limited partnership now owned by Countrywide and WILP Holdings, Inc.,acquired certain assets comprising the business of the former WoodmarkInternational L.P., a Texas limited partnership, and its wholly-ownedsubsidiary, the former Stair House, Inc., a Georgia corporation(collectively, the “Sellers”), and assumed certain of the Sellers’ relatedliabilities (the “Woodmark acquisition transaction”). Woodmark is an importer of builders’ hardware, includingstaircase components and kitchen and bath hardware and accessories. As a resultof this transaction, Countrywide has significantly increased its purchasingpower and geographic distribution. Woodmark also agreed to make additionalpayments to the Sellers. The amount of these payments, which would be made asof either June 30, 2007 or June 30, 2009, are to be based onincreases in earnings before interest and taxes, for the year ended on therespective date, over a base of $5,100,000. Woodmark has the option to make apayment as of June 30, 2007 in an amount equal to 48% of this increase. IfWoodmark does not make this payment as of June 30, 2007, the Sellers maydemand payment as of June 30, 2009 in an amount equal to 40% of theincrease. Any such additional payments will be treated as additions togoodwill. The acquisition was financed through the Company’s senior creditfacility with Citibank, described in Note 9. Theconsolidated financial statements presented herein include the results ofoperations for Woodmark for the period from the date of acquisition.

Thepurchase price for this acquisition, negotiated on the basis of Woodmark’shistorical financial performance, was as follows:

| Cash paid at  closing from borrowings under term loan     |   | $         | 27,160,000 |   |
|-----------------------------------------------------------|--------|-----------|------------|--------|
| Additional  purchase price for working capital adjustment |   | 340,000   |       |
| Notes payable                                             |   | 3,408,000 |       |
| Direct  acquisition costs                                 |   | 990,000   |       |
| Total purchase price                                      |   | $         | 31,898,000 |   |

 

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Thefollowing table presents the estimated fair values of the net assets acquiredand the amount allocated to goodwill:

| Current and other  assets                |   |    |      | $          | 10,437,000 |   |
|------------------------------------------|--------|---------|-----------|------------|------------|--------|
| Property and  equipment                  |   |    |      | 617,000    |       |
| Identifiable intangible  assets:         |   |    |      |       |       |
| Customer relationships                   |   | $       | 7,260,000 |       |       |   |
| Vendor relationship                      |   | 890,000 |      |       |       |
| Trademark                                |   | 690,000 |      | 8,840,000  |       |
|                                     |   |    |      | 19,894,000 |       |
| Less: liabilities  assumed               |   |    |      | 671,000    |       |
| Total fair value  of net assets acquired |   |    |      | 19,223,000 |       |
| Goodwill                                 |   |    |      | 12,675,000 |       |
| Total purchase price                     |   |    |      | $          | 31,898,000 |   |
|                                          |        |         |           |            |            |        |  |

 

The Companyobtained an independent third-party valuation of the identifiable intangibleassets. The excess of the total purchase price over the fairvalue of the net assets acquired, including the value of the identifiableintangible assets, has been allocated to goodwill. Goodwill will be amortized,for fifteen years, for tax purposes but not for financial reporting purposes. The fair values of theidentifiable intangible assets are based on current information and are subjectto change. The intangible assets subject to amortization will be amortized overfifteen years for tax purposes. For financial reporting purposes, useful liveshave been assigned as follows:

| Customer  relationships |   | 15 years   |   |
|-------------------------|--------|------------|--------|
| Vendor  relationship    |   | 10 years   |   |
| Trademark               |   | Indefinite |   |

 

The following unaudited pro forma financialinformation presents the combined results of operations of the Company and itsWoodmark acquisition as if it had occurred at the beginning of the periodpresented. The pro forma financial information reflects appropriate adjustmentsfor amortization of intangible assets, additional compensation related to anemployment agreement, interest expense and income taxes. The pro formafinancial information presented is not necessarily indicative of either theactual consolidated operating results had the acquisition been completed at thebeginning of such period or future operating results of the consolidatedentities.

| ** **                                             | ** ** | **Year Ended December 31, 2004** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| Net revenues                                           |       |                                                 | $          | 104,571,000 |   |   |
| Net earnings from  continuing operations               |       |                                                 | $          | 4,922,000 |   |   |
| Earnings per common  share from continuing operations: |       |                                                 |       |   |   |
| Basic                                                  |       |                                                 | $          | 1.40 |   |   |
| Diluted                                                |       |                                                 | $          | 1.34 |   |   |

 

**NOTE 3—DISCONTINUEDOPERATIONS**

*Embassy Industries, Inc.*

Pursuant to an AssetPurchase Agreement (the “Embassy APA”), dated as of October 11, 2005,among P&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. The assets sold pursuant to the Embassy APAinclude, among others, machinery and equipment, inventory, accounts 

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receivableand certain intangibles. 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. The consideration paid by EMI for the assetsacquired pursuant to the Embassy APA was approximately $8,433,000 plus theassumption of certain liabilities and obligations of Embassy by EMI.

Pursuant to a Lease, datedas of October 11, 2005, between Embassy, as landlord and EMI, as tenant(the “EMI Lease”), Embassy agreed to lease certain space (approximately 60,000rentable square feet) in the building located at 300 Smith Street, Farmingdale,New York to EMI in connection with the operation of EMI’s business, at anannual rental rate of $480,000, payable in monthly installments of $40,000each. The term of the EMI Lease was for a period of six (6) monthscommencing October 11, 2005 and terminating April 10, 2006; providedhowever, that, in the event EMI served notice on Embassy by December 31,2005, the Lease could be extended on a month to month basis to, and including, June 30,2006. EMI served notice on Embassy to extend the EMI Lease through May 31,2006.

Embassyhas effectively ceased all operating activities. The Company recognizeda gain on the sale of these assets of approximately $1,467,000, net of taxes,during the fourth quarter of fiscal 2005.

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

The sale of the FarmingdalePremises was contingent upon completion of due diligence and other conditionsset forth in the Contract of Sale, including, without limitation, that upon theexpiration of the Investigation Period (as defined in the Contract of Sale),Embassy was to proceed with certain environmental remediation at theFarmingdale Premises (the “Required Environmental Remediation”) to thesatisfaction of the Suffolk County Department of Health Services (“SCDHS”), toobtain a “No Further Action” letter from SCDHS, and to provide a copy of saidletter to Purchaser upon Embassy’s receipt thereof.

Upon the expiration of theInvestigation Period, Embassy completed the Required Environmental Remediation.On May 30, 2006, SCDHS issued a letter (the “SCDHS Letter”) stating thatno further remediation will be required by SCDHS at such time with respect tothe Required Environmental Remediation. The SCDHS Letter also noted thatlaboratory data provided for the upgradient groundwater sample (the “Sample”)indicated that groundwater contamination exists, and that, due to thesignificant exceedences noted, this information was reported to the New YorkState Department of Environmental Conservation (“NYSDEC”) Spills Unit, and aNYSDEC Spill Number (the “DEC Spill Number”) was assigned. Embassy delivered acopy of the SCDHS Letter to Purchaser pursuant to the terms of the Contract ofSale.

The Sample wascontaminated with petroleum, and, to the Company’s knowledge, no petroleumproducts were used, stored or handled by Embassy at the Farmingdale Premises ator near the location where the Sample was collected. The Sample was collectedfrom an upgradient location near the northern border of the FarmingdalePremises, which is in close proximity to a neighboring property that experienceda petroleum release. Shortly following receipt of the SCDHS Letter, NYSDECverbally advised Embassy that it approved an investigation work-plan submittedby Embassy; the purpose of the investigation was to confirm that thecontamination does not originate at the Farmingdale Premises. The investigationwas completed on August 2, 2006 and the investigation results, whichconfirmed that the source of the petroleum contamination is not the FarmingdalePremises, were submitted to the NYSDEC on August 7, 2006. On August 11,2006, the NYSDEC advised Embassy that, based on the results of theinvestigation, it is apparent that the Farmingdale Premises is not the sourceof groundwater contamination that was 

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discoveredbased on the Sample, and that therefore the NYSDEC database has been modifiedto remove the Farmingdale Premises as the source of the contamination.

The Purchaser Letterpurports to terminate the Contract of Sale based upon Purchaser’s assertionthat the SCDHS Letter does not constitute a “No Further Action” letter asrequired by the Contract of Sale, and demands that the escrow agent return thedownpayment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

Embassy has informedPurchaser that, in light of the contents of the SCDHS Letter, Purchaser’spurported termination of the Contract of Sale is without effect, and thatPurchaser is in default of its obligation to consummate the purchase of theFarmingdale Premises under the terms of the Contract of Sale. On August 2,2006, Purchaser instituted an action against Embassy in the Supreme Court ofthe State of New York, County of Suffolk, for breach of contract and return ofdownpayment, seeking $650,000, together with costs of title and survey andinterest thereon, and the cost of the action. Embassy believes the action iswithout merit and intends to vigorously defend it.

Embassy has entered into anew contract of sale, dated as of February 26, 2007, on the FarmingdalePremises with Tell Realty LLC, an affiliated entity of Sam Tell &Son, Inc., for a purchase price of $6,300,000. The contract is subject tocancellation at the purchaser’s sole discretion during a forty-five (45) dayinvestigation period which commenced February 26, 2007. Assuming thepurchaser has satisfied itself during the investigation period, the contract isexpected to close in the latter part of the Company’s second fiscal quarter of2007. The Company intends to use the net proceeds from this sale to satisfy anexisting mortgage on the building of approximately $1.2 million and to reduceits other debt. The Company expects to report a pre-tax gain from the sale ofthe building of approximately $5.0 million.

*Green Manufacturing, Inc.—Agricultural ProductsDivision*

Pursuant to an Asset PurchaseAgreement (the “Agricultural APA”), dated as of July 14, 2005, betweenGreen and Benko Products, Inc. (“Benko”), Green sold certain of its assetscomprising its Agricultural Products Division (the “Agricultural Division”) toBenko. The assets sold pursuant to the Agricultural APA include, among others,certain machinery and equipment. Certain assets of the Agricultural Divisionwere retained by Green, including, but not limited to, certain of theAgricultural Division’s accounts receivable and inventories existing at theconsummation of the sale to Benko (the “Agricultural Closing”).

The purchase price paid byBenko in consideration for the assets acquired pursuant to the Agricultural APAwas $530,000, consisting of (a) a payment to Green at the AgriculturalClosing of $225,000; (b) $25,000 payable pursuant to the terms of aPromissory Note (“Agricultural Note 1”), dated July 14, 2005, payable inequal monthly amounts over a five (5) month period commencing as of theAgricultural Closing; and (c) $280,000 payable pursuant to the terms of aPromissory Note (collectively with Agricultural Note 1, the “AgriculturalNotes”), dated July 14, 2005, payable in equal monthly amounts over a four(4) year period commencing as of the Agricultural Closing. In addition,Benko assumed certain of Green’s contractual obligations. The obligations ofBenko under the Agricultural APA and the Agricultural Notes were guaranteed byeach of a principal shareholder and an affiliate of Benko, and partiallysecured by certain collateral.

In connection with thetransaction, Green and Benko entered into an agreement which provided for Benkoto purchase from Green 100% of Benko’s requirements for products of the typethat constitute part of Green’s inventory of raw materials and finished goodsas of the acquisition date with all purchases by Benko being binding andnon-cancelable at pre-established prices. The term was for a period of one yearfrom the acquisition date. All of Green’s inventory was purchased by Benko.

The Company recognized again on the sale of these assets of approximately $312,000, net of taxes, infiscal 2005. At December 31, 2006, there are no outstanding balances dueto the Company from Benko.

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*Green Manufacturing, Inc.—AccessDivision*

Pursuant to an Asset Purchase Agreement (the “AccessAPA”), dated as of February 2, 2005, between Green and Benko, Green soldcertain of its assets comprising its Access Division (the “Access Division”) toBenko. The assets sold pursuant to the Access APA include, among others,certain machinery and equipment, accounts receivable, inventory, intellectualproperty and other intangibles. Certain assets of the Access Division wereretained by Green, including, but not limited to, certain of the AccessDivision’s accounts receivable existing at the consummation of the sale toBenko (the “Access Closing”).

The purchase price agreed to by Benko in considerationfor the assets acquired pursuant to the Access APA, giving effect to certainadjustments, was approximately $1,756,655, consisting of (a) a payment toGreen at the Access Closing of approximately $880,069; (b) $755,724payable pursuant to the terms of a Promissory Note (“Access Note 1”), dated February 2,2005, payable in various amounts over a twenty-one (21) month period commencingas of the Access Closing; and (c) $120,862 payable pursuant to the termsof a Promissory Note (collectively with Access Note 1, the “Access Notes”),dated February 2, 2005, payable in various amounts over a four (4) monthperiod commencing as of the Access Closing. Benko agreed to pay additionalconsideration on an annual basis for the two (2) successive twelve (12)month periods commencing as of the Access Closing, dependent on certain salesby Benko, subject to certain other conditions. In addition, Benko assumedcertain of Green’s contractual obligations. The obligations of Benko under theAccess APA and the Access Notes were guaranteed by each of a principalshareholder and an affiliate of Benko, and partially secured by certaincollateral.

Benko had withheld certain payments regarding itsoutstanding Access Note as a result of a disagreement regarding certainrepresentations made by the Company in the Access APA. As such, the Company recordeda reserve of $150,000 at December 31, 2005. In August 2006, theCompany and Benko negotiated a settlement under both the Access Note and theoutstanding Agricultural Note and received a payment of approximately $477,000to resolve the matter. At December 31, 2006, there are no outstandingbalances due to the Company from Benko.

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes, infiscal 2005.

*Green Manufacturing, Inc.—HydraulicCylinder Division*

In December 2004, pursuant to an Asset PurchaseAgreement and other related documents (collectively, the “Cylinder APA”), amongP&F, Green and Rosenboom Machine & Tool, Inc. (“RMT”) (anunaffiliated third party), Green sold certain of its assets comprising its HydraulicCylinder Division to RMT. The assets sold pursuant to the Cylinder APA include,among others, property, machinery and equipment, raw materials, work-in processinventory and certain intangibles. Green also sold the land and building inwhich the division was housed to RMT in connection with this transaction. Greenreceived net cash proceeds of approximately $3,679,000 and a promissory note ofapproximately $686,000 at the closing, which note was satisfied in December 2005.In addition, Green may receive additional consideration in the form ofcommissions through December 2009 based upon certain future sales by RMT.In fiscal 2006, 2005 and 2004, Green received approximately $402,000, $433,000and $11,000, respectively, in additional consideration. In addition, RMT agreedto hire all Green Hydraulic Cylinder Division employees in Bowling Green, Ohioand, as a result of the transaction, Green has effectively exited the hydrauliccylinder business.

The Company recognized a gain on the sale of theseassets of approximately $88,000, net of taxes of $46,000, in fiscal 2004. Green has effectively ceased all operatingactivities.

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The followingamounts related to Embassy and Green have been segregated from the Company’scontinuing operations and are reported as assets held for sale and assets andliabilities of discontinued operations in the consolidated balance sheets:

| ** **                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Assets held for  sale and assets of discontinued operations:      |       |                  |       |   |   |
| Prepaid expenses                                                  |       | $                     | 300,000    |   | $ | 77,000 |   |
| Assets held for  sale                                             |       | 577,000               |       | 623,000 |   |
| Total assets held  for sale and assets of discontinued operations |       | $                     | 877,000    |   | $ | 700,000 |   |
| Liabilities of discontinued operations:                           |       |                  |       |   |   |
| Accounts payable  and accrued expenses                            |       | $                     | 435,000    |   | $ | 991,000 |   |
| Mortgage payable                                                  |       | 1,254,000             |       | 1,367,000 |   |
| Total liabilities of  discontinued operations                     |       | $                     | 1,689,000  |   | $ | 2,358,000 |   |

 

Results ofoperations for Embassy and Green are included from the beginning of each fiscalperiod presented through the respective dates of asset disposition, and havebeen segregated from continuing operations and reflected as discontinuedoperations approximately as follows:

| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues                                                             |       | $                                          | —     |   | $ | 9,087,000 |   | $ | 25,894,000 |   |
| Earnings (loss) from operation of discontinued  operations, before taxes |       | $                                          | 17,000     |   | $ | (208,000 | ) | $ | 59,000 |   |
| Income tax  (expense) benefit                                            |       | 53,000                                     |       | 82,000 |   | (20,000 | ) |
| Earnings (loss)  from operation of discontinued operations               |       | 70,000                                     |       | (126,000 | ) | 39,000 |   |
| Gain on sale of  discontinued operations, before taxes                   |       | —                                     |       | 2,919,000 |   | 134,000 |   |
| Income tax  expense                                                      |       | —                                     |       | (1,069,000 | ) | (46,000 | ) |
| Gain on sale of  discontinued operations                                 |       | —                                     |       | 1,850,000 |   | 88,000 |   |
| Earnings from  discontinued operations                                   |       | $                                          | 70,000     |   | $ | 1,724,000 |   | $ | 127,000 |   |

 

**NOTE4—**ACCOUNTS RECEIVABLEAND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable—netconsists of:

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Trade accounts  receivables      |       | $                     | 12,908,000 |   | $ | 12,757,000 |   |
| Allowance for  doubtful accounts |       | (223,000              | )          | (190,000 | ) |
|                             |       | $                     | 12,685,000 |   | $ | 12,567,000 |   |

 

**NOTE 5—INVENTORIES**

Inventories—netconsist of:

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw material                                      |       | $                     | 2,537,000  |   | $ | 2,209,000 |   |
| Work in process                                   |       | 334,000               |       | 349,000 |   |
| Finished goods                                    |       | 25,651,000            |       | 25,597,000 |   |
|                                              |       | 28,522,000            |       | 28,155,000 |   |
| Reserve for  obsolete and slow-moving inventories |       | (1,829,000            | )          | (1,981,000 | ) |
|                                              |       | $                     | 26,693,000 |   | $ | 26,174,000 |   |

 

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**NOTE 6—GOODWILL ANDOTHER INTANGIBLE ASSETS**

The changes in thecarrying amounts of goodwill at December 31, 2006 and 2005 are as follows:

| ** **                         | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Balance,  January 1, 2005     |       | $                | 22,877,000 |                                    |       | $            | 2,394,000  |   |   | $ | 20,483,000 |   |
| Goodwill acquired  during the year |       | 944,000          |       |                                    | —     |         |       | 944,000 |   |
| Balance,  December 31, 2005   |       | 23,821,000       |       |                                    | 2,394,000  |         |       | 21,427,000 |   |
| Goodwill acquired  during the year |       | 1,100,000        |       |                                    | —     |         |       | 1,100,000 |   |
| Balance,  December 31, 2006   |       | $                | 24,921,000 |                                    |       | $            | 2,394,000  |   |   | $ | 22,527,000 |   |

 

In connection with Countrywide’s acquisition of all ofthe stock of Nationwide in 2002, the Company had been liable for contingentearnout payments to Nationwide’s previous owner, in amounts equal to 30% of theexcess of Nationwide’s earnings, before amortization of intangible assets,interest and taxes, over $2,500,000, for each of the five twelve-month periodssubsequent to the acquisition date. In July 2005, the Company entered intoa settlement agreement and amendment to the purchase agreement with Nationwide’sprevious owner regarding such future contingent earnout payments. In connectiontherewith, the Company made a payment of $1,250,000 in full and final settlementof the outstanding and remaining contingent earnout payments. These contingentearnout payments have been treated as additions to goodwill. During 2005, theCompany recorded net additions to goodwill of approximately $944,000, relatedto contingent earnout payments. During 2006, the Company recorded goodwill ofapproximately $950,000 related to the acquisition of certain assets of PacificStair and recorded net additions to goodwill of approximately $150,000 relatedto earnout payments pursuant to the terms of the asset purchase agreement.

Other intangibleassets were as follows:

| ** **                            | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Cost**                        | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible  assets:             |       |                            |       |                            |       |   |   |   |   |
| Customer relationships                |       | $                               | 10,960,000 |                            | $          | 3,055,000 |   | $ | 9,160,000 |   | $ | 2,119,000 |   |
| Vendor relationship                   |       | 890,000                         |       | 223,000                         |       | 890,000 |   | 134,000 |   |
| Non-compete and Employment agreements |       | 810,000                         |       | 719,000                         |       | 760,000 |   | 557,000 |   |
| Trademark                             |       | 2,140,000                       |       | —                          |       | 690,000 |   | — |   |
| Licensing                             |       | 105,000                         |       | 11,000                          |       | 105,000 |   | — |   |
| Total                                 |       | $                               | 14,905,000 |                            | $          | 4,008,000 |   | $ | 11,605,000 |   | $ | 2,810,000 |   |

 

Amortization expense forintangible assets subject to amortization was approximately $1,198,000,$1,105,000 and $819,000 for the years ended December 31, 2006, 2005 and2004, respectively. Amortization expense for each of the next five years isestimated to be as follows 2007 - $843,000;2008 - $665,000; 2009 - $666,000; 2010 - $665,000; and 2011 - $656,000.The weighted average amortization period for intangible assets was 14.07 yearsand 10.96 years at December 31, 2006 and 2005, respectively.

**NOTE 7—SHORT-TERMBORROWINGS**

On June 30, 2004, in conjunction with theWoodmark acquisition transaction, the Company entered into a credit agreementwith Citibank and another bank. Thisagreement includes a revolving credit loan facility, which provides a total of$12,000,000 for direct borrowings, with various sublimits for letters ofcredit, bankers’ acceptances and equipment loans. There are nocommitment fees for any unused portion of this credit facility. The credit agreement expires in June 2007 andis subject to annual review by the lending banks. The credit agreement alsoincludes a term loan facility, as described in Note 9.

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Direct borrowings under the revolving credit loanfacility are secured by the Company’s accounts receivable, inventory andequipment and are cross-guaranteed by each of the Company’s subsidiaries. Theseborrowings bear interest at either LIBOR (London InterBank Offered Rate) plusthe currently applicable loan margin or the prime interest rate. At December 31,2006 and 2005, the applicable loan margins added to LIBOR were 1.45% and 1.60%,respectively. At December 31, 2006, the prime interest rate and the LIBORrate were 8.25% and 5.35%, respectively. At December 31, 2005, the primeinterest rate and the LIBOR rate were 7.25% and 4.50%, respectively. At December 31,2006 and 2005, there was $3,000,000 outstanding against the revolving creditloan facility. The weighted average interest rate on short-term borrowingsduring 2006 and 2005 were 7.96% and 6.18%, respectively. There were nocommitments at December 31, 2006 for open letters of credit.

The credit agreement also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreign currencyforward contracts. These contracts fix the exchange rate on future purchases offoreign currencies needed for payments to foreign suppliers. The total amountof foreign currency forward contracts outstanding under the foreign exchangeline at December 31, 2006, based on that day’s closing spot rate, wasapproximately $301,000.

Under the terms of theCompany’s credit agreement, the Company is required to adhere to certainfinancial covenants. The Company received a waiver for one covenant with whichit was not in compliance at December 31, 2006 and another covenant withrespect to the period from October 1, 2006 through March 30, 2007.Management expects to be in full compliance with the financial covenants of thecredit agreement, as amended in February 2007, on March 31, 2007. Therevolving credit loan facility under the credit agreement expires inJune 2007 and is subject to annual review by the lending banks.

**NOTE 8—WARRANTYLIABILITY**

Changesin the Company’s warranty liability, included in other accrued liabilities, forthe years ended December 31, 2006 and 2005 were as follows:

| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Balance,  beginning of year                                         |       | $                     | 419,000    |   | $ | 510,000 |   |
| Warranties issued  and changes in estimated pre-existing warranties |       | 473,000               |       | 452,000 |   |
| Actual warranty  costs incurred                                     |       | (524,000              | )          | (543,000 | ) |
| Balance, end of year                                                |       | $                     | 368,000    |   | $ | 419,000 |   |

 

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**NOTE 9—LONG-TERM DEBT**

| ** **                                                                                                                                                                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Long-term debt consists  of:                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Term loan—$950,000 (plus interest at LIBOR plus the  applicable loan margin of 1.5% at December 31, 2006) payable quarterly  through June 2010, and the balance of $300,000 payable in  September 2010                                                                                                                    |       | $                     | 13,600,000 |   | $ | 17,400,000 |   |
| Note payable to former owners of Woodmark—lump sum  payment, plus interest payable monthly, due in June 2007. Interest  accrues at the Company’s highest borrowing rate in effect under its credit  agreement. At December 31, 2006, the applicable rate was LIBOR plus 1.5%                                              |       | 2,190,000             |       | 2,190,000 |   |
| Note payable to former owners of Woodmark—lump sum  payment due in June 2007. This non-interest bearing note was discounted  at inception using the Company’s borrowing rate of 3.04%. These amounts  include $95,833 and $57,500 of imputed interest expense recorded through  December 31, 2006 and 2005, respectively. |       | 1,314,000             |       | 1,276,000 |   |
| Mortgage loan—$11,244 (plus interest at LIBOR plus  155 basis points) payable monthly through May 2009, when a final payment  of approximately $1,090,000 is due (a)                                                                                                                                                                |       | 1,406,000             |       | 1,552,000 |   |
| Mortgage loan—$16,388 (including interest at 7.09%)  payable monthly through March 2014 (a)                                                                                                                                                                                                                                         |       | 1,110,000             |       | 1,214,000 |   |
|                                                                                                                                                                                                                                                                                                                                          |       | 19,620,000            |       | 23,632,000 |   |
| Less current  maturities                                                                                                                                                                                                                                                                                                                      |       | 7,560,000             |       | 4,059,000 |   |
|                                                                                                                                                                                                                                                                                                                                          |       | $                     | 12,060,000 |   | $ | 19,573,000 |   |

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(a)           These mortgages payablerelate to the land and buildings of certain of the Company’s subsidiaries.Property with a net book value of approximately $4,611,000 at December 31,2006 is pledged as collateral.

The aggregate amounts of the long-term debt scheduledto mature in each of the years ended December 31 are approximately asfollows: 2007—$7,560,000; 2008—$4,066,000; 2009—$5,075,000; 2010—$2,350,000;2011—$161,000; 2012—$173,000; and 2013 and thereafter—$234,000. Interestexpense on long-term debt was approximately $1,430,000**,**$1,463,000 and $859,000 for the years ended December 31, 2006, 2005 and2004, respectively. Embassy’s mortgage loan, which had outstanding balances ofapproximately $1,254,000 and $1,367,000 at December 31, 2006 and 2005,respectively, is included in “Liabilities of Discontinued Operations” on theconsolidated balance sheet (see Note 3).

TheCompany’s credit agreement also includes a term loan facility, whichprovides a maximum commitment of $34,000,000 to finance acquisitions subject tothe approval of the lending banks. There are no commitment fees for any unusedportion of this credit facility. Direct borrowings under the term loan aresecured by the Company’s accounts receivable, inventory and equipment and arecross-guaranteed by each of the Company’s subsidiaries. These borrowings bearinterest at either LIBOR plus the currently applicable loan margin or the primeinterest rate. At December 31, 2006 and 2005, the applicable loan marginsadded to LIBOR were 1.50 and 1.75%, respectively. The Company borrowed$29,000,000 against this facility to finance the Woodmark acquisitiontransaction, and there was $13,600,000 outstanding against the term loan facilityat December 31, 2006.

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**NOTE 10—CAPITALSTOCK TRANSACTIONS**

During the years ended December 31, 2006 and2005, the Company purchased 23,031 and 14,422 shares, respectively, of Class ACommon Stock, at costs of $294,196 and $181,050, respectively, in connectionwith a program to repurchase shares. In September 2005, the Company’s Board of Directors extended thisprogram by an additional year to September 30, 2006. In September 2006,the Company’s Board of Directorsauthorized the purchase of an additional 37,450 shares up to a share repurchasemaximum of 150,000 shares and extended the time during which the Company mayrepurchase such shares by an additional year to September 30, 2007.

During 2005, the Company issued to various employeesand directors options to purchase an aggregate of 29,500 shares of Class ACommon Stock at prices ranging between $14.44 and $16.68 per share, whichrepresented the fair market value of the shares of Class A Common Stock onthe date of grant.

During 2006 and 2005, the Company received 5,000shares and 6,418 shares, respectively, of Class A Common Stock inconnection with the exercise of options to purchase 15,000 shares and 14,000shares, respectively, of Class A Common Stock. The value of these shareswas recorded at $61,850 and $107,240, respectively.

In connection with itsStockholder Rights Plan, the Company entered into a Rights Agreement (asamended) and distributed as a dividend to each holder of Class A CommonStock a preferred stock purchase right. These rights entitle the stockholders,in certain circumstances, to purchase one one-thousandth of a share of theCompany’s Series A Junior Participating Preferred Stock for $10. TheStockholder Rights Plan, which expired in August 2004 and was extended bythe Company until August 2014, is intended to protect, among other things,the interests of the Company’s stockholders in the event the Company isconfronted with coercive or unfair takeover tactics.

**NOTE 11—STOCKOPTIONS**

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. Options granted to any 10% stockholder are exercisablefor a five year period from the date of grant, at prices not less than 110% ofthe market value of the Class A Common Stock on the date the option isgranted. Options typically vest immediately. 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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Thefollowing table contains information on stock options for the three years endedDecember 31, 2006:

| ** **                              | ** ** | **Option Shares** | ** ** | **Exercise Price  Range Per Share** | ** ** | **Weighted  Average  Exercise  Price** | ** **     | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------------------------------------------|------------|----------------------------------------|----------------|-------------------------------------|------------|
| **Outstanding  January 1, 2004**   |       |                   | 480,400    |                                               |       | $                                      | 1.94 to $9.00  |                                |       | $ | 6.44 |   |   |   |   |   |   |
| Granted                                 |       |                   | 166,000    |                                               |       | 7.90 to 8.87                           |           |                                | 8.18       |   |   |   |   |   |   |
| Exercised                               |       |                   | (42,000    | )                                                  |       | 1.94 to 8.06                           |           |                                | 3.59       |   |   |   |   |   |   |
| **Outstanding, December 31, 2004** |       |                   | 604,400    |                                               |       | 3.75 to 9.00                           |           |                                | 7.12       |   |   |   |   |   |   |
| Granted                                 |       |                   | 29,500     |                                               |       | 14.44 to 16.68                         |           |                                | 16.53      |   |   |   |   |   |   |
| Exercised                               |       |                   | (37,000    | )                                                  |       | 5.25 to 9.00                           |           |                                | 7.20       |   |   |   |   |   |   |
| **Outstanding, December 31, 2005** |       |                   | 596,900    |                                               |       | 3.75 to 16.68                          |           |                                | $          | 7.58 |   |   |   |   |   |   |
| Exercised                               |       |                   | (36,000    | )                                                  |       | 3.75 to 8.06                           |           |                                | 5.79       |   |   |   |   |   |   |
| **Outstanding, December 31, 2006** |       |                   | 560,900    |                                               |       | $                                      | 3.75 to $16.68 |                                |       | $ | 7.69 |   |   |   | $ | 1,856,000 |   |   |
| **Vested,  December 31, 2006**     |       |                   | 511,412    |                                               |       | $                                      | 3.75 to $16.68 |                                |       | $ | 7.53 |   |   |   | $ | 1,775,000 |   |   |

 

Thefollowing is a summary of changes in non-vested shares for the year ended December 31,2006:

| ** **                                 | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-  Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------------------------------------------------|------------|
| Non-vested  shares, January 1, 2006   |       |                   | 72,149     |                                                             |       |   | $ | 4.05 |   |   |
| Granted                                    |       |                   | —     |                                                             |       |   | — |   |   |
| Vested                                     |       |                   | (22,661    | )                                                                |       |   | 4.68 |   |   |
| Forfeited                                  |       |                   | —     |                                                             |       |   | — |   |   |
| Non-vested shares,  December 31, 2006 |       |                   | 49,488     |                                                             |       |   | $ | 3.77 |   |   |

 

The Company recognizescompensation cost over the requisite service period. However, theexercisability of the respective non-vested options, which are atpre-determined dates on a calendar year, do not necessarily correspond to theperiod(s) in which straight-line amortization of compensation cost isrecorded.

*Other Information*

As of December 31, 2006, the Company hadapproximately $30,000 of total unrecognized compensation cost related tonon-vested awards granted under our share-based plans, which we expect torecognize over a weighted-average period of 1.75 years.

The Company received cash from options exercisedduring the year ended December 31, 2006 of approximately $147,000. Theimpact of these cash receipts is included in financing activities in theaccompanying consolidated condensed statements of cash flows. Statement 123(R) requiresthat cash flows from tax benefits attributable to tax deductions in excess ofthe compensation cost recognized for those options (excess tax benefits) beclassified as financing cash flows.

There were options available for issuance under theCurrent Plan as of December 31 of each year as follows: 2004—712,900; 2005—683,400;and 2006—683,400. Of the options outstanding at December 31, 2006, 348,100were issued under the Current Plan and 212,800 were issued under the PriorPlan.

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Thefollowing table summarizes information about stock options outstanding andexercisable at December 31, 2006:

| **Range of  Exercise Prices** | ** ** | **Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------|------------|-----------------|------------|------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|
| $3.75–$5.25                        |       |            | 46,300     |                                                             |       |                                       | .3         |            |       |                                       | $          | 5.15 |   |   |   | 46,300 |   |   |   | $ | 5.15 |   |   |
| $6.00                                   |       |            | 110,436    |                                                             |       |                                       | 5.5        |            |       |                                       | 6.00       |   |   |   | 110,436 |   |   |   | 6.00 |   |   |
| $6.60                                   |       |            | 66,664     |                                                             |       |                                       | .5         |            |       |                                       | 6.60       |   |   |   | 49,998 |   |   |   | 6.60 |   |   |
| $7.88                                   |       |            | 152,500    |                                                             |       |                                       | 1.2        |            |       |                                       | 7.88       |   |   |   | 152,500 |   |   |   | 7.88 |   |   |
| $7.90–$8.06                        |       |            | 116,688    |                                                             |       |                                       | 7.5        |            |       |                                       | 8.05       |   |   |   | 116,688 |   |   |   | 8.05 |   |   |
| $8.75                                   |       |            | 2,000      |                                                             |       |                                       | 3.3        |            |       |                                       | 8.75       |   |   |   | 2,000 |   |   |   | 8.75 |   |   |
| $8.87                                   |       |            | 24,812     |                                                             |       |                                       | 2.5        |            |       |                                       | 8.87       |   |   |   | — |   |   |   | — |   |   |
| $8.94–$9.00                        |       |            | 12,000     |                                                             |       |                                       | 2.2        |            |       |                                       | 8.94       |   |   |   | 12,000 |   |   |   | 8.94 |   |   |
| $14.44–$16.68                      |       |            | 29,500     |                                                             |       |                                       | 8.5        |            |       |                                       | 16.47      |   |   |   | 21,490 |   |   |   | 16.47 |   |   |
| $3.75–$16.68                       |       |            | 560,900    |                                                             |       |                                       | 3.7        |            |       |                                       | $          | 7.69 |   |   |   | 511,412 |   |   |   | $ | 7.53 |   |   |

 

**NOTE 12—INCOMETAXES**

Provisionsfor income taxes on continuing operations in the consolidated statements ofearnings consist of:

| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:           |       |                                       |       |   |   |   |   |
| Federal            |       | $                                          | 1,624,000  |   | $ | 2,988,000 |   | $ | 2,860,000 |   |
| State and local    |       | 693,000                                    |       | 395,000 |   | 237,000 |   |
| Total current      |       | 2,317,000                                  |       | 3,383,000 |   | 3,097,000 |   |
| Deferred:          |       |                                       |       |   |   |   |   |
| Federal            |       | 333,000                                    |       | (223,000 | ) | (196,000 | ) |
| State and local    |       | 18,000                                     |       | (29,000 | ) | (36,000 | ) |
| Total deferred     |       | 351,000                                    |       | (252,000 | ) | (232,000 | ) |
| Total income taxes |       | $                                          | 2,668,000  |   | $ | 3,131,000 |   | $ | 2,865,000 |   |

 

Deferredtax assets (liabilities) consist of:

| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred tax  assets—current:             |       |                  |       |   |   |
| Bad debt reserves                              |       | $                     | 82,000     |   | $ | 270,000 |   |
| Inventory reserves                             |       | 901,000               |       | 1,004,000 |   |
| Warranty and other reserves                    |       | 320,000               |       | 477,000 |   |
| Deferred tax liabilities—current:         |       | 1,303,000             |       | 1,751,000 |   |
| Prepaid expenses                               |       | (323,000              | )          | (255,000 | ) |
| Net deferred tax assets— current          |       | $                     | 980,000    |   | $ | 1,496,000 |   |
| Deferred tax liabilities—non-current:     |       |                  |       |   |   |
| Depreciation                                   |       | (208,000              | )          | (273,000 | ) |
| Intangible assets                              |       | (135,000              | )          | (264,000 | ) |
| Goodwill                                       |       | (791,000              | )          | (441,000 | ) |
| Net deferred tax  liabilities—non-current |       | $                     | (1,134,000 | ) | $ | (978,000 | ) |

 

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Areconciliation of the Federal statutory rate to the total effective tax rateapplicable to earnings from continuing operations before income taxes is asfollows:

| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **$**                                      | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Federal income  taxes computed at statutory rates |       | $                                          | 2,203,000  |   | 34.0 |   | $ | 2,713,000 |   | 34.0 |   | $ | 2,304,000 |   | 34.0 |   |
| Increase in taxes  resulting from:                | ** ** | ** **                                 |       |   |   |   |   |   |   |   |   |   |   |
| State and local taxes, net of Federal tax benefit |       | 469,000                                    |       | 7.2 |   | 242,000 |   | 3.0 |   | 137,000 |   | 2.0 |   |
| Expenses not deductible for tax purposes          |       | 74,000                                     |       | 1.2 |   | 321,000 |   | 4.0 |   | 256,000 |   | 3.8 |   |
| Other                                             |       | (78,000                                    | )          | (1.2 | ) | (145,000 | ) | (1.8 | ) | 168,000 |   | 2.5 |   |
| Income taxes                                      |       | $                                          | 2,668,000  |   | 41.2 |   | $ | 3,131,000 |   | 39.2 |   | $ | 2,865,000 |   | 42.3 |   |

 

The Company has recordedan accrual totaling approximately $370,000, net of Federal benefit, at December 31,2006 for an uncertain tax position resulting from a pending state audit.

**NOTE 13—COMMITMENTSAND CONTINGENCIES**

(a)   P&F andcertain of its subsidiaries have adopted a defined contribution pension plan,which covers substantially all non-union employees. Contributions to this planwere determined as a percentage of compensation. The amounts recognized aspension expense for this plan were approximately $400,000, $328,000 and$262,000 for the years ended December 31, 2006, 2005 and 2004,respectively.

The Company maintains a defined contribution 401(k) plan,which covers all of their respective employees. Certain of the Company’ssubsidiaries provide for employer contributions to the plan, which aredetermined as a percentage of employee contributions. The amounts recognized asexpense for this plan were approximately $96,000, $63,000 and $25,000 for theyears ended December 31, 2006, 2005 and 2004, respectively.

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. The Company does not administer the planfunds and does not have any control over the plan funds. As a result of Embassy’swithdrawal from the plan, it has estimated and recorded a withdrawal liabilityof approximately $279,000, which is expected to be payable in quarterlyinstallments of approximately $8,200 from May 2006 through February 2026.Inclusive of the non-recurring withdrawal liability recorded as an expense inthe fourth quarter of 2005, the amounts recognized as pension expense for thisplan were approximately $299,000 and $30,000 for the years ended December 31,2005 and 2004, respectively. At December 31, 2006, the outstanding amountof this withdrawal liability was approximately $255,000.

(b)   Effective as of January 1, 2007, the Company enteredinto an employment agreement with its Chairman, President and Chief ExecutiveOfficer (the “officer”) that supercedes a prior agreement dated May 30,2001, as amended. The employment agreement provides for the officer to serve asthe Company’s President and Chief Executive Officer, and, if elected by theBoard of Directors, Chairman of the Board, for a term expiring on December 31,2011, unless sooner terminated pursuant to the provisions of the employmentagreement. Pursuant to the employment agreement, the officer will receive aminimum annual base salary of $975,000. The officer’s base salary will bereviewed annually by the Board and may be increased, but not decreased, fromtime to time. The officer will be eligible for an annual discretionaryincentive payment under the Company’s Executive 162(m) Bonus Plan with atarget of 90% of his then-current base salary. The officer will also receive (i) seniorexecutive level employee benefits, (ii) an annual 

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payment of $45,064.37 tocover premiums on a life insurance policy, and (iii) a Company-providedautomobile.

In the event the officer’s employment is terminated bythe Company without cause (as defined in the agreement), or the officer resignsfor good reason (as defined in the agreement), then subject to his execution ofa general release, the officer will continue to receive his base salary for 18months, a pro rata bonus for the year of termination, and the Company will payhis monthly COBRA premiums until the earlier of (a) 18 months from thedate of termination, (b) his becoming eligible for medical benefits from asubsequent employer, or (c) his becoming ineligible for COBRA.

In the event the officer’s employment is terminated bythe Company without cause or the officer resigns for good reason within twoyears following a change in control (as defined in the agreement) or, undercertain circumstances, within six months prior to a change in control, thensubject to the officer’s execution of a general release, he will receive thepro rata bonus, the COBRA payments, and a lump sum amount equal to the greaterof (i) 18 months base salary or (ii) the lesser of (a) two timesthe sum of his base salary plus the amount of any bonus he received for theyear prior to the change in control, or (b) 3% of the value on the date ofthe change in control of the Company’s outstanding shares on a fully dilutedbasis immediately prior to the change in control. Notwithstanding theforegoing, amounts paid to the officer upon a change in control will be reducedto 2.99 times his “base amount” (as determined in accordance with Sections 280Gof the Internal Revenue Code of 1986, as amended).

Pursuant to theemployment agreement, during term of his employment and for a period ofeighteen months after termination of his employment, the officer is prohibitedfrom (i) competing with the Company, (ii) soliciting or hiring theCompany’s employees, representatives or agents, or (iii) soliciting any ofthe Company’s customers. The employment agreement also prohibits the officerfrom using or disclosing any of the Company’s non-public, proprietary orconfidential information.

(c)   FloridaPneumatic purchases approximately 90% of its pneumatic tools from a Far Easttrading company that owns or represents 21 individual factories in Japan,Taiwan and China. Of the total pneumatic tool purchases, approximately 16% arebought from Japan, 31% from Taiwan and 52% from China. There are redundantsources for every product purchased and manufactured.

(d)   Woodmarkpurchases all of its stair parts and kitchen and bath products from a Far Easttrading company that owns or represents 9 individual factories in China, Taiwanand Indonesia. Of the total stair parts and kitchen and bath product purchases,approximately 59% are bought from China and 38% from Taiwan. There areredundant sources for every product purchased and manufactured.

(e)   PacificStair purchases approximately 42% of its stair products from several suppliersin Mexico, China and Indonesia. Of the total stair products and materialspurchases, approximately 21% are purchased from Mexico and 20% from China.There are redundant sources for every product purchased and manufactured.

(f)    Nationwidecurrently purchases approximately 85% of its product from several suppliers inChina and Taiwan. Of the total foreign hardware product purchases,approximately 60% are bought from China and approximately 40% are bought fromTaiwan. There are redundant sources for every product purchased andmanufactured.

(g)   The Company had non-cancelable inventory purchasecommitments totaling approximately $9,919,000 at December 31, 2006.

(h)   The Company is a defendant or co-defendant in variousactions brought about in the ordinary course of conducting its business. TheCompany does not believe that any of these actions are material to thefinancial position of the Company.

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(i)    The Company leases certain facilities and equipment.Generally, the facility leases carry renewal provisions and require the Companyto pay maintenance costs. Rental payments may be adjusted for increases intaxes and insurance above specified amounts. Rental expense for 2006, 2005 and2004 amounted to approximately $860,000, 481,000 and $199,000, respectively.Capital leases were immaterial in amount. Future minimum payments undernon-cancelable operating leases with initial or remaining terms of more thanone year as of December 31, 2006, were as follows:

| 2007       |   | $       | 1,046,000 |   |
|------------|--------|---------|-----------|--------|
| 2008       |   | 706,000 |      |
| 2009       |   | 365,000 |      |
| 2010       |   | 263,000 |      |
| 2011       |   | 190,000 |      |
| Thereafter |   | 246,000 |      |
|       |   | $       | 2,816,000 |   |

 

**NOTE 14—BUSINESS SEGMENTS**

The Company has organized itsbusiness into two reportable business segments: Tools and other products, andHardware. The Company is organized around these two distinct productsegments, each of which has very different end users. For reporting purposes,Florida Pneumatic and Franklin are combined in the “Tools and other products”segment, while Woodmark, Pacific Stair and Nationwide are combined in the “Hardware”segment. Results for Pacific Stair have been included since January 3,2006. The Company evaluates segmentperformance based primarily on segment operating income. The accountingpolicies of each of the segments are the same as those described in Note 1.

Thefollowing presents financial information by segment for the years ended December 31,2006, 2005 and 2004. Segment operating income excludes general corporateexpenses, interest expense and income taxes. Identifiable assets are thoseassets directly owned or utilized by the particular business segment.

| **Year ended  December 31, 2006**                   | ** ** | ** ** | ** **  | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------|-------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Net revenues from  unaffiliated customers                |       | $          | 111,733,000 |             |       | $                                       | 44,657,000 |         |       | $ | 67,076,000 |   |
| Segment operating  income                                |       | $          | 13,634,000  |             |       | $                                       | 3,417,000  |         |       | $ | 10,217,000 |   |
| General corporate  expense                               |       | (5,182,000 | )           |             |       |                                    |       |         |       |
| Interest  expense—net                               |       | (1,973,000 | )           |             |       |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $          | 6,479,000   |             |       |                                    |       |         |       |   |
| Segment assets                                           |       | $          | 85,054,000  |             |       | $                                       | 25,059,000 |         |       | $ | 59,995,000 |   |
| Corporate assets  and assets of discontinued operations  |       | 5,263,000  |        |             |       |                                    |       |         |       |
| Total assets                                             |       | $          | 90,317,000  |             |       |                                    |       |         |       |   |

 

| **Year ended December 31, 2005**     | ** ** | ** ** | ** **  | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------|-------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Net revenues from  unaffiliated customers                |       | $          | 107,978,000 |             |       | $                                       | 48,378,000 |         |       | $ | 59,600,000 |   |
| Segment operating  income                                |       | $          | 14,963,000  |             |       | $                                       | 4,127,000  |         |       | $ | 10,836,000 |   |
| General corporate  expense                               |       | (5,089,000 | )           |             |       |                                    |       |         |       |
| Interest  expense—net                               |       | (1,896,000 | )           |             |       |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $          | 7,978,000   |             |       |                                    |       |         |       |   |
| Segment assets                                           |       | $          | 81,088,000  |             |       | $                                       | 27,212,000 |         |       | $ | 53,876,000 |   |
| Corporate assets  and assets of discontinued operations  |       | 5,746,000  |        |             |       |                                    |       |         |       |
| Total assets                                             |       | $          | 86,834,000  |             |       |                                    |       |         |       |   |

 

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| **Year ended December 31, 2004**     | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Net revenues from  unaffiliated customers                |       | $          | 88,064,000 |             |       | $                                       | 51,868,000 |         |       | $ | 36,196,000 |   |
| Segment operating  income                                |       | $          | 12,176,000 |             |       | $                                       | 5,487,000  |         |       | $ | 6,689,000 |   |
| General corporate  expense                               |       | (4,251,000 | )          |             |       |                                    |       |         |       |
| Interest  expense—net                               |       | (1,149,000 | )          |             |       |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $          | 6,776,000  |             |       |                                    |       |         |       |   |
| Segment assets                                           |       | $          | 76,954,000 |             |       | $                                       | 25,224,000 |         |       | $ | 51,730,000 |   |
| Corporate assets  and assets of discontinued operations  |       | 13,890,000 |       |             |       |                                    |       |         |       |
| Total assets                                             |       | $          | 90,844,000 |             |       |                                    |       |         |       |   |

 

The Tools and otherproducts segment has one customer, Sears, Roebuck and Co., that accounted for17.8%**,** 16.5% and 24.3% of consolidatedrevenues for the years ended December 31, 2006, 2005 and 2004,respectively. This customer also accounted for 37.8% and 32.5% of consolidatedaccounts receivable as of December 31, 2006 and 2005, respectively. Asecond customer in the segment, The Home Depot, Inc., accounted for 9.8%,15.2% and 19.4% of consolidated revenues for the years ended December 31,2006, 2005 and 2004, respectively, and 11.5% and 20.9% of consolidated accountsreceivable as of December 31, 2006 and 2005, respectively. There were noother major customers requiring disclosure.

**NOTE 15—RELATED PARTYTRANSACTIONS**

(a)   The Companyand Sidney Horowitz, a director and father of Richard A. Horowitz, the Company’sChairman, Chief Executive Officer and President, were parties to a ConsultingAgreement, which terminated on October 31, 2006, pursuant to which Mr. SidneyHorowitz received $62,500, $75,000 and $75,000 in consulting fees for the yearsended December 31, 2006, 2005 and 2004, respectively.

(b)   One of theCompany’s directors is a principal of an insurance brokerage firm that theCompany utilizes for the purchase of business-related insurance products. Totalpremiums paid through this insurance brokerage firm were $422,000, $569,000 and$641,000 for the years ended December 31, 2006, 2005 and 2004,respectively.

(c)   In connection with the purchase of certain assets, PacificStair entered into a lease agreement with the president of the company fromwhich the assets were acquired by Pacific Stair, expiring in August 2008,for the manufacturing facility that he owns for average annual rental paymentsof approximately $113,000. Such individual resigned as an officer and employeeof Pacific Stair on December 31, 2006.

(d)   In connection with the purchase ofcertain assets of Woodmark, the Company assumed certain notes, aggregating$3,504,000 at December 31, 2006, payable to the President of Woodmark.

**NOTE 16—SUBSEQUENT EVENT(Unaudited)**

On February 14, 2007, pursuant to an AssetPurchase Agreement (the “Hy-Tech APA”) effective as of February 12, 2007,Hy-Tech Machine, Inc., a Delaware corporation (“Hy-Tech”), a wholly-ownedsubsidiary of Continental Tool Group, Inc. (“Continental”), acquiredsubstantially all of the assets (the “Hy-Tech Purchased Property”) of Hy-TechMachine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc., a Pennsylvania corporation (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 theHy-Tech Sellers’ historical financial performance. The Hy-Tech PurchasedProperty was used by the Hy-Tech Sellers in the business of, among otherthings, manufacturing and selling pneumatic tools and other tool products.

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In connection with this acquisition, Hy-Techcontemporaneously entered into an Agreement of Sale with HTM Associates, aPennsylvania general partnership comprised of certain shareholders of theHy-Tech Sellers (“HTM”), pursuant to which Hy-Tech purchased certain realproperty located in Cranberry Township, Pennsylvania from HTM for $2,200,000 incash. The acquisition of the Hy-Tech Purchased Property and the real propertywas financed through the Company’s senior credit facility.

The Company also agreed to make additional payments (“ContingentConsideration”) to the Sellers. The amount of Contingent Consideration is to bebased on a percentage of the average increase in earnings before interest,taxes, depreciation and amortization (“EBITDA”) over a two-year period from thedate of acquisition, over a base year EBITDA of $4,473,000.

In addition, the Company has agreed to make a furtheradditional payment (“Additional Contingent Consideration”), subject to certainconditions related to an exclusive supply agreement with a major customer and,to a certain extent and subject to certain provisions, the achievement ofContingent Consideration. This Additional Contingent consideration may notexceed $1,900,000.

Any such additional payments for ContingentConsideration or Additional Contingent Consideration, if any, would be payableon or about ninety days subsequent to the second anniversary of the acquisitiondate and will be treated by the Company as additions to goodwill.

Contemporaneously with the acquisition, the Companyexecuted and delivered Amendment No. 7 to Credit Agreement with Citibankand another bank. The amendment, among other things, adds Continental andHy-Tech as additional co-borrowers and provides for new term loans in amountsnot to exceed $19,000,000. The principal on the new term loan notes are payablein 25 consecutive quarterly installments of $760,000, commencing on January 31,2008. From the date of the amendment through January 31, 2008, monthlypayments shall be made of interest only. The Company and the co-borrowers havethe option to pay interest at a rate based on either the fluctuating primerate, LIBOR or a combination of the two rates. The new term loan notes shallmature on January 31, 2014. The amendment also provides for the amendmentand restatement of certain existing term loan notes. The revolving credit loanfacility provides for a maximum of $18,000,000, with various sublimits, fordirect borrowings, letters of credit, bankers’ acceptances and equipment loans.

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**NOTE 17—UNAUDITED QUARTERLY RESULTS**

| ** **                                                  | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| **2006**                                                    | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net revenues                                                |       | $                      | 26,849,503 |   | $ | 28,860,361 |   | $ | 32,318,961 |   | $ | 23,703,906 |   |
| Gross profit                                                |       | $                      | 8,247,300  |   | $ | 9,408,252 |   | $ | 9,701,716 |   | $ | 6,623,562 |   |
| Earnings from  continuing operations                        |       | $                      | 871,956    |   | $ | 1,283,739 |   | $ | 1,495,429 |   | $ | 159,739 |   |
| Earnings (loss)  from discontinued operations, net of taxes |       | 2,045                  |       | 43,416 |   | (51,491 | ) | 76,431 |   |
| Net earnings                                                |       | $                      | 874,001    |   | $ | 1,327,155 |   | $ | 1,443,938 |   | $ | 236,170 |   |
| Basic earnings per  common share:                           |       |                   |       |   |   |   |   |   |   |
| Earnings from continuing operations                         |       | $                      | .24        |   | $ | .36 |   | $ | .42 |   | $ | .05 |   |
| Earnings (loss) from discontinued operations, net of  taxes |       | —                 |       | .01 |   | (.02 | ) | .02 |   |
| Net earnings                                                |       | $                      | .24        |   | $ | .37 |   | $ | .40 |   | $ | .07 |   |
| Diluted earnings per  common share:                         |       |                   |       |   |   |   |   |   |   |
| Earnings from continuing operations                         |       | $                      | .23        |   | $ | .34 |   | $ | .40 |   | $ | .04 |   |
| Earnings (loss) from discontinued operations, net of  taxes |       | —                 |       | .01 |   | (.01 | ) | .02 |   |
| Net earnings                                                |       | $                      | .23        |   | $ | .35 |   | $ | .39 |   | $ | .06 |   |
| Weighted average common  shares outstanding:                |       |                   |       |   |   |   |   |   |   |
| Basic                                                       |       | 3,583,942              |       | 3,577,760 |   | 3,577,760 |   | 3,577,760 |   |
| Diluted                                                     |       | 3,832,264              |       | 3,825,317 |   | 3,741,052 |   | 3,736,366 |   |

 

| ** **                                                  | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| **2005**                                                    | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net revenues                                                |       | $                      | 24,324,264 |   | $ | 28,130,059 |   | $ | 29,754,959 |   | $ | 25,768,379 |   |
| Gross profit                                                |       | $                      | 7,715,705  |   | $ | 9,131,831 |   | $ | 9,072,770 |   | $ | 8,238,960 |   |
| Earnings from  continuing operations                        |       | $                      | 1,111,960  |   | $ | 1,443,406 |   | $ | 1,213,471 |   | $ | 1,078,151 |   |
| Earnings (loss)  from discontinued operations, net of taxes |       | (148,556               | )          | 41,518 |   | 311,628 |   | 1,519,013 |   |
| Net earnings                                                |       | $                      | 963,404    |   | $ | 1,484,924 |   | $ | 1,525,099 |   | $ | 2,597,164 |   |
| Basic earnings per  common share:                           |       |                   |       |   |   |   |   |   |   |
| Earnings from continuing operations                         |       | $                      | .31        |   | $ | .41 |   | $ | .34 |   | $ | .30 |   |
| Earnings (loss) from discontinued operations, net of  taxes |       | (.04                   | )          | .01 |   | .09 |   | .42 |   |
| Net earnings                                                |       | $                      | .27        |   | $ | .42 |   | $ | .43 |   | $ | .72 |   |
| Diluted earnings per  common share:                         |       |                   |       |   |   |   |   |   |   |
| Earnings from continuing operations                         |       | $                      | .29        |   | $ | .37 |   | $ | .31 |   | $ | .28 |   |
| Earnings (loss) from discontinued operations, net of  taxes |       | (.04                   | )          | .01 |   | .08 |   | .40 |   |
| Net earnings                                                |       | $                      | .25        |   | $ | .38 |   | $ | .39 |   | $ | .68 |   |
| Weighted average common  shares outstanding:                |       |                   |       |   |   |   |   |   |   |
| Basic                                                       |       | 3,559,922              |       | 3,568,209 |   | 3,581,326 |   | 3,577,378 |   |
| Diluted                                                     |       | 3,875,880              |       | 3,879,657 |   | 3,890,138 |   | 3,850,053 |   |

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIESSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS**

| ** **                                           | ** ** | **Column A**                              | ** ** | **Column B**                                                    | ** ** | **Column C**                                   | ** ** | **Column D** | ** ** | **Column E**                        | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------|------------|------------------------------------------|------------|
| **Description**                                      | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged  (Credited)  to Costs and  Expenses** | ** ** | **Additions  Charged to  Other Accounts** | ** ** | **Deductions**    | ** ** | **Balance at  End of  Period** | ** ** |
| *Allowance for doubtful  accounts:*                  |       |                                           |       |                                                                 |       |                                                |       |              |       |                                     |       |   |   |   |   |   |   |
| Year ended  December 31, 2006                   |       | $                                              | 189,586    |                                                                 |       | $                                                   | 59,689     |              |       |                                     | $          | — |   |   |   | $ | 26,198 | (b) |   | $ | 223,077 |   |
| Year ended  December 31, 2005                   |       | $                                              | 217,670    |                                                                 |       | $                                                   | 11,168     |              |       |                                     | $          | — |   |   |   | $ | 39,252 | (b) |   | $ | 189,586 |   |
| Year ended  December 31, 2004                   |       | $                                              | 114,232    |                                                                 |       | $                                                   | (21,260    | )                 |       |                                     | $          | 153,405 | (a) |   |   | $ | 28,707 | (b) |   | $ | 217,670 |   |
| *Reserve for obsolete and  slow-moving inventories:* |       |                                           |       |                                                                 |       |                                                |       |              |       |                                     |       |   |   |   |   |   |   |
| Year ended  December 31, 2006                   |       | $                                              | 1,981,196  |                                                                 |       | $                                                   | 276,099    |              |       |                                     | $          | — |   |   |   | $ | 427,970 | (b) |   | $ | 1,829,325 |   |
| Year ended  December 31, 2005                   |       | $                                              | 1,832,315  |                                                                 |       | $                                                   | 240,041    |              |       |                                     | $          | — |   |   |   | $ | 91,160 | (b) |   | $ | 1,981,196 |   |
| Year ended  December 31, 2004                   |       | $                                              | 1,047,220  |                                                                 |       | $                                                   | 75,398     |              |       |                                     | $          | 754,813 | (a) |   |   | $ | 45,116 | (b) |   | $ | 1,832,315 |   |
| *Provision for warranty  obligations:*               |       |                                           |       |                                                                 |       |                                                |       |              |       |                                     |       |   |   |   |   |   |   |
| Year ended  December 31, 2006                   |       | $                                              | 418,811    |                                                                 |       | $                                                   | 472,512    |              |       |                                     | $          | — |   |   |   | $ | 523,774 | (b) |   | $ | 367,549 |   |
| Year ended  December 31, 2005                   |       | $                                              | 509,947    |                                                                 |       | $                                                   | 451,846    |              |       |                                     | $          | — |   |   |   | $ | 542,982 | (b) |   | $ | 418,811 |   |
| Year ended  December 31, 2004                   |       | $                                              | 120,098    |                                                                 |       | $                                                   | 944,068    |              |       |                                     | $          | 148,487 | (a) |   |   | $ | 702,706 | (b) |   | $ | 509,947 |   |

 

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(a)           Initial reserves ofcompany acquired in purchase business combination.

(b)          Write-off of expensesagainst reserve.

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosures

None.

**Item 9A.**                Controlsand Procedures

**Evaluation ofdisclosure controls and procedures**

An evaluation was performed, under the supervision of,and with the participation of, the Company’s management, including thePrincipal Executive Officer and Principal Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) tothe Securities and Exchange Act of 1934). Based on that evaluation, the Company’smanagement, including the Principal Executive Officer and Principal FinancialOfficer, concluded that the Company’s disclosure controls and procedures werenot effective as of December 31, 2005 due to the material weaknessesstated below. These material weaknesses were reiterated during the periodsending March 31, 2006, June 30, 2006 and September 30, 2006.Based on its evaluation, the Company’s management concluded that theremediation steps outlined below have been implemented and the deficiencieshave been remediated and tested without exception as of December 31, 2006.As such, the Company’s disclosure controls as of December 31, 2006 wereeffective. Accordingly, management believes that the consolidated financialstatements included in this Annual Report on Form 10-K, fairlypresent, in all material respects our financial condition, results ofoperations and cash flows for the periods presented.

P&F management is responsible for establishing andmaintaining effective internal controls. Because of its inherent limitations,internal controls may not prevent or detect misstatements. A control system, nomatter how well designed and operated, can only provide reasonable, notabsolute, assurance that the control system’s objectives will be met. Also,projections of any evaluation of effectiveness as to future periods are subjectto the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with policies and procedures maydeteriorate.

A material weakness is acontrol deficiency, or combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected.

***Description of Material Weaknesses as of December 31,2005***

Management’sassessment identified the following material weaknesses at December 31,2005 in the Company’s internal control over financial reporting:

1.                Deficiencies inthe segregation of duties, specifically as they relate to cash management, thepreparation and posting of journal entries and the general controls overinformation technology security and user access.

2.                Significantinternal control deficiencies that were considered to be, in the aggregate, amaterial weakness, included inadequate staffing and supervision leading to theuntimely identification and resolution of certain accounting matters; andfailure to perform timely reviews, substantiation and evaluation of certaingeneral ledger account balances.

The Certifications of theCompany’s Principal Executive Officer and Principal Financial Officer includedas Exhibits 31.1 and 31.2 to this Annual Report on Form 10-Kinclude, in paragraph 4 of such certifications, information concerning theCompany’s disclosure controls and procedures and internal control overfinancial reporting. Such certifications should be read in conjunction with theinformation contained in this Item 9A - Controls and Procedures for a morecomplete understanding of the matters covered by such certifications.

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***Remediation Efforts that Addressed Material Weaknesses***

The Companydeveloped remediation plans and initiated action steps subsequent to December 31,2005 designed to address each of the material weaknesses in the internalcontrol over financial reporting identified above and to implement any and allcorrective actions that are required to improve the design and operatingeffectiveness of internal control over financial reporting, including theenhancement of the Company’s policies, systems and procedures. The Companyimplemented the following measures to remediate the numbered controldeficiencies identified above:

1.                Management hasimplemented measures to segregate certain functions and otherwise improve cashmanagement functions including (i) individuals that initiate a wiretransfer are now prevented from transmitting the wire transfer; (ii) allwire transfers in excess of $100,000 now require written approval and releasefrom Corporate management; (iii) modification of its check-signingprivileges such that all checks will require dual manual signatures; and (iv) allblank check stock is now being maintained in a locked cabinet that isaccessible to an individual who is not a check signer. In addition, managementhas implemented measures to segregate the preparation of journal entries andtheir subsequent posting to the General Ledger, including (i) journal entriesare prepared only by Accounting personnel; (ii) journal entries must beapproved in writing by a financial management individual prior to posting tothe general ledger; (iii) access to post journal entries has been restricted toone or two individuals at each operating entity. This individual cannot be thesame as the person by whom the journal entry was approved; (iv) subsequent toposting, a report is generated from the system reflecting the posting entry.This report is reviewed and signed off by a financial management individual whodid not post the journal entry.

2.                Management hasinitiated a review of its training and supervision policies and procedures,particularly with respect to the functions described above where significantdeficiencies were noted, which is expected to include an evaluation of the specificknowledge and skills required to perform each function, an assessment of thepersonnel training necessary to perform such function adequately, a plan toensure that all personnel receive the appropriate level of training, and areview and modification of the supervisory procedures over such personnel.

The Company believes thatthe above measures have addressed all matters identified as a material weaknessby management. The Company will continue to monitor the effectiveness of itsinternal controls and procedures on an ongoing basis and will take furtheractions, as appropriate.

**Changes in InternalControl Over Financial Reporting**

Except as otherwisediscussed herein, there have been no significant changes in the Company’sinternal control over financial reporting during the most recently completedfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

**Item 9B.**               OtherInformation

None.

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**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance

The information requiredby Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-Kis incorporated by reference to the Company’s definitive proxy statement inconnection with its Annual Meeting of Stockholders scheduled to be held in2007, to be filed with the Securities and Exchange Commission within 120 daysfollowing the end of the Company’s fiscal year ended December 31, 2006.Information in the “Equity Compensation Plan Information” table is locatedunder Item 12 of this Part III.

**Item 11.**                 ExecutiveCompensation

See Item 10.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

See Item 10.

**EquityCompensation Plan Information**
| Plan category                                          | ** ** | ** ** | ** ** | **Number of securities  to be issued upon exercise of  outstanding options  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights  (b)** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in  column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 560,900    |                                                                                                                                                     |       |                                                                                                         | $          | 7.69                                                                                                                                                                                                          |       |   |   | 683,400 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                     |       |                                                                                                         | —     |                                                                                                                                                                                                          |       |   | — |   |   |
| **TOTAL**                                                   |       |       | 560,900    |                                                                                                                                                     |       |                                                                                                         | $          | 7.69                                                                                                                                                                                                          |       |   |   | 683,400 |   |   |

 

For further information,see Note 11 to the Notes to Consolidated Financial Statements.

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

See Item 10.

**Item14.**                 Principal Accountant Fees and Services

See Item 10.

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**PART IV**

**Item15.**                 Exhibits andFinancial Statement Schedules

|        | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                | ** ** | **Page** |
|--------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| a)     |       |       |       | List of Financial  Statements, Financial Statement Schedules, and Exhibits                                                                                                                |       |     |
|   |       | (1)        |       | List of Financial  Statements                                                                                                                                                             |       |     |
|   |       |       |       | The consolidated  financial statements of the Company and its subsidiaries are included in Item  8 of Part II of this report.                                                        |       | 28       |
|   |       | (2)        |       | List of Financial  Statement Schedules                                                                                                                                                    |       |     |
|   |       |       |       | The following financial  statement schedules of the Company and its subsidiaries are included in Item  8 of Part II of this report following the consolidated financial  statements: |       |     |
|   |       |       |       | Schedule II—Valuation and Qualifying Accounts and  Reserves                                                                                                                          |       | 65       |

 

All other schedulesfor which provision is made in the applicable accounting regulations of theCommission are not required under the related instructions or are inapplicableand, therefore, have been omitted.

|  |   | (3) |   | List of Exhibits |   | 69 |
|--|--------|-----|--------|------------------|--------|----|

 

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

| Exhibit   Number | ** ** | **Description of Exhibit** |
|------------------|------------|----------------------------|
|             | **2.1**    |                       |   | Stock Purchase  Agreement, dated as of May 3, 2002, by and between Mark C. Weldon and  the Registrant (Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K dated May 3, 2002).  Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish supplementally a copy of any exhibit or schedule omitted from the  Stock Purchase Agreement to the Securities and Exchange Commission upon request. |
|             | **2.2**    |                       |   | Settlement  Agreement and Amendment to Stock Purchase Agreement, dated as of  July 22, 2005, by and between Mark C. Weldon and the Registrant  (Incorporated by reference to Exhibit 2.3 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2005). |
|             | **2.3**    |                       |   | Asset Purchase  Agreement, dated as of June 30, 2004, by and among WM Texas  International, L.P., a Texas limited partnership formerly known as Woodmark  International, L.P., SH Georgia, Inc., a Georgia corporation formerly  known as Stair House, Inc., Samuel G. Sherstad, WM Texas GP, LLC, WM  Texas Partners, LLC and Woodmark International, L.P., a Delaware limited  partnership (Incorporated by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K  dated July 14, 2004, and amended September 10, 2004). Pursuant to Item 601(b)(2) of Regulation  S-K, the Registrant agrees to furnish, supplementally, a copy of any exhibit  or schedule omitted from the Asset Purchase Agreement to the Commission upon  request. |
|             | **2.4**    |                       |   | Asset Purchase  Agreement, dated December 13, 2004, among Rosenboom Machine &  Tool, Inc., Green Manufacturing, Inc. and P&F  Industries, Inc. (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K dated December 17, 2004, and amended March 4,  2005). Pursuant to Item  601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request. |

69

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|        | **2.5** |   |   | Amendment to Asset  Purchase Agreement, dated June 8, 2005, among Rosenboom  Machine & Tool, Inc., Green Manufacturing, Inc. and  P&F Industries, Inc. (Incorporated  by reference to Exhibit 2.7 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2005).                                                                                                                                                                                                                                                       |
|--------|---------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **2.6** |   |   | Asset Purchase  Agreement, dated as of February 2, 2005, between Green  Manufacturing, Inc. and Benko Products, Inc. (Incorporated by reference to Exhibit 2.1  to the Registrant’s Current Report on Form 8-K dated  February 4, 2005). Pursuant to  Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request.                                                                                                       |
|   | **2.7** |   |   | Asset Purchase  Agreement, dated as of October 11, 2005, between Embassy  Industries, Inc. and Mestek, Inc. (Incorporated by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K  dated October 12, 2005). Pursuant to  Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request.                                                                                                                |
|   | **2.8** |   |   | Asset Purchase  Agreement, effective as of February 12, 2007, Hy-Tech  Machine, Inc., a Delaware corporation, Hy-Tech Machine, Inc., a  Pennsylvania corporation, Quality Gear and Machine, Inc. and HTM  Associates (Incorporated by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K  dated February 14, 2007).  Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request. |
|   | **2.9** |   |   | Agreement of Sale,  effective as of February 12, 2007, Hy-Tech Machine, Inc., and HTM  Associates (Incorporated by reference to Exhibit 2.2 to the Registrant’s  Current Report on Form 8-K dated February 14, 2007).                                                                                                                                                                                                                                                                                                                                                   |
|   | **3.1** |   |   | Restated Certificate of  Incorporation of the Registrant (Incorporated by reference to  Exhibit 3.1 to Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                     |
|   | **3.2** |   |   | Amended By-laws of the  Registrant (Incorporated by reference to Exhibit 3.2 to Registrant’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | **3.3** |   |   | Amendment to the Amended  By-laws of the Registrant (Incorporated by reference to Exhibit 3.1 to  the Registrant’s Current Report on Form 8-K dated March 21,  2005).                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | **3.4** |   |   | Amendment to the Amended  By-laws of the Registrant (Incorporated by reference to Exhibit 3 to the  Registrant’s Current Report on Form 8-K dated September 16,  2005).                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | **4.1** |   |   | Rights Agreement, dated  as of August 19, 2004, between the Registrant and American Stock  Transfer & Trust Company, as Rights Agent (Incorporated by reference  to Exhibit 1 to the Registrant’s Registration Statement on Form 8-A  dated August 19, 2004).                                                                                                                                                                                                                                                                                                       |
|   | **4.2** |   |   | Credit Agreement, dated  as of June 30, 2004, 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. and 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 14, 2004).                                                                                       |
|   | **4.3** |   |   | Amendment to Credit  Agreement, dated June 24, 2005, 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. and 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 June 27, 2005).                                                                                |

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|        | **4.4**  |   |   | Amendment No. 2 to  Credit Agreement, dated December 27, 2005, 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. and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.4 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 2005).                                                                                                           |
|--------|----------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **4.5**  |   |   | Amendment No. 3 to  Credit Agreement, dated February 13, 2006, 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., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.5 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 2005).                                            |
|   | **4.6**  |   |   | Amendment No. 4 to  Credit Agreement, dated May 11, 2006, 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., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.6 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 31,  2006).                                                     |
|   | **4.7**  |   |   | Amendment No. 5 to  Credit Agreement, dated June 29, 2006, 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., and 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 June 30, 2006).                                                                        |
|   | **4.8**  |   |   | Amendment No. 6 to  Credit Agreement, dated August 31, 2006, 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., and 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 August 31, 2006).                                                                    |
|   | **4.9**  |   |   | Amendment No. 7 to  Credit Agreement, dated February 12, 2007, by and among the Registrant,  Florida Pneumatic Manufacturing Corporation, Embassy Industries, Inc.,  Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair  Products, Inc., WILP Holdings, Inc., Continental Tool  Group, Inc., Hy-Tech Machine, Inc. and 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 February 14, 2007). |
|   | **4.10** |   |   | Certain instruments  defining the rights of holders of the long-term debt securities of the  Registrant are omitted pursuant to Section (b)(4)(iii)(A) of Item  601 of Regulation S-K. The Registrant agrees to furnish supplementally copies  of these instruments to the Commission upon request.                                                                                                                                                                                                                                                                                                                                                           |
|   | **10.1** |   |   | Second Amended and  Restated Employment Agreement, dated as of May 30, 2001 and amended  October 24, 2005, between the Registrant and Richard A. Horowitz (Incorporated  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2006 and incorporated by reference to Exhibits 10.1 and  10.2 to the Registrant’s Current Report on Form 8-K dated  October 28, 2005).                                                                                                                                                                                        |

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|        | **10.2**  |   |   | Amendment to the Second  Amended and Restated Employment Agreement, dated as of October 24, 2005,  between the Registrant and Richard A. Horowitz and the 1994 Richard A.  Horowitz Family Trust (Incorporated by reference to Exhibits 10.1 and 10.2 to the Registrant’s Current Report on  Form 8-K dated October 28, 2005). |
|--------|-----------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **10.3**  |   |   | Agreement, dated as of  October 24, 2005, among the Registrant, Richard A. Horowitz and the 1994  Richard A. Horowitz Family Trust (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current  Report on Form 8-K dated October 28, 2005).                                                                    |
|   | **10.4**  |   |   | Executive Employment  Agreement, dated February 12, 2007, among the Registrant and Richard A.  Horowitz (Incorporated by reference to Exhibit 10.1  to the Registrant’s Current Report on Form 8-K dated  February 12, 2007).                                                                                             |
|   | **10.5**  |   |   | 1992 Incentive Stock  Option Plan of the Registrant, as amended and restated as of March 13,  1997 (Incorporated by reference to Exhibit 10.3 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 2003).                                                                              |
|   | **10.6**  |   |   | 2002  Stock Incentive Plan of the Registrant (Incorporated by reference to  Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002).                                                                                                                                              |
|   | **10.7**  |   |   | Executive 162(m) Bonus Plan of the Registrant effective as of  January 1, 2006 (Incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated May 31, 2006).                                                                                                                            |
|   | **10.8**  |   |   | Contract of Sale, dated  January 13, 2006, between the Registrant and J. D’Addario &  Company, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K dated January 13, 2006).                                                                                |
|   | **10.9**  |   |   | First Amendment to  Contract of Sale, dated March 8, 2006, between the Registrant and J.  D’Addario & Company, Inc. (Incorporated by reference to  Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 2005).                                          |
|   | **10.10** |   |   | Contract of Sale, dated  February 26, 2007, between the Registrant and Tell Realty LLC  (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated  February 27, 2007).                                                                                                              |
|   | **21**    |   |   | Subsidiaries of the  Registrant (Filed herein).                                                                                                                                                                                                                                                                                                    |
|   | **23.1**  |   |   | Consent of the  Registrant’s Independent Registered Public Accounting Firm (Filed herein).                                                                                                                                                                                                                                                    |
|   | **23.2**  |   |   | Consent of the Registrant’s  Independent Registered Public Accounting Firm (Filed herein).                                                                                                                                                                                                                                                    |
|   | **31.1**  |   |   | Certification of Richard  A. Horowitz, Principal Executive Officer of the Registrant, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herein).                                                                                                                                                                              |
|   | **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 (Filed herein).                                                                                                                                                                       |
|   | **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 (Filed herein).                                                                                                                         |
|   | **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 (Filed herein).                                                                                                                  |

 

A copy of any of the foregoing exhibits to this AnnualReport on Form 10-K may be obtained, upon payment of theRegistrant’s reasonable expenses in furnishing such exhibit, by writing toP&F Industries, Inc., 445 Broadhollow Road, Suite 100, MelvilleNew York 11747, Attention: Corporate Secretary.

72

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

**P&F INDUSTRIES, INC.**

(Registrant)
| By:    |   | /s/ RICHARD A.  HOROWITZ                                                                   |   |   | By:    |                                                        | /s/ JOSEPH A.  MOLINO, JR. |   |
|--------|--------|--------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------|---------------------------------|--------|
|   |   | Richard A. Horowitz                                                                        |   |   |   | Joseph A. Molino, Jr.                                  |
|   |   | Chairman of the Board  President  Principal Executive Officer  Principal Operating Officer |   |   |   | Vice President  Principal Financial and  Accounting Officer |

 

Date: March 30, 2007

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the date indicated.
|                         | **Name** | ** **          | ** ** | **Title** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|----------|---------------------|------------|-----------|------------|------------|----------|------------|
| /s/ ROBERT L. DUBOFSKY  | Director | March 30, 2007 |
| Robert L. Dubofsky      |     |                |
| /s/ JEFFREY D. FRANKLIN | Director | March 30, 2007 |
| Jeffrey D. Franklin     |     |                |
| /s/ ALAN GOLDBERG       | Director | March 30, 2007 |
| Alan Goldberg           |     |                |
| /s/ RICHARD A. HOROWITZ | Director | March 30, 2007 |
| Richard A. Horowitz     |     |                |
| /s/ SIDNEY HOROWITZ     | Director | March 30, 2007 |
| Sidney Horowitz         |     |                |
| /s/ DENNIS KALICK       | Director | March 30, 2007 |
| Dennis Kalick           |     |                |
| /s/ KENNETH M. SCHERIFF | Director | March 30, 2007 |
| Kenneth M. Scheriff     |     |                |
| /s/ MITCHELL A. SOLOMON | Director | March 30, 2007 |
| Mitchell A. Solomon     |     |                |
| /s/ ROBERT M. STEINBERG | Director | March 30, 2007 |
| Robert M. Steinberg     |     |                |
| /s/ MARC A. UTAY        | Director | March 30, 2007 |
| Marc A. Utay            |     |                |

 

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