**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, 2005** |
| **or**                                               |
| **o**                                                | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**Commission File Number 1-5332**

**P&FINDUSTRIES, INC.**

(Exact name of registrantas specified in its charter)

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

 

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

Securities registeredpursuant to Section 12(b) of the Act: **NONE**

Securities registeredpursuant to Section 12(g) of the Act:

| **Class A Common Stock,  $1.00 par value** |   | **NONE**                                     |
|-------------------------------------------------|--------|----------------------------------------------|
| (Title of each  class)                          |   | (Name of each  exchange on which registered) |

 

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. x

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              AcceleratedFiler 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, 2005 (the lastbusiness day of the registrant’s most recently completed second fiscalquarter), was approximately $36,444,000.

As of March 28, 2006,there were 3,582,760 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 2006.

 

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**P&F INDUSTRIES, INC.**

**FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2005**

**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                               |       |     |
| Item 1.           |       | Business                                                                                                           |       | 1        |
| Item 1A.          |       | Risk  Factors                                                                                                      |       | 5        |
| Item 1B.          |       | Unresolved Staff Comments                                                                                          |       | 6        |
| Item 2.           |       | Properties                                                                                                         |       | 6        |
| Item 3.           |       | Legal  Proceedings                                                                                                 |       | 7        |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                |       | 7        |
| **PART II**  |       |                                                                                                               |       |     |
| Item 5.           |       | Market for Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities |       | 7        |
| Item  6.          |       | Selected  Financial Data                                                                                           |       | 8        |
| Item 7.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                   |       | 9        |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       | 22       |
| Item 8.           |       | Financial Statements and Supplementary Data                                                                        |       | 23       |
| Item 9.           |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       | 57       |
| Item 9A.          |       | Controls and Procedures                                                                                            |       | 57       |
| Item  9B.         |       | Other  Information                                                                                                 |       | 58       |
| **PART III** |       |                                                                                                               |       |     |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                                                 |       | 58       |
| Item 11.          |       | Executive Compensation                                                                                             |       | 59       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       | 59       |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                     |       | 59       |
| Item 14.          |       | Principal Accountant Fees and Services                                                                             |       | 59       |
| **PART IV**  |       |                                                                                                               |       |     |
| Item 15.          |       | Exhibits and Financial Statement Schedules                                                                         |       | 60       |
|              |       | Signatures                                                                                                         |       | 64       |

 

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**FORWARD LOOKING STATEMENTS**

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 and its representatives may, from time to time,make written or verbal forward-looking statements, including statementscontained in the Company’s filings with the Securities and Exchange Commissionand in its reports to stockholders. Generally, the inclusion of the words “believe,”“expect,” “intend,” “estimate,” “anticipate,” “will,” their opposites andsimilar 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 theCompany’s future performance, are based upon the Company’s historicalperformance and on current plans, estimates and expectations. Suchforward-looking statements are subject to various risks and uncertainties,including those identified in Item 1A, which may cause actual results to differmaterially from the forward looking statements. Forward-looking statementsspeak only as of the date on which they are made, and the Company undertakes noobligation to update publicly or revise any forward-looking statement, whetheras a result of new information, future developments or otherwise.

**PART I**

**ITEM 1.   Business**

P&F Industries, Inc.(“P&F”) is a Delaware corporation incorporated on April 19, 1963.P&F conducts its business operations through two of its wholly-ownedsubsidiaries: Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.

Florida Pneumatic isengaged in the importation, manufacture and sale of pneumatic hand tools,primarily for the industrial, retail and automotive markets, and theimportation and sale of compressor air filters. Florida Pneumatic also markets,through its Berkley Tool division (“Berkley”), a line of pipe cutting andthreading tools, wrenches and replacement electrical components for awidely-used brand of pipe cutting and threading machines. In addition, throughits Franklin Manufacturing (“Franklin”) division, Florida Pneumatic imports aline of door and window hardware. Countrywide conducts its business operationsthrough Nationwide Industries, Inc. (“Nationwide”) and through WoodmarkInternational, L.P. (“Woodmark”), a limited partnership between Countrywide andWILP Holdings, Inc. (See Note 2 to the Notes to Consolidated FinancialStatements for information regarding the June 2004 Woodmark acquisitiontransaction.) Nationwide is an importer and manufacturer of door, window andfencing hardware. Woodmark is an importer of builders’ hardware, includingstaircase components and kitchen and bath hardware and accessories. In January 2006,Countrywide acquired substantially all of the operating assets of Pacific StairProducts, Inc. (“Pacific Stair”). Pacific Stair is a manufacturer ofpremium stair rail products and a distributor of Woodmark’s staircasecomponents to the building industry, primarily in southern California and thesouthwestern region of the United States. (See Note 16 to the Notes toConsolidated Financial Statements.)

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 to the Notes to Consolidated Financial Statements.) The Company’swholly-owned subsidiary, Green Manufacturing, Inc. (“Green”), wasprimarily engaged in the manufacture, development and sale of heavy-duty weldedcustom 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 

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certainassets and a line of post hole digging equipment for the agricultural industryuntil it exited that business in July 2005 through the sale of certainassets. Green has effectively ceased all operating activities. The assets andliabilities and results of operations of Embassy and Green have been segregatedand reported separately as discontinued operations in the ConsolidatedFinancial Statements. (See Note 3 to the Notes to Consolidated FinancialStatements.) Note 14 to the Notes to Consolidated Financial Statements presentsfinancial information for the segments of the Company’s business.

Florida Pneumatic has twomajor customers. Sears, Roebuck and Co. accounted for 16.5%, 24.3% and 29.6% ofconsolidated revenues for the years ended December 31, 2005, 2004 and2003, respectively. The Home Depot, Inc. accounted for 15.2%, 19.4% and21.4% of consolidated revenues for the years ended December 31, 2005, 2004and 2003, respectively. Revenues derived from countries outside of the UnitedStates were immaterial for the years ended December 31, 2005, 2004 and2003.

**Florida Pneumatic**

Florida Pneumatic importsor manufactures approximately fifty types of pneumatic hand tools, most ofwhich are sold at prices ranging from $50 to $1,000, under the names “FloridaPneumatic” and “Universal Tool,” as well as under the trade names or trademarksof several private label customers. This line of products includes sanders,grinders, drills, saws and impact wrenches. These tools are similar in appearanceand function to electric hand tools, but are powered by compressed air, ratherthan directly by electricity. Air tools, as they are also called, are generallyless expensive to operate, offer better performance and weigh less than theirelectrical counterparts.

Berkley markets a productline consisting of pipe and bolt dies, pipe taps, pipe and tubing cutter wheelsand replacement electrical components for a widely-used brand of pipe cuttingand threading machines. Florida Pneumatic markets Berkley’s products throughindustrial distributors and contractors.

Franklin imports andpackages approximately 225 types of hardware products, including locksets,deadbolts, door and window security hardware, rope-related hardware productsand fire escape ladders. Franklin’s products generally range in price fromunder $1.00 to $30.00, and are sold to retailers, wholesalers and private labelaccounts through manufacturers’ representatives and in-house sales supportpersonnel. Nearly all of Franklin’s sales are of products imported from China.

Florida Pneumatic’sproducts are sold to distributors, retailers and private label customersthrough in-house sales personnel and manufacturers’ representatives. Users ofFlorida Pneumatic’s hand tools include industrial maintenance and productionstaffs, do-it-yourself mechanics, automobile mechanics and auto body personnel.

The primary competitivefactors in the pneumatic tool market are price, service and brand-nameawareness. The primary competitive factors in Franklin’s business are price,service, skill in packaging and point-of-sale marketing.

Florida Pneumatic’sproducts are sold off the shelf, and no material backlog of orders exists. Thebusiness is not seasonal, but it may be subject to significant periodic changesresulting from holiday sales promotions by customers.

Florida Pneumaticpurchases all of its pneumatic tools from a Far East trading company that ownsor represents 18 individual factories in Japan, Taiwan and China. Of the totalpneumatic tool purchases, approximately 32% are bought from Japan, 54% fromTaiwan and 14% 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 manufactured.

Two customers accountedfor 36.7% and 34.0%, 41.3% and 33.0% and 38.3% and 27.7% of Florida Pneumatic’srevenues for the years ended December 31, 2005, 2004 and 2003,respectively.

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**Countrywide**

Countrywide conducts itsbusiness through Nationwide Industries, Inc. (“Nationwide”), WoodmarkInternational LP (“Woodmark”), and, since January 3, 2006, Pacific StairProducts, Inc. (“Pacific Stair”). Pacific Stair is a manufacturer ofpremium stair rail products and a distributor of staircase components forWoodmark to the building industry, primarily in southern California and thesouthwestern region of the United States. (See Note 16 to the Notes toConsolidated Financial Statements.)

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

Most of Nationwide’s salesare of products imported from Taiwan and China. Nationwide currently purchasesapproximately 84% of its product from two foreign suppliers. Although there areredundant sources available for substantially all products manufactured, theloss of either of these existing suppliers could, at least temporarily,adversely affect operating results. Nationwide manufactures rollers, hinges andpool enclosure products at its factory in Tampa, Florida.

Nationwide’s products aresold through in-house sales personnel and manufacturers’ representatives todistributors, retailers and OEM customers. End users of Nationwide’s productsinclude contractors, home builders, pool and patio distributors, OEM/privatelabel customers and general consumers.

One customer accounted for11.2% of Nationwide’s revenues for the year ended December 31, 2005 and10.9% of Nationwide’s revenues for the year ended December 31, 2004 whiletwo customers accounted for 13.0% and 10.4% of Nationwide’s revenues for theyear ended December 31, 2003.

Nationwide’s sales aresomewhat seasonal, with revenues increasing approximately 35% during the springand summer months. The majority of Nationwide’s products are sold off theshelf. The backlog at December 31, 2005, of approximately 17.5% of annualsales, results primarily from blanket customer orders.

The primary competitivefactors in Nationwide’s business are price, quality, product availability andservice.

Woodmark is an importer ofiron and wood stair parts and residential plumbing fixtures and otheraccessories for new construction and home improvement applications.

Woodmark purchases all ofits stair parts and kitchen and bath products through a longstandingrelationship with a Far East trade partner that owns or represents 11individual factories in China, Taiwan and Indonesia. Of the total stair partsand kitchen and bath products purchases, approximately 68% are bought fromChina, 26% from Taiwan and 6% from Indonesia. There are redundant sources forevery product manufactured.

Woodmark’s stair productsare sold through in-house sales personnel and manufacturers’ representativesto: a) traditional one- and two-step distributors of construction componentswho in turn sell to carpenters, home builders and the retail channel; b)distributors who specialize in stair parts and staircase installation; and c)stair parts manufacturers who outsource certain components from othermanufacturers. Woodmark’s residential plumbing fixtures are sold throughin-house sales personnel and manufacturers’ representatives to plumbingwholesalers and distributors, purchasing cooperatives and OEMs in themanufactured housing and recreational vehicle industry.

No customer accounted formore than 10% of Woodmark’s revenues for the year ended December 31, 2005or for the six-month period since its acquisition through December 31,2004.

The primary competitivefactors in Woodmark’s business are price, quality and product availability.

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**Green**

Green was primarilyengaged in the manufacture, development and sale of heavy-duty welded customdesigned hydraulic cylinders until it exited the cylinder business in December 2004through the sale of certain of its assets, including property, equipment andcertain inventories, to a non-affiliated third party in the industry. (See Note3 to the Notes to Consolidated Financial Statements.) Prior to the sale, all ofGreen’s hydraulic cylinders were sold for use as integrated components on avariety of equipment and machinery manufactured by others.

Until February 2005,Green manufactured a line of access equipment for the petro-chemical and bulkstorage industries. This product line consisted of bridges, platforms, walkwaysand stairways, constructed of steel or aluminum and generally installedoutdoors. In February 2005, Green exited the access equipment business andsold certain of its assets, including equipment, inventories and certainaccounts receivable, to a non-affiliated third party. (See Note 3 to the Notesto Consolidated Financial Statements.)

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, 2004 or 2003. (See Note 3 to the Notes toConsolidated Financial Statements.)

**Embassy**

Until October 2005,Embassy’s baseboard heating products were sold nationally, under the Embassyname and under its Panel-Track, Commercial-Pak, Ambassador, System 6 andHide-a-Vector trademarks, for use in hot-water heating systems installed insingle family homes, multi-unit dwellings and commercial and industrialbuildings. Embassy’s products were sold principally to wholesalers bymanufacturers’ representatives and in-house sales personnel. Embassy’s productswere also sold to other manufacturers for incorporation into their products andfor distribution on a private-label basis.

Embassy also imported aline of radiant heating systems. These systems are different from baseboardheating systems in that the radiant heating systems radiate heat provided byhot water circulating through plastic tubing, which is generally installed beneaththe surface of the floor. These systems include the tubing, manifolds, controlsand installation supplies. Embassy also provided computer software that aids inthe design of the system. No customer accounted for greater than 10% of Embassy’srevenues for the years ended December 31, 2005, 2004 or 2003.

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 under contract for the sale of its realproperty. (See Note 3 to the Notes to Consolidated Financial Statements.)

**Employees**

The Company employed 171persons as of December 31, 2005, including eight at corporateheadquarters. Countrywide had no employees. Florida Pneumatic had 71 employees,Nationwide had 33 employees and Woodmark had 59 employees. These employees arenot represented by a union. The Company believes that its relationships withits employees are satisfactory.

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**ITEM 1A.   RiskFactors**

A widerange of factors could materially affect our performance. In addition to thefactors affecting specific business operations identified in connection withthe description of these operations and the financial results of theseoperations elsewhere in this report, the following factors, among others, couldadversely affect our operations:

·       The strength of the retaileconomy in the United States. Our business is subject to economic conditions inits major markets, including recession, inflation, deflation, general weaknessin retail, industrial, and housing markets.

·       Ourability to maintain mutually beneficial relationships with key customers. Wehave several significant customers, including two customers that, in theaggregate, constituted approximately 32% of our consolidated revenues for 2005.The loss of either of these significant customers or a material negative changein our relationships with these significant customers could have an adverseeffect on our financial position and results of operations.

·       Adversechanges in currency exchange rates or raw material commodity prices. Asignificant amount of our products are manufactured outside the United Statesand purchased in the local currency. As a result, we are exposed to movementsin the exchange rates of various currencies against the United States dollar.We believe our most significant foreign currency exposures are the Japanese yenand the New Taiwan dollar. Additionally, we purchase approximately $25 millionof products from China. These purchases are made in U.S. dollars. However, ifthe Chinese currency, the Renminbi (RMB), were to be revalued against thedollar, there could be a significant negative impact on the cost of ourproducts.

·       Unforeseeninventory adjustments or changes in purchasing patterns by major customers andthe resultant impact on manufacturing volumes and inventory levels. We make purchasingdecisions based upon a number of factors including an assessment of marketneeds and preferences, manufacturing lead times and cash flow considerations.To the extent that our assumptions result in inventory levels being too high ortoo low, there could be a negative impact on our financial position and resultsof operations.

·       Unforeseeninterruptions in the manufacturing ability of certain foreign suppliers.Although we believe that there are redundant sources available and maintainmultiple sources for certain of our products, there may be costs and delaysassociated with securing such sources and there can be no assurance that suchsources would provide the same quality of product at similar prices.

·       Marketacceptance of new products. There can be no assurance that the market continuesits acceptance of the new products we introduced in 2005 or will accept newproducts scheduled for introduction in 2006. Nor can there be assurance thatthe level of sales generated from these new products relative to ourexpectations, based on existing investments in productive capacity andcommitments by us to fund advertising and product promotions in connection withthe introduction of these new products, will materialize.

·       Impairmentof long-lived assets and goodwill. The inability of certain of our subsidiariesto generate future cash flows sufficient to support the recorded amounts ofgoodwill, other intangible assets and other long-lived assets related to thosesubsidiaries could result in future impairment charges.

·       Increasedcompetition. The domestic markets in which we sell our products are highlycompetitive on the basis of price, quality, availability, post-sale service andbrand-name awareness. A number of competing companies are well-established manufacturersthat compete on a global basis.

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·       Pricereductions. Price reductions taken by us in response to customer andcompetitive pressures, as well as price reductions or promotional actions takenin order to drive demand, may not result in anticipated sales necessary tooffset the associated costs.

·       Interestrates. Interest rate fluctuations and other capital market conditions couldimpact our financial position and results of operations.

·       Litigation.The effects of litigation and product liability exposures, as well as otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission could impact our financial position andresults of operations. (See “Item 3—Legal Proceedings”.)

·       Regulatoryenvironment. We cannot anticipate the impact of changes in laws andregulations, including changes in accounting standards, taxation requirements,including tax rate changes, new tax laws and revised tax law interpretations,and environmental laws, in both domestic and foreign jurisdictions.

·       Unforeseenevents. We cannot anticipate the impact of unforeseen events, including war orterrorist activities, on economic conditions and consumer confidence on ourbusiness.

This listing is notintended to be all-inclusive. There can be no assurance that we have correctlyidentified and appropriately assessed all factors affecting our business orthat the publicly available and other information with respect to these mattersis complete and correct. Additional risks and uncertainties not presently knownto us or that we currently believe to be immaterial also may adversely impactus. Should any risks and uncertainties develop into actual events, thesedevelopments could have material adverse effects on our financial position andresults of operations.

**ITEM1B.   Unresolved Staff Comments**

None

**ITEM 2.   Properties**

In connection with the acquisition of Nationwide in2002, Countrywide purchased the real property and the improvements thereon inwhich Nationwide conducts its business. Countrywide leases part of its facilityto a non-affiliated tenant. Florida Pneumatic owns the plant facility that itoccupies. Countrywide owns the plant facility occupied by Nationwide. Each ofthese facilities is subject to a mortgage. Woodmark leases two plant facilitiesfrom non-affiliated landlords with lease terms expiring in June 2008 and May 2010,respectively, and a third plant facility from a non-affiliated landlord on amonth-to-month basis. Pacific Stair leases its two plant facilities; awarehouse from a non-affiliated landlord with the lease term expiring in July 2008and a manufacturing facility leased from its President and former owner of thecompany, the assets of which were purchased by Pacific Stair, with a lease termexpiring in August 2008. Embassy is presently under contract to sell itsfacility. Green sold its plant facility in December 2004.

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 24,000 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.Embassy’s 75,000 square foot plant facility is located in Farmingdale, NewYork. Each facility either provides adequate space for the operations of therespective subsidiary for the foreseeable future or can be modified or expandedto provide additional space. The Company’s executive offices of approximately5,000 square feet are located in an office building in Melville, New Yorkleased from a non-affiliated landlord with a lease term expiring in March 2013.

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**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.

**ITEM4.   Submission of 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.

**PART II**

**ITEM 5.**   Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

TheCompany’s Class A Common Stock trades on The Nasdaq Stock Market under thesymbol PFIN. The range of high and low bid information for the Company’s Class ACommon Stock during the last two fiscal years was as follows:

| **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    |       |
|                |            |            |            |          |            |         |            |  |  |

 

| **2004**       | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $          | 9.00       |     | $          | 8.03    |       |
| Second Quarter |       | 9.10       |       | 7.50     |       |
| Third Quarter  |       | 9.90       |       | 7.50     |       |
| Fourth Quarter |       | 15.50      |       | 9.01     |       |
|                |            |            |            |          |            |         |            |  |  |

 

Such over-the-countermarket quotations reflect inter-dealer prices, without retail mark-up,mark-down or commission and may not necessarily represent actual transactions.As of March 28, 2006, there were approximately 1,300 holders of record ofthe Company’s Class A Common Stock and the last sale price of the Company’sstock as reported by the The Nasdaq Stock Market was $13.37. The Company hasnot declared any cash dividends on its Class A Common Stock since itsincorporation in 1963 and has no plans to declare any cash dividends in theforeseeable future.

***Issuer Purchases ofEquity Securities***

| **Period**                                            | ** ** | ** ** | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid  per Share** | ** ** | **Total Number  of Shares  Purchased  as Part of  Publicly  Announced  Plans(a)** | ** ** | **Maximum  Number of  Shares that  May Yet Be  Purchased  Under  the Plans** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| October 1,  2005 through October 31, 2005   |       |       | —     |                                         |       |                                     | —     |                                                                                                  |       |                                                                                                  | —     |   |   |   | 150,000 |   |   |
| November 1,  2005 through November 30, 2005 |       |       | 14,422     |                                         |       |                                     | $          | 12.55                                                                                                 |       |                                                                                                  |       | 14,422 |   |   |   | 135,578 |   |   |
| December 1,  2005 through December 31, 2005 |       |       | —     |                                         |       |                                     | —     |                                                                                                  |       |                                                                                                  | —     |   |   |   | 135,578 |   |   |
| Total                                                 |       |       | 14,422     |                                         |       |                                     | $          | 12.55                                                                                                 |       |                                                                                                  |       | 14,422 |   |   |   | 135,578 |   |   |

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(a)           Allpurchases by the Company of its Class A Common Stock were made under thepublicly announced repurchase plans: (1) on August 24, 2001, theCompany’s Board of Directors authorized the purchase 

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of up to 125,000shares, (2) on October 8, 2004, the Company’s Board of Directorsauthorized the purchase of an additional 125,591 shares up to a share repurchasemaximum of 150,000 shares through September 30, 2005, and (3) on September 16,2005, the Company’s Board of Directors extended the time during which theCompany may repurchase such shares by an additional year to September 30,2006.

**ITEM6.**                Selected FinancialData

The following selected consolidated financial data hasbeen derived from the Company’s audited Consolidated Financial Statements forthe five years ended December 31, 2005. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”, found in Item 7of this report, for information regarding business acquisitions, discontinuedoperations, critical accounting policies and items affecting comparability ofthe amounts below. The selected financial information should be read inconjunction with the Consolidated Financial Statements included in Item 8of this report.

| ** **                                                                                                                   | ** ** | **Year ended December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                   | ** ** | **2005**                                   | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net revenues                                                                                                                 |       | $                                          | 107,977,661 |   | $ | 88,063,861 |   | $ | 64,267,009 |   | $ | 55,805,823 |   | $ | 43,033,294 |   |
| Earnings from continuing  operations before discontinued operations and cumulative effect of change in  accounting principle |       | $                                          | 4,846,988   |   | $ | 3,911,202 |   | $ | 3,622,837 |   | $ | 3,122,518 |   | $ | 1,707,355 |   |
| Discontinued operations,  net of taxes                                                                                       |       | 1,723,603                                  |        | 127,361 |   | (259,888 | ) | (259,667 | ) | 105,453 |   |
| Earnings before  cumulative effect of change in accounting principle                                                         |       | 6,570,591                                  |        | 4,038,563 |   | 3,362,949 |   | 2,862,851 |   | 1,812,808 |   |
| Cumulative effect of  change in accounting principle, net of taxes                                                           |       | —                                     |        | — |   | — |   | (3,239,118 | ) | — |   |
| Net earnings (loss)                                                                                                          |       | $                                          | 6,570,591   |   | $ | 4,038,563 |   | $ | 3,362,949 |   | $ | (376,267 | ) | $ | 1,812,808 |   |
| Earnings (loss) per common share:                                                                                            |       |                                       |        |   |   |   |   |   |   |   |   |
| Basic:                                                                                                                       |       |                                       |        |   |   |   |   |   |   |   |   |
| Net earnings from  continuing operations                                                                                     |       | $                                          | 1.36        |   | $ | 1.11 |   | $ | 1.03 |   | $ | .89 |   | $ | .48 |   |
| Discontinued operations,  net                                                                                                |       | .48                                        |        | .04 |   | (.07 | ) | (.07 | ) | .03 |   |
| Change in accounting  principle, net                                                                                    |       | —                                     |        | — |   | — |   | (.93 | ) | — |   |
| Net earnings (loss) per  common share—basic                                                                             |       | $                                          | 1.84        |   | $ | 1.15 |   | $ | .96 |   | $ | (.11 | ) | $ | .51 |   |
| Diluted:                                                                                                                     |       |                                       |        |   |   |   |   |   |   |   |   |
| Net earnings from  continuing operations                                                                                     |       | $                                          | 1.25        |   | $ | 1.07 |   | $ | 1.01 |   | $ | .87 |   | $ | .47 |   |
| Discontinued operations,  net                                                                                                |       | .45                                        |        | .03 |   | (.07 | ) | (.07 | ) | .03 |   |
| Change in accounting  principle, net                                                                                    |       | —                                     |        | — |   | — |   | (.91 | ) | — |   |
| Net earnings (loss) per  common share—assuming dilution                                                                 |       | $                                          | 1.70        |   | $ | 1.10 |   | $ | .94 |   | $ | (.11 | ) | $ | .50 |   |
| Total assets                                                                                                                 |       | $                                          | 86,833,547  |   | $ | 90,844,367 |   | $ | 58,331,924 |   | $ | 59,167,556 |   | $ | 46,469,522 |   |
| Long-term obligations,  less current maturities                                                                              |       | $                                          | 19,572,651  |   | $ | 30,480,327 |   | $ | 7,242,901 |   | $ | 9,788,178 |   | $ | 1,506,672 |   |
| Cash dividends declared  per common share                                                                                    |       | $                                          | —      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

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

**OVERVIEW**

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. The Company’s consolidatedresults of operations include the results of operations for Woodmark for all offiscal 2005 versus half of fiscal 2004 within its hardware business segment. Inaddition, the Company’s consolidated results of operations present Embassy andGreen as discontinued operations.

Consolidated revenues forthe year ended December 31, 2005 increased $19.9 million, or 22.6%, from$88.0 million to $108.0 million. Revenues increased approximately $23.4million, or 64.7%, at Countrywide, which includes revenues at Woodmark andNationwide. The increase at Countrywide resulted primarily from the inclusionof a full year of revenues from Woodmark, acquired on June 30, 2004, of$40.5 million in fiscal 2005 versus $19.7 million for fiscal 2004, as well asan increase in revenues of Nationwide of $2.6 million, or 16.0%, from $16.5million in fiscal 2004 to $19.1 million. Revenues at Florida Pneumaticdecreased $3.5 million, or 6.7%, to $48.3 million from the prior fiscal yearprimarily due to decreases in base product sales and reduction in retailpromotions. Gross profit increased $6.4 million, or 23.0%, for fiscal 2005primarily due to increased revenues. Overall gross profit margin remainedconsistent at 31.6%. Consolidated earnings from continuing operations increased$936,000, or 23.9%, from $3.9 million to $4.8 million, for the year ended December 31,2005.

**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 theTWD, as the Company spends approximately $22 million in these currenciesannually. Additionally, the Company purchases approximately $25 million ofproducts from China. These purchases are made in U.S. dollars. However, if theChinese currency, the Renminbi (RMB), were to be revalued against the dollar,there could be a significant negative impact on the cost of the Company’sproducts. Key elements for the demand for the Company’s products include retailsales and housing starts.

During 2005, the value of the U.S. dollar increased inrelation to the Japanese yen and decreased in relation to the TWD. Whencomparing the change in the weighted average value of the Company’s foreigncurrency purchases in 2005 compared to 2004, the increase in the value of thedollar was approximately 6.9% in relation to the Japanese yen and the decreasein the value of the TWD was approximately 5.0% in relation to the U.S. dollar.Based on our purchases from these countries, the net weakening of the U.S.dollar in Taiwan, offset by the net strengthening of the U.S. dollar in Japan,resulted in an increase in the cost of imported product in 2005 ofapproximately $120,000. Although there can be no certainty, the Company doesnot expect these rates to vary significantly in the next year.

In 2005, retail salesimproved over 2004, and strong housing starts continued in the northeast andsouth. Housing starts for the 2005 year were up 6.5% over the prior year.Housing starts are a strong driver of demand for both Woodmark and Nationwide.In addition, overall retail sales in 2005 were up 7.2% over 2004. This isgenerally a good indicator of the market in which Florida Pneumatic sells itsproducts. Any change in the trend for these indicators in 2006 is likely tohave an impact on results.

**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 

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arerecorded and monitored at various intervals, including daily, weekly and monthly.To the extent these measures are relevant, they are discussed in the detailedsections 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 beforeinterest, taxes and bonus, operating cash flows and capital expenditures,return on sales, return on assets, days sales outstanding and inventory turns.These measures are reviewed at monthly, quarterly and annual intervals andcompared to historical periods as well as established objectives. To the extentthat these measures are relevant, they are discussed in the detailed sectionsfor each operating segment.

**CRITICALACCOUNTING POLICIES 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 warrantyreserves. The Company bases its estimates on historical data and experience,when available, and on various other assumptions that are believed to bereasonable under the circumstances, the combined results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates. The Company’s critical accounting policies include:

**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 has experiencedlittle, if any, sales returns. If the Company believes there are potentialsales returns, the Company would provide any necessary provision against sales.

**AccountsReceivable and 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 are also utilized.

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 

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thegeneral financial conditions affecting its customer base. If actual collectionexperience changes, revisions to the allowance may be required. The Company hasa limited number of customers with individually large amounts due at any givenbalance sheet date. Any unanticipated change in the creditworthiness of any ofthese customers could have a material affect on the Company’s results ofoperations in the period in which such changes or events occur. After allreasonable attempts to collect an account receivable have failed, the amount ofthe receivable is written off against the allowance. Based on the information available,the Company believes that its allowance for doubtful accounts as of December 31,2005 was adequate. However, actual write-offs might exceed the recordedallowance.

**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.

**Goodwilland Other Intangible 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 fairvalue of the Company’s reporting units with the reporting unit’s carryingamount, including goodwill. The Company generally determines the fair value ofits reporting units using the expected present value of future cash flows,giving consideration to the market valuation approach. If the carrying amountof 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 theamount the carrying value exceeds the fair value of the asset.

**ACQUISITION**

Results of operationsreported in the Consolidated Financial Statements are included from the date ofacquisition, reflecting only six months in 2004 for Woodmark. No results ofPacific Stair are included as of December 31, 2005 as these assets werepurchased effective January 3, 2006.

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*WoodmarkInternational L.P.*

On June 30, 2004, pursuant to an Asset PurchaseAgreement dated as of such date, Woodmark, a Delaware limited partnershipinitially owned by P&F and Countrywide, acquired certain assets (the “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 “Sellers”), andassumed certain of the Sellers’ related liabilities. Woodmark paid $31,898,000to acquire the Purchased Property, which purchase price consisted primarily of$27,160,000 in cash and certain subordinated notes in the aggregate principalamount of $3,408,000. The purchase price was negotiated on the basis ofWoodmark’s historical financial performance. Subject to certain conditions,Woodmark also agreed to pay additional cash consideration to the Sellers afterthe third or the fifth anniversary of the closing of the acquisition if certainfinancial targets described in the Asset Purchase Agreement are met. Theacquisition of the Purchased Property was financed through the Company’s seniorcredit facility. (See Note 9 to the Notes to Consolidated FinancialStatements.)

As part of the acquisition,the Company recorded approximately $8,840,000 in other identifiable intangibleassets, principally related to the value of customer relationships, andapproximately $12,675,000 of goodwill through December 31, 2005. (See Note2 to the Notes to Consolidated Financial Statements.)

**DISCONTINUED OPERATIONS**

*Embassy Industries, Inc.*

Pursuant to an Asset Purchase Agreement (the “EmbassyAPA”), dated as of October 11, 2005, among P&F, Embassy, Mestek, Inc.(“Mestek”) and Embassy Manufacturing, Inc., a wholly-owned subsidiary ofMestek (“EMI”), Embassy sold substantially all of its operating assets to EMI.The assets sold pursuant to the Embassy APA include, among others, machineryand equipment, inventory, accounts receivable and certain intangibles. Certainassets were retained by Embassy, including, but not limited to, cash and titleto any real property owned by Embassy at the consummation of the sale to EMI.The consideration paid by EMI for the assets acquired pursuant to the EmbassyAPA was approximately $8,433,000 plus the assumption of certain liabilities andobligations of Embassy by EMI.

Pursuant to a Lease, dated as of October 11,2005, between Embassy, as landlord and EMI, as tenant (the “EMI Lease”),Embassy has agreed to lease certain space (approximately 60,000 rentable squarefeet) in the building located at 300 Smith Street, Farmingdale, New York to EMIin connection with the operation of EMI’s business, at an annual rental rate of$480,000, payable in monthly installments of $40,000 each. The term of the EMILease is for a period of six (6) months commencing October 11, 2005and terminating April 10, 2006; provided however, that, in the event EMIserves notice on Embassy by December 31, 2005, the Lease may be extendedon a month to month basis to, and including, June 30, 2006. EMI has servednotice on Embassy to extend the EMI Lease through May 31, 2006.

Embassy has effectively ceasedall operating activities. The Company recognized a gain on the sale ofthese assets of approximately $1,467,000, net of taxes, during the fourthquarter of fiscal 2005.

In January 2006, Embassy entered into a contract ofsale, as amended, on its building with a non-affiliated third party for apurchase price of approximately $6.4 million. The contract is scheduled to closeon or about June 1, 2006. TheCompany intends to use the net proceeds from this sale to satisfy an existingmortgage on the building of approximately $1.3 million and to reduce its shortand long-term debt. The Company expects to report a pre-tax gain from the saleof the building of approximately $5.0 million in its second fiscal quarter of2006.

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*Green Manufacturing, Inc.—AgriculturalProducts Division*

Pursuant to an Asset Purchase Agreement (the “AgriculturalAPA”), dated as of July 14, 2005, between Green and Benko Products, Inc.(“Benko”), Green sold certain of its assets comprising its AgriculturalProducts Division (the “Agricultural Division”) to Benko. The assets soldpursuant to the Agricultural APA include, among others, certain machinery and equipment.Certain assets of the Agricultural Division were retained by Green, including,but not limited to, certain of the Agricultural Division’s accounts receivableand inventories existing at the consummation of the sale to Benko (the “AgriculturalClosing”).

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 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 equalmonthly amounts over a four (4) year period commencing as of theAgricultural Closing. In addition, Benko assumed certain of Green’s contractualobligations. The obligations of Benko under the Agricultural APA and theAgricultural Notes are guaranteed by each of a principal shareholder and anaffiliate of Benko, and partially secured by certain collateral.

In connection with the transaction, Green and Benkoentered into an agreement which provides for Benko to purchase from Green 100%of Benko’s requirements for products of the type that constitute part of Green’sinventory of raw materials and finished goods as of the acquisition date withall purchases by Benko being binding and non-cancelable at pre-establishedprices. The term is for a period of one year from the acquisition date. Benkoshall maintain for the benefit of Green an insurance policy insuring theinventory and will bear the entire risk of loss, theft, destruction or anydamage to the inventory. Benko will also be responsible for all recordkeepingwith respect to the inventory. After the expiration of the term, Benko isobligated to provide Green with a list of all unpurchased inventory and returnsuch inventory to Green. Based on the terms of the agreement, Green haseffectively entered into an arrangement which provides for a transfer of itsinventory to Benko prior to payment, as if it had been sold to Benko, withGreen recording it as an other current receivable (based on the cost of theinventory, which approximated $373,000) in the third quarter of 2005. Thistreatment is based on the fact that Green has effectively transferred controlof the inventory to Benko. Benko’s employees maintain control of the inventoryas it is located on Benko’s premises and also bears risk of loss, theft,destruction or any damage to the inventory. Also, all purchases by Benko arebinding and non-cancelable at pre-established prices with Benko being Green’sonly customer for the one-year period.

The Company recognized again on the sale of these assets of approximately $312,000, net of taxes, infiscal 2005.

*Green Manufacturing, Inc.—AccessDivision*

Pursuant to an Asset Purchase Agreement (the “AccessAPA”), dated as of February 2, 2005, between Green and Benko Products, Inc.(“Benko”), Green sold certain of its assets comprising its Access Division (the“Access Division”) to Benko. The assets sold pursuant to the Access APAinclude, among others, certain machinery and equipment, accounts receivable (“PurchasedReceivables”), inventory, intellectual property and other intangibles. Certainassets of the Access Division were retained by Green, including, but notlimited to, certain of the Access Division’s accounts receivable existing at theconsummation of the sale to Benko (the “Access Closing”).

The purchase price paid by Benko in consideration forthe assets acquired pursuant to the Access APA, giving effect to certainadjustments, was approximately $1,756,655, consisting of (a) a payment to 

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Green at Access Closing ofapproximately $880,069; (b) $755,724 payable pursuant to the terms of aPromissory Note (“Access Note 1”), dated February 2, 2005, payable invarious amounts over a twenty-one (21) month period commencing as of the AccessClosing; and (c) $120,862 payable pursuant to the terms of a PromissoryNote (collectively with Access Note 1, the “Access Notes”), dated February 2,2005, payable in various amounts over a four (4) month period commencingas of the Access Closing. Benko agreed to pay additional consideration on anannual basis for the two (2) successive twelve (12) month periodscommencing as of the Access Closing, dependent on certain sales by Benko,subject to certain other conditions. In addition, Benko assumed certain ofGreen’s contractual obligations. The obligations of Benko under the Access APAand the Access Notes are guaranteed by each of a principal shareholder and anaffiliate of Benko, and partially secured by certain collateral.

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes, in thefiscal 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 itsHydraulic Cylinder Division to RMT. The assets sold pursuant to the CylinderAPA include, among others, property, machinery and equipment, raw materials,work-in process inventory and certain intangibles. Green also sold the land andbuilding in which the division was housed to RMT in connection with thistransaction. Green received net cash proceeds of approximately $3,679,000 and apromissory note of approximately $686,000 at the closing, which note wassatisfied in December 2005. In addition, Green may receive additionalconsideration in the form of commissions through December 2009 based uponcertain future sales by RMT. In fiscal 2005 and 2004, Green receivedapproximately $433,000 and $11,000, respectively, in additional consideration.In addition, RMT agreed to hire all Green Hydraulic Cylinder Division employeesin Bowling Green, Ohio and, as a result of the transaction, Green haseffectively exited the hydraulic cylinder 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.

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, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **Current**                     | ** ** | **Long-term**                   | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Assets held for sale and assets of discontinued  operations:      |       |                            |       |                            |       |   |   |   |   |   |   |
| Accounts receivable                                               |       | $                               | —     |                            |       | $ | — |   |   | $ | 4,379,000 |   | $ | — |   |
| Inventories                                                       |       | —                          |       |                            | —     |   |   | 2,696,000 |   | — |   |
| Goodwill                                                          |       | —                          |       |                            | —     |   |   | — |   | 848,000 |   |
| Other assets                                                      |       | —                          |       |                            | —     |   |   | — |   | 17,000 |   |
| Prepaid expenses                                                  |       | 77,000                          |       |                            | —     |   |   | 181,000 |   | — |   |
| Property and equipment                                            |       | —                          |       |                            | —     |   |   | — |   | 2,561,000 |   |
| Assets held for sale                                              |       | 623,000                         |       |                            | —     |   |   | — |   | — |   |
| Total assets held for  sale and assets of discontinued operations |       | $                               | 700,000    |                            |       | $ | — |   |   | $ | 7,256,000 |   | $ | 3,426,000 |   |
| Liabilities of discontinued operations:                           |       |                            |       |                            |       |   |   |   |   |   |   |
| Accounts payable and  accrued expenses                            |       | $                               | 991,000    |                            |       | $ | — |   |   | $ | 1,285,000 |   | $— |   |
| Mortgage payable                                                  |       | 1,367,000                       |       |                            | —     |   |   | 113,000 |   | 1,367,000 |   |
| Total liabilities of  discontinued operations                     |       | $                               | 2,358,000  |                            |       | $ | — |   |   | $ | 1,398,000 |   | $ | 1,367,000 |   |

 

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Resultsof operations for Embassy and Green are included from the beginning of eachfiscal period presented through the respective dates of asset disposition, andhave been segregated from continuing operations and reflected as discontinuedoperations approximately as follows: 

| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net revenues                                                             |       | $                                          | 9,087,000  |   | $ | 25,894,000 |   | $ | 22,073,000 |   |
| Earnings (loss) from operation of discontinued  operations, before taxes |       | $                                          | (208,000   | ) | $ | 59,000 |   | $ | (441,000 | ) |
| Income tax (expense)  benefit                                            |       | 82,000                                     |       | (20,000 | ) | 181,000 |   |
| Earnings (loss)  from operation of discontinued operations               |       | (126,000                                   | )          | 39,000 |   | (260,000 | ) |
| 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 (loss) from  discontinued operations                            |       | $                                          | 1,724,000  |   | $ | 127,000 |   | $ | (260,000 | ) |

 

**RESULTS OFOPERATIONS**

**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 andother products decreased due primarily to approximately $1,670,000 less inretail promotions in the period, as well as a decrease in base sales ofapproximately $2,386,000, offset by an increase of approximately $1,767,000related to new product introductions. Base sales decreased as a result ofdecreased purchasing activity of approximately $1,373,000 from a significantcustomer as part of a program to reduce its overall inventory levels. Decreasesin automotive revenues of approximately $933,000 were due primarily to the lackof inventory-stocking accounts that were obtained in 2004, as well as nosignificant new product introductions in this area in 2005. Decreases inrevenues of approximately $200,000 at Franklin were due primarily to asignificant customer that reduced its ordering. Further, 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.

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Revenues from hardwareincreased significantly as a result of the acquisition of Woodmark, whichrecorded a full year of revenues of approximately $40,483,000 in fiscal 2005versus approximately $19,721,000 in revenues during second half of 2004.Revenues from the sale of staircase components continue to increase, benefitingfrom strong new housing starts. These revenues have more than offset weaknessin demand for our kitchen and bath products sold into the mobile home andremodeling markets. Moreover, Nationwide’s revenues increased by approximately$2,642,000, or 16.0%, primarily attributable to an increase of approximately$1,297,000 in sales of fencing products and an increase of approximately$1,229,000 in OEM, which was due primarily to the addition of new OEMcustomers.

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 New Taiwan dollar and bya less 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, General and 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 slightly from 22.6% to 22.5%.

**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.

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**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.)

**2004 Compared to2003**

**Revenues**

Revenuesfor the years ended December 31, 2004 and 2003 were as follows:

| **Year ended  December 31,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| 2004                                   |       | $          | 88,064,000 |             |       | $                                       | 51,868,000 |         |       | $ | 36,196,000 |   |
| 2003                                   |       | $          | 64,267,000 |             |       | $                                       | 49,781,000 |         |       | $ | 14,486,000 |   |
| % increase                             |       | 37.0       | %          |             | 4.2        | %                                       |       | 149.8        | %          |

 

Revenues from tools and otherproducts increased due primarily to: increases in retail promotions, newproduct introductions and base sales of approximately $2,085,000, $1,755,000and $236,000, respectively, from two major retailers; increases in sales to theautomotive after-market of approximately $1,381,000, of which $968,000 relatedto sales from new product introductions; increases in catalog sales ofapproximately $496,000; and increases in sales of OEM products of approximately$578,000, primarily from the addition of a new product. These increases wereoffset by a decrease of approximately $3,914,000 attributable to the loss of amajor customer in early 2004, the reduction of sales commission revenues ofapproximately $311,000 related to a product no longer being sold and a decreasein revenues of approximately $166,000, or 3.6%, at Franklin, related to asignificant customer that reduced its ordering. Selling prices of pneumatictools and related equipment were unchanged.

Revenues from hardwareincreased significantly as a result of the acquisition of Woodmark, whichrecorded approximately $19,721,000 in revenues during second half of 2004.Moreover, Nationwide’s revenues increased by approximately $1,989,000, or13.7%, primarily attributable to an increase of approximately $2,194,000 insales of fencing products, which was partially offset by decreases in OEM salesof approximately $251,000. During the first quarter of 2004, the Companyincurred increases in the price of steel. Effective February 1, 2004,Nationwide began charging fencing product customers an additional 4-5% tocover the increased cost. During April of 2004, the Company beganincreasing prices to customers at Nationwide in an effort to cover the costincreases.

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

**GrossProfit**

Grossprofit for the years ended December 31, 2004 and 2003 was as follows:

| **Year ended  December 31,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| 2004                                   |       | $          | 27,795,000 |             |       | $                                       | 15,509,000 |         |       | $ | 12,286,000 |   |
|                                   |       | 31.6       | %          |             | 30.0       | %                                       |       | 33.9         | %          |
| 2003                                   |       | $          | 21,645,000 |             |       | $                                       | 16,269,000 |         |       | $ | 5,376,000 |   |
|                                   |       | 33.7       | %          |             | 32.7       | %                                       |       | 37.1         | %          |

 

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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 Japanese yen and the NewTaiwan dollar, the loss of a major customer with a better-than-average grossmargin and by a less favorable product mix, offset by other cost reductions andproductivity improvements. The decrease in the gross profit percentage fromhardware products was due primarily to the inclusion of Woodmark, whose grossprofit percentage of 31.1% was less than this segment’s 2003 average. The grossprofit percentage for the other company in the hardware products segment was37.3%. The gross profit percentage increased slightly compared with the prioryear due to a more favorable product mix in its OEM business.

**Selling,General and Administrative Expenses**

Consolidated selling,general and administrative (“SG&A”) expenses increased $4,726,000, or31.2%, from $15,144,000 to $19,870,000. SG&A expenses increased dueprimarily to the inclusion of $2,689,000 of expenses related to Woodmark in thesecond half of the year, increased compensation resulting from a change inexecutive personnel at Nationwide and, to a lesser extent, to increasedcompensation tied to higher profitability and increases related to professionalfees, mainly related to corporate compliance and reporting requirements. Theseincreases were partially offset by decreases resulting from cost-cuttingefforts in each segment. However, due to increases in revenues, SG&Aexpenses as a percentage of revenues decreased from 23.6% to 22.6%.

**Interest—Net**

Net interest expenseincreased $469,000, or 68.9%, from $680,000 to $1,149,000, due primarily to theamounts borrowed under the Company’s term loan facility to finance the Woodmarkacquisition transaction on June 30, 2004, as well as the issuance andassumption of certain notes related thereto. Interest expense on borrowingsunder the term loan facility increased by approximately $444,000 and interestexpense on the acquisition-related notes approximated $57,000. Interest expenseon borrowings under the Company’s revolving credit loan facility decreased byapproximately $8,000, as lower average borrowings were offset by higher averageinterest rates.

**Income Taxes**

The effective tax ratesfor the years ended December 31, 2004 and 2003 were 42.3% and 37.8%,respectively. The increase in the effective tax rate was due primarily to anincrease in expenses that are not deductible for tax purposes, includingexecutive compensation in excess of $1,000,000. (See Note 12 to the Notes toConsolidated Financial Statements.)

**LIQUIDITYAND CAPITAL RESOURCES**

The Company’s cash flowsfrom operations are cyclical, 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 cash flowsand 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,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Working Capital            |       | $                     | 27,981     |   | $ | 29,530 |   | $ | 20,960 |   |
| Current Ratio              |       | 2.51 to 1             |       | 2.69 to 1 |   | 2.72 to 1 |   |
| Shareholders’  Equity |       | $                     | 47,716     |   | $ | 41,168 |   | $ | 36,978 |   |

 

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In connection with Countrywide’s acquisition of all ofthe stock of Nationwide in 2002, the Company was liable for contingent earnoutpayments to Nationwide’s previous owner, in amounts equal to 30% of the excessof Nationwide’s earnings, before amortization of intangible assets, interestand 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 paymentshave been treated as additions to goodwill. During 2005, the Company recordednet additions to goodwill of approximately $944,000, related to contingentearnout payments. (See Note 6 to the Notesto Consolidated Condensed Financial Statements.)

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. (See Note 2 tothe Notes to Consolidated Financial Statements.)

In connection with the Woodmarkacquisition transaction, the Company is liable for additional paymentsto the sellers. The amount of these payments, which would be made as of either June 30,2007 or June 30, 2009, are to be based on increases in earnings beforeinterest and 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.

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 are expectedto be paid to the Company in June 2007.

Embassy participated in a multi-employer pension planuntil it sold substantially all of its operating assets in October 2005.This plan provided defined benefits to all of its union workers. Contributionsto this plan were determined by the union contract. The Company does notadminister the plan funds and does not have any control over the plan funds. Asa result of Embassy’s withdrawal from the plan, it has estimated and recorded awithdrawal liability of approximately $279,000, which is expected to be payablein quarterly installments of approximately $8,200 from May 2006 through February 2026.

In January 2006, Embassy entered into a contract of sale on its building with anon-affiliated third party for a purchase price of approximately $6.4 million.The contract is scheduled to close on or about June 1, 2006. The Company intends to use the net proceedsfrom this sale to satisfy an existing mortgage on the building of approximately$1.3 million and to reduce its short and long-term debt. The Company expects toreport a pre-tax gain from the sale of the building of approximately $5.0million in its second fiscal quarter of 2006.

Cash increased $582,000 from $1,190,000 as of December 31,2004 to $1,772,000, as of December 31, 2005. The Company’s debt levelsdecreased from $33,430,000 at December 31, 2004 to $23,631,000 at December 31,2005, due primarily to repayments from earnings. The Company’s total percent ofdebt to total book capitalization (debt plus equity) decreased from 47.6% at December 31,2004 to 35.8% at December 31, 2005.

Cash provided by operating activities of continuingoperations for 2005, 2004 and 2003 was approximately $3,836,000, $6,176,000 and$4,953,000, respectively. The Company believes that cash on 

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hand derived fromoperations and cash available through borrowings under its credit facilitieswill be sufficient to allow the Company to meet its foreseeable working capitalneeds.

During 2005, gross accounts receivable increased byapproximately $1,462,000. Increases (decreases) were approximately $1,625,000and $(163,000) at Florida Pneumatic and Countrywide, respectively. The increasein Florida Pneumatic’s gross accounts receivable resulted from delays inpayment from a major customer resulting from a large promotion that areexpected to be paid in the first quarter of 2006. The decrease at Countrywidewas due primarily to an improvement in collection efforts at Woodmark.

During 2005, inventories increased by approximately$2,797,000. Increases were approximately $909,000 and $1,888,000 at FloridaPneumatic and Countrywide, respectively. Inventory levels at Florida Pneumaticincreased as a result of the timing of inventory purchases. The increase atCountrywide was due primarily to an increase at Woodmark, which acceleratedinventory purchases in anticipation of a vendor’s plant shutdown and relocationin the first quarter of 2006.

During 2005, short-term borrowings decreased by$1,000,000 primarily from repayments from earnings and the timing of workingcapital requirements.

During 2005, accounts payable decreased byapproximately $204,000. Increases (decreases) were approximately $(671,000) and$467,000 at Florida Pneumatic and Countrywide, respectively. The decreases atFlorida Pneumatic were due primarily to the timing of payments associated withinventory purchases. The increase at Countrywide was due primarily the increasein Woodmark’s inventory purchases, as described above.

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,provides the Company with various credit facilities, including revolving creditloans, term loans for acquisitions and a foreign exchange line. The credit agreement expires in June 2006 andis subject to annual review by the lending banks. (See Notes 7 and 9 tothe Notes to Consolidated Financial Statements.)

The revolving credit loan facility provides a maximumof $12,000,000, with various sublimits, for direct borrowings, letters ofcredit, bankers’ acceptances and equipment loans. There are no commitment feesfor any unused portion of this credit facility. At December 31, 2005,there was $3,000,000 outstanding against the revolving credit loan facility,and there were no open letters of credit.

The term loan facility provides a maximum commitmentof $34,000,000 to finance acquisitions subjectto the approval of the lending banks. There are no commitment fees forany unused portion of this credit facility. The Company borrowed $29,000,000against this facility to finance the Woodmark acquisition transaction in June 2004,and there was $17,400,000, including amounts rolled over from the prior termloan facility, outstanding against the term loan facility at December 31,2005.

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, 2005, based on that day’s closingspot rate, was approximately $1,393,000.

Under its credit agreement, the Company is required toadhere to certain financial covenants. At December 31,2005, and for the year then ended, the Company was in compliance with all ofthese covenants. Certain of the Company’s mortgage agreements alsorequire the Company to adhere to certain financial covenants. At December 31, 2005, and for the year thenended, the Company was in compliance with all of these covenants.

Capital spending wasapproximately $600,000, $418,000 and $294,000 in 2005, 2004 and 2003,respectively, which amounts were provided from working capital. Capitalexpenditures for 2006 are 

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expectedto be approximately $1,500,000, some of which may be financed through theCompany’s credit facilities. Included in the expected total for 2006 arecapital expenditures relating to renovation and expansion of corporate andoperating facilities, new products, expansion of existing product lines andreplacement of equipment.

**OFF-BALANCESHEET 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 total amountof foreign currency forward contracts outstanding at December 31, 2005,based on that day’s closing spot rate, was approximately $1,393,000.

The Company, throughFlorida Pneumatic, imports a significant amount of its purchases from Japan,with payment due in Japanese yen. As a result, the Company is subject to theeffects of foreign currency exchange fluctuations. The Company uses a varietyof techniques to protect itself from any adverse effects from thesefluctuations, including increasing its selling prices, obtaining pricereductions from its overseas suppliers, using alternative supplier sources andentering into foreign currency forward contracts. The decrease in the strengthof the Japanese yen versus the U.S. dollar from 2004 to 2005 had a positiveeffect on the Company’s results of operations and its financial position. SinceDecember 31, 2005, the relative value of the U.S dollar in relation to theJapanese yen has continued to increase over fiscal 2005 averages. There can beno assurance as to the future trend of this value. (See “Item 7A. Quantitativeand Qualitative Disclosures 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.

**ENVIRONMENTALMATTERS**

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.

**CONTRACTUALOBLIGATIONS**

At December 31,2005, 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)   |       | $          | 28,483,000 |                                      | $          | 6,769,000 |   | $ | 13,195,000 |   | $ | 7,894,000 |   |   | $ | 625,000 |   |   |
| Purchase  obligations(b)         |       | 12,740,000 |       | 12,740,000                                |       | — |   | — |   |   | — |   |   |
| Operating lease  obligations     |       | 3,594,000  |       | 949,000                                   |       | 1,636,000 |   | 573,000 |   |   | 436,000 |   |   |
| Total contractual  obligations   |       | $          | 44,817,000 |                                      | $          | 20,458,000 |   | $ | 14,831,000 |   | $ | 8,467,000 |   |   | $ | 1,061,000 |   |   |

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(a)              Long-term debt includes a term loan, notespayable related to the Woodmark acquisition and mortgage loans. Embassy’smortgage loan, which was approximately $1.4 million at December 31, 2005,is included in “Liabilities of Discontinued Operations” on the consolidatedbalance sheet. The amounts shown in the table include expected interestpayments. For long-term debt not subject to a pre-determined fixed rate ofinterest, the expected interest payments were calculated on the basis of theCompany’s borrowing rate of 6.2% at December 31, 2005. (See Note 9 to theNotes to Consolidated Financial Statements.)

(b)             The Company enters into contractualarrangements for purchase commitments in the ordinary course of business toensure adequate levels of inventories, including raw material and sourcedproducts. (See Note 13 to the Notes to Consolidated Financial Statements.)

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**NEWACCOUNTING PRONOUNCEMENTS**

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

**ITEM7A.   Quantitative And Qualitative 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. The Company attempts to reduce the risks related toforeign currency fluctuation by utilizing financial instruments, pursuant toCompany 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 statement ofearnings. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statement of earnings. At December 31,2005, the Company had foreign currency forward contracts, maturing in 2006, topurchase Japanese yen at contracted forward rates. The value of these contractsat December 31, 2005, based on that day’s closing spot rate, wasapproximately $1,393,000, which was the approximate value of the Company’scorresponding yen-denominated accounts payable. During the years ended December 31,2005, 2004 and 2003, the Company recorded in its cost of sales a net realizedgain (loss) of approximately $(135,000), $(96,000) and $105,000, respectively,on foreign currency transactions. At December 31, 2005 and 2004, 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, 2005 was approximately $157,000. (See Note1 to 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 capitalexpenditures.

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, 2005 and 2004 because of the relativelyshort-term maturity of these financial instruments. The carrying amountsreported for long-term debt approximate fair value as of December 31, 2005and 2004 because, in general, the interest rates underlying the instrumentsfluctuate with market rates.

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**ITEM8.**                FinancialStatements and Supplementary Data

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

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

|                                                                                                                                | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------|----------|
| Reports of Independent Registered Public Accounting  Firms                                                                | 24       |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                             | 26       |
| Consolidated Statements of Earnings for each of the  three years ended  December 31, 2005, 2004 and 2003                  | 28       |
| Consolidated Statements of Shareholders’ Equity for  each of the three years ended  December 31, 2005, 2004 and 2003 | 29       |
| Consolidated Statements of Cash Flows for each of the  three years ended  December 31, 2005, 2004 and 2003                | 30       |
| Notes to Consolidated Financial Statements                                                                                     | 33       |
| Schedule II—Valuation and Qualifying Accounts for each  of the three years ended  December 31, 2005, 2004 and 2003   | 56       |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

We have audited the accompanying consolidated balancesheet of P&F Industries, Inc. and Subsidiaries (the “Company”) as of December 31,2005, and the related consolidated statements of earnings, shareholders’ equityand cash flows for the year then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of P&F Industries, Inc.and Subsidiaries as of December 31, 2005, and the consolidatedresults of their operations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming anopinion on the basic financial statements taken as a whole. The schedule listedin the index of consolidated financial statements and supplementary data 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 the audit 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 THORNTONLLP

Melville, New YorkMarch 24, 2006

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

We have audited the accompanying consolidated balancesheet of P&F Industries, Inc. and Subsidiaries (the “Company”) as of December 31,2004, and the related consolidated statements of earnings, shareholders’ equityand cash flows for each of the two years in the period ended December 31,2004. We have also audited the schedule listed in the accompanying index foreach of the two years in the period ended December 31, 2004. Theseconsolidated financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and schedule based on our 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 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. Ouraudits 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 audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of P&F Industries, Inc. and Subsidiaries at December 31,2004, and the results of their operations and their cash flows for each of thetwo years in the period ended December 31, 2004, in conformity withaccounting principles 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)

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**P&F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| CURRENT                                         |       |                  |       |   |   |
| Cash and cash equivalents                       |       | $                     | 1,771,624  |   | $ | 1,189,869 |   |
| Accounts receivable—net                    |       | 12,567,256            |       | 11,077,196 |   |
| Notes and other receivables                     |       | 2,727,393             |       | 1,849,030 |   |
| Inventories—net                            |       | 26,173,990            |       | 23,377,356 |   |
| Deferred income taxes—net                  |       | 1,496,000             |       | 1,070,000 |   |
| Assets held for sale                            |       | 623,519               |       | — |   |
| Assets of discontinued operations               |       | 76,538                |       | 7,256,002 |   |
| Prepaid expenses and other current assets       |       | 1,111,164             |       | 1,202,576 |   |
| TOTAL CURRENT ASSETS                            |       | 46,547,484            |       | 47,022,029 |   |
| PROPERTY AND  EQUIPMENT                         |       |                  |       |   |   |
| Land                                            |       | 1,174,773             |       | 1,174,773 |   |
| Buildings and improvements                      |       | 5,219,993             |       | 5,193,231 |   |
| Machinery and equipment                         |       | 8,087,469             |       | 7,524,243 |   |
|                                            |       | 14,482,235            |       | 13,892,247 |   |
| Less accumulated  depreciation and amortization |       | 7,620,626             |       | 6,818,095 |   |
| NET PROPERTY AND EQUIPMENT                      |       | 6,861,609             |       | 7,074,152 |   |
| GOODWILL                                        |       | 23,821,240            |       | 22,877,021 |   |
| OTHER INTANGIBLE ASSETS—net                |       | 8,794,833             |       | 9,794,833 |   |
| ASSETS OF DISCONTINUED OPERATIONS               |       | —                |       | 3,425,628 |   |
| OTHER ASSETS—net                           |       | 808,381               |       | 650,704 |   |
| TOTAL ASSETS                                    |       | $                     | 86,833,547 |   | $ | 90,844,367 |   |

p

See accompanying notes to consolidated financial statements.

26

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)**

| ** **                                                                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| **CURRENT LIABILITIES**                                                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Short-term borrowings                                                                                        |       | $                     | 3,000,000  |   | $ | 4,000,000 |   |
| Accounts payable                                                                                             |       | 2,927,133             |       | 3,131,538 |   |
| Income taxes payable                                                                                         |       | 1,366,146             |       | 1,633,572 |   |
| Accrued compensation                                                                                         |       | 2,518,196             |       | 2,187,059 |   |
| Other accrued liabilities                                                                                    |       | 2,338,909             |       | 2,193,147 |   |
| Current maturities of long-term debt                                                                         |       | 4,058,729             |       | 2,949,328 |   |
| Liabilities of discontinued operations                                                                       |       | 2,357,573             |       | 1,397,622 |   |
| TOTAL CURRENT LIABILITIES                                                                                    |       | 18,566,686            |       | 17,492,266 |   |
| LONG-TERM DEBT, less current maturities                                                                      |       | 19,572,651            |       | 30,480,327 |   |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                       |       | —      |       | 1,367,270 |   |
| DEFERRED INCOME TAXES—net                                                                               |       | 978,000               |       | 337,000 |   |
| TOTAL LIABILITIES                                                                                            |       | 39,117,337            |       | 49,676,863 |   |
| 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—3,814,367 and 3,777,367 shares |       | 3,814,367             |       | 3,777,367 |   |
| Class B—$1 par; authorized—2,000,000 shares; no  shares issued                                |       | —                |       | — |   |
| Additional  paid-in capital                                                                                  |       | 8,947,855             |       | 8,718,450 |   |
| Retained earnings                                                                                            |       | 36,969,119            |       | 30,398,528 |   |
| Treasury stock,  at cost (244,576 and 223,736 shares)                                                        |       | (2,015,131            | )          | (1,726,841 | ) |
| TOTAL SHAREHOLDERS’ EQUITY                                                                              |       | 47,716,210            |       | 41,167,504 |   |
| TOTAL LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                             |       | $                     | 86,833,547 |   | $ | 90,844,367 |   |

 

See accompanying notes to consolidated financial statements.

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**P&F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF EARNINGS**

| ** **                                                                                                                                                            | ** ** | **Year Ended December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                                                            | ** ** | **2005**                                   | ** **  | **2004** | ** ** | **2003** | ** ** |
| Net revenues                                                                                                                                                          |       | $                                          | 107,977,661 |   | $ | 88,063,861 |   | $ | 64,267,009 |   |
| Cost of sales                                                                                                                                                         |       | 73,818,395                                 |        | 60,268,610 |   | 42,622,294 |   |
| Gross profit                                                                                                                                                          |       | 34,159,266                                 |        | 27,795,251 |   | 21,644,715 |   |
| Selling, general and administrative expenses                                                                                                                          |       | 24,285,013                                 |        | 19,870,464 |   | 15,143,729 |   |
| Operating income                                                                                                                                                      |       | 9,874,253                                  |        | 7,924,787 |   | 6,500,986 |   |
| Interest expense—net                                                                                                                                             |       | 1,896,265                                  |        | 1,148,585 |   | 680,149 |   |
| Earnings from  continuing operations before income taxes                                                                                                              |       | 7,977,988                                  |        | 6,776,202 |   | 5,820,837 |   |
| Income taxes                                                                                                                                                          |       | 3,131,000                                  |        | 2,865,000 |   | 2,198,000 |   |
| Earnings from continuing operations before  discontinued operations                                                                                                   |       | 4,846,988                                  |        | 3,911,202 |   | 3,622,837 |   |
| Discontinued  operations (net of taxes):                                                                                                                              |       |                                       |        |   |   |   |   |
| Earnings (loss) from operation of discontinued  operations (net of tax expense (benefit) of $(82,000), $20,000 and $(181,000)  for 2005, 2004 and 2003, respectively) |       | (126,592                                   | )           | 39,534 |   | (259,888 | ) |
| Gain on sale of discontinued operations (net of tax  expense of $1,069,000 and $46,000 for 2005 and 2004, respectively)                                               |       | 1,850,195                                  |        | 87,827 |   | — |   |
| Earnings (loss) from discontinued operations                                                                                                                          |       | 1,723,603                                  |        | 127,361 |   | (259,888 | ) |
| Net earnings                                                                                                                                                          |       | $                                          | 6,570,591   |   | $ | 4,038,563 |   | $ | 3,362,949 |   |
| Basic earnings  (loss) per common share:                                                                                                                              |       |                                       |        |   |   |   |   |
| Continuing operations                                                                                                                                                 |       | $                                          | 1.36        |   | $ | 1.11 |   | $ | 1.03 |   |
| Discontinued operations                                                                                                                                               |       | .48                                        |        | .04 |   | (.07 | ) |
|                                                                                                                                                                  |       | $                                          | 1.84        |   | $ | 1.15 |   | $ | .96 |   |
| Diluted earnings  (loss) per common share:                                                                                                                            |       |                                       |        |   |   |   |   |
| Continuing operations                                                                                                                                                 |       | $                                          | 1.25        |   | $ | 1.07 |   | $ | 1.01 |   |
| Discontinued operations                                                                                                                                               |       | .45                                        |        | .03 |   | (.07 | ) |
|                                                                                                                                                                  |       | $                                          | 1.70        |   | $ | 1.10 |   | $ | .94 |   |
| Weighted average  common shares outstanding:                                                                                                                          |       |                                       |        |   |   |   |   |
| Basic                                                                                                                                                                 |       | 3,571,785                                  |        | 3,522,094 |   | 3,506,820 |   |
| Diluted                                                                                                                                                               |       | 3,874,008                                  |        | 3,670,882 |   | 3,589,739 |   |

 

See accompanying notes to consolidated financial statements.

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

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

| **Years Ended December 31,**                           | ** ** | ** ** | ** ** | **Class A Common   Stock, $1 Par** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| **2005, 2004 and 2003**                                | ** ** | **Total**  | ** ** | **Shares**                                                  | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| **Balance,  January 1, 2003**                                    |       | $          | 33,823,410 |                                                        | 3,690,367  |                    | $          | 3,690,367    |       | $                       | 8,540,528  |   | $ | 22,997,016 |   | (176,045 | ) | $ | (1,404,501 | ) |
| Net earnings                                                          |       | 3,362,949  |       | —                                                      |       | —                  |       | —       |       | 3,362,949               |       | — |   | — |   |
| Issuance of  Class A common stock upon exercise of stock options |       | 114,312    |       | 45,000                                                      |       | 45,000                  |       | 69,312       |       | —                  |       | — |   | — |   |
| Purchase of  Class A common stock                                |       | (322,340   | )          | —                                                      |       | —                  |       | —       |       | —                  |       | (47,691 | ) | (322,340 | ) |
| **Balance,  December 31, 2003**                                  |       | 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 | ) |

 

See accompanying notes to consolidated financial statements.

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash Flows from  Operating Activities of Continuing Operations:                      |       |                                       |       |   |   |   |   |
| Net earnings                                                                         |       | $                                          | 6,570,591  |   | $ | 4,038,563 |   | $ | 3,362,949 |   |
| (Earnings) loss from discontinued operations—net of  taxes                      |       | (1,723,603                                 | )          | (127,361 | ) | 259,888 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Non-cash charges and  credits:                                                       |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 812,566                                    |       | 751,239 |   | 723,104 |   |
| Amortization of other intangible assets                                              |       | 1,105,000                                  |       | 818,500 |   | 532,000 |   |
| Amortization of other assets                                                         |       | 6,000                                      |       | 6,000 |   | 6,000 |   |
| Provision for losses on accounts receivable - net                                    |       | (28,084                                    | )          | (49,967 | ) | (68,976 | ) |
| Deferred income taxes—net                                                       |       | 215,000                                    |       | (385,000 | ) | (346,000 | ) |
| Loss on disposal of fixed assets                                                     |       | —                                     |       | 12,062 |   | 11,638 |   |
| Changes in:                                                                          |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                  |       | (1,461,976                                 | )          | 729,060 |   | (663,756 | ) |
| Notes and other receivables                                                          |       | 1,128,952                                  |       | (377,599 | ) | 51,561 |   |
| Inventories                                                                          |       | (2,796,634                                 | )          | (2,475,549 | ) | 585,641 |   |
| Prepaid expenses and other current assets                                            |       | 91,412                                     |       | 465,053 |   | (332,819 | ) |
| Other assets                                                                         |       | (87,844                                    | )          | 574,914 |   | 641 |   |
| Accounts payable                                                                     |       | (204,405                                   | )          | 43,186 |   | 598,319 |   |
| Accruals and other                                                                   |       | 209,473                                    |       | 2,152,616 |   | 232,397 |   |
| Total adjustments                                                                    |       | (2,734,143                                 | )          | 2,137,154 |   | 1,589,638 |   |
| Net cash provided by operating activities of  continuing operations                  |       | $                                          | 3,836,448  |   | $ | 6,175,717 |   | $ | 4,952,587 |   |

 

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,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash Flows from  Investing Activities of Continuing Operations:                          |       |                                       |       |   |   |   |   |
| Capital  expenditures                                                                    |       | $                                          | (600,023   | ) | $ | (418,028 | ) | $ | (294,216 | ) |
| Purchase of  certain assets, net of certain liabilities, of Woodmark International, L.P. |       | —                                     |       | (27,160,000 | ) | — |   |
| Additional  payments for acquisition-related expenses                                    |       | —                                     |       | (989,385 | ) | — |   |
| Additional  purchase price adjustment                                                    |       | —                                     |       | (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 | ) | (351,082 | ) |
| Proceeds from  disposal of fixed assets                                                  |       | —                                     |       | 7,500 |   | — |   |
| Net cash provided by (used in) investing activities  of continuing operations            |       | 6,760,827                                  |       | (25,710,553 | ) | (645,298 | ) |
| Cash Flows from  Financing Activities of Continuing Operations:                          |       |                                       |       |   |   |   |   |
| Proceeds from  short-term borrowings                                                     |       | 17,000,000                                 |       | 14,000,000 |   | 9,500,000 |   |
| Repayments of  short-term borrowings                                                     |       | (18,000,000                                | )          | (13,000,000 | ) | (11,000,000 | ) |
| Proceeds from  term loan                                                                 |       | —                                     |       | 34,000,000 |   | — |   |
| Repayments of  term loan                                                                 |       | (9,600,000                                 | )          | (12,250,000 | ) | — |   |
| Principal  payments on long-term debt                                                    |       | (198,275                                   | )          | (204,305 | ) | (2,476,294 | ) |
| Proceeds from  exercise of stock options                                                 |       | 159,165                                    |       | 150,610 |   | 114,312 |   |
| Purchase of  Class A common stock                                                   |       | (181,050                                   | )          | — |   | (322,340 | ) |
| Net cash (used  in) provided by financing activities of continuing operations            |       | (10,820,160                                | )          | 22,696,305 |   | (4,184,322 | ) |
|                                                                                          |            |                                            |            |  |  |  |  |  |  |  |

 

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,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash Flows from Discontinued Operations:                |       |                                       |       |   |   |   |   |
| Net cash provided by (used in) operating activities     |       | 1,907,584                                  |       | (419,760 | ) | 256,696 |   |
| Net cash used in investing activities                   |       | (989,790                                   | )          | (1,472,096 | ) | (921,771 | ) |
| Net cash used in financing activities                   |       | (113,154                                   | )          | (293,153 | ) | (268,705 | ) |
| Net cash provided by (used in) discontinued  operations |       | 804,640                                    |       | (2,185,009 | ) | (933,780 | ) |
| NET INCREASE (DECREASE) IN CASH                         |       | 581,755                                    |       | 976,460 |   | (810,813 | ) |
| Cash and cash equivalents at beginning of year          |       | 1,189,869                                  |       | 213,409 |   | 1,024,222 |   |
| Cash and cash equivalents at end of year                |       | $                                          | 1,771,624  |   | $ | 1,189,869 |   | $ | 213,409 |   |
|                                                         |            |                                            |            |  |  |  |  |  |  |  |

 

**Supplemental disclosures of cash flow information:**

| Cash paid for: |   |   |      |   |   |      |   |
|----------------|--------|--------|-----------|--------|--------|-----------|--------|
| Interest       |   | $      | 1,871,000 |   | $      | 1,060,000 |   | $ | 746,000 |   |
| Income taxes   |   | $      | 4,033,000 |   | $      | 1,366,000 |   | $ | 2,509,000 |   |

 

Non-cashinvesting and financing activities were as follows:

In connection with the sale of certain assets of Embassyin October 2005, the Company recorded a receivable of approximately $1,233,000related to escrow monies due, subject to certain conditions of release, and aworking capital adjustment.

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, payable in varying amounts through July 2009.

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, payable in varyingamounts through November 2006.

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

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 Woodmark acquisitiontransaction in June 2004, the Company issued a note payable to the sellersin the amount of $1,218,000. The Company also assumed a note payable to thesellers in the amount of $2,190,000.

See accompanying notes to consolidated financial statements.

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**P&F INDUSTRIES,INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003**

**NOTE1—SUMMARY OF ACCOUNTING POLICIES**

**Principles of Consolidation**

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 ManufacturingCorporation (“Florida Pneumatic”) and Countrywide Hardware, Inc. (“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. (See Note 2 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 acquiredsubstantially all of the operating assets of Pacific Stair Products, Inc.(“Pacific Stair”). Pacific Stair is a manufacturer of premium stair railproducts and a distributor of Woodmark’s staircase components to the buildingindustry, primarily in southern California and the southwestern region of theUnited States (see Note 16).

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 Note 3).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).

**Basisof Financial Statement Presentation**

The Company prepares itsconsolidated financial statements in accordance with generally acceptedaccounting principles in the United States. Certain of these accounting policiesrequire the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities and the related disclosure of contingent assetsand liabilities at the date of the financial statements and the reported 

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amountsof revenues and expenses during the reporting period. On an ongoing basis, theCompany evaluates estimates, including those related to bad debts, inventoryreserves, goodwill and intangible assets. The Company bases its estimates onhistorical data and experience, when available, and on various otherassumptions that are believed to be reasonable under the circumstances, thecombined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates.

**Reclassifications**

Certain prior years’amounts in the Consolidated Financial Statements have been reclassified toconform to the current year’s presentation.

**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 and Handling 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 $1,971,000, $1,366,000 and $1,250,000 for the yearsended December 31, 2005, 2004 and 2003, respectively.

**Cash and Cash Equivalents**

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

**Financial Instruments**

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, 2005 and 2004 because of therelatively short-term maturity of these financial instruments. The carryingamounts reported for long-term debt approximate fair value as of December 31,2005 and 2004 because, in general, the interest rates underlying theinstruments fluctuate with market rates.

**AccountsReceivable and 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 

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customers’ financialcondition, and although the Company generally does not require collateral,letters of credit may be required from customers in certain circumstances.

Senior management reviewsaccounts receivable on a monthly basis to determine if any receivables willpotentially be uncollectible. The Company records an allowance for doubtfulaccounts based on specifically identified amounts that are believed to beuncollectible. The Company also records additional allowances based on certain percentagesof aged receivables, based on historical experience and the Company’sassessment of the general financial conditions affecting its customer base. Ifactual collections experience changes, revisions to the allowance may berequired. The Company has a limited number of customers with individually largeamounts due at any given balance sheet date. Any unanticipated change in thecredit worthiness of any of these customers or any other matters affecting thecollectibility of amounts due from such customers could have a material affecton the Company’s results of operations in the period in which such changes orevents occur. After all reasonable attempts to collect a receivable havefailed, the receivable is written off against the allowance. Based on theinformation available, the Company believes that its allowance for doubtfulaccounts as of December 31, 2005 was adequate. However, actual write-offsmight 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 notesreceivables. The Company places its cash in overnight money market instrumentswith high quality financial institutions, which, by policy, limit the amount ofcredit exposure in any one financial instrument. The Company principally sellsits products domestically to customers in diversified industries and therefore,has no other significant concentrations of credit risk other than with twomajor customers (see Notes 3 and 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.

**Propertyand Equipment and Depreciation and Amortization**

Property and equipment are stated at cost lessaccumulated depreciation and amortization. The Company capitalizes items inexcess of $1,000. Minor replacements and maintenance and repair items arecharged to expense as incurred. Upon disposal or retirement of assets, the costand related accumulated depreciation are removed from the Company’sconsolidated 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 |

 

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**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.

**Goodwilland Other Intangible 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 fairvalue of the Company’s reporting units with the reporting unit’s carryingamount, including goodwill. The Company generally determines the fair value ofits reporting units using the expected present value of future cash flows,giving consideration to the market valuation approach. If the carrying amountof 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 theamount the 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 a consolidated Federal tax return.P&F Industries, Inc. and each of its subsidiaries file separate stateand 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 

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liabilitiesof any change in the tax rate is recognized in income in the period thatincludes the enactment date of such change.

**Advertising**

The Company expenses itscosts of advertising in the period in which they are incurred. Advertisingcosts for the years ended December 31, 2005, 2004 and 2003 were$2,109,000, $1,862,000 and $1,438,000, respectively.

**Earnings (Loss) Per Common Share**

Basic earnings (loss) per common share is based onlyon the average number of shares of common stock outstanding for the year.Diluted earnings (loss) per common share reflects the effect of shares ofcommon stock issuable upon the exercise of options, unless the effect onearnings is antidilutive.

Diluted earnings (loss) per common share is computedusing the treasury stock method. Under this method, the aggregate number ofshares of common stock outstanding reflects the assumed use of proceeds fromthe hypothetical exercise of any outstanding options or warrants to purchaseshares of the Company’s Class A Common Stock. The average market value forthe period is used as the assumed purchase price.

Thefollowing table sets forth the computation of basic and diluted earnings (loss)per common share:

| ** **                                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| Numerator:                                                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator for  basic and diluted earnings (loss) per common share:                                                       |       |                                       |       |   |   |   |   |
| Earnings from continuing operations                                                                                      |       | $                                          | 4,847,000  |   | $ | 3,911,000 |   | $ | 3,623,000 |   |
| Discontinued operations, net of taxes                                                                                    |       | 1,724,000                                  |       | 128,000 |   | (260,000 | ) |
| Net earnings                                                                                                             |       | $                                          | 6,571,000  |   | $ | 4,039,000 |   | $ | 3,363,000 |   |
| Denominator:                                                                                                             |       |                                       |       |   |   |   |   |
| Denominator for basic earnings (loss) per share -  weighted average common shares outstanding                            |       | 3,572,000                                  |       | 3,522,000 |   | 3,507,000 |   |
| Effect of  dilutive securities:                                                                                          |       |                                       |       |   |   |   |   |
| Stock options                                                                                                            |       | 302,000                                    |       | 149,000 |   | 83,000 |   |
| Denominator for  diluted earnings (loss) per share—adjusted weighted average common shares and  assumed conversions |       | 3,874,000                                  |       | 3,671,000 |   | 3,590,000 |   |

At December 31, 2005, 2004 and 2003 and during theyears then ended there were outstanding stock options whose exercise priceswere higher than the average market values for the respective periods. Theseoptions are anti-dilutive and are excluded from the computation of earnings(loss) per share. The weighted average anti-dilutive options outstanding forthe years ended December 31, 2005, 2004 and 2003 were 14,250, 20,453 and181,207, respectively.

**Stock-Based Compensation**

The Company accounts for its stock option awards toits employees under the intrinsic value based method of accounting prescribedby Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees.” Under the intrinsic value based method, compensation costis the excess, if any, of the quoted market price of the stock at grant date orother measurement date over the amount an employee must pay to acquire thestock. The Company makes pro forma disclosures of net income and earnings pershare as if the fair value based method of accounting had been applied, asrequired by SFAS 123. *“*Accounting for Stock Based Compensation”(SFAS 123).

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SFAS123 requires 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** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | 4.0                                        | %          | 4.5 | % |   | — |   |   |
| Volatility               |       | 37.0                                       | %          | 35.0 | % |   | — |   |   |
| Expected life (years)    |       | 10                                         |       | 9.3 |   |   | — |   |   |

 

The weighted-average fair value of options for whichthe exercise price equaled the market price on the grant date was $9.09 and$4.43 in 2005 and 2004, respectively. The weighted-average fair value ofoptions for which the exercise price exceeded the market price on the grantdate was $2.50 in 2004. No options for which the exercise price exceeded themarket price on the grant date were granted in 2005. No options were granted in2003.

Underthe provisions of SFAS 123, the Company’s net earnings and its basic anddiluted earnings per common share would have changed to the pro forma amountsindicated below:

| ** **                                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings as  reported                                                                                                |       | $                                          | 6,571,000  |   | $ | 4,039,000 |   | $ | 3,363,000 |   |
| 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 |   | $ | 3,363,000 |   |
| Basic earnings  per common share:                                                                                        |       |                                       |       |   |   |   |   |
| As reported                                                                                                              |       | $                                          | 1.84       |   | $ | 1.15 |   | $ | .96 |   |
| Pro forma                                                                                                                |       | $                                          | 1.79       |   | $ | 1.03 |   | $ | .96 |   |
| Diluted earnings  per common share:                                                                                      |       |                                       |       |   |   |   |   |
| As reported                                                                                                              |       | $                                          | 1.70       |   | $ | 1.10 |   | $ | .94 |   |
| Pro forma                                                                                                                |       | $                                          | 1.66       |   | $ | .99 |   | $ | .94 |   |

 

**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.

**Derivative Financial 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 

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of variability in theexpected future cash flows that would be attributable to a particular risk),the effective portion of the gain or loss on the derivative instrument isreported as a component of accumulated comprehensive loss (a component ofshareholders’ equity) and reclassified into earnings in the same period orperiods during which the hedged transaction affects earnings. The remaininggain or loss on the derivative instrument, if any (i.e., the ineffectiveportion and any portion of the derivative instrument excluded from theassessment of effectiveness), is recognized in earnings in the current period.For derivative instruments not designated as hedging instruments, changes inthe fair market values are recognized in earnings as a component of cost ofsales.

The Company accounts for changes in the fair value ofits foreign currency contracts by marking them to market and recognizing anyresulting gains or losses through its statement of earnings. The Company alsomarks its yen-denominated payables to market, recognizing any resulting gainsor losses in its statement of earnings. At December 31, 2005, the Companyhad foreign currency forward contracts, maturing in 2006, to purchase Japaneseyen at contracted forward rates. The value of these contracts at December 31,2005, based on that day’s closing spot rate, was approximately $1,393,000,which was the approximate value of the Company’s yen-denominated accountspayable. During the years ended December 31, 2005, 2004 and 2003, theCompany recorded in its cost of sales a net realized gain (loss) ofapproximately $(135,000), $(96,000) and $105,000, respectively, on foreigncurrency transactions. At December 31, 2005 and 2004, the Company had nomaterial unrealized gains or losses on foreign currency transactions.

**New AccountingPronouncements**

In May 2005, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154,“Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20and FASB Statement No. 3” (“SFAS 154”). This Statement replaces APBOpinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “ReportingAccounting Changes in Interim Financial Statements.” SFAS 154 changes therequirements for the accounting for and reporting of a change in accountingprinciple. Previously, most voluntary changes in accounting principles requiredrecognition through a cumulative adjustment within net income of the period ofthe change. SFAS 154 requires retrospective application to prior periods’financial statements, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005;however, the Statement does not change the specific transition provisions ofany existing or future accounting pronouncements. The adoption of thisstatement is not expected to have a material effect on our financial positionor results of operations.

In March 2005, the SEC issued Staff AccountingBulletin No. 107, “Share-Based Payments” (“SAB 107”). SAB 107expresses views of the SEC regarding the interaction between SFAS 123R andcertain SEC rules and regulations and provides the SEC’s views regardingthe valuation of share-based compensation for public companies. We intend toapply the principles of SAB 107 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 is not 

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expected to have amaterial effect on our financial position or results of operations. We intendto implement the provisions of this statement in the first quarter of 2006.

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 is not expected to have a material effect on our financialposition or results of operations.

In December 2004, theFASB issued SFAS 123R, “Share-BasedPayment.”**This statementis a revision of SFAS 123, “Accountingfor Stock-Based Compensation” and supersedes APB 25, “Accounting for Stock Issued to Employees,”and is effective the first annual period that begins after June 15, 2005or the Company’s first quarter of fiscal 2006. SFAS 123R establishes standardson accounting for transactions in which an entity obtains employee services inshare-based payment transactions. This statement requires measurement of thecost of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award. That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award, which is usually the vesting period. SFAS123R also addresses transactions in which an entity incurs liabilities inexchange for goods or services that are based on the fair value of the entity’sequity instruments or that may be settled by the issuance of those equityinstruments. The adoption of this statement is not expected to have a materialeffect on our financial position or results of operations. We intend toimplement the provisions of this statement in the first quarter of 2006.

**NOTE 2—ACQUISITION**

*WoodmarkInternational L.P.*

On June 30, 2004, Woodmark,a Delaware limited partnership initially owned by P&F and Countrywide,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 July 1, 2004 to December 31,2005.

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The purchase pricefor this acquisition, negotiated on the basis of Woodmark’s historicalfinancial 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 |   |

 

The following tablepresents the estimated fair values of the net assets acquired and the amountallocated 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 Company obtained an independentthird-party valuation of the identifiable intangible assets. Theexcess of the total purchase price over the fair value of the net assetsacquired, including the value of the identifiable intangible assets, has beenallocated to goodwill. Goodwill will be amortized, for fifteen years, for taxpurposes but not for financial reporting purposes. The fair values of the identifiableintangible assets are based on current information and are subject to change.The intangible assets subject to amortization will be amortized over fifteenyears for tax purposes and for financial reporting purposes and have beenassigned useful lives 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 periodspresented. 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 each period or future operating results of the consolidated entities.

| ** **                                             | ** ** | **Year Ended December 31,** | ** **  |
|--------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                             | ** ** | **2004**                                   | ** **  | **2003** | ** ** |
| Net revenues                                           |       | $                                          | 104,571,000 |   | $ | 90,640,000 |   |
| Net earnings from  continuing operations               |       | $                                          | 4,922,000   |   | $ | 5,364,000 |   |
| Earnings per  common share from continuing operations: |       |                                       |        |   |   |
| Basic                                                  |       | $                                          | 1.40        |   | $ | 1.53 |   |
| Diluted                                                |       | $                                          | 1.34        |   | $ | 1.49 |   |

 

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**NOTE 3—DISCONTINUED OPERATIONS**

*Embassy Industries, Inc.*

Pursuant to an Asset Purchase Agreement (the “EmbassyAPA”), dated as of October 11, 2005, among P&F, Embassy, Mestek, Inc.(“Mestek”) and Embassy Manufacturing, Inc., a wholly-owned subsidiary ofMestek (“EMI”), Embassy sold substantially all of its operating assets to EMI.The assets sold pursuant to the Embassy APA include, among others, machineryand equipment, inventory, accounts receivable and certain intangibles. Certainassets were retained by Embassy, including, but not limited to, cash and titleto any real property owned by Embassy at the consummation of the sale to EMI.The consideration paid by EMI for the assets acquired pursuant to the EmbassyAPA was approximately $8,433,000 plus the assumption of certain liabilities andobligations of Embassy by EMI.

Pursuant to a Lease, dated as of October 11,2005, between Embassy, as landlord and EMI, as tenant (the “EMI Lease”),Embassy has agreed to lease certain space (approximately 60,000 rentable squarefeet) in the building located at 300 Smith Street, Farmingdale, New York to EMIin connection with the operation of EMI’s business, at an annual rental rate of$480,000, payable in monthly installments of $40,000 each. The term of the EMILease is for a period of six (6) months commencing October 11, 2005and terminating April 10, 2006; provided however, that, in the event EMIserves notice on Embassy by December 31, 2005, the Lease may be extendedon a month to month basis to, and including, June 30, 2006. EMI has servednotice on Embassy to extend the EMI Lease through May 31, 2006.

Embassy has effectively ceasedall operating activities. The Company recognized a gain on the sale ofthese assets of approximately $1,467,000, net of taxes, during the fourthquarter of fiscal 2005.

In January 2006, Embassy entered into a contract ofsale, as amended, on its building with a non-affiliated third party for apurchase price of approximately $6.4 million. The contract is scheduled to closeon or about June 1, 2006. TheCompany intends to use the net proceeds from this sale to satisfy an existingmortgage on the building of approximately $1.3 million and to reduce its shortand long-term debt. The Company expects to report a pre-tax gain from the saleof the building of approximately $5.0 million in its second fiscal quarter of2006.

*Green Manufacturing, Inc.—AgriculturalProducts Division*

Pursuant to an Asset Purchase Agreement (the “AgriculturalAPA”), dated as of July 14, 2005, between Green and Benko Products, Inc.(“Benko”), Green sold certain of its assets comprising its AgriculturalProducts Division (the “Agricultural Division”) to Benko. The assets soldpursuant to the Agricultural APA include, among others, certain machinery and equipment.Certain assets of the Agricultural Division were retained by Green, including,but not limited to, certain of the Agricultural Division’s accounts receivableand inventories existing at the consummation of the sale to Benko (the “AgriculturalClosing”).

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 Agricultural Closing of $225,000;(b) $25,000 payable pursuant to the terms of a Promissory Note(“Agricultural Note 1”), dated July 14, 2005, payable in equal monthlyamounts over a five (5) month period commencing as of the AgriculturalClosing; and (c) $280,000 payable pursuant to the terms of a PromissoryNote (collectively with Agricultural Note 1, the “Agricultural Notes”), datedJuly 14, 2005, payable in equal monthly amounts over a four (4) yearperiod commencing as of the Agricultural Closing. In addition, Benko assumedcertain of Green’s contractual obligations. The obligations of Benko under theAgricultural APA and the Agricultural Notes are guaranteed by each of aprincipal shareholder and an affiliate of Benko, and partially secured bycertain collateral.

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In connection with the transaction, Green and Benkoentered into an agreement which provides for Benko to purchase from Green 100%of Benko’s requirements for products of the type that constitute part of Green’sinventory of raw materials and finished goods as of the acquisition date withall purchases by Benko being binding and non-cancelable at pre-establishedprices. The term is for a period of one year from the acquisition date. Benkoshall maintain for the benefit of Green an insurance policy insuring theinventory and will bear the entire risk of loss, theft, destruction or anydamage to the inventory. Benko will also be responsible for all recordkeepingwith respect to the inventory. After the expiration of the term, Benko isobligated to provide Green with a list of all unpurchased inventory and returnsuch inventory to Green. Based on the terms of the agreement, Green haseffectively entered into an arrangement which provides for a transfer of itsinventory to Benko prior to payment, as if it had been sold to Benko, withGreen recording it as an other current receivable (based on the cost of theinventory, which approximated $373,000) in the third quarter of 2005. Thistreatment is based on the fact that Green has effectively transferred controlof the inventory to Benko. Benko’s employees maintain control of the inventoryas it is located on Benko’s premises and also bears risk of loss, theft,destruction or any damage to the inventory. Also, all purchases by Benko arebinding and non-cancelable at pre-established prices with Benko being Green’sonly customer for the one-year period.

The Company recognized again on the sale of these assets of approximately $312,000, net of taxes, infiscal 2005.

*Green Manufacturing, Inc.—AccessDivision*

Pursuant to an Asset Purchase Agreement (the “AccessAPA”), dated as of February 2, 2005, between Green and Benko Products, Inc.(“Benko”), Green sold certain of its assets comprising its Access Division (the“Access Division”) to Benko. The assets sold pursuant to the Access APAinclude, among others, certain machinery and equipment, accounts receivable (“PurchasedReceivables”), inventory, intellectual property and other intangibles. Certainassets of the Access Division were retained by Green, including, but not limitedto, certain of the Access Division’s accounts receivable existing at theconsummation of the sale to Benko (the “Access Closing”).

The purchase price paid by Benko in consideration forthe assets acquired pursuant to the Access APA, giving effect to certainadjustments, was approximately $1,756,655, consisting of (a) a payment toGreen at Access Closing of approximately $880,069; (b) $755,724 payablepursuant 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 are guaranteed by each of a principalshareholder and an affiliate of Benko, and partially secured by certaincollateral.

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes, in thefiscal 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 itsHydraulic Cylinder Division to RMT. The assets sold pursuant to the CylinderAPA include, among others, property, machinery and 

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equipment, raw materials,work-in process inventory and certain intangibles. Green also sold the land andbuilding in which the division was housed to RMT in connection with thistransaction. Green received net cash proceeds of approximately $3,679,000 and apromissory note of approximately $686,000 at the closing, which note wassatisfied in December 2005. In addition, Green may receive additionalconsideration in the form of commissions through December 2009 based uponcertain future sales by RMT. In fiscal 2005 and 2004, Green receivedapproximately $433,000 and $11,000, respectively, in additional consideration.In addition, RMT agreed to hire all Green Hydraulic Cylinder Division employeesin Bowling Green, Ohio and, as a result of the transaction, Green haseffectively exited the hydraulic cylinder 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.

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, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **Current**                     | ** ** | **Long-term**                   | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Assets held for  sale and assets of discontinued operations:      |       |                            |       |                            |       |   |   |   |   |   |   |
| Accounts  receivable                                              |       | $                               | —     |                            |       | $ | — |   |   | $ | 4,379,000 |   | $ | — |   |
| Inventories                                                       |       | —                          |       |                            | —     |   |   | 2,696,000 |   | — |   |
| Goodwill                                                          |       | —                          |       |                            | —     |   |   | — |   | 848,000 |   |
| Other assets                                                      |       | —                          |       |                            | —     |   |   | — |   | 17,000 |   |
| Prepaid expenses                                                  |       | 77,000                          |       |                            | —     |   |   | 181,000 |   | — |   |
| Property and  equipment                                           |       | —                          |       |                            | —     |   |   | — |   | 2,561,000 |   |
| Assets held for  sale                                             |       | 623,000                         |       |                            | —     |   |   | — |   | — |   |
| Total assets held  for sale and assets of discontinued operations |       | $                               | 700,000    |                            |       | $ | — |   |   | $ | 7,256,000 |   | $ | 3,426,000 |   |
| Liabilities of  discontinued operations:                          |       |                            |       |                            |       |   |   |   |   |   |   |
| Accounts payable  and accrued expenses                            |       | $                               | 991,000    |                            |       | $ | — |   |   | $ | 1,285,000 |   | $ | — |   |
| Mortgage payable                                                  |       | 1,367,000                       |       |                            | —     |   |   | 113,000 |   | 1,367,000 |   |
| Total liabilities of  discontinued operations                     |       | $                               | 2,358,000  |                            |       | $ | — |   |   | $ | 1,398,000 |   | $ | 1,367,000 |   |

 

Results of operations forEmbassy and Green are included from the beginning of each fiscal periodpresented through the respective dates of asset disposition, and have beensegregated from continuing operations and reflected as discontinued operationsapproximately as follows: 

| ** **                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net revenues                                                             |       | $                                          | 9,087,000  |   | $ | 25,894,000 |   | $ | 22,073,000 |   |
| Earnings (loss)  from operation of discontinued operations, before taxes |       | $                                          | (208,000   | ) | $ | 59,000 |   | $ | (441,000 | ) |
| Income tax  (expense) benefit                                            |       | 82,000                                     |       | (20,000 | ) | 181 ,000 |   |
| Earnings (loss)  from operation of discontinued operations               |       | (126,000                                   | )          | 39,000 |   | (260,000 | ) |
| 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 (loss) from  discontinued operations                            |       | $                                          | 1,724,000  |   | $ | 127,000 |   | $ | (260,000 | ) |

 

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**NOTE4—******ACCOUNTS RECEIVABLE ANDALLOWANCE FOR DOUBTFUL ACCOUNTS****

Accountsreceivable -net consists of:

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Trade accounts  receivables      |       | $                     | 12,757,000 |   | $ | 11,295,000 |   |
| Allowance for  doubtful accounts |       | (190,000              | )          | (218,000 | ) |
|                             |       | $                     | 12,567,000 |   | $ | 11,077,000 |   |

 

**NOTE 5—INVENTORIES**

Inventories—netconsist of:

| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Raw material                                      |       | $                     | 2,209,000  |   | $ | 2,177,000 |   |
| Work in process                                   |       | 349,000               |       | 350,000 |   |
| Finished goods                                    |       | 25,597,000            |       | 22,682,000 |   |
|                                              |       | 28,155,000            |       | 25,209,000 |   |
| Reserve for  obsolete and slow-moving inventories |       | (1,981,000            | )          | (1,832,000 | ) |
|                                              |       | $                     | 26,174,000 |   | $ | 23,377,000 |   |

 

**NOTE 6—GOODWILL AND OTHERINTANGIBLE ASSETS**

Thechanges in the carrying amounts of goodwill at December 31, 2005 and 2004are as follows:

| ** **                         | ** ** | **Consolidated** | ** ** | **Tools and other  products** | ** ** | **Hardware** | ** ** |
|------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Balance,  January 1, 2004     |       | $                | 9,714,000  |                                    |       | $            | 2,394,000  |   |   | $ | 7,320,000 |   |
| Goodwill acquired  during the year |       | 13,163,000       |       |                                    | —     |         |       | 13,163,000 |   |
| Balance,  December 31, 2004   |       | 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 |   |

 

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 finalsettlement of the outstanding and remaining contingent earnout payments. Thesecontingent earnout payments have been treated as additions to goodwill. During2005, the Company recorded net additions to goodwill of approximately $944,000,related to contingent earnout payments.

45

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Otherintangible assets were as follows:

| ** **                | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Cost**                        | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible  assets: |       |                            |       |                            |       |   |   |   |   |   |   |
| Customer relationships    |       | $                               | 9,160,000  |                            |       | $ | 2,119,000 |   |   | $ | 9,160,000 |   | $ | 1,255,000 |   |
| Vendor relationship       |       | 890,000                         |       |                            | 134,000    |   |   | 890,000 |   | 45,000 |   |
| Employment agreement      |       | 760,000                         |       |                            | 557,000    |   |   | 760,000 |   | 405,000 |   |
| Trademark                 |       | 690,000                         |       |                            | —     |   |   | 690,000 |   | — |   |
| Licensing                 |       | 105,000                         |       |                            | —     |   |   | — |   | — |   |
| Total                     |       | $                               | 11,605,000 |                            |       | $ | 2,810,000 |   |   | $ | 11,500,000 |   | $ | 1,705,000 |   |

 

Amortization expense forintangible assets subject to amortization was approximately $1,105,000,$819,000 and $532,000 for the years ended December 31, 2005, 2004 and2003, respectively. Amortization expense for each of the next five years isestimated to be as follows 2006—$1,116,000;2007—$761,000; 2008—$584,000; 2009—$584,000; and 2010—$584,000. Theweighted average amortization period for intangible assets was 10.96 years and11.6 years at December 31, 2005 and 2004, 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 2006 andis subject to annual review by the lending banks. The credit agreement alsoincludes a term loan facility, as described in Note 9.

Direct borrowings under the revolving credit loan facilityare secured by the Company’s accounts receivable, inventory and equipment andare cross-guaranteed by each of the Company’s subsidiaries. These borrowingsbear interest at either LIBOR (London InterBank Offered Rate) plus thecurrently applicable loan margin or the prime interest rate. At December 31,2005 and 2004, the applicable loan margin added to LIBOR was 1.6%. At December 31,2005, the prime interest rate and the LIBOR rate were 7.25% and approximately4.50%, respectively. At December 31, 2004, the prime interest rate and theLIBOR rate were 5.25% and approximately 2.42%, respectively. At December 31,2005 and 2004, there was $3,000,000 and $4,000,000, respectively, outstandingagainst the revolving credit loan facility. The weighted average interest rateon short-term borrowings during 2005 and 2004 were 6.18% and 4.30%,respectively. There were no commitments at December 31, 2005 for openletters of credit.

The credit agreement also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. Thetotal amount of foreign currency forward contracts outstanding under theforeign exchange line at December 31, 2005, based on that day’s closingspot rate, was approximately $1,393,000.

Under the terms of theCompany’s credit agreement, the Company is required to adhere to certainfinancial covenants. At December 31, 2005, and for the year then ended,the Company was in compliance with all of these covenants.

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**NOTE 8—WARRANTY LIABILITY**

Changesin the Company’s warranty liability, included in other accrued liabilities, forthe years ended December 31, 2005 and 2004 were as follows:

| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Balance,  beginning of year                                         |       | $                     | 509,947    |   | $ | 120,098 |   |
| Addition related  to the acquisition of Woodmark                    |       | —                |       | 148,487 |   |
| Warranties issued  and changes in estimated pre-existing warranties |       | 451,846               |       | 944,068 |   |
| Actual warranty  costs incurred                                     |       | (542,982              | )          | (702,706 | ) |
| Balance, end of year                                                |       | $                     | 418,811    |   | $ | 509,947 |   |

 

**NOTE 9—LONG-TERM DEBT**

Long-termdebt consists of:

| ** **                                                                                                                                                                                                                                                                                                                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Term loan - $250,000  payable quarterly from September 2004 through June 2005. Principal  amount outstanding at September 30, 2005 to be paid in 24 equal  quarterly installments (plus interest at LIBOR plus the applicable loan  margin of 1.75% or prime) from September 2005 through June 2011                  |       | $                     | 17,400,000 |   | $ | 27,000,000 |   |
| 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, 2005, the applicable rate was LIBOR plus  1.75%                                            |       | 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 $57,500 and $19,167 of imputed interest expense recorded through  December 31, 2005 and 2004, respectively. |       | 1,275,500             |       | 1,237,167 |   |
| 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)                                                                                                                                                                    |       | 1,551,733             |       | 1,675,422 |   |
| Mortgage loan - $16,388 (including interest at  7.09%) payable monthly through March 2014(a)                                                                                                                                                                                                                                             |       | 1,214,147             |       | 1,327,066 |   |
|                                                                                                                                                                                                                                                                                                                                          |       | 23,631,380            |       | 33,429,655 |   |
| Less current  maturities                                                                                                                                                                                                                                                                                                                      |       | 4,058,729             |       | 2,949,328 |   |
|                                                                                                                                                                                                                                                                                                                                          |       | $                     | 19,572,651 |   | $ | 30,480,327 |   |

----

(a)           These mortgages payablerelate to the land and buildings of certain of the Company’s subsidiaries.Property with a net book value of approximately $4,457,000 at December 31,2005 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: 2006—$4,059,000; 2007—$7,525,000; 2008—$4,065,000; 2009—$5,076,000;2010—$2,351,000; 2011—$162,000; and 2012 and thereafter—$393,000. Interest 

47

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expense on long-term debtwas approximately $1,463,000**,** $859,000 and$604,000 for the years ended December 31, 2005, 2004 and 2003,respectively. Embassy’s mortgage loan, which was approximately $1,367,000 and$1,480,000 at December 31, 2005 and 2004, respectively, is included in “Liabilitiesof Discontinued Operations” on the consolidated balance sheet (see Note 3).

The Company’s creditagreement also includes a term loan facility, which provides a maximumcommitment of $34,000,000 to finance acquisitions subject to the approval ofthe lending banks. There are no commitment fees for any unused portion of thiscredit facility. Direct borrowings under the term loan are secured by theCompany’s accounts receivable, inventory and equipment and are cross-guaranteedby each of the Company’s subsidiaries. These borrowings bear interest at eitherLIBOR plus the currently applicable loan margin or the prime interest rate. At December 31,2005 and 2004, the applicable loan margin added to LIBOR was 1.75%. The Companyborrowed $29,000,000 against this facility to finance the Woodmark acquisitiontransaction, and there was $17,400,000 outstanding against the term loanfacility at December 31, 2005. The credit agreement expires in June 2006and is subject to annual review by the lending banks.

Certain of the Company’smortgage agreements require the Company to adhere to certain financialcovenants. At December 31, 2005, the Company was in compliance with all ofthe covenants.

**NOTE 10—CAPITAL STOCK TRANSACTIONS**

During the years ended December 31, 2005 and2003, the Company purchased 14,422 and 47,691 shares, respectively, of Class ACommon Stock, at costs of $181,050 and $322,340, respectively, in connectionwith a program to repurchase shares. No shares were repurchased in 2004. In September 2004,the Company extended this program until September 30, 2005 for thepurchase of up to 150,000 shares of Class A common stock. In September 2005,the Company further extended this program until September 30, 2006.

During 2005 and 2004, the Company issued to variousemployees and directors options to purchase an aggregate of 29,500 shares and166,000 shares, respectively, of Class A Common Stock at prices rangingbetween $7.90 and $16.68 per share, which represented the fair market value ofthe shares of Class A Common Stock on the date of grant.

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

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—STOCK OPTIONS**

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 

48

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Class A Common Stockon the date the option is granted. The Current Plan is the successor to theCompany’s 1992 Incentive Stock Option Plan (the “Prior Plan”).

Thefollowing table contains information on stock options for the three years endedDecember 31, 2005:

| ** **                               | ** ** | **Option Shares** | ** ** | **Exercise Price  Range Per Share** | ** ** | **Weighted  Average  Exercise  Price** | ** **     |
|------------------------------------------|------------|------------------------|------------|----------------------------------------------------|------------|----------------------------------------|----------------|
| **Outstanding  January 1, 2003**    |       |                   | 538,900    |                                               |       | $                                      | 1.44 to $9.00  |   |   | $ | 6.16 |   |   |
| Exercised                                |       |                   | (45,000    | )                                                  |       | 1.44 to 6.00                           |           |   | 2.54 |   |   |
| Forfeited/Canceled                       |       |                   | (13,500    | )                                                  |       | 5.25 to 8.66                           |           |   | 8.16 |   |   |
| **Outstanding,  December 31, 2003** |       |                   | 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 |   |   |

 

There were options available for issuance under theCurrent Plan as of December 31 of each year as follows: 2003 - 878,900;2004 - 712,900; and 2005 - 683,400. Of the options outstanding at December 31,2005, 372,100 were issued under the Current Plan and 224,800 were issued underthe Prior Plan.

Thefollowing table summarizes information about stock options outstanding andexercisable at December 31, 2005:

| ** **                       | **Range of Exercise Prices** | ** ** | ** ** | **Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Exercisable** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|----------------------------------|---------------------------------------------|------------|------------|-----------------|------------|------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|
| $3.75 – $5.25               |                                        |       | 56,300     |            |       |                                                             | 1.3        |                                       |       |            | $          | 4.90                                       |       |   |   | 56,300 |   |   |   | $ | 4.90 |   |   |
| $6.00                            |                                        |       | 128,936    |            |       |                                                             | 6.5        |                                       |       |            | 6.00       |                                       |       |   | 128,936 |   |   |   | 6.00 |   |   |
| $6.60                            |                                        |       | 66,664     |            |       |                                                             | 1.5        |                                       |       |            | 6.60       |                                       |       |   | 33,332 |   |   |   | 6.60 |   |   |
| $7.88                            |                                        |       | 154,500    |            |       |                                                             | 2.2        |                                       |       |            | 7.88       |                                       |       |   | 154,500 |   |   |   | 7.88 |   |   |
| $7.90 – $8.06               |                                        |       | 122,188    |            |       |                                                             | 8.5        |                                       |       |            | 8.06       |                                       |       |   | 122,188 |   |   |   | 8.06 |   |   |
| $8.75                            |                                        |       | 2,000      |            |       |                                                             | 4.3        |                                       |       |            | 8.75       |                                       |       |   | 2,000 |   |   |   | 8.75 |   |   |
| $8.87                            |                                        |       | 24,812     |            |       |                                                             | 3.5        |                                       |       |            | 8.87       |                                       |       |   | — |   |   |   | — |   |   |
| $8.94 – $9.00               |                                        |       | 12,000     |            |       |                                                             | 3.2        |                                       |       |            | 8.94       |                                       |       |   | 12,000 |   |   |   | 8.94 |   |   |
| $14.44 – $16.68             |                                        |       | 29,500     |            |       |                                                             | 9.5        |                                       |       |            | 16.39      |                                       |       |   | 15,495 |   |   |   | 16.39 |   |   |
| $  3.75  – $16.68 |                                        |       | 596,900    |            |       |                                                             | 4.7        |                                       |       |            | $          | 7.58                                       |       |   |   | 524,751 |   |   |   | $ | 7.58 |   |   |

 

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**NOTE 12—INCOME TAXES**

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

| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:           |       |                                       |       |   |   |   |   |
| Federal            |       | $                                          | 2,988,000  |   | $ | 2,860,000 |   | $ | 2,240,000 |   |
| State and local    |       | 395,000                                    |       | 237,000 |   | 304,000 |   |
| Total current      |       | 3,383,000                                  |       | 3,097,000 |   | 2,544,000 |   |
| Deferred:          |       |                                       |       |   |   |   |   |
| Federal            |       | (223,000                                   | )          | (196,000 | ) | (279,000 | ) |
| State and local    |       | (29,000                                    | )          | (36,000 | ) | (67,000 | ) |
| Total deferred     |       | (252,000                                   | )          | (232,000 | ) | (346,000 | ) |
| Total income taxes |       | $                                          | 3,131,000  |   | $ | 2,865,000 |   | $ | 2,198,000 |   |

 

Deferred tax assets(liabilities) consist of:

| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax  assets—current:             |       |                  |       |   |   |
| Bad debt reserves                              |       | $                     | 270,000    |   | $ | 256,000 |   |
| Inventory reserves                             |       | 1,004,000             |       | 800,000 |   |
| Warranty and other reserves                    |       | 477,000               |       | 313,000 |   |
|                                           |       | 1,751,000             |       | 1,369,000 |   |
| Deferred tax  liabilities—current:        |       |                  |       |   |   |
| Prepaid expenses                               |       | (255,000              | )          | (299,000 | ) |
| Net deferred tax  assets—current          |       | $                     | 1,496,000  |   | $ | 1,070,000 |   |
| Deferred tax  assets—non-current:         |       |                  |       |   |   |
| Goodwill                                       |       | $                     | —     |   | $ | 1,121 ,000 |   |
| Deferred tax  liabilities—non-current:    |       |                  |       |   |   |
| Depreciation                                   |       | (273,000              | )          | (787,000 | ) |
| Intangible assets                              |       | (264,000              | )          | (605,000 | ) |
| Goodwill                                       |       | (441,000              | )          | (66,000 | ) |
|                                           |       | (978,000              | )          | (1,458,000 | ) |
| Net deferred tax  liabilities—non-current |       | $                     | (978,000   | ) | $ | (337,000 | ) |

A reconciliation of theFederal statutory rate to the total effective tax rate applicable to earningsfrom continuing operations before income taxes is as follows:

| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **$**                                      | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Federal income  taxes computed at statutory rates |       | 2,713,000                                  | ** ** | 34.0 |   | 2,304,000 |   | 34.0 |   | 1,979,000 |   | 34.0 |   |
| Increase in taxes  resulting from:                |       |                                       | ** ** |   |   |   |   |   |   |   |   |   |   |
| State and local taxes, net of Federal tax benefit |       | 242,000                                    | ** ** | 3.0 |   | 137,000 |   | 2.0 |   | 156,000 |   | 2.7 |   |
| Expenses not deductible for tax purposes          |       | 321,000                                    | ** ** | 4.0 |   | 256,000 |   | 3.8 |   | 57,000 |   | 1.0 |   |
| Other                                             |       | (145,000                                   | )          | (1.8 | ) | 168,000 |   | 2.5 |   | 6,000 |   | .1 |   |
| Income taxes                                      |       | 3,131,000                                  | ** ** | 39.2 |   | 2,865,000 |   | 42.3 |   | 2,198,000 |   | 37.8 |   |

 

50

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**NOTE 13—COMMITMENTS AND 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 $328,000, $262,000 and$269,000 for the years ended December 31, 2005, 2004 and 2003,respectively.

In conjunction with the acquisition of Woodmark,P&F acquired a defined contribution 401(k) plan, which covers all oftheir respective employees. Employer contributions to these plans weredetermined as a percentage of employee contributions. The amounts recognized asexpense for this plan were approximately $63,000, $25,000 and $25,000 for theyears ended December 31, 2005, 2004 and 2003, 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, $30,000 and $31,000 for the years ended December 31,2005, 2004 and 2003, respectively.

(b)   Effective as of May 30, 2001, the Company entered intoan employment agreement, as amended, with its Chairman and Chief ExecutiveOfficer (the “officer”). The employment agreement provides for the officer toserve as President of the Company, or in such other capacity as determined bythe Company’s Board of Directors, for a term expiring on May 30, 2008,unless sooner terminated pursuant to the provisions of the employmentagreement. Pursuant to the employment agreement, the officer will receive aminimum annual salary of $675,000 and is also eligible to receive such increasesin base compensation as the Board of Directors may from time to time grant tohim and to receive such bonuses as the Board of Directors, in its discretion,may allocate to him. The officer is expected to receive an annual salary of$861,000 for the year ending December 31, 2006. In the event of a “discharge”following a “change in control” of the Company (as each term is defined in theemployment agreement), the officer will receive his annual salary and allbenefits to which he is entitled under the employment agreement for theremainder of the term thereof or a lump sum severance allowance in an amountequal to 2.99 times his “annualized includable compensation for the base period”(as defined in the Internal Revenue Code of 1986, as amended).

(c)   FloridaPneumatic purchases all of its pneumatic tools from a Far East trading companythat owns or represents 18 individual factories in Japan, Taiwan and China. Ofthe total pneumatic tool purchases, approximately 32% are bought from Japan,54% from Taiwan and 14% from China. There are redundant sources for everyproduct manufactured.

(d)   Woodmarkpurchases all of its stair parts and kitchen and bath products from a Far Easttrading company that owns or represents 11 individual factories in China,Taiwan and Indonesia. Of the total stair parts and kitchen and bath productspurchases, approximately 68% are bought from China, 26% from Taiwan and 6% fromIndonesia. There are redundant sources for every product manufactured.

(e)   Nationwidecurrently purchases approximately 84% of its product from two foreignsuppliers. Although there are redundant sources available for substantially allproducts manufactured, the loss of either of these existing suppliers could, atleast temporarily, adversely affect operating results.

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(f)    The Company had non-cancelable inventory purchasecommitments totaling approximately $12,740,000 at December 31, 2005.

(g)   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.

(h)   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 2005 and 2004amounted to approximately $481,000 and $199,000, respectively. There was norental expense for 2003. Capital leases were immaterial in amount. Futureminimum payments under non-cancelable operating leases with initial orremaining terms of more than one year as of December 31, 2005, were asfollows:

| 2006       |   | $       | 949,000   |   |
|------------|--------|---------|-----------|--------|
| 2007       |   | 953,000 |      |
| 2008       |   | 683,000 |      |
| 2009       |   | 327,000 |      |
| 2010       |   | 246,000 |      |
| Thereafter |   | 436,000 |      |
|       |   | $       | 3,594,000 |   |

 

**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, Woodmark and Nationwide are combined in the “Hardware” segment. TheFranklin Manufacturing division, formerly included in the Hardware segment,relocated its operations to Florida Pneumatic in the first quarter of 2005 andis now included in the “Tools and other products” segment. Prior period amountshave been reclassified to reflect this change. The primary reasons for takingthis action were for, among other things, synergies between the companies inthe retail channel, principally selling to the same significant customer, andother operational synergies. The Companyevaluates segment performance based primarily on segment operating income. Theaccounting policies of each of the segments are the same as those described inNote 1.

The following presentsfinancial information by segment for the years ended December 31, 2005,2004 and 2003. Segment operating income excludes general corporate expenses,interest expense and income taxes. Identifiable assets are those assetsdirectly owned or utilized by the particular business segment.

| ** **                                               | ** ** | **Consolidated** | ** **  | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|-------------|-----------------------------------------|------------|--------------|------------|
| **Year ended December 31, 2005**                    |       |             |        |                                    |       |         |       |   |   |
| Net revenues from  unaffiliated customers                |       | $                | 107,978,000 |                                    |       | $            | 48,378,000 |   |   | $ | 59,600,000 |   |
| Segment operating income (loss)                          |       | $                | 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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| ** **                                               | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **Year  ended December 31, 2004**                   |       |             |       |                                    |       |         |       |   |   |
| Net revenues from  unaffiliated customers                |       | $                | 88,064,000 |                                    |       | $            | 51,868,000 |   |   | $ | 36,196,000 |   |
| Segment operating income  (loss)                         |       | $                | 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 |                                    |       |         |       |   |   |   |

 

| ** **                                               | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **Year  ended December 31, 2003**                   |       |             |       |                                    |       |         |       |   |   |
| Net revenues from  unaffiliated customers                |       | $                | 64,267,000 |                                    |       | $            | 49,781,000 |   |   | $ | 14,486,000 |   |
| Segment operating income  (loss)                         |       | $                | 10,307,000 |                                    |       | $            | 7,086,000  |   |   | $ | 3,221,000 |   |
| General corporate  expense                               |       | (3,806,000       | )          |                                    |       |         |       |   |   |
| Interest expense—net                                |       | (680,000         | )          |                                    |       |         |       |   |   |
| Earnings from continuing  operations before income taxes |       | $                | 5,821,000  |                                    |       |         |       |   |   |   |
| Segment assets                                           |       | $                | 43,704,000 |                                    |       | $            | 27,044,000 |   |   | $ | 16,660,000 |   |
| Corporate assets and  assets of discontinued operations  |       | 14,628,000       |       |                                    |       |         |       |   |   |
| Total assets                                             |       | $                | 58,332,000 |                                    |       |         |       |   |   |   |

The Tools and other products segment has one customer,Sears, Roebuck and Co., that accounted for 16.5%**,**24.3% and 29.6% of consolidated revenues for the years ended December 31,2005, 2004 and 2003, respectively. This customer also accounted for 32.5% and23.8% of consolidated accounts receivable as of December 31, 2005 and2004, respectively. A second customer in the segment, The Home Depot, Inc.,accounted for 15.2%, 19.4% and 21.4% of consolidated revenues for the yearsended December 31, 2005, 2004 and 2003, respectively, and 20.9% and 21.6%of consolidated accounts receivable as of December 31, 2005 and 2004,respectively. There were no other major customers requiring disclosure.

**NOTE 15—RELATED PARTY TRANSACTIONS**

(a)           The Company and SidneyHorowitz, a director and father of Richard A. Horowitz, the Company’s Chairmanand Chief Executive Officer, are parties to a Consulting Agreement, which willterminate on October 31, 2006, pursuant to which Mr. Sidney Horowitzreceives $75,000 in annual consulting fees.

(b)          One of the Company’sdirectors is a principal of an insurance brokerage firm that the Companyutilizes for the purchase of business-related insurance products. Totalpremiums paid through this insurance brokerage firm were $569,000, $641,000 and$673,000 for the years ended December 31, 2005, 2004 and 2003,respectively.

(c)           As of December 31,2005, Woodmark has recorded a note receivable of approximately $91,000 for thereturn of inventory it no longer sells on behalf of a company that is 50%-ownedby the President of Woodmark and his wife. Such note is also personallyguaranteed by them.

(d)          In connection with the purchase of certainassets, Pacific Stair entered into a lease agreement with the president of thecompany from which 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 in presently the President ofPacific Stair.

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**NOTE 16—SUBSEQUENT EVENT**

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, NewPSP purchased substantially all of the operating assets of Old PSP. The totalpurchase price for the assets was approximately $5,233,000, subject toadjustments, 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. The purchase price represents a premium over the fairvalue of the assets purchased of approximately $4,050,000, which will beallocated among goodwill and other intangible assets. New PSP is a manufacturerof premium stair rail products and a distributor of staircase components to thebuilding industry, primarily in southern California and the southwestern regionof the United States.

**NOTE17—UNAUDITED QUARTERLY RESULTS**

| ** **                                                  | ** ** | **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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| ** **                                                  | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| **2004**                                                    | ** ** | ** **             | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net revenues                                                |       | $                      | 13,950,323 |   | $ | 15,205,387 |   | $ | 31,735,156 |   | $ | 27,172,995 |   |
| Gross profit                                                |       | $                      | 4,620,650  |   | $ | 5,614,289 |   | $ | 9,344,719 |   | $ | 8,215,593 |   |
| Earnings from  continuing operations                        |       | $                      | 354,677    |   | $ | 784,680 |   | $ | 1,628,685 |   | $ | 1,143,160 |   |
| Earnings (loss)  from discontinued operations, net of taxes |       | (118,111               | )          | (80,306 | ) | (23,284 | ) | 349,062 |   |
| Net earnings                                                |       | $                      | 236,566    |   | $ | 704,374 |   | $ | 1,605,401 |   | $ | 1,492,222 |   |
| Basic earnings per  common share:                           |       |                   |       |   |   |   |   |   |   |
| Earnings from continuing operations                         |       | $                      | .10        |   | $ | .22 |   | $ | .47 |   | $ | .32 |   |
| Earnings (loss) from discontinued operations, net of  taxes |       | (.03                   | )          | (.02 | ) | (.01 | ) | .10 |   |
| Net earnings                                                |       | $                      | .07        |   | $ | .20 |   | $ | .46 |   | $ | .42 |   |
| Diluted earnings per  common share:                         |       |                   |       |   |   |   |   |   |   |
| Earnings from continuing operations                         |       | $                      | .10        |   | $ | .22 |   | $ | .45 |   | $ | .30 |   |
| Earnings (loss) from discontinued operations, net of  taxes |       | (.03                   | )          | (.02 | ) | (.01 | ) | .09 |   |
| Net earnings                                                |       | $                      | .07        |   | $ | .20 |   | $ | .44 |   | $ | .39 |   |
| Weighted average  common shares outstanding:                |       |                   |       |   |   |   |   |   |   |
| Basic                                                       |       | 3,515,447              |       | 3,517,755 |   | 3,518,212 |   | 3,536,842 |   |
| Diluted                                                     |       | 3,632,539              |       | 3,611,099 |   | 3,653,472 |   | 3,786,297 |   |
|                                                             |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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

**SCHEDULE II**

**VALUATIONAND 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  (Credited) to  Other  Accounts** | ** ** | **Deductions**    | ** ** | **Balance at  End of  Period** | ** ** |
| *Allowance for doubtful accounts*:                   |       |              |       |                                           |       |                                                                 |       |                                                        |       |              |       |   |   |   |   |   |   |
| 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 |   |
| Year ended  December 31, 2003                   |       | $                 | 183,208    |                                           |       | $                                                                    | (43,308    | )                                                           |       |              | $          | 10,503 |   |   |   | $ | 36,171 | (b) |   | $ | 114,232 |   |
| *Reserve  for obsolete and slow-moving inventories:* | * *   | * *          | * *   | * *                                       | * *   | * *                                                             | * *   | * *                                                    | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * |
| Year ended  December 31, 2005                   |       | $                 | 1,832,315  |                                           |       | $                                                                    | 240,041    |                                                        |       |              | $          | — |   |   |   | $ | 91,160 |   |   | $ | 1,981,196 |   |
| Year ended  December 31, 2004                   |       | $                 | 1,047,220  |                                           |       | $                                                                    | 75,398     |                                                        |       |              | $          | 754,813 | (a) |   |   | $ | 45,116 |   |   | $ | 1,832,315 |   |
| Year ended  December 31, 2003                   |       | $                 | 1,050,155  |                                           |       | $                                                                    | —     |                                                        |       |              | $          | — |   |   |   | $ | 2,935 |   |   | $ | 1,047,220 |   |
| *Provision  for warranty obligations:*               | * *   | * *          | * *   | * *                                       | * *   | * *                                                             | * *   | * *                                                    | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * |
| Year ended  December 31, 2005                   |       | $                 | 509,947    |                                           |       | $                                                                    | 451,846    |                                                        |       |              | $          | — |   |   |   | $ | 542,982 |   |   | $ | 418,811 |   |
| Year ended  December 31, 2004                   |       | $                 | 120,098    |                                           |       | $                                                                    | 944,068    |                                                        |       |              | $          | 148,487 | (a) |   |   | $ | 702,706 |   |   | $ | 509,947 |   |
| Year ended  December 31, 2003                   |       | $                 | 93,980     |                                           |       | $                                                                    | 181,499    |                                                        |       |              | $          | — |   |   |   | $ | 155,381 |   |   | $ | 120,098 |   |
|                                                      |            |                   |            |                                                |            |                                                                      |            |                                                             |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

(b)          Write-off of expensesagainst reserve.

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**ITEM9.**                Changes in andDisagreements with Accountants on Accounting and Financial Disclosures

None.

**ITEM 9A.**        Controlsand Procedures

**Evaluationof disclosure 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 for the reasons discussed below related to the weaknesses in ourinternal control over financial reporting. To address the control weaknessesdescribed below, the Company performed additional analysis and performed otherprocedures to ensure the consolidated financial statements were prepared inaccordance with generally accepted accounting principles. Accordingly,management believes that the consolidated financial statements included in thisAnnual Report on Form 10-K, fairly present, in all material respectsour financial condition, results of operations and cash flows for the periodspresented.

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***

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; and failureto perform timely reviews, substantiation and evaluation of certain generalledger 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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***Planned Remediation Efforts to Address MaterialWeaknesses***

The Company hasdeveloped remediation plans and initiated action steps subsequent toDecember 31, 2005 designed to address each of the material weaknesses inthe internal control over financial reporting identified above and to implementany and all corrective actions that are required to improve the design andoperating effectiveness of internal control over financial reporting, includingthe enhancement 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 will now be maintained in a locked cabinet that will beaccessible to an individual who is not a check signer. In addition, managementhas implemented measures to segregate the preparation of journal entries andthe subsequent posting to the General Ledger.

2.                Managementhas initiated 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 thespecific knowledge and skills required to perform each function, an assessmentof the personnel training necessary to perform such function adequately, a planto ensure 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 and the independent registered public accounting firm. TheCompany will continue to monitor the effectiveness of its internal controls andprocedures on an ongoing basis and will take further actions, as appropriate.

**Changesin Internal Control Over Financial Reporting**

Except asotherwise discussed herein, there have been no significant changes in theCompany’s internal control over financial reporting during the most recentlycompleted fiscal quarter that has materially affected, or is reasonably likelyto materially affect, the Company’s internal control over financial reporting.However, the Company made changes to the design and operation of internalcontrol over financial reporting during the fourth quarter in order to increasethe design and operating effectiveness of internal controls in connection withimplementing Section 404 of the Sarbanes-Oxley Act of 2002. In addition,the Company is currently implementing enhancements to the Company’s internalcontrol over financing reporting to address the material weaknesses describedabove.

**ITEM 9B.**       OtherInformation

None.

**PART III**

**ITEM 10.**         Directorsand Executive Officers of the Registrant

Information required bythis Item 10 is set forth under the captions “Ownership of Equity Securities,” “CorporateGovernance” and “Section 16(a) Beneficial Ownership ReportingCompliance” in the registrant’s definitive Proxy Statement for its 2006 AnnualMeeting of Stockholders (the “Proxy 

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Statement”)to be filed with the Securities and Exchange Commission pursuant to Regulation14A of the Securities Exchange Act of 1934, as amended, and is herebyincorporated by reference.

**ITEM 11.**         ExecutiveCompensation

Information required bythis Item 11 is set forth under the captions “Executive Compensation,” “Reporton Executive Compensation” and “Company Stock Performance Graph” in the ProxyStatement to be filed with the Securities and Exchange Commission pursuant toRegulation 14A of the Securities Exchange Act of 1934, as amended, and ishereby incorporated by reference.

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

Other then the informationshown in the table below entitled “Equity Compensation Plan Information,” theinformation required by this Item 12 is set forth under the caption “Ownershipof Equity Securities” in the Proxy Statement to be filed with the Securitiesand Exchange Commission pursuant to Regulation 14A of the Securities ExchangeAct of 1934, as amended, and is hereby incorporated by reference.

**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     | ** ** |       | 596,900    |                                                                                                                                                      |       |                                                                                                             | $          | 7.58                                                                                                                                                                                                          |       |   |   | 683,400 | ** ** |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                      |       |                                                                                                             | —     |                                                                                                                                                                                                          |       |   | — | ** ** |   |
| TOTAL                                                       |       |       | 596,900    |                                                                                                                                                      |       |                                                                                                             | $          | 7.58                                                                                                                                                                                                          |       |   |   | 683,400 | ** ** |   |

 

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

**ITEM 13.**         CertainRelationships and Related Transactions

Information required bythis Item 13 is set forth under the caption “Transactions with Management andOthers” in the Proxy Statement to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A of the Securities Exchange Act of 1934,as amended, and is hereby incorporated by reference.

**ITEM 14.**         Principal Accountant Feesand Services

Information required by this Item 14 is set forthunder the caption “Selection of Auditors” in the Proxy Statement to be filedwith the Securities and Exchange Commission pursuant to Regulation 14A of theSecurities Exchange Act of 1934, as amended, and is hereby incorporated byreference.

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**PART IV**

**ITEM15.**         Exhibits and FinancialStatement 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.                                                                                   |       | 23       |
|     |                                                                       |                                                                                                                                                                                                                 |       |     |
|     | (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                                                                                                                                                     |       | 56       |
|     |                                                                       | All other schedules for which provision is made in  the applicable accounting regulations of the Commission are not required  under the related instructions or are inapplicable and, therefore, have been  omitted. |       |     |
|     | (3)                                                                        | List of Exhibits                                                                                                                                                                                                     |       | 61       |

 

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

| Exhibit   Number | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Asset Purchase  Agreement, dated as of September 16, 1998, by and between Green  Manufacturing, Inc., an Ohio corporation, and the Registrant  (Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30,  2003). 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.                                                                                                                                                                                                                                                                  |
| 2.2              |       | 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.                                                                                                                                                                                                                                                                                                                    |
| 2.3              |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.4              |       | Contract  for Purchase and Sale, dated as of May 1, 2002, between W. I.  Commercial Properties, Inc., a Florida corporation, and Countrywide  Hardware, Inc., a Delaware corporation  (Incorporated by reference to Exhibit 4.7 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.5              |       | 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. |
| 2.6              |       | 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.                                                                                                                                                                                                                              |
| 2.7              |       | Amendment to Asset  Purchase Agreement, dated June 8, 2005, among Rosenboom  Machine & Tool, Inc. and 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.8              |       | 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.                                                                                                                                                                                                                                                                                                           |

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| 2.9  |   | 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.                                 |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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). |
| 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 (Filed herein).                                                                                                       |
| 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 (Filed herein).                                        |
| 4.6  |   | 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 June 30, 2001 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 |   | Consulting Agreement,  effective as of November 1, 2003, between the Registrant and Sidney  Horowitz (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31,  2003).                                                                            |
| 10.4 |   | 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).                                                                              |
| 10.5 |   | 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).                                                                                                                                              |
| 10.6 |   | 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).                                                                                |
| 10.7 |   | First Amendment to  Contract of Sale, dated March 8, 2006, between the Registrant and J.  D’Addario & Company, Inc. (Filed herein).                                                                                                                                                                                        |
| 14.1 |   | Code of Business Conduct  and Ethics of the Registrant and its Affiliates (Incorporated by reference to  Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 2003).                                                                                                            |
| 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 copy 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.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the 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, 2006

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the date indicated.

| ** **               | **Name** | ** ** | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------|----------|------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ ROBERT L. DUBOFSKY   |     | Director   |       | March 30,  2006 |
| Robert L. Dubofsky       |     |       |       |                 |
| /s/ JEFFREY D. FRANKLIN  |     | Director   |       | March 30, 2006  |
| Jeffrey D. Franklin      |     |       |       |                 |
| /s/ ALAN GOLDBERG        |     | Director   |       | March 30, 2006  |
| Alan Goldberg            |     |       |       |                 |
| /s/ RICHARD A.  HOROWITZ |     | Director   |       | March 30, 2006  |
| Richard A. Horowitz      |     |       |       |                 |
| /s/ SIDNEY HOROWITZ      |     | Director   |       | March 30, 2006  |
| Sidney Horowitz          |     |       |       |                 |
| /s/ DENNIS KALICK        |     | Director   |       | March 30, 2006  |
| Dennis Kalick            |     |       |       |                 |
| /s/ KENNETH M. SCHERIFF  |     | Director   |       | March 30, 2006  |
| Kenneth M. Scheriff      |     |       |       |                 |
| /s/ MITCHELL A. SOLOMON  |     | Director   |       | March 30, 2006  |
| Mitchell A. Solomon      |     |       |       |                 |
| /s/ ROBERT M. STEINBERG  |     | Director   |       | March 30, 2006  |
| Robert M. Steinberg      |     |       |       |                 |
| /s/ MARC A. UTAY         |     | Director   |       | March 30, 2006  |
| Marc A. Utay             |     |       |       |                 |

 

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