**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March 31, 2006**

 

**o****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from            to            **

 

**Commission File Number 1 - 5332**

 

**P&FINDUSTRIES, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**445 Broadhollow Road, Suite 100,Melville, New York  11747**

(Address of principalexecutive offices)                          (ZipCode)

 

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý   No  o

 

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

Large Accelerated Filer o  Accelerated Filer   o  Non-Accelerated Filer   ý

 

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

 

As of May 12, 2006, there were 3,577,760 shares of the registrant’sClass A Common Stock outstanding.

 

 

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**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006**

 

**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION** |                                                                                                                  |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                  |   |
| Item 1.                                 | Financial  Statements (unaudited)                                                                                     |   |
|                                    |                                                                                                                  |   |
|                                    | Consolidated Condensed  Balance Sheets as of March 31, 2006 and December 31, 2005                                     |   |
|                                    |                                                                                                                  |   |
|                                    | Consolidated Condensed  Statements of Earnings for the Three Months Ended  March 31, 2006 and 2005                    |   |
|                                    |                                                                                                                  |   |
|                                    | Consolidated Condensed  Statement of Shareholders’ Equity for the period from  January 1, 2006 to March 31, 2006 |   |
|                                    |                                                                                                                  |   |
|                                    | Consolidated Condensed  Statements of Cash Flows for the Three Months Ended  March 31, 2006 and 2005                  |   |
|                                    |                                                                                                                  |   |
|                                    | Notes to Consolidated  Condensed Financial Statements                                                                 |   |
|                                    |                                                                                                                  |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   |
|                                    |                                                                                                                  |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                           |   |
|                                    |                                                                                                                  |   |
| Item 4.                                 | Controls and Procedures                                                                                               |   |
|                                    |                                                                                                                  |   |
| **PART II – OTHER INFORMATION**    |                                                                                                                  |
|                                    |                                                                                                                  |   |
| Item 1.                                 | Legal Proceedings                                                                                                     |   |
|                                    |                                                                                                                  |   |
| Item  1A.                               | Risk  Factors                                                                                                         |   |
|                                    |                                                                                                                  |   |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          |   |
|                                    |                                                                                                                  |   |
| Item 3.                                 | Defaults  Upon Senior Securities                                                                                      |   |
|                                    |                                                                                                                  |   |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                                  |   |
|                                    |                                                                                                                  |   |
| Item 5.                                 | Other Information                                                                                                     |   |
|                                    |                                                                                                                  |   |
| Item  6.                                | Exhibits                                                                                                              |   |
|                                    |                                                                                                                  |   |
| **Signatures**                          |                                                                                                                  |
|                                    |                                                                                                                  |   |
| **Exhibit Index**                       |                                                                                                                  |

 

i

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.             FinancialStatements**

 

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

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **March 31,  2006** | ** ** | **D****ecember 31,  2005**                        | ** ** |
|-------------------------------------------------|------------|---------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**     | ** ** | **(derived from  audited financial  statements)** | ** ** |
| **ASSETS**                                      |       |                |       |                                              |       |
| CURRENT                                         |       |                |       |                                              |       |
| Cash and cash equivalents                       |       | $                   | 922,323    |                                              | $          | 1,771,624 |   |
| Accounts receivable – net                  |       | 13,076,064          |       | 12,567,256                                        |       |
| Notes and other receivables                     |       | 1,915,380           |       | 2,727,393                                         |       |
| Inventories – net                          |       | 26,254,440          |       | 26,173,990                                        |       |
| Deferred income taxes – net                |       | 1,509,000           |       | 1,496,000                                         |       |
| Assets held for sale                            |       | 599,518             |       | 623,519                                           |       |
| Assets of discontinued operations               |       | 82,155              |       | 76,538                                            |       |
| Prepaid expenses and other current assets       |       | 1,616,056           |       | 1,111,164                                         |       |
| TOTAL CURRENT ASSETS                            |       | 45,974,936          |       | 46,547,484                                        |       |
|                                            |       |                |       |                                              |       |
| PROPERTY AND EQUIPMENT                          |       |                |       |                                              |       |
| Land                                            |       | 1,174,773           |       | 1,174,773                                         |       |
| Buildings and improvements                      |       | 5,356,800           |       | 5,219,993                                         |       |
| Machinery and equipment                         |       | 8,701,868           |       | 8,087,469                                         |       |
|                                            |       | 15,233,441          |       | 14,482,235                                        |       |
| Less accumulated depreciation and  amortization |       | 7,847,436           |       | 7,620,626                                         |       |
| NET PROPERTY AND EQUIPMENT                      |       | 7,386,005           |       | 6,861,609                                         |       |
|                                            |       |                |       |                                              |       |
| GOODWILL                                        |       | 24,719,312          |       | 23,821,240                                        |       |
|                                            |       |                |       |                                              |       |
| OTHER INTANGIBLE ASSETS – net              |       | 11,796,209          |       | 8,794,833                                         |       |
|                                            |       |                |       |                                              |       |
| OTHER ASSETS – net                         |       | 486,548             |       | 808,381                                           |       |
|                                            |       |                |       |                                              |       |
| TOTAL ASSETS                                    |       | $                   | 90,363,010 |                                              | $          | 86,833,547 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

1

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| ** **                                                                                                                                       | ** ** | **March 31,  2006** | ** ** | **D****ecember 31,  2005**                        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(unaudited)**     | ** ** | **(derived from  audited financial  statements)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                    |       |                |       |                                              |       |
| CURRENT  LIABILITIES                                                                                                                             |       |                |       |                                              |       |
| Short-term borrowings                                                                                                                            |       | $                   | 7,000,000  |                                              | $          | 3,000,000 |   |
| Accounts payable                                                                                                                                 |       | 5,232,743           |       | 2,927,133                                         |       |
| Income taxes payable                                                                                                                             |       | 496,781             |       | 1,366,146                                         |       |
| Accrued compensation                                                                                                                             |       | 780,042             |       | 2,518,196                                         |       |
| Other accrued liabilities                                                                                                                        |       | 2,760,165           |       | 2,338,909                                         |       |
| Current maturities of long-term debt                                                                                                             |       | 4,060,737           |       | 4,058,729                                         |       |
| Liabilities of discontinued operations                                                                                                           |       | 2,072,402           |       | 2,357,573                                         |       |
| TOTAL CURRENT LIABILITIES                                                                                                                        |       | 22,402,870          |       | 18,566,686                                        |       |
|                                                                                                                                             |       |                |       |                                              |       |
| LONG-TERM  DEBT, less current maturities                                                                                                         |       | 18,557,395          |       | 19,572,651                                        |       |
|                                                                                                                                             |       |                |       |                                              |       |
| DEFERRED  INCOME TAXES – net                                                                                                                |       | 960,000             |       | 978,000                                           |       |
|                                                                                                                                             |       |                |       |                                              |       |
| TOTAL LIABILITIES                                                                                                                                |       | 41,920,265          |       | 39,117,337                                        |       |
|                                                                                                                                             |       |                |       |                                              |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                   |       |                |       |                                              |       |
|                                                                                                                                             |       |                |       |                                              |       |
| SHAREHOLDERS’  EQUITY                                                                                                                       |       |                |       |                                              |       |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares outstanding                                                                 |       | —              |       | —                                            |       |
| Common stock                                                                                                                                     |       |                |       |                                              |       |
| Class A - $1 par; authorized - 7,000,000  shares; issued - 3,850,367 and 3,814,367 shares at March 31, 2006 and  December 31, 2005, respectively |       | 3,850,367           |       | 3,814,367                                         |       |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued                                                                               |       | —              |       | —                                            |       |
| Additional paid-in capital                                                                                                                       |       | 9,120,435           |       | 8,947,855                                         |       |
| Retained earnings                                                                                                                                |       | 37,843,120          |       | 36,969,119                                        |       |
| Treasury stock, at cost (272,607 and  244,576 shares at March 31, 2006 and December 31, 2005, respectively)                                      |       | (2,371,177          | )          | (2,015,131                                        | )          |
|                                                                                                                                             |       |                |       |                                              |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                  |       | 48,442,745          |       | 47,716,210                                        |       |
|                                                                                                                                             |       |                |       |                                              |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                  |       | $                   | 90,363,010 |                                              | $          | 86,833,547 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

2

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

 

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

 
| ** **                                                                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net revenues                                                                                                                                        |       | $                                | 26,849,503 |   | $ | 24,324,264 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Cost of sales                                                                                                                                       |       | 18,602,203                       |       | 16,608,559 |   |
| Gross profit                                                                                                                                        |       | 8,247,300                        |       | 7,715,705 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Selling, general and administrative  expenses                                                                                                       |       | 6,299,390                        |       | 5,416,616 |   |
| Operating income                                                                                                                                    |       | 1,947,910                        |       | 2,299,089 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Interest expense – net                                                                                                                         |       | 491,954                          |       | 415,129 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Earnings from continuing operations before  income taxes                                                                                            |       | 1,455,956                        |       | 1,883,960 |   |
| Income taxes                                                                                                                                        |       | 584,000                          |       | 772,000 |   |
| Earnings from continuing operations before  discontinued operations                                                                                 |       | 871,956                          |       | 1,111,960 |   |
| Discontinued operations (net of taxes):                                                                                                             |       |                             |       |   |   |
| Earnings (loss) from operation of  discontinued operations (net of tax expense (benefit) of $1,000 and  $(112,000) for 2006 and 2005, respectively) |       | 2,045                            |       | (219,788 | ) |
| Gain on sale of discontinued operations  (net of tax expense of $36,000 for 2005)                                                                   |       | —                           |       | 71,232 |   |
| Earnings (loss) from discontinued  operations                                                                                                       |       | 2,045                            |       | (148,556 | ) |
|                                                                                                                                                |       |                             |       |   |   |
| Net earnings                                                                                                                                        |       | $                                | 874,001    |   | $ | 963,404 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Basic earnings (loss) per common share:                                                                                                             |       |                             |       |   |   |
| Continuing operations                                                                                                                               |       | $                                | .24        |   | $ | .31 |   |
| Discontinued operations                                                                                                                             |       | —                           |       | (.04 | ) |
|                                                                                                                                                |       | $                                | .24        |   | $ | .27 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Diluted earnings (loss) per common share:                                                                                                           |       |                             |       |   |   |
| Continuing operations                                                                                                                               |       | $                                | .23        |   | $ | .29 |   |
| Discontinued operations                                                                                                                             |       | —                           |       | (.04 | ) |
|                                                                                                                                                |       | $                                | .23        |   | $ | .25 |   |
|                                                                                                                                                |       |                             |       |   |   |
| Weighted average common shares outstanding:                                                                                                         |       |                             |       |   |   |
| Basic                                                                                                                                               |       | 3,583,942                        |       | 3,559,922 |   |
| Diluted                                                                                                                                             |       | 3,832,264                        |       | 3,875,880 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

3

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

 

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

 
| ** **                                                       | ** ** | **Total**  | ** ** | **Class A Common   Stock, $1 Par** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury Stock** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|----------------------------------|------------|------------------------|------------|--------------------|------------|
| **Shares**                                                       | ** ** | **Amount** | **Shares** | ** **                         | **Amount** | ** **                       |
| ** **                                                       | ** ** | ** ** | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance,  January 1, 2006**                                    |       | $          | 47,716,210 |                               | 3,814,367  |                             | $          | 3,814,367              |       | $                  | 8,947,855  |   | $ | 36,969,119 |   | (244,576 | ) | $ | (2,015,131 | ) |
| ** **                                                       |       |       |       |                               |       |                             |       |                   |       |               |       |   |   |   |   |
| Net earnings                                                     |       | 874,001    |       | —                             |       | —                           |       | —                 |       | 874,001            |       | — |   | — |   |
| Issuance of Class  A common stock upon exercise of stock options |       | 208,580    |       | 36,000                             |       | 36,000                           |       | 172,580                |       | —             |       | — |   | — |   |
| Shares  surrendered as payment for exercise of stock options     |       | (61,850    | )          | —                             |       | —                           |       | —                 |       | —             |       | (5,000 | ) | (61,850 | ) |
| Purchase of Class  A common stock                                |       | (294,196   | )          | —                             |       | —                           |       | —                 |       | —             |       | (23,031 | ) | (294,196 | ) |
| **Balance,  March 31, 2006**                                     |       | $          | 48,442,745 |                               | 3,850,367  |                             | $          | 3,850,367              |       | $                  | 9,120,435  |   | $ | 37,843,120 |   | (272,607 | ) | $ | (2,371,177 | ) |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

4

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

 

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

 
| ** **                                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Cash Flows from Operating Activities of Continuing  Operations:                                                         |       |                             |       |   |   |
| Net earnings                                                                                                            |       | $                                | 874,001    |   | $ | 963,404 |   |
| (Earnings) loss from discontinued  operations – net of taxes                                                       |       | (2,045                           | )          | 148,556 |   |
| Adjustments to reconcile net earnings to  net cash provided by (used in) operating activities of continuing operations: |       |                             |       |   |   |
| Non-cash charges and credits:                                                                                           |       |                             |       |   |   |
| Depreciation and amortization                                                                                           |       | 226,810                          |       | 191,601 |   |
| Amortization of other intangible assets                                                                                 |       | 298,624                          |       | 276,250 |   |
| Amortization of other assets                                                                                            |       | 1,500                            |       | 1,500 |   |
| Provision (recoveries) for losses on accounts  receivable - net                                                         |       | (8,075                           | )          | 9,345 |   |
| Deferred income taxes – net                                                                                        |       | (31,000                          | )          | (48,000 | ) |
| Changes in:                                                                                                             |       |                             |       |   |   |
| Accounts receivable                                                                                                     |       | 76,261                           |       | (414,410 | ) |
| Notes and other receivables                                                                                             |       | 812,013                          |       | 924,806 |   |
| Inventories                                                                                                             |       | 257,825                          |       | (3,165,583 | ) |
| Prepaid expenses and other current assets                                                                               |       | (508,356                         | )          | (479,819 | ) |
| Other assets                                                                                                            |       | 320,333                          |       | 8,376 |   |
| Accounts payable                                                                                                        |       | 2,303,470                        |       | 235,162 |   |
| Accruals and other                                                                                                      |       | (2,186,263                       | )          | (1,730,968 | ) |
| Total adjustments                                                                                                       |       | 1,561,097                        |       | (4,043,184 | ) |
| Net cash provided by (used in) operating  activities of continuing operations                                           |       | $                                | 2,435,098  |   | $ | (3,079,780 | ) |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

5

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| ** **                                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Cash Flows  from Investing Activities of Continuing Operations:                          |       |                             |       |   |   |
| Capital expenditures                                                                     |       | $                                | (501,206   | ) | $ | (150,931 | ) |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products, Inc. |       | (5,232,916                       | )          | — |   |
| Additional payments for acquisition-related  expenses                                    |       | (162,434                         | )          | — |   |
| Additional purchase price adjustment                                                     |       | 37,613                           |       | — |   |
| Proceeds from sale of certain assets of  Green’s Access Division                    |       | —                           |       | 880,069 |   |
| Additional payments for purchase of  Nationwide Industries, Inc.                         |       | —                           |       | (101,450 | ) |
|                                                                                     |       |                             |       |   |   |
| Net cash (used in) provided by investing  activities of continuing operations            |       | (5,858,943                       | )          | 627,688 |   |
|                                                                                     |       |                             |       |   |   |
| Cash Flows  from Financing Activities of Continuing Operations:                          |       |                             |       |   |   |
| Proceeds from short-term borrowings                                                      |       | 9,500,000                        |       | 6,000,000 |   |
| Repayments of short-term borrowings                                                      |       | (5,500,000                       | )          | (3,000,000 | ) |
| Repayments of term loan                                                                  |       | (950,000                         | )          | (3,250,000 | ) |
| Principal payments on long-term debt                                                     |       | (63,248                          | )          | (58,406 | ) |
| Proceeds from exercise of stock options                                                  |       | 146,730                          |       | 74,995 |   |
| Purchase of Class A common stock                                                         |       | (294,196                         | )          | — |   |
|                                                                                     |       |                             |       |   |   |
| Net cash provided by (used in) financing  activities of continuing operations            |       | 2,839,286                        |       | (233,411 | ) |
|                                                                                     |       |                             |       |   |   |
| Cash Flows  from Discontinued Operations:                                                |       |                             |       |   |   |
| Net cash (used in) provided by operating  activities                                     |       | (236,454                         | )          | 2,695,583 |   |
| Net cash used in investing activities                                                    |       | —                           |       | (1,049,601 | ) |
| Net cash used in financing activities                                                    |       | (28,288                          | )          | (28,288 | ) |
|                                                                                     |       |                             |       |   |   |
| Net cash (used in) provided by discontinued  operations                                  |       | (264,742                         | )          | 1,617,694 |   |
|                                                                                     |       |                             |       |   |   |
| NET DECREASE  IN CASH                                                                    |       | (849,301                         | )          | (1,067,809 | ) |
| Cash and  cash equivalents at beginning of period                                        |       | 1,771,624                        |       | 1,189,869 |   |
| Cash and  cash equivalents at end of period                                              |       | $                                | 922,323    |   | $ | 122,060 |   |
|                                                                                     |       |                             |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                  |       |                             |       |   |   |
| Cash  paid for:                                                                          |       |                             |       |   |   |
| Interest                                                                                 |       | $                                | 478,000    |   | $ | 408,000 |   |
| Income taxes                                                                             |       | $                                | 1,736,000  |   | $ | 1,606,000 |   |

 

Non-cashinvesting and financing activities were as follows:

 

In connection with the sale of certain assets of Green’s AccessDivision in February 2005, the Company received interest-bearing promissorynotes of approximately $877,000, as adjusted, payable in varying amountsthrough November 2006.

 

During the first quarter of 2006, the Company received 5,000 shares ofClass A Common Stock in connection with the exercise of options to purchase15,000 shares of Class A Common Stock. The value of these shares was recordedat $61,850.

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

6

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

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

 

**NOTE 1 - SUMMARY OF ACCOUNTING POLICIES**

 

**Principles of Consolidation**

 

The unaudited consolidated condensed financial statements containedherein include the accounts of P&F Industries, Inc. and its subsidiaries.All significant intercompany balances and transactions have been eliminated.

 

P&F Industries, Inc. (“P&F”) conducts its business operationsthrough two of its wholly-owned subsidiaries: Florida PneumaticManufacturing Corporation (“Florida Pneumatic”) and Countrywide Hardware, Inc.(“Countrywide”). P&F and its subsidiaries are herein referred tocollectively as the “Company.” In addition, the words “we”, “our” and “us”refer to the Company.

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”), throughWoodmark International, L.P. (“Woodmark”), a limited partnership betweenCountrywide and WILP Holdings, Inc., a subsidiary of Countrywide, and throughPacific Stair Products, Inc. (“Pacific Stair”). Nationwide is an importer andmanufacturer of door, window and fencing hardware. Woodmark is an importer ofbuilders’ hardware, including staircase components and kitchen and bathhardware and accessories. In January 2006, Countrywide acquired substantiallyall of the operating assets of Pacific Stair, a manufacturer of premium stairrail products and a distributor of Woodmark’s staircase components to thebuilding industry, primarily in southern California and the southwestern regionof the United States (see Note 6). The Company’s wholly-owned subsidiary,Embassy Industries, Inc. (“Embassy”), was engaged in the manufacture and saleof baseboard heating products and the importation and sale of radiant heatingsystems until it exited that business in October 2005 (see Note 7) through thesale of substantially all of its non-real estate assets. The Company’swholly-owned subsidiary, Green Manufacturing, Inc. (“Green”), was primarilyengaged in the manufacture, development and sale of heavy-duty welded customdesigned 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 inFebruary 2005 through the sale of certain assets and a line of post holedigging equipment for the agricultural industry until it exited that businessin July 2005 through the sale of certain assets. Green has effectively ceasedall operating activities (see Note 7). Note 12 presents financial informationfor the segments of the Company’s business.

 

**Basis of Financial StatementPresentation**

 

The accompanying unaudited consolidated condensed financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information, and with therules and regulations of the Securities and Exchange Commission regardinginterim financial reporting. Accordingly, these interim financial statements donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of the Company, these unauditedconsolidated

 

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condensed financialstatements include all adjustments necessary to present fairly the informationset forth therein. All such adjustments are of a normal recurring nature.Results for interim periods are not necessarily indicative of results to beexpected for a full year.

 

The results of operations for Embassy and Green have been segregatedfrom continuing operations and are reflected on the consolidated condensed statementsof earnings as discontinued operations.

 

The unaudited consolidated condensed balance sheet information as ofDecember 31, 2005 was derived from the audited financial statements included inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2005.The interim financial statements contained herein should be read in conjunctionwith that Report.

 

In preparing its unaudited consolidated condensed financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America, the Company is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.On an ongoing basis, the Company evaluates estimates, including those relatedto bad debts, inventory reserves, goodwill and intangible assets. The Companybases its estimates on historical data and experience, when available, and onvarious other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from thoseestimates.

 

**NOTE 2 - EARNINGS PER SHARE**

 

Basic earnings (loss) per common share is based only on the averagenumber of shares of common stock outstanding for the periods. Diluted earnings(loss) per common share reflects the effect of shares of common stock issuableupon the exercise of options, unless the effect on earnings is antidilutive.

 

Diluted earnings (loss) per common share is computed using the treasurystock method. Under this method, the aggregate number of shares of common stockoutstanding reflects the assumed use of proceeds from the hypothetical exerciseof any outstanding options or warrants to purchase shares of the Company’sClass A Common Stock. The average market value for the period is used as theassumed purchase price.

 

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

 
| ** **                                                                                                         | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Numerator:                                                                                                         |       |                             |       |   |   |
| Numerator for basic and diluted earnings  (loss) per common share:                                                 |       |                             |       |   |   |
| Earnings from continuing operations                                                                                |       | $                                | 871,956    |   | $ | 1,111,960 |   |
| Discontinued operations, net of taxes                                                                              |       | 2,045                            |       | (148,556 | ) |
| Net earnings                                                                                                       |       | $                                | 874,001    |   | $ | 963,404 |   |
|                                                                                                               |       |                             |       |   |   |
| Denominator:                                                                                                       |       |                             |       |   |   |
| Denominator for basic earnings per share –  weighted average common shares outstanding                        |       | 3,583,942                        |       | 3,559,922 |   |
| Effect of dilutive securities:                                                                                     |       |                             |       |   |   |
| Stock options                                                                                                      |       | 248,322                          |       | 315,958 |   |
| Denominator for diluted earnings per share –  adjusted weighted average common shares and assumed conversions |       | 3,832,264                        |       | 3,875,880 |   |
|                                                                                                                    |            |                                  |            |  |  |  |  |  |

 

At March 31, 2006 and 2005 and during the three-month periods endedMarch 31, 2006 and 2005, there were outstanding stock options whose exerciseprices were higher than the average market values of the underlying Class ACommon Stock for the period. These options are anti-dilutive and are excludedfrom the computation of earnings per share. The weighted average anti-dilutivestock options outstanding were as follows:

 
| ** **                                                | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Weighted  average anti-dilutive stock options outstanding |       | 29,500                           |       | — |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

On January 1, 2006, the Company adopted the provisions of FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting Standards(“SFAS”) No. 123(R), “Share-Based Payment” (“Statement 123(R)”), which revisesFASB SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedesAPB Opinion 25, “Accounting for Stock Issued to Employees”. Statement 123(R)requires the Company to recognize expense related to the fair value of ourstock-based compensation awards, including employee stock options.

 

Prior to the adoption of Statement 123(R), the Company accounted forstock-based compensation awards using the intrinsic value method of APB Opinion25. Accordingly, the Company did not recognize compensation expense in itsstatement of earnings for options granted that had an exercise price equal to themarket value of the underlying common stock on the date of grant. As requiredby Statement 123, the Company also provided certain pro forma disclosures forstock-based awards as if the fair-value-based approach of Statement 123 hadbeen applied.

 

The Company has elected to use the modified prospective transitionmethod as permitted by Statement 123(R) and therefore has not restated its financialresults for prior periods. Under this transition method, the Company appliedthe provisions of Statement 123(R) to new awards and to awards modified,repurchased, or cancelled after January 1, 2006. Additionally, the Company willrecognize compensation

 

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cost for the portion ofthe awards for which the requisite service has not been rendered (unvestedawards) that are outstanding as of January 1, 2006, as the remaining service isrendered. The compensation cost the Company records for these awards will bebased on their grant-date fair value as calculated for the pro formadisclosures required by Statement 123.

 

No stock-based compensation cost related to stock options wasrecognized in the statements of earnings for the years ended December 31, 2005and 2004, as all options granted in these periods had an exercise price equalto the market price at the date of grant. As a result of adopting Statement123(R), the Company’s earnings before income taxes and net earnings for thethree-month period ended March 31, 2006 were approximately $7,000 and $4,000lower than if we had continued to account for stock-based compensation underAPB Opinion 25. Compensation expense is recognized in the general andadministrative expenses line item of the Company’s statements of earnings on astraight-line basis over the vesting periods. There are no capitalizedstock-based compensation costs at March 31, 2006 and 2005. The adoption ofStatement 123(R) had no impact on our basic and dilutive earnings per commonshare for the three-month period ended March 31, 2006.

 

The following table illustrates the effect on net earnings after taxand net earnings per common share as if we had applied the fair valuerecognition provisions of Statement 123 to stock-based compensation for thethree-month period ended March 31, 2005:

 
| Net earnings as reported                                                                                                 |   | $      | 963,000 |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Deduct: Total stock-based employee  compensation expense determined under fair value method, net of related tax  effects |   | (6,000 | )       |
| Pro forma  net earnings                                                                                                  |   | $      | 957,000 |   |
|                                                                                                                     |   |   |    |
| Basic  earnings per common share                                                                                         |   |   |    |
| As reported                                                                                                              |   | $      | .27     |   |
| Pro forma                                                                                                                |   | $      | .27     |   |
| Diluted  earnings per common share                                                                                       |   |   |    |
| As reported                                                                                                              |   | $      | .25     |   |
| Pro forma                                                                                                                |   | $      | .25     |   |
|                                                                                                                          |        |        |         |        |  |

 

The fair value of options granted is estimated on the date of grantusing the Black-Scholes option pricing model.

 

Stock Option Plan

 

The Company’s 2002 Incentive Stock Option Plan (the “Current Plan”)authorizes the issuance, to employees and directors, of options to purchase amaximum of 1,100,000 shares of Class A Common Stock. These options must beissued within ten years of the effective date of the Plan and are exercisablefor a ten year period from the date of grant, at prices not less than 100% ofthe market value of the Class A Common Stock on the date the option is granted.Options granted to any 10% stockholder are exercisable for a five year periodfrom the date of grant, at prices not less than 110% of the market value of theClass A Common Stock on the date the option is granted. Options typically vestimmediately. In the event options granted contain a vesting schedule over aperiod of years, the Company recognizes compensation cost for these awards on astraight-line basis over the service period. The Current Plan, which terminatesin 2012, is the successor to the Company’s 1992 Incentive Stock Option Plan(the “Prior Plan”).

 

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The following is a summary of the changes in outstanding options forthe three months ended March 31, 2006:

 
| ** **                    | ** ** | **Option  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average Remaining Contractual Life (Years)** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|-------------------------------|------------|--------------------|------------|---------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding,  January 1, 2006 |       | 596,900            |       | $                                     | 7.58       |                                                    | 4.7        |                           |       |   |
| Granted                       |       | —             |       | —                                |       |                                                    |       |                           |       |
| Exercised                     |       | (36,000            | )          | 5.79                                  |       | —                                                  |       |                           |       |
| Forfeited                     |       | —             |       | —                                |       | —                                                  |       |                           |       |
| Expired                       |       | —             |       | —                                |       | —                                                  |       |                           |       |
| Outstanding,  March 31, 2006  |       | 560,900            |       | $                                     | 7.69       |                                                    | 4.4        |                           | $          | 3,932,000 |   |
| Vested,  March 31, 2006       |       | 519,422            |       | $                                     | 7.53       |                                                    | 4.5        |                           | $          | 3,724,000 |   |

 

There were no stock options granted during the three months ended March31, 2006 and 2005. The total intrinsic value of stock options exercised duringthe three months ended March 31, 2006 and 2005 was $223,000 and $113,000,respectively.

 

The following is a summary of changes in non-vested shares for thethree months ended March 31, 2006:

 
| ** **                          | ** ** | **Option  Shares** | ** ** | **Weighted  Average Grant-Date Fair Value** | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------------------------------|------------|
| Non-vested  shares, January 1, 2006 |       | 41,478             |       | $                                           | 2.73       |   |
| Granted                             |       | —             |       | —                                      |       |
| Vested                              |       | —             |       | —                                      |       |
| Forfeited                           |       | —             |       | —                                      |       |
| Non-vested  shares, March 31, 2006  |       | 41,478             |       | $                                           | 2.73       |   |

 

The Company recognizes compensation cost over the requisite serviceperiod. However, the exercisability of the respective non-vested options, whichare at pre-determined dates on a calendar year, do not necessarily correspondto the period(s) in which straight-line amortization of compensation cost isrecorded.

 

Other Information

 

As of March 31, 2006, the Company has approximately $43,000 of totalunrecognized compensation cost related to non-vested awards granted under ourshare-based plans, which we expect to recognize over a weighted-average periodof 2.7 years.

 

The Company received cash from options exercised during thethree-months ended March 31, 2006 of approximately $147,000. The impact ofthese cash receipts is included in financing activities in the accompanyingconsolidated condensed statements of cash flows. Statement 123(R) requires thatcash flows from tax benefits attributable to tax deductions in excess of thecompensation cost recognized for those options (excess tax benefits) beclassified as financing cash flows.

 

The number of shares of Class A common stock reserved for stock optionsavailable for issuance under the Current Plan as of March 31, 2006 was 683,400.Of the options outstanding at March 31, 2006, 348,100 were issued under theCurrent Plan and 212,800 were issued under the Prior Plan.

 

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**NOTE 4 - FOREIGN CURRENCY TRANSACTIONS**

 

**Derivative Financial Instruments**

 

The Company uses derivatives to reduce its exposure to fluctuations inforeign currencies, principally Japanese yen. Derivative products, specificallyforeign currency forward contracts, are used to hedge the foreign currencymarket exposures underlying certain debt and forecasted transactions withforeign vendors. The Company does not enter into such contracts for speculativepurposes.

 

For derivative instruments that are designated and qualify as fairvalue hedges (i.e., hedging the exposure to changes in the fair value of anasset or a liability or an identified portion thereof that is attributable to aparticular risk), the gain or loss on the derivative instrument as well as theoffsetting gain or loss on the hedge item attributable to the hedged risk arerecognized in earnings in the current period. For derivative instruments thatare designated and qualify as a cash flow hedge (i.e., hedging the exposure ofvariability in the expected future cash flows that would be attributable to aparticular risk), the effective portion of the gain or loss on the derivativeinstrument is reported as a component of accumulated comprehensive loss (acomponent of shareholders’ equity) and reclassified into earnings in the sameperiod or periods during which the hedged transaction affects earnings. Theremaining gain or loss on the derivative instrument, if any (i.e., theineffective portion and any portion of the derivative instrument excluded fromthe assessment of effectiveness), is recognized in earnings in the currentperiod. For derivative instruments not designated as hedging instruments,changes in the fair market values are recognized in earnings as a component ofcost of sales.

 

The Company accounts for changes in the fair value of its foreigncurrency contracts by marking them to market and recognizing any resultinggains or losses through its statement of earnings. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or losses inits statement of earnings. At March 31, 2006, the Company had foreign currencyforward contracts, maturing in 2006, to purchase Japanese yen at contractedforward rates. The value of these contracts at March 31, 2006, based on thatday’s closing spot rate, was approximately $1,341,000, which was theapproximate value of the Company’s yen-denominated accounts payable. During thethree month periods ended March 31, 2006 and 2005, the Company recorded in itscost of sales a net realized gain of approximately $10,000 and a net realizedloss of $102,000, respectively, on foreign currency transactions. At March 31,2006 and 2005, the Company had no unrealized gains or losses in foreigncurrency transactions.

 

**NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS**

 

In February 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accountingfor Certain Hybrid Financial Instruments – an amendment of FASB Statements No.133 and 140.” SFAS No. 155 allows companies to elect to measure at fair valueentire financial instruments containing embedded derivatives that wouldotherwise have to be accounted for separately. It also requires companies toidentify interests in securitized financial assets that are freestandingderivatives or contain embedded derivatives that would have to be accounted forseparately, clarifies which interest- and principal-only strips are subject toSFAS No. 133, and amends SFAS No. 140 to revise the conditions of a qualifyingspecial purpose entity due to the new requirement to identify whether interestsin securitized financial assets are freestanding derivatives or containembedded derivatives. SFAS No. 155 is effective for all financial instrumentsacquired, issued or subject to a remeasurement event after the beginning of acompany’s first fiscal year that begins after September 15, 2006. The Companydoes not expect adoption of SFAS No. 155 to have a material effect on itsresults of operations or financial position.

 

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets – an amendment of FASB Statement No. 140.” SFAS No. 156requires the recognition of a servicing asset

 

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or liability each time acompany undertakes an obligation to service a financial asset in certainsituations. It requires all separately recognized servicing assets andliabilities to be initially measured at fair value, if practical. SFAS No. 156is effective as of the beginning of a company’s first fiscal year that beginsafter September 15, 2006. The Company does not expect adoption of SFAS No. 156to have a material effect on its results of operations or financial position.

 

**NOTE 6****–****ACQUISITION**

 

Pacific Stair Products, Inc.

 

Pursuant to an Asset Purchase Agreement (the “PSP APA”), dated December20, 2005, between Pacific Stair Products, a California corporation (“Old PSP”),and Pacific Stair Products, Inc., a newly-formed Delaware corporation (“PacificStair”) and a wholly-owned subsidiary of Countrywide, effective January 3,2006, Pacific Stair purchased substantially all of the operating assets of OldPSP. The total purchase price for the assets was approximately $5,233,000,subject to adjustments, plus the assumption of certain liabilities andobligations by Pacific Stair. The assets purchased pursuant to the PSP APAinclude, among others, accounts receivable, inventory, machinery and equipmentand certain intangibles. Certain assets were retained by Old PSP including cashand title to any real property. The purchase price, including directacquisition costs, represents a premium over the fair value of the assetspurchased of approximately $4,198,000, which will be allocated among goodwilland other intangible assets. Pacific Stair is a manufacturer of premium stairrail products and a distributor of staircase components to the buildingindustry, primarily in southern California and the southwestern region of theUnited States. As a result of this transaction, Countrywide has increased itspurchasing power and geographic distribution. The acquisition was financedthrough the Company’s credit facility with Citibank. The consolidated condensedfinancial statements presented herein include the results of operations forPacific Stair for the period from January 3, 2006 to March 31, 2006.

 

The purchase price for this acquisition, negotiated on the basis ofPacific Stair’s historical financial performance, was as follows:

 
| Cash paid at closing from short-term  borrowings          |   | $       | 5,233,000 |   |
|-----------------------------------------------------------|--------|---------|-----------|--------|
| Additional  purchase price for working capital adjustment |   | (38,000 | )         |
| Direct  acquisition costs                                 |   | 163,000 |      |
| Total  purchase price                                     |   | $       | 5,358,000 |   |
|                                                           |        |         |           |        |  |

 

The following table presents the estimated fair valuesof the net assets acquired and the amount allocated to goodwill:

 
| Current and other assets                 |   |      |      | $         | 912,000   |   |
|------------------------------------------|--------|-----------|-----------|-----------|-----------|--------|
| Property and  equipment                  |   |      |      | 250,000   |      |
| Identifiable  intangible assets:         |   |      |      |      |      |
| Customer relationships                   |   | $         | 1,800,000 |      |      |   |
| Tradename                                |   | 1,450,000 |      |      |      |
| Non-compete and employment agreements    |   | 50,000    |      | 3,300,000 |      |
|                                     |   |      |      | 4,462,000 |      |
| Less:  liabilities assumed               |   |      |      | 2,000     |      |
| Total fair  value of net assets acquired |   |      |      | 4,460,000 |      |
| Goodwill                                 |   |      |      | 898,000   |      |
| Total  purchase price                    |   |      |      | $         | 5,358,000 |   |
|                                          |        |           |           |           |           |        |  |  |

 

The Company obtained anindependent third-party valuation of the identifiable intangible assets.

 

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The excess of the total purchase price over the fair value of the netassets acquired, including the value of the identifiable intangible assets, hasbeen allocated to goodwill. Goodwill will be amortized, for fifteen years, fortax purposes but not for financial reporting purposes. The fair values of the identifiable intangible assets are based oncurrent information and are subject to change. The intangible assets subject toamortization will be amortized over fifteen years for tax purposes and forfinancial reporting purposes and have been assigned useful lives as follows:

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

 

The following unaudited pro forma financial information presents thecombined results of operations of the Company and its Pacific Stair acquisitionas if it had occurred at the beginning of the periods presented. The pro formafinancial information reflects appropriate adjustments for amortization ofintangible assets, additional compensation related to an employment agreement,interest expense and income taxes. The pro forma financial informationpresented is not necessarily indicative of either the actual consolidatedoperating results had the acquisition been completed at the beginning of eachperiod or future operating results of the consolidated entities.

 
| ** **                                             | ** ** | **Three Months Ended March 31, 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
|                                                   |       |                                  |       |
| Net revenues                                           |       |                                  | $          | 25,530,000 |   |   |
| Net earnings  from continuing operations               |       |                                  | $          | 1,226,000 |   |   |
| Earnings per  common share from continuing operations: |       |                                  |       |   |   |
| Basic                                                  |       |                                  | $          | .34 |   |   |
| Diluted                                                |       |                                  | $          | .32 |   |   |

 

**NOTE 7 – DISCONTINUED OPERATIONS**

 

Embassy Industries, Inc.

 

Pursuant to an Asset Purchase Agreement (the “Embassy APA”), dated asof October 11, 2005, among P&F, Embassy, Mestek, Inc. (“Mestek”) andEmbassy Manufacturing, Inc., a wholly-owned subsidiary of Mestek (“EMI”),Embassy sold substantially all of its operating assets to EMI. The assets soldpursuant to the Embassy APA include, among others, machinery and equipment,inventory, accounts receivable and certain intangibles. Certain assets wereretained by Embassy, including, but not limited to, cash and title to any realproperty owned by Embassy at the consummation of the sale to EMI. Theconsideration paid by EMI for the assets acquired pursuant to the Embassy APAwas approximately $8,433,000 plus the assumption of certain liabilities andobligations of Embassy by EMI.

 

Pursuant to a Lease, dated as of October11, 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, 2005 andterminating April 10, 2006; provided however, that, in the event EMI servesnotice on Embassy by December 31, 2005, the Lease may be extended on a month tomonth basis to, and including, June 30, 2006. EMI has served notice on Embassyto extend the EMI Lease through May 31, 2006.

 

Embassy has effectively ceased all operatingactivities. The Company recognized a gain on the

 

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sale of these assets ofapproximately $1,467,000, net of taxes, during the fourth quarter of fiscal2005.

 

In January 2006, Embassyentered into a contract of sale, as amended, 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.

 

Green Manufacturing, Inc. –Agricultural Products Division

 

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

 

The purchase price paid by Benko in consideration for the assets acquiredpursuant to the Agricultural APA was $530,000, consisting of (a) a payment toGreen at Agricultural Closing of $225,000; (b) $25,000 payable pursuant to theterms of a Promissory Note (“Agricultural Note 1”), dated July 14, 2005,payable in equal monthly amounts over a five (5) month period commencing as ofthe Agricultural Closing; and (c) $280,000 payable pursuant to the terms of aPromissory Note (collectively with Agricultural Note 1, the “Agricultural Notes”),dated July 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.

 

In connection with the transaction, Green and Benko entered into anagreement which provides for Benko to purchase from Green 100% of Benko’srequirements for products of the type that constitute part of Green’s inventoryof raw materials and finished goods as of the acquisition date with allpurchases by Benko being binding and non-cancelable at pre-established prices.The term is for a period of one year from the acquisition date. Benko shallmaintain for the benefit of Green an insurance policy insuring the inventoryand will bear the entire risk of loss, theft, destruction or any damage to theinventory. Benko will also be responsible for all recordkeeping with respect tothe inventory. After the expiration of the term, Benko is obligated to provideGreen with a list of all unpurchased inventory and return such inventory toGreen. Based on the terms of the agreement, Green has effectively entered intoan arrangement which provides for a transfer of its inventory to Benko prior topayment, as if it had been sold to Benko, with Green recording it as an othercurrent receivable (based on the cost of the inventory, which approximated$373,000) in the third quarter of 2005. This treatment is based on the factthat Green has effectively transferred control of the inventory to Benko. Benko’semployees maintain control of the inventory as it is located on Benko’spremises and also bears risk of loss, theft, destruction or any damage to theinventory. Also, all purchases by Benko are binding and non-cancelable atpre-established prices with Benko being Green’s only customer for the one-yearperiod.

 

The Company recognized a gain on the sale of these assets of approximately$312,000, net of taxes, in fiscal 2005.

 

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Green Manufacturing, Inc. –Access Division

 

Pursuant to an Asset Purchase Agreement (the “Access APA”), dated as ofFebruary 2, 2005, between Green and Benko Products, Inc. (“Benko”), Green soldcertain of its assets comprising its Access Division (the “Access Division”) toBenko. The assets sold pursuant to the Access APA include, among others,certain machinery and equipment, accounts receivable (“Purchased Receivables”),inventory, intellectual property and other intangibles. Certain assets of theAccess Division were retained by Green, including, but not limited to, certainof the Access Division’s accounts receivable existing at the consummation of thesale to Benko (the “Access Closing”).

 

The purchase price paid by Benko in consideration for the assetsacquired pursuant to the Access APA, giving effect to certain adjustments, wasapproximately $1,756,655, consisting of (a) a payment to Green at AccessClosing of approximately $880,069; (b) $755,724 payable pursuant to the termsof a Promissory 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 Promissory Note(collectively with Access Note 1, the “Access Notes”), dated February 2, 2005,payable in various amounts over a four (4) month period commencing as of theAccess Closing. Benko agreed to pay additional consideration on an annual basisfor the two (2) successive twelve (12) month periods commencing as of theAccess Closing, dependent on certain sales by Benko, subject to certain otherconditions. In addition, Benko assumed certain of Green’s contractualobligations. The obligations of Benko under the Access APA and the Access Notesare guaranteed by each of a principal shareholder and an affiliate of Benko,and partially secured by certain collateral.

 

The Company recognized a gain on the sale of these assets ofapproximately $71,000, net of taxes, in fiscal 2005.

 

The following amounts related to Embassy and Green have been segregatedfrom the Company’s continuing operations and are reported as assets held forsale and assets and liabilities of discontinued operations in the consolidatedcondensed balance sheets:

 
| ** **                                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| Assets held  for sale and assets of discontinued operations:      |       |               |       |                  |       |
| Prepaid  expenses                                                 |       | $                  | 82,000     |                  | $          | 77,000 |   |
| Assets held  for sale                                             |       | 600,000            |       | 623,000               |       |
| Total assets  held for sale and assets of discontinued operations |       | $                  | 682,000    |                  | $          | 700,000 |   |
|                                                              |       |               |       |                  |       |
| Liabilities  of discontinued operations:                          |       |               |       |                  |       |
| Accounts  payable and accrued expenses                            |       | $                  | 733,000    |                  | $          | 991,000 |   |
| Mortgage  payable                                                 |       | 1,339,000          |       | 1,367,000             |       |
| Total  liabilities of discontinued operations                     |       | $                  | 2,072,000  |                  | $          | 2,358,000 |   |
|                                                                   |            |                    |            |                       |            |  |  |  |  |

 

16

----

 

Results of operations for Embassy and Green are included from thebeginning of each fiscal period presented through the respective dates of assetdisposition, and have been segregated from continuing operations and reflectedas discontinued operations approximately as follows: 

 
| ** **                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net revenues                                                             |       | $                                | —     |   | $ | 2,983,000 |   |
|                                                                     |       |                             |       |   |   |
| Earnings  (loss) from operation of discontinued operations, before taxes |       | $                                | 3,000      |   | $ | (332,000 | ) |
| Income tax  (expense) benefit                                            |       | (1,000                           | )          | 112,000 |   |
| Earnings  (loss) from operation of discontinued operations               |       | 2,000                            |       | (220,000 | ) |
|                                                                     |       |                             |       |   |   |
| Gain on sale  of discontinued operations, before taxes                   |       | —                           |       | 107,000 |   |
| Income tax  expense                                                      |       | —                           |       | (36,000 | ) |
| Gain on sale  of discontinued operations                                 |       | —                           |       | 71,000 |   |
| Earnings  (loss) from discontinued operations                            |       | $                                | 2,000      |   | $ | (149,000 | ) |
|                                                                          |            |                                  |            |  |  |  |  |  |  |

 

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

 

Accounts receivable -net consists of:

 
| ** **                       | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|
| Trade  accounts receivables      |       | $                  | 13,258,000 |                  | $          | 12,757,000 |   |
| Allowance  for doubtful accounts |       | (182,000           | )          | (190,000              | )          |
|                             |       | $                  | 13,076,000 |                  | $          | 12,567,000 |   |
|                                  |            |                    |            |                       |            |  |  |  |

 

**NOTE 9 - INVENTORIES**

 

Inventories - net consist of:

 
| ** **                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| Raw material                                      |       | $                  | 2,122,000  |                  | $          | 2,209,000 |   |
| Work in  process                                  |       | 422,000            |       | 349,000               |       |
| Finished  goods                                   |       | 25,804,000         |       | 25,597,000            |       |
|                                              |       | 28,348,000         |       | 28,155,000            |       |
| Reserve for  obsolete and slow-moving inventories |       | (2,094,000         | )          | (1,981,000            | )          |
|                                              |       | $                  | 26,254,000 |                  | $          | 26,174,000 |   |
|                                                   |            |                    |            |                       |            |  |  |  |  |

 

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

 

The changes in the carrying amounts of goodwill for the three monthsended March 31, 2006 are as follows:

 
| ** **                    | ** ** | **Consolidated** | ** ** | **Tools and other products** | ** ** | **Hardware** | ** ** |
|-------------------------------|------------|------------------|------------|------------------------------|------------|--------------|------------|
| Balance,  January 1, 2006     |       | $                | 23,821,000 |                         | $          | 2,394,000    |       | $ | 21,427,000 |   |
| Acquisition  of Pacific Stair |       | 898,000          |       | —                       |       | 898,000      |       |
| Balance,  March 31, 2006      |       | $                | 24,719,000 |                         | $          | 2,394,000    |       | $ | 22,325,000 |   |

 

17

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Other intangible assets were as follows:

 
| ** **                            | ** ** | **March 31, 2006** | ** ** | **December 31, 2005**        | ** ** |
|---------------------------------------|------------|--------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **Cost**           | ** ** | **Accumulated amortization** | ** ** | **Cost** | ** ** | **Accumulated amortization** | ** ** |
| Other intangible assets:              |       |               |       |                         |       |   |   |   |   |
| Customer relationships                |       | $                  | 10,960,000 |                         | $          | 2,353,000 |   | $ | 9,160,000 |   | $ | 2,119,000 |   |
| Vendor relationship                   |       | 890,000            |       | 156,000                      |       | 890,000 |   | 134,000 |   |
| Non-compete and Employment agreements |       | 810,000            |       | 598,000                      |       | 760,000 |   | 557,000 |   |
| Trademark/tradename                   |       | 2,140,000          |       | —                       |       | 690,000 |   | — |   |
| Licensing                             |       | 105,000            |       | 2,000                        |       | 105,000 |   | — |   |
| Total                                 |       | $                  | 14,905,000 |                         | $          | 3,109,000 |   | $ | 11,605,000 |   | $ | 2,810,000 |   |
|                                       |            |                    |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense for intangible assets subject to amortization wasapproximately $299,000 and $276,000 for the three-month periods ended March 31,2006 and 2005, respectively.

 

Amortization expense for each of the twelve-month periods ending March31, through the twelve-month period ending March 31, 2011, is estimated to beas follows: 2007 - $1,198,000; 2008 -$710,000; 2009 - $666,000; 2010 - $665,000; and 2011 - $663,000. Theweighted average amortization period for intangible assets was 12.3 years atMarch 31, 2006 and 10.96 years at December 31, 2005.

 

**NOTE 11 - WARRANTY LIABILITY**

 

The Company offers to its customers warranties against product defectsfor periods ranging from one to three years, depending on the specific productand terms of the customer purchase agreement. The Company’s typical warrantiesrequire it to repair or replace the defective products during the warrantyperiod at no cost to the customer. At the time the product revenue isrecognized, the Company records a liability for estimated costs under itswarranties, which costs are estimated based on historical experience. TheCompany periodically assesses the adequacy of its recorded warranty liability andadjusts the amounts as necessary. While the Company believes that its estimatedliability for product warranties is adequate, the estimated liability for theproduct warranties could differ materially from future actual warranty costs.

 

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

 
| ** **                                                          | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Balance, beginning of period                                        |       | $                                | 419,000    |   | $ | 510,000 |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 91,000                           |       | 95,000 |   |
| Actual warranty costs incurred                                      |       | (96,000                          | )          | (124,000 | ) |
| Balance, end of period                                              |       | $                                | 414,000    |   | $ | 481,000 |   |

 

18

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**NOTE 12 - BUSINESS SEGMENTS**

 

The Company has organized its business into tworeportable business segments: Tools and other products, and Hardware. TheCompany is organized around these two distinct product segments, each of whichhas very different end users. For reporting purposes, Florida Pneumatic andFranklin are combined in the “Tools and other products” segment, Woodmark,Pacific Stair and Nationwide are combined in the “Hardware” segment. Resultsfor Pacific Stair have been included since January 3, 2006. The Company evaluates segment performance basedprimarily on segment operating income. The accounting policies of each of thesegments are the same as those described in Note 1.

 

The following presents financial information by segment for thethree-month periods ended March 31, 2006 and 2005. Segment operating incomeexcludes general corporate expenses, interest expense and income taxes.Identifiable assets are those assets directly owned or utilized by theparticular business segment.

 
| **Three months ended March 31,  2006**                   | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **   | ** ** |
| Revenues from unaffiliated customers                     |       | $                | 26,850,000 |                          | $          | 9,463,000    |       | $ | 17,387,000 |   |
|                                                     |       |             |       |                          |       |         |       |
| Segment operating income                                 |       | 3,418,000        |       | $                             | 710,000    |         | $          | 2,708,000 |   |
| General corporate expense                                |       | (1,470,000       | )          |                          |       |         |       |
| Interest expense – net                              |       | (492,000         | )          |                          |       |         |       |
| Earnings from continuing operations before  income taxes |       | $                | 1,456,000  |                          |       |         |       |   |
|                                                     |       |             |       |                          |       |         |       |
| Segment assets                                           |       | $                | 85,464,000 |                          | $          | 26,169,000   |       | $ | 59,295,000 |   |
| Corporate assets and assets of discontinued  operations  |       | 4,899,000        |       |                          |       |         |       |
| Total assets                                             |       | $                | 90,363,000 |                          |       |         |       |   |
|                                                          |            |                  |            |                               |            |              |            |  |  |  |  |  |  |

 
| **Three months ended March 31,  2005**                   | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **   | ** ** |
| Revenues from unaffiliated customers                     |       | $                | 24,324,000 |                          | $          | 10,114,000   |       | $ | 14,210,000 |   |
|                                                     |       |             |       |                          |       |         |       |
| Segment operating income                                 |       | 3,383,000        |       | $                             | 1,022,000  |         | $          | 2,361,000 |   |
| General corporate expense                                |       | (1,084,000       | )          |                          |       |         |       |
| Interest expense – net                              |       | (415,000         | )          |                          |       |         |       |
| Earnings from continuing operations before  income taxes |       | $                | 1,884,000  |                          |       |         |       |   |
|                                                     |       |             |       |                          |       |         |       |
| Segment assets                                           |       | $                | 79,118,000 |                          | $          | 26,515,000   |       | $ | 52,603,000 |   |
| Corporate assets and assets of discontinued  operations  |       | 10,355,000       |       |                          |       |         |       |
| Total assets                                             |       | $                | 89,473,000 |                          |       |         |       |   |
|                                                          |            |                  |            |                               |            |              |            |  |  |  |  |  |

 

19

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

 

**General**

 

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. andsubsidiaries. The Company and its representatives may, from time to time, makewritten or verbal forward-looking statements, including statements contained inthe Company’s filings with the Securities and Exchange Commission and in itsreports to stockholders. Generally, the inclusion of the words “believe,” “expect,”“intend,” “estimate,” “anticipate,” “will,” and similar expressions identifystatements that constitute “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934 and that are intended to come within the safe harborprotection provided by those sections. Anyforward-looking statements contained herein, including those related to the Company’sfuture performance, are based upon the Company’s historical performance and oncurrent plans, estimates and expectations. All forward-lookingstatements involve risks and uncertainties. Theserisks and uncertainties could cause the Company’s actual results for the 2006fiscal year and beyond to differ materially from those expressed in anyforward-looking statement made by or on behalf of the Company for anumber of reasons, as previously disclosed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2005 in response to Item 1A. to Part I of Form 10-K. Forward-looking statements speak only as of thedate on which they are made. The Company undertakes no obligation to updatepublicly or revise any forward-looking statement, whether as a result of newinformation, future developments or otherwise.

 

**Business**

 

P&F Industries, Inc. (“P&F”) is a Delawarecorporation incorporated on April 19, 1963. P&F conducts its businessoperations through two of its wholly-owned subsidiaries: FloridaPneumatic Manufacturing Corporation (“Florida Pneumatic”) and CountrywideHardware, Inc. (“Countrywide”). P&F and its subsidiaries are hereinreferred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

 

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”) andthrough Woodmark International, L.P. (“Woodmark”), a limited partnershipbetween Countrywide and WILP Holdings, Inc., a subsidiary of Countrywide.Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircase components and kitchenand bath hardware and accessories. InJanuary 2006, Countrywide acquired substantially all of the operating assets ofPacific Stair Products, Inc. (“Pacific Stair”). Pacific Stair is a manufacturerof premium 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.

 

20

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The Company’s wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), was engaged in the manufacture andsale of baseboard heating products and the importation and sale of radiantheating systems until it exited that business in October 2005 through the saleof substantially all of its non-real estate assets. The Company’s wholly-ownedsubsidiary, Green Manufacturing, Inc. (“Green”), was primarily engaged in themanufacture, development and sale of heavy-duty welded custom designedhydraulic cylinders until it exited that business in December 2004 through thesale of certain assets. Green also manufactured a line of access equipment forthe 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 operations inthe Consolidated Financial Statements. Note 12 to the Notes to ConsolidatedCondensed Financial Statements presents financial information for the segmentsof the Company’s business.

 

**Overview**

 

On January 3, 2006, Pacific Stair acquired certain assets comprisingthe business of the former Pacific Stair Products, and assumed certain relatedliabilities. The Company’s consolidated resultsof operations include the results of operations for Pacific Stair for the threemonths ended March 31, 2006 within its hardware business segment. In addition,the Company’s consolidated results of operations present Embassy and Green asdiscontinued operations.

 

Consolidated revenues for the quarter ended March 31, 2006 increased$2,526,000, or 10.4%, from $24,324,000 to $26,850,000. Revenues increasedapproximately $3,177,000, or 22.3%, at Countrywide, which includes revenues atWoodmark, Pacific Stair and Nationwide. Woodmark had first quarter revenues of$10,977,000, increasing $986,000, or 9.9%. Newly-acquired Pacific Stairreported first quarter revenues of $1,666,000. Nationwide reported revenues of$4,742,000, increasing $523,000, or 12.4%. Revenues at Florida Pneumaticdecreased $651,000, or 6.4%, to $9,463,000. Gross profit increased $532,000, or6.9%, for the quarter primarily due to an increase in revenues, which includedPacific Stair in 2006. Consolidated earnings from continuing operationsdecreased $240,000, or 21.6%, from $1,112,000 to $872,000 for the quarter endedMarch 31, 2006.

 

**Critical Accounting Policies andEstimates**

 

The Company prepares its consolidated financial statements inaccordance with accounting principles generally accepted in the United Statesof America. Certain of these accounting policies require the Company to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and the related disclosure of contingentassets and liabilities, revenues and expenses. On an ongoing basis, the Companyevaluates estimates, including those related to bad debts, inventory reserves,goodwill and intangible assets and warranty reserves. The Company bases itsestimates on historical data and experience, when available, and on variousother assumptions 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.

 

There have been no material changes in the Company’s criticalaccounting policies and estimates from those discussed in Item 7 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005.

 

21

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**ACQUISITION**

 

For acquisitions, results of operations are included in theConsolidated Condensed Financial Statements from the date of acquisition.

 

Pacific Stair Products, Inc.

 

Pursuant to an AssetPurchase Agreement (the “PSP APA”), dated December 20, 2005, between PacificStair Products, a California corporation (“Old PSP”), and Pacific StairProducts, Inc., a newly-formed Delaware corporation (“Pacific Stair”) and awholly-owned subsidiary of Countrywide, effective January 3, 2006, PacificStair 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, among others,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, including direct acquisition costs,represents a premium over the fair value of the assets purchased ofapproximately $4,198,000, which will be allocated among goodwill and otherintangible assets. Pacific Stair is a manufacturer of premium stair railproducts and a distributor of staircase components to the building industry,primarily in southern California and the southwestern region of the UnitedStates. As a result of this transaction, Countrywide has increased itspurchasing power and geographic distribution. The acquisition was financedthrough the Company’s credit facility with Citibank. The consolidated condensed financial statements presented hereininclude the results of operations for Pacific Stair for the period from January3, 2006 to March 31, 2006.

 

As part of theacquisition, the Company recorded approximately $3,300,000 in otheridentifiable intangible assets, principally related to the value of customerrelationships and a tradename, and approximately $898,000 of goodwill,including direct acquisition costs, through March 31, 2006.

 

**DISCONTINUED OPERATIONS**

 

Embassy Industries, Inc.

 

Pursuant to an AssetPurchase Agreement (the “Embassy APA”), dated as of October 11, 2005, amongP&F, Embassy, Mestek, Inc. (“Mestek”) and Embassy Manufacturing, Inc., awholly-owned subsidiary of Mestek (“EMI”), Embassy sold substantially all ofits operating assets to EMI. The assets sold pursuant to the Embassy APAinclude, among others, machinery and equipment, inventory, accounts receivableand certain intangibles. Certain assets were retained by Embassy, including, butnot limited to, cash and title to any real property owned by Embassy at theconsummation of the sale to EMI. The consideration paid by EMI for the assetsacquired pursuant to the Embassy APA was approximately $8,433,000 plus theassumption of certain liabilities and obligations of Embassy by EMI.

 

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

 

22

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2006.

 

Embassy has effectivelyceased all 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, Embassyentered into a contract of sale, as amended, 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 Companyintends to use the net proceeds from this sale to satisfy an existing mortgageon the building of approximately $1.3 million and to reduce its short andlong-term debt. The Company expects to report a pre-tax gain from the sale ofthe building of approximately $5.0 million in its second fiscal quarter of2006.

 

Green Manufacturing, Inc. –Agricultural Products Division

 

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

 

The purchase price paid byBenko in consideration for the assets acquired pursuant to the Agricultural APAwas $530,000, consisting of (a) a payment to Green at Agricultural Closing of$225,000; (b) $25,000 payable pursuant to the terms of a Promissory Note (“AgriculturalNote 1”), dated July 14, 2005, payable in equal monthly amounts over a five (5)month period commencing as of the Agricultural Closing; and (c) $280,000payable pursuant to the terms of a Promissory Note (collectively withAgricultural Note 1, the “Agricultural Notes”), dated July 14, 2005, payable inequal monthly 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 thetransaction, Green and Benko entered into an agreement which provides for Benkoto purchase from Green 100% of Benko’s requirements for products of the typethat constitute part of Green’s inventory of raw materials and finished goodsas of the acquisition date with all purchases by Benko being binding andnon-cancelable at pre-established prices. The term is for a period of one yearfrom the acquisition date. Benko shall maintain for the benefit of Green aninsurance policy insuring the inventory and will bear the entire risk of loss,theft, destruction or any damage to the inventory. Benko will also beresponsible for all recordkeeping with respect to the inventory. After theexpiration of the term, Benko is obligated to provide Green with a list of allunpurchased inventory and return such inventory to Green. Based on the terms ofthe agreement, Green has effectively entered into an arrangement which providesfor a transfer of its inventory to Benko prior to payment, as if it had beensold to Benko, with Green recording it as an other current receivable (based onthe cost of the inventory, which approximated $373,000) in the third quarter of2005. This treatment is based on the fact that Green has effectivelytransferred control of the inventory to Benko. Benko’s employees maintaincontrol of the inventory as it is located on Benko’s premises and also bearsrisk of loss, theft, destruction or any damage to the inventory. Also, allpurchases by Benko are binding and non-cancelable at pre-established priceswith Benko being Green’s only customer for the one-year period.

 

23

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

 

Green Manufacturing, Inc. –Access Division

 

Pursuant to an AssetPurchase Agreement (the “Access APA”), dated as of February 2, 2005, betweenGreen and Benko Products, Inc. (“Benko”), Green sold certain of its assetscomprising its Access Division (the “Access Division”) to Benko. The assetssold pursuant to the Access APA include, among others, certain machinery andequipment, accounts receivable (“Purchased Receivables”), inventory,intellectual property and other intangibles. Certain assets of the AccessDivision were retained by Green, including, but not limited to, certain of theAccess Division’s accounts receivable existing at the consummation of the saleto Benko (the “Access Closing”).

 

The purchase price paid byBenko in consideration for the assets acquired pursuant to the Access APA,giving effect to certain adjustments, was approximately $1,756,655, consistingof (a) a payment to Green at Access Closing of approximately $880,069; (b)$755,724 payable pursuant to the terms of a Promissory Note (“Access Note 1”),dated February 2, 2005, payable in various amounts over a twenty-one (21) monthperiod commencing as of the Access Closing; and (c) $120,862 payable pursuantto the terms of a Promissory Note (collectively with Access Note 1, the “AccessNotes”), dated February 2, 2005, payable in various amounts over a four (4)month period commencing as of the Access Closing. Benko agreed to payadditional consideration on an annual basis for the two (2) successive twelve(12) month periods commencing as of the Access Closing, dependent on certainsales by 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, infiscal 2005.

 

The following amountsrelated to Embassy and Green have been segregated from the Company’s continuingoperations and are reported as assets held for sale and assets and liabilitiesof discontinued operations in the consolidated condensed balance sheets:

 
| ** **                                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| Assets held  for sale and assets of discontinued operations:      |       |               |       |                  |       |
| Prepaid  expenses                                                 |       | $                  | 82,000     |                  | $          | 77,000 |   |
| Assets held  for sale                                             |       | 600,000            |       | 623,000               |       |
| Total assets  held for sale and assets of discontinued operations |       | $                  | 682,000    |                  | $          | 700,000 |   |
|                                                              |       |               |       |                  |       |
| Liabilities  of discontinued operations:                          |       |               |       |                  |       |
| Accounts  payable and accrued expenses                            |       | $                  | 733,000    |                  | $          | 991,000 |   |
| Mortgage  payable                                                 |       | 1,339,000          |       | 1,367,000             |       |
| Total  liabilities of discontinued operations                     |       | $                  | 2,072,000  |                  | $          | 2,358,000 |   |

 

24

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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:

 
| ** **                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net revenues                                                             |       | $                                | —     |   | $ | 2,983,000 |   |
|                                                                     |       |                             |       |   |   |
| Earnings  (loss) from operation of discontinued operations, before taxes |       | $                                | 3,000      |   | $ | (332,000 | ) |
| Income tax  (expense) benefit                                            |       | (1,000                           | )          | 112,000 |   |
| Earnings  (loss) from operation of discontinued Operations               |       | 2,000                            |       | (220,000 | ) |
|                                                                     |       |                             |       |   |   |
| Gain on sale  of discontinued operations, before taxes                   |       | —                           |       | 107,000 |   |
| Income tax  expense                                                      |       | —                           |       | (36,000 | ) |
| Gain on sale  of discontinued operations                                 |       | —                           |       | 71,000 |   |
| Earnings  (loss) from discontinued operations                            |       | $                                | 2,000      |   | $ | (149,000 | ) |

 

**RESULTS OF OPERATIONS**

 

**Quarters ended March 31, 2006 and2005**

 

**Revenues**

 

Revenues for the quartersended March 31, 2006 and 2005 were approximately as follows:

 
| **Three months ended  March 31,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|
| **2006**                          |       | $                | 26,850,000 |                          | $          | 9,463,000    |       | $ | 17,387,000 |   |
| ** **                        | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **   | ** ** |
| **2005**                          |       | $                | 24,324,000 |                          | $          | 10,114,000   |       | $ | 14,210,000 |   |
| ** **                        | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **   | ** ** |
| **% increase (decrease)**         |       | 10.4             | %          | (6.4                          | )%         | 22.3         | %          |

 

Revenues from tools andother products decreased due primarily to approximately $310,000 less in retailpromotions in the period, as well as a decrease in base sales of approximately$360,000. Base sales decreased as a result of decreased purchasing activity ofapproximately $692,000 from a significant customer as part of a program toreduce its overall inventory levels, which was partially offset by a $332,000increase in base sales from another significant customer. Decreases in revenuesof approximately $173,000 at Franklin were due primarily to decreased shipmentsto a few customers related to weak in-store sales and supply-related issues.Partially offsetting these decreases were increases in automotive revenues ofapproximately $66,000 and increases in Berkley revenues of approximately$102,000.

 

Revenues from hardwareincreased at both Woodmark and Nationwide and include revenues from thenewly-acquired Pacific Stair as of January 3, 2006. Woodmark’s revenuesincreased $986,000,

 

25

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or 9.9%. Revenues from the sale of staircasecomponents continue to increase, benefiting from better customer penetration.Further, revenues in our kitchen and bath products sold into the mobile homeand remodeling markets have increased, reversing their 2005 trend, as we havestrengthened relationships with certain customers. Pacific Stair’s revenueswere $1,666,000 for the first quarter. Moreover, Nationwide’s revenuesincreased by approximately $523,000, or 12.4%, primarily attributable to anincrease of approximately $566,000, or 26%, in sales of fencing products.

 

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

 

**Gross Profits**

 

Grossprofits for the quarters ended March 31, 2006 and 2005 were approximately asfollows:

** **
| **Three months ended  March 31,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|
| **2006**                          |       | $                | 8,247,000  |                          | $          | 3,064,000    |       | $ | 5,183,000 |   |
| ** **                        |       | 30.7             | %          | 32.4                          | %          | 29.8         | %          |
| ** **                        | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **   | ** ** |
| **2005**                          |       | $                | 7,716,000  |                          | $          | 3,140,000    |       | $ | 4,576,000 |   |
| ** **                        |       | 31.7             | %          | 31.1                          | %          | 32.2         | %          |

 

The increase in the grossprofit percentage from tools and other products was due primarily to a lowerproportionate amount of retail promotional sales in the current period, whichhistorically have lower average margins, versus the prior-year period and thestrength of the U.S. dollar in relation to the Japanese yen, partially offsetby the weakness of the U.S. dollar in relation to the Taiwan dollar compared tothe prior-year period. The decrease in the gross profit percentage fromhardware was due primarily to some cost increases from Asian suppliers due toincreases in the cost of metals, competitive pricing pressures on certain stairproducts and the inclusion of Pacific Stair, which operates at a lower grossmargin than the rest of the group. The gross margin percentage decrease waspartially offset by a favorable product mix in fencing revenues and a shift byNationwide to high-quality, lower-cost suppliers for some products.

 

**Selling,General and Administrative Expenses**

 

Consolidated selling,general and administrative (“SG&A”) expenses increased $883,000, or 16.3%,from approximately $5,417,000 to approximately $6,299,000. SG&A expensesgrew at a faster rate than the consolidated revenue increase for the quarter.This unusual expense growth was driven by several factors, including certaincorporate non-recurring professional and tax fees, the non-recurring cost ofthe move of the Company’s corporate headquarters, certain other significantannual corporate expenses that are not typically concentrated in the firstquarter, and planned increases in sales and marketing expenses that areintended to generate additional revenue in the coming periods. SG&Aexpenses as a percentage of revenues increased from 22.3% to 23.5%.

 

**Interest- Net**

 

Net interest expenseincreased $77,000, or 18.5%, from approximately $415,000 to approximately$492,000, due primarily to higher average borrowings under the revolving creditloan

 

26

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facility to finance working capitalrequirements and the acquisition of Pacific Stair in January 2006. Interestexpense on borrowings under the Company’s revolving credit loan facilityincreased by approximately $42,000, as higher average borrowings were furtherimpacted by higher average interest rates. Interest expense on trade financingat Florida Pneumatic increased approximately $18,000 as a result of higherinterest rates and higher average borrowings from a supplier. Interest expenseon borrowings under the term loan facility remained flat due to lower averageborrowings during the period due to repayments, offset by higher averageinterest rates. Interest expense on Woodmark’s acquisition-related notesincreased by approximately $10,000 due to higher average interest rates.

 

**IncomeTaxes**

 

The effective tax rates applicableto earnings from continuing operations for the quarters ended March 31, 2006and 2005 were 40.1% and 41.0%, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cash flows fromoperations 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 cashflows and favorable banking relationships, the Company believes it has adequateaccess to capital, if and when needed. The Company monitors average days salesoutstanding, inventory turns and capital expenditures to project liquidityneeds and evaluate return on assets employed.

 

The Company gauges its liquidity and financialstability by the measurements shown in the following table:

 
| ** **                 | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| Working  Capital           |       | $                  | 23,572,000 |                  | $          | 27,981,000 |   |
| Current  Ratio             |       | 2.05 to 1          |       | 2.51 to 1             |       |
| Shareholders’  Equity |       | $                  | 48,443,000 |                  | $          | 47,716,000 |   |

 

On January 3, 2006, PacificStair acquired certain assets comprising the business of the former PacificStair Products and assumed certain related liabilities.

 

On June 30, 2004, Woodmarkacquired certain assets comprising the business of the former WoodmarkInternational L.P. and its wholly-owned subsidiary, the former Stair House,Inc., and assumed certain related liabilities.

 

Inconnection with the Woodmark acquisition transaction, the Company is liable foradditional payments to the sellers. The amount of these payments, which wouldbe made as of 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 may demandpayment as of June 30, 2009 in an amount equal to 40% of the increase. Any suchadditional payments will be treated as additions to goodwill.

 

In connection with the saleof certain assets of Embassy in October 2005, the Company recorded a receivableof approximately $1,233,000, comprised of a working capital adjustment ofapproximately

 

27

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$433,000 and approximately $800,000 of escrowmonies due, subject to certain conditions of release. In January 2006, theCompany received approximately $833,000 in cash relating to the working capitaladjustment and a partial release of escrow monies. The balance of the escrowmonies due are expected to be paid to the Company in June 2007.

 

Embassyparticipated in a multi-employer pension plan until it sold substantially allof its operating assets in October 2005. This plan provided defined benefits toall of its union workers. Contributions to this plan were determined by theunion contract. The Company does not administer the plan funds and does nothave any control over the plan funds. As a result of Embassy’s withdrawal fromthe plan, it has estimated and recorded a withdrawal liability of approximately$279,000, which is expected to be payable in quarterly installments ofapproximately $8,200 from May 2006 through February 2026.

 

In January 2006, Embassy entered into a contract ofsale on its building with a non-affiliated third party for a purchase price ofapproximately $6.4 million. The contract is scheduled to close on or about June1, 2006. The Company intends to usethe net proceeds from this sale to satisfy an existing mortgage on the buildingof approximately $1.3 million and to reduce its short and long-term debt. TheCompany expects to report a pre-tax gain from the sale of the building ofapproximately $5.0 million in its second fiscal quarter of 2006.

 

Cash decreased$850,000, from $1,772,000 as of December 31, 2005 to $922,000, as of March 31,2006. The Company’s debt levels increased, from $26,631,000 at December 31,2005 to $29,618,000 at March 31, 2006, primarily to fund working capital needsand the acquisition of Pacific Stair. The Company’s total percent of debt tototal book capitalization (debt plus equity) increased from 35.8% at December31, 2005 to 37.9% at March 31, 2006.

 

Cash provided by (used in)operating activities of continuing operations for the three-month periods endedMarch 31, 2006 and 2005 were approximately $2,435,000 and $(3,080,000),respectively. The Company believes that cash on hand derived from operationsand cash available through borrowings under its credit facilities will besufficient to allow the Company to meet its foreseeable working capital needs.

 

During the three monthsended March 31, 2006, gross accounts receivable decreased by approximately$76,000. Increases (decreases) were approximately $(1,820,000) and $1,744,000at Florida Pneumatic and Countrywide, respectively. The decrease in FloridaPneumatic’s gross accounts receivable resulted from payments received from amajor customer from a large promotion that occurred in the latter part of 2005.The increase at Countrywide was due primarily to increase in revenues ofWoodmark and Nationwide during the current quarter, as well as the inclusion ofPacific Stair which reported approximately $249,000 in gross accountsreceivable.

 

During the three monthsended March 31, 2006, inventories decreased by approximately $258,000.Increases (decreases) were approximately $396,000 and $(654,000) at FloridaPneumatic and Countrywide, respectively. Inventory levels at Florida Pneumaticincreased slightly as a result of the timing of inventory purchases. Thedecrease at Countrywide was due primarily to decreases at Woodmark ofapproximately $1,044,000 which had built up inventories at year-endanticipating a supplier shut-down and relocation in the first quarter of 2006,offset by the inclusion of Pacific Stair inventory of approximately $507,000.

 

During the three monthsended March 31, 2006, short-term borrowings increased by $4,000,000 primarilyfrom the acquisition of Pacific Stair and the timing of working capitalrequirements.

 

28

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During the three monthsended March 31, 2006, accounts payable increased by approximately $2,303,000.Increases were approximately $2,121,000 and $182,000 at Florida Pneumatic andCountrywide, respectively. The increases at Florida Pneumatic were dueprimarily to inventory purchases from a major foreign supplier that has grantedmore favorable payment terms. The increase at Countrywide was due primarily tothe increase associated with the inclusion of Pacific Stair accounts payable ofapproximately $104,000 and the timing of certain inventory purchases atNationwide.

 

On June 30, 2004, inconjunction with the Woodmark acquisition transaction, the Company entered intoa credit agreement with Citibank and another bank. This agreement, as amended fromtime to time, provides the Company with various credit facilities, includingrevolving credit loans, term loans for acquisitions and a foreign exchangeline. The credit agreement expires in June2006 and is subject to annual review by the lending banks.

 

The revolving credit loanfacility provides a maximum of $12,000,000, with various sublimits, for directborrowings, letters of credit, bankers’ acceptances and equipment loans. Thereare no commitment fees for any unused portion of this credit facility. At March31, 2006, there was $7,000,000 outstanding against the revolving credit loanfacility, and there were no open letters ofcredit.

 

The term loan facilityprovides a maximum commitment of $34,000,000 to finance acquisitions subject to the approval of the lending banks.There are no commitment fees for any unused portion of this credit facility.The Company borrowed $29,000,000 against this facility to finance the Woodmarkacquisition transaction in June 2004, and there was $16,450,000, including amountsrolled over from the prior term loan facility, outstanding against the termloan facility at March 31, 2006.

 

The foreign exchange lineprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases ofJapanese yen needed for payments to foreign suppliers. The total amount offoreign currency forward contracts outstanding under the foreign exchange line at March 31, 2006, based on thatday’s closing spot rate, was approximately $1,341,000.

 

Under its credit agreement,the Company is required to adhere to certain financial covenants. At March 31, 2006, and for the quarter then ended,the Company was in compliance with all of these covenants. Certain ofthe Company’s mortgage agreements also require the Company to adhere to certainfinancial covenants. At March 31, 2006, andfor the quarter then ended, the Company was in compliance with all of thesecovenants.

 

Capital spending wasapproximately $501,000 and $151,000 for the three months ended March 31, 2006and 2005, respectively, which amounts were provided from working capital.Capital expenditures for the remainder of 2006 are expected to be approximately$1,000,000, some of which may be financed through the Company’s creditfacilities. Included in the expected total for 2006 are capital expendituresrelating to renovation and expansion of operating facilities, new products,expansion of existing product lines and replacement of equipment.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

The Company’s foreignexchange line provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. The Companyhas not purchased forward contracts

 

29

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on New Taiwan dollars. The total amount offoreign currency forward contracts outstanding at March 31, 2006, based on thatday’s closing spot rate, was approximately $1,341,000.

 

The Company, through FloridaPneumatic, imports a significant amount of its purchases from Japan, withpayment due in Japanese yen. As a result, the Company is subject to the effectsof foreign currency exchange fluctuations. The Company uses a variety oftechniques to protect itself from any adverse effects from these fluctuations,including increasing its selling prices, obtaining price reductions from itsoverseas suppliers, using alternative supplier sources and entering into foreigncurrency forward contracts. The decrease in the strength of the Japanese yenversus the U.S. dollar from 2005 to 2006 had a positive effect on the Company’sresults of operations and its financial position. During the three-months endedMarch 31, 2006, the relative value of the U.S dollar in relation to theJapanese yen was above fiscal 2005 averages. There can be no assurance as tothe future trend of this value. (See “Item 3 - Quantitative and QualitativeDisclosures About Market Risk.”)

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

See Note 5 tothe Notes to Consolidated Condensed Financial Statements included in Item 1 ofthis report.

 

30

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**Item 3.****           ****QuantitativeAnd Qualitative Disclosures About Market Risk**

 

The Company is exposed to market risks, which includechanges in U.S. and international exchange rates, the prices of certaincommodities and currency rates as measured against the U.S. dollar and eachother. The Company attempts to reduce the risks related to foreign currencyfluctuation by utilizing financial instruments, pursuant to Company policy.

 

The value of the U.S. dollar affects the Company’sfinancial results. Changes in exchange rates may positively or negativelyaffect the Company’s gross margins through its inventory purchases andoperating expenses through realized foreign exchange gains or losses. TheCompany engages in hedging programs aimed at limiting, in part, the impact ofcurrency fluctuations. Using primarily forward exchange contracts, the Company hedgessome of those transactions that, when remeasured according to accountingprinciples generally accepted in the United States of America, impact thestatement of operations. Factors that could impact the effectiveness of theCompany’s programs include volatility of the currency markets and availabilityof hedging instruments. All currency contracts that are entered into by theCompany are components of hedging programs and are entered into not forspeculation but for the sole purpose of hedging an existing or anticipatedcurrency exposure. The Company does not buy or sell financial instruments fortrading purposes. Although the Company maintains these programs to reduce theimpact of changes in currency exchange rates, when the U.S. dollar sustains a weakeningexchange rate against currencies in which the Company incurs costs, the Company’scosts are adversely affected.

 

The Company accounts for changes in the fair value of itsforeign currency contracts by marking them to market and recognizing any resultinggains or losses through its statement of earnings. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of earnings. At March 31, 2006, the Company had foreigncurrency forward contracts, maturing in 2006, to purchase Japanese yen atcontracted forward rates. The value of these contracts at March 31, 2006, basedon that day’s closing spot rate, was approximately $1,341,000,which was the approximate value of the Company’s corresponding yen-denominatedaccounts payable. During the three month periods ended March 31, 2006 and 2005,the Company recorded in its cost of sales a net realized gain of approximately$10,000 and a net realized loss of $102,000, respectively, on foreign currencytransactions. At March 31, 2006 and 2005, the Company had no unrealized gainsor losses on foreign currency transactions.

 

The potential loss in value of the Company’s netinvestment in foreign currency forward contracts resulting from a hypothetical10 percent adverse change in foreign currency exchange rates at March 31, 2006was approximately $152,000.

 

The Company has various debt instruments that bearinterest at variable rates tied to LIBOR (London InterBank Offered Rate). Anyincrease in LIBOR would have an adverse effect on the Company’s interest costs.In addition to affecting operating results, adverse changes in interest ratescould impact the Company’s access to capital, certain merger and acquisitionstrategies and the level of capital expenditures.

 

The carrying amounts reported in the consolidated balancesheets for cash and cash equivalents, accounts receivable, accounts payable andshort-term debt, approximate fair value as of March 31, 2006 because of therelatively short-term maturity of these financial instruments. The carryingamounts reported for long-term debt approximate fair value as of March 31, 2006because, in general, the interest rates underlying the instruments fluctuatewith market rates.

 

31

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**Item 4.****           ****Controls and Procedures**

 

**Evaluation of disclosure controls and procedures**

 

An evaluation was performed,under the supervision of, and with the participation of, the Company’smanagement, including the Principal Executive Officer and Principal FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)to the Securities and Exchange Act of 1934). Based on that evaluation, theCompany’s management, including the Principal Executive Officer and PrincipalFinancial Officer, concluded that the Company’s disclosure controls andprocedures were not effective for the reasons discussed below related to theweaknesses in our internal control over financial reporting. To address thecontrol weaknesses described below, the Company performed additional analysisand performed other procedures to ensure the consolidated financial statementswere prepared in accordance with generally accepted accounting principles.Accordingly, management believes that the consolidated condensed financialstatements included in this Quarterly Report on Form 10-Q, fairly present, inall material respects our financial condition, results of operations and cashflows for the periods presented.

 

P&F management is responsible for establishing and maintainingeffective internal controls. Because of its inherent limitations, internalcontrols may not prevent or detect misstatements. A control system, no matterhow well designed and operated, can only provide reasonable, not absolute,assurance that the control system’s objectives will be met. Also, projectionsof any evaluation of effectiveness as to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with policies and procedures may deteriorate.

 

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’s assessmentconfirmed the following material weaknesses at March 31, 2006 that werepreviously identified at December 31, 2005 in the Company’s internal controlover financial reporting:

 

1.     Deficiencies in the segregation of duties, specifically as they relateto cash management, the preparation and posting of journal entries and thegeneral controls over information technology security and user access.

2.     Significant internal control deficiencies that were considered to be,in the aggregate, a material weakness, included inadequate staffing andsupervision leading to the untimely identification and resolution of certainaccounting matters; and failure to perform timely reviews, substantiation andevaluation of certain general ledger account balances.

 

The Certifications of theCompany’s Principal Executive Officer and Principal Financial Officer includedas Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, inparagraph 4 of such certifications, information concerning the Company’sdisclosure controls and procedures and internal control over financialreporting. Such certifications should be read in conjunction with theinformation contained in this Item 4 - Controls and Procedures for a morecomplete understanding of the matters covered by such certifications.

 

32

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***Planned Remediation Efforts toAddress Material Weaknesses***

 

The Company has developedremediation plans and initiated action steps during the three month periodended March 31, 2006 designed to address each of the material weaknesses in theinternal control over financial reporting identified above and to implement anyand 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 has implemented measures tosegregate certain functions and otherwise improve cash management functionsincluding (i) individuals that initiate a wire transfer are now prevented fromtransmitting the wire transfer; (ii) all wire transfers in excess of $100,000now require written approval and release from Corporate management; (iii)modification of its check-signing privileges such that all checks will requiredual manual signatures; and (iv) all blank check stock will now be maintainedin a locked cabinet that will be accessible to an individual who is not a checksigner. In addition, management has implemented measures to segregate the preparationof journal entries and the subsequent posting to the General Ledger.

2.     Management has initiated a review of itstraining and supervision policies and procedures, particularly with respect tothe functions described above where significant deficiencies were noted, whichis expected to include an evaluation of the specific knowledge and skillsrequired to perform each function, an assessment of the personnel trainingnecessary to perform such function adequately, a plan to ensure that allpersonnel receive the appropriate level of training, and a review andmodification 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.

 

**Changes in Internal Control OverFinancial Reporting**

 

Except as otherwisediscussed herein, there have been no significant changes in the Company’sinternal control over financial reporting during the most recently completedfiscal quarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. However, theCompany made changes to the design and operation of internal control overfinancial reporting during the first quarter in order to increase the designand operating effectiveness of internal controls in connection withimplementing Section 404 of the Sarbanes-Oxley Act of 2002. In addition, theCompany is currently implementing enhancements to the Company’s internalcontrol over financial reporting to address the material weaknesses describedabove.

 

33

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**PART II -OTHER INFORMATION**

 

**Item 1.****           ****LegalProceedings**

The Company is a defendant or co-defendant invarious actions brought about in the ordinary course of conducting its business.The Company does not believe that any of these actions are material to thefinancial condition of the Company.

 

**Item 1A.****        ****RiskFactors**

There were no materialchanges from risk factors previously disclosed in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2005 in response to Item 1A. toPart I of Form 10-K.

 

**Item 2.****           ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

***Issuer Purchases of EquitySecurities***
| **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** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
|                                       |       |                                    |       |                                |       |                                                                               |       |                                                                         |       |
| January 1, 2006 through January 31, 2006   |       | 3,356                                   |       | $                                   | 12.23      |                                                                               | 3,356      |                                                                         | 132,222    |   |
| February 1, 2006 through February 28, 2006 |       | 16,675                                  |       | $                                   | 12.84      |                                                                               | 16,675     |                                                                         | 115,547    |   |
| March 1, 2006 through March 31, 2006       |       | 3,000                                   |       | $                                   | 13.01      |                                                                               | 3,000      |                                                                         | 112,547    |   |
| Total                                      |       | 23,031                                  |       | $                                   | 12.55      |                                                                               | 23,031     |                                                                         | 112,547    |   |
|                                            |            |                                         |            |                                     |            |                                                                                    |            |                                                                              |            |  |  |

 

(a) All purchases by the Company of its Class ACommon Stock were made under the publicly announced repurchase plans: (1) onAugust 24, 2001, the Company’s Board of Directors authorized the purchase of up to 125,000shares, (2) on October 8, 2004, the Company’sBoard of Directors authorized the purchase of an additional 125,591shares up to a share repurchase maximum of 150,000 shares through September 30,2005, and (3) on September 16, 2005, the Company’sBoard of Directors extended the time during which the Company mayrepurchase such shares by an additional year to September 30, 2006.

 

**Item 3.****           ****DefaultsUpon Senior Securities**

None.

 

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

None.

 

**Item 5.****           ****OtherInformation**

None.

 

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

See “Exhibit Index” immediately following thesignature page.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|                | **P&F INDUSTRIES, INC.**                       |
|---------------------|----------------------------------------------------|
|                | (Registrant)                                       |
|                |                                               |
|                |                                               |
|                | By /s/  Joseph A. Molino, Jr.                      |   |
|                | Joseph A. Molino, Jr.                              |
|                | Chief Financial Officer                            |
| Dated: May 12, 2006 | (Principal Financial and Chief Accounting Officer) |

 

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The following exhibits are either included in this report orincorporated herein by reference 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., 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| ** ** | ** ** | 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.                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **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.,                                                                                                                                                                                                                                |

 

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|       |       | Woodmark  International, L.P. and Citibank, N.A., as Administrative Agent, and the  lenders** **party thereto (Incorporated by reference to Exhibit 4.4 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 2005).                                                                                                                                                                                                                                                                                                              |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **4.5**    |       | Amendment No. 3 to Credit  Agreement, dated February 13, 2006, by and among the Registrant, Florida  Pneumatic Manufacturing Corporation, Embassy Industries, Inc., Green  Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide Industries, Inc.,  Woodmark International, L.P., Pacific Stair Products, Inc., WILP Holdings,  Inc., and Citibank, N.A., as Administrative Agent, and the lenders** **party thereto (Incorporated  by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 2005). |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.6**    |       | Amendment No. 4 to Credit  Agreement, dated May 11, 2006, by and among the Registrant, Florida Pneumatic  Manufacturing Corporation, Embassy Industries, Inc., Green Manufacturing,  Inc., Countrywide Hardware, Inc., Nationwide Industries, Inc., Woodmark  International, L.P., Pacific Stair Products, Inc., WILP Holdings, Inc., and  Citibank, N.A., as Administrative Agent, and the lenders** **party  thereto (Filed herein).                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **4.7**    |       | 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, 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).                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.2**   |       | Amendment to the Second Amended and Restated Employment  Agreement, dated as of October 24, 2005, between the Registrant and Richard  A. Horowitz (Incorporated by reference to Exhibits 10.1 to the  Registrant’s Current Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.3**   |       | 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 10.2 to the Registrant’s Current  Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.4**   |       | 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).                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.5**   |       | 1992 Incentive Stock Option Plan of the Registrant, as  amended and restated as of March 13, 1997 (Incorporated by reference to  Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal  year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.6**   |       | 2002 Stock Incentive Plan of the Registrant (Incorporated by reference to Exhibit 4.7  to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March  31, 2002).                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **10.7**   |       | Contract  of Sale, dated January 13, 2006, between the Registrant and J. D’Addario  &                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | Company,  Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated January 13, 2006).                                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                  | ** ** |                                                                                                                                                                                                                                                                        |
| **10.8**                                                                                                                                                                                                                                                                                                                    |       | First  Amendment to Contract of Sale, dated March 8, 2006, between the Registrant  and J. D’Addario & Company, Inc. (Incorporated  by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 2005). |
| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | ** **                                                                                                                                                                                                                                                                  |
| **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).                                                    |
| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | ** **                                                                                                                                                                                                                                                                  |
| **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 Quarterly Report on Form 10-Q  may be obtained, upon payment of the Registrant’s reasonable expenses in  furnishing such exhibit, by writing to P&F Industries, Inc., 445  Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate  Secretary. |

 

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