**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended September 30, 2005**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 1 - 5332**

 

**P&F INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                | ** ** | **22-1657413**                          |
|---------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of             |       | (I.R.S. Employer Identification Number) |
| incorporation or organization)              |       |                                    |
|                                        |       |                                    |
| **300 Smith Street, Farmingdale, New York** | ** ** | **11735**                               |
| (Address of principal executive offices)    |       | (Zip Code)                              |

 

Registrant’s telephone number, including area code: **(631) 694-1800**

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days.

**Yes ****ý****    No ****o**

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

**Yes ****o****    No ****ý**

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

**Yes ****o****    No ****ý**

 

Asof November 10, 2005, there were 3,584,213 shares of the registrant’s Class ACommon Stock outstanding.

 

 

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**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**

 

**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION** |                                                                                                                                |
|----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                                                |   |
| Item 1.                                      | Consolidated Condensed  Financial Statements (unaudited)                                                                            |   |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Balance Sheets as of September 30, 2005 and December 31,  2004                                    |   |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Statements of Earnings for the Three and Nine Months Ended September 30,  2005 and 2004                |   |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Statement of Shareholders’ Equity for the period from January 1,  2005 to September 30, 2005 |   |
|                                         |                                                                                                                                |   |
|                                         | Consolidated  Condensed Statements of Cash Flows for the Nine Months Ended September 30,  2005 and 2004                        |   |
|                                         |                                                                                                                                |   |
|                                         | 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 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                                                                                                                            |   |
|                                         |                                                                                                                                |   |
| **Signature**                                |                                                                                                                                |   |
|                                         |                                                                                                                                |   |
| **Exhibit Index**                       |                                                                                                                                |   |

 

i

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.****                                                          ****Financial Statements**

 

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

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                      | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| **ASSETS**                                      |       |                        |       |                       |       |
| CURRENT                                         |       |                        |       |                       |       |
| Cash and  cash equivalents                      |       | $                           | 1,162,326  |                       | $          | 1,189,869 |   |
| Accounts  receivable - net                      |       | 18,400,088                  |       | 14,849,748                 |       |
| Notes and  other receivables                    |       | 2,365,507                   |       | 1,735,383                  |       |
| Inventories  - net                              |       | 29,950,966                  |       | 25,691,380                 |       |
| Deferred  income taxes - net                    |       | 1,051,000                   |       | 1,070,000                  |       |
| Assets of  discontinued operations              |       | —                      |       | 795,941                    |       |
| Prepaid  expenses and other current assets      |       | 1,743,693                   |       | 1,383,414                  |       |
| TOTAL CURRENT  ASSETS                           |       | 54,673,580                  |       | 46,715,735                 |       |
|                                            |       |                        |       |                       |       |
| PROPERTY AND EQUIPMENT                          |       |                        |       |                       |       |
| Land                                            |       | 1,246,938                   |       | 1,246,938                  |       |
| Buildings  and improvements                     |       | 7,401,848                   |       | 7,230,248                  |       |
| Machinery  and equipment                        |       | 12,299,844                  |       | 11,983,955                 |       |
|                                            |       | 20,948,630                  |       | 20,461,141                 |       |
| Less  accumulated depreciation and amortization |       | 11,930,264                  |       | 10,997,885                 |       |
| NET PROPERTY  AND EQUIPMENT                     |       | 9,018,366                   |       | 9,463,256                  |       |
|                                            |       |                        |       |                       |       |
| GOODWILL                                        |       | 23,821,240                  |       | 22,877,021                 |       |
|                                            |       |                        |       |                       |       |
| OTHER INTANGIBLE ASSETS - net                   |       | 8,966,083                   |       | 9,794,833                  |       |
|                                            |       |                        |       |                       |       |
| ASSETS OF DISCONTINUED OPERATIONS               |       | —                      |       | 1,019,969                  |       |
|                                            |       |                        |       |                       |       |
| OTHER ASSETS - net                              |       | 1,008,802                   |       | 667,259                    |       |
|                                            |       |                        |       |                       |       |
| TOTAL ASSETS                                    |       | $                           | 97,488,071 |                       | $          | 90,538,073 |   |

 

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

 

1

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| ** **                                                                                      | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                                                      | ** ** | **(unaudited)**             | ** ** | ** **                 | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                  |       |                        |       |                       |       |
| CURRENT LIABILITIES                                                                             |       |                        |       |                       |       |
| Short-term  borrowings                                                                          |       | $                           | 11,500,000 |                       | $          | 4,000,000 |   |
| Accounts  payable                                                                               |       | 3,729,238                   |       | 3,355,377                  |       |
| Income taxes  payable                                                                           |       | 262,936                     |       | 1,600,683                  |       |
| Accrued  compensation                                                                           |       | 2,330,942                   |       | 2,331,222                  |       |
| Other  accrued liabilities                                                                      |       | 2,668,220                   |       | 2,836,209                  |       |
| Current  maturities of long-term debt                                                           |       | 5,111,383                   |       | 3,062,481                  |       |
| TOTAL  CURRENT LIABILITIES                                                                      |       | 25,602,719                  |       | 17,185,972                 |       |
|                                                                                            |       |                        |       |                       |       |
| LONG-TERM DEBT, less current maturities                                                         |       | 25,355,347                  |       | 31,847,597                 |       |
|                                                                                            |       |                        |       |                       |       |
| DEFERRED INCOME TAXES - net                                                                     |       | 1,242,000                   |       | 337,000                    |       |
|                                                                                            |       |                        |       |                       |       |
| TOTAL  LIABILITIES                                                                              |       | 52,200,066                  |       | 49,370,569                 |       |
|                                                                                            |       |                        |       |                       |       |
| 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 - 3,812,867 and 3,777,367  shares |       | 3,812,867                   |       | 3,777,367                  |       |
| Class B  - $1 par; authorized - 2,000,000 shares; no shares issued or outstanding          |       | —                      |       | —                     |       |
| Additional  paid-in capital                                                                     |       | 8,937,265                   |       | 8,718,450                  |       |
| Retained  earnings                                                                              |       | 34,371,955                  |       | 30,398,528                 |       |
| Treasury  stock, at cost (230,154 and 223,736 shares)                                           |       | (1,834,082                  | )          | (1,726,841                 | )          |
|                                                                                            |       |                        |       |                       |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                |       | 45,288,005                  |       | 41,167,504                 |       |
|                                                                                            |       |                        |       |                       |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                |       | $                           | 97,488,071 |                       | $          | 90,538,073 |   |

 

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

 

2

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

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

 
| ** **                                                                                                                                             | ** ** | **Three months  ended September 30,** | ** ** | **Nine months  ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                                                                                                               |       | $                                          | 32,648,637 |                                      | $          | 34,589,302 |   | $ | 89,815,297 |   | $ | 68,661,525 |   |
| Cost of sales                                                                                                                                          |       | 22,772,800                                 |       | 24,448,242                                |       | 61,800,107 |   | 46,881,351 |   |
| Gross profit                                                                                                                                           |       | 9,875,837                                  |       | 10,141,060                                |       | 28,015,190 |   | 21,780,174 |   |
| Selling, general and administrative  expenses                                                                                                          |       | 7,189,855                                  |       | 6,848,133                                 |       | 20,118,617 |   | 16,404,253 |   |
| Operating income                                                                                                                                       |       | 2,685,982                                  |       | 3,292,927                                 |       | 7,896,573 |   | 5,375,921 |   |
|                                                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense – net                                                                                                                            |       | 548,640                                    |       | 436,883                                   |       | 1,477,555 |   | 697,316 |   |
| Earnings from continuing operations before  income taxes                                                                                               |       | 2,137,342                                  |       | 2,856,044                                 |       | 6,419,018 |   | 4,678,605 |   |
| Income taxes                                                                                                                                           |       | 902,000                                    |       | 1,215,000                                 |       | 2,711,000 |   | 1,933,000 |   |
| Earnings  from continuing operations before discontinued operations                                                                                    |       | 1,235,342                                  |       | 1,641,044                                 |       | 3,708,018 |   | 2,745,605 |   |
|                                                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Discontinued  operations (net of taxes):                                                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Loss from  operation of discontinued operations (net of tax benefits of $16,000 and  $61,000 for 2005 and $18,000 and $103,000 for 2004, respectively) |       | (55,035                                    | )          | (35,643                                   | )          | (150,615 | ) | (199,264 | ) |
| Gain on sale  of discontinued operations (net of tax expense of $178,000 and 214,000 for  2005)                                                        |       | 344,792                                    |       | —                                    |       | 416,024 |   | — |   |
| Earnings  (loss) from discontinued operations                                                                                                          |       | 289,757                                    |       | (35,643                                   | )          | 265,409 |   | (199,264 | ) |
|                                                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Net earnings                                                                                                                                           |       | $                                          | 1,525,099  |                                      | $          | 1,605,401 |   | $ | 3,973,427 |   | $ | 2,546,341 |   |
|                                                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Basic  earnings (loss) per common share:                                                                                                               |       |                                       |       |                                      |       |   |   |   |   |
| Continuing  operations                                                                                                                                 |       | $                                          | .35        |                                      | $          | .47 |   | $ | 1.04 |   | $ | .78 |   |
| Discontinued  operations                                                                                                                               |       | .08                                        |       | (.01                                      | )          | .07 |   | (.06 | ) |
| Net earnings  per common share - basic                                                                                                                 |       | $                                          | .43        |                                      | $          | .46 |   | $ | 1.11 |   | $ | .72 |   |
|                                                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Diluted  earnings (loss) per common share:                                                                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Continuing  operations                                                                                                                                 |       | $                                          | .32        |                                      | $          | .45 |   | $ | .96 |   | $ | .76 |   |
| Discontinued  operations                                                                                                                               |       | .07                                        |       | (.01                                      | )          | .06 |   | (.06 | ) |
| Net earnings  per common share - diluted                                                                                                               |       | $                                          | .39        |                                      | $          | .44 |   | $ | 1.02 |   | $ | .70 |   |
|                                                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Weighted  average common shares outstanding:                                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                                                                                  |       | 3,581,326                                  |       | 3,518,212                                 |       | 3,569,897 |   | 3,517,142 |   |
| Diluted                                                                                                                                                |       | 3,890,138                                  |       | 3,653,472                                 |       | 3,881,970 |   | 3,632,374 |   |

 

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

 

3

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

**CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY**

**(unaudited)**

 
| ** **                                                            | ** ** | ** ** | ** ** | **Class A Common   Stock, $1 Par** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|-------------------------|------------|--------------|------------|--------------------|------------|
| ** **                                                            | ** ** | **Total**  | ** ** | **Shares**                              | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**       | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                                                            |       |       |       |                                    |       |                    |       |         |       |               |       |   |   |   |   |   |   |   |   |   |
| **Balance, January 1, 2005**                                     |       | $          | 41,167,504 |                                    | 3,777,367  |                    | $          | 3,777,367    |       | $                  | 8,718,450  |   | $ | 30,398,528 |   | (223,736 | ) | $ | (1,726,841 | ) |
| Net earnings                                                          |       | 3,973,427  |       | —                                  |       | —                  |       | —       |       | 3,973,427          |       | — |   | — |   |
| Issuance of Class A common stock upon exercise  of stock options |       | 254,315    |       | 35,500                                  |       | 35,500                  |       | 218,815      |       | —             |       | — |   | — |   |
| Shares surrendered as payment for exercise of stock  options          |       | (107,241   | )          | —                                  |       | —                  |       | —       |       | —             |       | (6,418 | ) | (107,241 | ) |
| ** **                                                            |       |       |       |                                    |       |                    |       |         |       |               |       |   |   |   |   |   |   |   |   |   |
| **Balance, September 30, 2005**                                  |       | $          | 45,288,005 |                                    | 3,812,867  |                    | $          | 3,812,867    |       | $                  | 8,937,265  |   | $ | 34,371,955 |   | (230,154 | ) | $ | (1,834,082 | ) |

 

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

 

4

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

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                                      | ** ** | **Nine months ended**  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                      | ** ** | **September 30,** | ** ** |
| ** **                                                                                      | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                            |       |                   |       |   |   |
|                                                                                            |       |                   |       |   |   |
| Net earnings                                                                                    |       | $                      | 3,973,427  |   | $ | 2,546,341 |   |
|                                                                                            |       |                   |       |   |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) operating  activities: |       |                   |       |   |   |
| Loss from  discontinued operations - net of taxes                                               |       | 150,615                |       | 199,264 |   |
| Gain on sale  of assets of discontinued operations - net of taxes                               |       | (416,024               | )          | — |   |
| Non-cash  charges and credits:                                                                  |       |                   |       |   |   |
| Depreciation  and amortization                                                                  |       | 932,379                |       | 1,340,153 |   |
| Amortization  of other intangible assets                                                        |       | 828,750                |       | 542,250 |   |
| Amortization  of other assets                                                                   |       | 4,500                  |       | 10,450 |   |
| Provision  for losses on accounts receivable - net                                              |       | 23,730                 |       | (6,954 | ) |
| Deferred  income taxes - net                                                                    |       | 924,000                |       | (146,000 | ) |
| Loss on  disposal of fixed assets                                                               |       | —                 |       | (5,463 | ) |
| Changes in:                                                                                     |       |                   |       |   |   |
| Accounts  receivable                                                                            |       | (3,574,070             | )          | (4,703,614 | ) |
| Notes and  other receivables                                                                    |       | 231,683                |       | — |   |
| Inventories                                                                                     |       | (4,259,586             | )          | (4,084,974 | ) |
| Prepaid  expenses and other current assets                                                      |       | (360,279               | )          | (470,195 | ) |
| Other assets                                                                                    |       | (26,335                | )          | (300,226 | ) |
| Accounts  payable                                                                               |       | 373,861                |       | 2,914,068 |   |
| Accruals and  other                                                                             |       | (1,764,300             | )          | 1,351,001 |   |
|                                                                                            |       |                   |       |   |   |
| Total  adjustments                                                                              |       | (6,931,076             | )          | (3,360,240 | ) |
|                                                                                            |       |                   |       |   |   |
| Net cash  used in operating activities                                                          |       | (2,957,649             | )          | (813,899 | ) |
|                                                                                            |       |                   |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                           |       |                   |       |   |   |
|                                                                                            |       |                   |       |   |   |
| Capital  expenditures                                                                           |       | (434,470               | )          | (943,914 | ) |
| Purchase of  certain assets, net of certain liabilities, of Woodmark International, L.P.        |       | —                 |       | (27,160,000 | ) |
| Additional  payments for acquisition-related expenses                                           |       | —                 |       | (340,357 | ) |
| Proceeds  from the sale of certain assets of Green’s Access Division                       |       | 880,069                |       | (856,073 | ) |
| Proceeds  from the sale of certain assets of Green’s Agricultural Division                 |       | 225,000                |       |   |   |
| Additional  payments for purchase of Nationwide Industries, Inc.                           |       | (944,219               | )          | (501,708 | ) |
| Proceeds  from the disposal of fixed assets                                                     |       | —                 |       | 35,032 |   |
|                                                                                            |       |                   |       |   |   |
| Net cash  used in investing activities                                                          |       | (273,620               | )          | (29,767,020 | ) |
|                                                                                                 |            |                        |            |  |  |  |  |

 

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

 

5

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| ** **                                             | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **September 30,** | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH FLOWS  FROM FINANCING ACTIVITIES                  |       |                   |       |   |   |
|                                                   |       |                   |       |   |   |
| Proceeds  from short-term borrowings                   |       | 13,500,000             |       | 12,500,000 |   |
| Repayments  of short-term borrowings                   |       | (6,000,000             | )          | (6,000,000 | ) |
| Proceeds  from term loan                               |       | —                 |       | 34,000,000 |   |
| Repayments  of term loan                               |       | (4,200,000             | )          | (7,500,000 | ) |
| Principal  payments on mortgages                       |       | (243,348               | )          | (249,315 | ) |
| Proceeds  from exercise of stock options               |       | 147,074                |       | 45,688 |   |
|                                                   |       |                   |       |   |   |
| Net cash  provided by financing activities             |       | 3,203,726              |       | 32,796,373 |   |
|                                                   |       |                   |       |   |   |
| NET  (DECREASE) INCREASE IN CASH                       |       | (27,543                | )          | 2,215,454 |   |
|                                                   |       |                   |       |   |   |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF PERIOD      |       | 1,189,869              |       | 213,409 |   |
|                                                   |       |                   |       |   |   |
| CASH AND  CASH EQUIVALENTS AT END OF PERIOD            |       | $                      | 1,162,326  |   | $ | 2,428,863 |   |
|                                                   |       |                   |       |   |   |
| **Supplemental disclosures of cash flow information:** |       |                   |       |   |   |
|                                                   |       |                   |       |   |   |
| Cash paid for:                                         |       |                   |       |   |   |
| Interest                                               |       | $                      | 1,388,000  |   | $ | 614,000 |   |
| Income taxes                                           |       | $                      | 3,480,000  |   | $ | 1,275,000 |   |

 

Non-cash investing andfinancing activities were as follows:

 

Inconnection with the sale of certain assets of Green’s Agricultural Division,the Company received interest-bearing promissory notes of approximately$305,000, payable in varying amounts through July 2009.

 

Inconnection with the sale of certain assets of Green’s Access Division, theCompany received interest-bearing promissory notes of approximately $877,000,as amended, payable in varying amounts through November 2006.

 

Duringthe nine months ended September 30, 2005, the Company received 6,418shares of Class A Common Stock in connection with the exercise of optionsto purchase 14,000 shares of Class A Common Stock. The value of theseshares was recorded at $107,241.

 

See accompanying notes to consolidated condensed financial 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**

 

**Principlesof Consolidation**

 

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

 

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

 

FloridaPneumatic is engaged in the importation, manufacture and sale of pneumatic handtools, primarily for the industrial, retail and automotive markets, and theimportation and sale of compressor air filters. Florida Pneumatic also markets,through its Berkley Tool division (“Berkley”), a line of pipe cutting andthreading tools, wrenches and replacement electrical components for awidely-used brand of pipe cutting and threading machines. In addition, throughits Franklin Manufacturing (“Franklin”) division, Florida Pneumatic imports aline of door and window hardware. Countrywide conducts its business operationsthrough Nationwide Industries, Inc. (“Nationwide”) and through WoodmarkInternational, L.P. (“Woodmark”), a limited partnership between P&F andCountrywide. Nationwide is an importer and manufacturer of door, window andfencing hardware. Woodmark is an importer of builders’ hardware, includingstaircase components and kitchen and bath hardware and accessories. The Company’swholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), was engagedin the manufacture and sale of baseboard heating products and the importationand sale of radiant heating systems until it exited that business in October 2005(see Note 12) through the sale of substantially all of its non-real estateassets. The Company’s wholly-owned subsidiary, Green Manufacturing, Inc. (“Green”),was primarily engaged in the manufacture, development and sale of heavy-dutywelded custom designed hydraulic cylinders until it exited that business in December 2004through the sale of certain assets. Green also manufactured a line of accessequipment for the petro-chemical industry until it exited that business in February 2005through the sale of certain assets and a line of post hole digging equipmentfor the agricultural industry until it exited that business in July 2005through the sale of certain assets. Green has effectively ceased all operatingactivities (see Note 6). Note 11 presents financial information for thesegments of the Company’s business.

 

**Basis ofFinancial Statement Presentation**

 

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

 

7

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Theresults of operations for Green have been segregated from continuing operationsand are reflected on the consolidated condensed statements of earnings asdiscontinued operations.

 

Theunaudited consolidated condensed balance sheet information as of December 31,2004 was derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004, asadjusted for discontinued operations. The interim financial statementscontained herein should be read in conjunction with that Report.

 

Inpreparing its unaudited consolidated condensed financial statements inconformity with accounting principles generally accepted in the United Statesof America, the Company is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, the Company evaluates estimates, including those related tobad 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 not readilyapparent from other sources. Actual results could differ from those estimates.

 

**Reclassifications**

 

Certainprior period amounts in the Consolidated Condensed Financial Statements havebeen reclassified to conform to the current period’s presentation.

 

**NOTE 2 -EARNINGS PER SHARE**

 

Basicearnings (loss) per common share is based only on the average number of sharesof common stock outstanding for the periods. Diluted earnings (loss) per commonshare reflects the effect of shares of common stock issuable upon the exerciseof options, unless the effect on earnings is antidilutive.

 

Dilutedearnings (loss) per common share is computed using the treasury stock method.Under this method, the aggregate number of shares of common stock outstandingreflects the assumed use of proceeds from the hypothetical exercise of anyoutstanding options or warrants to purchase shares of the Company’s Class ACommon Stock. The average market value for the period is used as the assumedpurchase price.

 

8

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

 
| ** **                                                                                                            | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                            | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Numerator  for basic and diluted earnings (loss) per common share:                                                    |       |                   |       |                   |       |   |   |   |   |
| Earnings  from continuing operations                                                                                  |       | $                      | 1,235,342  |                   | $          | 1,641,044 |   | $ | 3,708,018 |   | $ | 2,745,605 |   |
| Discontinued  operations, net of taxes                                                                                |       | 289,757                |       | (35,643                | )          | 265,409 |   | (199,264 | ) |
| Net earnings                                                                                                          |       | $                      | 1,525,099  |                   | $          | 1,605,401 |   | $ | 3,973,427 |   | $ | 2,546,341 |   |
|                                                                                                                  |       |                   |       |                   |       |   |   |   |   |
| Denominator:                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Denominator  for basic earnings (loss) per share - weighted average common shares  outstanding                        |       | 3,581,326              |       | 3,518,212              |       | 3,569,897 |   | 3,517,142 |   |
| Effect of  dilutive securities:                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Employee  stock options                                                                                               |       | 308,812                |       | 135,260                |       | 312,073 |   | 115,232 |   |
| Denominator  for diluted earnings (loss) per share - adjusted weighted average common  shares and assumed conversions |       | 3,890,138              |       | 3,653,472              |       | 3,881,970 |   | 3,632,374 |   |

 

AtSeptember 30, 2005 and 2004 and during the three-month and nine-monthperiods ended September 30, 2005 and 2004, there were outstanding stockoptions, the exercise prices of which were higher than the average marketvalues of the underlying Class A Common Stock for the period. Theseoptions are anti-dilutive and are excluded from the computation of earnings pershare. The weighted average anti-dilutive stock options outstanding were asfollows:

 
| ** **                                                | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted  average anti-dilutive stock options outstanding |       | 27,500                 |       | 43,812                 |       | 9,167 |   | 27,271 |   |

 

**NOTE 3 -STOCK-BASED COMPENSATION**

 

InDecember 2002, the FASB issued SFAS No. 148, *“*Accounting for Stock Based Compensation -Transition and Disclosure”, which was issued to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS 148 amended thedisclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation”to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.

 

TheCompany accounts for its stock option awards to its employees under theintrinsic value based method of accounting prescribed by Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees.” Underthe intrinsic value based method, compensation cost is the excess, if any, ofthe quoted market price of the stock at grant date or other measurement dateover the amount an employee must pay to acquire the stock. The Company makespro forma disclosures of net earnings and earnings per share as if the fairvalue based method of accounting had been applied, as required by SFAS 123.

 

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SFAS123 requires the Company to provide pro forma information regarding netearnings and earnings per share as if compensation cost for its incentive stockoption plan had been determined in accordance with the fair value methodprescribed by SFAS 123. The Company estimates the fair value of each stockoption at the grant date by using the Black-Scholes option-pricing model, withthe following weighted-average assumptions for options granted in 2005 and2004, respectively; no dividends paid; expected volatility of 36.8% and 35.0%;risk-free interest rate of 4.0% and 4.5%; and expected life of 10 years and 9.3years.

 

Underthe provisions of SFAS 123, the Company’s net earnings and its basic anddiluted earnings per common share for the three-month and nine-month periodsended September 30, 2005 and 2004 would have changed to the pro formaamounts indicated below:

 
| ** **                                                                                                               | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                               | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net earnings  as reported                                                                                                |       | $                      | 1,525,099  |                   | $          | 1,605,401 |   | $ | 3,973,427 |   | $ | 2,546,341 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  method, net of related tax effects |       | (145,439               | )          | (400,393               | )          | (145,439 | ) | (400,393 | ) |
| Pro forma  net earnings                                                                                                  |       | $                      | 1,379,660  |                   | $          | 1,205,008 |   | $ | 3,827,988 |   | $ | 2,145,948 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| Basic  earnings per common share                                                                                         |       |                   |       |                   |       |   |   |   |   |
| As reported                                                                                                              |       | $                      | .43        |                   | $          | .46 |   | $ | 1.11 |   | $ | .72 |   |
| Pro forma                                                                                                                |       | $                      | .39        |                   | $          | .34 |   | $ | 1.07 |   | $ | .61 |   |
| Diluted  earnings per common share                                                                                       |       |                   |       |                   |       |   |   |   |   |
| As reported                                                                                                              |       | $                      | .39        |                   | $          | .44 |   | $ | 1.02 |   | $ | .70 |   |
| Pro forma                                                                                                                |       | $                      | .35        |                   | $          | .33 |   | $ | .98 |   | $ | .59 |   |

 

**NOTE 4 - FOREIGNCURRENCY TRANSACTIONS**

 

**DerivativeFinancial Instruments**

 

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

 

Forderivative instruments that are designated and qualify as fair value hedges(i.e., hedging the exposure to changes in the fair value of an asset or aliability or an identified portion thereof that is attributable to a particularrisk), the gain or loss on the derivative instrument as well as the offsettinggain or loss on the hedge item attributable to the hedged risk are recognizedin earnings in the current period. For derivative instruments that aredesignated and qualify as a cash flow hedge (i.e., hedging the exposure ofvariability in the expected future cash flows that would be attributable to aparticular risk), the effective portion of the gain or loss on the derivativeinstrument is reported as a component of accumulated comprehensive loss (acomponent of shareholders’ equity) and reclassified into earnings in the sameperiod or periods during which the hedged transaction affects earnings. Theremaining gain or loss on the derivative instrument, if any (i.e., theineffective portion and any portion of the derivative instrument excluded fromthe assessment of effectiveness), is recognized in earnings in the currentperiod. For

 

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derivative instruments notdesignated as hedging instruments, changes in the fair market values arerecognized in earnings as a component of cost of sales.

 

TheCompany accounts for changes in the fair value of its foreign currencycontracts by marking them to market and recognizing any resulting gains orlosses through its statement of earnings. The Company also marks its yen-denominatedpayables to market, recognizing any resulting gains or losses in its statementof earnings. At September 30, 2005, the Company had foreign currencyforward contracts, maturing in 2005, to purchase Japanese yen at contractedforward rates. The value of these contracts at September 30, 2005, basedon that day’s closing spot rate, was approximately $1,295,000, which was theapproximate value of the Company’s yen-denominated accounts payable. During thethree month periods ended September 30, 2005 and 2004, the Companyrecorded in its cost of sales a net realized loss of approximately $29,000 anda net realized gain of approximately $18,000, respectively, on foreign currencytransactions. During the nine-month periods ended September 30, 2005 and2004, the Company recorded in its cost of sales net realized losses ofapproximately $119,000 and $65,000, respectively, on foreign currencytransactions. At September 30, 2005 and 2004, the Company had unrealizedgains of $122,000 and $60,000 on foreign currency transactions.

 

**NOTE 5 -NEW ACCOUNTING PRONOUNCEMENTS**

 

InMay 2005, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 154, “AccountingChanges and Error Corrections – a replacement of APB Opinion No. 20 andFASB Statement No. 3” (“SFAS 154”). This Statement replaces APB Opinion No. 20,“Accounting Changes,” and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements.” SFAS 154 changes the requirements forthe accounting for and reporting of a change in accounting principle.Previously, most voluntary changes in accounting principles requiredrecognition through a cumulative adjustment within net income of the period ofthe change. SFAS 154 requires retrospective application to prior periods’financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning after December 15,2005; however, the Statement does not change the specific transition provisionsof any existing or future accounting pronouncements. The adoption of thisstatement is not expected to have a material effect on our financial positionor results of operations.

 

InMarch 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-BasedPayments” (“SAB 107”). SAB 107 expresses views of the SEC regarding theinteraction between SFAS 123R and certain SEC rules and regulations andprovides the SEC’s views regarding the valuation of share-based compensationfor public companies. We are currently evaluating the adoption of SFAS 123R andthe impact that this statement will have on our results of operations. Weintend to apply the principles of SAB 107 in conjunction with our adoption ofSFAS 123R.

 

InMarch 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations.” FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS No. 143, “Accounting forAssets Retirements Obligations,” refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity. Furthermore, the uncertainty about the timing and or method ofsettlement of a conditional asset retirement obligation should be factored intothe measurement of the liability when sufficient information exists. FIN 47clarifies that an entity is required to recognize the liability for the fairvalue of a conditional asset obligation when incurred if the liability’s fairvalue can be reasonably estimated. The adoption of this statement is notexpected to have a material effect on our financial position or results ofoperations. We

 

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intend to implement theprovisions of this statement in the first quarter of 2006.

 

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

 

InDecember 2004, the FASB issued SFAS 123R, “Share-Based Payment.”**This statement is a revision of SFAS 123,“Accounting for Stock-Based Compensation” and supersedes APB 25, “Accountingfor Stock Issued to Employees,” and is effective the first annual period thatbegins after June 15, 2005 or the Company’s first quarter of fiscal 2006.SFAS 123R establishes standards on accounting for transactions in which anentity obtains employee services in share-based payment transactions. Thisstatement requires measurement of the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award. That cost will be recognized over the period during which anemployee is required to provide service in exchange for the award, which isusually the vesting period. SFAS 123R also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. The adoption of this statement is notexpected to have a material effect on our financial position or results ofoperations. We intend to implement the provisions of this statement in thefirst quarter of 2006.

 

**NOTE 6 -DISCONTINUED OPERATIONS**

 

Green Manufacturing, Inc.– Agricultural Products Division

 

Pursuantto an Asset Purchase Agreement (the “Agricultural APA”), dated as of July 14,2005, between Green and Benko Products, Inc. (“Benko”), Green sold certainof its assets comprising its Agricultural Products Division (the “Agricultural Division”)to Benko. The assets sold pursuant to the Agricultural APA include, amongothers, certain machinery and equipment. Certain assets of the AgriculturalDivision were 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”).

 

Thepurchase price paid by Benko in consideration for the assets acquired pursuantto the Agricultural APA was $530,000, consisting of (a) a payment to Greenat 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 commencingas of the Agricultural Closing; and (c) $280,000 payable pursuant to theterms of a Promissory Note (collectively with Agricultural Note 1, the “AgriculturalNotes”), dated July 14, 2005, payable in equal monthly amounts over a four(4) year period commencing as of the Agricultural Closing. In addition,Benko assumed certain of Green’s contractual obligations. The obligations ofBenko under the Agricultural APA and the Agricultural Notes are guaranteed byeach of a principal shareholder and an affiliate of Benko, and partiallysecured by certain collateral.

 

Inconnection with the transaction, Green and Benko entered into an agreementwhich provides for Benko to purchase from Green 100% of Benko’s requirementsfor products of the type that constitute

 

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part of Green’s inventory ofraw materials and finished goods as of the acquisition date with all purchasesby Benko being binding and non-cancelable at pre-established prices. The termis for a period of one year from the acquisition date. Benko shall maintain forthe benefit of Green an insurance policy insuring the inventory and will bearthe entire risk of loss, theft, destruction or any damage to the inventory.Benko will also be responsible for all recordkeeping with respect to theinventory. 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.

 

TheCompany recognized a gain on the sale of these assets of approximately$345,000, net of taxes, in the third quarter of 2005.

 

Green Manufacturing, Inc.– Access Division

 

Pursuantto an Asset Purchase Agreement (the “Access APA”), dated as of February 2,2005, between Green and Benko Products, Inc. (“Benko”), Green sold certainof its assets comprising its Access Division (the “Access Division”) to Benko.The assets sold pursuant to the Access APA include, among others, certainmachinery 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 ofthe sale to Benko (the “Access Closing”).

 

Thepurchase price paid by Benko in consideration for the assets acquired pursuantto the Access APA, giving effect to certain adjustments, was approximately$1,756,655, consisting of (a) a payment to Green at Access Closing ofapproximately $880,069; (b) $755,724 payable pursuant to the terms of aPromissory Note (“Access Note 1”), dated February 2, 2005, payable invarious amounts over a twenty-one (21) month period commencing as of the AccessClosing; and (c) $120,862 payable pursuant to the terms of a PromissoryNote (collectively with Access Note 1, the “Access Notes”), dated February 2,2005, payable in various amounts over a four (4) month period commencingas of the Access Closing. Benko agreed to pay additional consideration on anannual basis for the two (2) successive twelve (12) month periodscommencing as of the Access Closing, dependent on certain sales by Benko,subject to certain other conditions. In addition, Benko assumed certain ofGreen’s contractual obligations. The obligations of Benko under the Access APAand the Access Notes are guaranteed by each of a principal shareholder and anaffiliate of Benko, and partially secured by certain collateral.

 

TheCompany recognized a gain on the sale of these assets of approximately $71,000,net of taxes of $36,000, in the first quarter of 2005.

 

Green Manufacturing, Inc.– Hydraulic Cylinder Division

 

InDecember 2004, pursuant to an Asset Purchase Agreement and other relateddocuments (collectively, the “Cylinder APA”), among P&F, Green andRosenboom Machine & Tool, Inc. (“RMT”) (an unaffiliated thirdparty), Green sold certain of its assets comprising its Hydraulic CylinderDivision to RMT. The assets sold pursuant to the Cylinder APA include, amongothers, property, machinery and

 

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equipment, raw materials,work-in process inventory and certain intangibles. Green also sold the land andbuilding in which the division was housed to RMT in connection with thistransaction. Green received net cash proceeds of approximately $3,679,000 and apromissory note of approximately $686,000 at the closing. In addition, Greenmay receive additional consideration in the form of commissions through December 2009based upon certain future sales by RMT. For the three-month and nine-monthperiods ended September 30, 2005, Green received approximately $108,000and $335,000, respectively, in additional consideration. In addition, RMTagreed to hire all Green Hydraulic Cylinder Division employees in BowlingGreen, Ohio and, as a result of the transaction, Green has effectively exitedthe hydraulic cylinder business.

 

Inconnection with the transaction, Green and RMT entered into an agreement whichprovides for RMT to purchase from Green 100% of RMT’s requirements for productsof the type that constitute part of Green’s inventory of finished goods as ofthe acquisition date with all purchases by RMT being binding and non-cancelableat pre-established prices. The term is for a period of one year from theacquisition date. RMT shall maintain for the benefit of Green the insurancepolicy insuring the finished goods inventory and will bear the entire risk ofloss, theft, destruction or any damage to the inventory. RMT will also beresponsible for all recordkeeping with respect to the inventory. After theexpiration of the term, RMT 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 RMT prior to payment, as if it had been soldto RMT, with Green recording it as an other current receivable (based on thecost of the inventory which approximated $889,000). This treatment is based onthe fact that Green has effectively transferred control of the inventory toRMT. RMT’s employees maintain control of the inventory as it is located on RMT’spremises and also bears risk of loss, theft, destruction or any damage to theinventory. Also, all purchases by RMT are binding and non-cancelable atpre-established prices with RMT being Green’s only customer for the one-yearperiod.

 

TheCompany recognized a gain on the sale of these assets of approximately $88,000,net of taxes of $46,000, in the fourth quarter of 2004.

 

Thefollowing amounts related to Green’s Access and Agricultural Divisions havebeen segregated from the Company’s continuing operations and are reported asassets of discontinued operations in the consolidated condensed balance sheets:

 
| ** **                              | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Current**                 | ** ** | **Long-term**              | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Assets of discontinued operations:      |       |                        |       |                       |       |   |   |   |   |
| Accounts receivable and inventories     |       | $                           | —     |                       | $          | — |   | $ | 796,000 |   | $ | — |   |
| Property and equipment                  |       | —                      |       | —                     |       | — |   | 1,020,000 |   |
|                                    |       |                        |       |                       |       |   |   |   |   |
| Total assets of discontinued operations |       | $                           | —     |                       | $          | — |   | $ | 796,000 |   | $ | 1,020,000 |   |

 

Theresults of operations for Green have been segregated from continuing operationsand are reflected on the consolidated condensed statement of earnings asdiscontinued operations. Discontinued operations were approximately as follows:

 

14

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| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                      |       | $                                          | 67,000     |                                      | $          | 4,347,000 |   | $ | 1,278,000 |   | $ | 11,201,000 |   |
| Loss from  operation of discontinued operations, before taxes |       | $                                          | (71,000    | )                                         | $          | (54,000 | ) | $ | (212,000 | ) | $ | (302,000 | ) |
| Income tax  benefit                                           |       | 16,000                                     |       | 18,000                                    |       | 61,000 |   | 103,000 |   |
| Loss from  operation of Discontinued operations               |       | (55,000                                    | )          | (36,000                                   | )          | (151,000 | ) | (199,000 | ) |
| Gain on sale  of discontinued operations, before taxes        |       | 523,000                                    |       | —                                    |       | 630,000 |   | — |   |
| Income taxes                                                  |       | (178,000                                   | )          | —                                    |       | (214,000 | ) | — |   |
| Gain on sale  of discontinued operations                      |       | 345,000                                    |       | —                                    |       | 416,000 |   | — |   |
| Earnings  (loss) from discontinued operations                 |       | $                                          | 290,000    |                                      | $          | (36,000 | ) | $ | 265,000 |   | $ | (199,000 | ) |

 

**NOTE 7 -INVENTORIES**

 

Inventoriesconsist of:

 
| ** **      | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|-----------------------------|------------|----------------------------|------------|
| Raw material    |       | $                           | 2,776,164  |                       | $          | 3,181,939 |   |
| Work in process |       | 530,709                     |       | 476,174                    |       |
| Finished goods  |       | 26,644,093                  |       | 22,033,267                 |       |
|            |       | $                           | 29,950,966 |                       | $          | 25,691,380 |   |

 

**NOTE 8 -GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Thechanges in the carrying amounts of goodwill for the nine months ended September 30,2005 are as follows:

 
| ** **                                                            | ** ** | **Consolidated** | ** ** | **Tools and other  products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|
| Balance, January 1, 2005                                         |       | $                | 22,877,000 |                          | $          | 2,326,000    |       | $ | 20,551,000 |   |
| Additional payments for purchase of  Nationwide Industries, Inc. |       | 944,000          |       | —                        |       | 944,000      |       |
| Balance, September 30, 2005                                      |       | $                | 23,821,000 |                          | $          | 2,326,000    |       | $ | 21,495,000 |   |

 

Inconnection with Countrywide’s acquisition of all of the stock of Nationwide in2002, the Company had been liable for contingent earnout payments to Nationwide’sprevious owner, in amounts equal to 30% of the excess of Nationwide’s earnings,before amortization of intangible assets, interest and taxes, over $2,500,000,for each of the five twelve-month periods subsequent to the acquisition date.In July 2005, the Company entered into a settlement agreement andamendment to the purchase agreement with Nationwide’s previous owner regardingsuch future contingent earnout payments. In connection therewith, the Companymade a payment of $1,250,000 in full and final settlement of the outstandingand remaining contingent earnout payments. These contingent earnout paymentshave been treated as additions to goodwill. During 2005, the Company recordednet additions to goodwill of approximately $944,000, related to contingentearnout payments.

 

Otherintangible assets were as follows:

 

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| ** **               | ** ** | **September 30, 2005** | ** ** | **December 31, 2004**    | ** ** |
|--------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **Cost**                    | ** ** | **Accumulated  amortization** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible assets: |       |                        |       |                          |       |   |   |   |   |
| Customer  relationships  |       | $                           | 9,160,000  |                          | $          | 1,903,334 |   | $ | 9,160,000 |   | $ | 1,255,334 |   |
| Vendor  relationship     |       | 890,000                     |       | 111,250                       |       | 890,000 |   | 44,500 |   |
| Employment  agreement    |       | 760,000                     |       | 519,333                       |       | 760,000 |   | 405,333 |   |
| Trademark                |       | 690,000                     |       | —                        |       | 690,000 |   | — |   |
|                     |       |                        |       |                          |       |   |   |   |   |
| Total                    |       | $                           | 11,500,000 |                          | $          | 2,533,917 |   | $ | 11,500,000 |   | $ | 1,705,167 |   |

 

Amortizationexpense for intangible assets subject to amortization was as follows:

 
| ** ** | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|       |       | $                                         | 276,250    |                                     | $          | 276,250 |   | $ | 828,750 |   | $ | 542,250 |   |
|            |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

Amortizationexpense for each of the twelve-month periods ending September 30, throughthe twelve-month period ending September 30, 2010, is estimated to be asfollows: 2006 - $1,105,000; 2007 - $883,000; 2008 - $573,000; 2009 - $573,000;and 2010 - $573,000. The weighted average amortization period for intangible assetswas 11.2 years at September 30, 2005 and 11.6 years at December 31,2004.

 

**NOTE 9 -WARRANTY LIABILITY**

 

TheCompany offers to its customers warranties against product defects for periodsranging from one year to the life of the product, depending on the specificproduct and terms of the customer purchase agreement. The Company’s typicalwarranties require it to repair or replace the defective products during thewarranty period 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 liabilityand adjusts the amounts as necessary. While the Company believes that itsestimated liability for product warranties is adequate, the estimated liabilityfor the product warranties could differ materially from future actual warrantycosts.

 

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

 
| ** **                                                          | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Balance, beginning of period                                        |       | $                                        | 565,874    |   | $ | 210,989 |   |
| Addition related to the Woodmark  acquisition                       |       | —                                   |       | 148,487 |   |
| Warranties issued and changes in estimated pre-existing  warranties |       | 410,064                                  |       | 972,705 |   |
| Actual warranty costs incurred                                      |       | (408,716                                 | )          | (718,161 | ) |
| Balance, end of period                                              |       | $                                        | 567,222    |   | $ | 614,020 |   |

 

**NOTE 10 –CAPITAL STOCK TRANSACTIONS**

 

Duringthe nine months ended September 30, 2005, the Company received 6,418shares of Class A Common Stock in connection with the exercise of optionsto purchase 14,000 shares of Class A Common Stock. The value of theseshares was recorded at $107,241.

 

**NOTE 11 -BUSINESS SEGMENTS**

 

TheCompany has organized its business into three reportable business segments:tools and other products, hardware and heating products. The Company isorganized around these three distinct operating

 

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segments, each of which hasvery different end users. For reporting purposes, Florida Pneumatic andFranklin are combined in the “Tools and other products” segment, Woodmark andNationwide are combined in the “Hardware” segment and Embassy represents the “Heatingproducts” segment. The Franklin Manufacturing division, formerly included inthe hardware segment, relocated its operations to Florida Pneumatic in thefirst quarter of 2005 and is now included in the “Tools and other products”segment. Prior period amounts have been reclassified to reflect this change.The primary reasons for taking this action were for, among other things,synergies between the companies in the retail channel, principally selling tothe same significant customer, and other operational synergies. The Companyevaluates segment performance based primarily on segment operating income.

 

Thefollowing presents financial information by segment for the three-month andnine-month periods ended September 30, 2005 and 2004. Segment operatingincome excludes general corporate expenses, interest expense and income taxes.Identifiable assets are those assets directly owned or utilized by theparticular business segment.

 
| **Three months ended September 30, 2005**           | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Revenues  from unaffiliated customers                    |       | $                | 32,649,000 |                          | $          | 13,933,000   |       | $                     | 15,822,000 |   | $ | 2,894,000 |   |
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Segment  operating income (loss)                         |       | 4,076,000        |       | $                             | 1,184,000  |         | $          | 2,839,000             |       | $ | 53,000 |   |
| General  corporate expense                               |       | (1,390,000       | )          |                          |       |         |       |                  |       |
| Interest  expense – net                             |       | (549,000         | )          |                          |       |         |       |                  |       |
| Earnings  from continuing operations before income taxes |       | $                | 2,137,000  |                          |       |         |       |                  |       |   |
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Segment  assets                                          |       | $                | 93,252,000 |                          | $          | 33,818,000   |       | $                     | 53,601,000 |   | $ | 5,833,000 |   |
| Corporate  assets and assets of discontinued operations  |       | 4,236,000        |       |                          |       |         |       |                  |       |
| Total assets                                             |       | $                | 97,488,000 |                          |       |         |       |                  |       |   |

 
| **Three months ended September 30, 2004**           | ** ** | **Consolidated** | ** **  | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|----------------------------------------------------------|------------|------------------|-------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
|                                                     |       |             |        |                          |       |         |       |                  |       |
| Revenues from unaffiliated customers                     |       | $                | 34,589,000  |                          | $          | 17,013,000   |       | $                     | 14,722,000 |   | $ | 2,854,000 |   |
|                                                     |       |             |        |                          |       |         |       |                  |       |
| Segment operating income (loss)                          |       | 4,522,000        |        | $                             | 1,684,000  |         | $          | 2,812,000             |       | $ | 26,000 |   |
| General corporate expense                                |       | (1,229,000       | )           |                          |       |         |       |                  |       |
| Interest expense – net                              |       | (437,000         | )           |                          |       |         |       |                  |       |
| Earnings from continuing operations before  income taxes |       | $                | 2,856,000   |                          |       |         |       |                  |       |   |
|                                                     |       |             |        |                          |       |         |       |                  |       |
| Segment assets                                           |       | $                | 90,155,000  |                          | $          | 32,202,000   |       | $                     | 51,935,000 |   | $ | 6,018,000 |   |
| Corporate assets and assets of discontinued  operations  |       | 11,949,000       |        |                          |       |         |       |                  |       |
| Total assets                                             |       | $                | 102,104,000 |                          |       |         |       |                  |       |   |

 

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| **Nine months ended September 30, 2005**            | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Revenues  from unaffiliated customers                    |       | $                | 89,815,000 |                          | $          | 36,008,000   |       | $                     | 46,201,000 |   | $ | 7,606,000 |   |
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Segment  operating income (loss)                         |       | 11,611,000       |       | $                             | 3,092,000  |         | $          | 8,566,000             |       | $ | (47,000 | ) |
| General  corporate expense                               |       | (3,714,000       | )          |                          |       |         |       |                  |       |
| Interest  expense – net                             |       | (1,478,000       | )          |                          |       |         |       |                  |       |
| Earnings  from continuing operations before income taxes |       | $                | 6,419,000  |                          |       |         |       |                  |       |   |

 
| **Nine months ended September 30, 2004**            | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Revenues from unaffiliated customers                     |       | $                | 68,662,000 |                          | $          | 37,294,000   |       | $                     | 23,597,000 |   | $ | 7,771,000 |   |
|                                                     |       |             |       |                          |       |         |       |                  |       |
| Segment operating income (loss)                          |       | 8,506,000        |       | $                             | 3,707,000  |         | $          | 4,808,000             |       | $ | (9,000 | ) |
| General corporate expense                                |       | (3,130,000       | )          |                          |       |         |       |                  |       |
| Interest expense – net                              |       | (697,000         | )          |                          |       |         |       |                  |       |
| Earnings from continuing operations before  income taxes |       | $                | 4,679,000  |                          |       |         |       |                  |       |   |

 

**NOTE 12 –SUBSEQUENT EVENT**

 

Pursuantto an Asset Purchase Agreement (the “Embassy APA”), dated as of October 11,2005, among the Company, Embassy, Mestek, Inc. (“Mestek”) and EmbassyManufacturing, Inc., a wholly-owned subsidiary of Mestek (“EMI”), Embassysold substantially all of its operating assets to EMI. The assets sold pursuantto the Embassy APA include, among others, machinery and equipment, inventory,accounts receivable and certain intangibles. Certain assets were retained byEmbassy, including, but not limited to, cash and title to any real propertyowned by Embassy at the consummation of the sale to EMI. The consideration paidby EMI for the assets acquired pursuant to the Embassy APA was $8,000,000, subjectto a closing adjustment, plus the assumption of certain liabilities andobligations of Embassy by EMI.

 

Pursuantto a lease, dated as of October 11, 2005, between Embassy, as landlord andEMI, as tenant, Embassy has agreed to lease certain space (approximately 60,000rentable square feet) in the building located at 300 Smith Street, Farmingdale,NY to EMI in connection with the operation of EMI’s business, at an annualrental rate of $480,000, payable in monthly installments of $40,000 each. Theterm of the lease is for a period of six months commencing October 11,2005 and terminating April 10, 2006; provided however, that, in the eventEMI serves notice on Embassy by December 31, 2005, the lease may beextended on a month-to-month basis through June 30, 2006.

 

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

 

**Item 2.****                                            ****Management’s Discussion andAnalysis 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 expressionsidentify statements that constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934 and that are intended to come within the safeharbor protection provided by those sections. Any forward-looking statementscontained herein, including those related to the Company’s future performance,are based upon the Company’s historical performance and on current plans,estimates and expectations. Such forward-looking statements are subject tovarious risks and uncertainties identified below. Forward-looking statementsspeak only as of the date on which they are made. The Company undertakes noobligation to update publicly or revise any forward-looking statement, whetheras a result of new information, future developments or otherwise.

 

All forward-lookingstatements involve risks and uncertainties. These risks and uncertainties couldcause the Company’s actual results for the 2005 fiscal year and beyond todiffer materially from those expressed in any forward-looking statement made byor on behalf of the Company for a number of reasons, including, but not limitedto:

 

•The strength of the retail economy in the United States. The Company’s businessis subject to economic conditions in its major markets, including recession,inflation, deflation, general weakness in retail, industrial, and housingmarkets.

 

•The Company’s ability to maintain mutually beneficial relationships with keycustomers. The Company has several significant customers, including twocustomers that, in the aggregate, constituted approximately 28% of itsconsolidated revenues for the nine-month period ended September 30, 2005. Theloss of either of these significant customers or a material negative change inthe Company’s relationships with these significant customers could have anadverse effect on its financial position and results of operations.

 

•Adverse changes in currency exchange rates or raw material commodity prices. Asignificant amount of the Company’s products are manufactured outside theUnited States and purchased in the local currency. As a result, the Company isexposed to movements in the exchange rates of various currencies against theUnited States dollar. The Company believes its most significant foreigncurrency exposures are the Japanese yen, the Taiwan dollar, and, to a lesserextent, the euro. In addition, the Company purchases a significant amount ofproducts from China for which it pays in U.S. dollars. As a result of therecent and potential future revaluations of the Chinese renminbi, the Companymay have additional adverse exposure related to the price of future purchases.

 

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•Unforeseen inventory adjustments or changes in purchasing patterns by majorcustomers and the resultant impact on manufacturing volumes and inventorylevels. The Company makes its purchasing decisions based upon a number offactors including an assessment of market needs and preferences, manufacturinglead times and cash flow considerations. To the extent that the Company’sassumptions result in inventory levels being too high or too low, there couldbe a negative impact on its financial position and results of operations.During the second and third quarters of 2005, one of the Company’s significantcustomers decreased its purchasing levels in order to reduce its overallinventory levels. This pattern, which we expect to continue through the end offiscal 2005, is expected to increase our inventory in the near term anddecrease revenues and related profits from that customer. We are unable at thistime, however, to quantify the impact on our financial position and results ofoperations.

 

•Unforeseen interruptions in the manufacturing ability of certain foreignsuppliers. Although the Company believes there are redundant sources availableand does maintain multiple sources for certain of its products, there may becosts and delays associated with securing such sources and there can be noassurance that such sources would provide the same quality of product at similarprices.

 

•Market acceptance of the new products introduced in 2004 and 2005 and otherproducts scheduled for introduction during 2005, as well as the level of salesgenerated from these new products relative to expectations, based on existinginvestments in productive capacity and commitments by the Company to fundadvertising and product promotions in connection with the introduction of thesenew products.

 

•The ability of certain subsidiaries of the Company to generate future cashflows sufficient to support the recorded amounts of goodwill, other intangibleassets and other long-lived assets related to those subsidiaries.

 

•Increased competition. The domestic markets in which the Company sells productsare highly competitive on the basis of price, quality, availability, post-saleservice and brand-name awareness. A number of competing companies arewell-established manufacturers that compete on a global basis.

 

•Price reductions taken by the Company in response to customer and competitivepressures, as well as price reductions or promotional actions taken in order todrive demand that may not result in anticipated sales necessary to offset theassociated costs.

 

•Interest rate fluctuations and other capital market conditions.

 

•The effects of litigation and product liability exposures, as well as otherrisks and uncertainties detailed from time to time in the Company’s filingswith the Securities and Exchange Commission.

 

•Changes in laws and regulations, including changes in accounting standards, taxationrequirements, including tax rate changes, new tax laws and revised tax lawinterpretations, and environmental laws, in both domestic and foreignjurisdictions.

 

•The impact of unforeseen events, including war or terrorist activities, oneconomic conditions and consumer confidence.

 

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This listing is not intendedto be all-inclusive. There can be no assurance that the Company has correctlyidentified and appropriately assessed all factors affecting its business orthat the publicly available and other information with respect to these mattersis complete and correct. Additional risks and uncertainties not presently knownto the Company or that it currently believes to be immaterial also mayadversely impact the Company. Should any risks and uncertainties develop intoactual events, these developments could have material adverse effects on theCompany’s financial position and results of operations.

 

**Business**

 

P&F Industries, Inc.(“P&F”) is a Delaware corporation incorporated on April 19, 1963. P&Fconducts its business operations through two of its wholly-owned subsidiaries:Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) andCountrywide Hardware, Inc. (“Countrywide”). P&F Industries, Inc. and itssubsidiaries are herein referred to collectively as the “Company.”

 

Florida Pneumatic is engagedin the importation, manufacture and sale of pneumatic hand tools, primarily forthe industrial, retail and automotive markets, and the importation and sale ofcompressor air filters. Florida Pneumatic also markets, through its BerkleyTool division (“Berkley”), a line of pipe cutting and threading tools, wrenchesand replacement electrical components for a widely-used brand of pipe cuttingand threading machines. In addition, through its Franklin Manufacturing(“Franklin”) division, Florida Pneumatic imports a line of door and windowhardware. Countrywide conducts its business operations through NationwideIndustries, Inc. (“Nationwide”), its wholly-owned subsidiary, and throughWoodmark International, L.P. (“Woodmark”), a limited partnership owned byP&F and Countrywide. Nationwide is an importer and manufacturer of door,window and fencing hardware. Woodmark is an importer of builders’ hardware,including staircase components and kitchen and bath hardware and accessories.The Company’s wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”),was engaged in the manufacture and sale of baseboard heating products and theimportation and sale of radiant heating systems and boilers until it exitedthat business in October 2005 (see Note 12) through the sale of substantiallyall of its non-real estate assets. The Company’s wholly-owned subsidiary, GreenManufacturing, Inc. (“Green”), was primarily engaged in the manufacture,development and sale of heavy-duty welded custom designed hydraulic cylindersuntil it exited that business in December 2004 through the sale of certainassets. Green also manufactured a line of access equipment for the petro-chemicalindustry until it exited that business in February 2005 through the sale ofcertain assets and a line of post hole digging equipment for the agriculturalindustry until it exited that business in July 2005 through the sale of certainassets (see Note 6). Note 11 to the Notes to Consolidated Condensed FinancialStatements presents financial information for the segments of the Company’sbusiness.

 

**Overview**

 

On June 30, 2004, Woodmarkacquired certain assets comprising the business of the former Woodmark InternationalL.P. and its wholly-owned subsidiary, the former Stair House, Inc., and assumedcertain related liabilities. The Company’s consolidated results of operationsinclude the results of operations for Woodmark for the nine months endedSeptember 30, 2005 within its hardware business segment. In addition, theCompany’s consolidated results of operations present Green as discontinuedoperations.

 

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Consolidated revenues forthe quarter ended September 30, 2005 decreased $1,940,000, or 5.6%, from$34,589,000 to $32,649,000. Revenues increased approximately $1.1 million, or7.5%, at Countrywide, which includes revenues at Woodmark and Nationwide.Woodmark had third quarter revenues of $10,706,000, increasing $221,000, or2.1%, and Nationwide reported revenues of $5,116,000, increasing $890,000, or21.1%. Revenues at Florida Pneumatic decreased $3,080,000, or 18.1%, to$13,933,000 from the comparable prior-year period primarily due to decreases inbase product sales and reduction in retail promotions in the period. Revenuesat Embassy were essentially flat. Gross profit decreased $265,000, or 2.7%, forthe quarter primarily due to decreased revenues. Consolidated earnings fromcontinuing operations decreased $406,000, or 24.7%, from $1,641,000 to$1,235,000 for the quarter ended September 30, 2005.

 

**CriticalAccounting Policies and Estimates**

 

The Company prepares itsconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America. Certain of these accountingpolicies require the Company to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities, revenues and expenses. On anongoing basis, the Company evaluates estimates, including those related to baddebts, inventory reserves, goodwill and intangible assets and warrantyreserves. The Company bases its estimates on historical data and experience,when available, and on various other assumptions that are believed to bereasonable under the circumstances, the combined results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates.

 

There have been no materialchanges in the Company’s critical accounting policies and estimates from thosediscussed in Item 7 of the Company’s Annual Report on Form 10-K for the yearended December 31, 2004.

 

**ACQUISITION**

 

For acquisitions, results ofoperations are included in the Consolidated Condensed Financial Statements fromthe date of acquisition.

 

Woodmark International L.P.

 

On June 30, 2004, pursuantto an Asset Purchase Agreement dated as of such date, Woodmark, a Delawarelimited partnership owned by P&F and Countrywide, acquired certain assets(the “Purchased Property”) comprising the business of the former WoodmarkInternational L.P., a Texas limited partnership, and its wholly-ownedsubsidiary, the former Stair House, Inc., a Georgia corporation (collectively,the “Sellers”), and assumed certain of the Sellers’ related liabilities.Woodmark paid $31,898,000 to acquire the Purchased Property, which purchaseprice consisted primarily of $27,160,000 in cash and certain subordinated notesin the aggregate principal amount of $3,408,000. The purchase price wasnegotiated on the basis of Woodmark’s historical financial performance. Subjectto certain conditions, Woodmark also agreed to pay additional cashconsideration to the Sellers after the third or the fifth anniversary of theclosing of the acquisition if certain financial targets described in the AssetPurchase Agreement are met. The acquisition of the Purchased Property wasfinanced through the Company’s senior credit facility.

 

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As part of the acquisition,the Company recorded approximately $8,840,000 in other identifiable intangibleassets, principally related to the value of customer relationships, andapproximately $12,675,000 of goodwill through September 30, 2005.

 

**DISCONTINUEDOPERATIONS**

 

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(“Agricultural Note 1”), dated July 14, 2005, payable in equal monthly amountsover a five (5) month period commencing as of the Agricultural Closing; and (c)$280,000 payable 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.

 

Green has effectively ceasedall operating activities. The Company recognized a gain on the sale of theseassets of approximately $345,000, net of taxes, in the third quarter of 2005.

 

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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 certain salesby Benko, subject to certain other conditions. In addition, Benko assumedcertain of Green’s contractual obligations. The obligations of Benko under theAccess APA and the Access Notes are guaranteed by each of a principalshareholder and an affiliate of Benko, and partially secured by certaincollateral.

 

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes of$36,000, in the first quarter of 2005.

 

Green Manufacturing, Inc. –Hydraulic Cylinder Division

 

In December 2004, pursuantto an Asset Purchase Agreement and other related documents (collectively, the“Cylinder APA”), among P&F, Green and Rosenboom Machine & Tool, Inc.(“RMT”) (an unaffiliated third party), Green sold certain of its assetscomprising its Hydraulic Cylinder Division to RMT. The assets sold pursuant tothe Cylinder APA include, among others, property, machinery and equipment, rawmaterials, work-in process inventory and certain intangibles. Green also soldthe land and building in which the division was housed to RMT in connectionwith this transaction. Green received net cash proceeds of approximately$3,679,000 and a promissory note of approximately $686,000 at the closing. Inaddition, Green may receive additional consideration in the form of commissionsthrough December 2009 based upon certain future sales by RMT. For thethree-month and nine-month periods ended September 30, 2005, Green receivedapproximately $108,000 and $335,000, respectively, in additional consideration.In addition, RMT has agreed to hire all Green Hydraulic Cylinder Divisionemployees in Bowling Green, Ohio and, as a result of the transaction, Green haseffectively exited the hydraulic cylinder business.

 

In connection with thetransaction, Green and RMT entered into an agreement which provides for RMT topurchase from Green 100% of RMT’s requirements for products of the type thatconstitute part of Green’s inventory of finished goods as of the acquisitiondate with all purchases by RMT being binding and non-cancelable atpre-established prices. The term is for a period of one year from theacquisition date. RMT shall maintain for the benefit of Green the insurancepolicy insuring the finished goods inventory and will bear the entire risk ofloss, theft, destruction or any damage to the inventory. RMT will also beresponsible for all recordkeeping with respect to the inventory. After theexpiration of the term, RMT 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

 

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arrangement which provides for a transfer of its inventory to RMT priorto payment, as if it had been sold to RMT, with Green recording it as an othercurrent receivable (based on the cost of the inventory which approximated$889,000). This treatment is based on the fact that Green has effectively transferredcontrol of the inventory to RMT. RMT’s employees maintain control of theinventory as it is located on RMT’s premises and also bears risk of loss,theft, destruction or any damage to the inventory. Also, all purchases by RMTare binding and non-cancelable at pre-established prices with RMT being Green’sonly customer for the one-year period.

 

The Company recognized again on the sale of these assets of approximately $88,000, net of taxes of$46,000, in the fourth quarter of 2004.

 

The following amountsrelated to Green’s Access and Agricultural Divisions have been segregated fromthe Company’s continuing operations and are reported as assets of discontinuedoperations in the consolidated condensed balance sheets:

 
| ** **                               | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Current**            | ** ** | **Long-term**         | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Assets of  discontinued operations:      |       |                   |       |                  |       |   |   |   |   |
| Accounts  receivable and inventories     |       | $                      | —     |                  | $          | — |   | $ | 796,000 |   | $ | — |   |
| Property and  equipment                  |       | —                 |       | —                |       | — |   | 1,020,000 |   |
|                                     |       |                   |       |                  |       |   |   |   |   |
| Total assets  of discontinued operations |       | $                      | —     |                  | $          | — |   | $ | 796,000 |   | $ | 1,020,000 |   |

 

The results of operationsfor Green have been segregated from continuing operations and are reflected onthe consolidated condensed statement of earnings as discontinued operations.Discontinued operations were approximately as follows:

 
| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                      |       | $                                     | 67,000     |                                 | $          | 4,347,000 |   | $ | 1,278,000 |   | $ | 11,201,000 |   |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Loss from operation of discontinued  operations, before taxes |       | $                                     | (71,000    | )                                    | $          | (54,000 | ) | $ | (212,000 | ) | $ | (302,000 | ) |
| Income tax benefit                                            |       | 16,000                                |       | 18,000                               |       | 61,000 |   | 103,000 |   |
| Loss from operation of discontinued  operations               |       | (55,000                               | )          | (36,000                              | )          | (151,000 | ) | (199,000 | ) |
| Gain on sale of discontinued operations, before  taxes        |       | 523,000                               |       | —                               |       | 630,000 |   | — |   |
| Income taxes                                                  |       | (178,000                              | )          | —                               |       | (214,000 | ) | — |   |
| Gain on sale of discontinued operations                       |       | 345,000                               |       | —                               |       | 416,000 |   | — |   |
| Earnings (loss) from discontinued  operations                 |       | $                                     | 290,000    |                                 | $          | (36,000 | ) | $ | 265,000 |   | $ | (199,000 | ) |

 

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**RESULTS OFOPERATIONS**

 

**Quartersended September 30, 2005 and September 30, 2004**

 

**Revenues**

 

Revenues for the quartersended September 30, 2005 and 2004 were approximately as follows:

 
| **Three months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|---------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
| **2005**                              |       | $                | 32,649,000 |                          | $          | 13,933,000   |       | $                     | 15,822,000 |   | $ | 2,894,000 |   |
|                                  |       |             |       |                          |       |         |       |                  |       |
| **2004**                              |       | $                | 34,589,000 |                          | $          | 17,013,000   |       | $                     | 14,722,000 |   | $ | 2,854,000 |   |
|                                  |       |             |       |                          |       |         |       |                  |       |
| **% increase (decrease)**             |       | (5.6             | )%         | (18.1                         | )%         | 7.5          | %          | 1.4                   | %          |

 

Revenues from tools andother products decreased due primarily to approximately $1,685,000 less inretail promotions in the period, as well as a decrease in base sales ofapproximately $1,676,000, offset by an increase of approximately $282,000related to new product introductions. Base sales decreased as a result ofdecreased purchasing activity of approximately $797,000 from a significantcustomer as part of a program to reduce its overall inventory levels, as well asa decrease in automotive revenues of approximately $477,000. Revenues from ourautomotive customers have decreased due primarily to the lack ofinventory-stocking accounts that were obtained in 2004, as well as nosignificant new product introductions in this area in 2005. In addition, theFranklin Manufacturing division, formerly included in the hardware segment,relocated its operations to Florida Pneumatic in the first quarter of 2005 andis now included in the “Tools and other products” segment. Prior period amountshave been reclassified to reflect this change. The primary reasons for takingthis action were for, among other things, synergies between the companies inthe retail channel, principally selling to the same significant customer, andother operational synergies. Selling prices of pneumatic tools and relatedequipment were unchanged.

 

Revenues from hardwareincreased at both Woodmark and Nationwide. Woodmark’s revenues increased$221,000, or 2.1%. Revenues from the sale of staircase components continue toincrease, benefiting from strong new housing starts. These revenues have morethan offset weakness in demand for our kitchen and bath products sold into themobile home and remodeling markets. Moreover, Nationwide’s revenues increasedby approximately $890,000, or 21.1%, primarily attributable to an increase ofapproximately $446,000 in sales of fencing products, as well as increases inour OEM hardware products of $390,000, which were due primarily to the additionof new OEM customers.

 

Revenues from heatingproducts remained relatively unchanged for the quarterly period. Revenues frombaseboard products decreased slightly despite increases in housing starts,especially in the northeast. This was due primarily to decreased constructionactivity in the New York City area, which represents a significant market forus. Our boiler sales increased due to the timing of certain jobs. Sellingprices of certain baseboard heating products and boilers were increased late inthe first quarter to offset rising costs of materials. Such price increases,which averaged approximately 7%, impacted revenues reported in the period byapproximately $200,000. (See Note 12 to the Notes to Consolidated CondensedFinancial Statements.)

 

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

 

**GrossProfits**

 

Gross profits for thequarters ended September 30, 2005 and 2004 were approximately as follows:

 
| **Three months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|---------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
| **2005**                              |       | $                | 9,876,000  |                          | $          | 3,727,000    |       | $                     | 5,346,000  |   | $ | 803,000 |   |
| ** **                            |       | 30.2             | %          | 26.8                          | %          | 33.8         | %          | 27.8                  | %          |
|                                  |       |             |       |                          |       |         |       |                  |       |
| **2004**                              |       | $                | 10,141,000 |                          | $          | 4,501,000    |       | $                     | 4,844,000  |   | $ | 796,000 |   |
| ** **                            |       | 29.3             | %          | 26.5                          | %          | 32.9         | %          | 27.9                  | %          |

 

The increase in the grossprofit percentage from tools and other products was due primarily to the impactof lower margins related to greater retail promotional sales in the prior-yearperiod, partially offset by the weakness of the U.S. dollar in relation to theTaiwan dollar compared to the prior-year period. The increase in the grossprofit percentage from hardware was due primarily to a favorable product mix infencing revenues and a shift by Nationwide to lower-cost suppliers for someproducts, partially offset by some cost increases from Asian suppliers due toincreases in the cost of metals. The gross profit percentage from heatingproducts was essentially unchanged.

 

**Selling,General and Administrative Expenses**

 

Consolidated selling,general and administrative (“SG&A”) expenses increased $342,000, or 5.0%,from approximately $6,848,000 to approximately $7,190,000. SG&A expensesincreased due primarily to increased personnel-related expenses from additionalpersonnel and west-coast expansion at Countrywide to support growth, increasedfreight costs due to fuel surcharges and sales territory expansion andincreases related to professional fees principally for certain non-recurringM&A activities and corporate compliance and reporting requirements, offsetby a reduction in certain warranty expenses. Due to decreases in revenues inthe period and that certain SG&A expenses are fixed, SG&A expenses as apercentage of revenues increased from 19.8% to 22.0%.

 

**Interest -Net**

 

Net interest expenseincreased $112,000, or 25.6%, from approximately $437,000 to approximately$549,000, due primarily to higher average borrowings under the revolving creditloan facility to finance working capital requirements, as well as higher averageinterest rates during the period. Interest expense on borrowings under the termloan facility increased by approximately $48,000. Interest expense onborrowings under the Company’s revolving credit loan facility increased byapproximately $59,000.

 

**Income Taxes**

 

The effective tax ratesapplicable to earnings from continuing operations for the quarters endedSeptember 30, 2005 and 2004 were 42.2% and 42.5%, respectively.

 

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**Nine-month periods ended September 30, 2005 andSeptember 30, 2004**

 

**Revenues**

 

Revenues for the nine-monthperiods ended September 30, 2005 and 2004 were approximately as follows:

 
| **Nine months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|--------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
| **2005**                             |       | $                | 89,815,000 |                          | $          | 36,008,000   |       | $                     | 46,201,000 |   | $ | 7,606,000 |   |
|                                 |       |             |       |                          |       |         |       |                  |       |
| **2004**                             |       | $                | 68,662,000 |                          | $          | 37,294,000   |       | $                     | 23,597,000 |   | $ | 7,771,000 |   |
|                                 |       |             |       |                          |       |         |       |                  |       |
| **% increase (decrease)**            |       | 30.8             | %          | (3.4                          | )%         | 95.8         | %          | (2.1                  | )%         |

 

Revenues from tools andother products decreased due primarily to a decrease in base sales ofapproximately $3,513,000 during the nine-month period, offset by an increase ofapproximately $2,083,000 related to new product introductions. Base salesdecreased as a result of decreased purchasing activity of approximately$2,326,000 from two significant customers ($1,627,000 from one significantcustomer as part of a program to reduce its overall inventory levels), as wellas a decrease in automotive revenues of approximately $762,000. Revenues fromour automotive customers have decreased due primarily to the lack ofinventory-stocking accounts that were obtained in 2004, as well as nosignificant new product introductions in this area in 2005. In addition, theFranklin Manufacturing division, formerly included in the hardware segment,relocated its operations to Florida Pneumatic in the first quarter of 2005 andis now included in the “Tools and other products” segment. Prior period amountshave been reclassified to reflect this change. The primary reasons for takingthis action were for, among other things, synergies between the companies inthe retail channel, principally selling to the same significant customer, andother operational synergies. Selling prices of pneumatic tools and relatedequipment were unchanged.

 

Revenues from hardwareincreased as a result of the acquisition of Woodmark in 2004, which recordedapproximately $30,615,000 in revenues during the nine months ended September30, 2005 compared with $10,485,000 for the comparable prior-year period whichrepresented only one quarter of operational activity. Revenues from the sale ofstaircase components continue to increase, benefiting from strong new housingstarts. These revenues have more than offset weakness in demand for our kitchenand bath products sold into the mobile home and remodeling markets. Moreover,Nationwide’s revenues increased by approximately $2,515,000, or 19.2%,primarily attributable to an increase of approximately $1,155,000, or 14.4%, insales of fencing products, and increases in our OEM and patio hardware productsof $1,072,000, or 37.1%, and $325,000, or 14.6%, respectively, which were dueprimarily to the addition of new OEM customers and to greater sale of patioproducts resulting from reconstruction following the hurricanes in Florida lastyear.

 

Revenues from heatingproducts decreased $165,000 for the nine-month period ended September 30, 2005.Revenues from baseboard products did not increase despite increases in housingstarts, especially in the northeast. This was due primarily to decreasedconstruction activity in the New York City area during the second quarter of2005, which represents a significant market for us. Sales of our other heatingproducts, excluding boilers, were also below comparable prior-period levels.Our boiler sales increased due to the timing of certain jobs. Selling prices ofcertain baseboard heating products and

 

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boilers were increased late in the first quarter to offset rising costsof materials. Such price increases, which averaged approximately 7%, impactedrevenues reported in the period by approximately $350,000. (See Note 12 to theNotes to Consolidated Condensed Financial Statements.)

 

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

 

**GrossProfits**

 

Gross profits for thenine-month periods ended September 30, 2005 and 2004 were approximately asfollows:

 
| **Nine months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Heating  products** | ** ** |
|--------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------|------------|
| **2005**                             |       | $                | 28,015,000 |                          | $          | 10,194,000   |       | $                     | 15,726,000 |   | $ | 2,095,000 |   |
| ** **                           |       | 31.2             | %          | 28.3                          | %          | 34.0         | %          | 27.5                  | %          |
|                                 |       |             |       |                          |       |         |       |                  |       |
| **2004**                             |       | $                | 21,780,000 |                          | $          | 11,257,000   |       | $                     | 8,322,000  |   | $ | 2,201,000 |   |
| ** **                           |       | 31.7             | %          | 30.2                          | %          | 35.3         | %          | 28.3                  | %          |

 

The decrease in the grossprofit percentage from tools and other products was due primarily to the impactof decreased base product business which has higher margins than those relatedto retail promotional sales, as well as the weakness of the U.S. dollar inrelation to the Taiwan dollar compared to the prior-year period. The decreasein the gross profit percentage from hardware was due primarily to the inclusionof Woodmark for nine months in 2005 versus three months in 2004, whose grossprofit percentage of approximately 31.5% was less than this segment’scomparable prior-year period average. The gross profit percentage forNationwide, the other company in the hardware segment was 39.0%. The decreasein the gross profit percentage from heating products was due primarily toincreases in steel and other raw material costs, prompting an increase incertain selling prices late in the first quarter.

 

**Selling,General and Administrative Expenses**

 

Consolidated selling,general and administrative expenses increased $3,714,000, or 22.6%, fromapproximately $16,404,000 to approximately $20,119,000. SG&A expensesincreased due primarily to the inclusion of $2,947,000 of expenses in the firsthalf of 2005 related to Woodmark, increased compensation tied to higherprofitability, increased personnel-related expenses resulting from increasingrevenues, increased freight costs due to fuel surcharges and sales territoryexpansion, offset by a reduction in certain warranty expenses. However, due toincreases in revenues and that certain SG&A expenses are fixed, SG&Aexpenses as a percentage of revenues decreased from 23.9% to 22.4%.

 

**Interest -Net**

 

Net interest expenseincreased approximately $781,000, or 112%, from approximately $697,000 toapproximately $1,478,000, due primarily to the amounts borrowed under theCompany’s term loan facility to finance the Woodmark acquisition transaction onJune 30, 2004, as well as the issuance and assumption of certain notes relatedthereto. Interest expense on borrowings under the term loan facility increasedby approximately $530,000. Interest expense on the acquisition-related notes,which was for nine months in 2005 and three months in 2004, increased byapproximately $91,000. Interest expense on

 

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borrowings under the Company’s revolving credit loan facility increasedby approximately $164,000, as a result of both higher average borrowings andhigher average interest rates.

 

**IncomeTaxes**

 

The effective tax ratesapplicable to earnings from continuing operations for the nine months endedSeptember 30, 2005 and 2004 were 42.2% and 41.3%, respectively. The decrease inthe effective tax rate was due primarily to an increase in expenses that arenot deductible for tax purposes.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s cash flowsfrom operations are cyclical, with the greatest demand in the second and thirdquarters followed by positive cash flows in the fourth quarter as receivablesand inventories trend down. Due to its strong asset base, predictable 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 itsliquidity and financial stability by the measurements shown in the followingtable:

 
| ** **                 | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| Working  Capital           |       | $                      | 29,071,000 |                  | $          | 29,530,000 |   |
| Current  Ratio             |       | 2.14 to 1              |       | 2.72 to 1             |       |
| Shareholders’  Equity |       | $                      | 45,288,000 |                  | $          | 41,168,000 |   |

 

Cash decreased $28,000, from$1,190,000 as of December 31, 2004 to $1,162,000, as of September 30, 2005. TheCompany’s debt levels increased, from $38,910,000 at December 31, 2004 to$41,967,000 at September 30, 2005, primarily to fund working capital needs. TheCompany’s total percent of debt to total book capitalization decreased from48.6% at December 31, 2004 to 48.1% at September 30, 2005.

 

In connection withCountrywide’s acquisition of all of the stock of Nationwide in 2002, theCompany was liable for contingent earnout payments to Nationwide’s previousowner, in amounts equal to 30% of the excess of Nationwide’s earnings, beforeamortization of intangible assets, interest and taxes, over $2,500,000, foreach of the five twelve-month periods subsequent to the acquisition date. InJuly 2005, the Company entered into a settlement agreement and amendment to thepurchase agreement with Nationwide’s previous owner regarding such futurecontingent earnout payments. In connection therewith, the Company made apayment of $1,250,000 in full and final settlement of the outstanding andremaining contingent earnout payments. These payments have been treated asadditions to goodwill. During 2005, the Company recorded net additions togoodwill of approximately $944,000, related to contingent earnout payments.(See Note 8 to the Notes to Consolidated Condensed Financial Statements.)

 

In connection with theWoodmark acquisition transaction, the Company is liable for additional paymentsto the sellers. The amount of these payments, which would be made as of eitherJune 30, 2007 or June 30, 2009, are to be based on increases in earnings beforeinterest and taxes, for the year ended on the respective date, over a base of$5,100,000. Woodmark has the option to make a payment as of June 30, 2007 in anamount equal to 48% of this increase. If Woodmark does not make this payment asof June

 

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30, 2007, the Sellers may demand payment as of June 30, 2009 in anamount equal to 40% of the increase. Any such additional payments will betreated as additions to goodwill.

 

In October 2005, the Companysold substantially all of the operating assets, excluding real estate, of Embassyfor $8,000,000, subject to a closing adjustment, plus the assumption of certainliabilities and obligations of Embassy by the buyer. Embassy received net cashproceeds of $7,200,000 at closing, with $800,000 held in escrow subject topost-closing adjustments and certain indemnification provisions. The Companyhas used the proceeds to reduce its term loan by $3,500,000 and to reduce theamount outstanding under its revolving credit facility by $3,500,000.

 

The Company has receivednearly $17 million to date, including approximately $13 million in 2005 andapproximately $4 million in 2004, in cash related to the sale and liquidationof certain assets of Green and Embassy. The Company anticipates generatingadditional cash in the future from the possible sale of Embassy’s formeroperating facilities, as well as the collection of various notes and possiblereceipt of certain contingent consideration over the next several years relatedto certain of the Company’s recent dispositions.

 

Cash used in operatingactivities was approximately $2,958,000 and $814,000 for the nine-month periodsended September 30, 2005 and 2004, respectively. The Company believes that cashon hand derived from operations and cash available through borrowings under itscredit facilities will be sufficient to allow the Company to meet itsforeseeable working capital needs.

 

During the nine months endedSeptember 30, 2005, gross accounts receivable increased by approximately$3,574,000 in the aggregate. Increases (decreases) were approximately$3,614,000, $1,669,000, $164,000 and $(1,873,000) at Florida Pneumatic,Countrywide, Embassy and Green, respectively. These changes were all primarilyrelated to the respective companies’ sales volume for the period, with theexception of Green, whose reduction was principally related to the collectionof outstanding accounts receivable from the discontinued operations of each ofits operating divisions.

 

During the nine months endedSeptember 30, 2005, inventories increased by approximately $4,260,000 in theaggregate. Increases (decreases) were approximately $4,041,000, $402,000,$249,000 and $(432,000) at Florida Pneumatic, Countrywide, Embassy and Green,respectively. The increase in inventories at Florida Pneumatic was dueprimarily to the stocking of inventory related to anticipated sales promotionswith its two major customers and, in the case of Green, from the discontinuanceof the business. Overall, inventory levels fluctuate quarter-to-quarter due tothe timing of purchases, actual sales and anticipated sales levels.

 

During the nine months endedSeptember 30, 2005, short-term borrowings increased by $7,500,000, primarily tofund working capital needs.

 

During the nine months endedSeptember 30, 2005, accounts payable increased by approximately $374,000 in theaggregate. Increases (decreases) were approximately $425,000, $50,000, $2,000and $(103,000) at Florida Pneumatic, Countrywide, Embassy and Green,respectively. These changes were all due primarily to the timing of paymentsassociated with inventory purchases and, in the case of Green, from thediscontinuance of the business.

 

On June 30, 2004, inconjunction with the Woodmark acquisition transaction, the Company entered intoa credit agreement with Citibank and another bank. This agreement provides theCompany with various credit facilities, including revolving credit loans, termloans for acquisitions and a foreign

 

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exchange line. The credit agreement is subject to annual review by the banks.An amendment to the credit agreement, dated June 24, 2005, extended the term ofthe agreement through June 30, 2006.

 

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. AtSeptember 30, 2005, there was $11,500,000 outstanding against the revolvingcredit loan facility, and there were no open letters of credit.

 

The term loan facilityprovides a maximum commitment of $34,000,000 to finance acquisitions subject tothe approval of the lending banks. There are no commitment fees for any unusedportion of this credit facility. The Company borrowed $29,000,000 against thisfacility to finance the Woodmark acquisition transaction, and there was$22,800,000 outstanding against the term loan facility at September 30, 2005.

 

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 lineat September 30, 2005, based on that day’s closing spot rate, was approximately$1,295,000.

 

Under its credit agreement,the Company is required to adhere to certain financial covenants. Certain ofthe Company’s mortgage agreements also require the Company to adhere to certainfinancial covenants. At September 30, 2005, the Company was in compliance withall of these covenants.

 

Capital spending for thenine-month periods ending September 30, 2005 and 2004 was approximately$434,000 and $944,000, respectively, which amounts were provided from workingcapital. Capital expenditures for the balance of fiscal 2005 are expected to beapproximately $180,000, some of which may be financed through the Company’scredit facilities. Included in the expected total for 2005 are capitalexpenditures relating to new products, expansion of existing product lines,geographic expansion to the west coast and replacement of equipment.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

The Company’s foreignexchange line provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. TheCompany has not purchased forward contracts on New Taiwan dollars or euros. Thetotal amount of foreign currency forward contracts outstanding at September 30,2005, based on that day’s closing spot rate, was approximately $1,295,000.

 

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 intoforeign currency forward contracts. The increase in the strength of theJapanese yen versus the U.S. dollar from 2004 to 2005 had a negative effect onthe Company’s results of operations and its financial position. Since December31, 2004, the relative value of the U.S dollar in relation to the Japanese yenhas increased, particularly in the second and third quarters. There can be noassurance as to the future trend of this value. (See “Item 3 - Quantitative andQualitative Disclosures About Market Risk.”)

 

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**NEWACCOUNTING PRONOUNCEMENTS**

 

See Note 5 to the Notes toConsolidated Condensed Financial Statements included in Item 1 of this report.

 

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

 

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

 

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

 

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

 

The Company accounts forchanges in the fair value of its foreign currency contracts by marking them tomarket and recognizing any resulting gains or losses through its statement ofoperations. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statement of operations. AtSeptember 30, 2005, the Company had foreign currency forward contracts, maturingin 2005, to purchase Japanese yen at contracted forward rates. The value ofthese contracts at September 30, 2005, based on that day’s closing spot rate,was approximately $1,295,000, which was the approximate value of the Company’scorresponding yen-denominated accounts payable. During the three month periodsended September 30, 2005 and 2004, the Company recorded in its selling, generaland administrative expenses a net realized loss of approximately $29,000 and anet realized gain of approximately $18,000, respectively, on foreign currencytransactions. During the nine-month periods ended September 30, 2005 and 2004,the Company recorded in its selling, general and administrative expenses netrealized losses of approximately $119,000 and $65,000, respectively, on foreigncurrency transactions. At September 30, 2005 and 2004, the Company hadunrealized gains of $122,000 and $60,000 on foreign currency transactions.

 

The potential loss in valueof the Company’s net investment in foreign currency forward contracts resultingfrom a hypothetical 10 percent adverse change in foreign currency exchangerates at September 30, 2005 was approximately $151,000.

 

The Company has various debtinstruments that bear interest at variable rates tied to LIBOR (London InterBankOffered Rate). Any increase in LIBOR would have an adverse effect on theCompany’s interest costs. In addition to affecting operating results, adversechanges in interest rates could impact the Company’s access to capital, certainmerger and acquisition strategies and the level of capital expenditures.

 

The carrying amountsreported in the consolidated balance sheets for cash and cash equivalents,accounts receivable, accounts payable and short-term debt, approximate fairvalue as of September 30, 2005

 

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because of the relatively short-term maturity of these financialinstruments. The carrying amounts reported for long-term debt approximate fairvalue as of September 30, 2005 because, in general, the interest ratesunderlying the instruments fluctuate with market rates.

 

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

 

**Evaluationof disclosure controls and procedures**

 

An evaluation was performed,under the supervision of, and with the participation of, the Company’s management,including the Principal Executive Officer and Principal Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to theSecurities and Exchange Act of 1934). Based on that evaluation, the Company’smanagement, including the Principal Executive Officer and Principal FinancialOfficer, concluded that the Company’s disclosure controls and procedures wereadequate and effective, as of the end of the period covered by this QuarterlyReport on Form 10-Q for the quarter ended September 30, 2005 (this “Report”),in timely alerting them to all material information relating to the Company andits consolidated subsidiaries that is required to be included in this Report.

 

**Changes ininternal controls**

 

There have been nosignificant changes in the Company’s internal controls over financial reportingthat occurred during the most recent fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

35

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**PART II - OTHER INFORMATION**

 
| **Item 1.** | ** ** | **Legal  Proceedings**                                                                                                                                                                                                                           |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                             |
|        |       | The Company is a defendant  or co-defendant in various actions brought about in the ordinary course of  conducting its business. The Company does not believe that any of these  actions are material to the financial condition of the Company. |
|        |       |                                                                                                                                                                                                                                             |
| **Item 2.** | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                             |
|        |       | None.                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                             |
| **Item 3.** | ** ** | **Defaults  Upon Senior Securities**                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                             |
|        |       | None.                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                             |
| **Item 4.** | ** ** | **Submission  of Matters to a Vote of Security Holders**                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                             |
|        |       | None.                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                             |
| **Item 5.** | ** ** | **Other  Information**                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                             |
|        |       | None.                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                             |
| **Item 6.** | ** ** | **Exhibits**                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                             |
|        |       | See “Exhibit Index”  immediately following the signature page.                                                                                                                                                                         |

 

36

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf 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: November 11, 2005 |   | (Principal Financial and  Chief Accounting Officer) |

 

37

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The following exhibits areeither included in this report or incorporated herein by reference as indicatedbelow:

 
| **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 9, 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  16, 2004, and amended March 4, 2005). Pursuant to Item 601(b)(2) of  Regulation S-K, the Registrant agrees to furnish, supplementally, a copy of  any exhibit or schedule omitted from the Asset Purchase Agreement to the  Commission upon request.                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.7**             |       | Amendment to Asset  Purchase Agreement, dated June 8, 2005, among Rosenboom Machine & Tool,  Inc. and Green Manufacturing, Inc. (Incorporated by reference to Exhibit 2.7  to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June  30, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

38

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| **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 3, 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 11, 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  the 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 the Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **3.3**    |   | Amendment to the Amended  By-laws, as amended, of the Registrant (Incorporated by reference to Exhibit  3 to the Registrant’s Current Report on Form 8-K dated September 13, 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 9, 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 24, 2005). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **4.4**    |   | Certain instruments  defining the rights of holders of the long-term debt securities of the  Registrant are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of  Regulation S-K. The Registrant agrees to furnish supplementally copies of  these instruments to the Commission upon request.                                                                                                                                                                                      |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **10.1**   |   | Second Amended and  Restated Employment Agreement, dated as of May 30, 2001 and amended October  24, 2005, between the Registrant and Richard A. Horowitz (Incorporated by  reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2001 and incorporated by reference to Exhibit  10.1 to the                                                                                                                                  |

 

39

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| ** ** |   | Registrant’s Current  Report on Form 8-K dated October 24, 2005).                                                                                                                                                                             |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   |                                                                                                                                                                                                                                               |
| **10.2**   |   | 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). |
|       |   |                                                                                                                                                                                                                                               |
| **10.3**   |   | 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).   |
|       |   |                                                                                                                                                                                                                                               |
| **10.4**   |   | Executive Incentive Bonus  Plan of the Registrant (Incorporated by reference to Exhibit 10.4 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 2001).                                                   |
|       |   |                                                                                                                                                                                                                                               |
| **10.5**   |   | 2002 Stock Incentive Plan  of the Registrant (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2002).                                                             |
|       |   |                                                                                                                                                                                                                                               |
| **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 onForm 10-Q may be obtained, upon payment of the Registrant’s reasonable expensesin furnishing such exhibit, by writing to P&F Industries, Inc., 300 SmithStreet, Farmingdale, New York 11735-1114, Attention: Corporate Secretary.

 

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