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

**Washington, D.C. 20549**

 

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**FORM 10-Q**

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**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended March 31, 2005**

 

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

 

**Commission File Number 1 - 5332**

 

**P & FINDUSTRIES, INC.**

(Exactname of registrant as specified in its charter)

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

 

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

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.

**Yes ****ý****    No ****o**

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

**Yes ****o****    No ****ý**

 

As of May 13, 2005,there were 3,565,631 shares of the registrant’s Class A Common Stockoutstanding.

 

 

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**P & F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005**

 

**TABLE OF CONTENTS**

** **
| **PART I – FINANCIAL INFORMATION** |                                                         |
|-----------------------------------------|--------------------------------------------------------------|
|                                    |                                                         |   |   |
| Item 1.                                 | Consolidated  Condensed Financial Statements (unaudited)     |   |
|                                    |                                                         |   |   |
|                                    |                                                         | Consolidated  Condensed Balance Sheets |   |
|                                    |                                                         |   |   |
|                                    |                                                         | Consolidated  Condensed Statements of Earnings |   |
|                                    |                                                         |   |   |
|                                    |                                                         | Consolidated  Condensed Statement of Shareholders’ Equity |   |
|                                    |                                                         |   |   |
|                                    |                                                         | Consolidated  Condensed Statements of Cash Flows |   |
|                                    |                                                         |   |   |
|                                    |                                                         | 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(unaudited)**

 
| ** **                                      | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **ASSETS**                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT                                         |       |               |       |                  |       |
| Cash and cash equivalents                       |       | $                  | 122,060    |                  | $          | 1,189,869 |   |
| Accounts receivable - net                       |       | 13,222,180         |       | 14,849,748            |       |
| Notes and other receivables                     |       | 1,800,740          |       | 1,735,383             |       |
| Inventories - net                               |       | 28,933,791         |       | 25,691,380            |       |
| Deferred income taxes - net                     |       | 1,070,000          |       | 1,070,000             |       |
| Assets of discontinued operations               |       | —             |       | 795,941               |       |
| Prepaid expenses and other                      |       | 1,783,260          |       | 1,383,414             |       |
| TOTAL CURRENT ASSETS                            |       | 46,932,031         |       | 46,715,735            |       |
|                                            |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT                          |       |               |       |                  |       |
| Land                                            |       | 1,246,938          |       | 1,246,938             |       |
| Buildings and improvements                      |       | 7,246,694          |       | 7,230,248             |       |
| Machinery and equipment                         |       | 12,286,525         |       | 12,127,511            |       |
|                                            |       | 20,780,157         |       | 20,604,697            |       |
| Less accumulated depreciation and  amortization |       | 11,393,394         |       | 11,064,240            |       |
| NET PROPERTY AND EQUIPMENT                      |       | 9,386,763          |       | 9,540,457             |       |
|                                            |       |               |       |                  |       |
| GOODWILL                                        |       | 22,978,471         |       | 22,877,021            |       |
|                                            |       |               |       |                  |       |
| OTHER INTANGIBLE ASSETS - net                   |       | 9,518,583          |       | 9,794,833             |       |
|                                            |       |               |       |                  |       |
| ASSETS OF DISCONTINUED OPERATIONS               |       | —             |       | 942,768               |       |
|                                            |       |               |       |                  |       |
| OTHER ASSETS - net                              |       | 657,383            |       | 667,259               |       |
|                                            |       |               |       |                  |       |
| TOTAL ASSETS                                    |       | $                  | 89,473,231 |                  | $          | 90,538,073 |   |

 

See accompanying notesto consolidated condensed financial statements (unaudited).

 

1

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** **

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

**CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)**

**(continued)**

 
| ** **                                                                                | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES                                                                       |       |               |       |                  |       |
| Short-term borrowings                                                                     |       | $                  | 5,500,000  |                  | $          | 4,000,000 |   |
| Bank overdrafts                                                                           |       | 1,500,000          |       | —                |       |
| Accounts payable                                                                          |       | 3,578,279          |       | 3,355,377             |       |
| Income taxes payable                                                                      |       | 828,683            |       | 1,600,683             |       |
| Accrued compensation                                                                      |       | 825,189            |       | 2,331,222             |       |
| Other accrued liabilities                                                                 |       | 3,172,793          |       | 2,836,209             |       |
| Current maturities of long-term debt                                                      |       | 3,544,169          |       | 3,062,481             |       |
| TOTAL CURRENT LIABILITIES                                                                 |       | 18,949,113         |       | 17,185,972            |       |
|                                                                                      |       |               |       |                  |       |
| LONG-TERM DEBT, less current maturities                                                   |       | 28,029,215         |       | 31,847,597            |       |
|                                                                                      |       |               |       |                  |       |
| DEFERRED INCOME TAXES - net                                                               |       | 289,000            |       | 337,000               |       |
|                                                                                      |       |               |       |                  |       |
| TOTAL LIABILITIES                                                                         |       | 47,267,328         |       | 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 - 3,789,367 and 3,777,367 shares |       | 3,789,367          |       | 3,777,367             |       |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued or outstanding         |       | —             |       | —                |       |
| Additional paid-in capital                                                                |       | 8,781,445          |       | 8,718,450             |       |
| Retained earnings                                                                         |       | 31,361,932         |       | 30,398,528            |       |
| Treasury stock, at cost (223,736 shares)                                                  |       | (1,726,841         | )          | (1,726,841            | )          |
|                                                                                      |       |               |       |                  |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                           |       | 42,205,903         |       | 41,167,504            |       |
|                                                                                      |       |               |       |                  |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                           |       | $                  | 89,473,231 |                  | $          | 90,538,073 |   |

 

See accompanying notesto 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 March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues                                                                                                                       |       | $                                | 27,306,848 |   | $ | 16,903,978 |   |
| Cost of sales                                                                                                                  |       | 18,872,097                       |       | 11,448,991 |   |
| Gross profit                                                                                                                   |       | 8,434,751                        |       | 5,454,987 |   |
| Selling, general and administrative  expenses                                                                                  |       | 6,128,406                        |       | 4,682,373 |   |
| Operating income                                                                                                               |       | 2,306,345                        |       | 772,614 |   |
| Interest expense - net                                                                                                         |       | 426,482                          |       | 121,873 |   |
| Earnings from continuing operations before  income taxes                                                                       |       | 1,879,863                        |       | 650,741 |   |
| Income taxes                                                                                                                   |       | 771,000                          |       | 246,000 |   |
| Earnings from continuing operations before  discontinued operations                                                            |       | 1,108,863                        |       | 404,741 |   |
| Discontinued operations (net of taxes):                                                                                        |       |                             |       |   |   |
| Loss from operation of discontinued  operations (net of tax benefits of $111,000 and $86,000 for 2005 and 2004,  respectively) |       | (216,691                         | )          | (168,175 | ) |
| Gain on sale of discontinued operations  (net of tax of $36,000)                                                               |       | 71,232                           |       | — |   |
| Loss from discontinued operations                                                                                              |       | (145,459                         | )          | (168,175 | ) |
| Net earnings                                                                                                                   |       | $                                | 963,404    |   | $ | 236,566 |   |
|                                                                                                                           |       |                             |       |   |   |
| Basic earnings (loss) per common share:                                                                                        |       |                             |       |   |   |
| Continuing operations                                                                                                          |       | $                                | .31        |   | $ | .12 |   |
| Discontinued operations                                                                                                        |       | (.04                             | )          | (.05 | ) |
| Net earnings per common share - basic                                                                                          |       | $                                | .27        |   | $ | .07 |   |
|                                                                                                                           |       |                             |       |   |   |
| Diluted earnings (loss) per common share:                                                                                      |       |                             |       |   |   |
| Continuing operations                                                                                                          |       | $                                | .29        |   | $ | .11 |   |
| Discontinued operations                                                                                                        |       | (.04                             | )          | (.04 | ) |
| Net earnings per common share - diluted                                                                                        |       | $                                | .25        |   | $ | .07 |   |
|                                                                                                                           |       |                             |       |   |   |
| Weighted average common shares outstanding:                                                                                    |       |                             |       |   |   |
| Basic                                                                                                                          |       | 3,559,922                        |       | 3,515,447 |   |
| Diluted                                                                                                                        |       | 3,875,880                        |       | 3,632,539 |   |

 

See accompanying notesto consolidated condensed financial statements (unaudited).

 

3

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

**CONSOLIDATED CONDENSED STATEMENT OFSHAREHOLDERS’ 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                                                     |       | 963,404    |       | —                             |       | —                  |       | —       |       | 963,404             |       | — |   | — |   |
| Issuance of Class  A common stock upon exercise of stock options |       | 74,995     |       | 12,000                             |       | 12,000                  |       | 62,995       |       | —              |       | — |   | — |   |
| **Balance,  March 31, 2005**                                     |       | $          | 42,205,903 |                               | 3,789,367  |                    | $          | 3,789,367    |       | $                   | 8,781,445  |   | $ | 31,361,932 |   | (223,736 | ) | $ | (1,726,841 | ) |

 

See accompanying notesto consolidated condensed financial statements (unaudited).

 

4

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

**CONSOLIDATED****CONDENSED****STATEMENTSOF CASH FLOWS**

**(unaudited)**

 
| ** **                                                                       | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**          | ** ** |
| ** **                                                                       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                             |       |                   |       |   |   |
| Net earnings                                                                     |       | $                      | 963,404    |   | $ | 236,566 |   |
|                                                                             |       |                   |       |   |   |
| Adjustments to reconcile net earnings to  net cash used in operating activities: |       |                   |       |   |   |
| Loss from discontinued operations - net of  taxes                                |       | 216,691                |       | — |   |
| Gain on sale of assets of discontinued  operations - net of taxes                |       | (71,232                | )          | — |   |
| Non-cash charges and credits:                                                    |       |                   |       |   |   |
| Depreciation and amortization                                                    |       | 331,448                |       | 435,051 |   |
| Amortization of other intangible assets                                          |       | 276,250                |       | 133,000 |   |
| Amortization of other assets                                                     |       | 2,535                  |       | 3,483 |   |
| (Recovery of) provision for losses on  accounts receivable - net                 |       | (4,299                 | )          | 4,326 |   |
| Deferred income taxes - net                                                      |       | (48,000                | )          | (49,000 | ) |
| Loss on disposal of fixed assets                                                 |       | —                 |       | (10,206 | ) |
| Changes in:                                                                      |       |                   |       |   |   |
| Accounts receivable                                                              |       | 1,631,867              |       | (177,212 | ) |
| Notes and other receivables                                                      |       | 892,289                |       | — |   |
| Inventories                                                                      |       | (3,233,047             | )          | 844,568 |   |
| Prepaid expenses and other                                                       |       | (399,846               | )          | 8,959 |   |
| Other assets                                                                     |       | 7,341                  |       | (18,286 | ) |
| Accounts payable                                                                 |       | 222,902                |       | (471,804 | ) |
| Accruals and other                                                               |       | (2,197,572             | )          | (1,189,694 | ) |
|                                                                             |       |                   |       |   |   |
| Total adjustments                                                                |       | (2,372,673             | )          | (486,815 | ) |
|                                                                             |       |                   |       |   |   |
| Net cash used in operating activities                                            |       | (1,409,269             | )          | (250,249 | ) |
|                                                                             |       |                   |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                             |       |                   |       |   |   |
| Capital expenditures                                                             |       | (175,460               | )          | (225,997 | ) |
| Proceeds from the sale of access division                                        |       | 880,069                |       | — |   |
| Proceeds from the disposal of fixed assets                                       |       | —                 |       | 27,532 |   |
| Additional payments for purchase of  Nationwide Industries, Inc.                 |       | (101,450               | )          | (29,597 | ) |
|                                                                             |       |                   |       |   |   |
| Net cash provided by (used in) investing  activities                             |       | 603,159                |       | (228,062 | ) |
|                                                                                  |            |                        |            |  |  |  |  |

 

See accompanying notesto consolidated condensed financial statements (unaudited).

 

5

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| ** **                                           | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **March 31,**          | ** ** |
| ** **                                           | ** ** | **2005**               | ** ** | **2004** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES                 |       |                   |       |   |   |
| Proceeds from short-term borrowings                  |       | $                      | 4,500,000  |   | $ | 1,500,000 |   |
| Bank overdrafts                                      |       | 1,500,000              |       | — |   |
| Repayments of short-term borrowings                  |       | (3,000,000             | )          | — |   |
| Repayments of term loan                              |       | (3,250,000             | )          | — |   |
| Principal payments on mortgages                      |       | (86,694                | )          | (335,943 | ) |
| Proceeds from exercise of stock options              |       | 74,995                 |       | 30,000 |   |
|                                                 |       |                   |       |   |   |
| Net cash (used in) provided by financing  activities |       | (261,699               | )          | 1,194,057 |   |
|                                                 |       |                   |       |   |   |
| NET (DECREASE) INCREASE IN CASH                      |       | (1,067,809             | )          | 715,746 |   |
|                                                 |       |                   |       |   |   |
| CASH AT BEGINNING OF PERIOD                          |       | 1,189,869              |       | 213,409 |   |
|                                                 |       |                   |       |   |   |
| CASH AT END OF PERIOD                                |       | $                      | 122,060    |   | $ | 929,155 |   |

 

**Supplemental disclosures of cashflow information:**

 

Cash paid for:
| ** **   | ** ** | **Three months ended** | ** ** |
|--------------|------------|------------------------|------------|
| ** **   | ** ** | **March 31,**          | ** ** |
| ** **   | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Interest     |       | $                      | 408,000    |   | $ | 123,000 |   |
|         |       |                   |       |   |   |
| Income taxes |       | $                      | 1,606,000  |   | $ | 152,000 |   |

 

Non-cash investing and financing activities were asfollows:

 

In connection with the sale of certain assets ofGreen’s Access division, the Company received interest-bearing promissory notesof approximately $958,000, payable in varying amounts through November 2006.

 

See accompanying notesto consolidated condensed financial statements (unaudited).

 

6

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

**NOTES TO CONSOLIDATED****CONDENSED****FINANCIALSTATEMENTS (unaudited)**

 

**NOTE 1 - SUMMARY OF ACCOUNTING POLICIES**

 

**Principles of Consolidation**

 

The unaudited consolidatedcondensed financial statements contained herein include the accounts of P&FIndustries, Inc. and its subsidiaries. All significant intercompany balancesand transactions have been eliminated.

 

P&F Industries, Inc.(“P&F”) conducts its business operations through its four wholly-ownedsubsidiaries: Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”),Countrywide Hardware, Inc. (“Countrywide”), Green Manufacturing, Inc. (“Green”)and Embassy Industries, Inc. (“Embassy”). P&F and its subsidiaries areherein referred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

 

Florida Pneumatic isengaged in the importation, manufacture and sale of pneumatic hand tools,primarily for the industrial, retail and automotive markets, and theimportation and sale of compressor air filters. Florida Pneumatic also markets,through its Berkley Tool division (“Berkley”), a line of pipe cutting andthreading tools, wrenches and replacement electrical components for awidely-used brand of pipe cutting and threading machines. In addition, throughits Franklin Manufacturing (“Franklin”) division, Florida Pneumatic imports aline of door and window hardware. Countrywide conducts its business operationsthrough Nationwide Industries, Inc. (“Nationwide”) and through WoodmarkInternational, L.P. (“Woodmark”), a limited partnership between P&F andCountrywide. Nationwide is an importer and manufacturer of door, window andfencing hardware. Woodmark is an importer of builders’ hardware, including staircase components and kitchenand bath hardware and accessories. Green wasprimarily engaged in the manufacture, development and sale of heavy-duty weldedcustom designed hydraulic cylinders until it exited that business in December2004 through the sale of certain assets. Green also manufactured a line ofaccess equipment for the petro-chemical industry until it exited that businessin February 2005 and continues to manufacture a line of post hole diggingequipment for the agricultural industry. (See Note 6 regarding disposition ofcertain assets related to Green’s exit from the hydraulic cylinder and accessequipment businesses.) Embassy is engaged in the manufacture and sale ofbaseboard heating products and the importation and sale of radiant heatingsystems. Note 10 presents financial information for the segments of the Company’sbusiness.

 

**Basis of Financial StatementPresentation**

 

The accompanyingunaudited consolidated condensed financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof 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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The results of operations for Green’s HydraulicCylinder and Access divisions have been segregated from continuing operationsand are reflected on the consolidated condensed statement of earnings asdiscontinued operations.

 

The unaudited consolidatedcondensed balance sheet information as of December 31, 2004 was derived fromthe audited financial statements included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2004. The interim financialstatements contained herein should be read in conjunction with that Report.

 

In preparing its Unauditedconsolidated condensed financial statements in conformity with accountingprinciples generally accepted in the United States of America, the Company isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. On an ongoing basis, the Company evaluates estimates, including thoserelated to bad debts, inventory reserves, goodwill and intangible assets. TheCompany bases its estimates on historical data and experience, when available,and on various other assumptions that are believed to be reasonable under the circumstances,the combined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results could differfrom those estimates.

 

**Reclassifications**

 

Certain prior period amountsin the Consolidated Condensed Financial Statements (Unaudited) have beenreclassified to conform to the current period’s presentation.

 

**NOTE 2 - EARNINGS PER SHARE**

 

Basic earnings (loss)per common share is based only on the average number of shares of common stockoutstanding for the periods. Diluted earnings (loss) per common share reflectsthe effect of shares of common stock issuable upon the exercise of options,unless the effect on earnings is antidilutive.

 

Diluted earnings (loss)per common share is computed using the treasury stock method. Under thismethod, the aggregate number of shares of common stock outstanding reflects theassumed use of proceeds from the hypothetical exercise of any outstandingoptions or warrants to purchase shares of the Company’s Class A Common Stock.The average market value for the period is used as the assumed purchase price.

 

8

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

 
| ** **                                                                                                           | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                           | ** ** | **March 31,**          | ** ** |
| ** **                                                                                                           | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Numerator:                                                                                                           |       |                   |       |   |   |
| Numerator for basic and diluted earnings  (loss) per common share:                                                   |       |                   |       |   |   |
| Earnings from continuing operations                                                                                  |       | $                      | 1,108,863  |   | $ | 404,741 |   |
| Discontinued operations, net of taxes                                                                                |       | (145,459               | )          | (168,175 | ) |
| Net earnings                                                                                                         |       | $                      | 963,404    |   | $ | 236,566 |   |
|                                                                                                                 |       |                   |       |   |   |   |   |
| Denominator:                                                                                                         |       |                   |       |   |   |
| Denominator for basic earnings (loss) per  share - weighted average common shares outstanding                        |       | 3,559,922              |       | 3,515,447 |   |
| Effect of dilutive securities:                                                                                       |       |                   |       |   |   |
| Employee stock options                                                                                               |       | 315,958                |       | 117,092 |   |
| Denominator for diluted earnings (loss) per  share - adjusted weighted average common shares and assumed conversions |       | 3,875,880              |       | 3,632,539 |   |
|                                                                                                                 |       |                   |       |   |   |
| Basic earnings (loss) per common share:                                                                              |       |                   |       |   |   |
| Continuing operations                                                                                                |       | $                      | .31        |   | $ | .12 |   |
| Discontinued operations                                                                                              |       | (.04                   | )          | (.05 | ) |
| Net earnings per common share - basic                                                                                |       | $                      | .27        |   | $ | .07 |   |
|                                                                                                                 |       |                   |       |   |   |   |   |
| Diluted earnings (loss) per common share:                                                                            |       |                   |       |   |   |
| Continuing operations                                                                                                |       | $                      | .29        |   | $ | .11 |   |
| Discontinued operations                                                                                              |       | (.04                   | )          | (.04 | ) |
| Net earnings per common share - diluted                                                                              |       | $                      | .25        |   | $ | .07 |   |

 

There were outstandingduring the three-month period ended March 31, 2004 stock options whose exerciseprices were higher than the average market values of the underlying Class ACommon Stock for the period. These options are anti-dilutive and are excludedfrom the computation of earnings per share. There were no anti-dilutive stockoptions outstanding at March 31, 2005. The weighted average anti-dilutive stockoptions outstanding were as follows:

 
| ** **                                                | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **March 31,**          | ** ** |
| ** **                                                | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Weighted average anti-dilutive stock  options outstanding |       | —                 |       | 19,000 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

 

In December 2002, the FASB issued SFAS No.148, *“*Accounting for Stock Based Compensation - Transition and Disclosure”,which was issued to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, SFAS 148 amended the disclosure 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.

 

9

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The Company accounts forits stock option awards to its employees under the intrinsic value based methodof accounting prescribed by Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees.” Under the intrinsic value based method,compensation cost is the excess, if any, of the quoted market price of thestock at grant date or other measurement date over the amount an employee mustpay to acquire the stock. The Company makes pro forma disclosures of net earningsand earnings per share as if the fair value based method of accounting had beenapplied, as required by SFAS 123.

 

SFAS 123 requires theCompany to provide pro forma information regarding net earnings and earningsper share as if compensation cost for its incentive stock option plan had beendetermined in accordance with the fair value method prescribed by SFAS 123. TheCompany estimates the fair value of each stock option at the grant date byusing the Black-Scholes option-pricing model. No options were granted, andthere was no pro forma compensation expense, during the quarters ended March31, 2005 and 2004.

 

**NOTE 4 - FOREIGN CURRENCY TRANSACTIONS**

 

**Derivative Financial Instruments**

 

The Company usesderivatives to reduce its exposure to fluctuations in foreign currencies,principally Japanese yen. Derivative products, specifically foreign currencyforward contracts, are used to hedge the foreign currency market exposuresunderlying certain debt and forecasted transactions with foreign vendors. TheCompany does not enter into such contracts for speculative purposes.

 

For derivativeinstruments that are designated and qualify as fair value hedges (i.e., hedgingthe exposure to changes in the fair value of an asset or a liability or anidentified portion thereof that is attributable to a particular risk), the gainor loss on the derivative instrument as well as the offsetting gain or loss onthe hedge item attributable to the hedged risk are recognized in earnings inthe current period. For derivative instruments that are designated and qualifyas a cash flow hedge (i.e., hedging the exposure of variability in the expectedfuture cash flows that would be attributable to a particular risk), theeffective portion of the gain or loss on the derivative instrument is reportedas a component of accumulated comprehensive loss (a component of shareholders’equity) and reclassified into earnings in the same period or periods duringwhich the hedged transaction affects earnings. The remaining gain or loss onthe derivative instrument, if any (i.e., the ineffective portion and anyportion of the derivative instrument excluded from the assessment ofeffectiveness), is recognized in earnings in the current period. For derivativeinstruments not designated as hedging instruments, changes in the fair marketvalues are recognized in earnings as a component of cost of sales.

 

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 of earnings.The Company also marks its yen-denominated payables to market, recognizing anyresulting gains or losses in its statement of earnings. At March 31, 2005, theCompany had foreign currency forward contracts, maturing in 2005, to purchaseJapanese yen at contracted forward rates. The value of these contracts at March31, 2005, based on that day’s closing spot rate, was approximately $3,795,000,which was the approximate value of the Company’s yen-denominated accountspayable. During the three-month periods ended March 31, 2005 and 2004, theCompany recorded in its selling, general and administrative expenses netrealized losses of approximately $102,000 and $69,000, respectively, on foreigncurrency transactions. At March 31, 2005, the Company had no materialunrealized gains or losses on foreign currency transactions.

 

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**NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS**

 

In December 2004, the FASB issued SFAS 123R, “Share-Based Payment.”**Thisstatement is a revision of SFAS 123, “Accountingfor Stock-Based Compensation” and supersedes APB 25, “Accounting for Stock Issued to Employees,”and is effective as of the next fiscal year that begins after June 15, 2005.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 in exchangefor an award of equity instruments based on the grant-date fair value of theaward. That cost will be recognized over the period during which an employee isrequired to provide service in exchange for the award, which is usually thevesting period. SFAS 123R also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments. The adoption of this statement is not expected tohave a material effect on our financial position or results of operations. Weintend to implement the provisions of this statement in the first quarter of2006.

 

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

 

In November 2004, the FASB issued Emerging Issues Task Force (“EITF”)03-13, “Applying the Conditions inParagraph 42 of SFAS 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, in Determining Whether to Report Discontinued Operations.”**This guidance is applied to acomponent of an enterprise that is either disposed of or classified as “heldfor sale” in fiscal periods after December 15, 2004. The application of thisguidance was adopted in December 2004, as permitted, and had no material effecton our financial position or results of operations.

 

In November 2004, the FASB issued EITF 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earningsper Share,”**which iseffective for reporting periods ending after December 15, 2004*.*This consensus addresses whencontingently convertible instruments should be included in diluted earnings pershare. The application of this guidance was adopted in the first quarter of2005 and had no effect on our financial position or results of operations.

 

In October 2004, the FASB issued EITF 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meetthe Quantitative Thresholds.” The consensus addresses the issue of howan enterprise should evaluate the aggregation criteria in paragraph 17 of SFAS131, “Disclosures about Segments of anEnterprise and Related Information,”**whendetermining whether operating segments that do not meet the quantitativethresholds may be aggregated. The effective date of this issue has been delayedand is anticipated to occur in 2005 to coincide with the final issuance of theFSP (FASB Staff Position), which will provide guidance in determining whethertwo or more operating segments have similar economic characteristics. However,earlier adoption is permitted. The application of this guidance is not expectedto have a material effect on our financial position or results of operations.

 

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**NOTE 6 - DISCONTINUED OPERATIONS**

 

Green Manufacturing, Inc. –Access Division

 

Pursuant to an AssetPurchase Agreement (the “APA”), dated as of February 2, 2005, between Green,P&F and Benko Products, Inc. (“Benko”), Green sold certain of its assetscomprising its Access Division (the “Division”) to Benko. The assets soldpursuant to the APA include, among others, certain machinery and equipment,accounts receivable (“Purchased Receivables”), inventory, intellectual propertyand other intangibles. Certain assets of the Division were retained by Green,including, but not limited to, certain of the Division’s accounts receivableexisting at the consummation of the sale to Benko (the “Closing”).

 

The purchase price paid byBenko in consideration for the assets acquired pursuant to the APA wasapproximately $1,837,715, consisting of (a) a payment to Green at Closing ofapproximately $880,069; (b) $836,783 payable pursuant to the terms of aPromissory Note (“Note 1”), dated February 2, 2005, payable in various amountsover a twenty-one (21) month period commencing as of the Closing; and (c)$120,862 payable pursuant to the terms of a Promissory Note (collectively withNote 1, the “Notes”), dated February 2, 2005, payable in various amounts over afour (4) month period commencing as of the Closing. Benko agreed to payadditional consideration on an annual basis for the two (2) successive twelve(12) month periods commencing as of the Closing, dependent on certain sales byBenko, subject to certain other conditions. In addition, Benko assumed certainof Green’s contractual obligations. Pursuant to the APA, and subject to certainconditions, Benko has the option to return, and Green must purchase, certaindelinquent Purchased Receivables. The obligations of Benko under the APA andthe Notes are guaranteed by each of a principal shareholder and an affiliate ofBenko, and partially secured by certain collateral.

 

The Company recognized a gain on the sale of these assets ofapproximately $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 “Agreement”),among P&F, Green and Rosenboom Machine & Tool, Inc. (“RMT”) (anunaffiliated third party), Green sold certain of its assets comprising itsHydraulic Cylinder Division to RMT. The assets sold pursuant to the Agreementinclude, among others, property, machinery and equipment, raw materials,work-in process inventory and certain intangibles. Green also sold the land andbuilding in which the division was housed to RMT in connection with thistransaction. Green received net cash proceeds of approximately $3,679,000 and apromissory note of approximately $686,000 at the closing. In addition, Greenmay receive additional consideration based upon certain future sales by RMT. Inaddition, 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. Within 5 daysof the expiration of the term, RMT is obligated to provide Green with a list ofall unpurchased inventory and

 

12

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returnsuch inventory to Green. Based on the terms of the agreement, Green haseffectively entered into an arrangement which provides for a transfer of itsinventory to RMT prior to payment, as if it had been sold to RMT, with Greenrecording it as an other current receivable (based on the cost of the inventorywhich approximated $889,000). This treatment is based on the fact that Greenhas effectively transferred control of the inventory to RMT. RMT’s employeesmaintain control of the inventory as it is located on RMT’s premises and alsobears risk of loss, theft, destruction or any damage to the inventory. Also,all purchases by RMT are binding and non-cancelable at pre-established priceswith RMT being Green’s only customer for the one-year period.

 

The Company recognized a gain on the sale of these assets ofapproximately $134,000 ($88,000 net of tax) in the fourth quarter of 2004.

 

The following amounts related to Green’s Access division have beensegregated from the Company’s continuing operations and are reported as assetsof discontinued operations in the consolidated condensed balance sheets:

 
| ** **                              | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Current**        | ** ** | **Long-term**         | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Assets of discontinued operations:      |       |               |       |                  |       |   |   |   |   |
| Accounts receivable and inventories     |       | $                  | —     |                  | $          | — |   | $ | 796,000 |   | $ | — |   |
| Property and equipment                  |       | —             |       | —                |       | — |   | 943,000 |   |
|                                    |       |               |       |                  |       |   |   |   |   |
| Total assets of discontinued operations |       | $                  | —     |                  | $          | — |   | $ | 796,000 |   | $ | 943,000 |   |

 

The results of operations for Green’s Hydraulic Cylinder and Access divisionshave been segregated from continuing operations and are reflected on theconsolidated condensed statement of earnings as discontinued operations.Discontinued operations were as follows:

 
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues                                                      |       | $                                | 180,000    |   | $ | 2,671,000 |   |
|                                                          |       |                             |       |   |   |
| Loss from operation of discontinued  operations, before taxes |       | $                                | (327,000   | ) | $ | (254,000 | ) |
| Income tax benefit                                            |       | 111,000                          |       | 86,000 |   |
| Loss from operation of discontinued  operations               |       | (216,000                         | )          | (168,000 | ) |
| Gain on sale of discontinued operations,  before taxes        |       | 107,000                          |       | — |   |
| Income taxes                                                  |       | (36,000                          | )          | — |   |
| Gain on sale of discontinued operations                       |       | 71,000                           |       | — |   |
|                                                          |       |                             |       |   |   |
| Loss from discontinued operations                             |       | $                                | (145,000   | ) | $ | (168,000 | ) |

 

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**NOTE 7 - INVENTORIES**

 

Inventories consist of:

 
| ** **      | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| Raw material    |       | $                  | 2,947,157  |                  | $          | 3,181,939 |   |
| Work in process |       | 515,018            |       | 476,174               |       |
| Finished goods  |       | 25,471,616         |       | 22,033,267            |       |
|            |       | $                  | 28,933,791 |                  | $          | 25,691,380 |   |

 

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

 

The changes in the carrying amounts of goodwill for the three monthsended March 31, 2005 are as follows:

 
| **(In  thousands)**                                             | ** ** | **Consolidated** | ** ** | **Tools and  other  products** | ** ** | **Hardware** | ** ** | **Agricultural  equipment** | ** ** | **Heating  products** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|--------------|------------|-----------------------------|------------|-----------------------|------------|
| Balance, January 1, 2005                                        |       | $                | 22,877     |                           | $          | 2,326        |       | $                           | 20,551     |                  | $          | — |   | $ | — |   |
| Additional payments for purchase of  Nationwide Industries, Inc |       | 101              |       | —                         |       | 101          |       | —                      |       | —                |       |
| Balance, March 31, 2005                                         |       | $                | 22,978     |                           | $          | 2,326        |       | $                           | 20,652     |                  | $          | — |   | $ | — |   |

 

Other intangible assetswere as follows:

 
| ** **               | ** ** | **March 31, 2005** | ** ** | **December 31, 2004**         | ** ** |
|--------------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **               | ** ** | **Cost**           | ** ** | **Accumulated  amortization** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible assets: |       |               |       |                          |       |   |   |   |   |
| Customer relationships   |       | $                  | 9,160,000  |                          | $          | 1,471,334 |   | $ | 9,160,000 |   | $ | 1,255,334 |   |
| Vendor relationship      |       | 890,000            |       | 66,750                        |       | 890,000 |   | 44,500 |   |
| Employment agreement     |       | 760,000            |       | 443,333                       |       | 760,000 |   | 405,333 |   |
| Trademark                |       | 690,000            |       | —                        |       | 690,000 |   | — |   |
| Total                    |       | $                  | 11,500,000 |                          | $          | 1,981,417 |   | $ | 11,500,000 |   | $ | 1,705,167 |   |

 

Amortization expense for intangible assets subject to amortization wasapproximately $276,000 and $133,000 for the three-month periods ended March 31,2005 and 2004, respectively. Amortization expense for each of the years in theperiod ending March 31, 2010 is estimated to be as follows 2006 - $1,105,000; 2007 - $1,105,000; 2008 - $617,000;2009 - $573,000; and 2010 - $573,000. The weighted average amortizationperiod for intangible assets was 11.5 years at March 31, 2005 and 11.6 years atDecember 31, 2004.

 

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**NOTE 9 - WARRANTY LIABILITY**

 

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

 
| ** **                                                          | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Balance, beginning of period                                        |       | $                                | 565,874    |   | $ | 210,989 |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 141,976                          |       | 263,589 |   |
| Actual warranty costs incurred                                      |       | (154,667                         | )          | (258,084 | ) |
| Balance, end of period                                              |       | $                                | 553,183    |   | $ | 216,494 |   |
|                                                                     |            |                                  |            |  |  |  |  |  |

 

**NOTE 10 - BUSINESS SEGMENTS**

 

The Company has organized its business into fourreportable business segments: tools and other products, hardware, agricultural equipmentand heating products. TheCompany is organized around these four distinct operating segments, each ofwhich has very different end users. For reporting purposes, Florida Pneumaticand Franklin are combined in the “Tools and other products” segment and Woodmarkand Nationwide are combined in the “Hardware” segment. The FranklinManufacturing division, formerly included in the hardware segment, relocatedits operations to Florida Pneumatic in the first quarter of 2005 and is nowincluded in the “Tools and other products” segment. Prior period amounts havebeen reclassified to reflect this change. The primary reasons for taking thisaction were for, among other things, synergies between the companies in theretail channel, principally selling to the same significant customer, and otheroperational synergies. The Company evaluatessegment performance based primarily on segment operating income.

 

The following presentsfinancial information by segment for the three-month periods ended March 31, 2005and 2004. Segment operating income excludes general corporate expenses,interest expense and income taxes. Identifiable assets are those assets directlyowned or utilized by the particular business segment.

 
| **(In  Thousands)  Three months ended March 31, 2005**   | ** ** | **Consolidated** | ** ** | **Tools and  other  products** | ** ** | **Hardware** | ** ** | **Agricultural  equipment** | ** ** | **Heating  products** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|--------------|------------|-----------------------------|------------|-----------------------|------------|
| Revenues from unaffiliated customers                     |       | $                | 27,307     |                           | $          | 10,114       |       | $                           | 14,210     |                  | $          | 526 |   | $ | 2,457 |   |
| Segment operating income (loss)                          |       | 3,390            |       | $                              | 1,039      |         | $          | 2,344                       |       | $                     | 65         |   | $ | (58 | ) |
| General corporate expense                                |       | (1,084           | )          |                           |       |         |       |                        |       |                  |       |
| Interest expense – net                              |       | (426             | )          |                           |       |         |       |                        |       |                  |       |
| Earnings from continuing operations before  income taxes |       | $                | 1,880      |                           |       |         |       |                        |       |                  |       |   |
|                                                     |       |             |       |                           |       |         |       |                        |       |                  |       |
| Segment assets                                           |       | $                | 87,064     |                           | $          | 26,515       |       | $                           | 52,603     |                  | $          | 2,565 |   | $ | 5,381 |   |
| Corporate assets                                         |       | 2,409            |       |                           |       |         |       |                        |       |                  |       |
| Total assets                                             |       | $                | 89,473     |                           |       |         |       |                        |       |                  |       |   |

 

15

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| **(In  Thousands)  Three months ended March 31, 2004**   | ** ** | **Consolidated** | ** ** | **Tools and  other  products** | ** ** | **Hardware** | ** ** | **Agricultural  equipment** | ** ** | **Heating  products** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|--------------|------------|-----------------------------|------------|-----------------------|------------|
| Revenues from unaffiliated customers                     |       | $                | 16,904     |                           | $          | 10,637       |       | $                           | 3,313      |                  | $          | 449 |   | $ | 2,505 |   |
| Segment operating income (loss)                          |       | 1,782            |       | $                              | 1,101      |         | $          | 597                         |       | $                     | 89         |   | $ | (5 | ) |
| General corporate expense                                |       | (1,009           | )          |                           |       |         |       |                        |       |                  |       |
| Interest expense – net                              |       | (122             | )          |                           |       |         |       |                        |       |                  |       |
| Earnings from continuing operations before  income taxes |       | $                | 651        |                           |       |         |       |                        |       |                  |       |   |
|                                                     |       |             |       |                           |       |         |       |                        |       |                  |       |
| Segment assets                                           |       | $                | 56,471     |                           | $          | 24,568       |       | $                           | 17,459     |                  | $          | 8,543 |   | $ | 5,901 |   |
| Corporate assets                                         |       | 1,581            |       |                           |       |         |       |                        |       |                  |       |
| Total assets                                             |       | $                | 58,052     |                           |       |         |       |                        |       |                  |       |   |

 

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**Item 2****.****                                                          ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**General**

 

ThePrivate Securities Litigation Reform Act of 1995 (the “Reform Act”) provides asafe harbor for forward-looking statements made by or on behalf of P&FIndustries, Inc. and subsidiaries. The Company and its representatives may,from time to time, make written or verbal forward-looking statements, includingstatements contained in the Company’s filings with the Securities and ExchangeCommission and in its reports to stockholders. Generally, the inclusion of thewords “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” andsimilar expressions identify statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934 and that areintended to come within the safe harbor protection provided by those sections.Any forward-looking statements contained herein, including those related to theCompany’s future performance, are based upon the Company’s historicalperformance and on current plans, estimates and expectations. Suchforward-looking statements are subject to various risks and uncertaintiesidentified below. Forward-looking statements speak only as of the date on whichthey are made, and the Company undertakes no obligation to update publicly orrevise any forward-looking statement, whether as a result of new information,future developments or otherwise.

 

All forward-looking statements involve risks and uncertainties. These risks and uncertainties could cause the Company’s actual results for the 2005 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons, including, but not limited to:

 

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

 

•  The Company’s ability to maintain mutually beneficial relationships with key customers. The Company has several significant customers, including two customers that, in the aggregate, constituted approximately 25% of its consolidated revenues for the three-month period ended March 31, 2005. The loss of either of these significant customers or a material negative change in the Company’s relationships with these significant customers could have an adverse effect on its financial position and results of operations.

 

•  Adverse changes in currency exchange rates or raw material commodity prices. A significant amount of the Company’s products are manufactured outside the United States and purchased in the local currency. As a result, the Company is exposed to movements in the exchange rates of various currencies against the United States dollar. The Company believes its most significant foreign currency exposures are the Japanese yen, the Taiwan dollar (“TWD”), and, to a lesser extent, the euro.

 

•  Unforeseen inventory adjustments or changes in purchasing patterns by major customers and the resultant impact on manufacturing volumes and inventory levels. The Company makes its purchasing decisions based upon a number of factors including an assessment of market needs and preferences, manufacturing lead times and cash flow considerations. To the extent that the Company’s assumptions result in inventory levels being too high or too low, there could be a negative impact on its financial position and results of operations.

 

•  Unforeseen interruptions in the manufacturing ability of certain foreign suppliers. Although the Company believes there are redundant sources available and does maintain multiple sources for certain of its products, there may be costs and delays associated with securing such sources and there can be no assurance that such sources would provide the same quality of product at similar prices.

 

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•  Market acceptance of the new products introduced in 2004 and 2005 and other products scheduled for introduction during 2005, as well as the level of sales generated from these new products relative to expectations, based on existing investments in productive capacity and commitments by the Company to fund advertising and product promotions in connection with the introduction of these new products.

 

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

 

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

 

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

 

•  Interest rate fluctuations and other capital market conditions.

 

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

 

•  Changes in laws and regulations, including changes in accounting standards, taxation requirements, including tax rate changes, new tax laws and revised tax law interpretations, and environmental laws, in both domestic and foreign jurisdictions.

 

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

 

Thislisting is not intended to be all-inclusive. There can be no assurance that theCompany has correctly identified and appropriately assessed all factorsaffecting its business or that the publicly available and other information withrespect to these matters is complete and correct. Additional risks anduncertainties not presently known to the Company or that it currently believesto be immaterial also may adversely impact the Company. Should any risks anduncertainties develop into actual events, these developments could havematerial adverse effects on the Company’s financial position and results ofoperations.

 

**Business**

 

P& F Industries, Inc. (“P & F”) is a Delaware corporation incorporatedon April 19, 1963. P&F conducts its business operations through itsfour wholly-owned subsidiaries: Florida Pneumatic Manufacturing Corporation (“FloridaPneumatic”), Countrywide Hardware, Inc. (“Countrywide”), Green Manufacturing,Inc. (“Green”) and Embassy Industries, Inc. (“Embassy”). P&F Industries,Inc. and its subsidiaries are herein referred to collectively as the “Company.”

 

FloridaPneumatic is engaged in the importation, manufacture and sale of pneumatic handtools, primarily for the industrial, retail and automotive markets, and the importationand sale of compressor air filters. Florida Pneumatic also markets, through itsBerkley Tool division (“Berkley”), a line of pipe cutting and threading tools,wrenches and replacement electrical components for a widely-used brand of pipecutting and 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.Embassy is engaged in the manufacture and sale of baseboard heating productsand

 

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theimportation and sale of radiant heating systems and boilers. Green wasprimarily engaged in the manufacture, development and sale of heavy-duty weldedcustom designed hydraulic cylinders until it exited that business in December 2004through the sale of certain assets. Green also manufactured a line of accessequipment for the petro-chemical industry until it exited that business in February 2005,and continues to manufacture a line of post hole digging equipment for theagricultural industry. (See Note 6 to the Notes to the Consolidated CondensedFinancial Statements.) Note 10 to the Notes to Consolidated Condensed FinancialStatements presents financial information for the segments of the Company’sbusiness.

 

**Overview**

 

OnJune 30, 2004, Woodmark acquired certain assets comprising the business ofthe former Woodmark International L.P. and its wholly-owned subsidiary, theformer Stair House, Inc., and assumed certain related liabilities. The Company’sconsolidated results of operations include the results of operations forWoodmark for the three months ended March 31, 2005 within its hardwarebusiness segment.

 

Consolidatedrevenues for the quarter ended March 31, 2005 increased $10,403,000, or61.5%, from $16,904,000 to $27,307,000. There was a $48,000, or 1.9%, decreasein revenues at Embassy and a $524,000, or 4.9%, decrease in revenues at FloridaPneumatic. Revenues increased at the other two subsidiaries, with the greatestincrease at Countrywide, which included revenues at Woodmark, which wasacquired by the Company on June 30, 2004, of $9,991,000 and a $924,000, or28.0%, increase in revenues at Nationwide. Revenues at Florida Pneumaticdecreased from the comparable prior-year period primarily due to the delay in timingof a retail promotion from a significant customer expected later in the fiscalyear, partially offset by increases in base sales and new productintroductions. Gross profit increased for the quarter, due primarily toincreased revenues. Gross profit increases were offset, in part, due toincreases in the cost of raw materials and the cost of imported product due tothe weakening of the U.S. dollar versus the yen, Taiwan dollar and euro.Consolidated earnings from continuing operations increased $704,000, or 174.0%,from $405,000 to $1,109,000.

 

**CriticalAccounting Policies and Estimates**

 

TheCompany prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America.Certain of these accounting policies require the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and the related disclosure of contingent assets and liabilities,revenues and expenses. On an ongoing basis, the Company evaluates estimates,including those related to bad debts, inventory reserves, goodwill andintangible assets and warranty reserves. The Company bases its estimates onhistorical data and experience, when available, and on various otherassumptions that are believed to be reasonable under the circumstances, thecombined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates.

 

Therehave been no material changes in the Company’s critical accounting policies andestimates from those discussed in Item 7 of the Company’s Annual Report on Form10-K for the year ended December 31, 2004.

 

**ACQUISITION**

 

Foracquisitions, results of operations are included in the Consolidated CondensedFinancial Statements from the date of acquisition.

 

WoodmarkInternational L.P.

 

OnJune 30, 2004, pursuant to an Asset Purchase Agreement dated as of suchdate, Woodmark, a Delaware limited partnership owned by P&F andCountrywide, acquired certain assets (the “Purchased Property”) comprising thebusiness of the former Woodmark International L.P., a Texas limitedpartnership, and its wholly-owned subsidiary, the former Stair House, Inc., aGeorgia corporation (collectively, the “Sellers”), and

 

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assumedcertain of the Sellers’ related liabilities. Woodmark paid $31,898,000 toacquire the Purchased Property, which purchase price consisted primarily of$27,160,000 in cash and certain subordinated notes in the aggregate principalamount of $3,408,000. The purchase price was negotiated on the basis ofWoodmark’s historical financial performance. Subject to certain conditions,Woodmark also agreed to pay additional cash consideration to the Sellers afterthe third or the fifth anniversary of the closing of the acquisition if certainfinancial targets described in the Asset Purchase Agreement are met. Theacquisition of the Purchased Property was financed through the Company’s seniorcredit facility.

 

Aspart of the acquisition, the Company recorded approximately $8,840,000 in otheridentifiable intangible assets, principally related to the value of customerrelationships, and approximately $12,675,000 of goodwill through March 31,2005. (See Note 8 to the Notes to the Consolidated Condensed FinancialStatements.) 

**DISCONTINUED OPERATIONS**

 

GreenManufacturing, Inc. – Access Division

 

Pursuantto an Asset Purchase Agreement (the “APA”), dated as of February 2, 2005,between Green, P&F and Benko Products, Inc. (“Benko”), Green sold certainof its assets comprising its Access Division (the “Division”) to Benko. Theassets sold pursuant to the APA include, among others, certain machinery andequipment, accounts receivable (“Purchased Receivables”), inventory, intellectualproperty and other intangibles. Certain assets of the Division were retained byGreen, including, but not limited to, certain of the Division’s accountsreceivable existing at the consummation of the sale to Benko (the “Closing”).

 

Thepurchase price paid by Benko in consideration for the assets acquired pursuantto the APA was approximately $1,837,715, consisting of (a) a payment to Greenat Closing of approximately $880,069; (b) $836,783 payable pursuant to theterms of a Promissory Note (“Note 1”), dated February 2, 2005, payable invarious amounts over a twenty-one (21) month period commencing as of theClosing; and (c) $120,862 payable pursuant to the terms of a Promissory Note(collectively with Note 1, the “Notes”), dated February 2, 2005, payablein various amounts over a four (4) month period commencing as of the Closing.Benko agreed to pay additional consideration on an annual basis for the two (2)successive twelve (12) month periods commencing as of the Closing, dependent oncertain sales by Benko, subject to certain other conditions. In addition, Benkoassumed certain of Green’s contractual obligations. Pursuant to the APA, andsubject to certain conditions, Benko has the option to return, and Green mustpurchase, certain delinquent Purchased Receivables. The obligations of Benkounder the APA and the Notes are guaranteed by each of a principal shareholderand an affiliate 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.

 

GreenManufacturing, Inc. – Hydraulic Cylinder Division

 

InDecember 2004, pursuant to an Asset Purchase Agreement and other relateddocuments (collectively, the “Agreement”), among P&F, Green and RosenboomMachine & Tool, Inc. (“RMT”) (an unaffiliated third party), Green soldcertain of its assets comprising its Hydraulic Cylinder Division to RMT. Theassets sold pursuant to the Agreement include, among others, property, machineryand equipment, raw materials, work-in process inventory and certainintangibles. Green also sold the land and building in which the division washoused to RMT in connection with this transaction. Green received net cashproceeds of approximately $3,679,000 and a promissory note of approximately$686,000 at the closing. In addition, Green may receive additionalconsideration based upon certain future sales by RMT. In addition, RMT hasagreed 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.

 

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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. Within 5 daysof the expiration of the term, RMT is obligated to provide Green with a list ofall unpurchased inventory and return such inventory to Green. Based on the termsof the agreement, Green has effectively entered into an arrangement whichprovides for a transfer of its inventory to RMT prior to payment, as if it hadbeen sold to RMT, with Green recording it as an other current receivable (basedon the cost of the inventory which approximated $889,000). This treatment isbased on the fact that Green has effectively transferred control of theinventory to RMT. RMT’s employees maintain control of the inventory as it islocated on RMT’s premises and also bears risk of loss, theft, destruction orany damage to the inventory. Also, all purchases by RMT are binding andnon-cancelable at pre-established prices with RMT being Green’s only customerfor the one-year period.

 

TheCompany recognized a gain on the sale of these assets of approximately $134,000($88,000 net of tax) in the fourth quarter of 2004.

 

Thefollowing amounts related to Green’s Access division have been segregated fromthe Company’s continuing operations and are reported as assets of discontinuedoperations in the consolidated condensed balance sheets:

 
| ** **                              | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Current**             | ** ** | **Long-term**              | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Assets of discontinued operations:      |       |                    |       |                       |       |   |   |   |   |
| Accounts receivable and inventories     |       | $                       | —     |                       | $          | — |   | $ | 796,000 |   | $ | — |   |
| Property and equipment                  |       | —                  |       | —                     |       | — |   | 943,000 |   |
|                                    |       |                    |       |                       |       |   |   |   |   |
| Total assets of discontinued operations |       | $                       | —     |                       | $          | — |   | $ | 796,000 |   | $ | 943,000 |   |

 

Theresults of operations for Green’s Hydraulic Cylinder and Access divisions havebeen segregated from continuing operations and are reflected on theconsolidated condensed statement of earnings as discontinued operations.Discontinued operations were as follows:

 
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Revenues                                                      |       | $                                     | 180,000    |   | $ | 2,671,000 |   |
|                                                          |       |                                  |       |   |   |
| Loss from operation of discontinued  operations, before taxes |       | $                                     | (327,000   | ) | $ | (254,000 | ) |
| Income tax benefit                                            |       | 111,000                               |       | 86,000 |   |
| Loss from operation of discontinued  operations               |       | (216,000                              | )          | (168,000 | ) |
|                                                          |       |                                  |       |   |   |
| Gain on sale of discontinued operations,  before taxes        |       | 107,000                               |       | — |   |
| Income taxes                                                  |       | (36,000                               | )          | — |   |
| Gain on sale of discontinued operations                       |       | 71,000                                |       | — |   |
|                                                          |       |                                  |       |   |   |
| Loss from discontinued operations                             |       | $                                     | (145,000   | ) | $ | (168,000 | ) |

 

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**RESULTSOF OPERATIONS**

 

**Quartersended March 31, 2005 and March 31, 2004**

 

**Revenues**

 

Revenuesfor the quarters ended March 31, 2005 and 2004 were as follows:

 
| **Three  months  ended  March 31,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** | **Agricultural  equipment** | ** ** | **Heating  products** | ** ** |
|------------------------------------------|------------|------------------|------------|-------------------------------|------------|--------------|------------|-----------------------------|------------|-----------------------|------------|
| **2005**                                 |       | $                | 27,307,000 |                          | $          | 10,114,000   |       | $                           | 14,210,000 |                  | $          | 526,000 |   | $ | 2,457,000 |   |
|                                     |       |             |       |                          |       |         |       |                        |       |                  |       |
| **2004**                                 |       | $                | 16,904,000 |                          | $          | 10,637,000   |       | $                           | 3,313,000  |                  | $          | 449,000 |   | $ | 2,505,000 |   |
|                                     |       |             |       |                          |       |         |       |                        |       |                  |       |
| **% increase  (decrease)**               |       | 61.5             | %          | (4.9                          | )%         | 329.0        | %          | 17.1                        | %          | (1.9                  | )%         |

 

Revenuesfrom tools and other products decreased due primarily to the delay in timing ofa retail promotion from a significant customer expected later in the fiscalyear and a further reduction in sales to a previously significant customer inthe first quarter of 2005 versus the first quarter of 2004, partially offset byincreases in base sales, including new product introductions of approximately$900,000. Revenues from our automotive customers have decreased due primarilyto the lack of inventory-stocking accounts that were obtained in 2004, as wellas no significant 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.

 

Revenuesfrom hardware increased significantly as a result of the acquisition ofWoodmark, which recorded approximately $10,000,000 in revenues during the firstquarter of 2005. Revenues from the sale of staircase components continue toincrease, benefiting from strong new housing starts. These revenues have more thanoffset weakness in demand for our kitchen and bath products sold into themobile home and remodeling markets. Moreover, Nationwide’s revenues increasedby approximately $924,000, or 28.0%, primarily attributable to an increase ofapproximately $445,000 in sales of fencing products, and increases in our OEMand patio hardware products of $384,000, or 43.5%, and $92,000, or 12.8%,respectively, which were due primarily to the addition of new customers in OEMand to greater sale of patio products resulting from reconstruction followingthe hurricanes in Florida last year.

 

Revenuesfrom agricultural equipment increased primarily due to the addition of a newcustomer.

 

Revenuesfrom heating products were essentially flat for the quarterly period. Althoughsales of our standard baseboard products continued their growth resulting fromstrong housing starts, especially in the northeast, sales of our commercialproduct and boilers were weak. However, we have actively engaged in the biddingprocess for several large projects, the nature of which can cause revenues tofluctuate quarter to quarter. Selling prices of certain baseboard heatingproducts were increased late in the first quarter to offset rising costs ofmaterials but such price increases did not significantly impact revenuesreported in the period.

 

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

 

**Gross Profits**

 

Grossprofits for the quarters ended March 31, 2005 and 2004 were as follows:

 
| **Three  months  ended  March 31,** | ** ** | **Consolidated** | ** ** | **Tools and  other  products** | ** ** | **Hardware** | ** ** | **Agricultural  equipment** | ** ** | **Heating  products** | ** ** |
|------------------------------------------|------------|------------------|------------|--------------------------------|------------|--------------|------------|-----------------------------|------------|-----------------------|------------|
| **2005**                                 |       | $                | 8,435,000  |                           | $          | 3,141,000    |       | $                           | 4,575,000  |                  | $          | 90,000 |   | $ | 629,000 |   |
|                                     |       | 30.9             | %          | 31.1                           | %          | 32.2         | %          | 17.1                        | %          | 25.6                  | %          |
|                                     |       |             |       |                           |       |         |       |                        |       |                  |       |
| **2004**                                 |       | $                | 5,455,000  |                           | $          | 3,398,000    |       | $                           | 1,223,000  |                  | $          | 104,000 |   | $ | 730,000 |   |
|                                     |       | 32.3             | %          | 31.9                           | %          | 36.9         | %          | 23.2                        | %          | 29.1                  | %          |

 

Thedecrease in the gross profit percentage from tools and other products was dueprimarily to the impact of the weakness of the U.S. dollar in relation to theJapanese yen and the Taiwan dollar, partially offset by a favorable product mix.The decrease in the gross profit percentage from hardware was due primarily tothe inclusion of Woodmark, whose gross profit percentage was less than thissegment’s comparable prior-year period average. The gross profit percentage forNationwide, the other company in the hardware segment was 36.5%. The decreasein the gross profit percentage from agricultural equipment was due primarily toincreases in raw material costs which were not able to be recovered throughincreased selling prices, as well as increased costs associated with thetemporary outsourcing of our manufactured products while we transition thisproduct line to another location. The decrease in the gross profit percentagefrom heating products was due primarily to increases in steel and other rawmaterial costs, prompting an increase in certain selling prices late in thefirst quarter.

 

**Selling, General and Administrative Expenses**

 

Consolidatedselling, general and administrative (“SG&A”) expenses increased $1,446,000,or 30.9%, from $4,682,000 to $6,128,000. SG&A expenses increased dueprimarily to the inclusion of $1,444,000 of expenses related to Woodmark,increased compensation tied to higher profitability and increases related toprofessional fees, mainly related to corporate compliance and reportingrequirements, increased personnel-related expenses resulting from increasingrevenues, offset by a reduction in certain warranty expenses and certainnon-recurring legal expenses that were incurred in the prior year. However, dueto increases in revenues, SG&A expenses as a percentage of revenuesdecreased from 27.7% to 22.4%.

 

**Interest - Net**

 

Netinterest expense increased $305,000, or 250%, from $121,000 to $426,000, dueprimarily to the amounts borrowed under the Company’s term loan facility tofinance the Woodmark acquisition transaction on June 30, 2004, as well asthe issuance and assumption of certain notes related thereto. Interest expenseon borrowings under the term loan facility increased by approximately $233,000and interest expense on the acquisition-related notes approximated $33,000.Interest expense on borrowings under the Company’s revolving credit loanfacility increased by approximately $32,000, as a result of both higher averageborrowings and higher average interest rates.

 

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**Taxes on Income**

 

Theeffective tax rates applicable to earnings from continuing operations for thequarters ended March 31, 2005 and 2004 were 41.0% and 37.8%, respectively.The increase in the effective tax rate was due primarily to an increase inexpenses that are not deductible for tax purposes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cash flows from operations arecyclical, with the greatest demand in the second and third quarters followed bypositive cash flows inthe fourth quarter as receivables and inventories trend down. Due to its strongasset base, predictable cash flows and favorable banking relationships, theCompany believes it has adequate access to capital, if and when needed. TheCompany monitors average days sales outstanding, inventory turns and capitalexpenditures to project liquidity needs and evaluate return on assets employed.

 

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

 
| ** **                | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** | **March 31, 2004** | ** ** |
|---------------------------|------------|-------------------------|------------|----------------------------|------------|-------------------------|------------|
| Working Capital           |       | $                       | 27,983     |                       | $          | 29,530                  |       | $ | 21,154 |   |
|                      |       |                    |       |                       |       |                    |       |
| Current Ratio             |       | 2.48 to 1               |       | 2.72 to 1                  |       | 2.76 to 1               |       |
|                      |       |                    |       |                       |       |                    |       |
| Shareholders’ Equity |       | $                       | 42,206     |                       | $          | 41,168                  |       | $ | 37,245 |   |

 

OnJune 30, 2004, Woodmark acquired certain assets comprising the business ofthe former Woodmark International L.P. and its wholly-owned subsidiary, theformer Stair House, Inc., and assumed certain related liabilities.

 

Cashdecreased $1,068,000, from $1,190,000 as of December 31, 2004 to $122,000,as of March 31, 2005. The Company’s debt levels decreased, from$38,910,000 at December 31, 2004 to $37,073,000 at March 31, 2005,due primarily to the payments made on its debt related to the aforementionedWoodmark acquisition. The Company’s total percent of debt to total bookcapitalization decreased from 48.6% at December 31, 2004 to 46.8% at March 31,2005.

 

Inconnection with Countrywide’s acquisition of all of the stock of Nationwide in2002, the Company is 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.These contingent earnout payments have been and will be treated as additions togoodwill. During 2005, the Company recorded net additions to goodwill ofapproximately $101,000, related to contingent earnout payments.

 

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

 

Cash used in operating activities was approximately$1,409,000 and $250,000 for the quarters ended March 31, 2005 and 2004,respectively. The Company believes that cash on hand derived from operationsand cash available through borrowings under its credit facilities will besufficient to allow the Company to meet its foreseeable working capital needs.

 

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Duringthe first quarter of 2005, gross accounts receivable decreased by approximately$1,632,000 in the aggregate. Increases (decreases) were approximately $885,000 $(1,775,000),$(584,000) and $(158,000) at Countrywide, Green, Florida Pneumatic and Embassy,respectively. These changes were all primarily related to the respectivecompanies’ sales volume for the period, with the exception of Green, whosereduction was principally related to the collection of outstanding accountsreceivable from the discontinued operations of its hydraulic cylinder andaccess equipment divisions.

 

Duringthe first quarter of 2005, inventories increased by approximately $3,233,000 inthe aggregate. Increases (decreases) were approximately $2,375,000, $790,000, $136,000and $(68,000) at Florida Pneumatic, Countrywide, Embassy and Green, respectively.The increase in inventories at Florida Pneumatic was due primarily to thestocking of inventory related to anticipated sales promotions with its twomajor customers. The increase at Countrywide was due primarily to the stockingof inventories in preparation for the upcoming fencing season.

 

Duringthe first quarter of 2005, short-term borrowings increased by $1,500,000,primarily to fund working capital needs.

 

Duringthe first quarter of 2005, accounts payable increased by approximately $223,000in the aggregate. Increases (decreases) were approximately $288,000, $20,000,$(45,000) and $(40,000) at Florida Pneumatic, Countrywide, Embassy and Green,respectively. These changes were all due primarily to the timing of paymentsassociated with inventory purchases.

 

OnJune 30, 2004, in conjunction with the Woodmark acquisition transaction,the Company entered into a credit agreement with Citibank and another bank.This agreement provides the Company with various credit facilities, includingrevolving credit loans, term loans for acquisitions and a foreign exchangeline. The credit agreement is subject to annual review by the banks.

 

Therevolving credit loan facility provides a maximum of $12,000,000, with varioussublimits, for direct borrowings, letters of credit, bankers’ acceptances andequipment loans. There are no commitment fees for any unused portion of thiscredit facility. At March 31, 2005, there was $5,500,000 outstandingagainst the revolving credit loan facility, and there were no open letters ofcredit.

 

Theterm loan facility provides a maximum commitment of $34,000,000 to financeacquisitions subject to the approval of the lending banks. There are nocommitment fees for any unused portion of this credit facility. The Companyborrowed $29,000,000 against this facility to finance the Woodmark acquisitiontransaction, and there was $23,750,000 outstanding against the term loanfacility at March 31, 2005.

 

Theforeign exchange line provides for the availability of up to $10,000,000 inforeign currency forward contracts. These contracts fix the exchange rate onfuture purchases of Japanese yen needed for payments to foreign suppliers. Thetotal amount of foreign currency forward contracts outstanding under theforeign exchange line at March 31, 2005, based on that day’s closing spotrate, was approximately $3,795,000.

 

Underits credit agreement, the Company is required to adhere to certain financialcovenants. Certain of the Company’s mortgage agreements also require theCompany to adhere to certain financial covenants. At March 31, 2005, theCompany was in compliance with all of these covenants.

 

Capitalspending for the three-month periods ending March 31, 2005 and 2004 wasapproximately $175,000 and $226,000, respectively, which amounts were providedfrom working capital. Capital expenditures for the balance of fiscal 2005 areexpected to be approximately $500,000, some of which may be financed throughthe Company’s credit facilities. Included in the expected total for 2005 arecapital expenditures relating to new products, expansion of existing productlines and replacement of equipment.

 

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**OFF-BALANCESHEET ARRANGEMENTS**

 

TheCompany’s foreign exchange line provides for the availability of up to $10,000,000in foreign currency forward contracts. These contracts fix the exchange rate onfuture purchases of foreign currencies needed for payments to foreignsuppliers. The Company has not purchased forward contracts on New Taiwandollars or euros. The total amount of foreign currency forward contractsoutstanding at March 31, 2005, based on that day’s closing spot rate, wasapproximately $3,795,000.

 

TheCompany, through Florida Pneumatic, imports a significant amount of itspurchases from Japan, with payment due in Japanese yen. As a result, theCompany is subject to the effects of foreign currency exchange fluctuations.The Company uses a variety of techniques to protect itself from any adverseeffects from these fluctuations, including increasing its selling prices,obtaining price reductions from its overseas suppliers, using alternativesupplier sources and entering into foreign currency forward contracts. Theincrease in the strength of the Japanese yen versus the U.S. dollar from 2004to 2005 had a negative effect on the Company’s results of operations and itsfinancial position. Since December 31, 2004, the relative value of the U.Sdollar in relation to the Japanese yen has increased slightly. There can be noassurance as to the future trend of this value. (See “Item 3 - Quantitative andQualitative Disclosures About Market Risk.”)

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

SeeNote 5 to the Notes to Consolidated Condensed Financial Statements included inItem 1 of this report.

 

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

 

TheCompany is exposed to market risks, which include changes in U.S. andinternational exchange rates, the prices of certain commodities and currencyrates as measured against the U.S. dollar and each other. The Company attemptsto reduce the risks related to foreign currency fluctuation by utilizingfinancial instruments, pursuant to Company policy.

 

Thevalue of the U.S. dollar affects the Company’s financial results. Changes inexchange rates may positively or negatively affect the Company’s gross marginsthrough its inventory purchases and operating expenses through realized foreignexchange gains or losses. The Company engages in hedging programs aimed atlimiting, in part, the impact of currency fluctuations. Using primarily forwardexchange contracts, the Company hedges some of those transactions that, whenremeasured according to accounting principles generally accepted in the UnitedStates of America, impact the statement of operations. Factors that couldimpact the effectiveness of the Company’s programs include volatility of thecurrency markets and availability of hedging instruments. All currencycontracts that are entered into by the Company are components of hedgingprograms and are entered into not for speculation but for the sole purpose ofhedging an existing or anticipated currency exposure. The Company does not buyor sell financial instruments for trading purposes. Although the Companymaintains these programs to reduce the impact of changes in currency exchangerates, when the U.S. dollar sustains a weakening exchange rate againstcurrencies in which the Company incurs costs, the Company’s costs are adverselyaffected.

 

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 operations. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of operations. At March 31, 2005, the Company had foreigncurrency forward contracts, maturing in 2005, to purchase Japanese yen atcontracted forward rates. The value of these contracts at March 31, 2005,based on that day’s closing spot rate, was approximately $3,795,000, which wasthe approximate value of the Company’s corresponding yen-denominated accountspayable. For the quarters ended March 31, 2005 and 2004, the Companyrecorded in its selling, general and administrative expenses net realized lossesof approximately $102,000 and $69,000, respectively, on foreign currencytransactions. At March 31, 2005, the Company had no material unrealizedgains or losses on foreign currency transactions.

 

Thepotential loss in value of the Company’s net investment in foreign currencyforward contracts resulting from a hypothetical 10 percent adverse change inforeign currency exchange rates at March 31, 2005 was approximately $433,000.

 

TheCompany has various debt instruments that bear interest at variable rates tiedto LIBOR (London InterBank Offered Rate). Any increase in LIBOR would have anadverse effect on the Company’s interest costs. In addition to affectingoperating results, adverse changes in interest rates could impact the Company’saccess to capital, certain merger and acquisition strategies and the level ofcapital expenditures.

 

Thecarrying amounts reported in the consolidated balance sheets for cash and cashequivalents, accounts receivable, accounts payable and short-term debt,approximate fair value as of March 31, 2005 because of the relativelyshort-term maturity of these financial instruments. The carrying amountsreported for long-term debt approximate fair value as of March 31, 2005because, in general, the interest rates underlying the instruments fluctuatewith market rates.

 

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

 

**Evaluation of disclosure controls and procedures**

 

An evaluation was performed, under the supervision of, and with the participation of, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities and Exchange Act of 1934). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were adequate and effective, as of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (this “Report”), in timely alerting them to all material information relating to the Company and its consolidated subsidiaries that is required to be included in this Report.

 

**Changes in internal controls**

 

There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

28

 

**PART II****- OTHER INFORMATION**

 

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

 

TheCompany is a defendant or co-defendant in various actions brought about in theordinary course of conducting its business. The Company does not believe thatany of these actions are material to the financial condition of the Company.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

See“Exhibit Index” immediately following the signature page.

 

29

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                 |   | **P & F INDUSTRIES, INC.**                 |
|----------------------|--------|------------------------------------------------|
|                 |   | (Registrant)                                   |
|                 |   |                                           |
|                 |   |                                           |
|                 |   | By   /s/  Joseph A. Molino, Jr. |   |
|                 |   | Joseph  A. Molino, Jr.                         |
|                 |   | Vice  President                                |
| Dated:  May 13, 2005 |   | (Principal  Financial Officer)                 |

 

30

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

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.1**             |       | Asset  Purchase Agreement, dated as of September 16, 1998, by and between Green  Manufacturing, Inc., an Ohio corporation, and the Registrant (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2003). Pursuant to Item  601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request.                                                                                                                                                                                                                                                           |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.2**             |       | Stock  Purchase Agreement, dated as of May 3, 2002, by and between Mark C. Weldon  and the Registrant (Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K dated May 3, 2002). Pursuant to Item 601(b)(2)  of Regulation S-K, the Registrant agrees to furnish supplementally a copy of  any exhibit or schedule omitted from the Stock Purchase Agreement to the  Securities and Exchange Commission upon request.                                                                                                                                                                                                                                                                                                             |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.3**             |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.4**             |       | 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. |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.5**             |       | Asset  Purchase Agreement, dated December 13, 2004, among Rosenboom Machine  & Tool, Inc., Green Manufacturing, Inc. and P&F Industries, Inc.  (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report  on Form 8-K dated December 17, 2004, and amended March 4, 2005).  Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish, supplementally, a copy of any exhibit or schedule omitted from  the Asset Purchase Agreement to the Commission upon request.                                                                                                                                                                                                                                       |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.6**             |       | Asset  Purchase Agreement, dated as of February 2, 2005, between Green  Manufacturing, Inc. and Benko Products, Inc. (Incorporated by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated February 4,  2005). Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish, supplementally, a copy of any exhibit or schedule omitted from  the Asset Purchase Agreement to the Commission upon request.                                                                                                                                                                                                                                                                                                          |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

31

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| **3.3**    |       | Amendment  to the Amended By-laws of the Registrant (Incorporated by reference to  Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated March 18,  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 July 23, 1998, by and among the Registrant,  Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy  Industries, Inc., a New York corporation, and European American Bank, a New  York banking corporation (Incorporated by reference to Exhibit 4.3 to the  Registrant’s Annual Report on Form  10-K for the fiscal year ended December 31, 2003).                                                                                                                 |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.3**    |       | Amendment  No. 1 to Credit Agreement, dated as of September 16, 1998, by and among  the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.4 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31,  2003).                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.4**    |       | Amendment  No. 2 to Credit Agreement, dated as of July 28, 1999, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.4 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31,  2004).                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.5**    |       | Amendment  No. 3 to Credit Agreement, dated as of July 26, 2000, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.5 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2000).                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.6**    |       | Amendment  No. 4 to Credit Agreement, dated as of June 25, 2001, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2001).                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.7**    |       | Amendment  No. 5 to Credit Agreement, dated as of May 3, 2002, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green Manufacturing,  Inc., a Delaware corporation, and Citibank, N.A. (successor-in-interest to  European American Bank), a New York banking corporation (Incorporated by  reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2002). |

 

32

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| **4.8**    |       | Amendment  No. 6 to Credit Agreement, dated as of June 13, 2002, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and Citibank, N.A.  (successor-in-interest to European American Bank), a New York banking  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).                                                                                                                          |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.9**    |       | Amendment  No. 7 to Credit Agreement, dated as of August 1, 2002, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking 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).       |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.10**   |       | Amendment  No. 8 to Credit Agreement, dated as of August 1, 2002, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking corporation (Incorporated by reference to Exhibit 4.11 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2002). |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.11**   |       | Second  Amendment and Restated Term Note, dated as of February 20, 2003, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking corporation (Incorporated by reference to Exhibit 4.11 to the  Registrant’s Annual Report on Form 10-K for the year ended December 31,  2002).      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.12**   |       | Amendment  No. 9 to Credit Agreement, dated as of June 30, 2003, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking corporation (Incorporated by reference to Exhibit 4.11 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2003).            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.13**   |       | 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).                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.14**   |       | 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.                                                                                                                                                                                                                                                                                                                                                         |

 

33

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| **10.1**   |       | Second  Amended and Restated Employment Agreement, dated as of May 30, 2001, between  the Registrant and Richard A. Horowitz (Incorporated by reference to Exhibit  10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2001). |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                  |
| **10.2**   |       | 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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