**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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| **x**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** **                                                                                    |
| **For the  Quarterly Period Ended September 30, 2006**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** **                                                                                    |
| **For the  transition period from                           to                                                 ** |

** **

**Commission File Number 1 - 5332**

**P&FINDUSTRIES, INC.**

(Exactname of registrant as specified in its charter)

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

** **

| **445 Broadhollow Road, Suite 100, Melville, New York** |   | **11747**  |
|---------------------------------------------------------|--------|------------|
| (Address of  principal executive offices)               |   | (Zip Code) |

 

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

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days. Yes  x    No  o

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

LargeAccelerated Filer o Accelerated Filer  o  Non-Accelerated Filer  x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes   o     No   x

As ofNovember 10, 2006, there were 3,577,760 shares of the registrant’s Class ACommon Stock outstanding.

 

 

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**P&F INDUSTRIES, INC.**

**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2006**

**TABLE OF CONTENTS**
|                                         | ** **                                                                                                                | **PAGE** |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I — FINANCIAL INFORMATION** |                                                                                                                      |
| ** **                              |                                                                                                                      |
| Item 1.                                 | Financial Statements (unaudited)                                                                                          |     |
|                                    |                                                                                                                      |     |
|                                    | Consolidated  Condensed Balance Sheets as of September 30, 2006 and December 31, 2005                                     | 1        |
|                                    |                                                                                                                      |     |
|                                    | Consolidated  Condensed Statements of Earnings for the Three months and Nine months ended September  30, 2006 and 2005    | 3        |
|                                    |                                                                                                                      |     |
|                                    | Consolidated  Condensed Statement of Shareholders’ Equity for the period from January 1,  2006 to September 30, 2006 | 4        |
|                                    |                                                                                                                      |     |
|                                    | Consolidated  Condensed Statements of Cash Flows for the Nine months ended September 30,  2006 and 2005                   | 5        |
|                                    |                                                                                                                      |     |
|                                    | Notes to  Consolidated Condensed Financial Statements                                                                     | 8        |
|                                    |                                                                                                                      |     |
| Item 2.                                 | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                               | 25       |
|                                    |                                                                                                                      |     |
| Item 3.                                 | Quantitative and Qualitative Disclosures About  Market Risk                                                               | 40       |
|                                    |                                                                                                                      |     |
| Item 4.                                 | Controls and Procedures                                                                                                   | 41       |
|                                    |                                                                                                                      |     |
| **PART II — OTHER INFORMATION**    |                                                                                                                      |
| ** **                              |                                                                                                                      |
| Item 1.                                 | Legal Proceedings                                                                                                         | 43       |
|                                    |                                                                                                                      |     |
| Item 1A.                                | Risk Factors                                                                                                              | 43       |
|                                    |                                                                                                                      |     |
| Item 2.                                 | Unregistered Sales of Equity Securities and Use of  Proceeds                                                              | 43       |
|                                    |                                                                                                                      |     |
| Item 3.                                 | Defaults Upon Senior Securities                                                                                           | 43       |
|                                    |                                                                                                                      |     |
| Item 4.                                 | Submission of Matters to a Vote of Security Holders                                                                       | 43       |
|                                    |                                                                                                                      |     |
| Item 5.                                 | Other Information                                                                                                         | 43       |
|                                    |                                                                                                                      |     |
| Item 6.                                 | Exhibits                                                                                                                  | 43       |
|                                    |                                                                                                                      |     |
| **Signatures**                          |                                                                                                                      | 44       |
| ** **                              |                                                                                                                      |     |
| **Exhibit  Index**                      |                                                                                                                      | 45       |
|                                         |                                                                                                                           |          |  |

 

i

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**PART I - FINANCIAL INFORMATION**

**Item 1.                    FinancialStatements**

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

**CONSOLIDATED CONDENSED BALANCE SHEETS**
| ** **                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**              | ** ** | **(derived from**      | ** ** |
| ** **                                      | ** ** | ** **                   | ** ** | **audited financial**  | ** ** |
| ** **                                      | ** ** | ** **                   | ** ** | **statements)**             | ** ** |
| **ASSETS**                                      |       |                         |       |                        | ** ** |
| CURRENT                                         |       |                         |       |                        | ** ** |
| Cash and cash  equivalents                      |       | $                            | 1,373,132  |                        | $          | 1,771,624 |   |
| Accounts  receivable — net                 |       | 18,709,934                   |       | 12,567,256                  |       |
| Notes and other  receivables                    |       | 837,256                      |       | 2,727,393                   |       |
| Inventories —  net                         |       | 27,346,342                   |       | 26,173,990                  |       |
| Deferred income  taxes — net               |       | 1,496,000                    |       | 1,496,000                   |       |
| Assets held for  sale                           |       | 575,519                      |       | 623,519                     |       |
| Assets of  discontinued operations              |       | 315,829                      |       | 76,538                      |       |
| Prepaid expenses  and other current assets      |       | 1,509,581                    |       | 1,111,164                   |       |
| TOTAL CURRENT  ASSETS                           |       | 52,163,593                   |       | 46,547,484                  |       |
|                                            |       |                         |       |                        |       |
| PROPERTY AND EQUIPMENT                          |       |                         |       |                        |       |
| Land                                            |       | 1,174,773                    |       | 1,174,773                   |       |
| Buildings and  improvements                     |       | 5,614,131                    |       | 5,219,993                   |       |
| Machinery and  equipment                        |       | 9,200,484                    |       | 8,087,469                   |       |
|                                            |       | 15,989,388                   |       | 14,482,235                  |       |
| Less accumulated  depreciation and amortization |       | 8,301,001                    |       | 7,620,626                   |       |
| NET PROPERTY AND  EQUIPMENT                     |       | 7,688,387                    |       | 6,861,609                   |       |
|                                            |       |                         |       |                        |       |
| GOODWILL                                        |       | 24,763,793                   |       | 23,821,240                  |       |
|                                            |       |                         |       |                        |       |
| OTHER INTANGIBLE ASSETS  — net             |       | 11,196,709                   |       | 8,794,833                   |       |
|                                            |       |                         |       |                        |       |
| OTHER ASSETS — net                         |       | 506,953                      |       | 808,381                     |       |
|                                            |       |                         |       |                        |       |
| TOTAL ASSETS                                    |       | $                            | 96,319,435 |                        | $          | 86,833,547 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

1

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| ** **                                                                                                                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(unaudited)**              | ** ** | **(derived from**      | ** ** |
| ** **                                                                                                                                           | ** ** | ** **                   | ** ** | **audited financial**  | ** ** |
| ** **                                                                                                                                           | ** ** | ** **                   | ** ** | **statements)**             | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                        |       |                         |       |                        |       |
| ** **                                                                                                                                           |       |                         |       |                        |       |
| CURRENT  LIABILITIES                                                                                                                                 |       |                         |       |                        |       |
| Short-term borrowings                                                                                                                                |       | $                            | 5,500,000  |                        | $          | 3,000,000 |   |
| Accounts payable                                                                                                                                     |       | 9,256,832                    |       | 2,927,133                   |       |
| Income taxes payable                                                                                                                                 |       | 535,062                      |       | 1,366,146                   |       |
| Accrued compensation                                                                                                                                 |       | 2,241,443                    |       | 2,518,196                   |       |
| Other accrued liabilities                                                                                                                            |       | 4,180,522                    |       | 2,338,909                   |       |
| Current maturities of long-term debt                                                                                                                 |       | 7,547,956                    |       | 4,058,729                   |       |
| Liabilities of discontinued operations                                                                                                               |       | 1,737,824                    |       | 2,357,573                   |       |
| TOTAL CURRENT LIABILITIES                                                                                                                            |       | 30,999,639                   |       | 18,566,686                  |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| LONG-TERM DEBT,  less current maturities                                                                                                             |       | 13,074,586                   |       | 19,572,651                  |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| DEFERRED INCOME  TAXES — net                                                                                                                    |       | 978,000                      |       | 978,000                     |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| TOTAL LIABILITIES                                                                                                                                    |       | 45,052,225                   |       | 39,117,337                  |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                       |       |                         |       |                        |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| SHAREHOLDERS’  EQUITY                                                                                                                           |       |                         |       |                        |       |
| Preferred stock - $10 par; authorized - 2,000,000  shares; no shares outstanding                                                                     |       | —                       |       | —                      |       |
| Common stock                                                                                                                                         |       |                         |       |                        |       |
| Class A - $1 par; authorized - 7,000,000 shares;  issued - 3,850,367 and 3,814,367 shares at September 30, 2006 and December  31, 2005, respectively |       | 3,850,367                    |       | 3,814,367                   |       |
| Class B - $1 par; authorized - 2,000,000 shares; no  shares issued                                                                                   |       | —                       |       | —                      |       |
| Additional paid-in capital                                                                                                                           |       | 9,173,807                    |       | 8,947,855                   |       |
| Retained earnings                                                                                                                                    |       | 40,614,213                   |       | 36,969,119                  |       |
| Treasury stock, at cost - 272,607 and 244,576 shares  at September 30, 2006 and December 31, 2005, respectively                                      |       | (2,371,177                   | )          | (2,015,131                  | )          |
|                                                                                                                                                 |       |                         |       |                        |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                      |       | 51,267,210                   |       | 47,716,210                  |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                     |       | $                            | 96,319,435 |                        | $          | 86,833,547 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

2

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

**CONSOLIDATED CONDENSED STATEMENTS OFEARNINGS (unaudited)**

** **
| ** **                                                                                                                                          | ** ** | **Three months**             | ** ** | **Nine months**              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **ended September 30,** | ** ** | **ended September 30,** | ** ** |
| ** **                                                                                                                                          | ** ** | **2006**                          | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                                                                                                                                        |       | $                                 | 32,318,961 |                              | $          | 29,754,959 |   | $ | 88,028,825 |   | $ | 82,209,282 |   |
| Cost of sales                                                                                                                                       |       | 22,617,245                        |       | 20,682,189                        |       | 60,671,557 |   | 56,288,976 |   |
| Gross profit                                                                                                                                        |       | 9,701,716                         |       | 9,072,770                         |       | 27,357,268 |   | 25,920,306 |   |
| Selling, general  and administrative expenses                                                                                                       |       | 6,715,792                         |       | 6,439,811                         |       | 19,763,637 |   | 17,976,878 |   |
| Operating income                                                                                                                                    |       | 2,985,924                         |       | 2,632,959                         |       | 7,593,631 |   | 7,943,428 |   |
| Interest expense  — net                                                                                                                        |       | 493,495                           |       | 530,488                           |       | 1,507,507 |   | 1,431,591 |   |
| Earnings from  continuing operations before income taxes                                                                                            |       | 2,492,429                         |       | 2,102,471                         |       | 6,086,124 |   | 6,511,837 |   |
| Income taxes                                                                                                                                        |       | 997,000                           |       | 889,000                           |       | 2,435,000 |   | 2,743,000 |   |
| Earnings from  continuing operations before discontinued operations                                                                                 |       | 1,495,429                         |       | 1,213,471                         |       | 3,651,124 |   | 3,768,837 |   |
| Discontinued  operations (net of taxes):                                                                                                            |       |                              |       |                              |       |   |   |   |   |
| Loss from operation of discontinued operations (net  of tax benefits of $34,000 and $3,000 for 2006 and $3,000 and $93,000 for  2005, respectively) |       | (51,491                           | )          | (33,164                           | )          | (6,030 | ) | (211,434 | ) |
| Gain on sale of discontinued operations (net of tax expense  of $178,000 and $214,000 for 2005)                                                     |       | —                            |       | 344,792                           |       | — |   | 416,024 |   |
| Earnings (loss) from discontinued operations                                                                                                        |       | (51,491                           | )          | 311,628                           |       | (6,030 | ) | 204,590 |   |
| Net earnings                                                                                                                                        |       | $                                 | 1,443,938  |                              | $          | 1,525,099 |   | $ | 3,645,094 |   | $ | 3,973,427 |   |
|                                                                                                                                                |       |                              |       |                              |       |   |   |   |   |
| Basic earnings  (loss) per common share:                                                                                                            |       |                              |       |                              |       |   |   |   |   |
| Continuing operations                                                                                                                               |       | $                                 | .42        |                              | $          | .34 |   | $ | 1.02 |   | $ | 1.06 |   |
| Discontinued operations                                                                                                                             |       | (.02                              | )          | .09                               |       | — |   | .05 |   |
|                                                                                                                                                |       | $                                 | .40        |                              | $          | .43 |   | $ | 1.02 |   | $ | 1.11 |   |
|                                                                                                                                                |       |                              |       |                              |       |   |   |   |   |
| Diluted earnings  (loss) per common share:                                                                                                          |       |                              |       |                              |       |   |   |   |   |
| Continuing operations                                                                                                                               |       | $                                 | .40        |                              | $          | .31 |   | $ | .96 |   | $ | .97 |   |
| Discontinued operations                                                                                                                             |       | (.01                              | )          | .08                               |       | — |   | .05 |   |
|                                                                                                                                                |       | $                                 | .39        |                              | $          | .39 |   | $ | .96 |   | $ | 1.02 |   |
|                                                                                                                                                |       |                              |       |                              |       |   |   |   |   |
|                                                                                                                                                |       |                              |       |                              |       |   |   |   |   |
| Weighted average  common shares outstanding:                                                                                                        |       |                              |       |                              |       |   |   |   |   |
| Basic                                                                                                                                               |       | 3,577,760                         |       | 3,581,326                         |       | 3,579,798 |   | 3,569,897 |   |
| Diluted                                                                                                                                             |       | 3,741,052                         |       | 3,890,138                         |       | 3,799,522 |   | 3,881,970 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

3

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

**CONSOLIDATED CONDENSED STATEMENT OFSHAREHOLDERS’ EQUITY (unaudited)**
| ** **                                                       | ** ** | ** ** | ** ** | **Class A Common** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|----------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | **Stock, $1 Par**  | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** |
| ** **                                                       | ** ** | **Total**  | ** ** | **Shares**                   | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                                                       |       |       |       |                         |       |           |       |         |       |                    |       |       |       |   |   |
| **Balance, January 1, 2006**                                     |       | $          | 47,716,210 |                         | 3,814,367  |           | $          | 3,814,367    |       | $                       | 8,947,855  |       | $          | 36,969,119 |   | (244,576 | ) | $ | (2,015,131 | ) |
| ** **                                                       |       |       |       |                         |       |           |       |         |       |                    |       |       |       |   |   |
| Net earnings                                                     |       | 3,645,094  |       | —                       |       | —         |       | —       |       | 3,645,094               |       | —     |       | — |   |
| Issuance of Class A  common stock upon exercise of stock options |       | 208,580    |       | 36,000                       |       | 36,000         |       | 172,580      |       | —                  |       | —     |       | — |   |
| Share-based  compensation                                        |       | 53,372     |       | —                       |       | —         |       | 53,372       |       | —                  |       | —     |       | — |   |
| Shares surrendered as  payment for exercise of stock options     |       | (61,850    | )          | —                       |       | —         |       | —       |       | —                  |       | (5,000     | )          | (61,850 | ) |
| Purchase of Class A  common stock                                |       | (294,196   | )          | —                       |       | —         |       | —       |       | —                  |       | (23,031    | )          | (294,196 | ) |
| **Balance, September 30, 2006**                                  |       | $          | 51,267,210 |                         | 3,850,367  |           | $          | 3,850,367    |       | $                       | 9,173,807  |       | $          | 40,614,213 |   | (272,607 | ) | $ | (2,371,177 | ) |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

 

4

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

**CONSOLIDATED CONDENSED STATEMENTS OFCASH FLOWS (unaudited)**
| ** **                                                                                                               | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Cash Flows from  Operating Activities of Continuing Operations:                                                          |       |                                                    |       |   |   |
| Net earnings                                                                                                             |       | $                                                       | 3,645,094  |   | $ | 3,973,427 |   |
| (Earnings) loss from discontinued operations — net  of taxes                                                        |       | 6,030                                                   |       | (204,590 | ) |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating activities  of continuing operations: |       |                                                    |       |   |   |
| Non-cash charges  and credits:                                                                                           |       |                                                    |       |   |   |
| Depreciation and amortization                                                                                            |       | 680,375                                                 |       | 602,665 |   |
| Amortization of other intangible assets                                                                                  |       | 898,124                                                 |       | 828,750 |   |
| Amortization of other assets                                                                                             |       | 3,000                                                   |       | 4,500 |   |
| Provision for losses on accounts receivable - net                                                                        |       | 3,051                                                   |       | 7,367 |   |
| Share-based compensation                                                                                                 |       | 53,372                                                  |       | — |   |
| Deferred income taxes — net                                                                                         |       | —                                                  |       | 924,000 |   |
| Changes in  operating assets and liabilities, net of assets and liabilities acquired:                                    |       |                                                    |       |   |   |
| Accounts receivable                                                                                                      |       | (5,568,735                                              | )          | (5,363,046 | ) |
| Notes and other receivables                                                                                              |       | 1,890,137                                               |       | 665,039 |   |
| Inventories                                                                                                              |       | (837,541                                                | )          | (4,442,834 | ) |
| Prepaid expenses and other current assets                                                                                |       | (398,417                                                | )          | (437,250 | ) |
| Other assets                                                                                                             |       | 298,428                                                 |       | (26,335 | ) |
| Accounts payable                                                                                                         |       | 6,327,559                                               |       | 401,759 |   |
| Accruals and other                                                                                                       |       | 733,776                                                 |       | (1,361,538 | ) |
| Total adjustments                                                                                                        |       | 4,089,159                                               |       | (8,401,513 | ) |
| Net cash provided by (used in) operating activities  of continuing operations                                            |       | $                                                       | 7,734,253  |   | $ | (4,428,086 | ) |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

 

5

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| ** **                                                                         | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Cash Flows from  Investing Activities of Continuing Operations:                    |       |                                                    |       |   |   |
| Capital expenditures                                                               |       | $                                                       | (1,257,153 | ) | $ | (404,238 | ) |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products |       | (5,232,916                                              | )          | — |   |
| Additional payments for acquisition-related expenses                               |       | (206,915                                                | )          | — |   |
| Additional purchase price adjustment                                               |       | 37,613                                                  |       | — |   |
| Proceeds from sale of certain assets of Green’s  Access Division              |       | —                                                  |       | 880,069 |   |
| Proceeds from sale of certain assets of Green’s  Agricultural Division        |       | —                                                  |       | 225,000 |   |
| Additional payments for purchase of Nationwide Industries,  Inc.                   |       | —                                                  |       | (944,219 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net cash used in investing activities of continuing  operations                    |       | (6,659,371                                              | )          | (243,388 | ) |
|                                                                               |       |                                                    |       |   |   |
| Cash Flows from  Financing Activities of Continuing Operations:                    |       |                                                    |       |   |   |
| Proceeds from short-term borrowings                                                |       | 11,000,000                                              |       | 13,500,000 |   |
| Repayments of short-term borrowings                                                |       | (8,500,000                                              | )          | (6,000,000 | ) |
| Repayments of term loan                                                            |       | (2,850,000                                              | )          | (4,200,000 | ) |
| Principal payments on long-term debt                                               |       | (158,838                                                | )          | (158,483 | ) |
| Proceeds from exercise of stock options                                            |       | 146,730                                                 |       | 147,074 |   |
| Purchase of Class A common stock                                                   |       | (294,196                                                | )          | — |   |
|                                                                               |       |                                                    |       |   |   |
| Net cash (used in) provided by financing activities  of continuing operations      |       | (656,304                                                | )          | 3,288,591 |   |
|                                                                               |       |                                                    |       |   |   |
| Cash Flows from  Discontinued Operations:                                          |       |                                                    |       |   |   |
| Net cash (used in) provided by operating activities                                |       | (732,205                                                | )          | 2,641,822 |   |
| Net cash used in investing activities                                              |       | —                                                  |       | (1,201,617 | ) |
| Net cash used in financing activities                                              |       | (84,865                                                 | )          | (84,865 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net cash (used in) provided by discontinued  operations                            |       | (817,070                                                | )          | 1,355,340 |   |
|                                                                               |       |                                                    |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                         |       | (398,492                                                | )          | (27,543 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 1,771,624                                               |       | 1,189,869 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                       | 1,373,132  |   | $ | 1,162,326 |   |

 

6

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**Supplementaldisclosures of cash flow information:**

Cash paid for:

| Interest     |   | $ | 1,367,000 |   | $ | 1,388,000 |   |
|--------------|--------|---|-----------|--------|---|-----------|--------|
| Income taxes |   | $ | 3,645,000 |   | $ | 3,501,000 |   |

 

Non-cash investing and financing activities wereas follows:

During the nine months ended September 30,2006, the Company received 5,000 shares of Class A Common Stock inconnection with the exercise of options to purchase 15,000 shares ofClass A Common Stock. The value of these shares was recorded at $61,850.

Inconnection with the sale of certain assets of Green’s Access Division inFebruary 2005, the Company received interest-bearing promissory notes ofapproximately $877,000, as adjusted.

During the nine months ended September 30, 2005,the Company received 6,418 shares of Class A Common Stock inconnection with the exercise of options to purchase 14,000 shares of Class ACommon Stock. The value of these shares was recorded at $107,241.

 

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

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**P&F INDUSTRIES, INC. ANDSUBSIDIARIES****NOTES TO CONSOLIDATED****CONDENSED****FINANCIALSTATEMENTS (unaudited)**

**NOTE 1 — SUMMARY OF ACCOUNTING POLICIES**

**Principles of Consolidation**

The unaudited consolidated condensed financial statementscontained herein include the accounts of P&F Industries, Inc. and itssubsidiaries (“P&F”). All significant intercompany balances andtransactions have been eliminated.

P&F conducts its business operations through two ofits wholly-owned subsidiaries: Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”) and Countrywide Hardware, Inc. (“Countrywide”).P&F and its subsidiaries are herein referred to collectively as the “Company.”In addition, the words “we”, “our” and “us” refer to the Company.

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”), throughWoodmark International, L.P. (“Woodmark”), a limited partnership betweenCountrywide and WILP Holdings, Inc., a subsidiary of Countrywide, and throughPacific Stair Products, Inc. (“Pacific Stair”). Nationwide is an importer andmanufacturer of door, window and fencing hardware. Woodmark is an importer ofbuilders’ hardware,including staircase components and kitchen and bath hardware and accessories.In January 2006, Countrywide acquiredsubstantially all of the operating assets of Pacific Stair, a manufacturerof premium stair rail products and a distributor of Woodmark’s staircasecomponents to the building industry, primarily in southern California and thesouthwestern region of the United States (see Note 6).

TheCompany’s wholly-owned subsidiary, EmbassyIndustries, Inc. (“Embassy”), was engaged in the manufacture and sale ofbaseboard heating products and the importation and sale of radiant heatingsystems until it exited that business in October 2005 (see Note 7) through thesale of substantially all of its non-real estate assets. The Company’swholly-owned subsidiary, Green Manufacturing, Inc. (“Green”), was primarilyengaged in the manufacture, development and sale of heavy-duty welded customdesigned hydraulic cylinders until it exited that business in December 2004through the sale of certain assets. Green also manufactured a line of accessequipment for the petro-chemical industry until it exited that business inFebruary 2005 through the sale of certain assets and a line of post holedigging equipment for the agricultural industry until it exited that businessin July 2005 through the sale of certain assets. Green has effectively ceasedall operating activities (see Note 7). Note 12 presents financial informationfor the segments of the Company’s business.

**Basis of Financial Statement Presentation**

The accompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information, and with the rules and regulations of the Securities andExchange Commission regarding interim financial reporting. Accordingly, theseinterim financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of 

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Americafor complete financial statements. In the opinion of the Company, theseunaudited consolidated condensed financial statements include all adjustmentsnecessary to present fairly the information set forth therein. All suchadjustments are of a normal recurring nature. Results for interim periods arenot necessarily indicative of results to be expected for a full year.

The resultsof operations for Embassy and Green have been segregated from continuingoperations and are reflected on the consolidated condensed statements ofearnings as discontinued operations.

The unaudited consolidated condensed balance sheetinformation as of December 31, 2005 was derived from the audited financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005. The interim financial statements contained hereinshould be read in conjunction with that Report.

In preparing its unaudited consolidated condensedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, the Company is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring 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 thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actualresults could differ from those estimates.

**NOTE 2****—****EARNINGS PER SHARE**

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

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

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Thefollowing table sets forth the computation of basic and diluted earnings (loss)per common share:
| ** **                                                                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Numerator:                                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator for basic and diluted earnings (loss) per  common share:                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Earnings from continuing operations                                                                                 |       | $                                                    | 1,495,000  |                                                | $          | 1,213,000 |   | $ | 3,651,000 |   | $ | 3,769,000 |   |
| Discontinued operations, net of taxes                                                                               |       | (51,000                                              | )          | 312,000                                             |       | (6,000 | ) | 204,000 |   |
| Net earnings                                                                                                        |       | $                                                    | 1,444,000  |                                                | $          | 1,525,000 |   | $ | 3,645,000 |   | $ | 3,973,000 |   |
|                                                                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Denominator:                                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Denominator for basic earnings per share — weighted  average common shares outstanding                         |       | 3,577,760                                            |       | 3,581,326                                           |       | 3,579,798 |   | 3,569,897 |   |
| Effect of dilutive securities:                                                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Stock options                                                                                                       |       | 163,292                                              |       | 308,812                                             |       | 219,724 |   | 312,073 |   |
| Denominator for  diluted earnings per share — adjusted weighted average common shares and  assumed conversions |       | 3,741,052                                            |       | 3,890,138                                           |       | 3,799,522 |   | 3,881,970 |   |

 

At September 30, 2006 and during the three-month andnine-month periods ended September 30, 2006, there were outstanding stockoptions whose exercise prices were higher than the average market values of theunderlying Class A Common Stock for the period. These options are anti-dilutiveand are excluded from the computation of earnings per share. The weightedaverage anti-dilutive stock options outstanding were as follows:
| ** **                                                | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  anti-dilutive stock options outstanding |       | 29,500                                               |       | 27,500                                              |       | 29,500 |   | 9,167 |   |

 

**NOTE 3 — STOCK-BASED COMPENSATION**

Stock-basedCompensation

On January 1, 2006, the Company adopted the provisions ofFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Share-Based Payment” (“Statement 123(R)”),which revises FASB SFAS No. 123, “Accounting for Stock-Based Compensation”, andsupersedes APB Opinion 25, “Accounting for Stock Issued to Employees”.Statement 123(R) requires the Company to recognize expense related to the fairvalue of our stock-based compensation awards, including employee stock options.

Prior to the adoption of Statement 123(R), the Companyaccounted for stock-based compensation awards using the intrinsic value methodof APB Opinion 25. Accordingly, the Company did not recognize compensationexpense in its statement of earnings for options granted that had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant. As required by Statement 123, the Company also provided certain proforma disclosures for stock-based awards as if the fair-value-based approach ofStatement 123 had been applied.

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The Company has elected to use the modified prospectivetransition method as permitted by Statement 123(R) and therefore has notrestated its financial results for prior periods. Under this transition method,the Company applied the provisions of Statement 123(R) to new awards and toawards modified, repurchased, or cancelled after January 1, 2006. Additionally,the Company will recognize compensation cost for the portion of the awards forwhich the requisite service has not been rendered (unvested awards) that areoutstanding as of January 1, 2006, as the remaining service is rendered. Thecompensation cost the Company records for these awards will be based on theirgrant-date fair value as calculated for the pro forma disclosures required byStatement 123.

Nostock-based compensation cost related to stock options was recognized in thestatements of earnings for the years ended December31, 2005 and 2004, as all options granted in these periods had an exerciseprice equal to the market price at the date of grant. As a result of adoptingStatement 123(R), the Company’s earnings before income taxes and net earningsfor the three-month period ended September 30, 2006 were approximately $17,000and $11,000 lower, and for the nine-month period ended September 30, 2006 wereapproximately $53,000 and $32,000 lower, than if we had continued to accountfor stock-based compensation under APB Opinion 25. Compensation expense isrecognized in the general and administrative expenses line item of the Company’sstatements of earnings on a straight-line basis over the vesting periods. Thereare no capitalized stock-based compensation costs at September 30, 2006 and2005. The adoption of Statement 123(R) had no material impact on our basic anddilutive earnings per common share for the three-month and nine-month periodsended September 30, 2006.

The following table illustrates the effect on netearnings after tax and net earnings per common share as if we had applied thefair value recognition provisions of Statement 123 to stock-based compensationfor the three-month and nine-month periods ended September 30, 2005:

|                                                                                                                          | ** ** | **Three months ended  September 30, 2005** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Net earnings as  reported                                                                                                |       | $                                                              | 1,525,000  |                                                          | $          | 3,973,000 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method,  net of related tax effects |       | (46,000                                                        | )          | (58,000                                                       | )          |
| Pro forma net  earnings                                                                                                  |       | $                                                              | 1,479,000  |                                                          | $          | 3,915,000 |   |
|                                                                                                                     |       |                                                           |       |                                                          |       |
| Basic earnings  per common share                                                                                         |       |                                                           |       |                                                          |       |
| As reported                                                                                                              |       | $                                                              | .43        |                                                          | $          | 1.11 |   |
| Pro forma                                                                                                                |       | $                                                              | .41        |                                                          | $          | 1.10 |   |
|                                                                                                                     |       |                                                           |       |                                                          |       |
| Diluted earnings  per common share                                                                                       |       |                                                           |       |                                                          |       |
| As reported                                                                                                              |       | $                                                              | .39        |                                                          | $          | 1.02 |   |
| Pro forma                                                                                                                |       | $                                                              | .38        |                                                          | $          | 1.01 |   |

 

The fair value of options granted is estimated on thedate of grant using the Black-Scholes option pricing model.

StockOption Plan

The Company’s 2002 Incentive Stock Option Plan (the “CurrentPlan”) authorizes the issuance, to employees and directors, of options topurchase a maximum of 1,100,000 shares of Class A Common Stock. 

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Theseoptions must be issued within ten years of the effective date of the Plan andare exercisable for a ten year period from the date of grant, at prices notless than 100% of the market value of the Class A Common Stock on the date theoption is granted. Options granted to any 10% stockholder are exercisable for afive year period from the date of grant, at prices not less than 110% of themarket value of the Class A Common Stock on the date the option is granted.Options typically vest immediately. In the event options granted contain avesting schedule over a period of years, the Company recognizes compensationcost for these awards on a straight-line basis over the service period. TheCurrent Plan, which terminates in 2012, is the successor to the Company’s 1992Incentive Stock Option Plan (the “Prior Plan”).

The following is a summary of the changes in outstandingoptions for the nine months ended September 30, 2006:

|                                  | ** ** | **Option  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  January 1, 2006    |       | 596,900            |       | $                                          | 7.58       |                                                                 | 4.7        |                            |       |   |
| Granted                          |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Exercised                        |       | (36,000            | )          | 5.79                                       |       | —                                                               |       |                            |       |
| Forfeited                        |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Expired                          |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Outstanding,  September 30, 2006 |       | 560,900            |       | $                                          | 7.69       |                                                                 | 3.9        |                            | $          | 1,137,000 |   |
|                             |       |               |       |                                       |       |                                                                 |       |                            |       |
| Vested, September 30,  2006      |       | 511,412            |       | $                                          | 7.53       |                                                                 | 4.0        |                            | $          | 1,120,000 |   |

 

There were no stock options granted during the ninemonths ended September 30, 2006 and 27,500 options were granted during the ninemonths ended September 30, 2005. The total intrinsic value of stock optionsexercised during the nine months ended September 30, 2006 and 2005 was $223,000and $311,000, respectively.

The following is a summary ofchanges in non-vested shares for the nine months ended September 30, 2006:

|                                        | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-  Date Fair Value** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------------------------------------------------|------------|
| Non-vested  shares, January 1, 2006    |       | 49,488                 |       | $                                                                | 3.77       |   |
| Granted                                |       | —                 |       | —                                                           |       |
| Vested                                 |       | —                 |       | —                                                           |       |
| Forfeited                              |       | —                 |       | —                                                           |       |
| Non-vested shares,  September 30, 2006 |       | 49,488                 |       | $                                                                | 3.77       |   |

 

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

Other Information

As of September 30, 2006, the Company had approximately$48,000 of total unrecognized compensation cost related to non-vested awardsgranted under our share-based plans, which we expect to recognize over aweighted-average period of 2.3 years.

The Company received cash from options exercised duringthe nine-months ended September 30, 2006 of approximately $147,000. The impactof these cash receipts is included in financing activities in the 

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accompanyingconsolidated condensed statements of cash flows. Statement 123(R) requires that cash flowsfrom tax benefits attributable to tax deductions in excess of the compensationcost recognized for those options (excess tax benefits) be classified asfinancing cash flows.

The number of shares of Class A common stock reserved forstock options available for issuance under the Current Plan as of September 30,2006 was 683,400. Of the options outstanding at September 30, 2006, 348,100were issued under the Current Plan and 212,800 were issued under the PriorPlan.

**NOTE 4****—****FOREIGN CURRENCY TRANSACTIONS**

**Derivative Financial Instruments**

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

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

The Company accounts for changes in the fair value of itsforeign currency contracts by marking them to market and recognizing anyresulting gains or losses through its statement of earnings. The Company alsomarks its yen-denominated payables to market, recognizing any resulting gainsor losses in its statement of earnings. At September 30, 2006, the Company hadforeign currency forward contracts, maturing in 2006, to purchase Japanese yenat contracted forward rates. The value of these contracts at September 30,2006, based on that day’s closing spot rate, was approximately $1,157,000,which was the approximate value of the Company’s yen-denominated accountspayable. During the three-month periods ended September 30, 2006 and 2005, theCompany recorded in its cost of sales net realized losses of approximately$13,000 and $29,000, respectively, on foreign currency transactions. During thenine-month periods ended September 30, 2006 and 2005, the Company recorded inits cost of sales net realized losses of approximately $6,000 and $119,000,respectively, on foreign currency transactions. At September 30, 2006 and 2005,the Company had no unrealized gains or losses in foreign currency transactions.

**NOTE 5 — NEW ACCOUNTING PRONOUNCEMENTS**

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements*”* (“SFAS No. 157”) to eliminate the diversity in practice that exists dueto the different definitions of fair value. SFAS No. 157 retains the exchangeprice notion in earlier definitions of fair value, but clarifies that theexchange price is the price in an orderly transaction between market 

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participants to sell an asset or liability in the principal or mostadvantageous market for the asset or liability. SFAS No. 157 states that thetransaction is hypothetical at the measurement date, considered from theperspective of the market participant who holds the asset or liability. Assuch, fair value is defined as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date (an exit price), as opposed to the pricethat would be paid to acquire the asset or received to assume the liability atthe measurement date (an entry price).

SFASNo. 157 also stipulates that, as a market-based measurement, fair value measurementshould be determined based on the assumptionsthat market participants would use in pricing the asset or liability, andestablishes a fair value hierarchy that distinguishes between (a) marketparticipant assumptions developed based on market data obtained from sourcesindependent of the reporting entity (observable inputs) and (b) the reportingentity’s own assumptions about market participant assumptions developed basedon the best information available in the circumstances (unobservable inputs).SFAS No. 157 expands disclosures about the use of fair value to measure assetsand liabilities in interim and annual periods subsequent to initialrecognition.

SFASNo. 157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years,although earlier application is encouraged. Additionally, prospectiveapplication of the provisions of SFASNo. 157 is required as of the beginning of the fiscal year in which it isinitially applied, except when certain circumstances require retrospectiveapplication. The Company is currently evaluating the impact of SFAS No. 157 onits consolidated financial statements.

In September 2006, theSEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements.” SAB 108 was issued to provide consistency between howregistrants quantify financial statement misstatements.

Historically, there havebeen two widely-used methods for quantifying the effects of financial statementmisstatements. These methods are referred to as the “roll-over” and “ironcurtain” method. The roll-over method quantifies the amount by which thecurrent year income statement is misstated. Exclusive reliance on an incomestatement approach can result in the accumulation of errors on the balancesheet that may not have been material to any individual income statement, butwhich may misstate one or more balance sheet accounts. The iron curtain methodquantifies the error as the cumulative amount by which the current year balancesheet is misstated. Exclusive reliance on a balance sheet approach can resultin disregarding the effects of errors in the current year income statement thatresults from the correction of an error existing in previously issued financialstatements. The Company currently uses the roll-over method for quantifyingidentified financial statement misstatements.

SAB 108 established anapproach that requires quantification of financial statement misstatementsbased on the effects of the misstatement on each of the company’s financialstatements and the related financial statement disclosures. This approach iscommonly referred to as the “dual approach” because it requires quantificationof errors under both the roll-over and iron curtain methods.

SAB 108 allowsregistrants to initially apply the dual approach either by (1) retroactivelyadjusting prior financial statements as if the dual approach had always been usedor by (2) recording the cumulative effect of initially applying the dualapproach as adjustments to the carrying values of assets and liabilities as ofJanuary 1, 2006 with an offsetting adjustment recorded to the opening balanceof 

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retained earnings. Use of this “cumulativeeffect” transition method requires detailed disclosure of the nature and amountof each individual error being corrected through the cumulative adjustment andhow and when it arose.

The Company willinitially apply SAB 108 using the cumulative effect transition method inconnection with the preparation of our annual financial statements for the yearending December 31, 2006. When the Company initially applies the provisions ofSAB 108, the Company does not expect to record any adjustments.

In June 2006, the FASB issued Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes”.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with Statement ofFinancial Accounting Standards (“SFAS”)No. 109,**“Accountingfor Income Taxes”. FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Thisinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006. Earlier application of the provisions of this Interpretation isencouraged if the enterprise has not yet issued financial statements, includinginterim statements, in the period this Interpretation is adopted. The Companyis presently evaluating the effect of the adoption of this interpretation onits results of operations or financial position.

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

In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — anamendment of FASB Statements No. 133 and 140.” SFAS No. 155 allows companies toelect to measure at fair value entire financial instruments containing embeddedderivatives that would otherwise have to be accounted for separately. It alsorequires companies to identify interests in securitized financial assets thatare freestanding derivatives or contain embedded derivatives that would have tobe accounted for separately, clarifies which interest- and principal-onlystrips are subject to SFAS No. 133, and amends SFAS No. 140 to revise theconditions of a qualifying special purpose entity due to the new requirement toidentify whether interests in securitized financial assets are freestandingderivatives or contain embedded derivatives. SFAS No. 155 is effective for allfinancial instruments acquired, issued or subject to a remeasurement eventafter the beginning of a company’s first fiscal year that begins after September15, 2006. The Company does not expect adoption of SFAS No. 155 to have amaterial effect on its results of operations or financial position.

**NOTE 6****—****ACQUISITION**

Pacific Stair Products, Inc.

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

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January 3, 2006, Pacific Stair purchased substantially all of theoperating assets of Old PSP. The total purchase price for the assets wasapproximately $5,233,000, subject to adjustments, plus the assumption ofcertain liabilities and obligations by Pacific Stair. The assets purchasedpursuant to the PSP APA include, among others, accounts receivable, inventory,machinery and equipment and certain intangibles. Certain assets were retainedby Old PSP including cash and title to any real property. The purchase price,including direct acquisition costs, represents a premium over the fair value ofthe assets purchased of approximately $4,243,000, which has been allocatedamong goodwill and other intangible assets. Pacific Stair is a manufacturer ofpremium stair rail products and a distributor of staircase components to thebuilding industry, primarily in southern California and the southwestern regionof the United States. As a result of this transaction, Countrywide hasincreased its purchasing power and geographic distribution. The acquisition wasfinanced through the Company’s credit facility with Citibank. The consolidated condensed financial statementspresented herein include the results of operations for Pacific Stair for theperiod from January 3, 2006 to September 30, 2006.

The purchase price for thisacquisition, negotiated on the basis of Pacific Stair’s historical financialperformance, was as follows:

| Cash paid at closing from  short-term borrowings         |   | $       | 5,233,000 |   |
|----------------------------------------------------------|--------|---------|-----------|--------|
| Purchase price  reduction for working capital adjustment |   | (38,000 | )         |
| Direct  acquisition costs                                |   | 207,000 |      |
| Total purchase price                                     |   | $       | 5,402,000 |   |

 

The following table presents the estimatedfair values of the net assets acquired and the amount allocated to goodwill:

| Accounts receivable                      |   |      |      | $         | 576,000   |   |
|------------------------------------------|--------|-----------|-----------|-----------|-----------|--------|
| Inventories                              |   |      |      | 335,000   |      |
| Property and  equipment                  |   |      |      | 250,000   |      |
| Identifiable  intangible assets:         |   |      |      |      |      |
| Customer relationships                   |   | $         | 1,800,000 |      |      |   |
| Tradename                                |   | 1,450,000 |      |      |      |
| Non-compete and employment agreements    |   | 50,000    |      | 3,300,000 |      |
|                                     |   |      |      | 4,461,000 |      |
| Less:  liabilities assumed               |   |      |      | 2,000     |      |
| Total fair value  of net assets acquired |   |      |      | 4,459,000 |      |
| Goodwill                                 |   |      |      | 943,000   |      |
| Total purchase price                     |   |      |      | $         | 5,402,000 |   |
|                                          |        |           |           |           |           |        |  |

 

The Company obtained an independentthird-party valuation of the identifiable intangible assets. The excess of the total purchase price overthe fair value of the net assets acquired, including the value of theidentifiable intangible assets, has been allocated to goodwill. Goodwill willbe amortized, for fifteen years, for tax purposes but not for financialreporting purposes. The fair values of the identifiable intangible assets are based oncurrent information and are subject to change. The intangible assets subject toamortization will be amortized over fifteen years for tax purposes and forfinancial reporting purposes and have been assigned useful lives as follows:

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

 

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

|                                                        | ** ** | **Three months ended  September 30, 2005** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Net revenues                                           |       | $                                                              | 31,169,000 |                                                          | $          | 86,204,000 |   |
| Net earnings from  continuing operations               |       | $                                                              | 1,362,000  |                                                          | 4,259,000  |   |
| Earnings per common  share from continuing operations: |       |                                                           |       |                                                          |       |
| Basic                                                  |       | $                                                              | .47        |                                                          | $          | 1.25 |   |
| Diluted                                                |       | $                                                              | .43        |                                                          | $          | 1.15 |   |

 

**NOTE 7 — DISCONTINUED OPERATIONS**

Embassy Industries, Inc.

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

Pursuant to a Lease, dated as of October 11, 2005,between Embassy, as landlord and EMI, as tenant (the “EMI Lease”), Embassyagreed to lease certain space (approximately 60,000 rentable square feet) inthe building located at 300 Smith Street, Farmingdale, New York to EMI inconnection with the operation of EMI’s business, at an annual rental rate of$480,000, payable in monthly installments of $40,000 each. The term of the EMILease was for a period of six (6) months commencing October 11, 2005 andterminating April 10, 2006; provided however, that, in the event EMI servednotice on Embassy by December 31, 2005, the EMI Lease could be extended on amonth to month basis to, and including, September 30, 2006. EMI served noticeon Embassy to extend the EMI Lease through May 31, 2006.

Embassy has effectively ceasedall operating activities. TheCompany recognized a gain on the sale of these assets of approximately$1,467,000, net of taxes, during the fourth quarter of fiscal 2005.

On July 24, 2006, Embassy received a letter (the “PurchaserLetter”) from counsel to J. D’Addario & Company, Inc., a New Yorkcorporation (“Purchaser”), purporting to terminate that certain contractentered into by Embassy and Purchaser on January 13, 2006 (the “Agreement”, andas amended, the “Contract of Sale”). Pursuant to the Contract of Sale, Embassyagreed to sell its Farmingdale, New York premises (the “Farmingdale Premises”)to Purchaser for a purchase price of $6,403,000.

The sale of the Farmingdale Premises was contingentupon completion of due diligence and other conditions set forth in the Contractof Sale, including, without limitation, that upon the expiration of theInvestigation Period (as defined in the Contract of Sale), Embassy was toproceed with certain 

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environmental remediation at the Farmingdale Premises (the “RequiredEnvironmental Remediation”) to the satisfaction of the Suffolk CountyDepartment of Health Services (“SCDHS”), to obtain a “No Further Action” letterfrom SCDHS, and to provide a copy of said letter to Purchaser upon Embassy’sreceipt thereof.

Upon the expiration of the Investigation Period,Embassy completed the Required Environmental Remediation. On May 30, 2006,SCDHS issued a letter (the “SCDHS Letter”) stating that no further remediationwill be required by SCDHS at such time with respect to the RequiredEnvironmental Remediation. The SCDHS Letter also noted that laboratory dataprovided for the upgradient groundwater sample (the “Sample”) indicated thatgroundwater contamination exists, and that, due to the significant exceedencesnoted, this information was reported to the New York State Department ofEnvironmental Conservation (“NYSDEC”) Spills Unit, and a NYSDEC Spill Number(the “DEC Spill Number”) was assigned. Embassy delivered a copy of the SCDHSLetter to Purchaser pursuant to the terms of the Contract of Sale.

The Sample was contaminated with petroleum, and, tothe Company’s knowledge, no petroleum products were used, stored or handled byEmbassy at the Farmingdale Premises at or near the location where the Samplewas collected. The Sample was collected from an upgradient location near thenorthern border of the Farmingdale Premises, which is in close proximity to aneighboring property that experienced a petroleum release. Shortly followingreceipt of the SCDHS Letter, NYSDEC verbally advised Embassy that it approvedan investigation work-plan submitted by Embassy; the purpose of theinvestigation was to confirm that the contamination does not originate at theFarmingdale Premises. The investigation was completed on August 2, 2006 and theinvestigation results, which confirmed that the source of the petroleumcontamination is not the Farmingdale Premises, were submitted to the NYSDEC onAugust 7, 2006. On August 11, 2006, the NYSDEC advised Embassy that, based onthe results of the investigation, it is apparent that the Farmingdale Premisesis not the source of groundwater contamination that was discovered based on theSample, and that therefore the NYSDEC database has been modified to remove theFarmingdale Premises as the source of the contamination.

The Purchaser Letter purports to terminate theContract of Sale based upon Purchaser’s assertion that the SCDHS Letter doesnot constitute a “No Further Action” letter as required by the Contract ofSale, and demands that the escrow agent return the downpayment with accruedinterest, and that Purchaser be reimbursed for the costs of survey and titleexamination.

Embassy has informed Purchaser that, in light of thecontents of the SCDHS Letter, Purchaser’s purported termination of the Contractof Sale is without effect, and that Purchaser is in default of its obligationto consummate the purchase of the Farmingdale Premises under the terms of theContract of Sale. On August 2, 2006, Purchaser instituted an action againstEmbassy in the Supreme Court of the State of New York, County of Suffolk, forbreach of contract and return of downpayment, seeking $650,000, together withcosts of title and survey and interest thereon, and the cost of the action.Embassy believes the action is without merit and intends to vigorously defendit.

Green Manufacturing, Inc. — Agricultural Products Division

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

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“Agricultural Closing”).

The purchase price paid by Benko in considerationfor the assets acquired pursuant to the Agricultural APA was $530,000,consisting of (a) a payment to Green at Agricultural Closing of $225,000; (b)$25,000 payable pursuant to the terms of a Promissory Note (“Agricultural Note1”), dated July 14, 2005, payable in equal monthly amounts over a five (5)month period commencing as of the Agricultural Closing; and (c) $280,000payable pursuant to the terms of a Promissory Note (collectively withAgricultural Note 1, the “Agricultural Notes”), dated July 14, 2005, payable inequal monthly amounts over a four (4) year period commencing as of theAgricultural Closing. In addition, Benko assumed certain of Green’s contractualobligations. The obligations of Benko under the Agricultural APA and theAgricultural Notes were guaranteed by each of a principal shareholder and anaffiliate of Benko, and partially secured by certain collateral.

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

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

Green Manufacturing, Inc. — Access Division

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

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

Benko had withheld certain payments regarding itsoutstanding Access Note as a result of a disagreement regarding certainrepresentations made by the Company in the Access APA. As such, the Companyrecorded a reserve of $150,000 at December 31, 2005. In August 2006, theCompany and Benko negotiated a settlement under both the Access Note and theoutstanding Agricultural Note and received a payment of approximately $477,000to resolve the matter.

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The Company recognized a gain on the sale of theseassets of approximately $71,000, net of taxes, in fiscal 2005.

The following amounts related to Embassy and Green havebeen segregated from the Company’s continuing operations and are reported asassets held for sale and assets and liabilities of discontinued operations inthe consolidated condensed balance sheets:

|                                                                   | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Assets held for sale  and assets of discontinued operations:      |       |                             |       |                            |       |
| Prepaid expenses                                                  |       | $                                | 316,000    |                            | $          | 77,000 |   |
| Assets held for sale                                              |       | 575,000                          |       | 623,000                         |       |
| Total assets held for  sale and assets of discontinued operations |       | $                                | 891,000    |                            | $          | 700,000 |   |
|                                                              |       |                             |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                             |       |                            |       |
| Accounts payable and  accrued expenses                            |       | $                                | 456,000    |                            | $          | 991,000 |   |
| Mortgage payable                                                  |       | 1,282,000                        |       | 1,367,000                       |       |
| Total liabilities of discontinued operations                      |       | $                                | 1,738,000  |                            | $          | 2,358,000 |   |

 

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

|                                                               | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                                                  |       | $                                                    | —     |                                                | $          | 2,960,000 |   | $ | — |   | $ | 8,884,000 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from operation of  discontinued operations, before taxes |       | $                                                    | (85,000    | )                                                   | $          | (36,000 | ) | $ | (9,000 | ) | $ | (304,000 | ) |
| Income tax benefit                                            |       | 34,000                                               |       | 3,000                                               |       | 3,000 |   | 93,000 |   |
| Loss from operation of  discontinued operations               |       | (51,000                                              | )          | (33,000                                             | )          | (6,000 | ) | (211,000 | ) |
| Gain on sale of  discontinued operations, before taxes        |       | —                                               |       | 523,000                                             |       | — |   | 630,000 |   |
| Income tax expense                                            |       | —                                               |       | (178,000                                            | )          | — |   | (214,000 | ) |
| Gain on sale of  discontinued operations                      |       | —                                               |       | 345,000                                             |       | — |   | 416,000 |   |
| Earnings (loss) from discontinued operations                  |       | $                                                    | (51,000    | )                                                   | $          | 312,000 |   | $ | (6,000 | ) | $ | 205,000 |   |

 

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

Accounts receivable -net consists of:

|                                  | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Trade accounts  receivable       |       | $                                | 18,903,000 |                            | $          | 12,757,000 |   |
| Allowance for doubtful  accounts |       | (193,000                         | )          | (190,000                        | )          |
|                             |       | $                                | 18,710,000 |                            | $          | 12,567,000 |   |

 

**NOTE 9 — INVENTORIES**

Inventories- net consist of:

|                                                   | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw material                                      |       | $                                | 2,518,000  |                            | $          | 2,209,000 |   |
| Work in process                                   |       | 436,000                          |       | 349,000                         |       |
| Finished goods                                    |       | 26,385,000                       |       | 25,597,000                      |       |
|                                              |       | 29,339,000                       |       | 28,155,000                      |       |
| Reserve for  obsolete and slow-moving inventories |       | (1,993,000                       | )          | (1,981,000                      | )          |
|                                              |       | $                                | 27,346,000 |                            | $          | 26,174,000 |   |

 

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

The changes in the carryingamounts of goodwill for the nine months ended September 30, 2006 are asfollows:
| ** **                    | ** ** | **Consolidated** | ** ** | **Tools and other  products** | ** ** | **Hardware** | ** ** |
|-------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Balance, January 1,  2006     |       | $                | 23,821,000 |                                    | $          | 2,394,000    |       | $ | 21,427,000 |   |
| Acquisition of Pacific  Stair |       | 943,000          |       | —                                  |       | 943,000      |       |
| Balance, September 30, 2006   |       | $                | 24,764,000 |                                    | $          | 2,394,000    |       | $ | 22,370,000 |   |

 

Other intangible assets were as follows:
| ** **                             | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Cost**                         | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible  assets:              |       |                             |       |                            |       |   |   |   |   |
| Customer relationships                 |       | $                                | 10,960,000 |                            | $          | 2,821,000 |   | $ | 9,160,000 |   | $ | 2,119,000 |   |
| Vendor relationship                    |       | 890,000                          |       | 200,000                         |       | 890,000 |   | 134,000 |   |
| Non-compete and  Employment agreements |       | 810,000                          |       | 679,000                         |       | 760,000 |   | 557,000 |   |
| Trademark/tradename                    |       | 2,140,000                        |       | —                          |       | 690,000 |   | — |   |
| Licensing                              |       | 105,000                          |       | 8,000                           |       | 105,000 |   | — |   |
| Total                                  |       | $                                | 14,905,000 |                            | $          | 3,708,000 |   | $ | 11,605,000 |   | $ | 2,810,000 |   |

 

Amortization expense forintangible assets subject to amortization was as follows:
| ** ** | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|       |       | $                                                        | 299,000    |                                                    | $          | 276,000 |   | $ | 898,000 |   | $ | 829,000 |   |
|            |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

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Amortization expense foreach of the twelve-month periods ending September 30, through the twelve-monthperiod ending September 30, 2011, is estimated to be as follows: 2007 - $976,000; 2008 - $666,000; 2009 - $666,000;2010 - $666,000; and 2011 - $658,000. The weighted average amortizationperiod for intangible assets was 14.1 years at September 30, 2006 and 10.96years at December 31, 2005.

**NOTE 11 — WARRANTY LIABILITY**

The Company offers to its customers warrantiesagainst product defects for periods primarily ranging from one to three years,with certain faucet hardware having a limited lifetime warranty, depending onthe specific product and terms of the customer purchase agreement. The Company’stypical warranties require it to repair or replace the defective productsduring the warranty period at no cost to the customer. At the time the productrevenue is recognized, the Company records a liability for estimated costsunder its warranties, which costs are estimated based on historical experience.The Company periodically assesses the adequacy of its recorded warrantyliability and adjusts the amounts as necessary. While the Company believes thatits estimated liability for product warranties is adequate, the estimatedliability for the product warranties could differ materially from future actualwarranty costs.

Changes in the Company’swarranty liability, included in other accrued liabilities, were as follows:

|                                                                     | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Balance, beginning of  period                                       |       | $                                                       | 419,000    |   | $ | 566,000 |   |
| Warranties issued and  changes in estimated pre-existing warranties |       | 530,000                                                 |       | 410,000 |   |
| Actual warranty costs  incurred                                     |       | (491,000                                                | )          | (409,000 | ) |
| Balance, end of period                                              |       | $                                                       | 458,000    |   | $ | 567,000 |   |

 

**NOTE 12 — BUSINESS SEGMENTS**

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

The following presents financial information by segmentfor the three-month and nine-month periods ended September 30, 2006 and 2005.Segment operating income excludes general corporate expenses, interest expenseand income taxes. Identifiable assets are those assets directly owned orutilized by the particular business segment.

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| Three months ended September 30, 2006 | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                     |       |       |       |             |       |                                    |       |
| Revenues from  unaffiliated customers                          |       | $          | 32,319,000 |             | $          | 15,043,000                              |       | $            | 17,276,000 |   |
|                                                           |       |       |       |             |       |                                    |       |
| Segment operating  income                                      |       | 4,287,000  |       | $                | 1,608,000  |                                    | $          | 2,679,000    |       |
| General corporate  expense                                     |       | (1,302,000 | )          |             |       |                                    |       |
| Interest expense — net                                    |       | (493,000   | )          |             |       |                                    |       |
| Earnings from  continuing operations before income taxes       |       | $          | 2,492,000  |             |       |                                    |       |         |
|                                                           |       |       |       |             |       |                                    |       |
| Segment assets                                                 |       | $          | 91,571,000 |             | $          | 29,575,000                              |       | $            | 61,996,000 |   |
| Corporate assets and  assets of discontinued operations        |       | 4,748,000  |       |             |       |                                    |       |
| Total assets                                                   |       | $          | 96,319,000 |             |       |                                    |       |         |

 

| Three months ended September 30, 2005 | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                     |       |       |       |             |       |                                    |       |
| Revenues from  unaffiliated customers                          |       | $          | 29,755,000 |             | $          | 13,933,000                              |       | $            | 15,822,000 |   |
|                                                           |       |       |       |             |       |                                    |       |
| Segment operating  income                                      |       | 4,023,000  |       | $                | 1,184,000  |                                    | $          | 2,839,000    |       |
| General corporate  expense                                     |       | (1,391,000 | )          |             |       |                                    |       |
| Interest expense — net                                    |       | (530,000   | )          |             |       |                                    |       |
| Earnings from  continuing operations before income taxes       |       | $          | 2,102,000  |             |       |                                    |       |         |
|                                                           |       |       |       |             |       |                                    |       |
| Segment assets                                                 |       | $          | 87,419,000 |             | $          | 33,818,000                              |       | $            | 53,601,000 |   |
| Corporate assets and  assets of discontinued operations        |       | 10,069,000 |       |             |       |                                    |       |
| Total assets                                                   |       | $          | 97,488,000 |             |       |                                    |       |         |

 

| Nine months ended September 30, 2006 | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                    |       |       |       |             |       |                                    |       |
| Revenues from  unaffiliated customers                         |       | $          | 88,029,000 |             | $          | 34,071,000                              |       | $            | 53,958,000 |   |
|                                                          |       |       |       |             |       |                                    |       |
| Segment operating  income                                     |       | 11,755,000 |       | $                | 2,910,000  |                                    | $          | 8,845,000    |       |
| General corporate expense                                     |       | (4,161,000 | )          |             |       |                                    |       |
| Interest expense — net                                   |       | (1,508,000 | )          |             |       |                                    |       |
| Earnings from  continuing operations before income taxes      |       | $          | 6,086,000  |             |       |                                    |       |         |

 

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| Nine months ended September 30, 2005 | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                    |       |       |       |             |       |                                    |       |
| Revenues from  unaffiliated customers                         |       | $          | 82,209,000 |             | $          | 36,008,000                              |       | $            | 46,201,000 |   |
|                                                          |       |       |       |             |       |                                    |       |
| Segment operating  income                                     |       | 11,657,000 |       | $                | 3,092,000  |                                    | $          | 8,565,000    |       |
| General corporate  expense                                    |       | (3,713,000 | )          |             |       |                                    |       |
| Interest expense — net                                   |       | (1,432,000 | )          |             |       |                                    |       |
| Earnings from  continuing operations before income taxes      |       | $          | 6,512,000  |             |       |                                    |       |         |

 

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

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

**General**

The Private Securities Litigation Reform Act of 1995(the “Reform Act”) provides a safe harbor for forward-looking statements madeby or on behalf of P&F Industries, Inc. and subsidiaries. The Company andits representatives may, from time to time, make written or verbalforward-looking statements, including statements contained in the Company’sfilings with the Securities and Exchange Commission and in its reports tostockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,”“estimate,” “anticipate,” “will,” and their opposites and similar expressionsidentify statements that constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934 and that are intended to come within the safeharbor protection provided by those sections.Any forward-looking 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. Allforward-looking statements involve risks and uncertainties. These risks and uncertainties could cause theCompany’s actual results for the 2006 fiscal year and beyond to differmaterially from those expressed in any forward-looking statement made by or onbehalf of the Company for a number of reasons, as previously disclosed inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2005in response to Item 1A. to Part I of Form 10-K. Forward-looking statements speak only as of the date on which they aremade. The Company undertakes no obligation to update publicly or revise anyforward-looking statement, whether as a result of new information, futuredevelopments or otherwise.

**Business**

P&F Industries, Inc. (“P&F”) conducts itsbusiness operations through two of its wholly-owned subsidiaries: FloridaPneumatic Manufacturing Corporation (“Florida Pneumatic”) and CountrywideHardware, Inc. (“Countrywide”). P&F and its subsidiaries are hereinreferred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”), throughWoodmark International, L.P. (“Woodmark”), a limited partnership betweenCountrywide and WILP Holdings, Inc., a subsidiary of Countrywide, and throughPacific Stair Products, Inc. (“Pacific Stair”). Nationwide is an importer andmanufacturer of door, window and fencing hardware. Woodmark is an importer ofbuilders’ hardware,including staircase components and kitchen and bath hardware and accessories.In January 2006, Countrywide acquiredsubstantially all of the operating assets of Pacific Stair, a manufacturerof premium stair rail products and a distributor of Woodmark’s staircasecomponents to the building industry, primarily in southern California and thesouthwestern region of the United States (see Note 6).

TheCompany’s wholly-owned subsidiary, EmbassyIndustries, Inc. (“Embassy”), was engaged in 

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themanufacture and sale of baseboard heating products and the importation and saleof radiant heating systems until it exited that business in October 2005 (seeNote 7) through the sale of substantially all of its non-real estateassets. The Company’s wholly-owned subsidiary, Green Manufacturing, Inc. (“Green”),was primarily engaged in the manufacture, development and sale of heavy-dutywelded custom designed hydraulic cylinders until it exited that business inDecember 2004 through the sale of certain assets. Green also manufactured aline of access equipment for the petro-chemical industry until it exited thatbusiness in February 2005 through the sale of certain assets and a line of posthole digging equipment for the agricultural industry until it exited thatbusiness in July 2005 through the sale of certain assets. Green has effectivelyceased all operating activities (see Note 7). Note 12 presentsfinancial information for the segments of the Company’s business.

**Overview**

On January 3, 2006, PacificStair acquired certain assets comprising the business of the former PacificStair Products, and assumed certain related liabilities. The Company’s consolidated results of operationsinclude the results of operations for Pacific Stair for the three and nine monthsended September 30, 2006 within its hardware business segment. In addition, theCompany’s consolidated results of operations present Embassy and Green asdiscontinued operations.

Consolidated revenues for the quarter endedSeptember 30, 2006 increased $2,564,000, or 8.6%, from $29,755,000 to$32,319,000. Revenues increased approximately $1,454,000, or 9.2%, atCountrywide, which includes revenues at Woodmark, Pacific Stair and Nationwide.Woodmark had third quarter revenues of $11,245,000, increasing $539,000, or5.0%. Newly-acquired Pacific Stair reported third quarter revenues of$1,526,000. Nationwide reported revenues of $4,505,000, decreasing $610,000, or11.9%. Revenues at Florida Pneumatic for the third quarter increased$1,110,000, or 8.0%, to $15,043,000. Consolidated gross profit increased$629,000, or 6.9%, for the third quarter primarily due to an increase inrevenues, which included Pacific Stair in 2006. Consolidated earnings fromcontinuing operations increased $282,000, or 23.2%, from $1,213,000 to$1,495,000 for the quarter ended September 30, 2006.

**Critical Accounting Policies and Estimates**

The Company prepares its consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States of America. Certain of these accounting policies require theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities, revenues and expenses. On an ongoing basis,the Company evaluates estimates, including those related to bad debts,inventory reserves, goodwill and intangible assets and warranty reserves. TheCompany bases its estimates on historical data and experience, when available,and on various other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates.

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

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**ACQUISITION**

For acquisitions, results of operations are includedin the Consolidated Condensed Financial Statements from the date ofacquisition.

Pacific Stair Products, Inc.

Pursuant to an Asset Purchase Agreement (the “PSPAPA”), dated December 20, 2005, between Pacific Stair Products, a Californiacorporation (“Old PSP”), and Pacific Stair Products, Inc., a newly-formedDelaware corporation (“Pacific Stair”) and a wholly-owned subsidiary ofCountrywide, effective January 3, 2006, Pacific Stair purchased substantiallyall of the operating assets of Old PSP. The total purchase price for the assetswas approximately $5,233,000, subject to adjustments, plus the assumption ofcertain liabilities and obligations by Pacific Stair. The assets purchasedpursuant to the PSP APA include, among others, accounts receivable, inventory,machinery and equipment and certain intangibles. Certain assets were retainedby Old PSP including cash and title to any real property. The purchase price,including direct acquisition costs, represents a premium over the fair value ofthe assets purchased of approximately $4,243,000, which has been allocatedamong goodwill and other intangible assets. Pacific Stair is a manufacturer ofpremium stair rail products and a distributor of staircase components to thebuilding industry, primarily in southern California and the southwestern regionof the United States. As a result of this transaction, Countrywide hasincreased its purchasing power and geographic distribution. The acquisition wasfinanced through the Company’s credit facility with Citibank. The consolidated condensed financial statementspresented herein include the results of operations for Pacific Stair for theperiod from January 3, 2006 to September 30, 2006.

As part of the acquisition, the Company recordedapproximately $3,300,000 in other identifiable intangible assets, principallyrelated to the value of customer relationships and a tradename, andapproximately $943,000 of goodwill, including direct acquisition costs, throughSeptember 30, 2006.

**DISCONTINUED OPERATIONS**

Embassy Industries, Inc.

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

Pursuant to a Lease, dated as of October 11, 2005,between Embassy, as landlord and EMI, as tenant (the “EMI Lease”), Embassyagreed to lease certain space (approximately 60,000 rentable square feet) inthe building located at 300 Smith Street, Farmingdale, New York to EMI inconnection with the operation of EMI’s business, at an annual rental rate of$480,000, payable in monthly installments of $40,000 each. The term of the EMILease was for a period of six (6) months commencing October 11, 2005 andterminating April 10, 2006; provided however, that, in the event EMI servednotice on Embassy by December 31, 2005, the EMI Lease could be extended on amonth to month basis to, and including, September 30, 2006. EMI served noticeon Embassy to extend the EMI Lease through May 31, 2006.

Embassy has effectively ceasedall operating activities. TheCompany recognized a gain on the 

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

On July 24, 2006, Embassy received a letter (the “PurchaserLetter”) from counsel to J. D’Addario & Company, Inc., a New Yorkcorporation (“Purchaser”), purporting to terminate that certain contractentered into by Embassy and Purchaser on January 13, 2006 (the “Agreement”, andas amended, the “Contract of Sale”). Pursuant to the Contract of Sale, Embassyagreed to sell its Farmingdale, New York premises (the “Farmingdale Premises”)to Purchaser for a purchase price of $6,403,000.

The sale of the Farmingdale Premises was contingentupon completion of due diligence and other conditions set forth in the Contractof Sale, including, without limitation, that upon the expiration of theInvestigation Period (as defined in the Contract of Sale), Embassy was toproceed with certain environmental remediation at the Farmingdale Premises (the“Required Environmental Remediation”) to the satisfaction of the Suffolk CountyDepartment of Health Services (“SCDHS”), to obtain a “No Further Action” letterfrom SCDHS, and to provide a copy of said letter to Purchaser upon Embassy’sreceipt thereof.

Upon the expiration of the Investigation Period,Embassy completed the Required Environmental Remediation. On May 30, 2006,SCDHS issued a letter (the “SCDHS Letter”) stating that no further remediationwill be required by SCDHS at such time with respect to the RequiredEnvironmental Remediation. The SCDHS Letter also noted that laboratory dataprovided for the upgradient groundwater sample (the “Sample”) indicated that groundwatercontamination exists, and that, due to the significant exceedences noted, thisinformation was reported to the New York State Department of EnvironmentalConservation (“NYSDEC”) Spills Unit, and a NYSDEC Spill Number (the “DEC SpillNumber”) was assigned. Embassy delivered a copy of the SCDHS Letter toPurchaser pursuant to the terms of the Contract of Sale.

The Sample was contaminated with petroleum, and, tothe Company’s knowledge, no petroleum products were used, stored or handled byEmbassy at the Farmingdale Premises at or near the location where the Samplewas collected. The Sample was collected from an upgradient location near thenorthern border of the Farmingdale Premises, which is in close proximity to aneighboring property that experienced a petroleum release. Shortly followingreceipt of the SCDHS Letter, NYSDEC verbally advised Embassy that it approvedan investigation work-plan submitted by Embassy; the purpose of theinvestigation was to confirm that the contamination does not originate at theFarmingdale Premises. The investigation was completed on August 2, 2006 and theinvestigation results, which confirmed that the source of the petroleumcontamination is not the Farmingdale Premises, were submitted to the NYSDEC onAugust 7, 2006. On August 11, 2006, the NYSDEC advised Embassy that, based onthe results of the investigation, it is apparent that the Farmingdale Premisesis not the source of groundwater contamination that was discovered based on theSample, and that therefore the NYSDEC database has been modified to remove theFarmingdale Premises as the source of the contamination.

The Purchaser Letter purports to terminate theContract of Sale based upon Purchaser’s assertion that the SCDHS Letter doesnot constitute a “No Further Action” letter as required by the Contract ofSale, and demands that the escrow agent return the downpayment with accruedinterest, and that Purchaser be reimbursed for the costs of survey and titleexamination.

Embassy has informed Purchaser that, in light of thecontents of the SCDHS Letter, Purchaser’s purported termination of the Contractof Sale is without effect, and that Purchaser is in default of its obligationto consummate the purchase of the Farmingdale Premises under the terms of theContract of Sale. On August 2, 2006, Purchaser instituted an action againstEmbassy in the Supreme Court of the 

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State of New York, County ofSuffolk, for breach of contract and return of downpayment, seeking $650,000,together with costs of title and survey and interest thereon, and the cost ofthe action. Embassy believes the action is without merit and intends tovigorously defend it.

Green Manufacturing, Inc. — Agricultural Products Division

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

The purchase price paid by Benko in considerationfor the assets acquired pursuant to the Agricultural APA was $530,000,consisting of (a) a payment to Green at Agricultural Closing of $225,000; (b)$25,000 payable pursuant to the terms of a Promissory Note (“Agricultural Note1”), dated July 14, 2005, payable in equal monthly amounts over a five (5)month period commencing as of the Agricultural Closing; and (c) $280,000payable pursuant to the terms of a Promissory Note (collectively withAgricultural Note 1, the “Agricultural Notes”), dated July 14, 2005, payable inequal monthly amounts over a four (4) year period commencing as of theAgricultural Closing. In addition, Benko assumed certain of Green’s contractualobligations. The obligations of Benko under the Agricultural APA and theAgricultural Notes were guaranteed by each of a principal shareholder and anaffiliate of Benko, and partially secured by certain collateral.

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

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

Green Manufacturing, Inc. — Access Division

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

The purchase price agreed to by Benko inconsideration for the assets acquired pursuant to the Access APA, giving effectto certain adjustments, was approximately $1,756,655, consisting of (a) apayment to Green at the Access Closing of approximately $880,069; (b) $755,724payable pursuant to the terms of a Promissory Note (“Access Note 1”), datedFebruary 2, 2005, payable in various amounts over a twenty-one (21) monthperiod commencing as of the Access Closing; and (c) $120,862 payable 

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pursuant to the terms of aPromissory Note (collectively with Access Note 1, the “Access Notes”), datedFebruary 2, 2005, payable in various amounts over a four (4) month periodcommencing as of the Access Closing. Benko agreed to pay additionalconsideration on an annual basis for the two (2) successive twelve (12) monthperiods commencing as of the Access Closing, dependent on certain sales byBenko, subject to certain other conditions. In addition, Benko assumed certainof Green’s contractual obligations. The obligations of Benko under the AccessAPA and the Access Notes were guaranteed by each of a principal shareholder andan affiliate of Benko, and partially secured by certain collateral.

Benko had withheld certain payments regarding itsoutstanding Access Note as a result of a disagreement regarding certainrepresentations made by the Company in the Access APA. As such, the Companyrecorded a reserve of $150,000 at December 31, 2005. In August 2006, theCompany and Benko negotiated a settlement under both the Access Note and theoutstanding Agricultural Note and received a payment of approximately $477,000to resolve the matter.

The Company recognized a gain on the sale of theseassets of approximately $71,000, net of taxes, in fiscal 2005.

The following amounts related to Embassy and Greenhave been segregated from the Company’s continuing operations and are reportedas assets held for sale and assets and liabilities of discontinued operationsin the consolidated condensed balance sheets:

|                                                                   | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                             |       |                            |       |
| Prepaid expenses                                                  |       | $                                | 316,000    |                            | $          | 77,000 |   |
| Assets held for  sale                                             |       | 575,000                          |       | 623,000                         |       |
| Total assets  held for sale and assets of discontinued operations |       | $                                | 891,000    |                            | $          | 700,000 |   |
|                                                              |       |                             |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                             |       |                            |       |
| Accounts payable  and accrued expenses                            |       | $                                | 456,000    |                            | $          | 991,000 |   |
| Mortgage payable                                                  |       | 1,282,000                        |       | 1,367,000                       |       |
| Total liabilities of  discontinued operations                     |       | $                                | 1,738,000  |                            | $          | 2,358,000 |   |

 

 

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Results of operations forEmbassy and Green are included from the beginning of each fiscal periodpresented through the respective dates of asset disposition, and have beensegregated from continuing operations and reflected as discontinued operationsapproximately as follows: 
| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                                                  |       | $                                                    | —     |                                                | $          | 2,960,000 |   | $ | — |   | $ | 8,884,000 |   |
|                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from operation of  discontinued operations, before taxes |       | $                                                    | (85,000    | )                                                   | $          | (36,000 | ) | $ | (9,000 | ) | $ | (304,000 | ) |
| Income tax benefit                                            |       | 34,000                                               |       | 3,000                                               |       | 3,000 |   | 93,000 |   |
| Loss from operation of  discontinued operations               |       | (51,000                                              | )          | (33,000                                             | )          | (6,000 | ) | (211,000 | ) |
| Gain on sale of  discontinued operations, before taxes        |       | —                                               |       | 523,000                                             |       | — |   | 630,000 |   |
| Income tax expense                                            |       | —                                               |       | (178,000                                            | )          | — |   | (214,000 | ) |
| Gain on sale of  discontinued operations                      |       | —                                               |       | 345,000                                             |       | — |   | 416,000 |   |
| Earnings (loss) from discontinued operations                  |       | $                                                    | (51,000    | )                                                   | $          | 312,000 |   | $ | (6,000 | ) | $ | 205,000 |   |

 

**RESULTS OF OPERATIONS**

**Quarters ended September 30, 2006 and 2005**

**Revenues**

Revenues for the quarters ended September 30, 2006and 2005 were approximately as follows:
| **Three months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                             |       | $                | 32,319,000 |                                    | $          | 15,043,000   |       | $ | 17,276,000 |   |
| ** **                                           |       |             |       |                                    |       |         |       |
| **2005**                                             |       | $                | 29,755,000 |                                    | $          | 13,933,000   |       | $ | 15,822,000 |   |
| ** **                                           |       |             |       |                                    |       |         |       |
| **% increase (decrease)**                            |       | 8.6              | %          | 8.0                                     | %          | 9.2          | %          |

 

Revenues from tools and other products increased dueprimarily to approximately $2,043,000 in retail revenues from new productsshipped to a significant customer. Partially offsetting this increase wasapproximately $509,000 less in retail promotions in the period, as well as adecrease in base sales of approximately $331,000. Base sales decreased as aresult of decreased purchasing activity of approximately $973,000 from asignificant customer as part of a program to reduce its overall inventorylevels. This was offset by an increase in base sales of approximately $642,000to another significant customer due primarily to the stocking of newly redesignedproducts that are expected to be reset in that customer’s store displays on orabout January 2007.

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Revenues from hardware increased at Woodmark andinclude revenues from the recently-acquired Pacific Stair. Woodmark’s revenuesincreased $539,000, or 5.0%. Revenues from the sale of staircase componentsdecreased in the third quarter by approximately $271,000, or 3.1%, dueprimarily to softness in the new home construction market. Further, revenues inour kitchen and bath products sold into the mobile home and remodeling marketshave increased approximately $810,000, or 41.6%, as sales to a large customerhave rebounded to 2004 levels after experiencing a decline in 2005. Inaddition, we have strengthened relationships with other customers. PacificStair’s revenues were $1,526,000 for the third quarter. Nationwide’s revenuesdecreased by approximately $610,000, or 11.9%, primarily attributable to adecrease of approximately $378,000 in sales of fencing products due to marketweakness and a decrease of approximately $178,000 in sales of patio productsthat resulted from the discontinuation of the production and sale of screendoors.

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

**Gross Profits**

Gross profits for thequarters ended September 30, 2006 and 2005 were approximately as follows:

** **
| **Three months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                             |       | $                | 9,702,000  |                                    | $          | 4,177,000    |       | $ | 5,525,000 |   |
| ** **                                           |       | 30.0             | %          | 27.8                                    | %          | 32.0         | %          |
| ** **                                           |       |             |       |                                    |       |         |       |
| **2005**                                             |       | $                | 9,073,000  |                                    | $          | 3,728,000    |       | $ | 5,345,000 |   |
| ** **                                           |       | 30.5             | %          | 26.8                                    | %          | 33.8         | %          |

 

The increase in the gross profit percentage fromtools and other products was due primarily to a lower proportionate amount ofretail promotional sales in the current period, which historically have loweraverage margins, versus the prior-year period, a shift to high-quality,lower-cost suppliers for some products and the strength of the U.S. dollar inrelation to the Japanese yen and the Taiwan dollar compared to the prior-yearperiod. The decrease in the gross profit percentage from hardware was dueprimarily to (a) some cost increases from Asian suppliers due to increases inthe cost of metals that were not fully offset by general selling priceincreases, (b) the impact from significant revenue increases in thelower-margin direct container business at Woodmark, (c) competitive pricingpressures on stair products in certain markets and (d) the inclusion of PacificStair, which operates at a lower gross margin than the rest of the group. Thegross margin percentage decrease was partially offset by a shift by Nationwideto high-quality, lower-cost suppliers for some products.

**Selling, General andAdministrative Expenses**

Consolidated selling, general and administrative (“SG&A”)expenses increased $276,000, or 4.3%, from approximately $6,440,000 toapproximately $6,716,000. SG&A expenses grew as expected at a lesser ratethan the consolidated revenue increase for the quarter. This expense growth wasdriven by several factors, including share-based compensation expense, theinclusion of Pacific Stair expenses in the 2006 period, increased freight costsdue to the increase in the price of oil and planned increases in sales andmarketing expenses that are intended to generate additional revenue in thecoming periods.

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SG&A expenses as a percentage of revenues decreased from 21.6% to20.8%.

**Interest - Net**

Net interest expense decreased $37,000, or 7.0%,from approximately $530,000 to approximately $493,000. Interest expense onborrowings under the Company’s revolving credit loan facility decreased byapproximately $23,000, as lower average borrowings were adversely impacted byhigher average interest rates. Interest expense on borrowings under the termloan facility decreased by approximately $40,000 as lower average borrowingsduring the period due to repayments were offset by higher average interestrates. Interest expense on Woodmark’s acquisition-related notes increased byapproximately $9,000 due to higher average interest rates.

**Income Taxes**

The effective tax rates applicable to earnings fromcontinuing operations for the quarters ended September 30, 2006 and 2005 were40.0% and 42.3%, respectively. The decrease in the effective tax rate isattributable to the deductibility of certain compensation expenses in 2006 thatwere not deductible in 2005, primarily related to the approval by stockholdersin May 2006 of the Executive 162(m) Bonus Plan.

**Nine-month periods ended September 30, 2006 and 2005**

**Revenues**

Revenues for the nine-month periods ended September30, 2006 and 2005 were approximately as follows:
| **Nine months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and other products** | ** ** | **Hardware** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------------------|------------|--------------|------------|
| **2006**                             |       | $88,029,000      |       | $34,071,000                  |       | $53,958,000  |       |
| ** **                           |       |             |       |                         |       |         |       |
| **2005**                             |       | $82,209,000      |       | $36,008,000                  |       | $46,201,000  |       |
| ** **                           |       |             |       |                         |       |         |       |
| **% increase (decrease)**            |       | 7.1              | %          | (5.4                         | )%         | 16.8         | %          |

 

Revenues from tools and other products decreased dueprimarily to approximately $2,963,000 less in retail promotions in the period,as well as a decrease in base sales of approximately $1,462,000. Base sales decreasedas a result of decreased purchasing activity of approximately $2,233,000 from asignificant customer as part of a program to reduce its overall inventorylevels, which was partially offset by a $771,000 increase in base sales fromanother significant customer due primarily to the stocking of newly redesignedproducts that are expected to be reset in that customer’s store displays on orabout January 2007. Decreases in revenues of approximately $188,000 at Franklinwere due primarily to decreased shipments to a few customers related to weakin-store sales and supply-related issues. Decreases in OEM sales ofapproximately $445,000 resulted from decreased activity with a certaincustomer. Partially offsetting these decreases were incremental revenues fromnew products in the retail channel of approximately $2,735,000 to a significantcustomer and increases in Berkley revenues of approximately $324,000 due tobetter market penetration.

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Revenues from hardware increased at Woodmark,decreased at Nationwide and include revenues from the recently-acquired PacificStair. Woodmark’s revenues increased $3,427,000, or 11.2%. Revenues from thesale of staircase components continued to increase by approximately $1,712,000,or 7.3%, benefiting from better customer penetration. Further, revenues in ourkitchen and bath products sold into the mobile home and remodeling markets haveincreased approximately $1,715,000, or 29.2%, as sales to a large customer haverebounded to 2004 levels after experiencing a decline in 2005. In addition, wehave strengthened relationships with other customers. Pacific Stair’s revenueswere $4,883,000 for the nine months ended September 30, 2006. Moreover,Nationwide’s revenues decreased by approximately $554,000, or 3.6%, primarilyattributable to a decrease of approximately $242,000 in revenues in the OEMbusiness and a decrease of approximately $248,000 in revenues from patioproducts that resulted from the discontinuation of the production and sale ofscreen doors.

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

**Gross Profits**

Gross profits for thenine-month periods ended September 30, 2006 and 2005 were approximately asfollows:
| **Nine months ended  September 30,** | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                            |       | $                | 27,357,000 |                                    | $          | 10,239,000   |       | $ | 17,118,000 |   |
| ** **                                          |       | 31.1             | %          | 30.1                                    | %          | 31.7         | %          |
| ** **                                          |       |             |       |                                    |       |         |       |
| **2005**                                            |       | $                | 25,920,000 |                                    | $          | 10,194,000   |       | $ | 15,726,000 |   |
| ** **                                          |       | 31.5             | %          | 28.3                                    | %          | 34.0         | %          |

 

The increase in the gross profit percentage fromtools and other products was due primarily to a lower proportionate amount ofretail promotional sales in the current period, which historically have loweraverage margins, versus the prior-year period, a shift to high-quality,lower-cost suppliers for some products and the strength of the U.S. dollar inrelation to the Japanese yen and the Taiwan dollar compared to the prior-yearperiod. The decrease in the gross profit percentage from hardware was dueprimarily to (a) some cost increases from Asian suppliers due to increases inthe cost of metals that were not fully offset by general selling priceincreases in the third quarter of 2006, (b) the impact from significant revenueincreases in the lower-margin direct container business at Woodmark, (c)competitive pricing pressures on stair products in certain markets and (d) theinclusion of Pacific Stair, which operates at a lower gross margin than therest of the group. The gross margin percentage decrease was partially offset bya favorable product mix in fencing revenues and a shift by Nationwide tohigh-quality, lower-cost suppliers for some products.

**Selling, General andAdministrative Expenses**

Consolidated selling, general and administrative (“SG&A”)expenses increased $1,787,000, or 9.9%, from approximately $17,977,000 toapproximately $19,764,000. SG&A expenses grew at a slightly faster ratethan the consolidated revenue increase for the nine months ended September 30,2006. This expense growth was driven by several factors, including share-basedcompensation expense, certain corporate non-recurring professional and taxfees, the non-recurring cost of the move of the Company’s

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corporate headquarters, increased freight costs and planned increasesin sales and marketing expenses that are intended to generate additionalrevenue in the coming periods. SG&A expenses as a percentage of revenuesincreased from 21.9% to 22.5%.

**Interest - Net**

Net interest expense increased $76,000, or 5.3%,from approximately $1,432,000 to approximately $1,508,000. Interest expense onborrowings under the Company’s revolving credit loan facility increased byapproximately $60,000, as lower average borrowings were adversely impacted byhigher average interest rates. Interest expense on trade financing at FloridaPneumatic increased approximately $31,000 as a result of higher averageborrowings and higher interest rates. Interest expense on borrowings under theterm loan facility decreased by approximately $59,000 as lower averageborrowings during the period due to repayments were offset by higher averageinterest rates. Interest expense on Woodmark’s acquisition-related notesincreased by approximately $30,000 due to higher average interest rates.

**Income Taxes**

The effective tax rates applicable to earnings fromcontinuing operations for the nine-month periods ended September 30, 2006 and2005 were 40.0% and 42.1%, respectively. The decrease in the effective tax rateis attributable to the deductibility of certain compensation expenses in 2006that were not deductible in 2005, primarily related to the approval bystockholders in May 2006 of the Executive 162(m) Bonus Plan.

**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s cash flows from operations can besomewhat cyclical, typically with the greatest demand in the second and thirdquarters followed by positive cash flows in the fourth quarter as receivablesand inventories trend down. Due to its strong asset base, predictable cashflows and favorable banking relationships, the Company believes it has adequateaccess to capital, if and when needed. The Company monitors average days salesoutstanding, inventory turns and capital expenditures to project liquidityneeds and evaluate return on assets employed.

TheCompany gauges its liquidity and financial stability by the measurements shownin the following table:

|                           | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                                | 21,164,000 |                            | $          | 27,981,000 |   |
| Current Ratio             |       | 1.68 to 1                        |       | 2.51 to 1                       |       |
| Shareholders’ Equity |       | $                                | 51,267,000 |                            | $          | 47,716,000 |   |

 

On January 3, 2006, Pacific Stair acquired certainassets comprising the business of the former Pacific Stair Products and assumedcertain related liabilities.

On June 30, 2004, Woodmark acquired certain assetscomprising the business of the former Woodmark International L.P. and itswholly-owned subsidiary, the former Stair House, Inc., and assumed certainrelated liabilities.

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In connection with theWoodmark acquisition transaction, the Company is liable for additional payments to the sellers. Theamount of these payments, which would be made as of either June 30, 2007 orJune 30, 2009, are to be based on increases in earnings before interest andtaxes, for the year ended on the respective date, over a base of $5,100,000.Woodmark has the option to make a payment as of June 30, 2007 in an amountequal to 48% of this increase. If Woodmark does not make this payment as ofJune 30, 2007, the Sellers may demand payment as of June 30, 2009 in an amountequal to 40% of the increase. Any such additional payments will be treated asadditions to goodwill.

In connection with the sale of certain assets ofEmbassy in October 2005, the Company recorded a receivable of approximately$1,233,000, comprised of a working capital adjustment of approximately $433,000and approximately $800,000 of escrow monies due, subject to certain conditionsof release. In January 2006, the Company received approximately $833,000 incash relating to the working capital adjustment and a partial release of escrowmonies. The balance of the escrow monies due are expected to be paid to theCompany in June 2007.

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

On July 24, 2006, Embassy received a letter (the “PurchaserLetter”) from counsel to J. D’Addario & Company, Inc., a New Yorkcorporation (“Purchaser”), purporting to terminate that certain contractentered into by Embassy and Purchaser on January 13, 2006 (the “Agreement”, andas amended, the “Contract of Sale”). Pursuant to the Contract of Sale, Embassyagreed to sell its Farmingdale, New York premises (the “Farmingdale Premises”)to Purchaser for a purchase price of $6,403,000.

The sale of the Farmingdale Premises was contingentupon completion of due diligence and other conditions set forth in the Contractof Sale, including, without limitation, that upon the expiration of theInvestigation Period (as defined in the Contract of Sale), Embassy was toproceed with certain environmental remediation at the Farmingdale Premises (the“Required Environmental Remediation”) to the satisfaction of the Suffolk CountyDepartment of Health Services (“SCDHS”), to obtain a “No Further Action” letterfrom SCDHS, and to provide a copy of said letter to Purchaser upon Embassy’sreceipt thereof.

Upon the expiration of the Investigation Period,Embassy completed the Required Environmental Remediation. On May 30, 2006,SCDHS issued a letter (the “SCDHS Letter”) stating that no further remediationwill be required by SCDHS at this time with respect to the RequiredEnvironmental Remediation. The SCDHS Letter also noted that laboratory dataprovided for the upgradient groundwater sample (the “Sample”) indicated thatgroundwater contamination exists, and that, due to the significant exceedencesnoted, this information was reported to the New York State Department ofEnvironmental Conservation (“NYSDEC”) Spills Unit, and a NYSDEC Spill Number(the “DEC Spill Number”) was assigned. Embassy delivered a copy of the SCDHSLetter to Purchaser pursuant to the terms of the Contract of Sale.

The Sample was contaminated with petroleum, and, tothe Company’s knowledge, no petroleum products were used, stored or handled byEmbassy at the Farmingdale Premises at or near the location where the Samplewas collected. The Sample was collected from an upgradient location near thenorthern

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border of the Farmingdale Premises, which is in close proximity to aneighboring property that experienced a petroleum release. Shortly followingreceipt of the SCDHS Letter, NYSDEC verbally advised Embassy that it approvedan investigation work-plan submitted by Embassy; the purpose of theinvestigation was to confirm that the contamination does not originate at theFarmingdale Premises. The investigation was completed on August 2, 2006 and theinvestigation results, which confirmed that the source of the petroleumcontamination is not the Farmingdale Premises, were submitted to the NYSDEC onAugust 7, 2006. On August 11, 2006, the NYSDEC advised Embassy that, based onthe results of the investigation, it is apparent that the Farmingdale Premisesis not the source of groundwater contamination that was discovered based on theSample, and that therefore the NYSDEC database has been modified to remove theFarmingdale Premises as the source of the contamination.

The Purchaser Letter purports to terminate theContract of Sale based upon Purchaser’s assertion that the SCDHS Letter doesnot constitute a “No Further Action” letter as required by the Contract ofSale, and demands that the escrow agent return the downpayment with accruedinterest, and that Purchaser be reimbursed for the costs of survey and titleexamination.

Embassy has informed Purchaser that, in light of thecontents of the SCDHS Letter, Purchaser’s purported termination of the Contractof Sale is without effect, and that Purchaser is in default of its obligationto consummate the purchase of the Farmingdale Premises under the terms of the Contractof Sale. On August 2, 2006, Purchaser instituted an action against Embassy inthe Supreme Court of the State of New York, County of Suffolk, for breach ofcontract and return of downpayment, seeking $650,000, together with costs oftitle and survey and interest thereon, and the cost of the action. Embassybelieves the action is without merit and intends to vigorously defend it.

Cash decreased $399,000, from $1,772,000 as ofDecember 31, 2005 to $1,373,000, as of September 30, 2006. The Company’s debtlevels decreased, from $26,631,000 at December 31, 2005 to $26,123,000 atSeptember 30, 2006, primarily from the pay down of debt from earnings. TheCompany’s total percent of debt to total book capitalization (debt plus equity)decreased from 35.8% at December 31, 2005 to 33.8% at September 30, 2006.

Cash provided by (used in) operating activities ofcontinuing operations for the nine-month periods ended September 30, 2006 and2005 was approximately $7,734,000 and $(4,428,000), respectively. The Company believesthat cash on hand derived from operations and cash available through borrowingsunder its credit facilities will be sufficient to allow the Company to meet itsforeseeable working capital needs.

During the nine months ended September 30, 2006, netaccounts receivable increased by approximately $6,143,000. Increases wereapproximately $3,508,000 and $2,059,000 at Florida Pneumatic and Countrywide,respectively. The increase in Florida Pneumatic’s net accounts receivableresulted from shipment of its redesigned product line to a major customer thatoccurred in the latter part of the third quarter of 2006. The increase atCountrywide was due primarily to increase in revenues of Woodmark during thecurrent nine-month period, as well as the inclusion of Pacific Stair, whichreported approximately $576,000 in net accounts receivable at the acquisitiondate that increased during the nine-month period ended September 30, 2006 byapproximately $426,000.

During the nine months ended September 30, 2006,inventories increased by approximately $1,172,000. Increases (decreases) wereapproximately $(1,246,000) and $2,080,000 at Florida Pneumatic and Countrywide,respectively. Inventory levels at Florida Pneumatic decreased as a result of ashift to high-quality, lower cost suppliers that require less lead times forinventory purchases, reducing the need

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to carry the same levels of inventory as in the prior year. Theincrease at Countrywide was due primarily to the inclusion of Pacific Stair,which reported approximately $335,000 in inventories at the acquisition datethat increased during the nine-month period ended September 30, 2006 byapproximately $815,000 and increases at Nationwide of approximately $1,880,000,offset by a decrease at Woodmark of approximately $612,000.

During the nine months ended September 30, 2006,short-term borrowings increased by $2,500,000, primarily from the acquisitionof Pacific Stair and the timing of working capital requirements.

During the nine months ended September 30, 2006,accounts payable increased by approximately $6,330,000. Increases wereapproximately $6,156,000 and $172,000 at Florida Pneumatic and Countrywide,respectively. The increase at Florida Pneumatic was due primarily to inventorypurchases of redesigned product introduced in the third quarter of 2006, aswell as the impact from a major foreign supplier that has granted morefavorable payment terms. The increase at Countrywide was due primarily to theincrease at Nationwide of approximately $315,000 and the inclusion of PacificStair, which reported approximately $2,000 in accounts payable at theacquisition date that increased during the nine-month period ended September30, 2006 by approximately $71,000. These increases were partially offset from adecrease at Woodmark of approximately $214,000, primarily resulting from thetiming of certain interest payments and inventory purchases.

On June 30, 2004, in conjunction with the Woodmarkacquisition transaction, the Company entered into a credit agreement withCitibank and another bank. This agreement, as amended from time to time,provides the Company with various credit facilities, including revolving creditloans, term loans for acquisitions and a foreign exchange line. The credit agreement expires on June 30, 2007 and issubject to annual review by the lending banks.

The revolving credit loan facility provides amaximum of $12,000,000, with various sublimits, for direct borrowings, lettersof credit, bankers’ acceptances and equipment loans. There are no commitmentfees for any unused portion of this credit facility. At September 30, 2006,there was $6,500,000 outstanding against the revolving credit loan facility,and there were no open letters of credit.

The term loan facilityprovides a maximum commitment of $34,000,000 to finance acquisitions subject to the approval of the lending banks.There are no commitment fees for any unused portion of this credit facility.The Company borrowed $29,000,000 against this facility to finance the Woodmarkacquisition transaction in June 2004, and there was $14,550,000, includingamounts rolled over from the prior term loan facility, outstanding against theterm loan facility at September 30, 2006.

The foreign exchange lineprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases ofJapanese yen needed for payments to foreign suppliers. The total amount offoreign currency forward contracts outstanding under the foreign exchange line at September 30, 2006, based onthat day’s closing spot rate, was approximately $1,157,000.

Under its credit agreement, the Company is requiredto adhere to certain financial covenants. AtSeptember 30, 2006, and for the quarter then ended, the Company was in compliancewith all of these covenants. Certain of the Company’s mortgageagreements also require the Company to adhere to certain financial covenants. At September 30, 2006, and for the quarter thenended, the Company was in compliance with all of these covenants.

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Capital spending was approximately $1,257,000 and$404,000 for the nine months ended September 30, 2006 and 2005, respectively,which amounts were provided from working capital. Capital expenditures for theremainder of 2006 are expected to be approximately $250,000, some of which maybe financed through the Company’s credit facilities. Included in the expectedtotal for 2006 are capital expenditures relating to renovation and expansion ofoperating facilities, new products, expansion of existing product lines andreplacement of equipment.

**OFF-BALANCE SHEET ARRANGEMENTS**

The Company’s foreign exchange line provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. The Company has not purchased forwardcontracts on New Taiwan dollars. The total amount of foreign currency forwardcontracts outstanding at September 30, 2006, based on that day’s closing spotrate, was approximately $1,157,000.

The Company, through Florida Pneumatic, imports asignificant amount of its purchases from Japan, with payment due in Japaneseyen. As a result, the Company is subject to the effects of foreign currencyexchange fluctuations. The Company uses a variety of techniques to protectitself from any adverse effects from these fluctuations, including increasingits selling prices, obtaining price reductions from its overseas suppliers,using alternative supplier sources and entering into foreign currency forwardcontracts. The decrease in the strength of the Japanese yen versus the U.S.dollar from 2005 to 2006 had a positive effect on the Company’s results ofoperations and its financial position. During the nine-months ended September30, 2006, the relative value of the U.S dollar in relation to the Japanese yenwas above fiscal 2005 averages. There can be no assurance as to the futuretrend of this value. (See “Item 3 - Quantitative and Qualitative DisclosuresAbout Market Risk.”)

**NEW ACCOUNTING PRONOUNCEMENTS**

See Note 5 to the Notes to Consolidated Condensed Financial Statementsincluded in Item 1 of this report.

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

**Item 3.                    QuantitativeAnd Qualitative Disclosures 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.

The Company accounts for changes in the fair value of itsforeign currency contracts by marking them to market and recognizing anyresulting gains or losses through its statement of earnings. The Company alsomarks its yen-denominated payables to market, recognizing any resulting gainsor losses in its statement of earnings. At September 30, 2006, the Company hadforeign currency forward contracts, maturing in 2006, to purchase Japanese yenat contracted forward rates. The value of these contracts at September 30,2006, based on that day’s closing spot rate, was approximately $1,157,000,which was the approximate value of the Company’s yen-denominated accountspayable. During the three-month periods ended September 30, 2006 and 2005, theCompany recorded in its cost of sales net realized losses of approximately$13,000 and $29,000, respectively, on foreign currency transactions. During thenine-month periods ended September 30, 2006 and 2005, the Company recorded inits cost of sales net realized losses of approximately $6,000 and $119,000,respectively, on foreign currency transactions. At September 30, 2006 and 2005,the Company had no unrealized gains or losses in 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 September 30, 2006 was approximately$129,000.

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 September 30, 2006 because of the relativelyshort-term maturity of these financial instruments. The carrying amountsreported for long-term debt approximate fair value as of September 30, 2006because, in general, the interest rates

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underlyingthe instruments fluctuate with market rates.

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

**Evaluation of disclosure controls and procedures**

An evaluation was performed, under the supervisionof, and with the participation of, the Company’s management, including thePrincipal Executive Officer and Principal Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securitiesand 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 noteffective for the reasons discussed below related to the weaknesses in ourinternal control over financial reporting. To address the control weaknessesdescribed below, the Company performed additional analysis and performed otherprocedures to ensure the consolidated financial statements were prepared inaccordance with generally accepted accounting principles. Accordingly,management believes that the consolidated condensed financial statementsincluded in this Quarterly Report on Form 10-Q, fairly present, in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

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

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

***Description of Material Weaknesses***

Management’s assessment confirmed the followingmaterial weaknesses at September 30, 2006 that were previously identified atJune 30, 2006, March 31, 2006, and December 31, 2005 in the Company’s internalcontrol over financial reporting:

1.               Deficiencies in the segregation of duties,specifically as they relate to cash management, the preparation and posting ofjournal entries and the general controls over information technology securityand user access.

2.               Significant internal control deficienciesthat were considered to be, in the aggregate, a material weakness, includedinadequate staffing and supervision leading to the untimely identification andresolution of certain accounting matters; and failure to perform timelyreviews, substantiation and evaluation of certain general ledger accountbalances.

The Certifications of the Company’s PrincipalExecutive Officer and Principal Financial Officer included as Exhibits 31.1 and31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of suchcertifications, information concerning the Company’s disclosure controls andprocedures and internal control over financial reporting. Such certificationsshould be read in conjunction with the information contained in this Item 4 -Controls and Procedures for a more complete understanding of the matters

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covered by such certifications.

***Planned Remediation Efforts to Address MaterialWeaknesses***

The Company has developed remediation plans andinitiated action steps during the nine-month period ended September 30, 2006designed to address each of the material weaknesses in the internal controlover financial reporting identified above and to implement any and allcorrective actions that are required to improve the design and operatingeffectiveness of internal control over financial reporting, including theenhancement of the Company’s policies, systems and procedures. The Company implementedthe following measures to remediate the numbered control deficienciesidentified above:

1.               Management has implemented measures tosegregate certain functions and otherwise improve cash management functionsincluding (i) individuals that initiate a wire transfer are now prevented fromtransmitting the wire transfer; (ii) all wire transfers in excess of $100,000now require written approval and release from Corporate management; (iii)modification of its check-signing privileges such that all checks will requiredual manual signatures; and (iv) all blank check stock will now be maintainedin a locked cabinet that will be accessible to an individual who is not a checksigner. In addition, management has implemented measures to segregate thepreparation of journal entries and the subsequent posting to the GeneralLedger.

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

The Company believes that the above measures haveaddressed all matters identified as a material weakness by management and theindependent registered public accounting firm. The Company will continue tomonitor the effectiveness of its internal controls and procedures on an ongoingbasis and will take further actions, as appropriate.

**Changes in Internal Control Over Financial Reporting**

Except as otherwise discussed herein, there havebeen no significant changes in the Company’s internal control over financialreporting during the most recently completed fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting. However, the Company made changes to thedesign and operation of internal control over financial reporting during thesecond quarter in order to increase the design and operating effectiveness ofinternal controls in connection with implementing Section 404 of theSarbanes-Oxley Act of 2002. In addition, the Company is currently implementingenhancements to the Company’s internal control over financial reporting toaddress the material weaknesses described above.

 

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**PART II - OTHER INFORMATION**
| **Item 1.**  | ** ** | **Legal Proceedings**                                                                                                                                                                                                                            |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       | The Company is a defendant or co-defendant in  various actions brought about in the ordinary course of conducting its  business. The Company does not believe that any of these actions are material  to the financial condition of the Company. |
|         |       |                                                                                                                                                                                                                                             |
| **Item 1A.** | ** ** | **Risk Factors**                                                                                                                                                                                                                                 |
|         |       | There were no material changes from risk factors  previously disclosed in the Company’s Annual Report on Form 10-K for the year  ended December 31, 2005 in response to Item 1A. to Part I of Form 10-K.                                    |
|         |       |                                                                                                                                                                                                                                             |
| **Item 2.**  | ** ** | **Unregistered Sales of Equity Securities and Use  of Proceeds**                                                                                                                                                                                 |
|         |       | None.                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                             |
| **Item 3.**  | ** ** | **Defaults Upon Senior Securities**                                                                                                                                                                                                              |
|         |       | None.                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                             |
| **Item 4.**  | ** ** | **Submission of Matters to a Vote of Security  Holders**                                                                                                                                                                                         |
|         |       | None.                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                             |
| **Item 5.**  | ** ** | **Other Information**                                                                                                                                                                                                                            |
|         |       | None.                                                                                                                                                                                                                                            |
|         |       |                                                                                                                                                                                                                                             |
| **Item 6.**  | ** ** | **Exhibits**                                                                                                                                                                                                                                     |
|         |       | See “Exhibit Index” immediately following the  signature page.                                                                                                                                                                         |

 

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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.                              |
|                     | Chief Financial Officer                            |
| Dated: November 10, 2006 | (Principal Financial and Chief Accounting Officer) |

 

 

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The following exhibits are either included in this report orincorporated herein by reference as indicated below:
| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.1**         |       | Stock Purchase Agreement, dated as of May 3, 2002,  by and between Mark C. Weldon and the Registrant (Incorporated by reference  to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated May 3,  2002). Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish supplementally a copy of any exhibit or schedule omitted from the  Stock Purchase Agreement to the Securities and Exchange Commission upon  request.                                                                                                                                                                                                                                                                                                   |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.2**         |       | Settlement Agreement and  Amendment to Stock Purchase Agreement, dated as of July 22, 2005, by  and between Mark C. Weldon and the Registrant (Incorporated by reference to  Exhibit 2.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.3**         |       | Asset Purchase Agreement, dated as of June 30, 2004,  by and among WM Texas International, L.P., a Texas limited partnership  formerly known as Woodmark International, L.P., SH Georgia, Inc., a Georgia  corporation formerly known as Stair House, Inc., Samuel G. Sherstad, WM Texas  GP, LLC, WM Texas Partners, LLC and Woodmark International, L.P., a Delaware  limited partnership (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  July 14, 2004, and amended September 10, 2004). Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees  to furnish, supplementally, a copy of any exhibit or schedule omitted from  the Asset Purchase Agreement to the Commission upon request. |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.4**         |       | Asset Purchase Agreement, dated December 13, 2004,  among Rosenboom Machine & Tool, Inc., Green Manufacturing, Inc. and  P&F Industries, Inc. (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  December 17, 2004, and amended March 4, 2005). Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees  to furnish, supplementally, a copy of any exhibit or schedule omitted from  the Asset Purchase Agreement to the Commission upon request.                                                                                                                                                                                                                                        |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.5**         |       | Amendment to Asset Purchase Agreement, dated June 8,  2005, among Rosenboom Machine & Tool, Inc., Green Manufacturing, Inc. and  P&F Industries, Inc. (Incorporated by  reference to Exhibit 2.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.6**         |       | Asset Purchase Agreement, dated as of February 2,  2005, between Green Manufacturing, Inc. and Benko Products, Inc. (Incorporated by reference to Exhibit 2.1 to  the Registrant’s Current Report on Form 8-K dated February 4, 2005). Pursuant to Item 601(b)(2) of Regulation S-K,  the Registrant agrees to furnish, supplementally, a copy of any exhibit or  schedule omitted from the Asset Purchase Agreement to the Commission upon  request.                                                                                                                                                                                                                                                                                                      |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.7**         |       | Asset Purchase Agreement, dated as of October 11,  2005, between Embassy Industries, Inc. and Mestek, Inc. (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  October 12, 2005). Pursuant to Item  601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule                                                                                                                                                                                                                                                                                                                                                                                         |

 

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|            |   | omitted from the Asset Purchase  Agreement to the Commission upon request.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **3.1**    |   | Restated Certificate of Incorporation of the  Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **3.2**    |   | Amended By-laws of the Registrant (Incorporated by  reference to Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **3.3**    |   | Amendment to the Amended By-laws of the Registrant  (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report  on Form 8-K dated March 21, 2005).                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **3.4**    |   | Amendment to the Amended By-laws of the Registrant  (Incorporated by reference to Exhibit 3 to the Registrant’s Current Report on  Form 8-K dated September 16, 2005).                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.1**    |   | Rights Agreement, dated as of August 19, 2004,  between the Registrant and American Stock Transfer & Trust Company, as  Rights Agent (Incorporated by reference to Exhibit 1 to the Registrant’s  Registration Statement on Form 8-A dated August 19, 2004).                                                                                                                                                                                                                                                                                               |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.2**    |   | Credit Agreement, dated as of June 30, 2004, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc.,  Nationwide Industries, Inc., Woodmark International, L.P. and Citibank, N.A.,  as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated July 14, 2004).                                                                                              |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.3**    |   | Amendment to Credit Agreement, dated June 24, 2005,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation,  Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide Hardware,  Inc., Nationwide Industries, Inc., Woodmark International, L.P. and Citibank,  N.A., as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated June 27, 2005).                                                                                       |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.4**    |   | Amendment No. 2 to Credit Agreement, dated December  27, 2005, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P. and  Citibank, N.A., as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.4 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 2005).                                                     |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.5**    |   | Amendment No. 3 to Credit Agreement, dated February  13, 2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.5 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2005). |

 

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| **4.6**    |   | Amendment No. 4 to Credit Agreement, dated May 11,  2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.6 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.7**    |   | Amendment No. 5 to Credit Agreement, dated June 29,  2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit  10.1 to the Registrant’s Current Report on Form 8-K dated June 30, 2006).                   |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.8**    |   | Amendment No. 6 to Credit Agreement, dated August  31, 2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit  10.1 to the Registrant’s Current Report on Form 8-K dated August 31, 2006).               |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.9**    |   | Certain instruments defining the rights of holders  of the long-term debt securities of the Registrant are omitted pursuant to  Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant agrees  to furnish supplementally copies of these instruments to the Commission upon  request.                                                                                                                                                                                                                                                        |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **10.1**   |   | Second Amended and Restated Employment Agreement,  dated as of May 30, 2001, between the Registrant and Richard A. Horowitz  (Filed herein).                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **10.2**   |   | Amendment to Second Amended and Restated Employment  Agreement, dated as of October 24, 2005, between the Registrant and Richard  A. Horowitz (Incorporated by reference to Exhibit  10.1 to the Registrant’s Current Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                     |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **10.3**   |   | Agreement, dated as of October 24, 2005, among the  Registrant, Richard A. Horowitz and the 1994 Richard A. Horowitz Family Trust  (Incorporated by reference to Exhibit  10.2 to the Registrant’s Current Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                                |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **10.4**   |   | 1992 Incentive Stock Option Plan of the Registrant,  as amended and restated as of March 13, 1997 (Incorporated by reference to  Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal  year ended December 31, 2003).                                                                                                                                                                                                                                                                                                           |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **10.5**   |   | 2002 Stock Incentive Plan of  the Registrant (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2002).                                                                                                                                                                                                                                                                                                                                                                     |

 

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| **10.6**                                                                                                                                                                                                                                                                                                                   |   | Contract of Sale, dated January 13, 2006, between  the Registrant and J. D’Addario & Company, Inc. (Incorporated by  reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated January 13, 2006).                                      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.7**                                                                                                                                                                                                                                                                                                                   |   | First Amendment to Contract of Sale, dated March 8,  2006, between the Registrant and J. D’Addario & Company, Inc.  (Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2005). |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.8**                                                                                                                                                                                                                                                                                                                   |   | Executive 162(m) Bonus Plan of the Registrant  (Incorporated by reference to Exhibit 10.1  to the Registrant’s Current Report on Form 8-K dated May 31, 2006).                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **14.1**                                                                                                                                                                                                                                                                                                                   |   | Code of Business Conduct and Ethics of the  Registrant and its Affiliates (Incorporated by reference to Exhibit 14.1 to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003).                                                   |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **31.1**                                                                                                                                                                                                                                                                                                                   |   | Certification of Richard A. Horowitz, Principal  Executive Officer of the Registrant, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Filed herein).                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **31.2**                                                                                                                                                                                                                                                                                                                   |   | Certification of Joseph A. Molino, Jr., Principal  Financial Officer of the Registrant, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Filed herein).                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **32.1**                                                                                                                                                                                                                                                                                                                   |   | Certification of Richard A. Horowitz, Principal  Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed  herein).                                                           |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **32.2**                                                                                                                                                                                                                                                                                                                   |   | Certification of Joseph A. Molino, Jr., Principal  Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed  herein).                                                         |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| A copy of any of  the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained,  upon payment of the Registrant’s reasonable expenses in furnishing such  exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite  100, Melville New York 11747, Attention: Corporate Secretary. |

 

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