**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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|   | **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |   |
|--------|------------|--------|-----------------------------------------------------------------------------------------------|--------|
|   |       |   |                                                                                          |   |
|   |       |   | **For the Quarter Ended March 31, 2004**                                                      |   |
|   |       |   |                                                                                          |   |
|   | **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |   |

 

**Commission File Number 1 - 5332**

 

**P & F INDUSTRIES, INC.**(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                 |   | **22-1657413**                          |
|------------------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of  incorporation or organization)              |   | (I.R.S. Employer Identification Number) |
|                                                                         |   |                                    |
| **300 Smith Street, Farmingdale, New York**                                  |   | **11735**                               |
| (Address of principal executive offices)                                     |   | (Zip Code)                              |
|                                                                         |   |                                    |
| Registrant’s telephone number, including  area code: **(631) 694-1800** |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

**Yes  ****ý    No  ****o**

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).   **Yes  ****o    No  ****ý**

 

As of May 14, 2004, there were 3,516,631 shares of the registrant’sClass A Common Stock outstanding.

 

 

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**P & F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTER ENDED MARCH 31, 2004**

 

**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION** |                                                                                        |
|-----------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                 | Consolidated Financial Statements (unaudited)                                               |   |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Balance Sheets |   |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Statements of Income |   |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Statement of Shareholders’  Equity |   |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Statements of Cash Flows |   |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Notes to Consolidated Financial Statements |   |
|                                    |                                                                                        |   |   |
| Item 2.                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                    |                                                                                        |   |   |
| Item 3.                                 | Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|                                    |                                                                                        |   |   |
| Item 4.                                 | Controls and Procedures                                                                     |   |
|                                    |                                                                                        |   |   |
| **PART II – OTHER INFORMATION**    |                                                                                        |
| Item 1.                                 | Legal Proceedings                                                                           |   |
|                                    |                                                                                        |   |   |
| Item 2.                                 | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity  Securities           |   |
|                                    |                                                                                        |   |   |
| Item 3.                                 | Defaults Upon Senior Securities                                                             |   |
|                                    |                                                                                        |   |   |
| Item 4.                                 | Submission of Matters to a Vote of Security Holders                                         |   |
|                                    |                                                                                        |   |   |
| Item 5.                                 | Other Information                                                                           |   |
|                                    |                                                                                        |   |   |
| Item 6.                                 | Exhibits and Reports on Form 8-K                                                            |   |
|                                    |                                                                                        |   |   |
| **Signatures**                          |                                                                                        |   |   |
|                                    |                                                                                        |   |   |
| **Exhibit Index**                       |                                                                                        |
|                                         |                                                                                             |  |  |  |

 

i

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**PARTI - FINANCIAL INFORMATION**

 

**Item1.    Financial Statements**

 

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

**CONSOLIDATED BALANCE SHEETS (unaudited)**

 
|                                                                                                        |   | **March 31,  2004** |       | **December  31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|--------|
| ASSETS                                                                                                      |   |                |       |                    |   |
|                                                                                                        |   |                |       |                    |   |
| CURRENT:                                                                                                    |   |                |       |                    |   |
| Cash                                                                                                        |   | $                   | 929,155    |                    | $      | 213,409 |   |
| Accounts receivable, net                                                                                    |   | 12,094,732          |       | 11,921,846              |   |
| Inventories                                                                                                 |   | 17,910,493          |       | 18,755,061              |   |
| Deferred income taxes - net                                                                                 |   | 789,000             |       | 789,000                 |   |
| Prepaid expenses and other                                                                                  |   | 1,446,195           |       | 1,456,188               |   |
| TOTAL CURRENT ASSETS                                                                                        |   | 33,169,575          |       | 33,135,504              |   |
|                                                                                                        |   |                |       |                    |   |
| PROPERTY AND EQUIPMENT:                                                                                     |   |                |       |                    |   |
| Land                                                                                                        |   | 1,582,938           |       | 1,582,938               |   |
| Buildings and improvements                                                                                  |   | 9,040,149           |       | 9,035,412               |   |
| Machinery and equipment                                                                                     |   | 15,126,375          |       | 14,962,867              |   |
|                                                                                                        |   | 25,749,462          |       | 25,581,217              |   |
| Less accumulated depreciation and  amortization                                                             |   | 13,234,992          |       | 12,840,367              |   |
| NET PROPERTY AND EQUIPMENT                                                                                  |   | 12,514,470          |       | 12,740,850              |   |
|                                                                                                        |   |                |       |                    |   |
| GOODWILL, net of accumulated amortization  of $1,419,274                                                    |   | 10,591,300          |       | 10,561,703              |   |
|                                                                                                        |   |                |       |                    |   |
| OTHER INTANGIBLE ASSETS, net of accumulated  amortization of $1,019,667 in 2004 and   $886,667 in 2003 |   | 1,640,333           |       | 1,773,333               |   |
|                                                                                                        |   |                |       |                    |   |
| OTHER ASSETS, net of accumulated  amortization of $181,693 in 2004 and $178,210 in 2003                     |   | 136,371             |       | 120,534                 |   |
| TOTAL ASSETS                                                                                                |   | $                   | 58,052,049 |                    | $      | 58,331,924 |   |

 

See accompanying notes to consolidatedfinancial statements (unaudited).

 

1

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

**CONSOLIDATEDBALANCE SHEETS (unaudited)**

 
|                                                                                                             |   | **March 31,  2004** |       | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|--------|
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                        |   |                |       |                    |   |
| CURRENT LIABILITIES:                                                                                             |   |                |       |                    |   |
| Short-term borrowings                                                                                            |   | $                   | 4,500,000  |                    | $      | 3,000,000 |   |
| Accounts payable                                                                                                 |   | 2,830,381           |       | 3,302,185               |   |
| Accruals:                                                                                                        |   |                |       |                    |   |
| Compensation                                                                                                     |   | 725,309             |       | 1,730,180               |   |
| Other                                                                                                            |   | 2,431,868           |       | 2,616,691               |   |
| Current maturities of long-term debt                                                                             |   | 1,528,256           |       | 1,526,213               |   |
| TOTAL CURRENT LIABILITIES                                                                                        |   | 12,015,814          |       | 12,175,269              |   |
|                                                                                                             |   |                |       |                    |   |
| LONG-TERM DEBT, less current maturities                                                                          |   | 8,385,338           |       | 8,723,324               |   |
|                                                                                                             |   |                |       |                    |   |
| DEFERRED INCOME TAXES - net                                                                                      |   | 406,000             |       | 455,000                 |   |
| TOTAL LIABILITIES                                                                                                |   | 20,807,152          |       | 21,353,593              |   |
|                                                                                                             |   |                |       |                    |   |
| COMMITMENTS AND CONTINGENCIES                                                                                    |   |                |       |                    |   |
|                                                                                                             |   |                |       |                    |   |
| SHAREHOLDERS’ EQUITY:                                                                                       |   |                |       |                    |   |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares issued or outstanding                       |   | —              |       | —                  |   |
| Common stock:                                                                                                    |   |                |       |                    |   |
| Class A - $1 par; authorized - 7,000,000  shares; issued - 3,740,367 shares in 2004 and 3,735,367 shares in 2003 |   | 3,740,367           |       | 3,735,367               |   |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued or outstanding                                |   | —              |       | —                  |   |
| Additional paid-in capital                                                                                       |   | 8,634,840           |       | 8,609,840               |   |
| Retained earnings                                                                                                |   | 26,596,531          |       | 26,359,965              |   |
| Treasury stock, at cost (223,736 shares in  2004 and 2003)                                                       |   | (1,726,841          | )          | (1,726,841              | )      |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                  |   | 37,244,897          |       | 36,978,331              |   |
|                                                                                                             |   |                |       |                    |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                  |   | $                   | 58,052,049 |                    | $      | 58,331,924 |   |

 

See accompanying notes to consolidatedfinancial statements (unaudited).

 

2

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

**CONSOLIDATED STATEMENTS OF INCOME**

**(unaudited)**

 
|                                        |   | **Three  months ended  March 31,** |       |
|---------------------------------------------|--------|------------------------------------|------------|
|                                        |   | **2004**                           |       | **2003** |   |
|                                        |   |                               |       | **(restated)** |   |
| REVENUES:                                   |   |                               |       |   |   |
| Net sales                                   |   | $                                  | 19,546,039 |   | $ | 19,355,770 |   |
| Other                                       |   | 29,257                             |       | 126,106 |   |
|                                        |   | 19,575,296                         |       | 19,481,876 |   |
|                                        |   |                               |       |   |   |
| COSTS AND EXPENSES:                         |   |                               |       |   |   |
| Cost of sales                               |   | 13,984,003                         |       | 13,479,502 |   |
| Selling, general and administrative         |   | 5,071,545                          |       | 4,870,825 |   |
| Interest – net                         |   | 123,182                            |       | 187,321 |   |
|                                        |   | 19,178,730                         |       | 18,537,648 |   |
|                                        |   |                               |       |   |   |
| INCOME BEFORE TAXES ON INCOME               |   | 396,566                            |       | 944,228 |   |
|                                        |   |                               |       |   |   |
| TAXES ON INCOME                             |   | 160,000                            |       | 354,000 |   |
|                                        |   |                               |       |   |   |
| NET INCOME                                  |   | $                                  | 236,566    |   | $ | 590,228 |   |
| Weighted average common shares outstanding: |   |                               |       |   |   |
| Basic                                       |   | 3,515,447                          |       | 3,506,086 |   |
|                                        |   |                               |       |   |   |
| Diluted                                     |   | 3,632,539                          |       | 3,574,715 |   |
|                                        |   |                               |       |   |   |
| Earnings per share of common stock:         |   |                               |       |   |   |
|                                        |   |                               |       |   |   |
| Basic                                       |   | $                                  | .07        |   | $ | .17 |   |
|                                        |   |                               |       |   |   |
| Diluted                                     |   | $                                  | .07        |   | $ | .16 |   |

 

See accompanying notes to consolidatedfinancial statements (unaudited).

 

3

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

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

**(unaudited)**

 
|                                                  |   | **Common  stock** |      | **Additional  paid-in  capital** |   | **Retained  earnings** |   | **Treasury  stock** |       | **Total** |        |
|-------------------------------------------------------|--------|-------------------|-----------|----------------------------------|--------|------------------------|--------|---------------------|------------|-----------|-------------|
|                                                  |   |              |      |                             |   |                   |   |                |       |      |        |
| Balance, January 1, 2004                              |   | $                 | 3,735,367 |                             | $      | 8,609,840              |   | $                   | 26,359,965 |      | ($1,726,841 | ) | $ | 36,978,331 |   |
|                                                  |   |              |      |                             |   |                   |   |                |       |      |        |
| Net income for the three months ended March  31, 2004 |   | —            |      | —                           |   | 236,566                |   | —              |       | 236,566   |        |
|                                                  |   |              |      |                             |   |                   |   |                |       |      |        |
| Exercise of stock options                             |   | 5,000             |      | 25,000                           |   | —                 |   | —              |       | 30,000    |        |
|                                                  |   |              |      |                             |   |                   |   |                |       |      |        |
| Balance, March 31, 2004                               |   | $                 | 3,740,367 |                             | $      | 8,634,840              |   | $                   | 26,596,531 |      | ($1,726,841 | ) | $ | 37,244,897 |   |

 

 
| **Shares**                |   | **Common  stock** |   | **Treasury  stock** |   |
|---------------------------|--------|-------------------|--------|---------------------|--------|
|                      |   |              |   |                |   |
| Balance, January 1, 2004  |   | 3,735,367         |   | 223,736             |   |
|                      |   |              |   |                |   |
| Exercise of stock options |   | 5,000             |   | —              |   |
|                      |   |              |   |                |   |
| Balance, March 31, 2004   |   | 3,740,367         |   | 223,736             |   |

 

See accompanying notes to consolidatedfinancial statements (unaudited).

 

4

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                           |   | **Three  months ended  March 31,** |          |
|--------------------------------------------------------------------------------|--------|------------------------------------|---------------|
|                                                                           |   | **2004**                           |          | **2003** |   |
|                                                                           |   |                               |          | **(restated)** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |   |                               |          |   |   |
| Net income                                                                     |   | $                                  | 236,566  |   | $ | 590,228 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |   |                               |          |   |   |
| Depreciation and amortization                                                  |   | 435,051                            |          | 435,228 |   |
| Amortization of intangible assets                                              |   | 136,483                            |          | 148,808 |   |
| Provision for losses on accounts receivable  - net                             |   | 4,326                              |          | 21,656 |   |
| Deferred income taxes                                                          |   | (49,000                            | )             | (49,000 | ) |
| Gain on disposal of fixed assets                                               |   | (10,206                            | )             | — |   |
| Decrease (increase) in:                                                        |   |                               |          |   |   |
| Accounts receivable                                                            |   | (177,212                           | )             | 188,570 |   |
| Inventories                                                                    |   | 844,568                            |          | (2,376,130 | ) |
| Prepaid expenses and other                                                     |   | 8,959                              |          | 12,916 |   |
| Other assets                                                                   |   | (18,286                            | )             | (20,836 | ) |
| Increase (decrease) in:                                                        |   |                               |          |   |   |
| Accounts payable                                                               |   | (471,804                           | )             | 1,844,119 |   |
| Accruals and other                                                             |   | (1,189,694                         | )             | (1,482,152 | ) |
| Total adjustments                                                              |   | (486,815                           | )             | (1,276,821 | ) |
| Net cash used in operating activities                                          |   | (250,249                           | )             | (686,593 | ) |
|                                                                           |   |                               |          |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |   |                               |          |   |   |
| Capital expenditures                                                           |   | (225,997                           | )             | (295,451 | ) |
| Additional payments for purchase of  Nationwide Industries, Inc.               |   | (29,597                            | )             | (75,000 | ) |
| Proceeds from disposal of fixed assets                                         |   | 27,532                             |          | — |   |
| Net cash used in investing activities                                          |   | (228,062                           | )             | (370,451 | ) |
|                                                                                |        |                                    |               |  |  |  |  |

 

See accompanying notes to consolidatedfinancial statements (unaudited).

 

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|                                              |   | **Three  months ended  March 31,** |    |
|---------------------------------------------------|--------|------------------------------------|---------|
|                                              |   | **2004**                           |    | **2003** |   |
|                                              |   |                               |    | **(restated)** |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:             |   |                               |    |   |   |
| Proceeds from short-term borrowings               |   | 1,500,000                          |    | 3,000,000 |   |
| Proceeds from mortgage                            |   | —                             |    | 1,697,301 |   |
| Principal payments on long-term debt              |   | (335,943                           | )       | (1,772,754 | ) |
| Proceeds from exercise of stock options           |   | 30,000                             |    | — |   |
| Purchase of Class A Common Stock                  |   | —                             |    | (71,819 | ) |
|                                              |   |                               |    |   |   |
| Net cash provided by financing activities         |   | 1,194,057                          |    | 2,852,728 |   |
|                                              |   |                               |    |   |   |
| NET INCREASE IN CASH                              |   | 715,746                            |    | 1,795,684 |   |
|                                              |   |                               |    |   |   |
| CASH AT BEGINNING OF PERIOD                       |   | 213,409                            |    | 1,024,222 |   |
|                                              |   |                               |    |   |   |
| CASH AT END OF PERIOD                             |   | $                                  | 929,155 |   | $ | 2,819,906 |   |
|                                              |   |                               |    |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |   |                               |    |   |   |
|                                              |   |                               |    |   |   |
| Cash paid during the period for:                  |   |                               |    |   |   |
|                                              |   |                               |    |   |   |
| Income taxes                                      |   | $                                  | 152,000 |   | $ | — |   |
|                                              |   |                               |    |   |   |
| Interest                                          |   | $                                  | 122,733 |   | $ | 197,846 |   |

 

See accompanying notes to consolidatedfinancial statements (unaudited).

 

6

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

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

 

**NOTE 1 - PRINCIPLES OF CONSOLIDATION**

 

The unaudited consolidated financial statements contained hereininclude the accounts of P & F Industries, Inc. and its subsidiaries. Allsignificant intercompany balances and transactions have been eliminated.

 

P & F Industries, Inc. (“P & F”) conducts its businessoperations through its four wholly-owned subsidiaries: Florida PneumaticManufacturing Corporation (“Florida Pneumatic”), Countrywide Hardware, Inc.(“Countrywide”), Green Manufacturing, Inc. (“Green”) and Embassy Industries,Inc. (“Embassy”). P & F and its subsidiaries are herein referred tocollectively as the “Company.”

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial and retail markets, andthe importation and sale of compressor air filters. Florida Pneumatic alsomarkets, through its Berkley Tool division (“Berkley”), a line of pipe cuttingand threading tools, wrenches and replacement electrical components for awidely-used brand of pipe cutting and threading machines. Countrywide conductsits business operations through Nationwide Industries, Inc. (“Nationwide”), itswholly-owned subsidiary, and through its Franklin Manufacturing (“Franklin”)division. Nationwide is an importer and manufacturer of door, window andfencing hardware. Franklin imports a line of door and window hardware. Green isengaged primarily in the manufacture, development and sale of heavy-duty weldedcustom designed hydraulic cylinders. Green also manufactures a line of accessequipment for the petro-chemical industry and a line of post hole diggingequipment for the agricultural industry. Embassy is engaged in the manufactureand sale of baseboard heating products and the importation and sale of radiantheating systems. Note 12 of the Notes to Consolidated Financial Statementspresents financial information for the segments of the Company’s business.

 

**NOTE 2 - BASIS OF FINANCIAL STATEMENTPRESENTATION**

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information, and with the rulesand regulations of the Securities and Exchange Commission regarding interimfinancial reporting. Accordingly, these interim financial statements do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of the Company, these unaudited consolidatedfinancial statements include all adjustments necessary to present fairly theinformation set forth therein. All such adjustments are of a normal recurringnature. Results for interim periods are not necessarily indicative of resultsto be expected for a full year.

 

7

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The consolidated balance sheet information as of December 31, 2003 wasderived from the audited financial statements included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2003. The interim financialstatements contained herein should be read in conjunction with that Report.

 

In preparing its consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America, theCompany is required to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

**NOTE 3 – RESTATEMENT OF PREVIOUSLY ISSUEDFINANCIAL STATEMENTS**

 

Subsequent to the issuance of the Company’sconsolidated financial statements as of March 31, 2003, filed as part of itsQuarterly Report on Form 10-Q filed on May 14, 2003, the Company determinedthat it needed to revise its provision for taxes on income in previously issuedfinancial statements. This change resulted from the amortization of a deferredtax liability, not previously recorded, related to the acquisition ofNationwide. The Company’s consolidated statement of income for the three monthsended March 31, 2003 has been restated from the amounts previously reported.The Company has filed an amended Quarterly Report on Form 10-Q for the quarterended March 31, 2003.

 

**NOTE 4 - STOCK-BASED COMPENSATION**

 

In December 2002, theFinancial Accounting Standards Board (the “FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 148, *“*Accounting for Stock BasedCompensation-Transition and Disclosure” (“SFAS 148”), which was issuedto provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, SFAS 148 amended the disclosure requirements of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”) to require prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.

 

8

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The Company accounts for its stock option awards to its employees underthe intrinsic value based method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees.”Under the intrinsic value based method, compensation cost is the excess, ifany, of the quoted market price of the stock at grant date or other measurementdate over the amount an employee must pay to acquire the stock. The Companymakes pro forma disclosures of net income and earnings per share as if the fairvalue based method of accounting had been applied, as required by SFAS 123.

 

SFAS 123 requires the Company to provide pro forma informationregarding net income and earnings per share as if compensation cost for theCompany’s 2002 Stock Incentive Plan had been determined in accordance with thefair value method prescribed by SFAS 123. The Company estimates the fair valueof each stock option at the grant date by using the Black-Scholesoption-pricing model. No options were granted, and there was no pro formacompensation expense, during the quarters ended March 31, 2004 and March 31,2003.

 

**NOTE 5 – FOREIGN CURRENCY TRANSACTIONS**

 

The Company accounts for changes in the fair value of its foreigncurrency contracts by marking them to market and recognizing any resultinggains or losses through its statement of operations. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of operations. At March 31, 2004, the Company had foreigncurrency forward contracts, maturing in 2004, to purchase yen at contractedforward rates. The value of these contracts at March 31, 2004, based on thespot rate, was approximately $2,265,000, which was the approximate value of theCompany’s corresponding yen-denominated accounts payable. During the threemonths ended March 31, 2004, the Company recorded net realized losses ofapproximately $69,000 on foreign currency transactions. During the three monthsended March 31, 2003, the Company recorded net realized gains of approximately$1,000 on foreign currency transactions. At March 31, 2004, the Company had anunrealized loss of approximately $33,000 on foreign currency transactions.

 

9

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**NOTE 6 - NEW ACCOUNTING PRONOUNCEMENT**

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN46”). This interpretation clarifies the application of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” to certain entities inwhich equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. FIN 46 is effective February 1, 2003 for variable interestentities created after January 31, 2003, and July 1, 2003 for variable interestentities created prior to February 1, 2003 (deferred until the first quarter of2004). The adoption of FIN 46 did not have any effect on either the Company’sresults of operations or its financial position.

 

**NOTE 7 – ACCOUNTS RECEIVABLE AND ALLOWANCEFOR DOUBTFUL ACCOUNTS**

 

Accounts receivable consist of:

 
|                            |   | **March 31,2004** |       | **December 31,  2003** |   |
|---------------------------------|--------|-------------------|------------|------------------------|--------|
| Trade accounts receivable       |   | $                 | 12,427,132 |                   | $      | 12,249,920 |   |
| Allowance for doubtful accounts |   | (332,400          | )          | (328,074               | )      |
|                            |   | $                 | 12,094,732 |                   | $      | 11,921,846 |   |

 

**NOTE 8 - INVENTORIES**

 

Major classes of inventory were as follows:

 
|                       |   | **March 31,2004** |       | **December 31,  2003** |   |
|----------------------------|--------|-------------------|------------|------------------------|--------|
| Raw materials and supplies |   | $                 | 3,568,696  |                   | $      | 3,521,478 |   |
| Work in process            |   | 773,761           |       | 723,728                |   |
| Finished goods             |   | 13,568,036        |       | 14,509,855             |   |
|                       |   | $                 | 17,910,493 |                   | $      | 18,755,061 |   |

 

10

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**NOTE 9 – SHORT-TERM BORROWINGS AND LONG-TERMDEBT**

 

On June 30, 2003, the Company renewed its credit agreement, as amended,with Citibank through July 26, 2004. This agreement includes a revolving creditloan facility, which provides a total of $12,000,000, with various sublimits,for direct borrowings, letters of credit, bankers’ acceptances and equipmentloans. There are no commitment fees for any unused portion of this creditfacility. At March 31, 2004, there was $4,500,000 outstanding against the revolvingcredit loan facility. There were no open letters of credit at March 31, 2004.

 

Direct borrowings under the Company’s revolving credit loan facilityare secured by the Company’s accounts receivable, inventory and equipment andare cross-guaranteed by each of the Company’s subsidiaries. These borrowingsbear interest at either the prime interest rate or LIBOR (London InterBankOffered Rate) plus 1.6%. The prime interest rate at March 31, 2004 was 4.0% andLIBOR was approximately 1.1%. The prime interest rate at March 31, 2003 was4.25% and LIBOR was approximately 1.3%.

 

The credit agreement also includes a foreign exchange line, whichprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases of yenneeded for payments to foreign suppliers. The total amount of foreign currencyforward contracts outstanding at March 31, 2004, based on the spot rate, wasapproximately $2,265,000.

 

Under the terms of the Company’s credit agreement, the Company isrequired to adhere to certain financial covenants. At March 31, 2004, and forthe three months then ended, the Company satisfied all of these covenants. Thecredit agreement is subject to annual review by the lending bank.

 

The credit agreement also includes a termloan facility, which provides a maximum commitment of $15,000,000to finance acquisitions subject to the lending bank’s approval. The Companyborrowed $11,500,000 against this facility to finance the acquisition of Nationwidein 2002, and there was $5,000,000 outstanding against this facility at March31, 2004. There was also a standby letter of credit totaling approximately$186,000 outstanding against this facility at March 31, 2004. This standbyletter of credit is used to secure the Economic Development Revenue Bondassumed as part of the acquisition of Green.

 

Certain of the Company’s mortgage agreementsrequire the Company to adhere to certain financial covenants. AtMarch 31, 2004, and for the three months then ended, the Company satisfied allof these covenants.

 

11

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**NOTE 10 - WARRANTY LIABILITY**

 

The Company offers to its customerswarranties against product defects for periods ranging from one year to thelife of the product, depending on the specific product and terms of thecustomer purchase agreement. The Company’s typical warranties require it torepair or replace the defective products during the warranty period at no costto the customer. At the time the product revenue is recognized, the Companyrecords a liability for estimated costs under its warranties. The costs areestimated based on historical experience. The Company periodically assesses theadequacy of its recorded warranty liability and adjusts the amounts necessary.While the Company believes that its estimated liability for product warrantiesis adequate, the estimated liability for the product warranties could differmaterially from future actual warranty costs.

 

Changes in the Company’s warranty liability,included in other accrued liabilities, for the periods ended March 31, 2004 andMarch 31, 2003 were as follows:

 
|                                                                |   | **Three  months ended  March 31,** |    |
|---------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                |   | **2004**                           |    | **2003** |   |
| Balance, beginning of period                                        |   | $                                  | 210,989 |   | $ | 186,513 |   |
|                                                                |   |                               |    |   |   |
| Warranties issued and changes in estimated  pre-existing warranties |   | 263,589                            |    | 114,898 |   |
|                                                                |   |                               |    |   |   |
| Actual warranty costs incurred                                      |   | (258,084                           | )       | (105,849 | ) |
| Balance, end of period                                              |   | $                                  | 216,494 |   | $ | 195,562 |   |

 

**NOTE 11 - CAPITAL STOCK TRANSACTIONS**

 

During the three months ended March 31, 2003, the Company purchased10,800 shares of Class A Common Stock, at a cost of $71,819.

 

12

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**NOTE 12 - SEGMENTS OF BUSINESS**

 

Thefollowing tables present financial information by segment for the periods endedMarch 31, 2004 and 2003. Segment profit (loss) excludes general corporateexpenses, interest expense and income taxes. All intersegment revenues havebeen eliminated.

 
| **Three months ended  March 31, 2004  (In thousands)** |   | **Con-  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|--------------------------------------------------------|--------|---------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
|                                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers                       |   | $                   | 19,575 |                 | $      | 9,457        |   | $                        | 4,493  |                   | $      | 3,120 |   | $ | 2,505 |   |
|                                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                                  |   | $                   | 1,530  |                 | $      | 1,081        |   | $                        | 617    |                   | $      | (163 | ) | $ | (5 | ) |
|                                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Identifiable assets at March 31, 2004                  |   | $                   | 56,471 |                 | $      | 22,386       |   | $                        | 19,641 |                   | $      | 8,543 |   | $ | 5,901 |   |
|                                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Corporate assets                                       |   | 1,581               |   |                 |   |         |   |                     |   |                   |   |
|                                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Total assets at March 31, 2004                         |   | $                   | 58,052 |                 |   |         |   |                     |   |                   |   |   |

 

 
| **Three months ended  March 31, 2003  (restated)  (In thousands)** |   | **Con-  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|--------------------------------------------------------------------|--------|---------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
|                                                               |   |                |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers                                   |   | $                   | 19,482 |                 | $      | 10,341       |   | $                        | 4,250  |                   | $      | 2,862 |   | $ | 2,029 |   |
|                                                               |   |                |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                                              |   | $                   | 2,014  |                 | $      | 1,769        |   | $                        | 605    |                   | $      | (216 | ) | $ | (144 | ) |
|                                                               |   |                |   |                 |   |         |   |                     |   |                   |   |
| Identifiable assets at March 31, 2003                              |   | $                   | 59,929 |                 | $      | 25,134       |   | $                        | 20,614 |                   | $      | 8,803 |   | $ | 5,378 |   |
|                                                               |   |                |   |                 |   |         |   |                     |   |                   |   |
| Corporate assets                                                   |   | 2,994               |   |                 |   |         |   |                     |   |                   |   |
|                                                               |   |                |   |                 |   |         |   |                     |   |                   |   |
| Total assets at March 31, 2003                                     |   | $                   | 62,923 |                 |   |         |   |                     |   |                   |   |   |

 

13

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The reconciliations of combined operating profits for reportablesegments to consolidated income before income taxes and cumulative effect ofchange in accounting principle are as follows:

 
|                                 |   | **Three  months ended  March 31,** |      |
|--------------------------------------|--------|------------------------------------|-----------|
|                                 |   | **2004**                           |      | **2003** |   |
| Total profit for reportable segments |   | $                                  | 1,529,470 |   | $ | 2,013,845 |   |
|                                 |   |                               |      |   |   |
| General corporate expenses           |   | (1,009,722                         | )         | (882,296 | ) |
|                                 |   |                               |      |   |   |
| Interest expense - net               |   | (123,182                           | )         | (187,321 | ) |
| Income before taxes on income        |   | $                                  | 396,566   |   | $ | 944,228 |   |

 

**NOTE 13 - EARNINGS PER SHARE**

 

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

 
|                                                                                                                 |   | **Three  months ended  March 31,** |    |
|----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                                                                 |   | **2004**                           |    | **2003** |   |
|                                                                                                                 |   |                               |    | **(restated)** |   |
| Numerator:                                                                                                           |   |                               |    |   |   |
| Numerator for basic and diluted earnings  per common share:                                                          |   |                               |    |   |   |
| Net income                                                                                                           |   | $                                  | 236,566 |   | $ | 590,228 |   |
|                                                                                                                 |   |                               |    |   |   |
| Denominator:                                                                                                         |   |                               |    |   |   |
| Denominator for basic earnings per common  share – weighted average common shares outstanding                   |   | 3,515,447                          |    | 3,506,086 |   |
|                                                                                                                 |   |                               |    |   |   |
| Effect of dilutive securities:                                                                                       |   |                               |    |   |   |
| Common stock options                                                                                                 |   | 117,092                            |    | 68,629 |   |
|                                                                                                                 |   |                               |    |   |   |
| Denominator for diluted earnings per common  share - adjusted weighted average common shares and assumed conversions |   | 3,632,539                          |    | 3,574,715 |   |
|                                                                                                                      |        |                                    |         |  |  |  |  |

 

14

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There were outstanding during the three month periods ended March 31,2004 and 2003 stock options whose exercise prices were higher than the averagemarket values for the respective periods. These options are anti-dilutive andare excluded from the computation of earnings per share. The weighted averageanti-dilutive stock options outstanding were as follows:

 
|                                                      |   | **Three  months ended  March 31,** |   |
|-----------------------------------------------------------|--------|------------------------------------|--------|
|                                                      |   | **2004**                           |   | **2003** |   |
| Weighted average anti-dilutive stock  options outstanding |   | 19,000                             |   | 253,664 |   |

 

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

 

**Item2.    Management’s Di****scussion and Analysis of Financial Condition andResults of Operations**

 

**General**

 

Any forward-looking statements contained herein, including thoserelated to the Company’s future performance, are based upon the Company’shistorical performance and on current plans, estimates and expectations, whichare subject to various risks and uncertainties, including, but not limited to,the impact of competition, product demand and pricing. These risks could causethe Company’s actual results for the balance of fiscal year 2004 and beyond todiffer materially from those expressed in any forward-looking statement made byor on behalf of the Company. Forward-looking statements speak only as of thedate on which they are made, and the Company undertakes no obligation to updatepublicly or revise any forward-looking statement, whether as a result of newinformation, future developments or otherwise.

 

**Overview**

 

The Company’s consolidated revenues for the quarter ended March 31,2004 increased 0.5%, from $19,481,876 to $19,575,296. Revenues increased atthree of the four subsidiaries, with the greatest increase at Embassy.  Substantially offsetting the three increaseswas an 8.5% decrease in revenues at Florida Pneumatic, resulting primarily fromthe loss of a major customer in early 2004. Overall gross profit decreased,resulting primarily from a less favorable product mix and the increase in costof imported product due to the weakening of the U.S. dollar versus both the yenand euro. Profits decreased overall, from $590,228 to $236,566.

 

**Critical AccountingPolicies and Estimates**

 

There have been no material changes in the Company’s criticalaccounting policies and estimates from those discussed in Item 7 of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

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**RESULTS OF OPERATIONS**

 

**Quarters ended March31, 2004 and March 31, 2003**

 

**Revenues**

 

Revenues for the quarters ended March 31, 2004 and 2003 were asfollows:

 
| **Three  months  ended  March 31,** |   | **Consolidated** |       | **Pneumatic  tools and  related  equipment** |   | **Hardware** |   | **Hydraulic  cylinders  and related  equipment** |      | **Heating  products** |   |
|-------------------------------------|--------|------------------|------------|----------------------------------------------|--------|--------------|--------|--------------------------------------------------|-----------|-----------------------|--------|
| **2004**                            |   | $                | 19,575,296 |                                         | $      | 9,457,621    |   | $                                                | 4,492,702 |                  | $      | 3,120,161 |   | $ | 2,504,812 |   |
|                                |   |             |       |                                         |   |         |   |                                             |      |                  |   |
| **2003**                            |   | $                | 19,481,876 |                                         | $      | 10,340,409   |   | $                                                | 4,250,034 |                  | $      | 2,862,247 |   | $ | 2,029,186 |   |
|                                |   |             |       |                                         |   |         |   |                                             |      |                  |   |
| **% increase  (decrease)**          |   | 0.5              | %          | (8.5                                         | )%     | 5.7          | %      | 9.0                                              | %         | 23.4                  | %      |

 

Revenues from pneumatic tools and related equipment decreased dueprimarily to lower industrial revenues, resulting from the loss of a majorcustomer in early 2004 of approximately $650,000, lower retail promotion andbase sales of approximately $450,000 and decreases in Berkeley tool divisionand filter sales and commission revenues. This was partially offset byincreased sales to the automotive after-market of approximately $300,000.Selling prices of pneumatic tools and related equipment were unchanged.

 

Revenues from hardware increased due to an increase in Nationwide’srevenues of approximately $400,000, reflecting an increase of approximately$650,000 from sales of fencing products. The increase at Nationwide was partially offset by a decrease in revenuesof approximately $160,000 at Franklin, as a significant customer reduced itsordering, because of a plan to reduce inventory carrying levels. During thefirst quarter of 2004, the Company incurred increases in the price of steel.Effective February 1, 2004, Nationwide began charging fencing product customersan additional 4-5% to cover the increased cost. During April of 2004, theCompany began increasing prices to customers at Franklin and to other customersat Nationwide in an effort to cover the cost increases.

 

Revenues from hydraulic cylinders and other equipment increasedprimarily due to entry into a new market for log splitter cylinders.  Sales of these newly-developed cylindersimported from China accounted for approximately $175,000 of the increase. Theoverall increase was partially offset by decreased sales in the access productline driven by weakness in the capital goods market. During the first quarterof 2004, the Company incurred increases in the price of steel. During April of2004, the Company began increasing cylinder prices to customers by 3.8%, theapproximate amount of the cost increases.

 

17

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Revenues from heating products increased due primarily to increasedboiler and commercial heating product sales, reflecting continued marketpenetration with these newer product lines, and increased baseboard and radiantsales, resulting from strong housing starts in the 2004 first quarter. Sellingprices of heating products were unchanged, with the exception of a modest priceincrease for baseboard products during the second quarter of 2003. During thefirst quarter of 2004, the Company incurred increases in the price of steel,copper and aluminum. During the second quarter of 2004, the Company beganincreasing prices across all product lines within this segment in amounts thatapproximate the cost increases.

 

**GrossProfit**

 

Gross profits for the quarters ended March 31, 2004 and 2003 were asfollows:

 
| **Quarter  ended  March 31,** |   | **Consolidated** |      | **Pneumatic  tools and  related  equipment** |   | **Hardware** |   | **Hydraulic  cylinders  and related  equipment** |      | **Heating  products** |   |
|-------------------------------|--------|------------------|-----------|----------------------------------------------|--------|--------------|--------|--------------------------------------------------|-----------|-----------------------|--------|
| **2004**                      |   | $                | 5,591,293 |                                         | $      | 3,063,864    |   | $                                                | 1,556,786 |                  | $      | 240,650 |   | $ | 729,993 |   |
|                          |   | 28.6             | %         | 32.4                                         | %      | 34.7         | %      | 7.7                                              | %         | 29.1                  | %      |
|                          |   |             |      |                                         |   |         |   |                                             |      |                  |   |
| **2003**                      |   | $                | 6,002,374 |                                         | $      | 3,819,076    |   | $                                                | 1,363,568 |                  | $      | 212,225 |   | $ | 607,505 |   |
|                          |   | 30.8             | %         | 36.9                                         | %      | 32.1         | %      | 7.4                                              | %         | 29.9                  | %      |

 

The decrease in the gross profit percentage from pneumatic tools andrelated equipment was due primarily to the loss of a major customer noted abovewith a better than average gross margin and the weakness of the U.S. dollar inrelation to the Japanese yen, partially offset by productivity improvements andcost reductions from suppliers. The increase in the gross profit percentagefrom hardware products was due primarily to a more favorable product mix andcost savings in material purchases and labor productivity.  The increase in the gross profit percentagefrom hydraulic cylinders and other equipment was due primarily to increasedsales noted above, which increased coverage of fixed expenses, including anincrease in sales of imported products. This was partially offset by materialcost increases. The decrease in the gross profit percentage from heatingequipment was due primarily to lower radiant margins, resulting principallyfrom the weakening of the U.S. dollar in relation to the euro, and an increasein boiler sales noted above that were at reduced margins.

 

18

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**Selling,General and Administrative Expenses**

 

Consolidated selling, general and administrative expenses increased4.1%, from $4,870,825 to $5,071,545, due primarily to increased compensation atNationwide and, to a lesser extent, to increased professional fees, mainlyrelated to corporate compliance and reporting requirements. These increaseswere partially offset by substantial decreases resulting from cost-cuttingefforts in all of the segments. As a percentage of revenues, selling, generaland administrative expenses increased from 25.0% to 25.9%, due primarily to theincreased expenses discussed above.

 

**Interest—Net**

 

Net interest expense decreased from $187,321 to $123,182, due primarilyto lower average borrowings under both the revolving credit and term loanfacilities.

 

**Taxeson Income**

 

The effective tax rates for the quarters ended March 31, 2004 and 2003were 40.3% and 37.5%, respectively. The increase in the effective tax rate wasdue primarily to an increase in expenses that are not deductible for taxpurposes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cash flows from operations arecyclical, with the greatest demand in the second and third quarters followed byvery positive cash flows in the fourth quarter as receivables andinventory trend down. Due to its strong asset base and predictable cash flows,the Company has access to substantial additional capital, if and when needed,based on favorable banking relationships. The Company monitors average dayssales outstanding, inventory turns and capital expenditures to projectliquidity needs and evaluate return on assets employed.

 

The Company gauges its liquidity and financial stability by themeasurements shown in the following table (dollar amounts in thousands):

 

|                      |   | **March, 31,  2004** |   | **December  31,  2003** |   | **March 31,  2003** |   |
|---------------------------|--------|----------------------|--------|-------------------------|--------|---------------------|--------|
| Working Capital           |   | $                    | 21,154 |                    | $      | 20,960              |   | $ | 20,008 |   |
| Current Ratio             |   | 2.76 to 1            |   | 2.72 to 1               |   | 2.18 to 1           |   |
| Shareholders’ Equity |   | $                    | 37,245 |                    | $      | 36,978              |   | $ | 34,342 |   |

 

19

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Cash increased 335.4%, or $.7 million, from $.2 million as of December31, 2003 to $.9 million as of March 31, 2004. The Company’s debt levelsincreased from $13.2 million at December 31, 2003 to $14.4 million at March 31,2004. Total percent of debt to total capitalization increased from 35.8% atDecember 31, 2003 to 38.7% at March 31, 2004.

 

In connection with Countrywide’s acquisition of all of the stock ofNationwide in 2002, the Company is liable for contingent earnout payments toNationwide’s previous owner, in amounts equal to 30% of the excess ofNationwide’s earnings, before amortization of intangible assets, interest andtaxes, over $2,500,000, for each of the five twelve-month periods subsequent tothe acquisition date. These contingent earnout payments have been and will betreated as additions to goodwill. During the quarter ended March 31, 2004, theCompany recorded net additions to goodwill of approximately $30,000, related tocontingent earnout payments.

 

During the quarter ended March 31, 2004, gross accounts receivableincreased by approximately $177,000, with increases of approximately $826,000and $272,000 at Countrywide and Embassy, respectively, partially offset bydecreases of $835,000 and $86,000 at Florida Pneumatic and Green, respectively.The increase at Countrywide was due primarily to an increase in sales in thefirst quarter of 2004, compared to the fourth quarter of 2003, and for itsFranklin division, the timing of shipments. The increase at Embassy was dueprimarily to an increase in sales in the first quarter of 2004 versus thefourth quarter of 2003. The decrease at Florida Pneumatic was due primarily toimproved collections and the timing of retail promotional receipts. Thedecrease at Green was due primarily to improved collections.

 

Inventories decreased by approximately $845,000 during the quarterended March 31, 2004, with a decrease of approximately $1,501,000 at FloridaPneumatic, partially offset by increases of approximately $333,000, $227,000and $96,000 at Countrywide, Green and Embassy, respectively. The decrease atFlorida Pneumatic was due primarily to reduced purchases, the loss of a majorcustomer in early 2004 noted above and more efficient ordering levels forsafety stock. The increase at Countrywide was due primarily to a concertedeffort to support overall growth in the business and preparation for the peakspring season at Nationwide. The increase at Green was due primarily to thetiming of inventory receipts and a further investment in inventory for importcylinders. The increase at Embassy was due primarily to the timing of radiantand boiler inventory receipts.

 

During the first quarter of 2004, short-term borrowings increased by$1,500,000, primarily to fund working capital needs.

 

20

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During the first quarter of 2004, accounts payable decreased byapproximately $472,000, with a decrease of approximately $908,000 at FloridaPneumatic, partially offset by increases of $170,000, $165,000 and $101,000 atEmbassy, Green and Countrywide, respectively. The decrease at Florida Pneumaticwas due primarily to reduced purchases and the timing of payments. The increaseat Embassy was due primarily to the timing of purchases. The increase at Greenwas due primarily to the timing of payments. The increase at Countrywide wasdue primarily to the timing of purchases.

 

On June 30, 2003, the Company renewed its credit agreement, as amended,with Citibank through July 26, 2004. This agreement provides the Company withvarious credit facilities, including revolving credit loans, term loans foracquisitions and a foreign exchange line. The credit agreement is subject toannual review by Citibank.

 

The revolving credit loan facility provides a maximum of $12,000,000,with various sublimits, for direct borrowings, letters of credit, bankers’acceptances and equipment loans. There are no commitment fees for any unusedportion of this credit facility.  AtMarch 31, 2004, there was $4,500,000 outstanding against the revolving creditloan facility. There were no open letters of credit at March 31, 2004.

 

The term loan facility provides a maximum commitment of $15,000,000 tofinance acquisitions subject to the lending bank’s approval. There are nocommitment fees for any unused portion of this credit facility. The Companyborrowed $11,500,000 against this facility to finance the acquisition ofNationwide. At March 31, 2004, there was $5,000,000 outstanding against theterm loan facility. There was also a standby letter of credit totalingapproximately $186,000 outstanding against this facility at March 31, 2004. Thisstandby letter of credit was used to secure the Economic Development RevenueBond assumed as part of the acquisition of Green.

 

The foreign exchange line provides for the availability of up to$10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of Japanese yen needed for payments offoreign suppliers. The total amount of foreign currency forward contractsoutstanding at March 31, 2004, based on the spot rate, was approximately$2,265,000.

 

Under its credit agreement, the Company is required to adhere tocertain financial covenants. At March 31, 2004 and for the quarter then ended,the Company satisfied all of these covenants.

 

Certain of the Company’s mortgage agreements also require the Companyto adhere to certain financial covenants. At March 31, 2004 and for the quarterthen ended, the Company satisfied all of these covenants.

 

21

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Capital spending for the quarters ended March 31, 2004 and 2003 was approximately$226,000 and $295,000, respectively, which amounts were provided from workingcapital. Capital expenditures for the remainder of 2004 are expected to beapproximately $1,200,000, some of which may be financed through the Company’scredit facilities. Included in the expected total for the remainder of 2004 arecapital expenditures relating to new products, expansion of existing productlines and replacement of equipment.

 

Operating activities used cash totaling approximately $250,000 and$687,000 during the quarters ended March 31, 2004 and March 31, 2003,respectively.  The Company believes thatcash 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.

 

**Off-Balance SheetArrangements**

 

The Company’s foreign exchange line provides for the availability of upto $10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of Japanese yen needed for payments toforeign suppliers. The Company does not purchase forward contracts on NewTaiwan dollars or euros. The total amount of foreign currency forward contractsoutstanding at March 31, 2004, based on the spot rate, was approximately$2,265,000.

 

The Company, through Florida Pneumatic, imports a significant amount ofits purchases from Japan, with payment due in Japanese yen. As a result, theCompany is subject to the effects of foreign currency exchange fluctuations.The Company uses a variety of techniques to protect itself from any adverseeffects from these fluctuations, including increasing its selling prices,obtaining price reductions from its overseas suppliers, using alternativesupplier sources and entering into foreign currency forward contracts. Theincrease in the strength of the Japanese yen versus the U.S. dollar over thefirst three months of 2004 had a negative effect on the Company’s results ofoperations and its financial position. Since March 31, 2004, the relative valueof the U.S dollar in relation to the Japanese yen has increased. There can beno assurance as to the future trend of this value. See “Item 3 – Quantitativeand Qualitative Disclosure About Market Risk.”

 

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**New Accounting Pronouncement**

 

In January 2003, the Financial AccountingStandards Board issued Interpretation No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”). This interpretation clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,” tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective February 1, 2003 for variableinterest entities created after January 31, 2003, and July 1, 2003 for variableinterest entities created prior to February 1, 2003 (deferred until the firstquarter of 2004).  The adoption of FIN46 did not have any effect on either the Company’s results of operations or itsfinancial position.

 

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**Item3.    Quantitative and****Qualitative Disclosures About Market Risk**

 

The Company is exposed to market risks, which include changes ininternational exchange rates and the prices of certain commodities. The Companyattempts to reduce the risks related to foreign currency fluctuation byutilizing financial instruments, pursuant to Company policy.

 

The value of the U.S. dollar affects the Company’s results. Changes inexchange rates may positively or negatively affect the Company’s gross marginsand operating expenses. 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 currencytransactions 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 has various debt instruments that bear interest atvariable rates tied to LIBOR (London InterBank Offered Rate). Any increase inLIBOR would have an adverse effect on the Company’s interest costs.

 

The Company accounts for changes in the fair value of its foreigncurrency contracts by marking them to market and recognizing any resultinggains or losses through its statement of operations. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of operations. At March 31, 2004, the Company had foreigncurrency forward contracts, maturing in 2004, to purchase yen at contractedforward rates. The value of these contracts at March 31, 2004, based on thespot rate, was approximately $2,265,000, which was the approximate value of theCompany’s corresponding yen-denominated accounts payable. During the threemonths ended March 31, 2004, the Company recorded net realized losses ofapproximately $69,000 on foreign currency transactions. During the three monthsended March 31, 2003, the Company recorded net realized gains of approximately$1,000 on foreign currency transactions. At March 31, 2004, the Company had anunrealized loss of approximately $33,000 on foreign currency transactions.

 

The potential loss in value of the Company’s net investment in foreigncurrency forward contracts resulting from a hypothetical 10 percent adversechange in foreign exchange rates at March 31, 2004 was approximately $247,000.

 

24

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**Item4.   ****Controls and****Procedures**

 

**Evaluation of disclosure controls andprocedures**

 

An evaluation was performed, under the supervision of, and with theparticipation of, the Company’s management, including the Principal ExecutiveOfficer and Principal Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) to the Securities and Exchange Act of 1934).Based on that evaluation, the Company’s management, including the PrincipalExecutive Officer and Principal Financial Officer, concluded that the Company’sdisclosure controls and procedures were adequate and effective, as of the endof the period covered by this Quarterly Report on Form 10-Q for the quarterended March 31, 2004 (this “Report”), in timely alerting them to all materialinformation relating to the Company and its consolidated subsidiaries that isrequired to be included in this Report.

 

**Changes in internal controls**

 

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

 

25

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**PARTII - OTHER INFORMATION**

 

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

The Company is a defendant or co-defendant in various actions broughtabout in the ordinary course of conducting its business. The Company does notbelieve that any of these actions are material to the financial condition ofthe Company.

 

**Item 2.****                                   Changesin Securities****, Use of Proceeds andIssuer Purchase of Equity Securities**

None.

 

**Item 3.****                                   Defaults Upon****Senior Securities**

None.

 

**Item 4.****                                   Submissionof Matters****to a Vote of SecurityHolders**

None.

 

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

None.

 

**Item 6.****                                   Exhibitsand Reports on Form****8-K**

**(a)   Exhibits**

See “Exhibit Index” immediately following the signature page.

 

**(b)   Reportson Form 8-K**

The Registrant filed a Report on Form 8-K dated March 29, 2004, inwhich it furnished a press release announcing its fourth quarter and year-end2003 results under Items 9 and 12 of such Report.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                | **P & F INDUSTRIES, INC.** |
|---------------------|--------------------------------|
|                | (Registrant)                   |
|                |                           |
|                | By                             |   | /s/ Joseph A. Molino, Jr. |   |
|                |                           | Joseph A. Molino, Jr. |   |
|                |                           | Vice President |   |
| Dated: May 17, 2004 |                           | (Principal Financial Officer) |   |
|                     |                                |  |  |  |  |

 

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**EXHIBITINDEX**

 
| **Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **2.1**    |   | Asset Purchase Agreement, dated as of September 16, 1998, by and between  Green Manufacturing, Inc., an Ohio corporation, and the Registrant  (Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2003). Pursuant to  Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request. |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **2.2**    |   | Stock Purchase Agreement, dated as of May 3, 2002, by and between  Mark C. Weldon and the Registrant (Incorporated by reference to Exhibit 2.1  to the Registrant’s Current Report on Form 8-K dated May 3, 2002). Pursuant  to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish  supplementally a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Securities and Exchange Commission upon request.                                              |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **2.3**    |   | Contract for Purchase and Sale, dated as of May 1, 2002, between W.  I. Commercial Properties, Inc., a Florida corporation, and Countrywide  Hardware, Inc., a Delaware corporation (Incorporated by reference to Exhibit  4.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2002).                                                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **3.1**    |   | Restated Certificate of Incorporation of the Registrant (Incorporated  by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 1999).                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **3.2**    |   | Amended By-laws of the Registrant (Incorporated by reference to  Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 1999).                                                                                                                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **3.3**    |   | Amendment to the Amended By-laws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **4.1**    |   | Rights Agreement, dated as of August 23, 1994, 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 24, 1994).                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **4.2**    |   | Amendment to Rights Agreement, dated as of April 11, 1997, between  the Registrant and American Stock Transfer & Trust Company, as Rights  Agent (Incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                                                         |

 

28

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| **Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.3**    |   | Credit Agreement, dated as of July 23, 1998, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, and European  American Bank, a New York banking corporation (Incorporated by reference to  Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K for the fiscal  year ended December 31, 2003).                                                                             |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.4**    |   | Amendment No. 1 to Credit Agreement, dated as of September 16, 1998,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.4 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 2003). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.5**    |   | Amendment No. 2 to Credit Agreement, dated as of July 28, 1999, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.5 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  1999).           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.6**    |   | Amendment No. 3 to Credit Agreement, dated as of July 26, 2000, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.5 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2000).           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.7**    |   | Amendment No. 4 to Credit Agreement, dated as of June 25, 2001, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2001).      |

 

29

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| **Number** |     | **Description** |
|------------|----------|-----------------|
|       |     |            |   |   |
|       | **4.8**  |            | Amendment No. 5 to Credit Agreement, dated as of May 3, 2002, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and Citibank, N.A. (successor-in-interest  to European American Bank), a New York banking corporation. (Incorporated by  reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002). |   |
|       |     |            |   |   |
|       | **4.9**  |            | Amendment No. 6 to Credit Agreement, dated as of June 13, 2002, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and Citibank, N.A. (successor-in-interest  to European American Bank), a New York banking corporation (Incorporated by  reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002). |   |
|       |     |            |   |   |
|       | **4.10** |            | Amendment No. 7 to Credit Agreement, dated as of August 1, 2002, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2002). |   |
|       |     |            |   |   |
|       | **4.11** |            | Amendment No. 8 to Credit Agreement, dated as of August 1, 2002, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking corporation (Incorporated by reference to Exhibit 4.11 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2002). |   |
|            |          |                 |  |  |  |  |

 

30

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| **Number** |     | **Description** |
|------------|----------|-----------------|
|       |     |            |   |   |
|       | **4.12** |            | Second Amendment and Restated Term Note, dated as of February 20,  2003, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, a Florida corporation, Embassy Industries, Inc., a New York  corporation, Green Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a  Delaware corporation, Nationwide  Industries, Inc.**,** a  Florida corporation, and Citibank, N.A. (successor-in-interest to European  American Bank), a New York banking corporation (Incorporated by reference to  Exhibit 4.11 to the Registrant’s Annual Report on Form 10-K for the year  ended December 31, 2002). |   |
|       |     |            |   |   |
|       | **4.13** |            | Amendment No. 9 to Credit Agreement, dated as of June 30, 2003, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, Countrywide Hardware, Inc., a Delaware corporation, Nationwide Industries, Inc.**,** a Florida corporation, and  Citibank, N.A. (successor-in-interest to European American Bank), a New York  banking corporation (Incorporated by reference to Exhibit 4.11 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2003). |   |
|       |     |            |   |   |
|       | **4.14** |            | Certain instruments defining the rights of holders of the long-term  debt securities of the Registrant are omitted pursuant to Section  (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant agrees to  furnish supplementally copies of these instruments to the Commission upon  request. |   |
|       |     |            |   |   |
|       | **10.1** |            | Second Amended and Restated Employment Agreement, dated as of May 30,  2001, between the Registrant and Richard A. Horowitz (Incorporated by  reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2001). |   |
|       |     |            |   |   |
|       | **10.2** |            | Consulting Agreement, effective as of November 1, 2003, between the  Registrant and Sidney Horowitz (Incorporated by reference to Exhibit 10.2 to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003). |   |
|       |     |            |   |   |
|       | **10.3** |            | 1992 Incentive Stock Option Plan of the Registrant, as amended and  restated as of March 13, 1997 (Incorporated by reference to Exhibit 10.3 to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003). |   |
|       |     |            |   |   |
|       | **10.4** |            | Executive Incentive Bonus Plan of the Registrant (Incorporated by  reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2001). |   |
|            |          |                 |  |  |  |  |

 

31

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| **Number** |     | **Description** |
|------------|----------|-----------------|
|       |     |            |   |
|       | **10.5** |            | 2002 Stock Incentive Plan of the Registrant (Incorporated by  reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002). |
|       |     |            |   |
|       | **14.1** |            | Code of Business Conduct and Ethics of the Registrant and its  Affiliates (Incorporated by reference to Exhibit 14.1 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 31, 2003). |
|       |     |            |   |
|       | **31.1** |            | Certification of Richard A. Horowitz, Principal Executive Officer of  the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |     |            |   |
|       | **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. |
|       |     |            |   |
|       | **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. |
|       |     |            |   |
|       | **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. |
|            |          |                 |  |  |  |

 

A copy of any of the foregoing exhibits to this Annual Report on Form10-K may be obtained, upon payment of the Registrant’s reasonable expenses infurnishing such exhibit, by writing to P & F Industries, Inc., 300 SmithStreet, Farmingdale, New York 11735-1114, Attention: Corporate Secretary.

 

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