**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For theQuarter Ended March 31, 2003**

 

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

 

**CommissionFile Number 1 - 5332**

 

**P & F INDUSTRIES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **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 theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,and (2) has been subject to such filing requirements for the past 90 days.

**Yes ****ý   No ****o**

 

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

 

As of May 14, 2003, there were3,503,822 shares of the registrant’s Class A Common Stock outstanding.

 

 

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**P & FINDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THEQUARTER ENDED MARCH 31, 2003**

 

**TABLE OFCONTENTS**

 
| **PART I**         |                                                                                                     |
|--------------------|----------------------------------------------------------------------------------------------------------|
| Item 1.            | Financial Statements (unaudited)                                                                         |
|               |                                                                                                     |
|               | Consolidated Balance Sheets as of  March 31, 2003 and December 31, 2002                                  |
|               |                                                                                                     |
|               | Consolidated Statements of Operations  for the three months ended  March 31, 2003 and 2002 (as restated) |
|               |                                                                                                     |
|               | Consolidated Statement of Shareholders’  Equity  for the three months ended March 31, 2003          |
|               |                                                                                                     |
|               | Consolidated Statements of Cash Flows  for the three months ended  March 31, 2003 and 2002 (as restated) |
|               |                                                                                                     |
|               | 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**        |                                                                                                     |
| Item 1.            | Legal Proceedings                                                                                        |
|               |                                                                                                     |
| Item 2.            | Changes in Securities and Use of Proceeds                                                                |
|               |                                                                                                     |
| Item 3.            | Defaults Upon Senior Securities                                                                          |
|               |                                                                                                     |
| Item 4.            | Submission of Matters to a Vote of Security  Holders                                                     |
|               |                                                                                                     |
| Item 5.            | Other Information                                                                                        |
|               |                                                                                                     |
| Item 6.            | Exhibits and Reports on Form 8-K                                                                         |
|               |                                                                                                     |
| **Signatures**     |
|               |                                                                                                     |
| **Certifications** |
|               |                                                                                                     |
| **Exhibit Index**  |
|                    |                                                                                                          |  |

 

i

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements**

 

**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(unaudited)**

 
|                                                                                                        |   | **March 31,  2003** |       | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
| ASSETS                                                                                                      |   |                |       |                   |   |
| CURRENT:                                                                                                    |   |                |       |                   |   |
| Cash                                                                                                        |   | $                   | 2,819,906  |                   | $      | 1,024,222 |   |
| Accounts  receivable, less allowance for possible losses of $376,097 in 2003 and  $354,441 in 2002 (Note 7) |   | 10,654,035          |       | 10,864,261             |   |
| Inventories  (Note 6)                                                                                       |   | 21,956,203          |       | 19,580,073             |   |
| Deferred  income taxes                                                                                      |   | 695,000             |       | 695,000                |   |
| Prepaid  expenses and other                                                                                 |   | 1,063,304           |       | 1,080,313              |   |
| TOTAL CURRENT  ASSETS                                                                                       |   | 37,188,448          |       | 33,243,869             |   |
|                                                                                                        |   |                |       |                   |   |
| PROPERTY AND  EQUIPMENT (Note 7):                                                                           |   |                |       |                   |   |
| Land                                                                                                        |   | 1,582,938           |       | 1,582,938              |   |
| Buildings and  improvements                                                                                 |   | 8,917,405           |       | 8,811,117              |   |
| Machinery and  equipment                                                                                    |   | 14,703,516          |       | 14,514,353             |   |
|                                                                                                        |   | 25,203,859          |       | 24,908,408             |   |
| Less  accumulated depreciation and amortization                                                             |   | 11,844,431          |       | 11,409,203             |   |
| NET PROPERTY  AND EQUIPMENT                                                                                 |   | 13,359,428          |       | 13,499,205             |   |
|                                                                                                        |   |                |       |                   |   |
| DEFERRED  INCOME TAXES                                                                                      |   | 1,377,000           |       | 1,377,000              |   |
|                                                                                                        |   |                |       |                   |   |
| GOODWILL, net  of accumulated amortization of $1,419,274 (Note 2)                                           |   | 9,313,621           |       | 9,238,621              |   |
|                                                                                                        |   |                |       |                   |   |
| OTHER  INTANGIBLE ASSETS, net of accumulated amortization of $487,667 and $354,667                          |   | 2,172,333           |       | 2,305,333              |   |
|                                                                                                        |   |                |       |                   |   |
| OTHER ASSETS,  net of accumulated amortization of $162,853 and $180,858                                     |   | 127,649             |       | 118,528                |   |
| TOTAL ASSETS                                                                                                |   | $                   | 63,538,479 |                   | $      | 59,782,556 |   |

 

See accompanying notes to consolidated financialstatements (unaudited).

 

1

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**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(unaudited)**

**(continued)**

 
|                                                                              |   | **March 31,  2003** |       | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                        |   |                |       |                   |   |
| CURRENT  LIABILITIES:                                                             |   |                |       |                   |   |
| Short-term  borrowings (Note 7)                                                   |   | $                   | 7,500,000  |                   | $      | 4,500,000 |   |
| Accounts  payable                                                                 |   | 4,704,390           |       | 2,860,271              |   |
| Accruals:                                                                         |   |                |       |                   |   |
| Compensation                                                                      |   | 800,520             |       | 2,112,377              |   |
| Other (Note 8)                                                                    |   | 2,075,667           |       | 2,250,962              |   |
| Deferred  income taxes                                                            |   | 210,000             |       | 210,000                |   |
| Current  maturities of long-term debt (Note 7)                                    |   | 1,755,791           |       | 1,402,547              |   |
| TOTAL CURRENT  LIABILITIES                                                        |   | 17,046,368          |       | 13,336,157             |   |
|                                                                              |   |                |       |                   |   |
| LONG-TERM DEBT,  less current maturities (Note 7)                                 |   | 11,163,292          |       | 11,591,989             |   |
|                                                                              |   |                |       |                   |   |
| DEFERRED  INCOME TAXES                                                            |   | 1,031,000           |       | 1,031,000              |   |
| TOTAL  LIABILITIES                                                                |   | 29,240,660          |       | 25,959,146             |   |
|                                                                              |   |                |       |                   |   |
| COMMITMENTS  AND CONTINGENCIES (Notes 7 and 8)                                    |   |                |       |                   |   |
|                                                                              |   |                |       |                   |   |
| SHAREHOLDERS’  EQUITY (Note 9):                                              |   |                |       |                   |   |
| Preferred  stock - $10 par; authorized - 2,000,000 shares; no shares outstanding  |   | —              |       | —                 |   |
| Common stock:                                                                     |   |                |       |                   |   |
| Class A - $1  par; authorized - 7,000,000 shares; issued - 3,690,367 shares       |   | 3,690,367           |       | 3,690,367              |   |
| Class B - $1  par; authorized - 2,000,000 shares; no shares issued or outstanding |   | —              |       | —                 |   |
| Additional  paid-in capital                                                       |   | 8,540,528           |       | 8,540,528              |   |
| Retained  earnings                                                                |   | 23,543,244          |       | 22,997,016             |   |
| Treasury  stock, at cost (186,845 and 176,045 shares)                             |   | (1,476,320          | )          | (1,404,501             | )      |
| TOTAL SHAREHOLDERS’  EQUITY                                                  |   | 34,297,819          |       | 33,823,410             |   |
|                                                                              |   |                |       |                   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                  |   | $                   | 63,538,479 |                   | $      | 59,782,556 |   |

 

See accompanying notes to consolidated financialstatements (unaudited).

 

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**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                                                                      |   | **Three months ended  March 31,** |             |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|------------------|
|                                                                                      |   | **2003**                          |             | **2002** |   |
|                                                                                      |   |                              |             | **(restated  - see Note 2)** |   |
| REVENUES (Note  10) :                                                                     |   |                              |             |   |   |
| Net sales                                                                                 |   | $                                 | 19,355,770  |   | $ | 17,037,755 |   |
| Other                                                                                     |   | 126,106                           |             | 58,964 |   |
|                                                                                      |   | 19,481,876                        |             | 17,096,719 |   |
|                                                                                      |   |                              |             |   |   |
| COSTS AND  EXPENSES:                                                                      |   |                              |             |   |   |
| Cost of sales                                                                             |   | 13,479,502                        |             | 12,004,222 |   |
| Selling,  general and administrative                                                      |   | 4,870,825                         |             | 4,089,063 |   |
| Interest - net                                                                            |   | 187,321                           |             | 101,772 |   |
|                                                                                      |   | 18,537,648                        |             | 16,195,057 |   |
|                                                                                      |   |                              |             |   |   |
| INCOME BEFORE  TAXES ON INCOME AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE    |   | 944,228                           |             | 901,662 |   |
|                                                                                      |   |                              |             |   |   |
| TAXES ON  INCOME                                                                          |   | 398,000                           |             | 348,000 |   |
|                                                                                      |   |                              |             |   |   |
| INCOME BEFORE  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                        |   | 546,228                           |             | 553,662 |   |
|                                                                                      |   |                              |             |   |   |
| CUMULATIVE  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES OF $1,668,000 (NOTE 2) |   | —                            |             | (3,239,118 | ) |
|                                                                                      |   |                              |             |   |   |
| NET INCOME  (LOSS)                                                                        |   | $                                 | 546,228          |   | $ | (2,685,456 | ) |
|                                                                                      |   |                              |             |   |   |   |   |
|                                                                                      |   |                              |             |   |   |   |   |
| Weighted  average common shares outstanding (Note 11):                                    |   |                              |             |   |   |
|                                                                                      |   |                              |             |   |   |
| Basic                                                                                     |   | 3,506,086                         |             | 3,510,605 |   |
|                                                                                      |   |                              |             |   |   |
| Diluted                                                                                   |   | 3,574,715                         |             | 3,587,347 |   |
|                                                                                      |   |                              |             |   |   |
| Earnings (loss)  per share of common stock (Note 11):                                     |   |                              |             |   |   |
| Basic:                                                                                    |   |                              |             |   |   |
| Income before  cumulative effect of change in accounting principle                        |   | $                                 | .16              |   | $ | .16 |   |
| Cumulative  effect of change in accounting principle, net of taxes                        |   | —                            |             | (.92 | ) |
|                                                                                      |   |                              |             |   |   |
| Net income  (loss)                                                                        |   | $                                 | .16              |   | $ | (.76 | ) |
|                                                                                      |   |                              |             |   |   |
| Diluted:                                                                                  |   |                              |             |   |   |
| Income before  cumulative effect of change in accounting principle                        |   | $                                 | .15              |   | $ | .15 |   |
| Cumulative  effect of change in accounting principle, net of taxes                        |   | —                            |             | (.90 | ) |
|                                                                                      |   |                              |             |   |   |
| Net income  (loss)                                                                        |   | $                                 | .15              |   | $ | (.75 | ) |

 

See accompanying notes to consolidated financialstatements (unaudited).

 

3

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

**CONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY**

**(unaudited)**

 
|                                                  |   | **Common  stock** |      | **Additional  paid-in  capital** |   | **Retained  earnings** |   | **Treasury  stock** |       |
|-------------------------------------------------------|--------|-------------------|-----------|----------------------------------|--------|------------------------|--------|---------------------|------------|
|                                                  |   |              |      |                             |   |                   |   |                |       |
| Balance, January 1, 2003                              |   | $                 | 3,690,367 |                             | $      | 8,540,528              |   | $                   | 22,997,016 |   | $ | (1,404,501 | ) |
|                                                  |   |              |      |                             |   |                   |   |                |       |
| Net income for the three  months ended March 31, 2003 |   | —            |      | —                           |   | 546,228                |   | —              |       |
|                                                  |   |              |      |                             |   |                   |   |                |       |
| Purchase of Class A Common  Stock (Note 9)            |   | —            |      | —                           |   | —                 |   | (71,819             | )          |
|                                                  |   |              |      |                             |   |                   |   |                |       |
| Balance, March 31, 2003                               |   | $                 | 3,690,367 |                             | $      | 8,540,528              |   | $                   | 23,543,244 |   | $ | (1,476,320 | ) |

 

See accompanying notes to consolidated financialstatements (unaudited).

 

4

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**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                                                 |   | **Three months ended  March 31,** |    |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                 |   | **2003**                          |    | **2002** |   |
|                                                                                                 |   |                              |    | **(restated  - see Note 2)** |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                                               |   |                              |    |   |   |
| Net income  (loss)                                                                                   |   | $                                 | 546,228 |   | $ | (2,685,456 | )  |
| Adjustments to  reconcile net income (loss) to net cash (used in) provided by operating  activities: |   |                              |    |   |   |
| Cumulative  effect of change in accounting for goodwill - net of taxes                               |   | —                            |    | 3,239,118 |   |
| Depreciation  and amortization                                                                       |   | 435,228                           |    | 368,944 |   |
| Amortization  of intangible assets                                                                   |   | 148,808                           |    | 4,295 |   |
| Provision for  losses on accounts receivable - net                                                   |   | 21,656                            |    | 6,251 |   |
| Decrease  (increase) in:                                                                             |   |                              |    |   |   |
| Accounts  receivable                                                                                 |   | 188,570                           |    | (1,932,484 | ) |
| Inventories                                                                                          |   | (2,376,130                        | )       | 924,959 |   |
| Prepaid  expenses and other                                                                          |   | 12,916                            |    | (39,048 | ) |
| Other assets                                                                                         |   | (20,836                           | )       | — |   |
| Increase  (decrease) in:                                                                             |   |                              |    |   |   |
| Accounts  payable                                                                                    |   | 1,844,119                         |    | 1,150,240 |   |
| Accruals and  other                                                                                  |   | (1,487,152                        | )       | (471,209 | ) |
| Total  adjustments                                                                                   |   | (1,232,821                        | )       | 3,251,066 |   |
| Net cash (used  in) provided by operating activities                                                 |   | (686,593                          | )       | 565,610 |   |
|                                                                                                 |   |                              |    |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                                               |   |                              |    |   |   |
| Capital  expenditures                                                                                |   | (295,451                          | )       | (293,132 | ) |
| Additional  payments for purchase of Nationwide Industries, Inc.                                     |   | (75,000                           | )       | — |   |
| Payment for  acquisition of product line                                                             |   | —                            |    | (397,940 | ) |
| Net cash used  in investing activities                                                               |   | (370,451                          | )       | (691,072 | ) |
|                                                                                                      |        |                                   |         |  |  |  |  |

 

See accompanying notes to consolidated financialstatements (unaudited).

 

5

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**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

**(continued)**

 
|                                                 |   | **Three months ended  March 31,** |      |
|------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                 |   | **2003**                          |      | **2002** |   |
|                                                 |   |                              |      | **(restated  - see Note 2)** |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:               |   |                              |      |   |   |
| Proceeds from  short-term borrowings                 |   | 3,000,000                         |      | 800,000 |   |
| Repayments of  short-term borrowings                 |   | —                            |      | (1,000,000 | ) |
| Proceeds from  mortgage                              |   | 1,697,301                         |      | — |   |
| Principal  payments on long-term debt                |   | (1,772,754                        | )         | (37,809 | ) |
| Purchase of  Class A Common Stock                    |   | (71,819                           | )         | (100,800 | ) |
| Net cash  provided by (used in) financing activities |   | 2,852,728                         |      | (338,609 | ) |
|                                                 |   |                              |      |   |   |
| NET INCREASE  (DECREASE) IN CASH                     |   | 1,795,684                         |      | (464,071 | ) |
|                                                 |   |                              |      |   |   |
| CASH AT  BEGINNING OF PERIOD                         |   | 1,024,222                         |      | 507,833 |   |
|                                                 |   |                              |      |   |   |
| CASH AT END OF  PERIOD                               |   | $                                 | 2,819,906 |   | $ | 43,762 |   |
|                                                 |   |                              |      |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:   |   |                              |      |   |   |
|                                                 |   |                              |      |   |   |
| Cash paid  during the period for:                    |   |                              |      |   |   |
|                                                 |   |                              |      |   |   |
| Income taxes                                         |   | $                                 | —    |   | $ | 2,500 |   |
|                                                 |   |                              |      |   |   |
| Interest                                             |   | $                                 | 197,846   |   | $ | 107,635 |   |

 

See accompanying notes to consolidated financialstatements (unaudited).

 

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**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

 

**NOTE 1 - PRINCIPLESOF CONSOLIDATION**

 

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

 

P & F Industries, Inc. (“P& F”) conducts its business operations through its four wholly-ownedsubsidiaries: Florida Pneumatic Manufacturing Corporation (“FloridaPneumatic”), Countrywide Hardware, Inc. (“Countrywide”), Green Manufacturing,Inc. (“Green”) and Embassy Industries, Inc. (“Embassy”). P & F and itssubsidiaries are herein referred to collectively as the “Company”.

 

Florida Pneumatic is engaged inthe importation, manufacture and sale of pneumatic hand tools, primarily forthe industrial and retail markets, and the importation and sale of compressorair filters. Florida Pneumatic also markets, through its Berkley Tool division(“Berkley”), a line of pipe cutting and threading tools, wrenches andreplacement electrical components for a widely-used brand of pipe cutting andthreading machines. Countrywide conducts its business operations throughNationwide Industries, Inc. (“Nationwide”), its wholly-owned subsidiary, andthrough its Franklin Manufacturing (“Franklin”) division. Countrywide acquiredall of the stock of Nationwide on May 3, 2002. The assets of Franklin weretransferred from Embassy to Countrywide on December 30, 2002. Nationwide is animporter and manufacturer of door, window and fencing hardware. Franklinimports a line of door and window hardware. Green is engaged primarily in themanufacture, development and sale of heavy-duty welded custom designedhydraulic cylinders. Green also manufactures a line of access equipment for thepetro-chemical industry and a line of post hole digging equipment for theagricultural industry. Embassy is engaged in the manufacture and sale ofbaseboard heating products and the importation and sale of radiant heatingsystems. Note 10 of the Notes to Consolidated Financial Statements presentsfinancial information for the segments of the Company’s business.

 

**NOTE 2 - BASIS OFFINANCIAL STATEMENT PRESENTATION AND RESTATEMENT**

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information, and with the rules and regulations of theSecurities and Exchange Commission regarding interim financial reporting.Accordingly, these interim financial statements do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements. In the opinion ofthe Company, these unaudited consolidated financial statements include alladjustments necessary to present fairly the information set forth therein. Allsuch adjustments are of a normal recurring nature. Results for interim periodsare not necessarily indicative of results to be expected for a full year.

 

7

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The consolidated balance sheetinformation as of December 31, 2002 was derived from the audited financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2002. The interim financial statements contained hereinshould be read in conjunction with that Report.

 

In preparing its consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, the Company is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

The Company had its goodwill tested forimpairment, effective January 1, 2002, during the second quarter of 2002. Theimpairment tests performed required that the Company determine the fair marketvalue of its reporting units for comparison to the carrying value of their netassets to assess whether any impairment exists. The methodologies used toestimate fair market value involved the use of estimates and assumptions,including projected revenues, earnings and cash flows.

 

The Company’s earnings forecasts for Green,which reflected the extremely weak market conditions in the hydraulic cylinderbusiness, resulted in the fair market value of Green’s goodwill, as determinedby an independent third-party appraiser, being lower than its carrying value asof December 31, 2001. Accordingly, in the quarter ended June 30, 2002, theCompany recorded, retroactive to January 1, 2002, an after-tax impairmentcharge of approximately $3.2 million, which is reported as a cumulative effectof change in accounting principle resulting from the adoption by the Company ofFinancial Accounting Standards Board Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets.”

 

The statement of operations and the statementof cash flows for the quarter ended March 31, 2002 have been retroactivelyrestated to give effect to the cumulative effect of change in accountingprinciple.

 

8

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**NOTE 3 - STOCK-BASEDCOMPENSATION**

 

The Company accounts for itsstock option awards to its employees under the intrinsic value based method ofaccounting prescribed by Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.” Under the intrinsic value basedmethod, compensation cost is the excess, if any, of the quoted market price ofthe stock at grant date or other measurement date over the amount an employeemust pay to acquire the stock. The Company makes pro forma disclosures of netincome and earnings per share as if the fair value based method of accountinghad been applied, as required by Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

 

The Company also complies withthe disclosure provisions of Statement of Financial AccountingStandards No. 148 “Accounting for Stock Based Compensation – Transition andDisclosure”, which requires prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method on reported results.

 

SFAS 123 requires the Company toprovide pro forma information regarding net income and earnings per share as ifcompensation cost for the Company’s 2002 Stock Incentive Plan had been determinedin accordance with the fair value method prescribed by SFAS 123. The Companyestimates the fair value of each stock option at the grant date by using theBlack-Scholes option-pricing model. No options were granted, and no pro formacompensation expense was incurred, during the quarters ended March 31, 2003 andMarch 31, 2002.

 

**NOTE 4 - FOREIGNCURRENCY TRANSACTIONS**

 

The Company accounts for changesin the fair value of its foreign currency contracts by marking them to marketand recognizing any resulting gains or losses through its statement ofoperations. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statement of operations. AtMarch 31, 2003, the Company had foreign currency forward contracts, maturing in2003, to purchase Japanese yen at contracted forward rates. The value of thesecontracts at March 31, 2003 was approximately $1,984,000, which was theapproximate value of the Company’s corresponding yen-denominated accountspayable. During the quarter ended March 31, 2003, the Company recorded netrealized gains of approximately $1,000 on foreign currency transactions. Duringthe quarter ended March 31, 2002, the Company recorded net realized losses ofapproximately $10,000 on foreign currency transactions. At March 31, 2003, theCompany had no material unrealized gains or losses on foreign currencytransactions.

 

9

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**NOTE 5 - NEWACCOUNTING PRONOUNCEMENTS**

 

In April 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 145,“Recission of FASB Statement No.4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections” (“SFAS 145”), which eliminates theautomatic classification of gain or loss on extinguishment of debt as anextraordinary item of income and requires that such gain or loss be evaluatedfor extraordinary classification under the criteria of Accounting PrinciplesBoard No. 30, “Reporting Results of Operations.” The provisions of SFAS 145related to the recission of Statement 4 are effective for fiscal yearsbeginning after May 15, 2002. The Company adopted SFAS 145 as of January 1,2003. During the quarter ended March 31, 2003, the Company recorded a loss ofapproximately $84,000, included in selling, general and administrativeexpenses, that resulted from the refinancing of a mortgage.

 

In June 2002,the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No.146,**“Accounting for Costs Associated with Exit or Disposal Activities”(“SFAS 146”).**SFAS 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and supersedes Emerging Issues Task Force Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)” (“EITF 94-3”). The principal difference between SFAS 146 andEITF 94-3 relates to the requirements for recognition of a liability for a costassociated with an exit or disposal activity. SFAS 146 requires that aliability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred. Under EITF 94-3, a liability was recognized atthe date of an entity’s commitment to an exit plan. SFAS 146 is effective forexit or disposal activities that are initiated after December 31, 2002.The Company did not have any exit or disposal activities since the adoption ofSFAS 146.

 

**NOTE 6- INVENTORIES**

 

Major classes of inventory wereas follows:

 
|                        |   | **March 31,2003** |       | **December 31,  2002** |   |
|-----------------------------|--------|-------------------|------------|------------------------|--------|
| Raw materials  and supplies |   | $                 | 3,351,888  |                   | $      | 3,566,161 |   |
| Work in  process            |   | 836,928           |       | 754,857                |   |
| Finished goods              |   | 17,767,387        |       | 15,259,055             |   |
|                        |   | $                 | 21,956,203 |                   | $      | 19,580,073 |   |

 

10

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**NOTE 7– SHORT-TERMBORROWINGS AND LONG-TERM DEBT**

 

The Company’s credit agreementwith a bank includes a revolving credit loan facility, which provides a totalof $12,000,000, with various sublimits, for direct borrowings, letters ofcredit, bankers’ acceptances and equipment loans. There are nocommitment fees for any unused portion of this credit facility. At March 31, 2003, there was $7,500,000outstanding against the revolving credit loan facility. There was also acommitment of approximately $55,000 at March 31, 2003 for open letters ofcredit.

 

Direct borrowings under theCompany’s revolving credit loan facility are secured by the Company’s accountsreceivable, inventory and equipment and are cross-guaranteed by each of theCompany’s subsidiaries. These borrowings bear interest at either the primeinterest rate or LIBOR (London InterBank Offered Rate) plus 1.6%. The prime interest rate at March 31,2003 was 4.25% and LIBOR was approximately 1.3%. The prime interest rate atMarch 31, 2002 was 4.75% and LIBOR was approximately 1.9%.

 

The credit agreement alsoincludes a foreign exchange line, which provides for the availability of up to$10,000,000 in foreign currency forward contracts. These contracts fix the exchangerate on future purchases of Japanese yen needed for payments to foreignsuppliers. The total amount of foreign currency forward contracts outstandingat March 31, 2003 was approximately $1,984,000.

 

Under the terms of the Company’scredit agreement, the Company is required to adhere to certain financialcovenants. At March 31, 2003, and for the three months then ended, the Companysatisfied all of these covenants. The credit agreement, which expires in July2003, is subject to annual review by the lending bank.

 

Theterm loan facility, which ispart of the Company’s credit agreement with a bank, provides a commitment of$15,000,000 to finance acquisitions subject to the lending bank’s approval. TheCompany borrowed $11,500,000 against this facility to finance the acquisitionof Nationwide Industries, Inc., described in Note 1, and there was $7,500,000outstanding against this facility at March 31, 2003. There was also a standby letter of credit totaling approximately$351,000 outstanding against this facility at March 31, 2003. This standby letter of credit is used to securethe Economic Development Revenue Bond assumed as part of the acquisition ofGreen.

 

On January 24, 2003, Embassyrefinanced its existing mortgage. The new mortgage, which was payable monthlythrough May 2006, bore interest at 8.16%. The new mortgage, which is payablemonthly through January 2010, bears interest at LIBOR plus 155 basis points.

 

11

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**NOTE 8 - WARRANTYLIABILITY**

 

TheCompany offers to its customers warranties against product defects for periodsranging from one year to the life of the product, depending on the specificproduct and terms of the customer purchase agreement. The Company’s typicalwarranties require it to repair or replace the defective products during thewarranty period at no cost to the customer. At the time the product revenue isrecognized, the Company records a liability for estimated costs under itswarranties. The costs are estimated based on historical experience. The Companyperiodically assesses the adequacy of its recorded warranty liability andadjusts the amounts necessary. While the Company believes that its estimatedliability for product warranties is adequate and that the judgment applied isappropriate, the estimated liability for the product warranties could differmaterially from future actual warranty costs.

 

Changesin the Company’s warranty liability, included in other accrued liabilities, forthe three month periods ended March 31, 2003 and March 31, 2002 were asfollows:

 
|                                                                |   | **Three months ended  March 31,** |    |
|---------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                |   | **2003**                          |    | **2002** |   |
|                                                                |   |                              |    |   |   |
| Balance,  beginning of period                                       |   | $                                 | 186,513 |   | $ | 198,384 |   |
|                                                                |   |                              |    |   |   |
| Warranties  issued and changes in estimated pre-existing warranties |   | 114,898                           |    | 134,369 |   |
|                                                                |   |                              |    |   |   |
| Actual  warranty costs/settlements                                  |   | (105,849                          | )       | (126,239 | ) |
| Balance, end  of period                                             |   | $                                 | 195,562 |   | $ | 206,514 |   |

 

**NOTE 9 - CAPITALSTOCK TRANSACTIONS**

 

During the three months endedMarch 31, 2003, the Company purchased 10,800 shares of Class A Common Stock, ata cost of $71,819.

 

12

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**NOTE 10 - SEGMENTS OFBUSINESS**

 

The following tables present financial informationby segment for the quarters ended March 31, 2003 and 2002. Segment profit(loss) excludes general corporate expenses, interest expense and income taxes.There were no intersegment revenues.

 
| **Three months ended  March 31, 2003** |   | **Consolidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|----------------------------------------|--------|------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
| **(In thousands)**                     |   |             |   |                 |   |         |   |                     |   |                   |   |
|                                   |   |             |   |                 |   |         |   |                     |   |                   |   |
| 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 |   | $                | 58,957 |                 | $      | 25,134       |   | $                        | 19,642 |                   | $      | 8,803 |   | $ | 5,378 |   |
| Corporate assets                       |   | 4,581            |   |                 |   |         |   |                     |   |                   |   |
| Total  assets at March 31, 2003        |   | $                | 63,538 |                 |   |         |   |                     |   |                   |   |   |

 

13

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| **Three months ended March 31, 2002**                |   | **Consolidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|------------------------------------------------------|--------|------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
| **(restated -  see Note 2)**                         |   |             |   |                 |   |         |   |                     |   |                   |   |
| **(In  thousands)**                                  |   |             |   |                 |   |         |   |                     |   |                   |   |
|                                                 |   |             |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external  customers                    |   | $                | 17,097 |                 | $      | 10,009       |   | $                        | 1,464  |                   | $      | 3,343 |   | $ | 2,281 |   |
|                                                 |   |             |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                                |   | $                | 1,770  |                 | $      | 1,737        |   | $                        | 25     |                   | $      | (94 | ) | $ | 102 |   |
|                                                 |   |             |   |                 |   |         |   |                     |   |                   |   |
| Cumulative  effect of change in accounting principle |   | $                | (3,239 | )                    | $      | —       |   | —                   |   | $                      | (3,239 | ) | $ | — |   |
|                                                 |   |             |   |                 |   |         |   |                     |   |                   |   |
| Identifiable  assets at March 31, 2002               |   | $                | 46,271 |                 | $      | 24,576       |   | $                        | 2,826  |                   | $      | 13,587 |   | $ | 5,282 |   |
| Corporate assets                                     |   | 1,093            |   |                 |   |         |   |                     |   |                   |   |
| Total  assets at March 31, 2002                      |   | $                | 47,364 |                 |   |         |   |                     |   |                   |   |   |

 

The reconciliation of combinedoperating profits for reportable segments to consolidated income before incometaxes and cumulative effect of change in accounting principle is as follows:

 
|                                                                         |   | **Three months ended  March 31,** |      |
|------------------------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                                         |   | **2003**                          |      | **2002** |   |
| Total profit  for reportable segments                                        |   | $                                 | 2,013,845 |   | $ | 1,770,133 |   |
|                                                                         |   |                              |      |   |   |
| General  corporate expenses                                                  |   | (882,296                          | )         | (766,699 | ) |
|                                                                         |   |                              |      |   |   |
| Interest  expense - net                                                      |   | (187,321                          | )         | (101,772 | ) |
| Income before  taxes and cumulative effect of change in accounting principle |   | $                                 | 944,228   |   | $ | 901,662 |   |

 

14

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**NOTE 11 - EARNINGS(LOSS) PER SHARE**

 

The following table sets forththe computation of basic and diluted earnings per common share:

 
|                                                                                                                  |   | **Three months ended  March 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                  |   | **2003**                          |    | **2002** |   |
|                                                                                                                  |   |                              |    | **(restated  - see Note 2)** |   |
| Numerator:                                                                                                            |   |                              |    |   |   |
| Numerator for  basic and diluted earnings (loss) per common share:                                                    |   |                              |    |   |   |
| Income before  cumulative effect of change in accounting principle                                                    |   | $                                 | 546,228 |   | $ | 553,662 |   |
|                                                                                                                  |   |                              |    |   |   |
| Cumulative  effect of change in accounting principle                                                                  |   | —                            |    | (3,239,118 | ) |
|                                                                                                                  |   |                              |    |   |   |
| Net income  (loss)                                                                                                    |   | $                                 | 546,228 |   | $ | (2,685,456 | ) |
|                                                                                                                  |   |                              |    |   |   |
| Denominator:                                                                                                          |   |                              |    |   |   |
| Denominator for  basic earnings per common share - weighted average common shares outstanding                         |   | 3,506,086                         |    | 3,510,605 |   |
|                                                                                                                  |   |                              |    |   |   |
| Effect of  dilutive securities:                                                                                       |   |                              |    |   |   |
| Common stock  options                                                                                                 |   | 68,629                            |    | 76,742 |   |
| Denominator for  diluted earnings per common share - adjusted weighted average common shares  and assumed conversions |   | 3,574,715                         |    | 3,587,347 |   |

 

15

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There were outstanding duringthe three month periods ended March 31, 2003 and 2002 stock options whoseexercise prices were higher than the average market values for the respectiveperiods. These options are anti-dilutive and are excluded from the computationof earnings (loss) per share. The weighted average anti-dilutive stock optionsoutstanding were as follows:

 
|                                                      |   | **Three months ended  March 31,** |   |
|-----------------------------------------------------------|--------|-----------------------------------|--------|
|                                                      |   | **2003**                          |   | **2002** |   |
|                                                      |   |                              |   |   |   |
| Weighted  average anti-dilutive stock options outstanding |   | 253,664                           |   | 189,000 |   |

 

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**P & FINDUSTRIES, INC. AND SUBSIDIARIES**

 

**Item2****.    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**General**

 

**Critical AccountingPolicies and Estimates**

 

The Company prepares its consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America. Certain of these accounting policies requirethe Company to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities. On an ongoing basis, the Company evaluatesestimates, including those related to bad debts, inventory reserves, intangibleassets, income taxes and contingencies. The Company bases its estimates onhistorical data and experience, when available, and on various otherassumptions that are believed to be reasonable under the circumstances, thecombined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates.

 

The Company’s critical accounting policiesinclude:

 

**RevenueRecognition**

 

The Company records revenues upon shipmentwith related risks and title passing to the customers.  Estimates of losses for bad debts, returnsand other allowances are recorded at the time of the sale.  Shipping charges to customers and relatedexpenses that are included in selling, general and administrative expenses areimmaterial.

 

**Allowance for Doubtful Accounts**

 

The Companyrecords an allowance for doubtful accounts based on specifically identifiedamounts that are believed to be uncollectible. The Company also records as anadditional allowance a certain percentage of aged accounts receivable, based onhistorical experience and the Company’s assessment of the general financialconditions affecting its customer base. If actual collections experiencechanges, revisions to the allowance may be required. The Company has a limitednumber of customers with individually large amounts due at any given balancesheet date. Any unanticipated change in the credit worthiness of any of thesecustomers or in any other matters affecting the collectibility of amounts duefrom such customers could have a material affect on the Company’s results ofoperations in the period in which such changes or events occur. After allreasonable attempts to collect an account receivable have failed, the amount ofthe receivable is written off against the allowance.

 

17

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**Inventories**

 

Inventories are valued at thelower of cost or market. Cost is determined by the first-in, first-out method.The inventory balance, which includes materials, labor and manufacturingoverhead costs, is recorded net of an allowance for obsolete or unmarketableinventory. Such allowance is based upon both historical experience andmanagement’s understanding of market conditions and forecasts of future productdemand. If the actual amount of obsolete or unmarketable inventorysignificantly exceeds the estimated allowance, the Company’s cost of sales,gross profit and net income would be significantly affected.

 

**Goodwilland Other Intangible Assets**

 

The Company’s operational policy for theassessment and measurement of any impairment in the value of goodwill and otherintangible assets that is other than temporary is to evaluate annually, withthe help of independent third-party appraisals, the recoverability andremaining life of its goodwill and other intangible assets to determine thefair value of these assets.Themethodologies to be used to estimate fair value include the use of estimatesand assumptions, including projected revenues, earnings and cash flows. If thefair value of any of these assets is determined to be less than its carryingvalue, the Company will reflect the impairment of any such asset through areduction in its carrying value, in an amount equal to the excess of thecarrying value of the asset over its appraised value.

 

**Long-LivedAssets**

 

The Company reviewed certain long-livedassets and identifiable intangibles for impairment. Whenever events or changes in circumstances indicate that the carryingvalue of any of these assets may not be recoverable, the Company will assessthe recoverability of such assets based upon estimated undiscounted cash flowforecasts.

 

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**Acquisition**

 

On May 3, 2002, Countrywide acquired all ofthe stock of Nationwide for approximately $10,452,000, plus acquisition costsof approximately $490,000 and working capital adjustments of approximately$260,000. There were additional acquisition-related costs of approximately$364,000 recorded as goodwill. In addition to the cash paid at the closing,Nationwide’s previous owner is entitled to contingent payments of 30% of theexcess of Nationwide’s earnings before interest and taxes over $2,500,000, foreach of the five twelve-month periods subsequent to the acquisition date, whichcontingent payments will be treated as additions to goodwill. Countrywideconducts its business through Nationwide and Franklin. The assets of Franklinwere transferred from Embassy to Countrywide on December 30, 2002.

 

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**Results of Operations**

 

**Quarters ended March 31, 2003 and March 31,2002**

 

Consolidatedrevenues increased 14.0%, from $17,096,719 to $19,481,876. Revenues frompneumatic tools and related equipment increased 3.3%, from $10,008,910 to$10,340,409, due primarily to strong promotions by a major customer, partiallyoffset by price concessions at a significant customer and a base volume decrease.Selling prices of pneumatic tools and related equipment were unchanged from theprior year’s first quarter, with the exception of prices to a significantcustomer, which were substantially reduced early in the fourth quarter of 2002.Revenues from hardware products increased 190.3%, from $1,464,279 to$4,250,034, due primarily to the acquisition of Nationwide, which had revenuesof approximately $2,900,000 in the first quarter of 2003. This increase waspartially offset by a decrease of 8.3% at Franklin, as a significant customerdeclared bankruptcy in the first quarter of 2003. Selling prices of hardwareproducts were unchanged from the first quarter of 2002. Revenues from hydrauliccylinders and other equipment decreased 14.4%, from $3,343,175 to $2,862,247,due primarily to the phasing out of a major customer in the first quarter of2002 and to continued depressed conditions in the refuse market, partiallyoffset by increased sales in the access and construction sectors. Sellingprices of hydraulic cylinders and other equipment were virtually unchanged fromthe first quarter of 2002. Revenues from heating products decreased 11.0%, from$2,280,355 to $2,029,186, due primarily to the weakness in baseboard heatingdemand, which continues to suffer from poor housing starts in the Northeast.Selling prices of heating products were unchanged from the comparable quarterof the prior year.

 

Consolidatedgross profit, as a percentage of revenues, increased from 29.8% to 30.8%. Grossprofit from pneumatic tools and related equipment was unchanged at 36.9%. Grossprofit from hardware products increased from 25.2% to 32.1%, due primarily tothe addition of Nationwide’s higher margin OEM business, which joined theproduct mix in the second quarter of 2002. Gross profit from hydrauliccylinders and other equipment decreased from 9.1% to 7.4%, due primarily to thedecrease in revenues, which reduced coverage of fixed expenses. Gross profitfrom heating equipment decreased from 32.0% to 29.9%, due primarily to increasedmaterial costs, a change in product mix and a weakening of the U.S. dollarversus the euro, which increased the cost of imported products.

 

20

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Consolidated selling, general andadministrative expenses increased 19.1%, from $4,089,063 to $4,870,825, dueprimarily to the addition of approximately $440,000 of these expenses atNationwide and to a loss of approximately $84,000 that resulted from therefinancing of Embassy’s mortgage, and, to a lesser extent, to increasedcompensation tied to higher profitability and to increased expenses related toadditional reporting and control requirements. These increases were partiallyoffset by substantial decreases resulting from cost-cutting efforts in all ofthe segments. As a percentage of revenues, selling, general and administrativeexpenses increased, from 23.9% to 25.0%, due primarily to the increasedexpenses discussed above.

 

Interestexpense increased 84.1%, from $101,772 to $187,321, due primarily to increasedborrowings to finance the Nationwide acquisition. The overall increase was netof decreases resulting from lower interest rates on the Company’s revolverborrowings and a refinanced mortgage.

 

The effectivetax rates for the quarters ended March 31, 2003 and 2002 were 42.2% and 38.6%,respectively. The higher effective tax rate resulted from the amortization ofintangible assets at Nationwide not being deductible for tax purposes.

 

The Companyhad its goodwill tested for impairment, effective January 1, 2002, during thesecond quarter of 2002. The impairment tests performed required that theCompany determine the fair market value of its reporting units for comparisonto the carrying value of their net assets to assess whether any impairmentexists. The methodologies used to estimate fair market value involved the useof estimates and assumptions, including projected revenues, earnings and cashflows.

 

The Company’searnings forecasts for Green, which reflected the extremely weak marketconditions in the hydraulic cylinder business, resulted in the fair marketvalue of Green’s goodwill, as determined by an independent third-partyappraiser, being lower than its carrying value as of December 31, 2001.Accordingly, in the quarter ended June 30, 2002, the Company recorded,retroactive to January 1, 2002, an after-tax impairment charge of approximately$3.2 million, which is reported as a cumulative effect of change in accountingprinciple resulting from the adoption by the Company of Financial AccountingStandards Board Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets.”

 

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**Liquidity and capitalresources**

 

The Company gauges itsliquidity and financial stability by the measurements shown in the followingtable (dollar amounts in thousands):

 
|                       |   | **March 31,2003** |   | **December 31,  2002** |   | **March 31,  2002** |   |
|----------------------------|--------|-------------------|--------|------------------------|--------|---------------------|--------|
| Working  Capital           |   | $                 | 20,142 |                   | $      | 19,908              |   | $ | 21,114 |   |
| Current Ratio              |   | 2.18 to 1         |   | 2.49 to 1              |   | 3.57 to 1           |   |
| Shareholders’  Equity |   | $                 | 34,298 |                   | $      | 33,823              |   | $ | 34,681 |   |

 

During thequarter ended March 31, 2003, gross accounts receivable decreased byapproximately $189,000, with decreases of approximately $672,000 and $240,000at Florida Pneumatic and Embassy, respectively, being partially offset byincreases of $570,000 and $153,000 at Countrywide and Green, respectively. Thedecreases at Florida Pneumatic and Embassy were due primarily to decreases insales in the first quarter of 2003 versus the fourth quarter of 2002. Theincreases at Countrywide and Green were due primarily to increases in sales inthe first quarter of 2003 versus the fourth quarter of 2002 at Nationwide,Franklin and Green.

 

Inventoriesincreased by approximately $2,376,000 during the quarter ended March 31, 2003,with increases of approximately $1,856,000, $347,000, $127,000 and $46,000 atFlorida Pneumatic, Countrywide, Green and Embassy, respectively. The increaseat Florida Pneumatic was primarily attributable to a decrease in revenues, inaddition to the timing of purchases of imported products. The increase atCountrywide was due primarily to the timing of overseas purchases, new items atFranklin and preparation for the peak spring season at Nationwide. The increaseat Green was due primarily to the timing of purchases. The increase at Embassywas due primarily to the timing of overseas purchases and new inventory items.

 

During thefirst quarter of 2003, short-term borrowings increased by $3,000,000, primarilyto fund working capital needs.

 

During thefirst quarter of 2003, accounts payable increased by approximately $1,844,000.Increases of approximately $1,744,000 and $188,000 at Florida Pneumatic andGreen, respectively, were partially offset by decreases of approximately$77,000 and $11,000 at Embassy and Countrywide, respectively. The increases atFlorida Pneumatic and Green were each due primarily to the timing of purchases.The decreases at Countrywide and Embassy were each due primarily to the timingof payments and purchases.

 

22

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On August 1, 2002, the Company renewed itscredit agreement, as amended, with Citibank through July 26, 2003. Thisagreement provides the Company with various credit facilities, includingrevolving credit loans, term loans for acquisitions and a foreign exchangeline. 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 unused portionof this credit facility.

 

At March 31, 2003, there was $7,500,000outstanding against the revolving credit loan facility. There was also acommitment of approximately $55,000 at March 31, 2003 for open letters ofcredit.

 

The term loan facility provides a maximumcommitment of $15,000,000 to finance acquisitions subject to the lending bank’sapproval. There are no commitment fees for any unused portion of this creditfacility. The Company borrowed $11,500,000 against this facility to finance theacquisition of Nationwide. There was a balance outstanding against thisfacility at March 31, 2003 of $7,500,000. There was also a standby letter ofcredit totaling approximately $351,000 outstanding against this facility atMarch 31, 2003. This standby letter of credit was used to secure the EconomicDevelopment Revenue Bond assumed as part of the acquisition of Green.

 

The Company’s credit agreement is subject toannual review by the lending bank. Under this agreement, the Company isrequired to adhere to certain financial covenants. At March 31, 2003 and forthe quarter then ended, the Company satisfied all of these covenants.

 

Capital spending for each of the quartersended March 31, 2003 and 2002 was approximately $295,000, which amounts wereprovided from working capital. Capital expenditures for the remainder of 2003are expected to be approximately $1,050,000, some of which may be financedthrough the Company’s credit facilities. Included in the expected total for theremainder of 2003 are capital expenditures relating to new products, expansionof existing product lines and replacement of equipment.

 

Operating activities used cash totallingapproximately $687,000 during the quarter ended March 31, 2003 and providedcash totalling approximately $566,000 during the quarter ended March 31, 2002.The Company believes that cash on hand derived from operations and cashavailable through borrowings under its credit facilities will be sufficient toallow the Company to meet its foreseeable capital needs.

 

23

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**Off-Balance Sheet Arrangements**

 

The Company’s foreign exchange line providesfor the availability of up to $10,000,000 in foreign currency forwardcontracts.  These contracts fix theexchange rate on future purchases of Japanese yen needed for payments toforeign suppliers. The total amount of foreign currency forward contractsoutstanding at March 31, 2003 was approximately $1,984,000.

 

The Company,through Florida Pneumatic, imports a significant amount of its purchases fromJapan, with payment due in Japanese yen. As a result, the Company is subject tothe effects of foreign currency exchange fluctuations. The Company uses avariety of techniques to protect itself from any adverse effects from thesefluctuations, including increasing its selling prices, obtaining pricereductions from its overseas suppliers, using alternative supplier sources andentering into foreign currency forward contracts. The increase in the strengthof the Japanese yen versus the U.S. dollar over the last 12 months had anegative effect on the Company’s results of operations and its financialposition. There can be no assurance as to the future trend of this value. See“Item 3 – Quantitative and Qualitative Disclosure About Market Risk.”

 

**Contractual Obligations and CommercialCommitments**

 

At March 31,2003, the Company had certain contractual cash obligations and other commercialcommitments, as set forth in the following tables:

 

** **
|                                |   | **Payments Due by Period** |       |
|-------------------------------------|--------|----------------------------|------------|
| **Contractual  Cash Obligations**   |   | **Total**                  |       | **Less than********1 year** |   | **1 - 3  years** |   | **4 - 5  years** |   | **After 5  years** |   |
| Long-term debt                      |   | $                          | 12,919,083 |   | $ | 1,755,791 |   | $ | 3,383,326 |   | $ | 3,235,063 |   | $ | 4,544,903 |   |
| Short-term borrowings               |   | 7,500,000                  |       | 7,500,000 |   | — |   | — |   | — |   |
| Employment agreements               |   | 4,233,000                  |       | 835,000 |   | 1,670,000 |   | 1,601,000 |   | 127,000 |   |
| Total contractual cash  obligations |   | $                          | 24,652,083 |   | $ | 10,090,791 |   | $ | 5,053,326 |   | $ | 4,836,063 |   | $ | 4,671,903 |   |

 

The Company has an employmentagreement, through May 2008, with its President, that provides for minimum annualcompensation of $760,000. The Company also has an employment agreement with thePresident of a subsidiary, through May 2007, that provides for annualcompensation of $75,000.

 

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|                              |   | **Amount of Commitment Expiration Per Period** |       |
|-----------------------------------|--------|------------------------------------------------|------------|
| **Other  Commercial Commitments** |   | **Total**                                      |       | **Less than********1 year** |   | **1 - 3  years** |   | **4 - 5  years** |   | **After 5  years** |   |
| Purchase commitments              |   | $                                              | 12,800,000 |   | $ | 12,800,000 |   | $ | — |   | $ | — |   | $ | — |   |
|                              |   |                                           |       |   |   |   |   |   |   |   |   |
| Commercial letters of credit      |   | $                                              | 55,000     |   | $ | 55,000 |   | $ | — |   | $ | — |   | $ | — |   |
|                              |   |                                           |       |   |   |   |   |   |   |   |   |
| Stand-by letter of credit         |   | $                                              | 351,000    |   | $ | 351,000 |   | $ | — |   | $ | — |   | $ | — |   |

 

**New AccountingPronouncements**

 

In April 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 145,“Recission of FASB Statement No.4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections” (“SFAS 145”), which eliminates theautomatic classification of gain or loss on extinguishment of debt as anextraordinary item of income and requires that such gain or loss be evaluatedfor extraordinary classification under the criteria of Accounting PrinciplesBoard No. 30, “Reporting Results of Operations.” The provisions of SFAS 145related to the recission of Statement 4 are effective for fiscal yearsbeginning after May 15, 2002. The Company adopted SFAS 145 as of January 1,2003. During the quarter ended March 31, 2003, the Company recorded a loss ofapproximately $84,000, included in selling, general and administrativeexpenses, that resulted from the refinancing of a mortgage.

 

In June 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 146,**“Accounting for Costs Associated with Exitor Disposal Activities” (“SFAS 146”).**SFAS146 addresses financial accounting and reporting for costs associated with exitor disposal activities and supersedes Emerging Issues Task Force Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring)” (“EITF 94-3”). The principal difference between SFAS 146 andEITF 94-3 relates to the requirements for recognition of a liability for a costassociated with an exit or disposal activity. SFAS 146 requires that aliability for a cost associated with an exit or disposal activity be recognizedwhen the liability is incurred. Under EITF 94-3, a liability was recognized atthe date of an entity’s commitment to an exit plan. SFAS 146 is effective forexit or disposal activities that are initiated after December 31, 2002.The Company did not have any exit or disposal activities since the adoption ofSFAS 146.

 

25

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**Item3****.    Quantitative and QualitativeDisclosures About Market Risk**

 

The Company isexposed to market risks, which include changes in International exchange ratesand the prices of certain commodities. The Company attempts to reduce the risks related to foreign currencyfluctuation by utilizing financial instruments, pursuant to Company policy.

 

The value ofthe U.S. dollar affects the Company’s results. Changes in exchange rates may positively or negatively affect theCompany’s gross margins and operating expenses. The Company engages in hedgingprograms aimed at limiting, in part, the impact of currency fluctuations. Usingprimarily forward exchange contracts, the Company hedges some of thosetransactions that, when remeasured according to accounting principles generallyaccepted in the United States of America, impact the statement of operations.Factors that could impact the effectiveness of the Company’s programs includevolatility of the currency markets and availability of hedging instruments. Allcurrency transactions that are entered into by the Company are components ofhedging programs and are entered into not for speculation but for the solepurpose of hedging an existing or anticipated currency exposure. The Companydoes not buy or sell financial instruments for trading purposes. Although theCompany maintains these programs to reduce the impact of changes in currencyexchange rates, 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 Companyaccounts for changes in the fair value of its foreign currency contracts bymarking them to market and recognizing any resulting gains or losses throughits statement of operations. The Company also marks its yen-denominatedpayables to market, recognizing any resulting gains or losses in its statementof operations. At March 31, 2003, the Company had foreign currency forwardcontracts, maturing in 2003, to purchase Japanese yen at contracted forwardrates. The value of these contracts at March 31, 2003 was approximately$1,984,000, which was the approximate value of the Company’s yen-denominatedaccounts payable. During the quarters ended March 31, 2003 and 2002, theCompany recorded a net realized gain of approximately $1,000 and a netrealizable loss of approximately $10,000, respectively, on foreign currencytransactions. At March 31, 2003, the Company had no material unrealized gainsor losses on foreign currency transactions.

 

The potentialloss in value of the Company’s net investment in foreign currency forwardcontracts resulting from a hypothetical 10 percent adverse change in foreignexchange rates at March 31, 2003 was approximately $219,000.

 

26

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

 

**Evaluation of disclosure controls andprocedures**

 

Within 90 days prior to the date of thisQuarterly Report on Form 10-Q (the “Report”), an evaluation was performed,under the supervision of, and with the participation of, the Company’smanagement, including the Principal Executive Officer and Principal FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)to the Securities and Exchange Act of 1934). Based on that evaluation, theCompany’s management, including the Principal Executive Officer and PrincipalFinancial Officer, concluded that the Company’s disclosure controls andprocedures were adequate and effective 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 theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of management’s evaluation.

 

27

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**PART II - OTHER INFORMATION**

 

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

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

 

**Item 2.****       Changes in Securities and Use of Proceeds**

None.

 

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

None.

 

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

None.

 

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

None.

 

**Item 6****.****       Exhibits and Reports on Form 8-K**

(a)        Exhibits

See “Exhibit Index” immediately following thecertification pages.

 

(b)        Reports on Form 8-K

The Registrant filed a Report on Form 8-Kdated May 13, 2003, in which it furnished a press release announcing its firstquarter 2003 results under Items 9 and 12 of such Report.

 

28

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                | **P & F  INDUSTRIES, INC.** |                          |
|---------------------|---------------------------------|-------------------------------|
|                |  (Registrant)              |                          |
|                |                            |                          |   |
|                |                            |                          |   |
|                | By                              | /s/ Joseph A. Molino, Jr.     |   |
|                |                            | Joseph A. Molino, Jr.         |   |
|                |                            | Vice President                |   |
| Dated: May 14, 2003 |                            | (Principal Financial Officer) |   |

 

29

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**CERTIFICATION OFPRINCIPAL EXECUTIVE OFFICER OF P & F INDUSTRIES, INC.**

 

I, Richard A. Horowitz,Principal Executive Officer of P & F Industries, Inc., certify that:

 

1.                                       Ihave reviewed this Quarterly Report on Form 10-Q of P & F Industries, Inc.

2.                                       Basedon my knowledge, this Quarterly Report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this QuarterlyReport;

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this Quarterly Report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this Quarterly Report;

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)        designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisQuarterly Report is being prepared;

b)        evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this Quarterly Report (the“Evaluation Date”); and

c)        presented in thisQuarterly Report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)        all significantdeficiencies in the design or operation of internal controls that couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)        any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.                                       Theregistrant’s other certifying officer and I have indicated in this QuarterlyReport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| May 14, 2003 |                        | /s/ Richard A. Horowitz |   |
|--------------|-----------------------------|-------------------------|--------|
| Date         | Richard A. Horowitz         |                    |
|         | Principal Executive Officer |                    |

 

30

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**CERTIFICATION OFPRINCIPAL FINANCIAL OFFICER OF P & F INDUSTRIES, INC.**

 

I, Joseph A. Molino, Jr.,Principal Financial Officer of P & F Industries, Inc., certify that:

 

1.                                       Ihave reviewed this Quarterly Report on Form 10-Q of P & F Industries, Inc.

2.                                       Basedon my knowledge, this Quarterly Report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this QuarterlyReport;

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this Quarterly Report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this Quarterly Report;

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)        designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisQuarterly Report is being prepared;

b)        evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this Quarterly Report (the“Evaluation Date”); and

c)        presented in thisQuarterly Report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)        all significantdeficiencies in the design or operation of internal controls that couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)        any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

6.                                       Theregistrant’s other certifying officer and I have indicated in this QuarterlyReport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| May 14, 2003 |                        | /s/ Joseph A. Molino, Jr. |   |
|--------------|-----------------------------|---------------------------|--------|
| Date         | Joseph A. Molino, Jr.       |                      |
|         | Principal Financial Officer |                      |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 of  the Registrant’s Current Report on Form 8-K dated September 16, 1998).  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 of 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).                                                                                                                                                                                                                                                                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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).                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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/A for the fiscal year ended December 31, 1998).                                                                          |

 

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| **Exhibit  No.** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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/A for  the fiscal year ended December 31, 1998).                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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).                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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). |

 

33

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| **Exhibit  No.** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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). |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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             |   | 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, 2000, between the Registrant and Sidney Horowitz (Incorporated by  reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2000).                                                                                                                                                                                                                                                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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/A  for the fiscal year ended December 31, 1998).                                                                                                                                                                                                                                                                                                                                                                                            |

 

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| **Exhibit  No.** |   |                                                                                                                                                                                                |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                |
| 10.4             |   | Executive Incentive Bonus Plan of the  Registrant (Incorporated by reference to Exhibit 10.4 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 31, 2001).     |
|             |   |                                                                                                                                                                                                |
| 10.5             |   | 2002 Stock Incentive Plan of the Registrant  (Incorporated by reference to Exhibit 4.7 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).               |
|             |   |                                                                                                                                                                                                |
| 99.1             |   | 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.   |
|             |   |                                                                                                                                                                                                |
| 99.2             |   | 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 foregoingexhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment ofthe Registrant’s reasonable expenses in furnishing such exhibit, by writing toP & F Industries, Inc., 300 Smith Street, Farmingdale, New York 11735-1114,Attention: Corporate Secretary.

 

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