**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

 

**Amendment No. 1**

 

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

 

**For the Quarter Ended June 30, 2003**

 

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

 

**Commission File Number 1 - 5332**

 

**P & F INDUSTRIES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **22-1657413**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of  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 areacode: **(631) 694-1800**

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

**Yes  ****ý    No  ****o**

 

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

 

As of August 13, 2003, there were 3,489,631 shares of theregistrant’s Class A Common Stock outstanding.

 

 

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**P & F INDUSTRIES, INC.**

 

**FORM 10-Q/A**

 

**FOR THE QUARTER ENDED JUNE 30, 2003**

 

**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION** |                                                                                        |
|-----------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                 | Consolidated  Financial Statements (unaudited)                                              |   |
|                                    |                                                                                        |   |
|                                    | Consolidated  Balance Sheets                                                                |   |
|                                    |                                                                                        |   |
|                                    | Consolidated Statements of Operations (as  restated)                                        |   |
|                                    |                                                                                        |   |
|                                    | Consolidated Statement of Shareholders’  Equity                                        |   |
|                                    |                                                                                        |   |
|                                    | Consolidated  Statements of Cash Flows                                                      |   |
|                                    |                                                                                        |   |
|                                    | Notes to  Consolidated Financial Statements                                                 |   |
|                                    |                                                                                        |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                    |                                                                                        |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|                                    |                                                                                        |   |
| Item 4.                                 | Controls and Procedures                                                                     |   |
|                                    |                                                                                        |   |
| **PART II – OTHER INFORMATION**    |                                                                                        |
| Item 1.                                 | Legal Proceedings                                                                           |   |
|                                    |                                                                                        |   |
| Item 2.                                 | Changes in Securities 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**                          |                                                                                        |
|                                    |                                                                                        |
| **Exhibit Index**                       |                                                                                        |
|                                    |                                                                                        |
| **Certifications**                      |                                                                                        |

 

i

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**EXPLANATORYNOTE**

 

This Amendment No. 1 on Form 10-Q/A amends and restates Items 1 and 2of Part I contained in the Company’s Quarterly Report on Form 10-Q for thequarter ended June 30, 2003 to give effect to the restatement of theCompany’s consolidated financial statements as of June 30, 2003, asdiscussed in Note 3 of the Notes to Consolidated Financial Statements. Exceptas set forth in Items 1 and 2 of Part I below, the Company has not made anychanges to, nor updated any disclosures contained in, its Quarterly Report onForm 10-Q filed on August 13, 2003.

 

ii

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**PART I****- FINANCIAL INFORMATION**

 

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

 

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

**CONSOLIDATEDBALANCE SHEETS**

**(unaudited)**

 
|                                                                                                       |   | **June 30,  2003** |       | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
| ASSETS                                                                                                     |   |                    |       |                        |   |
| CURRENT:                                                                                                   |   |                    |       |                        |   |
| Cash                                                                                                       |   | $                       | 506,859    |                        | $      | 1,024,222 |   |
| Accounts receivable, less allowance for  possible losses of $411,239 in 2003 and $354,441 in 2002 (Note 8) |   | 11,720,288              |       | 10,864,261                  |   |
| Inventories (Notes 7 and 8)                                                                                |   | 21,299,197              |       | 19,580,073                  |   |
| Deferred income taxes - net                                                                                |   | 485,000                 |       | 485,000                     |   |
| Prepaid expenses and other                                                                                 |   | 1,389,500               |       | 1,080,313                   |   |
| TOTAL CURRENT ASSETS                                                                                       |   | 35,400,844              |       | 33,033,869                  |   |
|                                                                                                       |   |                    |       |                        |   |
| PROPERTY AND EQUIPMENT (Note 8):                                                                           |   |                    |       |                        |   |
| Land                                                                                                       |   | 1,582,938               |       | 1,582,938                   |   |
| Buildings and improvements                                                                                 |   | 8,928,093               |       | 8,811,117                   |   |
| Machinery and equipment                                                                                    |   | 15,043,532              |       | 14,514,353                  |   |
|                                                                                                       |   | 25,554,563              |       | 24,908,408                  |   |
| Less accumulated depreciation and  amortization                                                            |   | 12,288,977              |       | 11,409,203                  |   |
| NET PROPERTY AND EQUIPMENT                                                                                 |   | 13,265,586              |       | 13,499,205                  |   |
|                                                                                                       |   |                    |       |                        |   |
| GOODWILL, net of accumulated amortization  of $1,419,274 (Note 2)                                          |   | 10,521,702              |       | 10,210,621                  |   |
|                                                                                                       |   |                    |       |                        |   |
| OTHER INTANGIBLE ASSETS, net of accumulated  amortization of $620,667 and $354,667                         |   | 2,039,333               |       | 2,305,333                   |   |
|                                                                                                       |   |                    |       |                        |   |
| OTHER ASSETS, net of accumulated  amortization of $167,802 and $180,858                                    |   | 130,833                 |       | 118,528                     |   |
|                                                                                                       |   |                    |       |                        |   |
| TOTAL ASSETS                                                                                               |   | $                       | 61,358,298 |                        | $      | 59,167,556 |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

1

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

**CONSOLIDATED BALANCE SHEETS**

**(unaudited)**

 
|                                                                                             |   | **June 30,  2003** |       | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                        |   |                    |       |                        |   |
| CURRENT LIABILITIES:                                                                             |   |                    |       |                        |   |
| Short-term borrowings (Note 8)                                                                   |   | $                       | 7,000,000  |                        | $      | 4,500,000 |   |
| Accounts payable                                                                                 |   | 3,731,986               |       | 2,860,271                   |   |
| Accruals:                                                                                        |   |                    |       |                        |   |
| Compensation                                                                                     |   | 1,337,632               |       | 2,112,377                   |   |
| Other (Note 9)                                                                                   |   | 2,501,224               |       | 2,379,962                   |   |
| Current maturities of long-term debt (Note  8)                                                   |   | 1,507,461               |       | 1,402,547                   |   |
| TOTAL CURRENT LIABILITIES                                                                        |   | 16,078,303              |       | 13,255,157                  |   |
|                                                                                             |   |                    |       |                        |   |
| LONG-TERM DEBT, less current maturities  (Note 8)                                                |   | 9,576,897               |       | 11,591,989                  |   |
|                                                                                             |   |                    |       |                        |   |
| DEFERRED INCOME TAXES - net                                                                      |   | 399,000                 |       | 497,000                     |   |
| TOTAL LIABILITIES                                                                                |   | 26,054,200              |       | 25,344,146                  |   |
|                                                                                             |   |                    |       |                        |   |
| COMMITMENTS AND CONTINGENCIES                                                                    |   |                    |       |                        |   |
| (Notes 8 and 9)                                                                                  |   |                    |       |                        |   |
|                                                                                             |   |                    |       |                        |   |
| SHAREHOLDERS’ EQUITY (Note 10):                                                             |   |                    |       |                        |   |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares issued or outstanding       |   | —                  |       | —                      |   |
| Common stock:                                                                                    |   |                    |       |                        |   |
| Class A - $1 par; authorized - 7,000,000  shares; issued - 3,713,367 shares and 3,690,367 shares |   | 3,713,367               |       | 3,690,367                   |   |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued or outstanding                |   | —                  |       | —                      |   |
| Additional paid-in capital                                                                       |   | 8,564,528               |       | 8,540,528                   |   |
| Retained earnings                                                                                |   | 24,684,140              |       | 22,997,016                  |   |
| Treasury stock, at cost (213,736 and  176,045 shares)                                            |   | (1,657,937              | )          | (1,404,501                  | )      |
| TOTAL SHAREHOLDERS’ EQUITY                                                                  |   | 35,304,098              |       | 33,823,410                  |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                  |   | $                       | 61,358,298 |                        | $      | 59,167,556 |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

2

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                                                                      |   | **Three  months ended  June 30,** |       | **Six months  ended  June 30,** |       |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                                                                      |   | **2003**                               |       | **2002**                             |       | **2003** |   | **2002** |   |
|                                                                                      |   |                                   | ** ** | **(restated)**                       | ** ** |   | ** ** |   | ** ** |
|                                                                                      |   |                                   | ** ** | **(Note 2)**                         | ** ** |   | ** ** |   | ** ** |
| REVENUES (Note 11):                                                                       |   |                                   |       |                                 |       |   |   |   |   |
| Net sales                                                                                 |   | $                                      | 21,614,224 |                                 | $          | 18,398,541 |   | $ | 40,969,994 |   | $ | 35,436,296 |   |
| Other                                                                                     |   | 124,081                                |       | 267,855                              |       | 250,187 |   | 326,819 |   |
|                                                                                      |   | 21,738,305                             |       | 18,666,396                           |       | 41,220,181 |   | 35,763,115 |   |
|                                                                                      |   |                                   |       |                                 |       |   |   |   |   |
| COSTS AND EXPENSES:                                                                       |   |                                   |       |                                 |       |   |   |   |   |
| Cost of sales                                                                             |   | 14,599,264                             |       | 12,520,520                           |       | 28,078,766 |   | 24,524,742 |   |
| Selling, general and administrative                                                       |   | 5,188,457                              |       | 4,424,727                            |       | 10,059,282 |   | 8,513,790 |   |
| Interest - net                                                                            |   | 195,688                                |       | 162,650                              |       | 383,009 |   | 264,422 |   |
|                                                                                      |   | 19,983,409                             |       | 17,107,897                           |       | 38,521,057 |   | 33,302,954 |   |
|                                                                                      |   |                                   |       |                                 |       |   |   |   |   |
| INCOME BEFORE TAXES ON INCOME AND  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE    |   | 1,754,896                              |       | 1,558,499                            |       | 2,699,124 |   | 2,460,161 |   |
|                                                                                      |   |                                   |       |                                 |       |   |   |   |   |
| TAXES ON INCOME                                                                           |   | 658,000                                |       | 599,000                              |       | 1,012,000 |   | 947,000 |   |
|                                                                                      |   |                                   |       |                                 |       |   |   |   |   |
| INCOME BEFORE CUMULATIVE EFFECT OF CHANGE  IN ACCOUNTING PRINCIPLE                        |   | 1,096,896                              |       | 959,499                              |       | 1,687,124 |   | 1,513,161 |   |
|                                                                                      |   |                                   |       |                                 |       |   |   |   |   |
| CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING  PRINCIPLE, NET OF TAXES OF $1,668,000 (Note 2) |   | —                                 |       | —                               |       | — |   | (3,239,118 | ) |
|                                                                                      |   |                                   |       |                                 |       |   |   |   |   |
| NET INCOME (LOSS)                                                                         |   | $                                      | 1,096,896  |                                 | $          | 959,499 |   | $ | 1,687,124 |   | $ | (1,725,957 | ) |

 

See accompanying notes to consolidated financial statements(unaudited).

 

3

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                                               |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|--------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                               |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                               |   |                                   |   | **(restated)**                       |   |   |   |   |   |
|                                                               |   |                                   |   | **(Note 2)**                         |   |   |   |   |   |
| Weighted average common shares outstanding  (Note 12):             |   |                                   |   |                                 |   |   |   |   |   |
| Basic                                                              |   | 3,505,785                              |   | 3,505,272                            |   | 3,505,935 |   | 3,507,924 |   |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Diluted                                                            |   | 3,578,594                              |   | 3,582,421                            |   | 3,576,654 |   | 3,584,476 |   |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Earnings (loss) per share of common stock  (Note 12):              |   |                                   |   |                                 |   |   |   |   |   |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Basic:                                                             |   |                                   |   |                                 |   |   |   |   |   |
| Income before cumulative effect of change  in accounting principle |   | $                                      | .31    |                                 | $      | .27 |   | $ | .48 |   | $ | .43 |   |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Cumulative effect of change in accounting  principle, net of taxes |   | —                                 |   | —                               |   | — |   | (.92 | ) |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Net income (loss)                                                  |   | $                                      | .31    |                                 | $      | .27 |   | $ | .48 |   | $ | (.49 | ) |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Diluted:                                                           |   |                                   |   |                                 |   |   |   |   |   |
| Income before cumulative effect of change  in accounting principle |   | $                                      | .31    |                                 | $      | .27 |   | $ | .47 |   | $ | .42 |   |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Cumulative effect of change in accounting  principle, net of taxes |   | —                                 |   | —                               |   | — |   | (.90 | ) |
|                                                               |   |                                   |   |                                 |   |   |   |   |   |
| Net income (loss)                                                  |   | $                                      | .31    |                                 | $      | .27 |   | $ | .47 |   | $ | (.48 | ) |

 

See accompanying notes to consolidated financial statements(unaudited).

 

4

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

**CONSOLIDATEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

**(unaudited)**

 
|                                                    |   | **Common  stock** |      | **Additional  paid-in  capital** |   | **Retained  earnings** |   | **Treasury  stock** |       | **Total** |   |
|---------------------------------------------------------|--------|-------------------|-----------|----------------------------------|--------|------------------------|--------|---------------------|------------|-----------|--------|
|                                                    |   |              |      |                             |   |                   |   |                |       |      |   |
| Balance, January 1, 2003                           |   | $                 | 3,690,367 |                             | $      | 8,540,528              |   | $                   | 22,997,016 |      | $      | (1,404,501 | ) | $ | 33,823,410 |   |
|                                                    |   |              |      |                             |   |                   |   |                |       |      |   |   |   |   |   |   |
| Net income for the six months ended  June 30, 2003 |   | —            |      | —                           |   | 1,687,124              |   | —              |       | 1,687,124 |   |
|                                                    |   |              |      |                             |   |                   |   |                |       |      |   |
| Exercise of stock options                               |   | 23,000            |      | 24,000                           |   | —                 |   | —              |       | 47,000    |   |
|                                                    |   |              |      |                             |   |                   |   |                |       |      |   |
| Purchase of Class A Common Stock (Note 10)              |   | —            |      | —                           |   | —                 |   | (253,436            | )          | (253,436  | )      |
|                                                    |   |              |      |                             |   |                   |   |                |       |      |   |
| Balance, June 30, 2003                             |   | $                 | 3,713,367 |                             | $      | 8,564,528              |   | $                   | 24,684,140 |      | $      | (1,657,937 | ) | $ | 35,304,098 |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

5

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                                      |   | **Six months  ended  June 30,** |      |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|
|                                                                                      |   | **2003**                             |      | **2002** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |                                 |      |   |   |
| Net income (loss)                                                                         |   | $                                    | 1,687,124 |   | $ | (1,725,957 | ) |
|                                                                                      |   |                                 |      |   |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                                 |      |   |   |
| Cumulative effect of change in accounting  principle - net of taxes                       |   | —                               |      | 3,239,118 |   |
| Depreciation and amortization                                                             |   | 879,774                              |      | 750,531 |   |
| Amortization of intangible assets                                                         |   | 286,757                              |      | 97,256 |   |
| Provision for losses on accounts receivable  - net                                        |   | 56,798                               |      | (8,881 | ) |
| Deferred income taxes                                                                     |   | (98,000                              | )         | (23,000 | ) |
| Decrease (increase) – net of acquisition of  Nationwide Industries, Inc in 2002:     |   |                                 |      |   |   |
| Accounts receivable                                                                       |   | (912,825                             | )         | 266,687 |   |
| Inventories                                                                               |   | (1,719,124                           | )         | (185,331 | ) |
| Prepaid expenses and other                                                                |   | (309,187                             | )         | (196,041 | ) |
| Other assets                                                                              |   | (33,062                              | )         | — |   |
| Increase (decrease) - net of acquisition of  Nationwide Industries, Inc. in 2002:         |   |                                 |      |   |   |
| Accounts payable                                                                          |   | 871,715                              |      | 964,488 |   |
| Accruals and other                                                                        |   | (653,483                             | )         | (142,946 | ) |
| Total adjustments                                                                         |   | (1,630,637                           | )         | 4,761,881 |   |
| Net cash provided by operating activities                                                 |   | 56,487                               |      | 3,035,924 |   |
|                                                                                      |   |                                 |      |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |                                 |      |   |   |
| Capital expenditures                                                                      |   | (646,155                             | )         | (3,362,664 | ) |
| Payments for acquisition of Nationwide  Industries, Inc. - net of $2,920 cash acquired    |   | —                               |      | (10,448,794 | ) |
| Additional payments for purchase of  Nationwide Industries, Inc.                          |   | (311,081                             | )         | — |   |
| Payments for acquisition-related expenses                                                 |   | —                               |      | (750,277 | ) |
| Payment for acquisition of product line                                                   |   | —                               |      | (397,940 | ) |
| Net cash used in investing activities                                                     |   | (957,236                             | )         | (14,959,675 | ) |
|                                                                                           |        |                                      |           |  |  |  |  |

 

See accompanying notes to consolidated financial statements(unaudited).

 

6

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                               |   | **Six months  ended  June 30,** |    |
|----------------------------------------------------|--------|--------------------------------------|---------|
|                                               |   | **2003**                             |    | **2002** |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:              |   |                                 |    |   |   |
| Proceeds from short-term borrowings                |   | 5,500,000                            |    | 1,500,000 |   |
| Repayments of short-term borrowings                |   | (3,000,000                           | )       | (1,435,000 | ) |
| Proceeds from mortgage                             |   | 1,697,301                            |    | 2,024,000 |   |
| Proceeds from term loan                            |   | —                               |    | 11,500,000 |   |
| Principal payments on long-term debt               |   | (3,607,479                           | )       | (1,575,704 | ) |
| Proceeds from exercise of stock options            |   | 47,000                               |    | — |   |
| Purchase of Class A Common Stock                   |   | (253,436                             | )       | (100,800 | ) |
| Net cash provided by financing activities          |   | 383,386                              |    | 11,912,496 |   |
|                                               |   |                                 |    |   |   |
| NET DECREASE IN CASH                               |   | (517,363                             | )       | (11,255 | ) |
|                                               |   |                                 |    |   |   |
| CASH AT BEGINNING OF PERIOD                        |   | 1,024,222                            |    | 507,833 |   |
|                                               |   |                                 |    |   |   |
| CASH AT END OF PERIOD                              |   | $                                    | 506,859 |   | $ | 496,578 |   |
|                                               |   |                                 |    |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION: |   |                                 |    |   |   |
|                                               |   |                                 |    |   |   |
| Cash paid during the period for:                   |   |                                 |    |   |   |
|                                               |   |                                 |    |   |   |
| Income taxes                                       |   | $                                    | 508,500 |   | $ | 480,000 |   |
|                                               |   |                                 |    |   |   |
| Interest                                           |   | $                                    | 386,465 |   | $ | 228,461 |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

7

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

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

 

**NOTE 1 - PRINCIPLES OF CONSOLIDATION**

 

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

 

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

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial and retail markets, andthe importation and sale of compressor air filters. Florida Pneumatic alsomarkets, through its Berkley Tool division (“Berkley”), a line of pipe cuttingand threading tools, wrenches and replacement electrical components for awidely-used brand of pipe cutting and threading machines. Countrywide conductsits business operations through Nationwide Industries, Inc. (“Nationwide”), itswholly-owned subsidiary, and through its Franklin Manufacturing (“Franklin”)division. Countrywide acquired all of the stock of Nationwide on May 3, 2002.The assets of Franklin were transferred from Embassy to Countrywide on December 30,2002. Nationwide is an importer and manufacturer of door, window and fencinghardware. Franklin imports a line of door and window hardware. Green is engagedprimarily in the manufacture, 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 11 of the Notes to Consolidated Financial Statements presentsfinancial information for the segments of the Company’s business.

 

**NOTE 2 - BASIS OF FINANCIAL STATEMENTPRESENTATION AND RESTATEMENT**

 

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

 

8

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The consolidated balance sheet information as of December 31, 2002was derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002. Theinterim financial statements contained herein should be read in conjunctionwith that Report.

 

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

 

The Company had its goodwill tested for impairment, effectiveJanuary 1, 2002, during the second quarter of 2002. The impairment testsperformed required that the Company determine the fair market value of itsreporting units for comparison to the carrying value of their net assets toassess whether any impairment exists. The methodologies used to estimate fairmarket value involved the use of estimates and assumptions, including projectedrevenues, earnings and cash flows.

 

The Company’s earnings forecasts for Green, which reflected theextremely weak market conditions in the hydraulic cylinder business, resultedin the fair market value of Green’s goodwill, as determined by an independentthird-party appraiser, being lower than its carrying value as ofDecember 31, 2001. Accordingly, in the quarter ended June 30, 2002,the Company recorded, retroactive to January 1, 2002, an after-taximpairment charge of approximately $3.2 million, which is reported as acumulative effect of change in accounting principle resulting from the adoptionby the Company of Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets.”

 

The statement of operations for the quarter ended June 30, 2002has been retroactively restated. The restatement gives effect to the cumulativeeffect of change in accounting principle, which had previously been reported inthe quarter ended June 30, 2002, being reflected as having occurred as ofJanuary 1, 2002

 

9

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

 

Subsequent to the issuance of the Company’sconsolidated financial statements as of June 30, 2003, filed as part ofits Quarterly Report on Form 10-Q filed on August 13, 2003, the Companydetermined that it needed to revise its provision for taxes on income inpreviously issued financial statements. This change resulted from theamortization of a deferred tax liability, not previously recorded, related tothe acquisition of Nationwide. The Company’s consolidated financial statementsas of June 30, 2003 and for the three month and six month periods endedJune 30, 2003 have been restated from the amounts previously reported.

 

Certain balance sheet amounts atDecember 31, 2002 have been reclassified to conform with the currentyear’s presentation.

 

The following is a summary of the effects ofthe restatements:

 
|                                            |   | **June 30,  2003**  |       |
|-------------------------------------------------|--------|--------------------------|------------|
|                                            |   | **Previously  reported** |       | **Restated** |   |
|                                            |   |                     |       |   |   |
| Deferred income taxes                           |   | $                        | 695,000    |   | $ | 485,000 |   |
|                                            |   |                     |       |   |   |
| Total current assets                            |   | 35,610,844               |       | 35,400,844 |   |
|                                            |   |                     |       |   |   |
| Deferred income taxes                           |   | 1,377,000                |       | — |   |
|                                            |   |                     |       |   |   |
| Goodwill                                        |   | 9,549,702                |       | 10,521,702 |   |
|                                            |   |                     |       |   |   |
| Total assets                                    |   | 61,973,298               |       | 61,358,298 |   |
|                                            |   |                     |       |   |   |
| Accruals – other                           |   | 2,402,224                |       | 2,501,224 |   |
|                                            |   |                     |       |   |   |
| Deferred income taxes                           |   | 210,000                  |       | — |   |
|                                            |   |                     |       |   |   |
| Total current liabilities                       |   | 16,189,303               |       | 16,078,303 |   |
|                                            |   |                     |       |   |   |
| Deferred income taxes                           |   | 1,031,000                |       | 399,000 |   |
|                                            |   |                     |       |   |   |
| Total liabilities                               |   | 26,797,200               |       | 26,054,200 |   |
|                                            |   |                     |       |   |   |
| Retained earnings                               |   | 24,556,140               |       | 24,684,140 |   |
|                                            |   |                     |       |   |   |
| Total shareholders’ equity                 |   | 35,176,098               |       | 35,304,098 |   |
|                                            |   |                     |       |   |   |
| Total liabilities and shareholders’ equity |   | $                        | 61,973,298 |   | $ | 61,358,298 |   |

 

10

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**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                              |   | **Three  months ended  June 30, 2003** |      | **Six months  ended  June 30, 2003** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------------|-----------|-------------------------------------------|--------|
|                                                                              |   | **Previously  reported**                    |      | **Restated**                              |   | **Previously  reported** |   | **Restated** |   |
|                                                                              |   |                                        |      |                                      |   |   |   |   |   |
| Taxes on income                                                                   |   | $                                           | 742,000   |                                      | $      | 658,000 |   | $ | 1,140,000 |   | $ | 1,012,000 |   |
|                                                                              |   |                                        |      |                                      |   |   |   |   |   |
| Income before cumulative effect of change  in accounting principle and Net income |   | $                                           | 1,012,896 |                                      | $      | 1,096,896 |   | $ | 1,559,124 |   | $ | 1,687,124 |   |
|                                                                              |   |                                        |      |                                      |   |   |   |   |   |
| Earnings per share of common stock:                                               |   |                                        |      |                                      |   |   |   |   |   |
| Income before cumulative effect of change  in accounting principle and Net income |   |                                        |      |                                      |   |   |   |   |   |
| Basic                                                                             |   | $                                           | .29       |                                      | $      | .31 |   | $ | .44 |   | $ | .48 |   |
|                                                                              |   |                                        |      |                                      |   |   |   |   |   |
| Diluted                                                                           |   | $                                           | .28       |                                      | $      | .31 |   | $ | .44 |   | $ | .47 |   |

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                           |   | **Six months  ended  June 30, 2003** |       |
|--------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                           |   | **Previously  reported**                  |       | **Restated** |   |
|                                                                           |   |                                      |       |   |   |
| Cash flows from operating activities:                                          |   |                                      |       |   |   |
| Net income                                                                     |   | $                                         | 1,559,124  |   | $ | 1,687,124 |   |
|                                                                           |   |                                      |       |   |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |   |                                      |       |   |   |
| (Decrease) increase in:                                                        |   |                                      |       |   |   |
| Deferred income taxes                                                          |   | —                                    |       | (98,000 | ) |
|                                                                           |   |                                      |       |   |   |
| Accruals and other                                                             |   | (623,483                                  | )          | (653,483 | ) |
|                                                                           |   |                                      |       |   |   |
| Total adjustments                                                              |   | $                                         | (1,502,637 | ) | $ | (1,630,637 | ) |

 

11

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**NOTE 4 - STOCK-BASED COMPENSATION**

 

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

 

The Company also complies with the disclosure provisions of Statementof Financial Accounting Standards No. 148, “Accounting for Stock BasedCompensation – Transition and Disclosure,” which requires prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method on reportedresults.

 

SFAS 123 requires the Company to provide pro forma informationregarding net income and earnings per share as if compensation cost for theCompany’s 2002 Stock Incentive Plan had been determined in accordance with thefair value method prescribed by SFAS 123. The Company estimates the fair valueof each stock option at the grant date by using the Black-Scholes option-pricingmodel. No options were granted, and no pro forma compensation expense wasincurred, during the six month periods ended June 30, 2003 andJune 30, 2002.

 

**NOTE 5 – FOREIGN CURRENCY TRANSACTIONS**

 

The Company accounts for changes in the fair value of its foreigncurrency contracts by marking them to market and recognizing any resultinggains or losses through its statement of operations. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of operations. At June 30, 2003, the Company had foreigncurrency forward contracts, maturing in 2003, to purchase yen at contractedforward rates. The value of these contracts at June 30, 2003, based on thecontracted forward rates, was approximately $1,363,000, which was theapproximate value of the Company’s corresponding yen-denominated accountspayable. During the quarters ended June 30, 2003 and 2002, the Companyrecorded net realized losses of approximately $10,000 and $59,000, respectively,on foreign currency transactions. During the six month periods endedJune 30, 2003 and 2002, the Company recorded net realized losses ofapproximately $9,000 and $69,000, respectively, on foreign currencytransactions. At June 30, 2003, the Company had no material unrealizedgains or losses on foreign currency transactions.

 

12

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**NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS**

 

InApril 2002, the Financial Accounting Standards Board (the “FASB”) issuedStatement of Financial Accounting Standards No. 145, “Recission of FASB Statement No.4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections” (“SFAS 145”), whicheliminates the automatic classification of gain or loss on extinguishment ofdebt as an extraordinary item of income and requires that such gain or loss beevaluated for extraordinary classification under the criteria of AccountingPrinciples Board No. 30, “Reporting Results of Operations.” The provisions ofSFAS 145 related to the recission of Statement 4 are effective for fiscal yearsbeginning after May 15, 2002. The Company adopted SFAS 145 as ofJanuary 1, 2003. In January 2003, the Company recorded a loss ofapproximately $84,000, included in selling, general and administrative expensesthat resulted from the refinancing of a mortgage.

 

InJune 2002,**the FASB 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.

 

InJune 2003,**the FASB issued Statement ofFinancial Accounting Standards No. 149,**“Amendments of Statement 133 on DerivativeInstruments and Hedging Activities” (“SFAS 149”).**SFAS 149 amends SFAS 133 and certain other FASB standards for decisions made bythe FASB as part of the DerivativesImplementation Group process. Among other changes, SFAS 149 clarifies thedefinition of a derivative financial instrument. SFAS 149 is generallyeffective for contracts entered into or modified after June 30, 2003. Theprovisions of SFAS 149 that relate to SFAS 133 Implementation Issues that havebeen effective for fiscal quarters that began prior to June 15, 2003should continue to be applied in accordance with their respective dates. Inaddition, certain provisions of SFAS 149 that apply to forward purchases orsales of when-issued securities or other securities that do not yet exist areapplicable to both existing contracts and new contracts entered into afterJune 30, 2003.

 

13

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**NOTE 7- INVENTORIES**

 

Major classes of inventory were as follows:

 
|                       |   | **June 30,2003** |       | **December 31,  2002** |   |
|----------------------------|--------|-----------------------|------------|-----------------------------|--------|
| Raw materials and supplies |   | $                     | 3,775,620  |                        | $      | 3,566,161 |   |
| Work in process            |   | 861,312               |       | 754,857                     |   |
| Finished goods             |   | 16,662,265            |       | 15,259,055                  |   |
|                       |   | $                     | 21,299,197 |                        | $      | 19,580,073 |   |

 

**NOTE 8– SHORT-TERM BORROWINGS AND LONG-TERMDEBT**

 

On June 30, 2003, the Company renewed its credit agreement, asamended, with Citibank through July 26, 2004. This agreement includes arevolving credit loan facility, which provides a total of $12,000,000, withvarious sublimits, for direct borrowings, letters of credit, bankers’acceptances and equipment loans. There are no commitment fees for any unusedportion of this credit facility. At June 30, 2003, there was $7,000,000outstanding against the revolving credit loan facility. There was also acommitment of approximately $116,000 at June 30, 2003 for open letters ofcredit.

 

Direct borrowings under the Company’s revolving credit loan facilityare secured by the Company’s accounts receivable, inventory and equipment andare cross-guaranteed by each of the Company’s subsidiaries. These borrowingsbear interest at either the prime interest rate or LIBOR (London InterBankOffered Rate) plus 1.6%. The prime interest rate at June 30, 2003 was 4.0%and LIBOR was approximately 1.1%. The prime interest rate at June 30, 2002was 4.75% and LIBOR was approximately 1.8%.

 

The credit agreement also includes a foreign exchange line, whichprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases of yenneeded for payments to foreign suppliers. The total amount of foreign currencyforward contracts outstanding at June 30, 2003, based on the contractedforward rates, was approximately $1,363,000.

 

Under the terms of the Company’s credit agreement, the Company isrequired to adhere to certain financial covenants. At June 30, 2003, andfor the six months then ended, the Company satisfied all of these covenants.The credit agreement is subject to annual review by the lending bank.

 

14

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The credit agreement also includes a termloan facility, which provides a maximum commitment of $15,000,000 to financeacquisitions subject to the lending bank’s approval. The Company borrowed$11,500,000 against this facility to finance the acquisition of Nationwide, describedin Note 1, and there was $5,750,000 outstanding against this facility at June30, 2003. There was also a standby letter of credit totaling approximately$351,000 outstanding against this facility at June 30, 2003. This standbyletter of credit is used to secure the Economic Development Revenue Bondassumed as part of the acquisition of Green.

 

On January 24, 2003, Embassy refinanced its mortgage, which waspayable monthly through May 2006 and bore interest at 8.16%. The new mortgage,which is payable monthly through January 2010, bears interest at LIBORplus 155 basis points.

 

Certain of the Company’s mortgage agreementsrequire the Company to adhere to certain financial covenants. At June 30, 2003,and for the six months then ended, the Company satisfied all of thesecovenants.

 

**NOTE 9 - WARRANTY LIABILITY**

 

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

 

15

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Changes in the Company’s warranty liability,included in other accrued liabilities, for the six month periods endedJune 30, 2003 and June 30, 2002 were as follows:

 
|                                                                |   | **Six months  ended  June 30,** |    |
|---------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                |   | **2003**                             |    | **2002** |   |
| Balance, beginning of period                                        |   | $                                    | 186,513 |   | $ | 198,384 |   |
|                                                                |   |                                 |    |   |   |
| Warranties issued and changes in estimated  pre-existing warranties |   | 147,239                              |    | 207,005 |   |
|                                                                |   |                                 |    |   |   |
| Actual warranty costs/settlements                                   |   | (146,827                             | )       | (209,745 | ) |
| Balance, end of period                                              |   | $                                    | 186,925 |   | $ | 195,644 |   |

 

**NOTE 10 - CAPITAL STOCK TRANSACTIONS**

 

During the six months ended June 30, 2003, the Company purchased37,691 shares of Class A Common Stock, at a cost of $253,436. During the sixmonths ended June 30, 2002, the Company purchased 16,000 shares of Class ACommon Stock, at a cost of $100,800.

 

16

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**NOTE 11 - SEGMENTS OF BUSINESS**

 

Thefollowing tables present financial information by segment for the periods endedJune 30, 2003 and 2002. Segment profit (loss) excludes general corporateexpenses, interest expense and income taxes. All intersegment revenues havebeen eliminated.

 
| **Three months ended  June 30, 2003** |   | **Con-  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|--------------------------------------------|--------|---------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
| **(In thousands)**                         |   |                |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers           |   | $                   | 21,738 |                 | $      | 10,933       |   | $                        | 5,697  |                   | $      | 3,027 |   | $ | 2,081 |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                      |   | $                   | 2,952  |                 | $      | 1,789        |   | $                        | 1,281  |                   | $      | (106 | ) | $ | (12 | ) |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Identifiable assets at June 30, 2003  |   | $                   | 60,077 |                 | $      | 25,357       |   | $                        | 20,319 |                   | $      | 8,620 |   | $ | 5,781 |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Corporate assets                           |   | 1,281               |   |                 |   |         |   |                     |   |                   |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Total assets at June 30, 2003         |   | $                   | 61,358 |                 |   |         |   |                     |   |                   |   |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| **Three months ended  June 30, 2002** |   | **Con-  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
| **(In thousands)**                         |   |                |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers           |   | $                   | 18,666 |                 | $      | 9,692        |   | $                        | 3,823  |                   | $      | 3,165 |   | $ | 1,986 |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                      |   | $                   | 2,564  |                 | $      | 2,157        |   | $                        | 563    |                   | $      | (178 | ) | $ | 22 |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Identifiable assets at June 30, 2002  |   | $                   | 56,610 |                 | $      | 23,177       |   | $                        | 19,357 |                   | $      | 8,777 |   | $ | 5,299 |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Corporate assets                           |   | 2,655               |   |                 |   |         |   |                     |   |                   |   |
|                                       |   |                |   |                 |   |         |   |                     |   |                   |   |
| Total assets at June 30, 2002         |   | $                   | 59,265 |                 |   |         |   |                     |   |                   |   |   |

 

17

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| **Six months ended  June 30, 2003**             |   | **Con-  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|------------------------------------------------------|--------|---------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
| **(In thousands)**                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers                     |   | $                   | 41,220 |                 | $      | 21,274       |   | $                        | 9,947  |                   | $      | 5,889 |   | $ | 4,110 |   |
|                                                 |   |                |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                                |   | $                   | 4,966  |                 | $      | 3,558        |   | $                        | 1,886  |                   | $      | (322 | ) | $ | (156 | ) |
|                                                 |   |                |   |                 |   |         |   |                     |   |                   |   |
| **Six months ended  June 30, 2002**             |   | **Con-  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
| **(In thousands)**                                   |   |                |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers                     |   | $                   | 35,763 |                 | $      | 19,701       |   | $                        | 5,287  |                   | $      | 6,508 |   | $ | 4,267 |   |
|                                                 |   |                |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                                |   | $                   | 4,334  |                 | $      | 3,894        |   | $                        | 588    |                   | $      | (272 | ) | $ | 124 |   |
|                                                 |   |                |   |                 |   |         |   |                     |   |                   |   |
| Cumulative effect of change in accounting  principle |   | $                   | (3,239 | )                    | $      | —       |   | —                   |   | $                      | (3,239 | ) | $ | — |   |

 

18

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

 
|                                                                         |   | **Three  months ended  June 30,** |      |
|------------------------------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                                         |   | **2003**                               |      | **2002** |   |
| Total profit for reportable segments                                         |   | $                                      | 2,952,065 |   | $ | 2,563,635 |   |
| General corporate expenses                                                   |   | (1,001,481                             | )         | (842,486 | ) |
| Interest expense - net                                                       |   | (195,688                               | )         | (162,650 | ) |
| Income before taxes and cumulative effect  of change in accounting principle |   | $                                      | 1,754,896 |   | $ | 1,558,499 |   |
|                                                                         |   |                                   |      |   |   |
|                                                                         |   | **Six months  ended  June 30,**   |      |
|                                                                         |   | **2003**                               |      | **2002** |   |
| Total profit for reportable segments                                         |   | $                                      | 4,965,910 |   | $ | 4,333,768 |   |
| General corporate expenses                                                   |   | (1,883,777                             | )         | (1,609,185 | ) |
| Interest expense - net                                                       |   | (383,009                               | )         | (264,422 | ) |
| Income before taxes and cumulative effect  of change in accounting principle |   | $                                      | 2,699,124 |   | $ | 2,460,161 |   |

 

19

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**NOTE 12 - EARNINGS (LOSS) PER SHARE**

 

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

 
|                                                                                                                 |   | **Three months  ended  June 30,** |      | **Six months  ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                                                                                                 |   | **2003**                               |      | **2002**                             |   | **2003** |   | **2002** |   |
| Numerator:                                                                                                           |   |                                   |      |                                 |   |   |   |   |   |
| Numerator for basic and diluted earnings  (loss) per common share:                                                   |   |                                   |      |                                 |   |   |   |   |   |
| Income before cumulative effect of change  in accounting principle                                                   |   | $                                      | 1,096,896 |                                 | $      | 959,499 |   | $ | 1,687,124 |   | $ | 1,513,161 |   |
|                                                                                                                 |   |                                   |      |                                 |   |   |   |   |   |
| Cumulative effect of change in accounting  principle                                                                 |   | —                                 |      | —                               |   | — |   | (3,239,118 | ) |
| Net income (loss)                                                                                                    |   | $                                      | 1,096,896 |                                 | $      | 959,499 |   | $ | 1,687,124 |   | $ | (1,725,957 | ) |
|                                                                                                                 |   |                                   |      |                                 |   |   |   |   |   |
| Denominator:                                                                                                         |   |                                   |      |                                 |   |   |   |   |   |
| Denominator for basic earnings (loss) per  common share - weighted average common shares outstanding                 |   | 3,505,785                              |      | 3,505,272                            |   | 3,505,935 |   | 3,507,924 |   |
|                                                                                                                 |   |                                   |      |                                 |   |   |   |   |   |
| Effect of dilutive securities:  Common stock options                                                                 |   | 72,809                                 |      | 77,149                               |   | 70,719 |   | 76,552 |   |
| Denominator for diluted earnings per common  share - adjusted weighted average common shares and assumed conversions |   | 3,578,594                              |      | 3,582,421                            |   | 3,576,654 |   | 3,584,476 |   |

 

There were outstanding during the six month periods ended June 30,2003 and 2002 stock options whose exercise prices were higher than the averagemarket values of the underlying Class A Common Stock 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  June 30,** |   | **Six months  ended  June 30,** |   |
|-----------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                      |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                      |   |                                   |   |                                 |   |   |   |   |   |
| Weighted average anti-dilutive stock  options outstanding |   | 253,664                                |   | 189,000                              |   | 253,664 |   | 189,000 |   |

 

20

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**Item 2****.****           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**General**

 

**Critical Accounting Policies and Estimates**

 

The Company prepares its consolidated financial statements in accordancewith accounting principles generally accepted in the United States of America.Certain of these accounting policies require the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and the related disclosure of contingent assets and liabilities. Onan ongoing basis, the Company evaluates estimates, including those related tobad debts, inventory reserves, intangible assets, income taxes andcontingencies. The Company bases its estimates on historical data andexperience, when available, and on various other assumptions that are believedto be reasonable under the circumstances, the combined results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates.

 

The Company’s critical accounting policies include:

 

**RevenueRecognition**

 

The Company records revenues upon shipment with related risks and titlepassing to the customers. Estimates of losses for bad debts, returns and otherallowances are recorded at the time of the sale.  Shipping charges to customers and related expenses that areincluded in selling, general and administrative expenses are immaterial.

 

**Allowance for Doubtful Accounts**

 

The Company records an allowance for doubtful accounts based onspecifically identified amounts that are believed to be uncollectible. TheCompany also records as an additional allowance a certain percentage of agedaccounts receivable, based on historical experience and the Company’sassessment of the general financial conditions affecting its customer base. Ifactual collection experience changes, revisions to the allowance may berequired. The Company has a limited number of customers with individually largeamounts due at any given balance sheet date. Any unanticipated change in thecredit worthiness of any of these customers or in any other matters affectingthe collectibility of amounts due from such customers could have a materialaffect on the Company’s results of operations in the period in which suchchanges or events occur. After all reasonable attempts to collect an accountreceivable have failed, the amount of the receivable is written off against theallowance.

 

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**Inventories**

 

Inventories are valued at the lower of cost or market. Cost isdetermined by the first-in, first-out method. The inventory balance, whichincludes materials, labor and manufacturing overhead costs, is recorded net ofan allowance for obsolete or unmarketable inventory. Such allowance is basedupon both historical experience and management’s understanding of marketconditions and forecasts of future product demand. If the actual amount ofobsolete or unmarketable inventory significantly exceeds the estimatedallowance, the Company’s cost of sales, gross profit and net income would besignificantly affected.

 

**Goodwilland Other Intangible Assets**

 

The Company’s operational policy for the assessment and measurement of any impairment in the value of goodwill and other intangible assets that is other than temporary is to evaluate at least annually, with the help of independent third-party appraisals, the recoverability and remaining life of its goodwill and other intangible assets to determine the fair value of these assets. The methodologies to be used to estimate fair value include the use of estimates and assumptions, including projected revenues, earnings and cash flows. If the fair value of any of these assets is determined to be less than its carrying value, the Company will reflect the impairment of any such asset through a reduction in its carrying value, in an amount equal to the excess of the carrying value of the asset over its appraised value.

 

On a quarterly basis, the Company reviews changes in market conditions, among other factors, that could have a material impact on its estimates of fair value in order to reassess the carrying value of goodwill and other intangible assets. At June 30, 2003, no adjustment for impairment was deemed necessary.

 

**Long-Lived Assets**

 

The Company reviews certain long-lived assets for impairment. Wheneverevents or changes in circumstances indicate that the carrying value of any ofthese assets may not be recoverable, the Company will assess the recoverabilityof such assets based upon estimated undiscounted cash flow forecasts.

 

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**Acquisition**

 

On May 3, 2002, Countrywide acquired all of the stock of Nationwide forapproximately $10,452,000, plus acquisition costs of approximately $490,000 andworking capital adjustments of approximately $260,000. There were additionalacquisition-related costs of approximately $364,000 recorded as goodwill. Inaddition to the cash paid at the closing, Nationwide’s previous owner isentitled to contingent payments of 30% of the excess of Nationwide’s earnings,before amortization of intangible assets, interest and taxes, over $2,500,000,for each of the five twelve-month periods subsequent to the acquisition date,which contingent payments will be treated as additions to goodwill. Countrywideconducts its business through Nationwide and through its Franklin division. Theassets of Franklin were transferred from Embassy to Countrywide onDecember 30, 2002.

 

**Results of Operations**

 

**Impairment ofgoodwill**

 

The Company had its goodwill tested for impairment, effectiveJanuary 1, 2002, during the second quarter of 2002. The impairment testsperformed required that the Company determine the fair market value of itsreporting units for comparison to the carrying value of their net assets toassess whether any impairment exists. The methodologies used to estimate fairmarket value involved the use of estimates and assumptions, including projectedrevenues, earnings and cash flows.

 

The Company’s earnings forecasts for Green, which reflected theextremely weak market conditions in the hydraulic cylinder business, resultedin the fair market value of Green’s goodwill, as determined by an independentthird-party appraiser, being lower than its carrying value as ofDecember 31, 2001. Accordingly, in the quarter ended June 30, 2002,the Company recorded, retroactive to January 1, 2002, an after-taximpairment charge of approximately $3.2 million, which is reported as acumulative effect of change in accounting principle resulting from the adoptionby the Company of Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets.”

 

The statement of operations for the quarter ended June 30, 2002has been retroactively restated. The restatement gives effect to the cumulativeeffect of change in accounting principle, which had previously been reported inthe quarter ended June 30, 2002, being reflected as having occurred as ofJanuary 1, 2002

 

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**Comparison of threemonths ended June 30, 2003 and June 30, 2002**

 

Consolidated revenues increased 16.5%, from $18,666,396 to $21,738,305.Revenues from pneumatic tools and related equipment increased 12.8%, from$9,691,652 to $10,933,587, due primarily to strong promotions by two majorcustomers and a major promotion at a new automotive after-market retailer,partially offset by price concessions at a significant customer and decreasedcommission revenues resulting from price and competitive pressures. Sellingprices of pneumatic tools and related equipment were unchanged, with theexception of prices to a significant customer, which were substantially reducedearly in the fourth quarter of 2002. Revenues from hardware products increased49.0%, from $3,822,901 to $5,696,536, due primarily to the inclusion ofNationwide for the entire quarter in 2003, as opposed to only two months in2002. Nationwide’s revenues increased approximately $2,200,000, including anincrease of approximately $1,600,000 from sales of fencing products. Theincrease at Nationwide was partially offset by a decrease in revenues ofapproximately $330,000 at Franklin, as a significant customer reduced itsordering, because of its decreased volume, in the second quarter of 2003.Selling prices of hardware products were unchanged. Revenues from hydrauliccylinders and other equipment decreased 4.4%, from $3,165,181 to $3,027,296,due primarily to depressed conditions in the access sector, partially offset byincreased sales in the refuse market. Selling prices of hydraulic cylinders andother equipment were virtually unchanged. Revenues from heating productsincreased 4.7%, from $1,986,662 to $2,080,886, due primarily to increasedradiant heating sales. Selling prices of heating products were unchanged, withthe exception of a modest price increase for baseboard heating products duringthe second quarter of 2003.

 

Consolidated gross profit, as a percentage of revenues, decreased from32.9% to 32.8%. Gross profit from pneumatic tools and related equipmentdecreased from 41.5% to 37.2%, due primarily to the lower-margin promotionalsales noted above, the impact of the price concessions effective in the fourthquarter of 2002 also noted above and the strengthening of the yen, partiallyoffset by productivity improvements and cost reductions from suppliers. Grossprofit from hardware products increased from 32.6% to 36.8%, due primarily tothe inclusion of Nationwide’s higher margin OEM business for the entire quarterin 2003, as opposed to only two months in 2002. Gross profit from hydrauliccylinders and other equipment increased from 9.0% to 10.0%, due primarily toreductions in labor and overhead. Gross profit from heating equipment increasedfrom 29.9% to 32.4%, due primarily to a change in the product mix and improvedoperating efficiencies.

 

24

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Consolidated selling, general and administrative expenses increased17.3%, from $4,424,727 to $5,188,457, due primarily to increases in advertisingand expenses related to promotional sales at Florida Pneumatic and the additionof approximately $200,000 of selling, general and administrative expenses atNationwide. Also contributing to the overall increase were increasedcompensation tied to higher profitability and 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 23.7% to 23.9%.

 

Interest expense increased 20.3%, from $162,650 to $195,688, dueprimarily to changes in average borrowings outstanding during the quartersended June 30, 2003 and 2002. Average borrowings under the Company’srevolving credit loan facility were higher in 2003 than in 2002. While averageborrowings under the Company’s term loan facility, which resulted from theacquisition of Nationwide on May 3, 2002, were lower in 2003 than in 2002,these amounts were outstanding for the entire quarter in 2003, as opposed toonly two months in 2002. The overall increase in interest expense was net ofdecreases resulting from lower interest rates on the Company’s borrowings underboth its revolving credit and term loan facilities, as well as on a refinancedmortgage.

 

The effective tax rates for the quarters ended June 30, 2003 and2002 were 37.5% and 38.4%, respectively.

 

25

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**Comparison of six months ended June 30,2003 and June 30, 2002**

 

Consolidated revenues increased 15.3%, from $35,763,115 to $41,220,181.Revenues from pneumatic tools and related equipment increased 8.0%, from$19,700,562 to $21,273,996, due primarily to strong promotions by two majorcustomers and a major promotion at an automotive after-market retailer,partially offset by price concessions at a significant customer, a base volumedecrease and decreased commission revenues resulting from price and competitivepressures. Selling prices of pneumatic tools and related equipment wereunchanged, with the exception of prices to a significant customer, which weresubstantially reduced early in the fourth quarter of 2002. Revenues fromhardware products increased 88.1%, from $5,287,180 to $9,946,570, due primarilyto the inclusion of Nationwide for the entire six months in 2003, as opposed toonly two months in 2002. Nationwide’s revenues increased approximately$5,100,000, including an increase of approximately $2,700,000 from sales offencing products. The increase at Nationwide was partially offset by a decreasein revenues of approximately $450,000 at Franklin, as a significant customerdeclared bankruptcy in the first quarter of 2003 and another significantcustomer reduced its ordering, because of its decreased volume, in the secondquarter of 2003. Selling prices of hardware products were unchanged. Revenuesfrom hydraulic cylinders and other equipment decreased 9.5%, from $6,508,356 to$5,889,543, due primarily to an approximately 70% decrease in sales to thewrecker market, including the phasing out of a major customer in the firstquarter of 2002. Selling prices of hydraulic cylinders and other equipment werevirtually unchanged. Revenues from heating products decreased 3.7%, from$4,267,017 to $4,110,072, due primarily to the weakness in baseboard demand inthe first quarter of 2003, partially offset by increased radiant heating sales.Selling prices of heating products were unchanged, with the exception of amodest price increase for baseboard heating products during the second quarterof 2003.

 

Consolidated gross profit, as a percentage of revenues, increased from31.4% to 31.9%. Gross profit from pneumatic tools and related equipmentdecreased from 39.1% to 37.1%, due primarily to the lower-margin promotionalsales noted above, the impact of the price concessions effective in the fourthquarter of 2002 also noted above and the strengthening of the yen, partiallyoffset by productivity improvements and cost reductions from suppliers. Grossprofit from hardware products increased from 30.5% to 34.8%, due primarily tothe inclusion of Nationwide’s higher margin OEM business for the entire sixmonths in 2003, as opposed to only two months in 2002. Gross

 

26

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profit from hydraulic cylinders and other equipment decreased from 9.1%to 8.7%, due primarily to the decrease in revenues (reflecting the phasing outof a major customer in the first quarter of 2002), which reduced coverage offixed expenses, partially offset by reductions in labor and overhead in thesecond quarter. Gross profit from heating equipment increased from 31.1% to31.2%, due primarily to a change in the product mix and improved operatingefficiencies in the second quarter.

 

Consolidated selling, general and administrative expenses increased18.2%, from $8,513,790 to $10,059,282, due primarily to the addition ofapproximately $640,000 of these expenses at Nationwide, increases inadvertising and expenses related to promotional sales at Florida Pneumatic and,to a lesser extent, to increased compensation tied to higher profitability andincreases related to additional reporting and control requirements.  These increases were partially offset bysubstantial decreases resulting from cost-cutting efforts in all of thesegments. As a percentage of revenues, selling, general and administrativeexpenses increased from 23.8% to 24.4%, due primarily to the increased expensesdiscussed above.

 

Interest expense increased 44.9%, from $264,422 to $383,009, dueprimarily to changes in average borrowings outstanding during the six monthperiods ended June 30, 2003 and 2002. Average borrowings under theCompany’s revolving credit loan facility were higher in 2003 than in 2002.While average borrowings under the Company’s term loan facility, which resultedfrom the acquisition of Nationwide on May 3, 2002, were lower in 2003 than in2002, these amounts were outstanding for the entire six months in 2003, asopposed to only two months in 2002. The overall increase was net of decreasesresulting from lower interest rates on the Company’s borrowings under both itsrevolving credit and term loan facilities, as well as on a refinanced mortgage.

 

The effective tax rates for the six months ended June 30, 2003 and2002 were 37.5% and 38.5%, respectively.

 

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**Liquidity and Capital Resources**

 

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

 
|                      |   | **June 30,2003** |   | **December 31,  2002** |   | **June 30,  2002** |   |
|---------------------------|--------|-----------------------|--------|-----------------------------|--------|-------------------------|--------|
| Working Capital           |   | $                     | 19,323 |                        | $      | 19,779                  |   | $ | 22,010 |   |
| Current Ratio             |   | 2.20 to 1             |   | 2.49 to 1                   |   | 3.02 to 1               |   |
| Shareholders’ Equity |   | $                     | 35,304 |                        | $      | 33,823                  |   | $ | 32,401 |   |

 

During the six months ended June 30, 2003, gross accountsreceivable increased by approximately $913,000, with increases of approximately$912,000, $150,000 and $36,000 at Countrywide, Green and Embassy, respectively,partially offset by a decrease of approximately $185,000 at Florida Pneumatic.The increases at Countrywide and Green were due primarily to increases in salesin the second quarter of 2003 as compared to the fourth quarter of 2002. Theincrease at Embassy was due primarily to the timing of sales. The decrease atFlorida Pneumatic was due primarily to an overall decrease in sales in thesecond quarter of 2003 as compared to the fourth quarter of 2002, partiallyoffset by extended terms on some retail promotional sales.

 

Inventories increased by approximately $1,719,000 during the six monthsended June 30, 2003, with increases of approximately $1,906,000, $64,000and $40,000 at Florida Pneumatic, Green and Embassy, respectively, partiallyoffset by a decrease of approximately $291,000 at Countrywide. The increase atFlorida Pneumatic was due primarily to a decrease in base revenues. Theincrease at Green was due primarily to the timing of purchases of importedproducts. The increase at Embassy was due primarily to preparation for the peakheating season. The decrease at Countrywide was due primarily to improvedinventory turnover at Nationwide.

 

During the six months ended June 30, 2003, short-term borrowingsincreased by $2,500,000, primarily to fund working capital changes and toreduce long-term debt.

 

During the six months ended June 30, 2003, accounts payableincreased by approximately $872,000, with an increase of approximately $978,000at Florida Pneumatic being partially offset by decreases of approximately $51,000,$35,000 and $20,000 at Countrywide, Embassy and Green, respectively. All ofthese changes were due primarily to the timing of purchases.

 

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On June 30, 2003, the Company renewed its credit agreement, asamended, with Citibank through July 26, 2004. This agreement provides theCompany with various credit facilities, including revolving credit loans, termloans for acquisitions and a foreign exchange line. The revolving credit loanfacility provides a maximum of $12,000,000, with various sublimits, for directborrowings, letters of credit, bankers’ acceptances and equipment loans. Thereare no commitment fees for any unused portion of this credit facility. AtJune 30, 2003, there was $7,000,000 outstanding against the revolvingcredit loan facility. There was also a commitment of approximately $116,000 atJune 30, 2003 for open letters of credit.

 

The term loan facility provides a maximum commitment of $15,000,000 tofinance acquisitions subject to the lending bank’s approval. There are nocommitment fees for any unused portion of this credit facility. The Companyborrowed $11,500,000 against this facility to finance the acquisition ofNationwide, described in Note 1, and there was $5,750,000 outstanding againstthis facility at June 30, 2003. There was also a standby letter of credittotaling approximately $351,000 outstanding against this facility atJune 30, 2003. This standby letter of credit was used to secure theEconomic Development Revenue Bond assumed as part of the acquisition of Green.

 

The Company’s credit agreement is subject to annual review by thelending bank. Under this agreement, the Company is required to adhere tocertain financial covenants. At June 30, 2003 and for the quarter thenended, the Company satisfied all of these covenants.

 

Certain of the Company’s mortgage agreementsrequire the Company to adhere to certain financial covenants. At June 30, 2003,and for the six months then ended, the Company satisfied all of thesecovenants.

 

Capital spending for the six month ended June 30, 2003 wasapproximately $646,000, which amounts were provided from working capital.Capital expenditures for the remainder of 2003 are expected to be approximately$540,000, some of which may be financed through the Company’s creditfacilities. Included in the expected total for the remainder of 2003 arecapital expenditures relating to new products, expansion of existing productlines and replacement of equipment.

 

Operating activities provided cash totaling approximately $56,000 and$3,036,000 during the six month periods ended June 30, 2003 and 2002,respectively. The Company believes that cash on hand derived from operationsand cash available through borrowings under its credit facilities will be sufficientto allow the Company to meet its foreseeable capital needs.

 

29

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**Off-Balance SheetArrangements**

 

The Company’s foreign exchange line provides for the availability of upto $10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of yen needed for payments to foreignsuppliers. The total amount of foreign currency forward contracts outstandingat June 30, 2003, based on the contracted forward rates, was approximately$1,363,000.

 

The Company, through Florida Pneumatic, imports a significant amount ofits purchases from Japan, with payment due in yen. As a result, the Company issubject to the effects of foreign currency exchange fluctuations. The Company usesa variety 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 yen versus the U.S. dollar over the last 12 months had a negative effecton the Company’s results of operations and its financial position. There can beno assurance as to the future trend of this value. See “Item 3 – Quantitativeand Qualitative Disclosure About Market Risk.”

 

**New Accounting Pronouncements**

 

In April 2002, the FASB issued Statement of Financial AccountingStandards No. 145, “Recission of FASBStatement No.4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections” (“SFAS 145”), which eliminates the automatic classificationof gain or loss on extinguishment of debt as an extraordinary item of incomeand requires that such gain or loss be evaluated for extraordinaryclassification under the criteria of Accounting Principles Board No. 30,“Reporting Results of Operations.” The provisions of SFAS 145 related to therecission of Statement 4 are effective for fiscal years beginning after May 15,2002. The Company adopted SFAS 145 as of January 1, 2003. InJanuary 2003, the Company recorded a loss of approximately $84,000,included in selling, general and administrative expenses, that resulted fromthe refinancing of a mortgage.

 

30

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In June 2002,**the FASB issued Statement of Financial Accounting Standards No. 146,**“Accountingfor Costs Associated with Exit or Disposal Activities” (“SFAS 146”).**SFAS 146 addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand supersedes Emerging Issues Task Force Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)” (“EITF94-3”). The principal difference between SFAS 146 and EITF 94-3 relates to therequirements for recognition of a liability for a cost associated with an exitor disposal activity. SFAS 146 requires that a liability for a cost associatedwith an exit or disposal activity be recognized when the liability is incurred.Under EITF 94-3, a liability was recognized at the date of an entity’scommitment to an exit plan. SFAS 146 is effective for exit or disposalactivities that are initiated after December 31, 2002. The Company did nothave any exit or disposal activities since the adoption of SFAS 146.

 

In June 2003,**the FASB issued Statement ofFinancial Accounting Standards No. 149,**“Amendments of Statement 133 on DerivativeInstruments and Hedging Activities” (“SFAS 149”).**SFAS 149 amends SFAS 133 and certain other FASB standards for decisions made bythe FASB as part of the DerivativesImplementation Group process. Among other changes, SFAS 149 clarifies thedefinition of a derivative financial instrument. SFAS 149 is generallyeffective for contracts entered into or modified after June 30, 2003. Theprovisions of SFAS 149 that relate to SFAS 133 Implementation Issues that havebeen effective for fiscal quarters that began prior to June 15, 2003should continue to be applied in accordance with their respective dates. Inaddition, certain provisions of SFAS 149 that apply to forward purchases orsales of when-issued securities or other securities that do not yet exist areapplicable to both existing contracts and new contracts entered into afterJune 30, 2003.

 

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**Item 3****.****           Quantitative and Qualitative DisclosuresAbout Market Risk**

 

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

 

The value of the U.S. dollar affects the Company’s results.  Changes in exchange rates may positively ornegatively affect the Company’s gross margins and operating expenses. TheCompany engages in hedging programs aimed at limiting, in part, the impact ofcurrency fluctuations. Using primarily forward exchange contracts, the Companyhedges some of those transactions that, when remeasured according to accountingprinciples generally accepted in the United States of America, impact thestatement of operations. Factors that could impact the effectiveness of theCompany’s programs include volatility of the currency markets and availabilityof hedging instruments. All currency transactions that are entered into by theCompany are components of hedging programs and are entered into not forspeculation but for the sole purpose of hedging an existing or anticipatedcurrency exposure. The Company does not buy or sell financial instruments fortrading purposes. Although the Company maintains these programs to reduce theimpact of changes in currency exchange rates, when the U.S. dollar sustains aweakening exchange rate against currencies in which the Company incurs costs,the Company’s costs are adversely affected. The Company has various debtinstruments that bear interest at variable rates tied to LIBOR (LondonInterBank Offered Rate). Any increase in LIBOR would have an adverse effect onthe Company’s interest costs.

 

The Company accounts for changes in the fair value of its foreigncurrency contracts by marking them to market and recognizing any resultinggains or losses through its statement of operations. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of operations. At June 30, 2003, the Company had foreigncurrency forward contracts, maturing in 2003, to purchase yen at contractedforward rates. The value of these contracts at June 30, 2003, based on thecontracted forward rates, was approximately $1,363,000, which was theapproximate value of the Company’s yen-denominated accounts payable. During thequarters ended June 30, 2003 and 2002, the Company recorded net realizedlosses of approximately $10,000 and $59,000, respectively, on foreign currencytransactions. During the six month periods ended June 30, 2003 and 2002,the Company recorded net realized losses of approximately $9,000 and $69,000,respectively, on foreign currency transactions. At June 30, 2003, theCompany had no material unrealized gains or losses on foreign currencytransactions.

 

The potential loss in value of the Company’s net investment in foreigncurrency forward contracts resulting from a hypothetical 10 percent adversechange in foreign exchange rates at June 30, 2003 was approximately$150,000.

 

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

 

**Evaluation of disclosure controls and procedures**

 

An evaluation was performed, under the supervision of, and with theparticipation of, the Company’s management, including the Principal ExecutiveOfficer and Principal Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) to the Securities and Exchange Act of 1934).Based on that evaluation, the Company’s management, including the PrincipalExecutive Officer and Principal Financial Officer, concluded that the Company’sdisclosure controls and procedures were adequate and effective, as of the endof the period covered by this Quarterly Report on Form 10-Q for the quarterended June 30, 2003 (the “Report”), in timely alerting them to allmaterial information relating to the Company and its consolidated subsidiariesthat is required to be included in this Report.

 

**Changes in internal controls**

 

There have been no significant changes in the Company’s internal controlsover financial reporting that occurred during the most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

33

 

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

 

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

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

 

**Item 2.****           Changes in Securities and Use ofProceeds**

None.

 

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

None.

 

**Item 4.****           Submission of Matters to a Vote ofSecurity Holders**

On May 28, 2003, the Registrant held its Annual Meeting ofStockholders, at which two proposals were voted upon: (i) Election of Directorsand (ii) the Appointment of Auditors.

 

The following persons were duly elected to serve, subject to theCompany’s Bylaws, as directors of the Registrant until the 2006 Annual Meetingof Stockholders, or until election and qualification of their successor(s):

 
|            |   | **Votes  in favor** |   | **Votes  against** |   | **Votes  abstained** |   |
|-----------------|--------|---------------------|--------|--------------------|--------|----------------------|--------|
| Sidney Horowitz |   | 2,650,875           |   | 362,599            |   | 0                    |   |
| Dennis Kalick   |   | 2,651,615           |   | 361,859            |   | 0                    |   |

 

The terms of office of Robert L. Dubofsky, Alan I. Goldberg, Richard A.Horowitz, Neil Novikoff, Robert M. Steinberg and Marc A. Utay as directors ofthe Registrant continued after the Annual Meeting of Stockholders.

 

The appointment of BDO Seidman, LLP as the Company’s auditors wasratified by 2,656,619 votes in favor and 356,013 votes against.

 

There were no broker non-votes pertaining to these proposals.

 

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

None.

 

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

**(a)****                                  Exhibits**

See “Exhibit Index” immediately following the signature page.

 

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

The Registrant filed a Report on Form 8-K dated May 13, 2003, in whichit furnished a press release announcing its first quarter 2003 results underItems 9 and 12 of such Report.

 

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**SIGNATURES**

 

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

 

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

 

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**EXHIBITINDEX**

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

 

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

 

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

 

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

 

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| **Number** |   | **Description**                                                                                                                                                                                                              |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                         |
| **10.5**   |   | 2002 Stock Incentive Plan of the Registrant (Incorporated by  reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002).                                   |
|       |   |                                                                                                                                                                                                                         |
| **14.1**   |   | Code of Business Conduct and Ethics of the Registrant and its  Affiliates (Incorporated by reference to Exhibit 14.1 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 31, 2003). |
|       |   |                                                                                                                                                                                                                         |
| **31.1**   |   | Certification of Richard A. Horowitz, Principal Executive Officer of  the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                       |
|       |   |                                                                                                                                                                                                                         |
| **31.2**   |   | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                       |
|       |   |                                                                                                                                                                                                                         |
| **32.1**   |   | Certification of Richard A. Horowitz, Principal Executive Officer of  the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                   |
|       |   |                                                                                                                                                                                                                         |
| **32.2**   |   | Certification of Joseph A. Molino, Jr., Principal Financial Officer  of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                 |

 

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

 

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