**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

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**FORM 10-Q**

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** **

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

**Forthe Quarter Ended September 30, 2003**

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

**CommissionFile Number 1 - 5332**

** **

**P & FINDUSTRIES, 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  area code: **(631) 694-1800** |

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months, and (2) has been subject to such filing requirementsfor the past 90 days.

**Yes ****ý   No ****o**

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

As ofNovember 12, 2003, there were 3,511,631 shares of the registrant’s Class ACommon Stock outstanding.

 

 

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**P& F INDUSTRIES, INC.**

** **

**FORM10-Q**

** **

**FORTHE QUARTER ENDED SEPTEMBER 30, 2003**

** **

**TABLEOF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION** |                                                                                        |
|-----------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                 | Consolidated Financial Statements (unaudited)                                               |   |
|                                    |                                                                                        |   |
|                                    | Consolidated Balance Sheets                                                                 |   |
|                                    |                                                                                        |   |
|                                    | Consolidated Statements of Operations                                                       |   |
|                                    |                                                                                        |   |
|                                    | 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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**PART I - FINANCIAL INFORMATION**

 

**Item 1.****           FinancialStatements**

 

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

**CONSOLIDATEDBALANCE SHEETS (unaudited)**

 
|                                                                                                       |   | **September 30,****2003** |       | **December 31,****2002** |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|-------------------------------|--------|
|                                                                                                       |   |                           |       |                          |   |
| ASSETS                                                                                                     |   |                           |       |                          |   |
|                                                                                                       |   |                           |       |                          |   |
| CURRENT:                                                                                                   |   |                           |       |                          |   |
| Cash                                                                                                       |   | $                              | 1,163,550  |                          | $      | 1,024,222 |   |
| Accounts receivable, less allowance for  possible losses of $392,662 in 2003 and $354,441 in 2002 (Note 7) |   | 14,598,161                     |       | 10,864,261                    |   |
| Inventories (Notes 6 and 7)                                                                                |   | 21,262,989                     |       | 19,580,073                    |   |
| Deferred income taxes                                                                                      |   | 695,000                        |       | 695,000                       |   |
| Prepaid expenses and other                                                                                 |   | 1,198,558                      |       | 1,080,313                     |   |
| TOTAL CURRENT ASSETS                                                                                       |   | 38,918,258                     |       | 33,243,869                    |   |
|                                                                                                       |   |                           |       |                          |   |
| PROPERTY AND EQUIPMENT (Note 7):                                                                           |   |                           |       |                          |   |
| Land                                                                                                       |   | 1,582,938                      |       | 1,582,938                     |   |
| Buildings and improvements                                                                                 |   | 8,983,150                      |       | 8,811,117                     |   |
| Machinery and equipment                                                                                    |   | 15,012,719                     |       | 14,514,353                    |   |
|                                                                                                       |   | 25,578,807                     |       | 24,908,408                    |   |
| Less accumulated depreciation and amortization                                                             |   | 12,599,275                     |       | 11,409,203                    |   |
| NET PROPERTY AND EQUIPMENT                                                                                 |   | 12,979,532                     |       | 13,499,205                    |   |
|                                                                                                       |   |                           |       |                          |   |
| DEFERRED INCOME TAXES                                                                                      |   | 1,377,000                      |       | 1,377,000                     |   |
|                                                                                                       |   |                           |       |                          |   |
| GOODWILL, net of accumulated amortization  of $1,419,274 (Note 2)                                          |   | 9,682,867                      |       | 9,238,621                     |   |
|                                                                                                       |   |                           |       |                          |   |
| OTHER INTANGIBLE ASSETS, net of accumulated  amortization of $753,667 in 2003 and $354,667 in 2002         |   | 1,906,333                      |       | 2,305,333                     |   |
| OTHER ASSETS, net of accumulated  amortization of $173,759 in 2003 and $180,858 in 2002                    |   | 126,301                        |       | 118,528                       |   |
| TOTAL ASSETS                                                                                               |   | $                              | 64,990,291 |                          | $      | 59,782,556 |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

1

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|                                                                                                             |   | **September 30,  2003** |       | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                                                                                             |   |                         |       |                        |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                        |   |                         |       |                        |   |
| CURRENT LIABILITIES:                                                                                             |   |                         |       |                        |   |
| Short-term borrowings (Note 7)                                                                                   |   | $                            | 9,500,000  |                        | $      | 4,500,000 |   |
| Accounts payable                                                                                                 |   | 3,240,650                    |       | 2,860,271                   |   |
| Accruals:                                                                                                        |   |                         |       |                        |   |
| Compensation                                                                                                     |   | 1,677,000                    |       | 2,112,377                   |   |
| Other (Note 8)                                                                                                   |   | 2,616,177                    |       | 2,250,962                   |   |
| Deferred income taxes                                                                                            |   | 210,000                      |       | 210,000                     |   |
| Current maturities of long-term debt (Note  7)                                                                   |   | 1,509,180                    |       | 1,402,547                   |   |
| TOTAL CURRENT LIABILITIES                                                                                        |   | 18,753,007                   |       | 13,336,157                  |   |
|                                                                                                             |   |                         |       |                        |   |
| LONG-TERM DEBT, less current maturities  (Note 7)                                                                |   | 9,240,336                    |       | 11,591,989                  |   |
|                                                                                                             |   |                         |       |                        |   |
| DEFERRED INCOME TAXES                                                                                            |   | 1,031,000                    |       | 1,031,000                   |   |
| TOTAL LIABILITIES                                                                                                |   | 29,024,343                   |       | 25,959,146                  |   |
|                                                                                                             |   |                         |       |                        |   |
| COMMITMENTS AND CONTINGENCIES (Notes 7 and  8)                                                                   |   |                         |       |                        |   |
|                                                                                                             |   |                         |       |                        |   |
| SHAREHOLDERS’ EQUITY (Note 9):                                                                              |   |                         |       |                        |   |
| Preferred stock - $10 par; authorized -  2,000,000 shares; no shares issued or outstanding                       |   | —                       |       | —                      |   |
| Common stock:                                                                                                    |   |                         |       |                        |   |
| Class A - $1 par; authorized - 7,000,000  shares; issued - 3,730,367 shares in 2003 and 3,690,367 shares in 2002 |   | 3,730,367                    |       | 3,690,367                   |   |
| Class B - $1 par; authorized - 2,000,000  shares; no shares issued or outstanding                                |   | —                       |       | —                      |   |
| Additional paid-in capital                                                                                       |   | 8,588,590                    |       | 8,540,528                   |   |
| Retained earnings                                                                                                |   | 25,373,832                   |       | 22,997,016                  |   |
| Treasury stock, at cost (223,736 shares in  2003 and 176,045 shares in 2002)                                     |   | (1,726,841                   | )          | (1,404,501                  | )      |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                  |   | 35,965,948                   |       | 33,823,410                  |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                  |   | $                            | 64,990,291 |                        | $      | 59,782,556 |   |

 

Seeaccompanying notes to consolidated financial statements (unaudited).

 

2

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited)**

 
|                                                                                      |   | **Three months ended  September 30,** |       | **Nine months ended  September 30,** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|--------|
|                                                                                      |   | **2003**                                   |       | **2002**                                  |   | **2003** |   | **2002** |   |
| REVENUES (Note 10):                                                                       |   |                                       |       |                                      |   |   |   |   |   |
| Net sales                                                                                 |   | $                                          | 23,614,451 |                                      | $      | 20,915,289 |   | $ | 64,584,445 |   | $ | 56,351,585 |   |
| Other                                                                                     |   | 88,251                                     |       | 167,220                                   |   | 338,438 |   | 494,039 |   |
|                                                                                      |   | 23,702,702                                 |       | 21,082,509                                |   | 64,922,883 |   | 56,845,624 |   |
|                                                                                      |   |                                       |       |                                      |   |   |   |   |   |
| COSTS AND EXPENSES:                                                                       |   |                                       |       |                                      |   |   |   |   |   |
| Cost of sales                                                                             |   | 16,967,999                                 |       | 14,864,251                                |   | 45,046,765 |   | 39,388,993 |   |
| Selling, general and administrative                                                       |   | 5,149,755                                  |       | 4,679,836                                 |   | 15,209,037 |   | 13,193,626 |   |
| Interest - net                                                                            |   | 172,256                                    |       | 233,416                                   |   | 555,265 |   | 497,838 |   |
|                                                                                      |   | 22,290,010                                 |       | 19,777,503                                |   | 60,811,067 |   | 53,080,457 |   |
|                                                                                      |   |                                       |       |                                      |   |   |   |   |   |
| INCOME BEFORE TAXES ON INCOME AND CUMULATIVE  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE    |   | 1,412,692                                  |       | 1,305,006                                 |   | 4,111,816 |   | 3,765,167 |   |
|                                                                                      |   |                                       |       |                                      |   |   |   |   |   |
| TAXES ON INCOME                                                                           |   | 595,000                                    |       | 528,000                                   |   | 1,735,000 |   | 1,475,000 |   |
| INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN  ACCOUNTING PRINCIPLE                        |   | 817,692                                    |       | 777,006                                   |   | 2,376,816 |   | 2,290,167 |   |
|                                                                                      |   |                                       |       |                                      |   |   |   |   |   |
| CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING  PRINCIPLE, NET OF TAXES OF $1,668,000 (Note 2) |   | —                                     |       | —                                    |   | — |   | (3,239,118 | ) |
|                                                                                      |   |                                       |       |                                      |   |   |   |   |   |
| NET INCOME (LOSS)                                                                         |   | $                                          | 817,692    |                                      | $      | 777,006 |   | $ | 2,376,816 |   | $ | (948,951 | ) |

 

See accompanying notes to consolidated financial statements(unaudited).

 

3

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|                                                               |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|--------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                               |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Weighted average common shares outstanding (Note  11):             |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                              |   | 3,503,766                                  |   | 3,516,519                                 |   | 3,505,204 |   | 3,510,820 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Diluted                                                            |   | 3,584,939                                  |   | 3,580,074                                 |   | 3,579,407 |   | 3,583,039 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Earnings (loss) per share of common stock (Note  11):              |   |                                       |   |                                      |   |   |   |   |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Basic:                                                             |   |                                       |   |                                      |   |   |   |   |   |
| Income before cumulative effect of change in  accounting principle |   | $                                          | .23    |                                      | $      | .22 |   | $ | .68 |   | $ | .65 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Cumulative effect of change in accounting  principle, net of taxes |   | —                                     |   | —                                    |   | — |   | (.92 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Net income (loss)                                                  |   | $                                          | .23    |                                      | $      | .22 |   | $ | .68 |   | $ | (.27 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Diluted:                                                           |   |                                       |   |                                      |   |   |   |   |   |
| Income before cumulative effect of change in  accounting principle |   | $                                          | .23    |                                      | $      | .22 |   | $ | .66 |   | $ | .64 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Cumulative effect of change in accounting  principle, net of taxes |   | —                                     |   | —                                    |   | — |   | (.90 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Net income (loss)                                                  |   | $                                          | .23    |                                      | $      | .22 |   | $ | .66 |   | $ | (.26 | ) |

 

See accompanying notes to consolidated financial statements(unaudited).

 

4

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**P & FINDUSTRIES, 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 nine months ended  September 30, 2003 |   | —            |      | —                           |   | 2,376,816              |   | —              |       | 2,376,816 |   |
|                                                          |   |              |      |                             |   |                   |   |                |       |      |   |
| Exercise of stock options                                     |   | 40,000            |      | 48,062                           |   | —                 |   | —              |       | 88,062    |   |
|                                                          |   |              |      |                             |   |                   |   |                |       |      |   |
| Purchase of Class A Common Stock (Note 9)                     |   | —            |      | —                           |   | —                 |   | (322,340            | )          | (322,340  | )      |
|                                                          |   |              |      |                             |   |                   |   |                |       |      |   |
| Balance, September 30, 2003                              |   | $                 | 3,730,367 |                             | $      | 8,588,590              |   | $                   | 25,373,832 |      | $      | (1,726,841 | ) | $ | 35,965,948 |   |

 

 
| **Shares**                       |   | **Common  stock** |   | **Treasury  stock** |   |
|----------------------------------|--------|-------------------|--------|---------------------|--------|
| Balance, January 1, 2003    |   | 3,690,367         |   | 176,045             |   |
|                             |   |              |   |                |   |
| Exercise of   stock options |   | 40,000            |   | —              |   |
|                             |   |              |   |                |   |
| Purchase of Class A Common Stock |   | —            |   | 47,691              |   |
|                             |   |              |   |                |   |
| Balance, September 30, 2003 |   | 3,730,367         |   | 223,736             |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

5

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                                                |   | **Nine months ended  September 30,** |      |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|
|                                                                                                |   | **2003**                                  |      | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |                                      |      |   |   |
| Net income (loss)                                                                                   |   | $                                         | 2,376,816 |   | $ | (948,951 | ) |
|                                                                                                |   |                                      |      |   |   |
| Adjustments to reconcile net income (loss)  to net cash (used in) provided by operating activities: |   |                                      |      |   |   |
| Cumulative effect of change in accounting  principle - net of taxes                                 |   | —                                    |      | 3,239,118 |   |
| Depreciation and amortization                                                                       |   | 1,307,990                                 |      | 1,176,161 |   |
| Amortization of intangible assets                                                                   |   | 425,714                                   |      | 234,550 |   |
| Issuance of Class A Common Stock                                                                    |   | —                                    |      | 89,163 |   |
| Loss on disposal of fixed assets                                                                    |   | 11,638                                    |      | — |   |
| Provision for losses on accounts receivable  - net                                                  |   | 38,221                                    |      | 5,861 |   |
| Deferred income taxes                                                                               |   | —                                    |      | (23,000 | ) |
| Decrease (increase) - net of acquisition of  Nationwide Industries, Inc. in 2002:                   |   |                                      |      |   |   |
| Accounts receivable                                                                                 |   | (3,772,121                                | )         | (1,989,694 | ) |
| Inventories                                                                                         |   | (1,682,916                                | )         | (2,882,772 | ) |
| Prepaid expenses and other                                                                          |   | (123,763                                  | )         | (354,145 | ) |
| Other assets                                                                                        |   | (28,969                                   | )         | — |   |
| Increase (decrease) - net of acquisition of  Nationwide Industries, Inc. in 2002:                   |   |                                      |      |   |   |
| Accounts payable                                                                                    |   | 380,379                                   |      | 2,685,922 |   |
| Accruals and other                                                                                  |   | (70,162                                   | )         | 158,542 |   |
| Total adjustments                                                                                   |   | (3,513,989                                | )         | 2,339,706 |   |
| Net cash (used in) provided by operating  activities                                                |   | (1,137,173                                | )         | 1,390,755 |   |
|                                                                                                |   |                                      |      |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |                                      |      |   |   |
| Capital expenditures                                                                                |   | (799,955                                  | )         | (3,707,085 | ) |
| Payments for acquisition of Nationwide  Industries, Inc. - net of $2,920 cash acquired              |   | —                                    |      | (10,448,794 | ) |
| Additional payments for purchase of  Nationwide Industries, Inc.                                    |   | (444,246                                  | )         | — |   |
| Payments for acquisition-related expenses                                                           |   | —                                    |      | (800,891 | ) |
| Payment for acquisition of product line                                                             |   | —                                    |      | (397,940 | ) |
|                                                                                                |   |                                      |      |   |   |
| Net cash used in investing activities                                                               |   | (1,244,201                                | )    | (15,354,710 | )  |
|                                                                                                     |        |                                           |           |  |  |  |  |

 

See accompanying notes to consolidated financial statements(unaudited).

 

6

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|                                               |   | **Nine months ended  September 30,** |      |
|----------------------------------------------------|--------|-------------------------------------------|-----------|
|                                               |   | **2003**                                  |      | **2002** |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:              |   |                                      |      |   |   |
| Proceeds from short-term borrowings                |   | 9,000,000                                 |      | 4,000,000 |   |
| Repayments of short-term borrowings                |   | (4,000,000                                | )         | (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               |   | (3,942,321                                | )         | (1,658,994 | ) |
| Proceeds from exercise of stock options            |   | 88,062                                    |      | — |   |
| Purchase of Class A Common Stock                   |   | (322,340                                  | )         | (100,800 | ) |
|                                               |   |                                      |      |   |   |
| Net cash provided by financing activities          |   | 2,520,702                                 |      | 14,329,206 |   |
|                                               |   |                                      |      |   |   |
| NET INCREASE IN CASH                               |   | 139,328                                   |      | 365,251 |   |
|                                               |   |                                      |      |   |   |
| CASH AT BEGINNING OF PERIOD                        |   | 1,024,222                                 |      | 507,833 |   |
|                                               |   |                                      |      |   |   |
| CASH AT END OF PERIOD                              |   | $                                         | 1,163,550 |   | $ | 873,084 |   |
|                                               |   |                                      |      |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION: |   |                                      |      |   |   |
|                                               |   |                                      |      |   |   |
| Cash paid during the period for:                   |   |                                      |      |   |   |
|                                               |   |                                      |      |   |   |
| Income taxes                                       |   | $                                         | 1,329,212 |   | $ | 1,282,500 |   |
|                                               |   |                                      |      |   |   |
| Interest                                           |   | $                                         | 566,885   |   | $ | 443,834 |   |

 

See accompanying notes to consolidated financial statements(unaudited).

 

7

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS****(unaudited)**

 

**NOTE 1 - PRINCIPLESOF 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 onDecember 30, 2002. Nationwide is an importer and manufacturer of door,window and fencing hardware. Franklin imports a line of door and windowhardware. Green is engaged primarily in the manufacture, development and saleof heavy-duty welded custom designed hydraulic cylinders. Green alsomanufactures a line of access equipment for the petro-chemical industry and aline of post hole digging equipment for the agricultural industry. Embassy isengaged in the manufacture and sale of baseboard heating products and theimportation and sale of radiant heating systems. Note 10 of the Notes toConsolidated Financial Statements presents financial information for thesegments of the Company’s business.

 

**NOTE 2 - BASIS OFFINANCIAL STATEMENT PRESENTATION 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 andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

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

 

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

 

**NOTE 3 - STOCK-BASEDCOMPENSATION**

 

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”).

 

9

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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-Scholesoption-pricing model. The weighted-average assumptions for options granted inthe three months and the nine months ended September 2002, respectively,were: no dividends paid for either of these periods; expected volatility of56.9%; risk-free interest rate of 4.3%; and expected life of 8.5 years. Nooptions were granted in 2003.

 

The weighted-average fair value of options for which the exercise priceequaled the market price on the grant date was $4.20. The weighted-average fairvalue of options for which the exercise price exceeded the market price on thegrant date was $3.07.

 

Under the provisions of SFAS 123, the Company’s net income (loss) andits basic and diluted earnings (loss) per share would have changed to the proforma amounts indicated below:

 
|                                                                               |   | **Three months ended  September 30,** |    | **Nine months ended  September 30,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------|--------|
|                                                                               |   | **2003**                                   |    | **2002**                                  |   | **2003** |   | **2002** |   |
| Net income (loss) as reported                                                      |   | $                                          | 817,692 |                                      | $      | 777,006 |   | $ | 2,376,816 |   | $ | (948,951 | ) |
| Pro forma adjustment for employee compensation  determined under fair value method |   | —                                     |    | (402,696                                  | )      | — |   | (402,696 | ) |
| Pro forma net income (loss)                                                        |   | $                                          | 817,692 |                                      | $      | 374,310 |   | $ | 2,376,816 |   | $ | (1,351,647 | )  |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Basic earnings (loss) per share                                                    |   |                                       |    |                                      |   |   |   |   |   |
| As reported                                                                        |   | $                                          | .23     |                                      | $      | .22 |   | $ | .68 |   | $ | (.27 | ) |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Pro forma                                                                          |   | $                                          | .23     |                                      | $      | .11 |   | $ | .68 |   | $ | (.38 | ) |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Diluted earnings (loss) per share                                                  |   |                                       |    |                                      |   |   |   |   |   |
| As reported                                                                        |   | $                                          | .23     |                                      | $      | .22 |   | $ | .66 |   | $ | (.26 | ) |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Pro forma                                                                          |   | $                                          | .23     |                                      | $      | .10 |   | $ | .66 |   | $ | (.38 | ) |

 

10

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**NOTE 4 – FOREIGNCURRENCY 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 September 30, 2003, the Company hadforeign currency forward contracts, maturing in 2003, to purchase yen atcontracted forward rates. The value of these contracts at September 30, 2003,based on the spot rate, was approximately $280,000, which was the approximatevalue of the Company’s corresponding yen-denominated accounts payable. Duringthe quarter ended September 30, 2003, the Company recorded a net realizedgain of approximately $8,000 on foreign currency transactions. During thequarter ended September 30, 2002, the Company recorded a net realized lossof approximately $65,000 on foreign currency transactions. During the ninemonth periods ended September 30, 2003 and 2002, the Company recorded netrealized losses of approximately $1,000 and $134,000, respectively, on foreigncurrency transactions. At September 30, 2003, the Company had anunrealized loss of approximately $168,000 on foreign currency transactions.

 

**NOTE 5 – NEW ACCOUNTINGPRONOUNCEMENTS**

 

In April 2002, the Financial Accounting Standards Board (the“FASB”) issued Statement of Financial Accounting Standards No. 145, “Recission of FASB Statement No.4, 44, and64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS145”), which eliminates the automatic classification of gain or loss onextinguishment of debt as an extraordinary item of income and requires thatsuch gain or loss be evaluated for extraordinary classification under thecriteria of Accounting Principles Board No. 30, “Reporting Results ofOperations.” The provisions of SFAS 145 related to the recission of Statement 4are effective for fiscal years beginning after May 15, 2002. The Companyadopted SFAS 145 as of January 1, 2003. In January 2003, the Companyrecorded a loss of approximately $84,000, included in selling, general andadministrative expenses that resulted from the refinancing of a mortgage.

 

11

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In June 2002, the FASBissued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exitor 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 FASBissued Statement of Financial Accounting Standards No. 149, “Amendments of Statement 133 on DerivativeInstruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends SFAS133 and certain other FASB standardsfor decisions made by the FASB as partof the Derivatives Implementation Group process. Among other changes, SFAS 149clarifies the definition of a derivative financial instrument. SFAS 149 isgenerally effective for contracts entered into or modified afterJune 30, 2003. The provisions of SFAS 149 that relate to SFAS 133Implementation Issues that have been effective for fiscal quarters that beganprior to June 15, 2003 should continue to be applied in accordance withtheir respective dates. In addition, certain provisions of SFAS 149 that applyto forward purchases or sales of when-issued securities or other securitiesthat do not yet exist are applicable to both existing contracts and newcontracts entered into after June 30, 2003.

 

**NOTE 6– INVENTORIES**

 

Major classes of inventory were as follows:

 

|                       |   | **September 30,2003** |       | **December 31,  2002** |   |
|----------------------------|--------|----------------------------|------------|-----------------------------|--------|
|                       |   |                       |       |                        |   |
| Raw materials and supplies |   | $                          | 3,803,063  |                        | $      | 3,566,161 |   |
| Work in process            |   | 811,408                    |       | 754,857                     |   |
| Finished goods             |   | 16,648,518                 |       | 15,259,055                  |   |
|                       |   | $                          | 21,262,989 |                        | $      | 19,580,073 |   |

 

12

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

 

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 September 30, 2003, there was$9,500,000 outstanding against the revolving credit loan facility. There wasalso a commitment of approximately $93,000 at September 30, 2003 for openletters of credit.

 

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 InterBank OfferedRate) plus 1.6%. The prime interest rate at September 30, 2003 was 4.0%and LIBOR was approximately 1.1%. The prime interest rate at September 30,2002 was 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 September 30, 2003, based on the spotrate, was approximately $280,000.

 

Under the terms of the Company’s credit agreement, the Company isrequired to adhere to certain financial covenants. At September 30, 2003,and for the nine months then ended, the Company satisfied all of thesecovenants. The credit agreement is subject to annual review by the lendingbank.

 

The credit agreement also includes a termloan facility, which provides a maximum commitment of $15,000,000to finance acquisitions subject to the lending bank’s approval. The Companyborrowed $11,500,000 against this facility to finance the acquisition ofNationwide, described in Note 1, and there was $5,500,000 outstanding againstthis facility at September 30, 2003. There was also a standby letter ofcredit totaling approximately $351,000 outstanding against this facility atSeptember 30, 2003. This standby letter of credit is used to secure theEconomic Development Revenue Bond assumed 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 newmortgage, which is payable monthly through January 2010, bears interest atLIBOR plus 155 basis points.

 

13

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Certain of the Company’s mortgage agreementsrequire the Company to adhere to certain financial covenants. AtSeptember 30, 2003, and for the nine months then ended, the Companysatisfied all of these covenants.

 

**NOTE 8 – WARRANTYLIABILITY**

 

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 are estimatedbased on historical experience. The Company periodically assesses the adequacyof its recorded warranty liability and adjusts the amounts necessary. While theCompany believes that its estimated liability for product warranties isadequate, the estimated liability for the product warranties could differmaterially from future actual warranty costs.

 

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

 

|                                                                |   | **Nine months ended  September 30,** |    |
|---------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                |   | **2003**                                  |    | **2002** |   |
| Balance, beginning of period                                        |   | $                                         | 186,513 |   | $ | 198,384 |   |
| Warranties issued and changes in estimated  pre-existing warranties |   | 258,610                                   |    | 183,586 |   |
| Actual warranty costs incurred                                      |   | (230,453                                  | )       | (182,696 | ) |
| Balance, end of period                                              |   | $                                         | 214,670 |   | $ | 199,274 |   |

 

**NOTE 9 – CAPITALSTOCK TRANSACTIONS**

 

During the nine months ended September 30, 2003, the Companypurchased 47,691 shares of Class A Common Stock, at a cost of $322,340. Duringthe nine months ended September 30, 2002, the Company purchased 16,000shares of Class A Common Stock, at a cost of $100,800.

 

14

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**NOTE 10 – SEGMENTS OFBUSINESS**

 

Thefollowing tables present financial information by segment for the periods endedSeptember 30, 2003 and 2002. Segment profit (loss) excludes generalcorporate expenses, interest expense and income taxes. All intersegmentrevenues have been eliminated.

 
| **Three  months ended  September 30, 2003** |   | **Con–  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|--------------------------------------------------|--------|--------------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
| **(In thousands)**                               |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers                 |   | $                        | 23,703 |                 | $      | 12,431       |   | $                        | 5,282  |                   | $      | 3,452 |   | $ | 2,538 |   |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                            |   | $                        | 2,543  |                 | $      | 1,734        |   | $                        | 912    |                   | $      | (69 | )  | $ | (34 | ) |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Identifiable assets at September 30, 2003   |   | $                        | 62,059 |                 | $      | 28,632       |   | $                        | 18,913 |                   | $      | 8,870 |   | $ | 5,644 |   |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Corporate assets                                 |   | 2,931                    |   |                 |   |         |   |                     |   |                   |   |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Total assets at September 30, 2003          |   | $                        | 64,990 |                 |   |         |   |                     |   |                   |   |   |

 
| **Three  months ended  September 30, 2002** |   | **Con–  solidated** |   | **Pneumatic  tools** |   | **Hardware** |   | **Hydraulic  cylinders** |   | **Heating  equipment** |   |
|--------------------------------------------------|--------|--------------------------|--------|----------------------|--------|--------------|--------|--------------------------|--------|------------------------|--------|
| **(In thousands)**                               |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Revenues from external customers                 |   | $                        | 21,083 |                 | $      | 11,221       |   | $                        | 4,637  |                   | $      | 2,980  |   | $ | 2,245 |   |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Segment profit (loss)                            |   | $                        | 2,427  |                 | $      | 1,862        |   | $                        | 822    |                   | $      | (216 | ) | $ | (41 | ) |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Identifiable assets at September 30, 2002   |   | $                        | 62,039 |                 | $      | 27,710       |   | $                        | 19,687 |                   | $      | 8,757 |   | $ | 5,885 |   |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Corporate assets                                 |   | 2,532                    |   |                 |   |         |   |                     |   |                   |   |
|                                             |   |                     |   |                 |   |         |   |                     |   |                   |   |
| Total assets at September 30, 2002          |   | $                        | 64,571 |                 |   |         |   |                     |   |                   |   |   |

 

15

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| **Nine  months ended  September 30, 2003** |   | **Con-  solidated** |       | **Pneumatic  tools** |       | **Hardware** |       | **Hydraulic  cylinders** |       | **Heating  equipment** |       |
|-------------------------------------------------|--------|---------------------|------------|----------------------|------------|--------------|------------|--------------------------|------------|------------------------|------------|
| **(In  thousands)**                             |   |                | ** ** |                 | ** ** |         | ** ** |                     | ** ** |                   | ** ** |
| Revenues from external customers                |   | $                   | 64,923     |                 | $          | 33,705       |       | $                        | 15,229     |                   | $          | 9,341 |   | $ | 6,648 |   |
|                                            |   |                |       |                 |       |         |       |                     |       |                   |       |
| Segment profit (loss)                           |   | $                   | 7,509      |                 | $          | 5,292        |       | $                        | 2,798      |                   | $          | (391 | ) | $ | (190 | ) |

 

 
| **Nine  months ended  September 30, 2002**      |   | **Con-  solidated** |       | **Pneumatic  tools** |       | **Hardware** |       | **Hydraulic  cylinders** |       | **Heating  equipment** |       |
|------------------------------------------------------|--------|---------------------|------------|----------------------|------------|--------------|------------|--------------------------|------------|------------------------|------------|
| **(In  thousands)**                                  |   |                | ** ** |                 | ** ** |         | ** ** |                     | ** ** |                   | ** ** |
| Revenues from external customers                     |   | $                   | 56,846     |                 | $          | 30,922       |       | $                        | 9,924      |                   | $          | 9,488 |   | $ | 6,512 |   |
|                                                 |   |                |       |                 |       |         |       |                     |       |                   |       |
| Segment profit (loss)                                |   | $                   | 6,761      |                 | $          | 5,756        |       | $                        | 1,410      |                   | $          | (488 | ) | $ | 83 |   |
|                                                 |   |                |       |                 |       |         |       |                     |       |                   |       |
| Cumulative effect of change in accounting  principle |   | $                   | (3,239     | )                    | $          | —       |       | $                        | —     |                   | $          | (3,239 | ) | $ | — |   |

 

16

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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  September 30,** |      |
|------------------------------------------------------------------------------|--------|--------------------------------------------|-----------|
|                                                                         |   | **2003**                                   |      | **2002** |   |
| Total profit for reportable segments                                         |   | $                                          | 2,543,152 |   | $ | 2,427,230 |   |
| General corporate expenses                                                   |   | (958,204                                   | )         | (888,808 | ) |
| Interest expense - net                                                       |   | (172,256                                   | )         | (233,416 | ) |
| Income before taxes and cumulative effect  of change in accounting principle |   | $                                          | 1,412,692 |   | $ | 1,305,006 |   |

 
|                                                                         |   | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                         |   | **2003**                                  |       | **2002** | ** ** |
| Total profit for reportable segments                                         |   | $                                         | 7,509,062  |   | $ | 6,760,998 |   |
| General corporate expenses                                                   |   | (2,841,981                                | )          | (2,497,993 | ) |
| Interest expense - net                                                       |   | (555,265                                  | )          | (497,838 | ) |
| Income before taxes and cumulative effect  of change in accounting principle |   | $                                         | 4,111,816  |   | $ | 3,765,167 |   |

 

17

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

 

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

 
|                                                                                                                 |   | **Three months ended  September 30,** |    | **Nine months ended  September 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                                                   |   | $                                          | 817,692 |                                      | $      | 777,006 |   | $ | 2,376,816 |   | $ | 2,290,167 |   |
|                                                                                                                 |   |                                       |    |                                      |   |   |   |   |   |
| Cumulative effect of change in accounting  principle                                                                 |   | —                                     |    | —                                    |   | — |   | (3,239,118 | ) |
| Net income (loss)                                                                                                    |   | $                                          | 817,692 |                                      | $      | 777,006 |   | $ | 2,376,816 |   | $ | (948,951 | ) |
|                                                                                                                 |   |                                       |    |                                      |   |   |   |   |   |
| Denominator:                                                                                                         |   |                                       |    |                                      |   |   |   |   |   |
| Denominator for basic earnings (loss) per common  share - weighted average common shares outstanding                 |   | 3,503,766                                  |    | 3,516,519                                 |   | 3,505,204 |   | 3,510,820 |   |
|                                                                                                                 |   |                                       |    |                                      |   |   |   |   |   |
| Effect of dilutive securities:                                                                                       |   |                                       |    |                                      |   |   |   |   |   |
| Common stock options                                                                                                 |   | 81,173                                     |    | 63,555                                    |   | 74,203 |   | 72,219 |   |
|                                                                                                                 |   |                                       |    |                                      |   |   |   |   |   |
| Denominator for diluted earnings per common share  - adjusted weighted average common shares and assumed conversions |   | 3,584,939                                  |    | 3,580,074                                 |   | 3,579,407 |   | 3,583,039 |   |

 

During the periods ended September 30, 2003 and 2002, there wereoutstanding 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  September 30,** |   | **Nine months ended  September 30,** |   |
|-----------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                      |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Weighted average anti-dilutive stock options  outstanding |   | 187,000                                    |   | 189,000                                   |   | 231,443 |   | 189,000 |   |

 

18

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

 

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

 

**General**

 

**Critical Accounting Policies and Estimates**

 

The Companyprepares its consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America. Certain of theseaccounting policies require the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andthe related disclosure of contingent assets and liabilities. On an ongoingbasis, the Company evaluates estimates, including those related to bad debts,inventory reserves, intangible assets, income taxes and contingencies. TheCompany bases its estimates on historical data and experience, when available,and on various other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates.

 

The Company’scritical accounting policies include:

 

**Revenue Recognition**

 

The Companyrecords revenues upon shipment with related risks and title passing to the customers.Estimates of losses for bad debts, returns and other allowances are recorded atthe time of the sale.  Shipping chargesto customers and related expenses that are included in selling, general andadministrative expenses are immaterial.

 

**Allowance for Doubtful Accounts**

 

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

 

19

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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 September 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.

 

20

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**Acquisition**

 

On May 3,2002, Countrywide acquired all of the stock of Nationwide for approximately$10,452,000, plus acquisition costs of approximately $490,000 and workingcapital 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. AtDecember 31, 2002, the Company had accrued $150,000 of these contingentpayments. During the nine months ended September 30, 2003, contingent paymentstotaling an additional $444,246, including amounts accrued atSeptember 30, 2003, have been recorded 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 of goodwill**

 

The Company had its goodwilltested for impairment, effective January 1, 2002, during the secondquarter of 2002. The impairment tests performed required that the Companydetermine the fair market value of its reporting units for comparison to thecarrying value of their net assets to assess whether any impairment exists. Themethodologies used to estimate fair market value involved the use of estimatesand assumptions, including projected revenues, earnings and cash flows.

 

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

 

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**Comparison of three months endedSeptember 30, 2003 and September 30, 2002**

 

Consolidatedrevenues increased 12.4%, from $21,082,509 to $23,702,702. Revenues frompneumatic tools and related equipment increased 10.8%, from $11,221,716 to$12,431,566, due primarily to strong promotions by two major customers,partially offset by lower industrial revenues resulting from inventoryreduction by a customer and the timing of an annual promotional order fromanother significant customer. Selling prices of pneumatic tools and relatedequipment were unchanged, with the exception of prices to a significantcustomer, which were substantially reduced early in the fourth quarter of 2002.Revenues from hardware products increased 13.9%, from $4,636,348 to $5,282,013,due primarily to increased sales of fencing products. The increase waspartially offset by a decrease in revenues associated with a significantcustomer declaring bankruptcy in the first quarter of 2003 and anothersignificant customer reducing its ordering, because of its decreased volume, inthe third quarter of 2003. Selling prices of hardware products were unchanged.Revenues from hydraulic cylinders and other equipment increased 15.8%, from$2,979,498 to $3,451,184, due primarily to increased sales that resulted fromentry into a new market for log splitter cylinders, partially offset bydepressed conditions early in the third quarter of 2003 in the access sector.Selling prices of hydraulic cylinders and other equipment were unchanged.Revenues from heating products increased 13.1%, from $2,244,947 to $2,537,939,due primarily to increased baseboard and boiler sales, reflecting increases ininventory levels of customers, partially offset by decreased radiant salesresulting from delays in receipt of vendor shipments. Selling prices of heatingproducts were unchanged, with the exception of a modest price increase forbaseboard products commencing in the second quarter of 2003.

 

Consolidatedgross profit, as a percentage of revenues, decreased from 29.5% to 28.4%. Grossprofit from pneumatic tools and related equipment decreased from 34.0% to30.7%, due primarily to the lower-margin promotional sales, the impact of theprice concessions effective in the fourth quarter of 2002 noted above anddecreased commission revenues. Gross profit from hardware products increasedfrom 32.1% to 35.1%, due primarily to a more favorable product mix, which waspartially offset by lower overhead absorption. Gross profit from hydrauliccylinders and other equipment increased from 8.1% to 10.6%, due primarily tohigher overhead absorption from greater cylinder activity, partially offset bychanges in product mix. Gross profit from heating equipment decreased from29.8% to 27.7%, due primarily to a change in product mix and increasedbaseboard material costs, partially offset by increased selling prices forbaseboard products, as noted above.

 

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Consolidatedselling, general and administrative expenses increased 10.0%, from $4,679,836to $5,149,755, due primarily to increased costs associated with the 12.4%increase in revenues noted above, the strengthening of the yen, which generatedlosses on foreign currency transactions, increases in advertising and expensesrelated to promotional sales at Florida Pneumatic and increased professionaland wage-related expenses at Countrywide. Also contributing to the overallincrease were increased expenses related to additional reporting and controlrequirements. These increases were partially offset by substantial decreasesresulting from cost-cutting efforts in all of the segments. As a percentage ofrevenues, selling, general and administrative expenses decreased from 22.2% to21.7%.

 

Interestexpense decreased 26.2%, from $233,416 to $172,256, due primarily to lowerinterest rates on the Company’s borrowings under both its revolving credit andterm loan facilities, as well as on a refinanced mortgage.  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.

 

The effectivetax rates for the quarters ended September 30, 2003 and 2002 were 42.1%and 40.5%, respectively. The higher effective tax rate resulted from theamortization of intangible assets at Nationwide not being deductible for taxpurposes.

 

**Comparison of nine months endedSeptember 30, 2003 and September 30, 2002**

 

Consolidated revenues increased 14.2%, from $56,845,624 to $64,922,883.Revenues from pneumatic tools and related equipment increased 9.0%, from$30,922,278 to $33,705,562, 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 lower industrial revenues resulting from inventory reductions attwo significant customers and a delayed annual promotion with a third customer.Selling prices of pneumatic tools and related equipment were unchanged, withthe exception of prices to a significant customer, which were substantiallyreduced early in the fourth quarter of 2002. Revenues from hardware productsincreased 53.5%, from $9,923,528 to $15,228,583, due primarily to the inclusionof Nationwide for the entire nine months in 2003, as opposed to only fivemonths in 2002.

 

23

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Nationwide’s revenues increasedapproximately $5,900,000, including an increase of approximately $3,400,000from sales of fencing products. The increase at Nationwide was partially offsetby a decrease in revenues of approximately $650,000 at Franklin, as asignificant customer declared bankruptcy in the first quarter of 2003 andanother significant customer reduced its ordering, because of its decreasedvolume, in the second and third quarters of 2003. Selling prices of hardwareproducts were unchanged. Revenues from hydraulic cylinders and other equipmentdecreased 1.6%, from $9,487,854 to $9,340,727, due primarily to anapproximately 40% decrease in sales to the wrecker market, including thephasing out of a major customer in the first quarter of 2002, and decreasedsales in the access product line, partially offset by increased sales thatresulted from entry into a new market for log splitter cylinders. Sellingprices of hydraulic cylinders and other equipment were unchanged. Revenues fromheating products increased 2.1%, from $6,511,964 to $6,648,011, due primarilyto increased baseboard and boiler sales in the third quarter of 2003,reflecting increases in inventory levels of customers. Selling prices ofheating products were unchanged, with the exception of a modest price increasefor baseboard products during the second quarter of 2003.

 

Consolidated gross profit, as a percentage of revenues, decreased from30.7% to 30.6%. Gross profit from pneumatic tools and related equipmentdecreased from 37.3% to 34.7%, due primarily to the lower-margin promotionalsales noted above and the impact of the price concessions effective in thefourth quarter of 2002 also noted above, partially offset by productivityimprovements and cost reductions from suppliers. Gross profit from hardware productsincreased from 31.3% to 34.9%, due primarily to the inclusion of Nationwide’shigher margin OEM business for the entire nine months in 2003, as opposed toonly five months in 2002. Gross profit from hydraulic cylinders and otherequipment increased from 8.8% to 9.4%, due primarily to changes in product mix.Gross profit from heating equipment decreased from 30.6% to 29.9%, dueprimarily to a change in product mix.

 

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Consolidatedselling, general and administrative expenses increased 15.3%, from $13,193,626to $15,209,037, due primarily to increased costs associated with the 14.2%increase in revenues noted above, increases in advertising and expenses relatedto promotional sales at Florida Pneumatic and, to a lesser extent, to increasedcompensation tied to higher profitability and increases related to additionalreporting and control requirements. These increases were partially offset by substantial decreases resultingfrom cost-cutting efforts in all of the segments. As a percentage of revenues,selling, general and administrative expenses increased from 23.2% to 23.4%, dueprimarily to the increased expenses discussed above.

 

Interestexpense increased 11.5%, from $497,838 to $555,265, due primarily to changes inaverage borrowings outstanding during the periods. Average borrowings under theCompany’s revolving credit loan facility were higher in 2003 than in 2002.Average borrowings under the Company’s term loan facility, which resulted fromthe acquisition of Nationwide on May 3, 2002, were lower in 2003 than in2002, but these amounts were outstanding for the entire nine months in 2003, asopposed to only five 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 effectivetax rates for the nine months ended September 30, 2003 and 2002 were 42.2%and 39.2%, respectively. The higher effective tax rate resulted from theamortization of intangible assets at Nationwide not being deductible for taxpurposes.

 

**Liquidity and Capital Resources**

 

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

 
|                      |   | **September 30,  2003** |   | **December 31,  2002** |   | **September 30,  2002** |   |
|---------------------------|--------|------------------------------|--------|-----------------------------|--------|------------------------------|--------|
| Working Capital           |   | $                            | 20,165 |                        | $      | 19,908                       |   | $ | 22,254 |   |
| Current Ratio             |   | 2.08 to 1                    |   | 2.49 to 1                   |   | 2.38 to 1                    |   |
| Shareholders’ Equity |   | $                            | 35,966 |                        | $      | 33,823                       |   | $ | 33,267 |   |

 

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During thenine months ended September 30, 2003, gross accounts receivable increasedby approximately $3,772,000, with increases of approximately $2,152,000,$765,000, $569,000 and $286,000 at Florida Pneumatic, Countrywide, Green andEmbassy, respectively. The increase at Florida Pneumatic was due primarily toan increase in sales in the third quarter of 2003 as compared to the fourthquarter of 2002, along with extended terms on some retail promotional sales.The increases at Countrywide and Green were due primarily to increases in salesin the third quarter of 2003, compared to the fourth quarter of 2002. Theincrease at Embassy was due primarily to the timing of sales.

 

Inventoriesincreased by approximately $1,683,000 during the nine months endedSeptember 30, 2003, with increases of approximately $2,640,000 and $85,000at Florida Pneumatic and Green, respectively, partially offset by decreases ofapproximately $769,000 and $273,000 at Countrywide and Embassy, respectively.The increase at Florida Pneumatic was the result of the timing of inventoryreceipts, safety stock inventory increases and a decrease in base revenues. Theincrease at Green was due primarily to an increase in raw material inventoryfor cylinder production. The decrease at Countrywide was due primarily toimproved inventory turnover. The decrease at Embassy was due primarily to thetiming of inventory receipts.

 

During thenine months ended September 30, 2003, short-term borrowings increased by$5,000,000, net of repayments, primarily to fund working capital needs.

 

During thenine months ended September 30, 2003, accounts payable increased byapproximately $380,000, with increases of approximately $306,000, $89,000 and$18,000 at Florida Pneumatic, Green and Countrywide, respectively, beingpartially offset by a decrease of approximately $33,000 at Embassy. Theincrease at Florida Pneumatic was due primarily to the timing of payments. Theincrease at Green was due primarily to the increase in inventories. Theincrease at Countrywide and the decrease at Embassy were due primarily to thetiming of purchases.

 

OnJune 30, 2003, the Company renewed its credit agreement, as amended, withCitibank through July 26, 2004. This agreement provides the Company withvarious credit facilities, including revolving credit loans, term loans foracquisitions and a foreign exchange line. The revolving credit loan facilityprovides a maximum of $12,000,000, with various sublimits, for direct borrowings,letters of credit, bankers’ acceptances and equipment loans. There are nocommitment fees for any unused portion of this credit facility. AtSeptember 30, 2003, there was $9,500,000 outstanding against the revolvingcredit loan facility. There was also a commitment of approximately $93,000 atSeptember 30, 2003 for open letters of credit.

 

26

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The term loanfacility provides a maximum commitment of $15,000,000 to finance acquisitionssubject to the lending bank’s approval. There are no commitment fees for anyunused portion of this credit facility. The Company borrowed $11,500,000against this facility to finance the acquisition of Nationwide, described inNote 1, and there was $5,500,000 outstanding against this facility atSeptember 30, 2003. There was also a standby letter of credit totalingapproximately $351,000 outstanding against this facility at September 30,2003. This standby letter of credit was used to secure the Economic DevelopmentRevenue 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 September 30, 2003 and for the nine monthsthen ended, the Company satisfied all of these covenants.

 

Certain of the Company’s mortgage agreementsalso require the Company to adhere to certain financialcovenants. At September 30, 2003, and for the nine months then ended, theCompany satisfied all of these covenants.

 

Capitalspending for the nine month ended September 30, 2003 was approximately$800,000, which amounts were provided from working capital. Capitalexpenditures for the remainder of 2003 are expected to be approximately$300,000, 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 activitiesused cash totaling approximately $1,137,000 during the nine months endedSeptember 30, 2003, and provided cash totaling approximately $1,391,000during the nine months ended September 30, 2002. The Company believes thatcash on hand derived from operations and cash available through borrowingsunder its credit facilities will be sufficient to allow the Company to meet itsforeseeable capital needs.

 

During thethird quarter of 2003, Florida Pneumatic was informed by its third largestcustomer that it will be sourcing from a new supplier effective January 1,2004. Sales to this customer for the fiscal year 2003 are estimated to beapproximately $4.4 million. We believe that retaining this customer would haverequired either eliminating all profit margins or converting to an inferiorproduct, which management felt was not in the best long-term interests of theCompany.

 

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**Off-Balance Sheet Arrangements**

 

The Company’sforeign exchange line provides for the availability of up to $10,000,000 inforeign currency forward contracts. These contracts fix the exchange rate onfuture purchases of yen needed for payments to foreign suppliers. The totalamount of foreign currency forward contracts outstanding at September 30,2003, based on the spot rate, was approximately $280,000.

 

The Company,through Florida Pneumatic, imports a significant amount of its purchases fromJapan, with payment due in yen. As a result, the Company is subject to theeffects of foreign currency exchange fluctuations. The Company uses a varietyof 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 afterMay 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.

 

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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 are applicableto both existing contracts and new contracts entered into after June 30,2003.

 

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**Item 3.****                                   Quantitativeand Qualitative Disclosures About Market Risk**

 

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

 

The value ofthe U.S. dollar affects the Company’s results. Changes in exchange rates may positively or negatively affect theCompany’s gross margins and operating expenses. The Company engages in hedgingprograms aimed at limiting, in part, the impact of currency fluctuations. Usingprimarily forward exchange contracts, the Company hedges some of thosetransactions that, when remeasured according to accounting principles generallyaccepted in the United States of America, impact the statement of operations.Factors that could impact the effectiveness of the Company’s programs includevolatility of the currency markets and availability of hedging instruments. Allcurrency transactions that are entered into by the Company are components ofhedging programs and are entered into not for speculation but for the solepurpose of hedging an existing or anticipated currency exposure. The Companydoes not buy or sell financial instruments for trading purposes. Although theCompany maintains these programs to reduce the impact of changes in currencyexchange rates, when the U.S. dollar sustains a weakening exchange rate againstcurrencies in which the Company incurs costs, the Company’s costs are adverselyaffected. The Company has various debt instruments that bear interest atvariable rates tied to LIBOR (London InterBank Offered Rate). Any increase inLIBOR would have an adverse effect on the Company’s interest costs.

 

The Companyaccounts for changes in the fair value of its foreign currency contracts bymarking them to market and recognizing any resulting gains or losses throughits statement of operations. The Company also marks its yen-denominatedpayables to market, recognizing any resulting gains or losses in its statementof operations. At September 30, 2003, the Company had foreign currencyforward contracts, maturing in 2003, to purchase yen at contracted forwardrates. The value of these contracts at September 30, 2003, based on thespot rate, was approximately $280,000, which was the approximate value of theCompany’s yen-denominated accounts payable. During the quarter endedSeptember 30, 2003, the Company recorded a net realized gain ofapproximately $8,000 on foreign currency transactions. During the quarter endedSeptember 30, 2002, the Company recorded a net realized loss of approximately$65,000 on foreign currency transactions. During the nine month periods endedSeptember 30, 2003 and 2002, the Company recorded net realized losses ofapproximately $1,000 and $134,000, respectively, on foreign currencytransactions. At September 30, 2003, the Company had an unrealized loss ofapproximately $168,000 on foreign currency transactions.

 

The potentialloss in value of the Company’s net investment in foreign currency forwardcontracts resulting from a hypothetical 10 percent adverse change in foreignexchange rates at September 30, 2003 was approximately $29,000.

 

30

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**Item 4.****                                  ****Controls andProcedures**

 

**Evaluation of disclosure controls and procedures**

 

An evaluation was performed, under the supervision of, and with the participation of, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities and Exchange Act of 1934). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were adequate and effective, as of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the “Report”), in timely alerting them to all material information relating to the Company and its consolidated subsidiaries that is required to be included in this Report.

 

**Changes in internal controls**

 

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

 

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**PARTII - OTHER INFORMATION**

 

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

 

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

 

**Item2.**                    **Changes in Securities and Use of Proceeds**

 

None.

 

**Item3.**                    **Defaults Upon Senior Securities**

 

None.

 

**Item 4.**                    **Submissionof Matters to a Vote of Security Holders**

 

None.

 

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

 

None.

 

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

 

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

See “Exhibit Index” immediately following the signature page.

 

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

The Registrant filed a Report on Form 8-K dated August 12, 2003,in which it furnished a press release announcing its second quarter 2003results under Items 9 and 12 of such Report.

 

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**SIGNATURES**

 

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

 

 
|                          | **P & F INDUSTRIES, INC.** |
|-------------------------------|--------------------------------|
|                          | (Registrant)                   |
|                          |                           |   |
|                          | By                             | /s/ Joseph A. Molino, Jr. |   |
|                          |                           | Joseph A. Molino, Jr. |   |
|                          |                           | Vice President |   |
| Dated: November 12, 2003 |                           | (Principal Financial Officer) |   |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |   | Asset Purchase Agreement, dated as of September 16, 1998, by and  between Green Manufacturing, Inc., an Ohio corporation, and the Registrant.  Page v of the Asset Purchase Agreement contains a list of the Schedules and  Exhibits thereto. Pursuant to Item 601(b)(2) of Regulation S-K, the  Registrant agrees to furnish, supplementally, a copy of any Exhibit or  Schedule omitted from the Asset Purchase Agreement to the Commission  upon request.       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2              |   | Stock Purchase Agreement, dated as of May 3, 2002, by and between  Mark C. Weldon and the Registrant (Incorporated by reference to Exhibit 2.1  of the Registrant’s Current Report on Form 8-K dated May 3, 2002).  Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish supplementally a copy of any exhibit or schedule omitted from  the Asset Purchase Agreement to the Securities and Exchange Commission upon  request. |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.3              |   | Contract for  Purchase and Sale, dated as of May 1, 2002, between W. I. Commercial  Properties, Inc., a Florida corporation and Countrywide Hardware, Inc., a  Delaware corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2002).                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1              |   | Restated Certificate of Incorporation of the Registrant (Incorporated  by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 31, 1999).                                                                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2              |   | Amended By-laws of the Registrant (Incorporated by reference to  Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 1999).                                                                                                                                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1              |   | Rights Agreement, dated as of August 23, 1994, between the  Registrant and American Stock Transfer & Trust Company, as Rights Agent  (Incorporated by reference to Exhibit 1 to the Registrant’s Registration  Statement on Form 8-A dated August 24, 1994).                                                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2              |   | Amendment to Rights Agreement, dated as of April 11, 1997,  between the Registrant and American Stock Transfer & Trust Company, as  Rights Agent (Incorporated by reference to Exhibit 4.2 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3              |   | Credit Agreement, dated as of July 23, 1998, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, and European  American Bank, a New York banking corporation (Incorporated by reference to  Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K/A for the fiscal  year ended December 31, 1998).                                                      |

 

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| 4.4    |   | Amendment No. 1 to Credit Agreement, dated as of September 16,  1998, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, a Florida corporation, Embassy Industries, Inc., a New York  corporation, Green Manufacturing, Inc., a Delaware corporation, and European  American Bank, a New York banking corporation (Incorporated by reference to  Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K/A for the fiscal  year ended December 31, 1998).                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.5    |   | Amendment No. 2 to Credit Agreement, dated as of July 28, 1999,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.5 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 1999).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Amendment No. 3 to Credit Agreement, dated as of July 26, 2000,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.5 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2000).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.7    |   | Amendment No. 4 to Credit Agreement, dated as of June 25, 2001,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001).                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | Amendment No. 5 to Credit Agreement, dated as of May 3, 2002, by  and among the Registrant, Florida Pneumatic Manufacturing Corporation, a  Florida corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and Citibank, N.A.  (successor-in-interest to European American Bank), a New York banking  corporation. (Incorporated by reference to Exhibit 4.7 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). |

 

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| 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).   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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).         |

 

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| 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, 2000, between  the Registrant and Sidney Horowitz (Incorporated by reference to Exhibit 10.3  to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2000).                                             |
|   |   |                                                                                                                                                                                                                                                                                                     |
| 10.3   |   | 1992 Incentive Stock Option Plan of the Registrant, as amended and  restated as of March 13, 1997 (Incorporated by reference to Exhibit 10.3  to the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended  December 31, 1998).                                             |
|   |   |                                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Executive Incentive Bonus Plan of the Registrant (Incorporated by  reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2001).                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                     |
| 10.5   |   | 2002 Stock Incentive Plan of the Registrant (Incorporated by  reference to Exhibit 4.7 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002).                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                     |
| 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 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 Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |

 

A copy of any of the foregoing exhibits to this Quarterly Report onForm 10-Q may be obtained, upon payment of the Registrant’s reasonable expensesin furnishing such exhibit, by writing to P & F Industries, Inc., 300 SmithStreet, Farmingdale, New York 11735-1114, Attention: Corporate Secretary.

 

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