**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

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x  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe Quarter Ended June 30, 2004**

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

**CommissionFile Number 1 - 5332**

**P & F INDUSTRIES, INC.**

(Exact name of registrantas specified in its charter)

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

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days.

**Yes** x  **No** o

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

As of August 16,2004, there were 3,516,631 shares of the registrant’s Class A Common Stockoutstanding.

 

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**P & FINDUSTRIES, INC.FORM 10-QFOR THE QUARTER ENDED JUNE 30, 2004TABLE OF CONTENTS**
|                                              | ** ** | ** **                                                                                  | ** ** | **PAGE** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| ***PART I—FINANCIAL INFORMATION*** |       |                                                                                        |       |     |
| Item 1.                                      |       | Consolidated  Financial Statements (unaudited)                                              |       |     |   |   |
|                                         |       | Consolidated Balance Sheets                                                                 |       |     | 1 -  2 |   |
|                                         |       | Consolidated  Statements of Income                                                          |       |     | 3 |   |
|                                         |       | Consolidated  Statement of Shareholders’ Equity                                        |       |     | 4 |   |
|                                         |       | Consolidated Statements of Cash  Flows                                                      |       |     | 5 -  6 |   |
|                                         |       | Notes to  Consolidated Financial Statements                                                 |       |     | 7 - 16 |   |
| Item 2.                                      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |     | 17 -  24 |   |
| Item 3.                                      |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |     | 25 |   |
| Item 4.                                      |       | Controls and  Procedures                                                                    |       |     | 26 |   |
| ***PART II—OTHER INFORMATION***    |       |                                                                                        |       |     |
| Item 1.                                      |       | Legal Proceedings                                                                           |       |     | 27 |   |
| Item 2.                                      |       | Changes in  Securities, Use of Proceeds and Issuer Purchases of Equity  Securities          |       |     | 27 |   |
| Item 3.                                      |       | Defaults  Upon Senior Securities                                                            |       |     | 27 |   |
| Item 4.                                      |       | Submission  of Matters to a Vote of Security Holders                                        |       |     | 27 |   |
| Item 5.                                      |       | Other Information                                                                           |       |     | 27 |   |
| Item 6.                                      |       | Exhibits  and Reports on Form 8-K                                                      |       |     | 27 |   |
| **Signatures**                               |       |                                                                                        | 28         |     |
| **Exhibit Index**                       |       |                                                                                        | 29 -  32   |     |
| **Certifications**                           |       |                                                                                        |       |     |

 

i

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**PART I—FINANCIAL INFORMATION**

**Item 1.   Financial Statements**

**P & FINDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(unaudited)**
| ** **                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| *ASSETS*                                                                                             |       |              |       |                  |       |
| CURRENT:                                                                                             |       |              |       |                  |       |
| Cash                                                                                                 |       | $                 | 3,280,487  |                  | $          | 213,409 |   |
| Accounts receivable, net                                                                             |       | 15,298,211        |       | 11,921,846            |       |
| Inventories                                                                                          |       | 24,772,889        |       | 18,755,061            |       |
| Deferred income taxes—net                                                                       |       | 789,000           |       | 789,000               |       |
| Prepaid expenses and other                                                                           |       | 1,899,879         |       | 1,456,188             |       |
| TOTAL CURRENT ASSETS                                                                                 |       | 46,040,466        |       | 33,135,504            |       |
| PROPERTY AND  EQUIPMENT:                                                                             |       |              |       |                  |       |
| Land                                                                                                 |       | 1,582,938         |       | 1,582,938             |       |
| Buildings and improvements                                                                           |       | 9,040,149         |       | 9,035,412             |       |
| Machinery and equipment                                                                              |       | 16,507,668        |       | 14,962,867            |       |
|                                                                                                 |       | 27,130,755        |       | 25,581,217            |       |
| Less accumulated depreciation and amortization                                                       |       | 14,010,686        |       | 12,840,367            |       |
| NET PROPERTY AND EQUIPMENT                                                                           |       | 13,120,069        |       | 12,740,850            |       |
| GOODWILL, net of accumulated amortization of  $1,419,274                                             |       | 23,358,946        |       | 10,561,703            |       |
| OTHER INTANGIBLE ASSETS, net of accumulated  amortization of $1,152,667 in 2004 and $886,667 in 2003 |       | 10,347,333        |       | 1,773,333             |       |
| OTHER ASSETS, net of accumulated amortization of  $185,177 in 2004 and $178,210 in 2003              |       | 1,008,797         |       | 120,534               |       |
| TOTAL ASSETS                                                                                         |       | $                 | 93,875,611 |                  | $          | 58,331,924 |   |

 

See accompanying notes to consolidated financial statements (unaudited).

1

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**P & FINDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (Continued)(unaudited)**
| ** **                                                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| *LIABILITIES  AND SHAREHOLDERS’ EQUITY*                                                                                    |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                            |       |              |       |                  |       |
| Short-term borrowings                                                                                                           |       | $                 | 5,000,000  |                  | $          | 3,000,000 |   |
| Accounts payable                                                                                                                |       | 4,606,262         |       | 3,302,185             |       |
| Accruals:                                                                                                                       |       |              |       |                  |       |
| Compensation                                                                                                                    |       | 1,225,208         |       | 1,730,180             |       |
| Other                                                                                                                           |       | 2,501,668         |       | 2,616,691             |       |
| Current maturities of long-term debt                                                                                            |       | 1,530,058         |       | 1,526,213             |       |
| TOTAL CURRENT LIABILITIES                                                                                                       |       | 14,863,196        |       | 12,175,269            |       |
| LONG-TERM DEBT, less current maturities                                                                                         |       | 40,705,144        |       | 8,723,324             |       |
| DEFERRED INCOME TAXES—net                                                                                                  |       | 358,000           |       | 455,000               |       |
| TOTAL LIABILITIES                                                                                                               |       | 55,926,340        |       | 21,353,593            |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                  |       |              |       |                  |       |
| SHAREHOLDERS’  EQUITY:                                                                                                     |       |              |       |                  |       |
| Preferred stock—$10 par;  authorized—2,000,000 shares;  no shares issued or outstanding                               |       | —            |       | —                |       |
| Common stock:                                                                                                                   |       |              |       |                  |       |
| Class A—$1 par;  authorized—7,000,000 shares;  issued—3,740,367 shares in 2004 and 3,735,367 shares in 2003 |       | 3,740,367         |       | 3,735,367             |       |
| Class B—$1 par;  authorized—2,000,000 shares;  no shares issued or outstanding                                   |       | —            |       | —                |       |
| Additional paid-in capital                                                                                                      |       | 8,634,840         |       | 8,609,840             |       |
| Retained earnings                                                                                                               |       | 27,300,905        |       | 26,359,965            |       |
| Treasury stock, at cost (223,736 shares)                                                                                        |       | (1,726,841        | )          | (1,726,841            | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                 |       | 37,949,271        |       | 36,978,331            |       |
| TOTAL LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                |       | $                 | 93,875,611 |                  | $          | 58,331,924 |   |

 

See accompanying notes to consolidated financial statements (unaudited).

2

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**P & F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(unaudited)**
| ** **                                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                   | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | **(restated)**                 | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| REVENUES                                     |       |                             |       |                           |       |   |   |   |   |
| Net sales                                    |       | $                                | 21,319,387 |                           | $          | 21,614,224 |   | $ | 40,865,426 |   | $ | 40,969,994 |   |
| Other                                        |       | 31,208                           |       | 124,081                        |       | 60,465 |   | 250,187 |   |
|                                         |       | 21,350,595                       |       | 21,738,305                     |       | 40,925,891 |   | 41,220,181 |   |
| COSTS AND  EXPENSES:                         |       |                             |       |                           |       |   |   |   |   |
| Cost of sales                                |       | 14,683,506                       |       | 14,599,264                     |       | 28,667,509 |   | 28,078,766 |   |
| Selling, general and administrative          |       | 5,349,805                        |       | 5,188,457                      |       | 10,421,350 |   | 10,059,282 |   |
| Interest—net                            |       | 139,910                          |       | 195,688                        |       | 263,092 |   | 383,009 |   |
|                                         |       | 20,173,221                       |       | 19,983,409                     |       | 39,351,951 |   | 38,521,057 |   |
| INCOME BEFORE TAXES ON INCOME                |       | 1,177,374                        |       | 1,754,896                      |       | 1,573,940 |   | 2,699,124 |   |
| TAXES ON INCOME                              |       | 473,000                          |       | 658,000                        |       | 633,000 |   | 1,012,000 |   |
| NET INCOME                                   |       | $                                | 704,374    |                           | $          | 1,096,896 |   | $ | 940,940 |   | $ | 1,687,124 |   |
| Weighted average  common shares outstanding: |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | 3,517,755                        |       | 3,505,785                      |       | 3,516,601 |   | 3,505,935 |   |
| Diluted                                      |       | 3,611,099                        |       | 3,578,594                      |       | 3,621,819 |   | 3,576,654 |   |
| Earnings per  share of common stock:         |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | $                                | .20        |                           | $          | .31 |   | $ | .27 |   | $ | .48 |   |
| Diluted                                      |       | $                                | .20        |                           | $          | .31 |   | $ | .26 |   | $ | .47 |   |

 

See accompanying notes to consolidated financial statements (unaudited).

3

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**P & F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY(unaudited)**
| ** **                                              | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **Total** | ** **  |
|---------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------|------------|-----------|-------------|
| Balance, January 1, 2004                           |       | $                 | 3,735,367  |                             | $          | 8,609,840              |       | $                   | 26,359,965 |      | $(1,726,841 | ) | $ | 36,978,331 |   |
| Net income for the six months ended June 30,  2004 |       | —            |       | —                           |       | 940,940                |       | —              |       | 940,940   |        |
| Exercise of stock  options                              |       | 5,000             |       | 25,000                           |       | —                 |       | —              |       | 30,000    |        |
| Balance,  June 30, 2004                            |       | $                 | 3,740,367  |                             | $          | 8,634,840              |       | $                   | 27,300,905 |      | $(1,726,841 | ) | $ | 37,949,271 |   |

 
| ** **                    | ** ** | **Common** | ** ** | **Treasury** | ** ** |
|-------------------------------|------------|------------|------------|--------------|------------|
| **Shares**                    | ** ** | ** ** | ** ** | **stock**    | ** ** | **stock** | ** ** |
| Balance, January 1, 2004 |       | 3,735,367  |       | 223,736      |       |
| Exercise of stock options     |       | 5,000      |       | —       |       |
| Balance, June 30,  2004  |       | 3,740,367  |       | 223,736      |       |
|                               |            |            |            |              |            |  |  |

 

See accompanying notes to consolidated financial statements (unaudited).

4

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)**
| ** **                                                                                   | ** ** | **Six months ended**  June 30, | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| ** **                                                                                   | ** ** | ** **                                    | ** ** | **(restated)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                       |       |                                          |       |   |   |
| Net income                                                                                   |       | $                                             | 940,940    |   | $ | 1,687,124 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                                |       | 879,488                                       |       | 879,774 |   |
| Amortization of intangible assets                                                            |       | 266,000                                       |       | 266,000 |   |
| Amortization of other assets                                                                 |       | 6,967                                         |       | 20,757 |   |
| Provision for losses on accounts receivable—net                                         |       | 22,858                                        |       | 56,798 |   |
| Deferred income taxes                                                                        |       | (97,000                                       | )          | (98,000 | ) |
| Gain on disposal of fixed assets                                                             |       | (9,570                                        | )          | — |   |
| Decrease  (increase) in:                                                                     |       |                                          |       |   |   |
| Accounts receivable                                                                          |       | (65,649                                       | )          | (912,825 | ) |
| Inventories                                                                                  |       | (420,284                                      | )          | (1,719,124 | ) |
| Prepaid expenses and other                                                                   |       | 93,402                                        |       | (309,187 | ) |
| Other assets                                                                                 |       | (152,303                                      | )          | (33,062 | ) |
| Increase (decrease)  in:                                                                     |       |                                          |       |   |   |
| Accounts payable                                                                             |       | 1,086,496                                     |       | 871,715 |   |
| Accruals and other                                                                           |       | (1,113,559                                    | )          | (653,483 | ) |
| Total adjustments                                                                            |       | 496,846                                       |       | (1,630,637 | ) |
| Net cash provided by operating activities                                                    |       | 1,437,786                                     |       | 56,487 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                       |       |                                          |       |   |   |
| Capital expenditures                                                                         |       | (649,900                                      | )          | (646,155 | ) |
| Purchase of certain assets, net of certain  liabilities, of Woodmark International, L.P.     |       | (27,160,000                                   | )          | — |   |
| Additional payments for acquisition-related expenses                                         |       | (816,784                                      | )          | — |   |
| Additional payments for purchase of Nationwide  Industries, Inc.                        |       | (379,221                                      | )          | (311,081 | ) |
| Proceeds from disposal of fixed assets                                                       |       | 27,532                                        |       | — |   |
| Net cash used in  investing activities                                                       |       | (28,978,373                                   | )          | (957,236 | ) |
|                                                                                              |            |                                               |            |  |  |  |  |

 

See accompanying notes to consolidated financial statements (unaudited).

5

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)**

 
| ** **                                         | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | ** **                                    | ** ** | **(restated)** | ** ** |
| CASH FLOWS FROM FINANCING  ACTIVITIES:             |       |                                          |       |   |   |
| Proceeds from short-term borrowings                |       | 8,000,000                                     |       | 5,500,000 |   |
| Repayments of short-term borrowings                |       | (6,000,000                                    | )          | (3,000,000 | ) |
| Proceeds from term loan                            |       | 34,000,000                                    |       | — |   |
| Repayments of term loan                            |       | (5,250,000                                    | )          | — |   |
| Proceeds from mortgage                             |       | —                                        |       | 1,697,301 |   |
| Principal payments on long-term debt               |       | (172,335                                      | )          | (3,607,479 | ) |
| Proceeds from exercise of stock options            |       | 30,000                                        |       | 47,000 |   |
| Purchase of Class A Common Stock              |       | —                                        |       | (253,436 | ) |
| Net cash provided by financing activities          |       | 30,607,665                                    |       | 383,386 |   |
| NET INCREASE (DECREASE) IN CASH                    |       | 3,067,078                                     |       | (517,363 | ) |
| CASH AT BEGINNING OF PERIOD                        |       | 213,409                                       |       | 1,024,222 |   |
| CASH AT END OF PERIOD                              |       | $                                             | 3,280,487  |   | $ | 506,859 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION: |       |                                          |       |   |   |
| Cash paid during  the period for:                  |       |                                          |       |   |   |
| Income taxes                                       |       | $                                             | 1,037,000  |   | $ | 508,500 |   |
| Interest                                           |       | $                                             | 299,034    |   | $ | 386,465 |   |

 

See accompanying notes to consolidated financial statements (unaudited).

6

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

**NOTE 1—PRINCIPLES OF CONSOLIDATION**

The unaudited consolidated financial statementscontained herein include the accounts of P & F Industries, Inc. (“P & F”) and its subsidiaries.All significant intercompany balances and transactions have been eliminated. P & F conducts its business operationsthrough its four wholly-owned subsidiaries: Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”), Countrywide Hardware, Inc. (“Countrywide”),Green Manufacturing, Inc. (“Green”) and Embassy Industries, Inc. (“Embassy”).P & F and its subsidiaries are herein referred to collectively as the “Company.”Note 14 presents financial information for the segments of the Company’sbusiness.

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial andretail markets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines.

Countrywide conducts its business operations throughNationwide Industries, Inc. (“Nationwide”), its wholly-owned subsidiary,its Franklin Manufacturing (“Franklin”) division and Woodmark International,L.P. (“Woodmark”), a limited partnership between P & F andCountrywide. (See Note 7 for additional information regarding the Woodmarkacquisition transaction.) Nationwide is an importer and manufacturer of door,window and fencing hardware. Franklin imports a line of door and windowhardware. Woodmark is an importer of builders’ hardware, including staircasecomponents and kitchen and bath hardware and accessories.

Green is engaged primarily in the manufacture,development and sale of heavy-duty welded custom designed hydraulic cylinders.Green also manufactures a line of access equipment for the petro-chemicalindustry and a line of post hole digging equipment for the agriculturalindustry.

Embassy is engaged in themanufacture and sale of baseboard heating products and the importation and saleof radiant heating systems.

**NOTE 2—BASIS OF FINANCIAL STATEMENT PRESENTATION**

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation, and with the rules and regulations of the Securities andExchange Commission regarding interim financial reporting. Accordingly, theseinterim financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion of theCompany, these unaudited consolidated financial statements include alladjustments necessary to present fairly the information set forth therein. Allsuch adjustments are of a normal recurring nature. Results for interim periodsare not necessarily indicative of results to be expected for a full year.

The consolidated balance sheet information as of December 31,2003 was derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003. Theinterim financial statements contained herein should be read in conjunctionwith that Report.

7

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE2—BASIS OF FINANCIAL STATEMENT PRESENTATION (Continued)**

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

**NOTE 3—RESTATEMENT OF PREVIOUSLY ISSUED FINANCIALSTATEMENTS**

Subsequent to the issuanceof the Company’s consolidated financial statements as of June 30, 2003,filed as part of its Quarterly Report on Form 10-Q filed on August 13,2003, the Company determined that it needed to revise its provision for taxeson income in previously issued financial statements. This change resulted fromthe amortization of a deferred tax liability, not previously recorded, relatedto the acquisition of Nationwide. The Company’s consolidated statements ofincome for the three month and six month periods ended June 30, 2003 havebeen restated from the amounts previously reported. The Company has filed anamended Quarterly Report on Form 10-Q for the quarter ended June 30,2003.

**NOTE 4—STOCK-BASED COMPENSATION**

The Company accounts for its stock option awards toits employees under the intrinsic value based method of accounting prescribedby Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees.” Under the intrinsic value based method, compensation costis the excess, if any, of the quoted market price of the stock at grant date orother measurement date over the amount an employee must pay to acquire thestock. The Company makes pro forma disclosures of net income and earnings pershare as if the fair value based method of accounting had been applied, asrequired by Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and Statement of FinancialAccounting Standards (“SFAS”) No. 148, *“*Accounting for Stock Based Compensation—Transitionand Disclosure” (“SFAS 148”), which requires prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.

SFAS 123 requires theCompany to provide pro forma information regarding net income and earnings pershare as if compensation cost for the Company’s 2002 Stock Incentive Plan hadbeen determined in accordance with the fair value method prescribed by SFAS123. The Company estimates the fair value of each stock option at the grantdate by using the Black-Scholes option-pricing model. No options were granted,and there was no pro forma compensation expense, during the three month and sixmonth periods ended June 30, 2004 and June 30, 2003.

**NOTE 5—FOREIGN CURRENCY TRANSACTIONS**

The Company accounts forchanges in the fair value of its foreign currency contracts by marking them tomarket and recognizing any resulting gains or losses through its statement ofoperations. The Company also marks its yen-denominated payables to market,recognizing any resulting gains or losses in its statement of operations. At June 30,2004, the Company had foreign currency forward contracts, maturing in 2004, topurchase yen at contracted forward rates. The value of these contracts at June 30,2004, based on the spot rate, was approximately $3,511,000, which was theapproximate value of the Company’s corresponding yen-denominated accountspayable. During the three month periods ended June 30, 2004 

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE5—FOREIGN CURRENCY TRANSACTIONS (Continued)**

and2003, the Company recorded net realized losses of approximately $14,000 and$10,000, respectively, on foreign currency transactions. During the six monthperiods ended June 30, 2004 and 2003, the Company recorded net realizedlosses of approximately $83,000 and $9,000, respectively, on foreign currencytransactions. At June 30, 2004, the Company had an unrealized gain ofapproximately $27,000 on foreign currency transactions.

**NOTE 6—NEW ACCOUNTING PRONOUNCEMENT**

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”). This interpretation clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,”to certain entities in which equity investors do not have the characteristicsof a controlling financial interest or do not have sufficient equity at riskfor the entity to finance its activities without additional subordinatedfinancial support from other parties. FIN 46 is effective February 1, 2003for variable interest entities created after January 31, 2003, and July 1,2003 for variable interest entities created prior to February 1, 2003(deferred until the first quarter of 2004). The adoption of FIN 46 did not haveany effect on either the Company’s results of operations or its financialposition.

**NOTE7—ACQUISITION**

On June 30, 2004, Woodmark International, L.P. (“NewWoodmark” or “Woodmark”), a Delaware limited partnership between P & F andCountrywide, acquired certain assets comprising the business of the formerWoodmark International L.P., a Texas limited partnership, and its wholly-ownedsubsidiary, the former Stair House, Inc., a Georgia corporation (collectively,the “Sellers”), and assumed certain of the Sellers’ related liabilities (the“Woodmark acquisition transaction”). Woodmark is an importer of builders’hardware, including staircase components and kitchen and bath hardware andaccessories. As a result of this transaction, Countrywide has significantlyincreased its purchasing power and geographic distribution.

The purchase price forthis acquisition was $30,568,000, which consisted of $27,160,000 in cash andsubordinated notes in the aggregate principal amount of $3,408,000. Woodmarkalso agreed to make additional payments to the Sellers. The amount of thesepayments, which would be made as of either June 30, 2007 or June 30,2009, are to be based on increases in earnings before interest and taxes , forthe year ended on the respective date, over a base of $5,100,000. Woodmark hasthe option to make a payment as of June 30, 2007 in an amount equal to 48%of this increase. If Woodmark does not make this payment as of June 30,2007, the Sellers may demand payment as of June 30, 2009 in an amountequal to 40% of the increase. Any such additional payments will be treated asadditions to goodwill. The acquisition was financed through the Company’ssenior credit facility, as described in Note 12.

The unaudited consolidated financial statementspresented in this Report include the assets and liabilities of Woodmark as of June 30,2004, but include no results of operations for Woodmark for any of the periodspresented.

9

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE7—ACQUISITION (Continued)**

The following tablesummarizes the unaudited estimated fair value of the assets acquired and theliabilities assumed in connection with this acquisition. The Company obtainedthird party valuations for the intangible assets, which are a trademark and customerand vendor relationships.
| ** **                     | ** ** | **(Amounts in thousands)** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| Current assets                 |       |                                 | $          | 9,470 |   |   |
| Property, plant  and equipment |       |                                 | 627        |   |   |
| Note receivable                |       |                                 | 723        |   |   |
| Customer  relationships        |       |                                 | 7,260      |   |   |
| Vendor  relationship           |       |                                 | 890        |   |   |
| Trademark                      |       |                                 | 690        |   |   |
| Goodwill                       |       |                                 | 12,418     |   |   |
| Other assets                   |       |                                 | 18         |   |   |
| Total assets  acquired         |       |                                 | 32,096     |   |   |
| Current liabilities            |       |                                 | (711       | ) |   |
| Non-current  liabilities       |       |                                 | (3,408     | ) |   |
| Total liabilities  assumed     |       |                                 | (4,119     | ) |   |
| Net assets  acquired           |       |                                 | $          | 27,977 |   |   |

 

Theintangible assets subject to amortization have been assigned useful lives asfollows:
| Customer  relationships |   | 15  years  |   |
|-------------------------|--------|------------|--------|
| Vendor  relationship    |   | 10  years  |   |
| Trademark               |   | Indefinite |   |

 

Thefollowing table summarizes, on an unaudited pro forma basis, the combinedresults of operations of the Company and Woodmark, as though the acquisitionhad occurred as of January 1, 2003. The pro forma amounts give effect toappropriate adjustments for amortization of intangible assets, interest expenseand income taxes. The pro forma amounts presented are not necessarilyindicative of future operating results.
| ** **                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                        | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                            |       | $                                               | 30,147,000 |                                          | $          | 27,416,000 |   | $ | 57,433,000 |   | $ | 53,399,000 |   |
| Net income                          |       | $                                               | 1,181,000  |                                          | $          | 1,594,000 |   | $ | 1,980,000 |   | $ | 2,383,000 |   |
| Earnings per share of common stock: |       |                                            |       |                                          |       |   |   |   |   |
| Basic                               |       | $                                               | .34        |                                          | $          | .45 |   | $ | .56 |   | $ | .68 |   |
| Diluted                             |       | $                                               | .33        |                                          | $          | .45 |   | $ | .55 |   | $ | .67 |   |

 

10

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE 8—ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFULACCOUNTS**

Accountsreceivable consist of:
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| Trade accounts  receivable       |       | $                 | 15,802,548 |                  | $          | 12,249,920 |   |
| Allowance for  doubtful accounts |       | (504,337          | )          | (328,074              | )          |
|                             |       | $                 | 15,298,211 |                  | $          | 11,921,846 |   |

 

**NOTE9—INVENTORIES**

Majorclasses of inventory were as follows:
| ** **                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2004**          | ** ** | **2003**              | ** ** |
| Raw materials and  supplies |       | $                 | 3,341,858  |                  | $          | 3,521,478 |   |
| Work in process             |       | 912,034           |       | 723,728               |       |
| Finished goods              |       | 20,518,997        |       | 14,509,855            |       |
|                        |       | $                 | 24,772,889 |                  | $          | 18,755,061 |   |

 

**NOTE 10**—GOODWILL ANDOTHER INTANGIBLE ASSETS

Thechanges in the carrying amounts of goodwill for the six months ended June 30,2004 were as follows:
| ** **                                                        | ** ** | **Consolidated**        | ** ** | **Pneumatic  tools and  related  equipment** | ** ** | ** Hardware ** | ** ** | **Hydraulic  cylinders** | ** ** | **Heating  products** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **(In thousands)** | ** ** |
| Balance,  January 1, 2004                                    |       |                    | $          | 10,562                                            |       |                     |       | $                        | 2,327      |                  |       |   | $ | 7,387 |   |   |   | $ | 848 |   |   |   | $ | — |   |   |
| Goodwill resulting from the Woodmark acquisition  transaction     |       |                    | 11,601     |                                              |       |                     | —     |                     |       |                  | 11,601     |   |   |   | — |   |   |   | — |   |   |
| Additional costs related to the Woodmark acquisition  transaction |       |                    | 817        |                                              |       |                     | —     |                     |       |                  | 817        |   |   |   | — |   |   |   | — |   |   |
| Additional payments related to the acquisition of  Nationwide     |       |                    | 379        |                                              |       |                     | —     |                     |       |                  | 379        |   |   |   | — |   |   |   | — |   |   |
| Balance,  June 30, 2004                                      |       |                    | $          | 23,359                                            |       |                     |       | $                        | 2,327      |                  |       |   | $ | 20,184 |   |   |   | $ | 848 |   |   |   | $ | — |   |   |

 

11

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE10—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)**

Other intangible assetswere as follows:
| ** **              | ** ** | **June 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Cost**                    | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Customer list           |       | $                           | 1,900,000  |                            | $          | 823,334 |   | $ | 1,900,000 |   |   | $ | 633,334 |   |   |
| Employment  agreement   |       | 760,000                     |       | 329,333                         |       | 760,000 |   |   | 253,333 |   |   |
| Customer  relationships |       | 7,260,000                   |       | —                          |       | — |   |   | — |   |   |
| Vendor  relationship    |       | 890,000                     |       | —                          |       | — |   |   | — |   |   |
| Trademark               |       | 690,000                     |       | —                          |       | — |   |   | — |   |   |
| Total                   |       | $                           | 11,500,000 |                            | $          | 1,152,667 |   | $ | 2,660,000 |   |   | $ | 886,667 |   |   |

 

Amortization expense forintangible assets subject to amortization was $266,000 for each of the sixmonth periods ended June 30, 2004 and 2003, and $133,000 for each of thethree month periods ended June 30, 2004 and 2003. Amortization expense forthe rest of 2004 is estimated to be $552,500. Amortization expense for each ofthe years in the five-year period ending December 31, 2009 is estimated tobe as follows: 2005—$1,105,000; 2006—$1,105,000;2007—$750,333; 2008—$573,000; and 2009—$573,000.

**NOTE11—SHORT-TERM BORROWINGS**

On June 30, 2004, in conjunction with theWoodmark acquisition transaction, the Company entered into a credit agreementwith Citibank and another bank. Thisagreement includes a revolving credit loan facility, which provides a total of$12,000,000 for direct borrowings, with various sublimits for letters ofcredit, bankers’ acceptances and equipment loans. There are nocommitment fees for any unused portion of this credit facility. At June 30, 2004, there was $5,000,000outstanding against the revolving credit loan facility, and there were no openletters of credit.

Direct borrowings under the Company’s revolving creditloan facility are secured by the Company’s accounts receivable, inventory andequipment and are cross-guaranteed by each of the Company’s subsidiaries. Theseborrowings bear interest at either the prime interest rate or LIBOR (LondonInterBank Offered Rate) plus the applicable loan margin. At June 30, 2004,the applicable loan margin was 1.6%. The prime interest rate at June 30,2004 was 4.0% and LIBOR was approximately 1.3%. The prime interest rate at June 30,2003 was 4.0% and LIBOR was approximately 1.1%.

The credit agreement also includes a foreign exchangeline, which provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of yen needed for payments to foreign suppliers. The total amount offoreign currency forward contracts outstanding at June 30, 2004, based onthe spot rate, was approximately $3,511,000.

Under the terms of theCompany’s credit agreement, the Company is required to adhere to certainfinancial covenants. At June 30, 2004, and for the six months then ended,the Company was in compliance with all of these covenants.

**NOTE12—LONG-TERM DEBT**

The credit agreement also includes a term loanfacility, which provides a maximum commitment of $34,000,000 to financeacquisitions subject to the approval of the lending banks. The Company borrowed

12

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE12—LONG-TERM DEBT (Continued)**

$29,000,000 against thisfacility to finance the Woodmark acquisition transaction, and there was$34,000,000, including $5,000,000 rolled over from the prior term loanfacility, outstanding against the new facility at June 30, 2004. There wasalso a standby letter of credit totaling approximately $186,000 outstandingagainst this facility at June 30, 2004. This standby letter of credit isused to secure the Economic Development Revenue Bond assumed as part of theacquisition of Green.

Long-term debtconsists of:
| ** **                                                                                                                                                                                                                                                                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Term  loan—$250,000 payable quarterly from September 2004 through  June 2005. Principal amount outstanding at September 30, 2005 to be  paid in 24 equal quarterly installments (plus interest at LIBOR plus the  applicable loan margin) from September 2005 through June 2011 |       | $                       | 34,000,000 |                        | $          | 5,250,000 |   |
| Note payable to  former owners of Woodmark—lump sum payment, plus interest, due in  June 2007. Interest accrues at the Company’s highest borrowing rate in  effect under its credit agreement. At June 30, 2004, the applicable rate  was LIBOR plus 1.75%                                |       | 2,190,000               |       | —                      |       |
| Note payable to  former owners of Woodmark—lump sum payment due in June 2007. This  non-interest bearing note has been discounted using the Company’s current  interest rate                                                                                                                   |       | 1,218,000               |       | —                      |       |
| Mortgage loan—$11,244  (plus interest at LIBOR plus 155 basis points) payable monthly through  May 2009, when a final payment of approximately $1,090,000 is due                                                                                                                                    |       | 1,742,889               |       | 1,810,356                   |       |
| Mortgage loan—$9,429  (plus interest at LIBOR plus 155 basis points) payable monthly through  January 2010, when a final payment of approximately $915,000 is due                                                                                                                                   |       | 1,537,000               |       | 1,593,577                   |       |
| Mortgage loan—$16,388  (including interest at 7.09%) payable monthly through March 2014                                                                                                                                                                                                             |       | 1,367,313               |       | 1,415,604                   |       |
| Economic  Development Revenue Bond—payable annually in various principal amounts (plus  interest at variable rates) through November 2004                                                                                                                                                           |       | 180,000                 |       | 180,000                     |       |
|                                                                                                                                                                                                                                                                                                          |       | 42,235,202              |       | 10,249,537                  |       |
| Less current  maturities                                                                                                                                                                                                                                                                                      |       | 1,530,058               |       | 1,526,213                   |       |
|                                                                                                                                                                                                                                                                                                          |       | $                       | 40,705,144 |                        | $          | 8,723,324 |   |

 

Certain of the Company’smortgage agreements require the Company to adhere to certain financialcovenants. At June 30, 2004, and for the six months then ended, the Companyreceived a waiver for the one covenant with which it was not in compliance.

13

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE13—WARRANTY LIABILITY**

The Company offers to its customers warranties againstproduct defects for periods ranging from one year to the life of the product,depending on the specific product and terms of the customer purchase agreement.The Company’s typical warranties require it to repair or replace the defectiveproducts during the warranty period at no cost to the customer. At the time theproduct revenue is recognized, the Company records a liability for estimatedcosts under its warranties, which costs are estimated based on historicalexperience. The Company periodically assesses the adequacy of its recordedwarranty liability and adjusts the amounts necessary. While the Companybelieves that its estimated liability for product warranties is adequate, theestimated liability for the product warranties could differ materially fromfuture actual warranty costs.

Changesin the Company’s warranty liability, included in other accrued liabilities, forthe six month periods ended June 30, 2004 and June 30, 2003 were asfollows:
| ** **                                                          | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**              | ** ** |
| ** **                                                          | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Balance,  beginning of period                                       |       | $                              | 210,989    |   | $ | 186,513 |   |
| Addition related to the acquisition of certain assets  of Woodmark  |       | 131,796                        |       | — |   |
| Warranties issued and changes in estimated  pre-existing warranties |       | 581,805                        |       | 147,239 |   |
| Actual warranty costs incurred                                      |       | (391,198                       | )          | (146,827 | ) |
| Balance, end of period                                              |       | $                              | 533,392    |   | $ | 186,925 |   |

 

**NOTE14—SEGMENTS OF BUSINESS**

Thefollowing tables present financial information by segment for the periods endedJune 30, 2004 and 2003. Segment profit (loss) excludes general corporateexpenses, interest expense and income taxes. All intersegment revenues havebeen eliminated.
| **Three months ended**     | ** ** | ** **              | ** ** | ** Pneumatic ** | ** ** | ** ** | ** ** | ** Hydraulic ** | ** ** | **Heating**               | ** ** |
|--------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|
| **June 30, 2004**          | ** ** | ** **              | ** ** | **Consolidated**          | ** ** | **tools**  | ** ** | ** Hardware **  | ** ** | ** cylinders ** | ** ** | **equipment** | ** ** |
| ** **                           | ** ** | **(In thousands)** | ** ** |
| Revenues from external  customers    |       |                    | $          | 21,351                    |       |       |       | $                         | 8,334      |                      |       |   | $ | 6,871 |   |   |   | $ | 3,734 |   |   |   | $ | 2,412 |   |   |
| Segment profit (loss)                |       |                    | $          | 2,209                     |       |       |       | $                         | 829        |                      |       |   | $ | 1,492 |   |   |   | $ | (82 | ) |   |   | $ | (30 | ) |   |
| Identifiable assets at June 30, 2004 |       |                    | $          | 90,193                    |       |       |       | $                         | 22,373     |                      |       |   | $ | 52,673 |   |   |   | $ | 9,329 |   |   |   | $ | 5,818 |   |   |
| Corporate assets                     |       |                    | 3,683      |                      |       |       |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Total assets at  June 30, 2004       |       |                    | $          | 93,876                    |       |       |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |
|                                      |            |                         |            |                           |            |            |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE 14—SEGMENTS OF BUSINESS (Continued)**
| **Three months ended**      | ** ** | ** **              | ** ** | ** **                | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                | ** ** |
|---------------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|
| **June 30, 2003**           | ** ** | ** **              | ** ** | ** Pneumatic ** | ** ** | ** ** | ** ** | ** Hydraulic ** | ** ** | **Heating**               | ** ** |
| **(restated)**                        | ** ** | ** **              | ** ** | **Consolidated**          | ** ** | **tools**  | ** ** | ** Hardware **  | ** ** | ** cylinders ** | ** ** | **equipment** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** |
| Revenues from  external customers     |       |                    | $          | 21,738                    |       |       |       | $                         | 10,933     |                      |       |   | $ | 5,697 |   |   |   | $ | 3,027 |   |   |   | $ | 2,081 |   |   |
| Segment profit (loss)                 |       |                    | $          | 2,952                     |       |       |       | $                         | 1,789      |                      |       |   | $ | 1,281 |   |   |   | $ | (106 | ) |   |   | $ | (12 | ) |   |
| Identifiable assets  at June 30, 2003 |       |                    | $          | 60,077                    |       |       |       | $                         | 25,357     |                      |       |   | $ | 20,319 |   |   |   | $ | 8,620 |   |   |   | $ | 5,781 |   |   |
| Corporate assets                      |       |                    | 1,281      |                      |       |       |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Total assets at June 30, 2003         |       |                    | $          | 61,358                    |       |       |       |                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |
|                                       |            |                         |            |                           |            |            |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six months ended**    | ** ** | ** **              | ** ** | ** Pneumatic ** | ** ** | ** ** | ** ** | ** Hydraulic ** | ** ** | **Heating**   | ** ** |
|-----------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|---------------------------|------------|---------------|------------|
| **June 30, 2004**       | ** ** | ** **              | ** ** | **Consolidated**          | ** ** | **tools**  | ** ** | ** Hardware **  | ** ** | **cylinders** | ** ** | **equipment** | ** ** |
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Revenues from external  customers |       |                    | $          | 40,926                    |       |       |       | $                         | 17,791     |          |       |   | $ | 11,364 |   |   |   | $ | 6,854 |   |   |   | $ | 4,917 |   |   |
| Segment profit  (loss)            |       |                    | $          | 3,739                     |       |       |       | $                         | 1,910      |          |       |   | $ | 2,109 |   |   |   | $ | (245 | ) |   |   | $ | (35 | ) |   |
|                                   |            |                         |            |                           |            |            |            |                           |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Six months ended**    | ** ** | ** **              | ** ** | ** Pneumatic ** | ** ** | ** ** | ** ** | ** Hydraulic ** | ** ** | **Heating**   | ** ** |
|-----------------------------------|------------|-------------------------|------------|---------------------------|------------|------------|------------|---------------------------|------------|---------------|------------|
| **June 30, 2003**       | ** ** | ** **              | ** ** | **Consolidated**          | ** ** | **tools**  | ** ** | ** Hardware **  | ** ** | **cylinders** | ** ** | **equipment** | ** ** |
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Revenues from external  customers |       |                    | $          | 41,220                    |       |       |       | $                         | 21,274     |          |       |   | $ | 9,947 |   |   |   | $ | 5,889 |   |   |   | $ | 4,110 |   |   |
| Segment profit  (loss)            |       |                    | $          | 4,966                     |       |       |       | $                         | 3,558      |          |       |   | $ | 1,886 |   |   |   | $ | (322 | ) |   |   | $ | (156 | ) |   |
|                                   |            |                         |            |                           |            |            |            |                           |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thereconciliations of combined operating profits for reportable segments toconsolidated income before income taxes and cumulative effect of change inaccounting principle are as follows:
| ** **                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                            | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total profit for  reportable segments |       | $                                | 2,209,190  |                           | $          | 2,952,065 |   | $ | 3,738,660 |   | $ | 4,965,910 |   |
| General corporate expenses            |       | (891,906                         | )          | (1,001,481                     | )          | (1,901,628 | ) | (1,883,777 | ) |
| Interest expense—net             |       | (139,910                         | )          | (195,688                       | )          | (263,092 | ) | (383,009 | ) |
| Income before  taxes on income        |       | $                                | 1,177,374  |                           | $          | 1,754,896 |   | $ | 1,573,940 |   | $ | 2,699,124 |   |

 

15

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**P & F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Continued)**

**NOTE 15—EARNINGS PER SHARE**

Thefollowing table sets forth the computation of basic and diluted earnings percommon share:
| ** **                                                                                                               | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                               | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Numerator for basic and diluted earnings per common  share:                                                              |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                                                               |       | $                                | 704,374    |                           | $          | 1,096,896 |   | $ | 940,940 |   | $ | 1,687,124 |   |
| Denominator:                                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic earnings per common  share—weighted average common shares outstanding                         |       | 3,517,755                        |       | 3,505,785                      |       | 3,516,601 |   | 3,505,935 |   |
| Effect of dilutive securities:                                                                                           |       |                             |       |                           |       |   |   |   |   |
| Common stock options                                                                                                     |       | 93,344                           |       | 72,809                         |       | 105,218 |   | 70,719 |   |
| Denominator for  diluted earnings per common share—adjusted weighted average common shares and  assumed conversions |       | 3,611,099                        |       | 3,578,594                      |       | 3,621,819 |   | 3,576,654 |   |
|                                                                                                                          |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

There were outstandingduring the three month and six month periods ended June 30, 2004 and 2003stock options whose exercise prices were higher than the average market valuesof the underlying Class A Common Stock for the respective periods. Theseoptions are anti-dilutive and are excluded from the computation of earnings pershare. The weighted average anti-dilutive stock options outstanding were asfollows:
| ** **                                                | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average  anti-dilutive stock options outstanding |       | 19,000                           |       | 253,664                        |       | 19,000 |   | 253,664 |   |

 

16

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

**General**

Any forward-lookingstatements contained herein, including those related to the Company’s futureperformance, are based upon the Company’s historical performance and on currentplans, estimates and expectations, which are subject to various risks anduncertainties, including, but not limited to, the impact of competition,product demand and pricing. These risks could cause the Company’s actualresults for the balance of fiscal year 2004 and beyond to differ materiallyfrom those expressed in any forward-looking statement made by or on behalf ofthe Company. Forward-looking statements speak only as of the date on which theyare made, and the Company undertakes no obligation to update publicly or reviseany forward-looking statement, whether as a result of new information,future developments or otherwise.

**Overview**

On June 30, 2004, as described in Note 7, New Woodmark acquired certainassets comprising the business of the former Woodmark International L.P. andits wholly-owned subsidiary, the former Stair House, Inc., and assumedcertain related liabilities. The Company’sresults of operations include no results of operations for Woodmark.

Consolidated revenues for the quarter ended June 30,2004 decreased 1.8%, from $21,738,305 to $21,350,595. Nonetheless, revenuesincreased at three of the four subsidiaries, with the greatest increase atCountrywide. More than offsetting the three increases was a 23.8% decrease inrevenues at Florida Pneumatic, resulting primarily from lower retail promotionsand base sales, as well as the loss of a major customer in early 2004. Grossprofit decreased for the quarter, due primarily to the aforementioned loss of amajor customer and the increase in cost of imported product due to theweakening of the U.S. dollar versus both the yen and euro. Net incomedecreased, from $1,096,896 to $704,374.

Consolidated revenues forthe six months ended June 30, 2004 decreased .7%, from $41,220,181 to$40,925,891. Nonetheless, revenues increased at three of the four subsidiaries,with the greatest increase at Countrywide. More than offsetting the threeincreases was a 16.4% decrease in revenues at Florida Pneumatic, resultingprimarily from lower retail promotions and base sales, as well as the loss of amajor customer in early 2004. Gross profit decreased for the six months,resulting primarily from the aforementioned loss of a major customer and theincrease in cost of imported product due to the weakening of the U.S. dollarversus both the yen and euro. Net income decreased, from $1,687,124 to$940,940.

**Critical Accounting Policies and Estimates**

There have been nomaterial changes in the Company’s critical accounting policies and estimatesfrom those discussed in Item 7 of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

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**RESULTS OFOPERATIONS**

**Quarters ended June 30,2004 and June 30, 2003**

**Revenues**

Revenuesfor the quarters ended June 30, 2004 and 2003 were as follows:
| **Quarter  ended  June 30,** |  

** ** | ** ** | ** ** | **Consolidated** | ** ** | **Pneumatic  tools and  related  equipment** | ** ** | **Hardware** | ** ** | **Hydraulic  cylinders  and related  equipment** | ** ** | **Heating  products** | ** ** |
|-----------------------------------|--------------------|------------|------------|------------------|------------|---------------------------------------------------|------------|--------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
| **2004**                          |               | $          | 21,350,595 |             | $          | 8,333,447                                         |       | $            | 6,871,940  |                                                  | $          | 3,733,507             |       | $ | 2,411,701 |   |
| **2003**                          |               | $          | 21,738,305 |             | $          | 10,933,587                                        |       | $            | 5,696,536  |                                                  | $          | 3,027,296             |       | $ | 2,080,886 |   |
| **%  increase (decrease)**        |               | (1.8       | )%         | (23.8            | )%         | 20.6                                              | %          | 23.3         | %          | 15.9                                                  | %          |

 

Revenues from pneumatic tools and related equipmentdecreased due primarily to lower retail promotions and base sales ofapproximately $1,700,000, including approximately $1,100,000 attributable tothe loss of a major customer in early 2004, and decreases in filter sales, OEMand commission revenues. This was partially offset by increased industrialrevenues of approximately $200,000 and sales to the automotive after-market ofapproximately $100,000. Selling prices of pneumatic tools and related equipmentwere unchanged.

Revenues from hardware increased due primarily to anincrease in Nationwide’s revenues of approximately $1,000,000, including an increaseof approximately $950,000 from sales of fencing products. In addition, sales atFranklin increased approximately $175,000 as a significant customer made alarge one-time purchase. During the first quarter of 2004, the Companyincurred increases in the price of steel. Effective February 1, 2004,Nationwide began charging fencing product customers an additional 4-5% prior tothe start of the second quarter of 2004 to cover the increased cost. During April of2004, the Company began increasing prices to customers at Franklin and to othercustomers at Nationwide in an effort to cover the cost increases.

Revenues from hydraulic cylinders and other equipmentincreased due primarily to increases in cylinder sales of approximately$450,000 and in the access product line of approximately $250,000. By the endof the second quarter of 2004, the Company increased cylinder prices tocustomers by 7.3% on average, the approximate amount of the increases in thecost of steel that began in the first quarter of 2004. However, due to thedelay in implementing these price increases, they did not fully offset thematerial cost increases for the period.

Revenues from heatingproducts increased due primarily to increased baseboard sales, resulting fromstrong housing starts in the 2004 second quarter. During the first quarter of2004, the Company incurred increases in the price of steel, copper andaluminum. During the second quarter of 2004, the Company began increasingselling prices across all product lines within this segment in amounts thatapproximate the cost increases.

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**Gross Profit**

Grossprofits for the quarters ended June 30, 2004 and 2003 were as follows:
| **Quarter  ended  June 30,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Pneumatic  tools and  related  equipment** | ** ** | **Hardware** | ** ** | **Hydraulic  cylinders  and related  equipment** | ** ** | **Heating  products** | ** ** |
|-----------------------------------|------------|------------|------------|------------------|------------|---------------------------------------------------|------------|--------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
| **2004**                          |       | $          | 6,667,089  |             | $          | 3,014,522                                         |       | $            | 2,599,767  |                                                  |       | $                     | 378,618    |   |   | $ | 674,182 |   |
| ** **                        |       | 31.2       | %          | 36.2             | %          | 37.8                                              | %          |         | 10.1       | %                                                     |       | 28.0                  | %          |
| **2003**                          |       | $          | 7,139,041  |             | $          | 4,066,373                                         |       | $            | 2,094,732  |                                                  |       | $                     | 303,512    |   |   | $ | 674,424 |   |
| ** **                        |       | 32.8       | %          | 37.2             | %          | 36.8                                              | %          |         | 10.0       | %                                                     |       | 32.4                  | %          |

 

The decrease in the grossprofit percentage from pneumatic tools and related equipment was due primarilyto the loss of a major customer noted above with a better than average grossmargin and the weakness of the U.S. dollar in relation to the Japanese yen,partially offset by a more favorable product mix. The increase in the grossprofit percentage from hardware products was due primarily to increased sales,a more favorable product mix, cost savings in material purchases and laborproductivity. The increase in the gross profit percentage from hydrauliccylinders and other equipment was due primarily to increased sales noted above,which increased coverage of fixed expenses. This was partially offset byincreases in the cost of materials. The decrease in the gross profit percentagefrom heating equipment was due primarily to lower radiant margins, resultingprincipally from the weakening of the U.S. dollar in relation to the euro, aless favorable product mix for commercial product and reduced margins forbaseboard heating products.

**Selling, Generaland Administrative Expenses**

Consolidated selling,general and administrative expenses increased 3.1%, from $5,188,457 to$5,349,805, due primarily to increased compensation resulting from a change inexecutive personnel at Nationwide and, to a lesser extent, to increasedprofessional fees, mainly related to corporate compliance and reportingrequirements. These increases were partially offset by decreases resulting fromcost-cutting efforts in all of the segments. As a percentage of revenues,selling, general and administrative expenses increased from 23.9% to 25.1%, dueprimarily to the increased expenses discussed above.

**Interest—Net**

Net interest expensedecreased from $195,688 to $139,910, due primarily to lower average borrowingsunder both the revolving credit and term loan facilities.

**Taxes on Income**

The effective tax ratesfor the quarters ended June 30, 2004 and 2003 were 40.2% and 37.5%,respectively. The increase in the effective tax rate was due primarily to anincrease in expenses that are not deductible for tax purposes.

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**Six month periodsended June 30, 2004 and June 30, 2003**

**Revenues**

Revenuesfor the six month periods ended June 30, 2004 and 2003 were as follows:
| **Six months  ended  June 30,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Pneumatic  tools and  related  equipment** | ** ** | **Hardware** | ** ** | **Hydraulic  cylinders  and related  equipment** | ** ** | **Heating  products** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|---------------------------------------------------|------------|--------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
| **2004**                                  |       | $          | 40,925,891 |             | $          | 17,791,068                                        |       | $            | 11,364,642 |                                                  | $          | 6,853,668             |       | $ | 4,916,513 |   |
| **2003**                                  |       | $          | 41,220,181 |             | $          | 21,273,996                                        |       | $            | 9,946,570  |                                                  | $          | 5,889,543             |       | $ | 4,110,072 |   |
| **%  increase (decrease)**                |       | (0.7       | )%         | (16.4            | )%         | 14.3                                              | %          | 16.4         | %          | 19.6                                                  | %          |

 

Revenues from pneumatic tools and related equipmentdecreased due primarily to lower retail promotions and base sales ofapproximately $2,150,000, including approximately $1,750,000 attributable tothe loss of a major customer in early 2004, and decreases in commissionrevenues and Berkeley tool division, OEM and filter sales. This was partiallyoffset by increased sales to the automotive after-market of approximately$400,000 and by increased industrial revenues of approximately $400,000.Selling prices of pneumatic tools and related equipment were unchanged.

Revenues from hardware increased due to an increase inNationwide’s revenues of approximately $1,400,000, reflecting an increase ofapproximately $1,600,000 from sales of fencing products. During the firstquarter of 2004, the Company incurred increases in the price of steel.Effective February 1, 2004, Nationwide began charging fencing productcustomers an additional 4-5% to cover the increased cost. During April of2004, the Company began increasing prices to customers at Franklin and to othercustomers at Nationwide in an effort to cover the cost increases.

Revenues from hydraulic cylinders and other equipmentincreased due primarily to increases in cylinder sales of approximately$800,000, reflecting entry into a new market for log splitter cylinders. Salesof these newly-developed cylinders imported from China accounted forapproximately $200,000 of the increase. In addition to a general increase insales to most cylinder customers, there were also small increases in sales inthe agriculture and access product lines. By the end of the second quarter of2004, the Company increased cylinder prices to customers by 7.3% on average,the approximate amount of the cost increases in the cost of steel that began inthe first quarter of 2004. However, due to the delay in implementing theseprice increases, they did not fully offset the material cost increases for theperiod.

Revenues from heatingproducts increased due primarily to increased baseboard sales, resulting fromstrong housing starts in the first half of 2004, and boiler sales, reflectingcontinued market penetration with the new product line. During the firstquarter of 2004, the Company incurred increases in the price of steel, copperand aluminum. During the second quarter of 2004, the Company began increasingselling prices across all product lines within this segment in amounts thatapproximate the cost increases.

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**Gross Profit**

Grossprofits for the six month periods ended June 30, 2004 and 2003 were asfollows:
| **Six  months  ended  June 30,** | ** ** | ** ** | ** ** | **Consolidated** | ** ** | **Pneumatic  tools and  related  equipment** | ** ** | **Hardware** | ** ** | **Hydraulic  cylinders   and related   equipment** | ** ** | **Heating  products** | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|---------------------------------------------------|------------|--------------|------------|-------------------------------------------------------------------|------------|-----------------------|------------|
| **2004**                              |       | $          | 12,258,382 |             | $          | 6,078,386                                         |       | $            | 4,156,553  |                                                              |       | $                     | 619,268    |   |   | $ | 1,404,175 |   |
|                                  |       | 30.0       | %          | 34.2             | %          | 36.6                                              | %          |         | 9.0        | %                                                                 |       | 28.6                  | %          |
| **2003**                              |       | $          | 13,141,415 |             | $          | 7,885,449                                         |       | $            | 3,458,300  |                                                              |       | $                     | 515,737    |   |   | $ | 1,281,929 |   |
|                                  |       | 31.9       | %          | 37.1             | %          | 34.8                                              | %          |         | 8.8        | %                                                                 |       | 31.2                  | %          |

 

The decrease in the grossprofit percentage from pneumatic tools and related equipment was due primarilyto the loss of a major customer noted above with a better than average grossmargin and the weakness of the U.S. dollar in relation to the Japanese yen,partially offset by a more favorable product mix and productivity improvements.The increase in the gross profit percentage from hardware products was dueprimarily to increased sales, a more favorable product mix, cost savings inmaterial purchases and labor productivity. The increase in the gross profitpercentage from hydraulic cylinders and other equipment was due primarily tothe increased sales noted above, which increased coverage of fixed expenses,including an increase in sales of imported products. This was partially offsetby material cost increases. The decrease in the gross profit percentage fromheating equipment was due primarily to lower radiant margins, resultingprincipally from the weakening of the U.S. dollar in relation to the euro, aless favorable product mix for commercial products, reduced margins forbaseboard heating products and an increase in boiler sales that were at reducedmargins.

**Selling, Generaland Administrative Expenses**

Consolidated selling,general and administrative expenses increased 3.6%, from $10,059,282 to$10,421,350, due primarily to increased compensation resulting from a change inexecutive personnel at at Nationwide and, to a lesser extent, to increasedprofessional fees, mainly related to corporate compliance and reportingrequirements. These increases were partially offset by decreases resulting fromcost-cutting efforts in all of the segments. As a percentage of revenues,selling, general and administrative expenses increased from 24.4% to 25.5%, dueprimarily to the increased expenses discussed above.

**Interest—Net**

Net interest expensedecreased from $383,009 to $263,092, due primarily to lower average borrowingsunder both the revolving credit and term loan facilities.

**Taxes on Income**

The effective tax ratesfor the six month periods ended June 30, 2004 and 2003 were 40.2% and37.5%, respectively. The increase in the effective tax rate was due primarilyto an increase in expenses that are not deductible for tax purposes.

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**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s cash flows from operations are cyclical,with the greatest demand in the second and third quarters followed by verypositive cash flows in the fourth quarter as receivables and inventory trenddown. Due to its strong asset base and predictable cash flows, the Company hasaccess to substantial additional capital, if and when needed, based onfavorable banking relationships. The Company monitors average days salesoutstanding, inventory turns and capital expenditures to project liquidityneeds and evaluate return on assets employed.

TheCompany gauges its liquidity and financial stability by the measurements shownin the following table (dollar amounts in thousands):
| ** **                | ** ** | **June, 30,  2004** | ** ** | **December 31,  2003** | ** ** | **June 30,  2003** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Working Capital           |       | $                        | 31,177     |                        |       | $                       | 20,960     |   |   | $ | 19,323 |   |
| Current Ratio             |       | 3.10 to 1                |       |                        | 2.72 to 1  |                    |       | 2.20 to 1 |   |
| Shareholders’ Equity |       | $                        | 37,949     |                        |       | $                       | 36,978     |   |   | $ | 35,304 |   |

 

On June 30, 2004, as described in Note 7, Woodmark acquired certain assetscomprising the business of the former Woodmark International L.P. and itswholly-owned subsidiary, the former Stair House, Inc., and assumed certainrelated liabilities.

Cash increased $3.1 million, from $.2 million as of December 31,2003 to $3.3 million as of June 30, 2004. The Company’s debt levelsincreased from $13.2 million at December 31, 2003 to $47.2 million at June 30,2004, due primarily to the financing of the aforementioned acquisition. Totalpercent of debt to total capitalization increased from 26.4% at December 31,2003 to 55.5% at June 30, 2004.

In connection with Countrywide’s acquisition of all ofthe stock of Nationwide in 2002, the Company is liable for contingent earnoutpayments to Nationwide’s previous owner, in amounts equal to 30% of the excessof Nationwide’s earnings, before amortization of intangible assets, interestand taxes, over $2,500,000, for each of the five twelve-month periodssubsequent to the acquisition date. These contingent earnout payments have beenand will be treated as additions to goodwill. During the six months ended June 30,2004, the Company recorded net additions to goodwill of approximately $379,000,related to contingent earnout payments.

During the six months ended June 30, 2004, grossaccounts receivable increased by approximately $3,553,000, includingapproximately $3,487,000 from the Woodmark acquisition transaction. Increasesof approximately $4,886,000 and $571,000 at Countrywide and Green,respectively, were partially offset by decreases of approximately $1,778,000and $126,000 at Florida Pneumatic and Embassy, respectively. The increase atCountrywide was due primarily to the addition of Woodmark’s accountsreceivable, an increase in sales in the second quarter of 2004, compared to thefourth quarter of 2003, and with respect to its Franklin division, the timingof shipments. The increase at Green was due primarily to an increase in salesin the second quarter of 2004 compared to the fourth quarter of 2003. Thedecrease at Florida Pneumatic was due primarily to improved collections, thetiming of retail promotional receipts and a decrease in sales in the secondquarter of 2004, compared to the fourth quarter of 2003. The decrease atEmbassy was due primarily to a decrease in sales in the second quarter of 2004,compared to the fourth quarter of 2003.

Inventories increased by approximately $6,018,000during the six months ended June 30, 2004, including approximately$5,598,000 from the Woodmark acquisition transaction. Increases ofapproximately $6,116,000, $246,000 and $179,000 at Countrywide, Green andEmbassy, respectively, were partially offset by a decrease of approximately$523,000 at Florida Pneumatic. The increase at Countrywide was due primarily tothe addition of Woodmark’s inventories, as well as to a concerted effort tosupport overall growth in the business. The increase at Green was due primarilyto a further investment in 

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inventory for importcylinders. The increase at Embassy was due primarily to the timing of radiantand boiler inventory receipts and to a concerted effort to anticipate customerpurchase needs. The decrease at Florida Pneumatic was due primarily to reducedpurchases, the loss of a major customer in early 2004 noted above and moreefficient ordering levels for safety stock.

During the first half of 2004, short-term borrowingsincreased by $2,000,000, primarily to fund working capital needs.

During the first half of 2004, accounts payableincreased by approximately $1,304,000, including approximately $218,000 fromthe Woodmark acquisition transaction. Increases of approximately $1,085,000,$211,000 and $167,000 at Florida Pneumatic, Countrywide and Green,respectively, were partially offset by a decrease of $159,000 at Embassy. Theincrease at Florida Pneumatic was due primarily to the mix of foreign purchasesto support new product introductions. The increase at Countrywide was dueprimarily to the aforementioned Woodmark acquisition. The increase at Green wasdue primarily to the timing of payments. The decrease at Embassy was dueprimarily to the timing of purchases.

On June 30, 2004, in conjunction with theWoodmark acquisition transaction, the Company entered into a credit agreementwith Citibank and another bank. This agreement provides the Company withvarious credit facilities, including revolving credit loans, term loans foracquisitions and a foreign exchange line. The credit agreement is subject toannual review by the banks.

The revolving credit loan facility provides a maximumof $12,000,000, with various sublimits, for direct borrowings, letters ofcredit, bankers’ acceptances and equipment loans. There are no commitment feesfor any unused portion of this credit facility. At June 30, 2004, therewas $5,000,000 outstanding against the revolving credit loan facility, and there were no open letters of credit.

The term loan facility provides a maximum commitmentof $34,000,000 to finance acquisitions subjectto the approval of the lending banks. There are no commitment fees forany unused portion of this credit facility. At June 30, 2004, there was$34,000,000, including $5,000,000 rolled over from the prior term loanfacility, outstanding against the new term loan facility. There was also astandby letter of credit totaling approximately $186,000 outstanding againstthis facility at June 30, 2004. This standby letter of credit was used tosecure the Economic Development Revenue Bond assumed as part of the acquisitionof Green.

The foreign exchange line provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of Japanese yen needed forpayments of foreign suppliers. The total amount of foreign currency forwardcontracts outstanding at June 30, 2004, based on the spot rate, wasapproximately $3,511,000.

Under its credit agreement, the Company is required toadhere to certain financial covenants. At June 30, 2004, and for the sixmonths then ended, the Company was in compliance with all of these covenants.

Certain of the Company’s mortgage agreements alsorequire the Company to adhere to certain financial covenants. At June 30,2004, and for the six months then ended, the Company received a waiver for theone covenant with which it was not in compliance.

Capital spending for the six months ended June 30,2004 and 2003 was approximately $650,000 and $646,000, respectively, whichamounts were provided from working capital. Capital expenditures for theremainder of 2004 are expected to be approximately $1,000,000, some of whichmay be financed through the Company’s credit facilities. Included in theexpected total for the remainder of 2004 are capital expenditures relating tonew products, expansion of existing product lines and replacement of equipment.

Operating activitiesprovided cash totaling approximately $1,438,000 and $56,000 during the sixmonths ended June 30, 2004 and 2003, respectively. The Company believesthat cash on hand derived from 

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operationsand cash available through borrowings under its credit facilities will besufficient to allow the Company to meet its foreseeable working capital needs.

**Off-Balance Sheet Arrangements**

The Company’s foreign exchange line provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of Japanese yen needed forpayments to foreign suppliers. The Company does not purchase forward contractson New Taiwan dollars or euros. The totalamount of foreign currency forward contracts outstanding at June 30, 2004,based on the spot rate, was approximately $3,511,000.

The Company, through Florida Pneumatic, imports asignificant amount of its purchases from Japan, with payment due in Japaneseyen. As a result, the Company is subject to the effects of foreign currencyexchange fluctuations. The Company uses a variety of techniques to mitigate anyadverse effects from these fluctuations, including increasing its sellingprices, obtaining price reductions from its overseas suppliers, usingalternative supplier sources and entering into foreign currency forwardcontracts. The increase in the strength of the Japanese yen versus the U.S.dollar over the first six months of 2004 had a negative effect on the Company’sresults of operations and its financial position. There can be no assurance asto the future trend of this value. See “Item 3—Quantitative and QualitativeDisclosure About Market Risk.”

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

The Company is exposed to market risks, which includechanges in international exchange rates and 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 of the U.S. dollar affects the Company’sresults. 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 Company accounts for changes in the fair value ofits foreign currency contracts by marking them to market and recognizing anyresulting gains or losses through its statement of operations. The Company alsomarks its yen-denominated payables to market, recognizing any resulting gainsor losses in its statement of operations. At June 30, 2004, the Companyhad foreign currency forward contracts, maturing in 2004, to purchase yen atcontracted forward rates. The value of these contracts at June 30, 2004,based on the spot rate, was approximately $3,511,000, which was the approximatevalue of the Company’s corresponding yen-denominated accounts payable. Duringthe three month periods ended June 30, 2004 and 2003, the Company recordednet realized losses of approximately $14,000 and $10,000, respectively, onforeign currency transactions. During the six month periods ended June 30,2004 and 2003, the Company recorded net realized losses of approximately$83,000 and $9,000, respectively, on foreign currency transactions. At June 30,2004, the Company had an unrealized gain of approximately $27,000 on foreigncurrency transactions.

The potential loss in value of the Company’s netinvestment in foreign currency forward contracts resulting from a hypothetical10 percent adverse change in foreign exchange rates at June 30, 2004 wasapproximately $391,000.

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**Item 4.  **Controls andProcedures

**Evaluation of disclosure controls and procedures**

An evaluation wasperformed, under the supervision of, and with the participation of, the Company’smanagement, including the Principal Executive Officer and Principal FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) to the Securities and Exchange Act of 1934). Based on thatevaluation, the Company’s management, including the Principal Executive Officerand Principal Financial Officer, concluded that the Company’s disclosurecontrols and procedures were adequate and effective, as of the end of theperiod covered by this Quarterly Report on Form 10-Q for the quarterended June 30, 2004 (this “Report”), in timely alerting them to allmaterial information relating to the Company and its consolidated subsidiariesthat is required to be included in this Report.

**Changes in internal controls**

There have been no significant changes in the Company’sinternal controls over financial reporting that occurred during the most recentfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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**PART II—OTHER INFORMATION**

**Item 1.   Legal Proceedings**

The Company is a defendantor co-defendant in various actions brought about in the ordinary course ofconducting its business. The Company does not believe that any of these actionsare material to the financial condition of the Company.

**Item 2.**   Changesin Securities, Use of Proceeds and Issuer Purchase ofEquity Securities

None.

**Item 3.   Defaults Upon Senior Securities**

None.

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

On May 26, 2004, the Registrant held its AnnualMeeting of Stockholders, at which two proposals were voted upon: (i) Electionof Directors and (ii) the Appointment of Auditors.

Thefollowing persons were duly elected to serve, subject to the Company’s Bylaws,as directors of the Registrant until the 2007 Annual Meeting of Stockholders,or until election and qualification of their successor(s):
| ** **           | ** ** | **Votes**         | ** ** | **Votes**   | ** ** | **Votes**     | ** ** |
|----------------------|------------|-------------------|------------|-------------|------------|---------------|------------|
| ** **           | ** ** | **in favor** | ** ** | **against** | ** ** | **abstained** | ** ** |
| Richard A.  Horowitz |       | 3,238,579         |       | 124,299     |       |          | 0          |   |   |
| Alan I. Goldberg     |       | 3,333,935         |       | 28,943      |       |          | 0          |   |   |
| Robert M. Steinberg  |       | 2,832,994         |       | 529,884     |       |          | 0          |   |   |

 

The terms of office of Robert L. Dubofsky, Jeffrey D.Franklin, Sidney Horowitz, Dennis Kalick, Neil Novikoff, Mitchell A.Solomon and Marc A. Utay as directors of the Registrant continued after theAnnual Meeting of Stockholders.

The appointment of BDO Seidman, LLP as the Company’sauditors was ratified by 3,355,941 votes in favor and 2,621 votes against.

There were no brokernon-votes pertaining to these proposals.

**Item 5.   Other Information**

None.

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

**(a)   Exhibits**

See “Exhibit Index”immediately following the signature page.

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

The Registrant filed a Report on Form 8-Kdated May 13, 2004, in which it furnished a press release announcing itsfirst quarter 2004 results under Items 9 and 12 of such Report.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                             | **P & F Industries,  Inc.** |
|-----------------------------|--------------------------------------|
|                        | (Registrant)                         |
|                        |   By                            | /s/  Joseph A. Molino, Jr. |   |
|                        |                                 | Joseph A.  Molino, Jr. |   |
|                        |                                 | *Vice  President* |   |
| Dated: August 16, 2004 |                                 | *(Principal  Financial Officer)* |   |

 

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**EXHIBIT INDEX**
|         | **Number** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Description** |
|---------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| **2.1** |       | Asset Purchase  Agreement, dated as of September 16, 1998, by and between Green  Manufacturing, Inc., an Ohio corporation, and the Registrant  (Incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2003).  Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish, supplementally, a copy of any exhibit or schedule omitted from the  Asset Purchase Agreement to the Commission upon request.                                                                                                                                                                                                                           |
| **2.2** |       | Stock Purchase  Agreement, dated as of May 3, 2002, by and between Mark C. Weldon and  the Registrant (Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K dated May 3, 2002).  Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to  furnish supplementally a copy of any exhibit or schedule omitted from the  Asset Purchase Agreement to the Securities and Exchange Commission upon  request.                                                                                                                                                                                                                                                                            |
| **2.3** |       | Contract  for Purchase and Sale, dated as of May 1, 2002, between W. I. Commercial  Properties, Inc., a Florida corporation, and Countrywide Hardware, Inc., a  Delaware corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **2.4** |       | Asset Purchase  Agreement, dated as of June 30, 2004, by and among WM Texas  International, LP, a Texas limited partnership formerly known as Woodmark  International, L.P., SH Georgia, Inc., a Georgia corporation formerly  known as Stair House, Inc., Samuel G. Sherstad, WM Texas GP, LLC, WM  Texas Partners, LLC and Woodmark International, L.P., a Delaware limited  partnership. (Incorporated by reference  to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  July 9, 2004). Pursuant to Item  601(b)(2) of Regulation S-K, the Registrant agrees to furnish,  supplementally, a copy of any exhibit or schedule omitted from the Asset  Purchase Agreement to the Commission upon request. |
| **3.1** |       | Restated Certificate of  Incorporation of the Registrant (Incorporated by reference to  Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **3.2** |       | Amended By-laws of the  Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **3.3** |       | Amendment to the Amended  By-laws of the Registrant (Incorporated by reference to Exhibit 3.2 to  the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.1** |       | Rights Agreement, dated  as of August 23, 1994, between the Registrant and American Stock  Transfer & Trust Company, as Rights Agent (Incorporated by reference  to Exhibit 1 to the Registrant’s Registration Statement on Form 8-A  dated August 24, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4.2** |       | Amendment to Rights  Agreement, dated as of April 11, 1997, between the Registrant and  American Stock Transfer & Trust Company, as Rights Agent  (Incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                        |

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| **4.3** |   | Credit Agreement,  dated as of July 23, 1998, by and among the Registrant, Florida  Pneumatic Manufacturing Corporation, a Florida corporation, Embassy  Industries, Inc., a New York corporation, and European American Bank, a  New York banking corporation (Incorporated by reference to Exhibit 4.3  to the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003).                                                                                                                        |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **4.4** |   | Amendment  No. 1 to Credit Agreement, dated as of September 16, 1998, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank,  a New York banking corporation (Incorporated by reference to Exhibit 4.4  to the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003).                                  |
| **4.5** |   | Amendment No. 2 to  Credit Agreement, dated as of July 28, 1999, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida corporation,  Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank,  a New York banking corporation (Incorporated by reference to Exhibit 4.5  to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 1999).                                            |
| **4.6** |   | Amendment No. 3 to  Credit Agreement, dated as of July 26, 2000, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank,  a New York banking corporation (Incorporated by reference to Exhibit 4.5  to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2000).                                            |
| **4.7** |   | Amendment No. 4 to  Credit Agreement, dated as of June 25, 2001, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and European American Bank,  a New York banking corporation (Incorporated by reference to Exhibit 4.7  to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001).                                       |
| **4.8** |   | Amendment No. 5 to  Credit Agreement, dated as of May 3, 2002, by and among the Registrant,  Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy  Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and Citibank, N.A.  (successor-in-interest to European American Bank), a New York banking  corporation. (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2002). |
| **4.9** |   | Amendment No. 6 to  Credit Agreement, dated as of June 13, 2002, by and among the  Registrant, Florida Pneumatic Manufacturing Corporation, a Florida  corporation, Embassy Industries, Inc., a New York corporation, Green  Manufacturing, Inc., a Delaware corporation, and Citibank, N.A.  (successor-in-interest to European American Bank), a New York banking  corporation (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2002). |

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| **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).       |
| **4.14** |   | Credit Agreement, dated  as of June 30, 2004, by and among the Registrant, Florida Pneumatic  Manufacturing Corporation, Embassy Industries, Inc., Green  Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P. and Citibank, N.A., as  Administrative Agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Current Report on Form 8-K dated July 9, 2004).                                                                                                                                                                       |
| **4.15** |   | 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).                                                                                                                                                                                                                                                                                                                                                                                            |

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| **10.2** |   | Consulting Agreement,  effective as of November 1, 2003, between the Registrant and Sidney  Horowitz (Incorporated by reference to Exhibit 10.2 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2003). |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **10.3** |   | 1992 Incentive Stock  Option Plan of the Registrant, as amended and restated as of March 13,  1997 (Incorporated by reference to Exhibit 10.3 to the Registrant’s  Annual Report on Form 10-K for the fiscal year ended  December 31, 2003).   |
| **10.4** |   | Executive Incentive  Bonus Plan of the Registrant (Incorporated by reference to Exhibit 10.4  to the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2001).                                                         |
| **10.5** |   | 2002 Stock Incentive  Plan of the Registrant (Incorporated by reference to Exhibit 4.7 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2002).                                                                                  |
| **14.1** |   | Code of Business  Conduct and Ethics of the Registrant and its Affiliates (Incorporated by  reference to Exhibit 14.1 to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2003).                                 |
| **31.1** |   | Certification of Richard  A. Horowitz, Principal Executive Officer of the Registrant, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                  |
| **31.2** |   | Certification of Joseph A.  Molino, Jr., Principal Financial Officer of the Registrant, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                           |
| **32.1** |   | Certification of Richard  A. Horowitz, Principal Executive Officer of the Registrant, Pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                             |
| **32.2** |   | Certification of Joseph  A. Molino, Jr., Principal Financial Officer of the Registrant, Pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                      |

 

A copy of any of the foregoing exhibits to this AnnualReport on Form 10-K may be obtained, upon payment of the Registrant’sreasonable expenses in furnishing such exhibit, by writing to P & FIndustries, Inc., 300 Smith Street, Farmingdale, New York 11735-1114,Attention: Corporate Secretary.

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