P&F INDUSTRIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1 - 5332

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

DELAWARE 22-1657413
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

300 SMITH STREET, FARMINGDALE, NEW YORK 11735
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (631) 694-1800

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /

As of November 12, 2002, there were 3,514,322 shares of the registrant's
Class A Common Stock outstanding.

P & F INDUSTRIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

i

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See accompanying notes to consolidated financial statements (unaudited).

1

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(CONTINUED)

See accompanying notes to consolidated financial statements (unaudited).

2

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to consolidated financial statements (unaudited).

3

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes to consolidated financial statements (unaudited).

4

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)

See accompanying notes to consolidated financial statements (unaudited).

5

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes to consolidated financial statements (unaudited).

6

P & F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)

See accompanying notes to consolidated financial statements (unaudited).

7

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements contained herein include
the accounts of P & F Industries, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.

P & F Industries, Inc. ("P & F") conducts business operations through its
four wholly-owned subsidiaries; Florida Pneumatic Manufacturing Corporation
("Florida Pneumatic"), Green Manufacturing, Inc. ("Green"), Embassy Industries,
Inc. ("Embassy") and Countrywide Hardware, Inc. ("Countrywide"). P & F and its
subsidiaries are herein referred to collectively as the "Company".

Florida Pneumatic is engaged in the importation, manufacture and sale of
pneumatic hand tools, primarily for the industrial and retail markets, and the
importation and sale of compressor air filters. Florida Pneumatic also markets,
through its Berkley Tool division ("Berkley"), a line of pipe cutting and
threading tools, wrenches and replacement electrical components for a
widely-used brand of pipe cutting and threading machines. 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-chemical industry and a line of post hole digging equipment for
the agricultural industry. Embassy is engaged in the manufacture and sale of
baseboard heating products and the importation and sale of radiant heating
systems. Embassy also imports a line of door and window hardware items through
its Franklin hardware division ("Franklin"). Countrywide, through its
subsidiary, Nationwide Industries, Inc. ("Nationwide"), imports and manufactures
door, window and fencing hardware for OEM's throughout the United States. Note 5
of the Notes to Consolidated Financial Statements (unaudited) presents financial
information for the segments of the Company's business.

BASIS OF FINANCIAL STATEMENT PRESENTATION

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

8

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

BASIS OF FINANCIAL STATEMENT PRESENTATION (CONTINUED)

The consolidated balance sheet information as of December 31, 2001 was
derived from the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. The interim financial
statements contained herein should be read in conjunction with that Report.

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is based only on the average number of
shares of the Company's Class A Common Stock outstanding for the period. Diluted
earnings (loss) per share reflects the effect of shares of Class A Common Stock
issuable upon the exercise of options or warrants.

Diluted earnings (loss) per share is computed using the treasury stock
method. Under this method, the aggregate number of shares of common stock
outstanding reflects the assumed use of proceeds from the hypothetical exercise
of any outstanding options or warrants to purchase shares of Class A Common
Stock, unless the effect on earnings (loss) is antidilutive. The average market
value for the period is used as the assumed purchase price.

NOTE 2 - INVENTORIES

Major classes of inventory were as follows:

9

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 - LONG-TERM DEBT

Long-term debt consists of:

- ----------
(a) These mortgages payable are collateralized and relate to the land and
buildings of the Company's subsidiaries.

(b) This bond was assumed by the Company as part of the acquisition of
Green and is secured by a standby letter of credit.

The term loan facility, which is part of the Company's credit agreement
with a bank, provides a commitment of $15,000,000 to finance acquisitions
subject to the lending bank's approval. The Company borrowed $11,500,000 against
this facility to finance the acquisition of Nationwide Industries, Inc.,
described in Note 7, and there was $10,000,000 outstanding against this facility
at September 30, 2002. There was also a standby letter of credit totaling
approximately $510,000 outstanding against this facility at September 30, 2002.
This standby letter of credit is used to secure the Economic Development Revenue
Bond assumed as part of the acquisition of Green.

10

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4 - CAPITAL STOCK TRANSACTIONS

During the nine months ended September 30, 2002, the Company purchased
16,000 shares of Class A Common Stock, at a cost of $100,800.

On July 12, 2002, the Company issued to various employees options to
purchase an aggregate of 221,100 shares of Class A Common Stock.

On July 12, 2002, the Company issued to the Chief Executive Officer of the
Company 12,774 unrestricted shares of Class A Common Stock. The Company recorded
the fair market value of these shares as of the date of issuance, $89,163, as
compensation expense.

On October 14, 2002, the Company extended until September 30, 2003 its
program to repurchase shares of Class A Common Stock.

NOTE 5 - SEGMENTS OF BUSINESS

The following tables present financial information by segment for the
periods ended September 30, 2002 and 2001. Segment profit (loss) excludes
general corporate expenses, interest expense and income taxes. There were no
intersegment revenues.

11

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 - SEGMENTS OF BUSINESS (CONTINUED)

12

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 - SEGMENTS OF BUSINESS (CONTINUED)

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

13

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6 - EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted
earnings (loss) per common share:

There were outstanding during the periods ended September 30, 2002 and 2001
stock options whose exercise prices were higher than the average market values
for the respective periods. These options are anti-dilutive and are excluded
from the computation of earnings (loss) per share. The weighted average
anti-dilutive options outstanding were as follows:

14

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6 - EARNINGS (LOSS) PER SHARE (CONTINUED)

NOTE 7 - ACQUISITION

On May 3, 2002, Countrywide acquired all of the stock of Nationwide for
approximately $10,452,000, plus acquisition costs and working capital
adjustments of approximately $750,000. Nationwide is engaged in the business of
importing and manufacturing door, window and fencing hardware. This acquisition
was financed through the term loan facility available under the Company's credit
agreement. In addition to the cash paid at the closing, Nationwide's previous
owner is entitled to contingent payments of 30% of the excess of Nationwide's
earnings before interest and taxes over $2,500,000, for each of the five
twelve-month periods subsequent to the acquisition date, which contingent
payments will be treated as additions to goodwill.

15

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 - ACQUISITION(CONTINUED)

On May 24, 2002, in connection with the acquisition of Nationwide,
Countrywide also purchased, for $2,500,000, the real property and the
improvements thereon in which Nationwide conducts its business.

The unaudited consolidated financial statements presented in this report
include the combined results of operations of Countrywide and Nationwide for the
period from May 4, 2002 through September 30, 2002.

The following table summarizes the unaudited estimated fair value of the
assets acquired and the liabilities assumed in connection with the acquisition
of Nationwide. The Company obtained third party valuations for the property,
plant and equipment and intangible assets (i.e., employment agreement and
customer list).

(AMOUNTS IN THOUSANDS)

Current assets $ 4,015
Property, plant and equipment 860
Employment agreement 760
Customer list 1,900
Goodwill 5,632
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Total assets acquired 13,167
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Current liabilities (1,965)
--------

Total liabilities assumed (1,965)
--------

Net assets acquired $ 11,202
========

The employment agreement and the customer list have each been assigned a
useful life of five years. The amortization of these intangible assets is not
deductible for tax purposes.

Amortization expense for intangible assets subject to amortization was
approximately $222,000 for the period ended September 30, 2002. Amortization
expense for each of the years in the five-year period ending December 31, 2006
is estimated to be approximately $355,000 in 2002, $532,000 in 2003 through
2006, and approximately $177,000 in 2007.

16

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 - ACQUISITION (CONTINUED)

The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Countrywide (combined with
Nationwide), as though the acquisition of Nationwide had been made January 1,
2001. The pro forma amounts give effect to appropriate adjustments for
depreciation of fixed assets, amortization of intangible assets, interest
expense and income taxes.

The pro forma amounts presented are not necessarily indicative of future
operating results.

17

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS" 142), which requires that goodwill shall not be amortized, but that it
shall be tested annually for impairment. The Company adopted SFAS 142 as of
January 1, 2002 and, in accordance therewith, ceased amortizing its goodwill as
of that date.

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

During the second quarter of 2002, the Company revised its earnings
forecasts for Green to reflect the extremely weak market conditions in the
hydraulic cylinder business. As a result of the revised forecasts, the fair
market value of Green's goodwill, as determined by an independent third party
appraiser, was lower than its carrying value as of December 31, 2001.
Accordingly, in the quarter ended June 30, 2002, the Company recorded an
after-tax impairment charge of approximately $3.2 million, which is reported as
a cumulative effect of change in accounting principle resulting from the
adoption of SFAS 142.

The changes in the carrying amounts of goodwill for the nine months ended
September 30, 2002 are as follows:

18

P & F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

The amortization expense and net income (loss) (including any tax effects)
of the Company for the periods ended September 30, 2002 and September 30, 2001,
respectively, are as follows:

19

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 1 of the Notes to Consolidated Financial Statements (unaudited),
included elsewhere in this Quarterly Report on Form 10-Q, includes a summary of
the significant accounting policies and methods used in the preparation of the
Company's unaudited consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Certain of these
accounting policies require the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates estimates, including those related to income taxes, bad
debts, inventory reserves, intangible assets and contingencies. The Company
bases it estimates on historical data, when available, experience, and on
various other assumptions that are believed to be reasonable under the
circumstances, the combined results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.

The Company's critical accounting policies include:

REVENUE RECOGNITION

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

GOODWILL

The Company's operational policy for the assessment and measurement of any
impairment in the value of excess of cost over net assets acquired that is other
than temporary is to evaluate, with the help of independent third-party
appraisals, the recoverability and remaining life of its goodwill and determine
whether the goodwill should be completely or partially written off. The Company
will recognize an impairment of goodwill if the fair value of the goodwill is
deemed to be less than its carrying value. If the Company determines that
goodwill has been impaired, the Company will reflect the impairment through a
reduction in the carrying value of goodwill, in an amount equal to the excess of
the carrying amount of the goodwill over the amount of the undiscounted
estimated operating cash flows.

20

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS

QUARTERS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001

Consolidated revenues increased 28.2%, from $16,448,858 to $21,082,509.
Revenues from pneumatic tools and related equipment increased 22.8%, from
$9,134,963 to $11,221,716, due primarily to promotions at two major customers
and increased sales in the catalog distribution channel, partially offset by
reduced base sales to one of these customers and by lower commission revenues.
Selling prices of pneumatic tools and related equipment were virtually unchanged
from the third quarter of 2001. Revenues from hardware increased 278.0%, from
$1,226,676 to $4,636,348, due primarily to the acquisition of Nationwide and
strong results at Franklin, which is benefiting from the addition of two
customers in the fourth quarter of 2001. Selling prices of hardware products
were unchanged from the third quarter of 2001. Revenues from hydraulic cylinders
and other equipment decreased 15.1%, from $3,507,980 to $2,979,498, due
primarily to the phasing out of a major wrecker customer in the first quarter of
2002 and continued depressed market conditions, which were partially offset by
increased sales in the access and agricultural product lines. Selling prices of
hydraulic cylinders were unchanged from the third quarter of 2001. Revenues from
heating products decreased 13.0%, from $2,579,239 to $2,244,947, due primarily
to weakness in the baseboard market and the loss of a major customer earlier in
the year. Selling prices of heating products were unchanged from the third
quarter of 2001.

Consolidated gross profit, as a percentage of revenues, decreased from
30.8% to 29.5%. Gross profit from pneumatic tools and related equipment
decreased from 40.0% to 34.0%, due primarily to the lower-margin promotional
sales noted above, which were partially offset by a weaker yen and improved
factory efficiencies. Gross profit from hardware increased from 26.1% to 32.1%,
due primarily to the addition of Nationwide's higher margin OEM business, which
is now included in the product mix. Gross profit from hydraulic cylinders and
other equipment decreased from 8.4% to 8.1%, due primarily to decreased
revenues, which reduced coverage of fixed expenses. Gross profit from heating
products decreased from 31.1% to 29.8%, due primarily to the decrease in
revenues, which reduced coverage of fixed expenses, as well as to a change in
product mix.

Consolidated selling, general and administrative expenses increased 14.1%,
from $4,102,867 to $4,679,836, due primarily to the addition of these expenses
at Nationwide, partially offset by major cost cutting efforts across all of the
facilities. Interest expense increased 34.1%, from $174,019 to $233,416, as a
result of increased borrowings to finance the Nationwide acquisition, net of a
decrease in the Company's average interest rate on its borrowings.

The effective tax rates for the quarters ended September 30, 2002 and 2001
were 40.5% and 38.3%, respectively.

21

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001

Consolidated revenues increased 13.4%, from $50,138,798 to $56,845,624.
Revenues from pneumatic tools and related equipment increased 7.4%, from
$28,781,405 to $30,922,278, due primarily to promotions at two major customers
and increased sales in the catalog distribution channel, partially offset by the
sale of a product line in the second quarter of 2001 that did not repeat in 2002
and by lower commission revenues. Selling prices of pneumatic tools and related
equipment were virtually unchanged from the first nine months of 2001, with the
exception of prices to one significant customer, which were reduced by an
average of 16% at the start of the third quarter of 2001. Revenues from hardware
increased 180.5%, from $3,538,391 to $9,923,528, due primarily to the
acquisition of Nationwide and strong results at Franklin, which is benefiting
from the addition of two customers in the fourth quarter of 2001. Selling prices
of hardware products were unchanged from the nine months ended September 30,
2001. Revenues from hydraulic cylinders and other equipment decreased 14.6%,
from $11,114,768 to $9,487,854, due primarily to the phasing out of a major
customer in the first quarter of 2002 and continued depressed market conditions,
which were partially offset by increased sales in the access and agricultural
product lines. Selling prices of hydraulic cylinders and other equipment were
virtually unchanged from the nine months ended September 30, 2001. Revenues from
heating products decreased 2.9%, from $6,704,234 to $6,511,964, reflecting
weakness in the baseboard market and the loss of a major customer. Selling
prices of heating products were unchanged from the nine months ended September
30, 2001.

Consolidated gross profit, as a percentage of revenues, remained at 30.7%.
Gross profit from pneumatic tools and related equipment decreased from 38.7% to
37.3%, due primarily to the lower-margin promotional sales noted above and a
price reduction to a major customer at the start of the second half of 2001,
partially offset by productivity improvements and a weaker yen. Gross profit
from hardware increased from 26.6% to 31.3%, due primarily to the addition of
Nationwide's higher margin OEM business, which is now included in the product
mix. Gross profit from hydraulic cylinders and other equipment decreased from
9.8% to 8.8%, due primarily to the decrease in revenues, which reduced coverage
of fixed expenses. Gross profit from heating products decreased from 33.4% to
30.6%, due primarily to the decrease in revenues, which reduced coverage of
fixed expenses, and to significant new product start-up costs incurred.

22

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001 (CONTINUED)

Consolidated selling, general and administrative expenses increased 5.2%,
from $12,542,528 to $13,193,626, due primarily to the addition of these expenses
at Nationwide, partially offset by major cost cutting efforts across all of the
facilities. Interest expense decreased 26.8%, from $679,985 to $497,838, as a
result of decreases in both the average outstanding balance of the Company's
borrowings and the average interest rate on these borrowings.

The effective tax rates for the nine months ended September 30, 2002 and
2001 were 39.2% and 38.5%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

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

During the nine months ended September 30, 2002, gross accounts receivable
increased by approximately $1,990,000, with increases of approximately
$2,060,000 and $62,000 at Florida Pneumatic and Countrywide, respectively, being
partially offset by decreases of approximately $74,000 and $58,000 at Green and
Embassy, respectively. The increase at Florida Pneumatic was due primarily to
incremental sales and the extended payment terms granted on a large sales
promotion. The increase at Countrywide was due to an increase in average days of
sales outstanding. The decrease at Green was due primarily to decreased sales in
the third quarter of 2002, compared to the last quarter of 2001. The decrease at
Embassy was consistent with the decrease in revenues between the fourth quarter
of 2001 and the third quarter of 2002.

23

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

During the nine months ended September 30, 2002, inventories increased by
approximately $2,883,000, with increases of approximately $1,377,000, $977,000,
$79,000 and $450,000 at Florida Pneumatic, Countrywide, Green and Embassy,
respectively. The increase at Florida Pneumatic was the result of promotion
inventory in transit or not yet shipped. The increase at Countrywide was due
primarily to overall growth in the business, as well as to the timing of
shipments. The increase at Green was due primarily to an increase in inventory
for cylinder resale products. The increase at Embassy was the result of initial
stocking of new items at its Franklin division, preparation for the busy season
for the heating business and lower than anticipated sales during the quarter
ended September 30, 2002.

During the nine months ended September 30, 2002, short-term borrowings
increased by $3,000,000, primarily to fund working capital changes and capital
expenditures. During the nine months ended September 30, 2002, accounts payable
increased by approximately $2,686,000, with increases of approximately
$2,650,000 and $299,000 at Florida Pneumatic and Green, respectively, being
partially offset by decreases of approximately $219,000 and $44,000 at
Countrywide and Embassy, respectively. The increase at Florida Pneumatic was due
primarily to the timing of purchases. The increase at Green was due primarily to
the build-up of cylinder resale inventory noted above and agricultural product.
The decreases at Countrywide and Embassy were due primarily to the timing of
payments and purchases.

On May 3, 2002, Countrywide acquired all of the stock of Nationwide for
approximately $10,452,000, plus acquisition costs and working capital
adjustments of approximately $750,000. This acquisition was financed through the
term loan facility available under the Company's credit agreement. In addition
to the cash paid at the closing, Nationwide's previous owner is entitled to
contingent payments of 30% of the excess of Nationwide's earnings before
interest and taxes over $2,500,000, for each of the five twelve-month periods
subsequent to the acquisition date, which contingent payments will be treated as
additions to goodwill.

On May 24, 2002, in connection with the acquisition of Nationwide,
Countrywide also purchased, for $2,500,000, the real property and the
improvements thereon in which Nationwide conducts its business. This purchase
was financed primarily through a mortgage in the amount of $2,024,000.

24

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

On August 1, 2002, the Company renewed its credit agreement, as amended,
with Citibank through July 26, 2003. This agreement provides the Company with
various credit facilities, including revolving credit loans, term loans for
acquisitions and a foreign exchange line. The revolving credit loan facility
provides a maximum of $12,000,000, with various sublimits, for direct
borrowings, letters of credit, bankers' acceptances and equipment loans. At
September 30, 2002, there was $5,000,000 outstanding against the revolving
credit loan facility. There were commitments totaling approximately $35,000 for
letters of credit at September 30, 2002.

The term loan facility provides a maximum commitment of $15,000,000 to
finance acquisitions subject to the lending bank's approval. The Company
borrowed $11,500,000 against this facility to finance the acquisition of
Nationwide. There was a balance outstanding against this facility at September
30, 2002 of $10,000,000. There was also a standby letter of credit totaling
approximately $510,000 outstanding against this facility at September 30, 2002.
This standby letter of credit was used to secure the Economic Development
Revenue Bond assumed as part of the acquisition of Green.

The foreign exchange line provides for the availability of up to
$10,000,000 in foreign currency forward contracts. These contracts fix the
exchange rate on future purchases of Japanese yen needed for payments to foreign
suppliers. The total amount of foreign currency forward contracts outstanding at
September 30, 2002 was approximately $3,310,000.

The Company's credit agreement is subject to annual review by the lending
bank. Under this agreement, the Company is required to adhere to certain
financial covenants. At September 30, 2002 and for the nine months then ended,
the Company satisfied all of these covenants.

Capital spending for the nine months ended September 30, 2002 was
approximately $3,707,000, including $2,500,000 for the purchase of the real
property and the improvements thereon in which Nationwide conducts its business.
The Company financed the purchase of the property primarily through a mortgage
in the amount of $2,024,000. The remainder of the capital spending was provided
by working capital. Capital expenditures for the remainder of 2002 are expected
to total approximately $240,000, some of which may be financed through the
Company's credit facilities. Included in the expected total for the remainder of
2002 are capital expenditures relating to new products, expansion of existing
product lines and replacement of old equipment.

25

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Company, through Florida Pneumatic, imports a significant amount of its
purchases from Japan, with payment due in Japanese yen. As a result, the Company
is subject to the effects of foreign currency exchange fluctuations. The Company
uses a variety of techniques to protect itself from any adverse effects from
these fluctuations, including increasing its selling prices, obtaining price
reductions from its overseas suppliers, using alternative supplier sources and
entering into foreign currency forward contracts. The strengthening of the U.S.
dollar versus the Japanese yen over the last 12 months has had a positive effect
on the Company's results of operations and its financial position. There can be
no assurance, however, that this situation will continue. See "Item 3 -
Quantitative and Qualitative Disclosures About Market Risk."

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

At September 30, 2002, the Company had certain contractual cash obligations
and other commercial commitments.

The aggregate payments of long-term debt due for each of the periods ending
September 30 are as follows: less than one year - $859,237; one to three years -
$4,308,319; four to five years - $5,319,817; and after five years - $5,239,653.

The aggregate payment of short-term borrowings due for each of the periods
ending September 30 is as follows: less than one year - $5,000,000.

The aggregate expiration of stand-by letters of credit for each of the
periods ending September 30 is as follows: less than one year - $510,000.

NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
addresses financial accounting and reporting for the impairment of long-lived
assets to be disposed of, and is required to be adopted for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144 effective
January 1, 2002, and does not expect the adoption of SFAS 144 to have a material
effect on its consolidated financial statements.

26

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which applies to costs associated
with an exit or disposal activity. SFAS 146 is required to be adopted for exit
or disposal activities initiated after December 31, 2002. The Company does not
believe that the initial adoption of SFAS 146 will have a material effect on its
consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks, which include changes in U.S. and
international exchange rates, the prices of certain commodities and currency
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce the risks related to foreign currency fluctuation by utilizing
financial instruments, pursuant to Company policy.

The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect the Company's
gross margins and operating expenses. The Company engages in hedging programs
aimed at mitigating the impact of currency fluctuations. Using primarily forward
exchange contracts, the Company hedges some of those transactions that, when
remeasured according to accounting principles generally accepted in the United
States of America, impact the income statement. Factors that could impact the
effectiveness of the Company's programs include volatility of the currency
markets and availability of hedging instruments. All currency contracts that are
entered into by the Company are components of hedging programs and are entered
into for the sole purpose of hedging an existing or anticipated currency
exposure, not for speculation. The Company does not buy or sell financial
instruments for trading purposes. Although the Company maintains these programs
to reduce the impact of changes in currency exchange rates, when the U.S. dollar
sustains a weakening exchange rate against currencies in which the Company
incurs costs, the Company's costs are adversely affected. At September 30, 2002,
the Company held open hedge forward contracts to purchase approximately
$3,310,000 of Japanese yen. The potential loss in value of the Company's net
investment in foreign currency forward contracts resulting from a hypothetical
10 percent adverse change in foreign currency exchange rates at September 30,
2002 is approximately $368,000.

27

P & F INDUSTRIES, INC. AND SUBSIDIARIES

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within 90 days prior to the date of this Quarterly Report on Form 10-Q (the
"Report"), an evaluation was performed, under the supervision of, and with the
participation of, the Company's management, including the Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) to the Securities and Exchange Act of 1934). Based
on that evaluation, the Company's management, including the Principal Executive
Officer and Principal Financial Officer, concluded that the Company's disclosure
controls and procedures were adequate and effective in timely alerting them to
all material information relating to the Company and its consolidated
subsidiaries that is required to be included in this Report.

CHANGES IN INTERNAL CONTROLS

There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of management's evaluation.

28

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant or co-defendant in various actions brought
about in the ordinary course of conducting its business. The Company
does not believe that any of these actions are material to the
financial condition of the Company.

ITEM 2. CHANGES IN SECURITIES
None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

ITEM 5. OTHER INFORMATION
None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See "Exhibit Index" immediately following the certification
pages.

(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the
quarter ended September 30, 2002.

29

SIGNATURES

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

P & F INDUSTRIES, INC.
(Registrant)

By /s/ Joseph A. Molino, Jr.
-------------------------------
Joseph A. Molino, Jr.
Vice President
Dated: November 12, 2002 (Principal Financial Officer)

30

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER OF P & F INDUSTRIES, INC.

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

1. I have reviewed this quarterly report on Form 10-Q of P & F Industries,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

November 12, 2002 /s/ Richard A. Horowitz
- ----------------- ---------------------------
Date Richard A. Horowitz
Principal Executive Officer

31

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER OF P & F INDUSTRIES, INC.

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

1. I have reviewed this quarterly report on Form 10-Q of P & F Industries,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function): a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and b) any fraud, whether or not material,
that involves management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

November 12, 2002 /s/ Joseph A. Molino, Jr.
- ---------------- -------------------------
Date Joseph A. Molino, Jr.
Principal Financial Officer

32

EXHIBIT INDEX

EXHIBIT
NO.
- -------

2.1 Asset Purchase Agreement, dated as of September 16, 1998, by and between
Green Manufacturing, Inc., an Ohio corporation, and the Registrant
(Incorporated by reference to Exhibit 2.1 of the Registrant's Current
Report on Form 8-K dated September 16, 1998). Pursuant to Item 601(b)(2) of
Regulation S-K, the Registrant agrees to furnish supplementally a copy of
any exhibit or schedule omitted from the Asset Purchase Agreement to the
Securities and Exchange Commission upon request.

2.2 Stock Purchase Agreement, dated as of May 3, 2002, by and between Mark C.
Weldon and the Registrant (Incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K dated May 3, 2002). Pursuant to
Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish
supplementally a copy of any exhibit or schedule omitted from the Asset
Purchase Agreement to the Securities and Exchange Commission upon request.

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
March 31, 1999).

4.1 Rights Agreement, dated as of August 23, 1994, between the Registrant and
American Stock Transfer & Trust Company, as Rights Agent (Incorporated by
reference to Exhibit 1 to the Registrant's Registration Statement on Form
8-A dated August 24, 1994).

4.2 Amendment to Rights Agreement, dated as of April 11, 1997, between the
Registrant and American Stock Transfer & Trust Company, as Rights Agent.

4.3 Credit Agreement, dated as of July 23, 1998, by and among the Registrant,
Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy
Industries, Inc., a New York corporation, and European American Bank, a New
York banking corporation (Incorporated by reference to Exhibit 4.3 to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1998).

33

EXHIBIT INDEX
(CONTINUED)

EXHIBIT
NO.
- ------

4.4 Amendment No. 1 to Credit Agreement, dated as of September 16, 1998, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.4 to the Registrant's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1998).

4.5 Amendment No. 2 to Credit Agreement, dated as of July 28, 1999, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).

4.6 Amendment No. 3 to Credit Agreement, dated as of July 26, 2000, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000).

4.7 Amendment No. 4 to Credit Agreement, dated as of June 25, 2001, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000).

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).

34

EXHIBIT INDEX
(CONTINUED)

EXHIBIT
NO.
- -------

4.9 Amendment No. 6 to Credit Agreement, dated as of June 13, 2002, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and Citibank, N.A.
(successor-in-interest to European American Bank), a New York banking
corporation (Incorporated by reference to Exhibit 4.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).

4.10 Amendment No. 7 to Credit Agreement, dated as of August 1, 2002, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, Countrywide Hardware,
Inc., a Delaware corporation, and 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, and Nationwide Industries, Inc., a Florida
corporation and Citibank, N.A. (successor-in-interest to European American
Bank), a New York banking.

4.12 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 March 31, 2000).

10.2 Consulting Agreement, effective as of November 1, 2000, between the
Registrant and Sidney Horowitz (Incorporated by reference to Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).

10.3 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).

35

EXHIBIT INDEX
(CONTINUED)

EXHIBIT
NO.
- -------

10.4 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).

10.5 Sale and Purchase Agreement, made as of the 1st day of May 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).

99.1 Certification of Richard A. Horowitz, Principal Executive Officer of the
Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 OF the Sarbanes-Oxley Act of 2002.

99.2 Certification of Joseph A. Molino, Jr., Principal Financial Officer of the
Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 OF the Sarbanes-Oxley Act of 2002.

36